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Who pays for credit cards?

Author

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  • Sujit Chakravorti
  • William R. Emmons

Abstract

We model side payments in a competitive credit-card market. If competitive retailers charge a single (higher) price to cover the cost of accepting cards, banks must subsidize convenience users to prevent them from defecting to merchants who do not accept cards. The side payments will be financed by card users who roll over balances at interest if their subjective discount rates are high enough. Despite the feasibility of cross subsidies among cardholders, price discrimination without side payments is Pareto preferred because of the costliness of the card network--unless banks have other motives, such as purchasing options on future borrowing by convenience users.

Suggested Citation

  • Sujit Chakravorti & William R. Emmons, 2001. "Who pays for credit cards?," Occasional Paper; Emerging Payments EPS-2001-1, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhop:eps-2001-1
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    References listed on IDEAS

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    Keywords

    Credit cards; Payment systems;

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