Price Regulation in Two-Sided Markets: Empirical Evidence from Debit Cards

59 Pages Posted: 5 Feb 2019 Last revised: 28 Nov 2022

See all articles by Vladimir Mukharlyamov

Vladimir Mukharlyamov

Georgetown University - McDonough School of Business

Natasha Sarin

University of Pennsylvania Carey Law School

Date Written: November 24, 2022

Abstract

This paper studies the impact of price regulation in two-sided markets, where intermediaries must get both sides of the market on board. Since platforms such as debit card networks can only succeed by simultaneously convincing consumers to use cards and merchants to accept them, they often subsidize one side of the market to generate supracompetitive profits from the other side (Rochet and Tirole 2003). Using a novel dataset on card processing fees, we show a regulation restricting banks’ ability to charge high processing fees on debit-card transactions (the Durbin Amendment of the 2010 Dodd-Frank Act) led to higher checking account fees paid by consumers, the previously subsidized side of the market. In addition, the policy has likely accelerated the adoption of credit cards with higher interchange fees, thus diminishing—if not offsetting entirely—merchants' savings. Taken together, these effects impede the regulation’s stated objective of enhancing consumers’ welfare through lower retail prices. Our evidence adds empirical support to the concern that market failures in two-sided markets are hard to identify, and even harder to correct.

Keywords: Financial regulation, Debit cards, Durbin amendment, Dodd Frank, commercial banks, two-sided markets, payments

JEL Classification: G21, G28, K29, L41, L84, L88

Suggested Citation

Mukharlyamov, Vladimir and Sarin, Natasha, Price Regulation in Two-Sided Markets: Empirical Evidence from Debit Cards (November 24, 2022). Available at SSRN: https://ssrn.com/abstract=3328579 or http://dx.doi.org/10.2139/ssrn.3328579

Vladimir Mukharlyamov

Georgetown University - McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

HOME PAGE: http://https://sites.google.com/view/mukharlyamov

Natasha Sarin (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States

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