Economic incentives to adopt electronic payment schemes under competition

With advances in information and other technologies, newer forms of electronic payment schemes such as Google Checkout, NetPay, WebMoney, etc., have emerged over the last decade. These payment schemes are cheaper for sellers as compared to traditional payment schemes such as credit cards. Further, the convenience of credit cards over these alternative payment schemes is not valued the same by all consumers. Inspite of the cost differences between these payment schemes and the consumer heterogeneity in their relative valuations, sellers typically charge the same price from consumers irrespective of the payment scheme. We develop an economic model to examine a seller's incentive to offer discounts to consumers to encourage the use of alternative payment schemes. We find that while a monopolistic seller does find it optimal to offer a discount, offers of such discounts are almost never optimal when two vertically-differentiated sellers compete with each other. Overall, we demonstrate that sellers' desire to not intensify price competition may partly explain why they do not encourage use of newer and cheaper alternative payment schemes by offering discounts to consumers.