Differentiated Interchange Fees

Abstract:     
Payment networks typically differentiate their interchange fees (IFs) by setting a variety of sector-specific IFs for the same payment card. While the previous literature on IFs has focussed on the optimal level of IFs, this paper addresses the optimal structure of IFs, i.e. whether or not IF differentiation is desirable. It is shown that it is generally efficient for a regulator to leave the decision on the structure of IFs to payment networks, even in cases where regulation of the (average) IF level itself is welfare-enhancing.

Number of Pages in PDF File: 10

Keywords: interchange fees, two-sided markets, price discrimination

JEL Classification: G21, L31, L42

Accepted Paper Series