Platform Competition With User Rebates Under No Surcharge Rules

29 Pages Posted: 6 Dec 2017  

Marius Schwartz

Georgetown University

Daniel R. Vincent

University of Maryland - Department of Economics

Date Written: November 17, 2017

Abstract

We analyze competing strategic platforms setting fees to a local monopolist merchant and granting cash-back rebates to end users, when the merchant is prevented from surcharging platforms customers, as frequently occurs with credit cards. Each platform has an incentive to gain transactions by increasing the spread between its merchant fee and user rebate above its rival’s spread. This incentive yields non-existence of pure strategy equilibrium in many natural environments. In some circumstances, there is a mixed strategy equilibrium where platforms choose fee structures that induce the merchant to accept only one platform with equal probability, a form of monopolistic market allocation.

Keywords: competing platforms, rebates, no surcharge, payment networks, credit cards

JEL Classification: L13, L41, L42, D43

Suggested Citation

Schwartz, Marius and Vincent, Daniel R., Platform Competition With User Rebates Under No Surcharge Rules (November 17, 2017). Available at SSRN: https://ssrn.com/abstract=3080888 or http://dx.doi.org/10.2139/ssrn.3080888

Marius Schwartz (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States
202-678-6112 (Phone)

Daniel R. Vincent

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-3485 (Phone)
301-405-3542 (Fax)

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