Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/96557
Authors: 
Bedre-Defolie, Özlem
Calvano, Emilio
Year of Publication: 
2010
Series/Report no.: 
ESMT Working Paper 10-005
Abstract: 
Payment card networks, such as Visa, require merchants' banks to pay substantial 'interchange' fees to cardholders' banks, on a per transaction basis. This paper shows that a network's profit-maximizing fee induces an inefficient price structure, over-subsidizing card usage and over-taxing merchants. In contrast to the literature we show that this distortion is systematic and arises from the fact that consumers make two distinct decisions (membership and usage) whereas merchants make only one (membership). These findings are robust to competition for cardholders and/or for merchants, network competition, and strategic card acceptance to attract consumers.
Subjects: 
payment card networks
interchange fees
merchant fees
JEL: 
G21
L11
L42
L31
L51
K21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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