Public vs. Private Payment Platforms: Market Impacts and Optimal Policy

Abstract

How should public payment platforms set their prices? How would their introduction affect existing private platforms? We model the introduction of a benevolent public payment platform, aiming to maximize total welfare rather than profits, in an oligopolistic market competing with a private platform. The public platform faces a trade-off between attracting users and accommodating preferences for the private payment platform due to heterogeneity in user preferences. We show that while the public platform's entry improves social welfare, it does not achieve the first best and could harm merchants who remain using the private platform. We also examine the effects of common practical constraints for public sector provision such as cost-recovery and a zero fees mandates.

Keywords: JEL Classification: E58, E42, D4 Public payment platform, CBDC, FPS, Platform competition