American Economic Journal: Microeconomics
no. 3, August 2013
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
profit-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 tariffs are useful pricing tools for platforms.
Bedre-Defolie, Özlem, and Emilio Calvano.
"Pricing Payment Cards."
American Economic Journal: Microeconomics,
Market Structure and Pricing: Monopoly
Network Formation and Analysis: Theory
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Monopoly; Monopolization Strategies