Interchange Fee Regulation and Service Investments

49 Pages Posted: 12 Sep 2018 Last revised: 30 Jun 2019

See all articles by Markus Reisinger

Markus Reisinger

Frankfurt School of Finance & Management - Economics Department; CESifo (Center for Economic Studies and Ifo Institute)

Hans Zenger

European Union - Directorate General for Competition

Date Written: May 1, 2019

Abstract

This paper analyzes the impact of interchange fee regulation on the investment incentives of a payment card platform in the presence of full merchant internalization. We distinguish between investment in consumer and retailer services. We find that the optimally regulated interchange fee can be above the privately optimal one to induce the platform to invest more in retailer services. We also demonstrate that the two prominent regulatory benchmarks of a zero interchange fee and regulation according to the “tourist test” tend to set too low investment incentives under a total welfare standard. Instead, “tourist test” regulation can be a reasonable approximation under a total user surplus standard.

Keywords: Payment Cards, Interchange Fee, Regulation, Service Investment, Two-Sided Markets

JEL Classification: G21, L31, L42

Suggested Citation

Reisinger, Markus and Zenger, Hans, Interchange Fee Regulation and Service Investments (May 1, 2019). International Journal of Industrial Organization, Vol. 66, pp. 40-77, 2019. Available at SSRN: https://ssrn.com/abstract=3241289

Markus Reisinger

Frankfurt School of Finance & Management - Economics Department ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Hans Zenger (Contact Author)

European Union - Directorate General for Competition ( email )

Place Madou, Madouplein 1
Saint-Josse-ten-Noode/Sint-Joost-ten-Noode
Brussels, B-1049
Belgium

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