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A study of the interrelated bilateral transactions in credit card networks

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  • Sujit Chakravorti
  • Alpa Shah

Abstract

Over the last decade, consumers have tripled their use of credit cards as more merchants have increased their acceptance of them. This increase suggests that incentives in today's marketplace favor greater credit card use by consumers and acceptance by merchants. In this paper, we study the set of interrelated bilateral transactions in credit card networks. First, we survey the recent theoretical papers using this approach and find there is a lack of consensus regarding the optimal set of pricing policies. Second, we explore each of these interrelated transactions emphasizing common market practices and the underlying regulatory and legal framework. Third, we analyze the impact of certain credit card market practices on competing payment instruments such as debit cards.

Suggested Citation

  • Sujit Chakravorti & Alpa Shah, 2001. "A study of the interrelated bilateral transactions in credit card networks," Occasional Paper; Emerging Payments EPS-2001-2, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhop:eps-2001-2
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    2. Calem, Paul S & Mester, Loretta J, 1995. "Consumer Behavior and the Stickiness of Credit-Card Interest Rates," American Economic Review, American Economic Association, vol. 85(5), pages 1327-1336, December.
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    7. Kitch, Edmund W, 1990. "The Framing Hypothesis: Is It Supported by Credit Card Issuer Opposition to a Surcharge on a Cash Price?," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 6(1), pages 217-233, Spring.
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    Cited by:

    1. Chakravorti Sujit & Roson Roberto, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-25, March.
    2. Rochet Jean-Charles, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-28, June.
    3. Manchev, Peter, 2006. "Oligopoly Model of a Debit Card Network," MPRA Paper 2460, University Library of Munich, Germany, revised 26 Feb 2007.
    4. Kenneth N. Kuttner & James J. McAndrews, 2001. "Personal on-line payments," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 35-50.
    5. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.

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    Keywords

    Credit cards; Debit cards; Payment systems;
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