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American Economic Journal: Microeconomics: Vol. 5 No. 3 (August 2013)

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Pricing Payment Cards

Article Citation

Bedre-Defolie, Özlem, and Emilio Calvano. 2013. "Pricing Payment Cards." American Economic Journal: Microeconomics, 5(3): 206-31.

DOI: 10.1257/mic.5.3.206

Abstract

Payment card networks, such as Visa, require merchants' banks to pay substantial "interchange" fees to cardholders' banks, on a per transaction basis. This paper shows that a network's profi t-maximizing fee induces an inefficient price structure, over-subsidizing card usage and over-taxing merchants. We show that this distortion is systematic and arises from the fact that consumers make two distinct decisions (membership and usage) whereas merchants make only one (membership). In general, we contribute to the theory of two-sided markets by introducing a model that distinguishes between extensive and intensive margins,thereby explaining why two-part tarif fs are useful pricing tools for platforms.

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Authors

Bedre-Defolie, Özlem (ESMT, Berlin)
Calvano, Emilio (Bocconi U)

JEL Classifications

D42: Market Structure and Pricing: Monopoly
D85: Network Formation and Analysis: Theory
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages
L12: Monopoly; Monopolization Strategies

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