Plastic Clashes: Competition Among Closed and Open Systems in the Credit Card Industry

This paper analyzes market competition between two difierent types of credit card platforms: card associations and proprietary systems. The main focus is on the role of the collective setting of the interchange fee by members,of the association. We de- scribe the sterilizing role of the interchange fee: when the interchange fee is set so as to maximize the sum of issuers’ and acquirers’ proflts, the equilibrium values of plat- forms’ proflts, of the sum of the fees charged by each platform and their market shares are independent of the competitive conditions within the associated members,in the two sides of the market and are afiected by the strength of inter-platform competition. We also show that the imposition of a ban on the setting of the interchange fee has ambiguous efiects on the proflt of the proprietary system. Keywords: credit cards, interchange fee, two-sided markets,