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The Interchange Fees - A Comparison between Optimal Private and Social Levels

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  • Dragoi, Ionut Mihai

    (Romanian Competition Council)

Abstract

In this paper we derived the optimal conditions which allow for a comparison between private and social levels of the interchange fees (IFs). We expand the model developed by Rochet and Tirole (2002) by allowing for several extensions which lead to a more accurate understanding of the determinants of the interchange fees by payment card systems. More specifically, we looked at a card payment system with a for-profit platform, unobservable heterogeneity across merchants and not-fully informed customers. Merchants behave strategically and imperfect competition of both issuers and acquirers is also considered. The simultaneous treatment of these assumptions is the novelty of our work and it is done with the purpose of reflecting more realistically the payment card industry.

Suggested Citation

  • Dragoi, Ionut Mihai, 2013. "The Interchange Fees - A Comparison between Optimal Private and Social Levels," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 24-38, March.
    • Handle: RePEc:rjr:romjef:v::y:2013:i:1:p:24-38
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    References listed on IDEAS

    as
    1. Rochet, Jean-Charles & Wright, Julian, 2010. "Credit card interchange fees," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1788-1797, August.
    2. Farrell Joseph, 2006. "Efficiency and Competition between Payment Instruments," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-19, March.
    3. Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 1-26, March.
    4. Rochet, Jean Charles & Tirole, Jean, 2008. "Tying in two-sided markets and the honor all cards rule," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1333-1347, November.
    5. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, June.
    6. Richard Schmalensee, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-122, June.
    7. repec:bla:jindec:v:50:y:2002:i:2:p:103-22 is not listed on IDEAS
    8. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
    9. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-588, October.
    10. Jean‐Charles Rochet & Jean Tirole, 2011. "Must‐Take Cards: Merchant Discounts And Avoided Costs," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 462-495, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    interchange fee; payment cards; two-sided markets; for-profit platforms; imperfect competition; market structure;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior

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