Two-Sided Markets, Bank Card Payment Networks, and Public Policy

This policy brief reviews recent studies that have sought to apply analysis of network externalities and the theory of two-sided markets to card payment networks, and it evaluates the public policy implications of this body of work. Three general conclusions emerge from the bulk of the research to date. First, this industrial-organization focus on the roles of network externalities and market two-sidedness in shaping the card payment industry’s pricing structure is likely to prove much more fruitful for analysis of relevant public policy issues than the alternative approach to payment economics offered in the modern monetary economics literature that emphasizes dynamic general equilibrium modeling of payment systems. Second, in light of the complex balancing act entailed in managing competing interests of card issuers, payment acquirers, cardholders, and retailers in the presence of network externalities, governmental regulation of card payment networks’ fee structures is unlikely to yield welfare improvements and in fact could yield significant inefficiencies. Third, welfare-improving competition among card payment networks is best promoted by permitting card issuers, payment acquirers, cardholders, and retailers to participate in multiple card payment networks, suggesting that recent antitrust challenges of restrictive rules imposed by some card payment networks have been appropriate.