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Nonbanks in the Payments System: Vertical Integration Issues

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Abstract

We discuss and evaluate the incentives for vertical expansion and vertical mergers in the payments systems industry paying particular attention to the implications of the existence of network effects in this industry. We assess the incentives of large merchants to extend vertically into payments systems, noting that this incentive is maximized when there is significant market power in payments systems and merchants are not sufficiently compensated for the business they bring to the network.

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  • Nicholas Economides, 2007. "Nonbanks in the Payments System: Vertical Integration Issues," Working Papers 07-06, NET Institute.
    • Handle: RePEc:net:wpaper:0706
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    References listed on IDEAS

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    1. Nicholas Economides, 2006. "Public Policy in Network Industries," Working Papers 06-17, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Economides, Nicholas & Salop, Steven C, 1992. "Competition and Integration among Complements, and Network Market Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 40(1), pages 105-123, March.
    3. Gans Joshua S & King Stephen P., 2003. "Approaches to Regulating Interchange Fees in Payment Systems," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-21, June.
    4. Nicholas Economides, 2001. "The Microsoft Antitrust Case," Journal of Industry, Competition and Trade, Springer, vol. 1(1), pages 7-39, March.
    5. Nicholas Economides & Evangelos Katsamakas, 2006. "Two-Sided Competition of Proprietary vs. Open Source Technology Platforms and the Implications for the Software Industry," Management Science, INFORMS, vol. 52(7), pages 1057-1071, July.
    6. Nicholas Economides, 1994. "The Incentive for Vertical Integration," Working Papers 94-05, New York University, Leonard N. Stern School of Business, Department of Economics.
    7. Terri Bradford & Matt Davies & Stuart E. Weiner, 2002. "Nonbanks in the payments system," Payments System Research Working Paper PSR WP 02-02, Federal Reserve Bank of Kansas City.
    8. Economides, Nicholas, 1989. "Desirability of Compatibility in the Absence of Network Externalities," American Economic Review, American Economic Association, vol. 79(5), pages 1165-1181, December.
    9. Nicholas Economides, 2001. "The Microsoft Antitrust Case: Rejoinder," Journal of Industry, Competition and Trade, Springer, vol. 1(1), pages 71-79, March.
    10. Rochet Jean-Charles & Tirole Jean, 2003. "An Economic Analysis of the Determination of Interchange Fees in Payment Card Systems," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-11, June.
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    Cited by:

    1. Economides, Nicholas & Tåg, Joacim, 2012. "Network neutrality on the Internet: A two-sided market analysis," Information Economics and Policy, Elsevier, vol. 24(2), pages 91-104.
    2. Don H Kim, 2007. "Spanned stochastic volatility in bond markets: a reexamination of the relative pricing between bonds and bond options," BIS Working Papers 239, Bank for International Settlements.
    3. Hsing Kenneth Cheng & Subhajyoti Bandyopadhyay & Hong Guo, 2011. "The Debate on Net Neutrality: A Policy Perspective," Information Systems Research, INFORMS, vol. 22(1), pages 60-82, March.

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    More about this item

    Keywords

    payments system; credit cards; debit cards; non-banks; vertical integration; market power; monopoly;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L80 - Industrial Organization - - Industry Studies: Services - - - General

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