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Interchange Fees and Innovation in Payment Systems

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  • Marc Bourreau

    (SES - Département Sciences Economiques et Sociales - Télécom ParisTech, ECOGE - Economie Gestion - I3 SES - Institut interdisciplinaire de l’innovation de Telecom Paris - Télécom ParisTech - I3 - Institut interdisciplinaire de l’innovation - CNRS - Centre National de la Recherche Scientifique)

  • Marianne Verdier

    (LTCI - Laboratoire Traitement et Communication de l'Information - Télécom ParisTech - IMT - Institut Mines-Télécom [Paris] - CNRS - Centre National de la Recherche Scientifique)

Abstract

We analyze the impact of interchange fees on consumers’ and merchants’ incentives to adopt an innovative payment instrument, in a setting with adoption externalities between consumers and merchants. We show that consumer adoption decreases with the interchange fee for high degrees of externality, and varies non-monotonically with it for low degrees of externality. The profit-maximizing interchange fee coincides with the social optimum when externalities are strong, whereas it is too high when they are weak. We also compare the issuers’ incentives to innovate when they cooperate and when they make their innovation decisions independently.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Marc Bourreau & Marianne Verdier, 2019. "Interchange Fees and Innovation in Payment Systems," Post-Print hal-02085280, HAL.
    • Handle: RePEc:hal:journl:hal-02085280
    DOI: 10.1007/s11151-018-9648-6
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    References listed on IDEAS

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    Cited by:

    1. Wilko Bolt, 2012. "Retail Payment Systems: Competition, Innovation, and Implications," DNB Working Papers 362, Netherlands Central Bank, Research Department.
    2. Hongru Tan, 2020. "The regulation of merchant fees in credit card markets," Journal of Regulatory Economics, Springer, vol. 57(3), pages 258-276, June.
    3. Reisinger, Markus & Zenger, Hans, 2019. "Interchange fee regulation and service investments," International Journal of Industrial Organization, Elsevier, vol. 66(C), pages 40-77.

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