Interchange Fees: The Economics and Regulation of What Merchants Pay for Cards

INTERCHANGE FEES: THE ECONOMICS AND REGULATION OF WHAT MERCHANTS PAY FOR CARDS, David S. Evans, ed., Competition Policy International, 2011

228 Pages Posted: 18 Dec 2011

See all articles by David S. Evans

David S. Evans

Global Economics Group; University College London

Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Robert E. Litan

Council on Foreign Relations (CFR) - Council on Foreign Relations- Washington D.C.

Daniel D. Garcia-Swartz

Charles River Associates - Chicago Office

Howard H. Chang

Global Economics Group, LLC

Margaret Morgan Weichert

Market Platform Dynamics

Abel Mateus

affiliation not provided to SSRN

Date Written: December 17, 2011

Abstract

This volume consists of seven articles on the economics and regulation of interchange fees. All rely on the multi-sided platform framework. The first two chapters examine whether there is a market failure in setting interchange fees and present principles for considering correction to a market failure. One of the themes of these articles is that regulating one side of a two-sided market necessarily has effects on the other side of the market: lower prices for merchants means higher prices for consumers. Chapters 3-5 address that tradeoff which is sometimes called a “waterbed effect”. Chapter 3 presents an empirical study of what happened following the imposition of price controls on interchange fees in Australia in the mid 2000s. Chapters 4 and 5 estimate the prospective impact on consumers in the US and EU of interchange fee caps. These chapters rely heavily on the economic concept of pass-through, which concerns the extent to which business change their prices in response to changes in costs. The net impact of reductions in interchange fees on consumers depends on the extent to which issuing banks raise fees and merchants lower prices in response to a reduction in interchange fees which are revenues to banks and ultimately costs to merchants. Chapter 6 examines a related question: how do interchange fee price caps affect investment and innovation for payment systems. Chapter 7 examines arguments that merchant representatives have made concerning debit card interchange fee regulation. That is followed by a short chapter with a few concluding thoughts.

Keywords: interchange fees, two-sided markets, credit cards, debit cards, payment cards

Suggested Citation

Evans, David S. and Schmalensee, Richard and Litan, Robert E. and Garcia-Swartz, Daniel D. and Chang, Howard H. and Weichert, Margaret Morgan and Mateus, Abel, Interchange Fees: The Economics and Regulation of What Merchants Pay for Cards (December 17, 2011). INTERCHANGE FEES: THE ECONOMICS AND REGULATION OF WHAT MERCHANTS PAY FOR CARDS, David S. Evans, ed., Competition Policy International, 2011. Available at SSRN: https://ssrn.com/abstract=1974023

David S. Evans (Contact Author)

Global Economics Group ( email )

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University College London ( email )

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Richard Schmalensee

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Robert E. Litan

Council on Foreign Relations (CFR) - Council on Foreign Relations- Washington D.C. ( email )

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Daniel D. Garcia-Swartz

Charles River Associates - Chicago Office ( email )

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Howard H. Chang

Global Economics Group, LLC ( email )

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312-533-4602 (Phone)

HOME PAGE: http://www.globaleconomicsgroup.com

Margaret Morgan Weichert

Market Platform Dynamics ( email )

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Building 7, Suite 300
Atlanta, GA 30305
United States

HOME PAGE: http://Www.marketplatforms.com

Abel Mateus

affiliation not provided to SSRN ( email )

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