Public Good Issues in Target: Natural Monopoly, Scale Economies, Network Effects and Cost Allocation

24 Pages Posted: 29 Jul 2005

See all articles by Wilko Bolt

Wilko Bolt

De Nederlandsche Bank (Dutch Central Bank); VU University Amsterdam

David B. Humphrey

Florida State University - Department of Finance

Date Written: July 2005

Abstract

This paper discusses various theoretic concepts which play a role in assessing the public benefits of Target, the large value RTGS payment network operated by the Eurosystem. These concepts touch upon natural monopoly, network externalities, competition and contestability, as well as economies of scale and scope. The existence of a natural monopoly provides a rationale for a temporary partial or full subsidy in order for Target to achieve the 'most efficient scale' or apply the most efficient technology to lower unit costs. Such a subsidy could be implemented through temporary 'penetration' pricing. Based on empirical results for the Federal Reserve's payment system (Fedwire), it is further argued that if Target decided to standardize its operating platforms and consolidate its processing sites into one or a few centers, it too could realize strong scale economy benefits and lower unit costs.

Keywords: public good, natural monopoly, most efficient scale, partial subsidy

JEL Classification: G20, H41, L10

Suggested Citation

Bolt, Wilko and Humphrey, David B., Public Good Issues in Target: Natural Monopoly, Scale Economies, Network Effects and Cost Allocation (July 2005). ECB Working Paper No. 505. Available at SSRN: https://ssrn.com/abstract=750785

Wilko Bolt (Contact Author)

De Nederlandsche Bank (Dutch Central Bank) ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

David B. Humphrey

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States
850-644-7899 (Phone)
850-668-6696 (Fax)

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