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

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