Private Cards and the Bypass of Payment Systems by Merchants

Telecom ParisTech Working Paper No. ESS-09-03

59 Pages Posted: 4 Feb 2009 Last revised: 10 Nov 2009

See all articles by Marc Bourreau

Marc Bourreau

Telecom ParisTech

Marianne Verdier

Ecole Nationale Superieure des Telecommunications

Date Written: September 3, 2009

Abstract

This paper studies the incentives of a merchant to bypass a payment platform by issuing private cards. In our model, a payment platform allocates the total cost of a card transaction between a monopolistic issuer and a monopolistic acquirer by choosing an "interchange fee". We determine how the level of the interchange fee impacts a merchant's decision to issue private cards, if there are strategic interactions between merchants. We prove that the payment platform can only deter entry by lowering the level of the interchange fee. If the payment platform chooses to accommodate entry, we find that the total user surplus increases, but that entry is beneficial to social welfare only if the entry cost is sufficiently low.

Keywords: Payment card systems, interchange fee, two-sided markets, private cards

JEL Classification: G21, L31, L42

Suggested Citation

Bourreau, Marc and Verdier, Marianne, Private Cards and the Bypass of Payment Systems by Merchants (September 3, 2009). Telecom ParisTech Working Paper No. ESS-09-03, Available at SSRN: https://ssrn.com/abstract=1337459 or http://dx.doi.org/10.2139/ssrn.1337459

Marc Bourreau

Telecom ParisTech ( email )

46, rue Barrault
Paris Cedex 13, F-75634
France

Marianne Verdier (Contact Author)

Ecole Nationale Superieure des Telecommunications ( email )

46, rue Barrault
Paris Cedex 13, F-75634
France

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