Credit Card Interchange Fees
University of Toulouse I - Institut d'Economie Industrielle (IDEI); Centre for Economic Policy Research (CEPR); Swiss Finance Institute; University of Zurich - Swiss Banking Institute (ISB)
National University of Singapore (NUS) - Department of Economics
December 30, 2009
ECB Working Paper No. 1138
We build a model of credit card pricing that explicitly takes into account credit functionality. We show that a monopoly card network always selects an interchange fee that exceeds the level that maximizes consumer surplus. If regulators only care about consumer surplus, a conservative regulatory approach is to cap interchange fees based on retailers’ net avoided costs from not having to provide credit themselves. In the model, this always raises consumer surplus compared to the unregulated outcome, sometimes to the point of maximizing consumer surplus.
Number of Pages in PDF File: 32working papers series
Date posted: January 18, 2010
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