Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70597
Authors: 
Bolt, Wilko
Chakravorti, Sujit
Year of Publication: 
2008
Series/Report no.: 
Working Paper, Federal Reserve Bank of Chicago 2008-11
Abstract: 
We study the ability of banks and merchants to influence the consumer's payment instrument choice. Consumers participate in payment card networks to insure themselves against three types of shocksincome, theft, and their merchant match. Merchants choose which payment instruments to accept based on their production costs and increased profit opportunities. Our key results can be summarized as follows. The structure of prices is determined by the level of the bank's cost to provide payment services including the level of aggregate credit loss, the probability of theft, and the timing of income flows. We also identify equilibria where the bank finds it profitable to offer one or both payment cards. Our model predicts that when merchants are restricted to charging a uniform price for goods that they sell, the bank benefits while consumers and merchants are worse off. Finally, we compare welfare-maximizing price structures to those that result from the bank's profit-maximizing price structure.
Subjects: 
- Retail Financial Services
Network Effects
Social Welfare
Multihoming
Payment Card Networks
JEL: 
L11
G21
D53
Document Type: 
Working Paper

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