Interchange Fees and Innovation in Payment Systems

54 Pages Posted: 3 Apr 2013 Last revised: 21 Oct 2013

See all articles by Marc Bourreau

Marc Bourreau

Telecom ParisTech

Marianne Verdier

Université Paris 2 Panthéon Assas

Date Written: October 8, 2013

Abstract

We analyze the impact of interchange fees on consumers' and merchants' incentives to adopt an innovative payment instrument, in a setting where there are adoption externalities between consumers and merchants. We show that consumer adoption decreases with the interchange fee for high degrees of externality, and varies non-monotonically with it for low degrees of externality. The profit-maximizing interchange fee coincides with the social optimum when externalities are strong, whereas it is too high when they are weak. We also compare the issuers' incentives to innovate when they cooperate and when they make their innovation decisions independently.

Keywords: Interchange fees, Innovation, Payment systems, Cooperation

JEL Classification: E42, L1, O33

Suggested Citation

Bourreau, Marc and Verdier, Marianne, Interchange Fees and Innovation in Payment Systems (October 8, 2013). Available at SSRN: https://ssrn.com/abstract=2244160 or http://dx.doi.org/10.2139/ssrn.2244160

Marc Bourreau (Contact Author)

Telecom ParisTech ( email )

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

Marianne Verdier

Université Paris 2 Panthéon Assas ( email )

France

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