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The Determinants of Optimal Interchange Fees in Payment Systems
Author(s) -
Wright Julian
Publication year - 2004
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.0022-1821.2004.00214.x
Subject(s) - payment , competition (biology) , business , microeconomics , charge (physics) , payment card , industrial organization , finance , commerce , economics , physics , ecology , quantum mechanics , biology
This paper presents a model of a card payment system as a two‐sided market that allows for partial participation by heterogeneous consumers and merchants. Taking into account the strategic effects arising from competition between merchants, the model is used to characterize the optimal structure of fees between those charged to cardholders and those charged to merchants and, more specifically, the level of the interchange fee that banks charge each other. The results modify the existing characterizations of the interchange fee, and explain the source of potential deviations between the privately and socially optimal level of the fee.