Competition Policy and Regulation in Credit Card Markets: Insights from Single-Sided Market Analysis

23 Pages Posted: 1 Dec 2014  

Dennis W. Carlton

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Ralph A. Winter

University of British Columbia (UBC) - Division of Finance

Date Written: November 28, 2014

Abstract

This paper reexamines the economics of two common features of credit card networks: the interchange fee paid by merchant banks, or acquirers, to cardholder banks, or issuers; and the restraint commonly placed on merchants against surcharging for credit card transactions. We show that the parallels with the economics of conventional one-sided markets offer insights that have been overlooked in the credit card economics literature, which stresses the two-sided nature of the market. The characterization of the optimal interchange fee is equivalent to the Dorfman-Steiner theorem from conventional price theory. The principle that the interchange fee maximizes output when an optimum exists and the possibility of interchange fee neutrality also have precise parallels in one-sided markets with promotion. Our analysis shows that the no-surcharge rule is equivalent to a retail MFN constraint. The no-surcharge rule raises prices to merchants due to a competition-suppression effect as well as a cost-externalization effect. The market condition underlying interchange neutrality (when surcharging is allowed) eliminates the impact of the no-surcharge rule in the case of a credit-card duopoly. Yet the same condition magnifies the impact in the presence of cash customers.

Keywords: credit cards, two-sided markets, interchange fees, retail MFN

JEL Classification: L00, L04

Suggested Citation

Carlton , Dennis W. and Winter, Ralph A., Competition Policy and Regulation in Credit Card Markets: Insights from Single-Sided Market Analysis (November 28, 2014). Available at SSRN: https://ssrn.com/abstract=2532166 or http://dx.doi.org/10.2139/ssrn.2532166

Dennis W. Carlton

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
312-322-0215 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ralph A. Winter (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8339 (Phone)
604-822-8377 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
274
rank
102,466
Abstract Views
1,003
PlumX