| By: |
Özlem Bedre-Defolie (Toulouse School of Economics, Manufacture de Tabacs, 21 allées de Brienne – 31000 Toulouse, France.);
Emilio Calvano (Department of Economics, Harvard University, Littauer Center, 1805 Cambridge Street, Cambridge, MA 02138, U.S.A) |
| Abstract: |
In a payment card association such as Visa, each time a consumer pays by card,
the bank of the merchant (acquirer) pays an interchange fee (IF) to the bank
of the cardholder (issuer) to carry out the transaction. This paper studies
the determinants of socially and privately optimal IFs in a card scheme where
services are provided by a monopoly issuer and perfectly competitive acquirers
to heterogeneous consumers and merchants. Different from the literature, we
distinguish card membership from card usage decisions (and fees). In doing so,
we reveal the implications of an asymmetry between consumers and merchants:
the card usage decision at a point of sale is delegated to cardholders since
merchants are not allowed to turn down cards once they are affiliated with a
card network. We show that this asymmetry is sufficient to induce the card
association to set a higher IF than the socially optimal IF, and thus to
distort the structure of user fees by leading to too low card usage fees at
the expense of too high merchant fees. Hence, cap regulations on IFs can
improve the welfare. These qualitative results are robust to imperfect issuer
competition, imperfect acquirer competition, and to other factors affecting
final demands, such as elastic consumer participation or strategic card
acceptance to attract consumers. JEL Classification: G21; L11; L42; L31; L51;
K21. |
| Keywords: |
Payment card associations; Interchange fees; Merchant fees. |
| Date: |
2009–12 |
| URL: |
http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091139&r=law |