Who Pays for Credit Cards?
The Clearing House
William R. Emmons
Federal Reserve Bank of St. Louis - Banking Supervision and Regulation; Washington University in Saint Louis
Federal Reserve Bank of Chicago Policy Studies EPS-2001-1
We model side payments in a competitive credit-card market. If competitive retailers charge a single (higher) price to cover the cost of accepting cards, banks must subsidize convenience users to prevent them from defecting to merchants who do not accept cards. The side payment will be financed by card users who roll over balances at interest if their subjective discount rates are high enough. Despite the feasibility of cross subsidies among cardholders, price discrimination without side payments is Pareto preferred because of the costliness of the card network---unless banks have other motives, such as purchasing options on future borrowing by current convenience users.
Number of Pages in PDF File: 37
Keywords: credit cards, payment systems, consumer credit
JEL Classification: D11, D23, G21working papers series
Date posted: December 21, 2001
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.437 seconds