Pricing Payment Cards

41 Pages Posted: 15 Oct 2008

See all articles by Özlem Bedre-Defolie

Özlem Bedre-Defolie

ESMT European School of Management and Technology; University of Bergen, Economics Department; CEPR IO

Emilio Calvano

University of Bologna - Department of Economics; University of Toulouse 1 - Department of Economics; CSEF - Center for Studies in Economics and Finance

Date Written: August 11, 2010

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.

Keywords: Payment Card Networks, Interchange Fees, Merchant Fees

JEL Classification: G21, L11, L42, L31, L51, K21

Suggested Citation

Bedre-Defolie, Özlem and Calvano, Emilio, Pricing Payment Cards (August 11, 2010). ECB Working Paper No. 1139, ESMT Working Paper No. 10-005, Available at SSRN: https://ssrn.com/abstract=1284648 or http://dx.doi.org/10.2139/ssrn.1284648

Özlem Bedre-Defolie (Contact Author)

ESMT European School of Management and Technology ( email )

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University of Bergen, Economics Department ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway

CEPR IO ( email )

London
United Kingdom

Emilio Calvano

University of Bologna - Department of Economics ( email )

Bologna
Italy

University of Toulouse 1 - Department of Economics ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

CSEF - Center for Studies in Economics and Finance ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

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