Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5078365 | International Journal of Industrial Organization | 2010 | 13 Pages |
Abstract
This paper provides a new theory to explain empirical puzzles regarding payment card interchange fees. Our model departs from the existing two-sided market theories by arguing that the extensive margin of card usage is less important in a mature card market. Instead, we focus on card issuer entry, elastic consumer demand and the role of card transaction value. Our analysis suggests that card networks demand higher interchange fees to maximize member issuers' profits as card payments become more efficient and convenient. At equilibrium, consumer rewards and card transaction values increase with interchange fees, while consumer surplus and merchant profits may not. Based on the theoretical framework, we discuss pros and cons of policy interventions.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Zhu Wang,