Research Discussion Papers, Bank of Finland
Assessing effects of price regulation in retail payment systems
Abstract: This paper considers effects of price regulation in retail
payment systems by applying the model of tele-communications competition by
Laffont-Rey-Tirole (1998). In our two-country model world there is one
retail payment network located in each country and markets are segmented ā
la Hotelling. We show that the optimal price under price regulation is the
weighted average of pre-regulation domestic and cross-border prices where
the degree of home-bias in making payments serves as the weight.
Furthermore, we find that the general welfare effects of price regulation
are ambiguous: gross social welfare is higher un-der price discrimination
than under price regulation in the special case where costs of access to
banking services (transportation costs) are high. However, there also exist
cases where prohibitively high transac-tion costs make price discrimination
to reduce total welfare. Finally, if transportation costs are reduced
sufficiently, segmentation of payment markets is eliminated. Markets then
become fully-served as in the original Laffont-Rey-Tirole model, suggesting
that price discrimination would be beneficial for welfare.
Keywords: payment systems; price regulation; retail payments; (follow links to similar papers)
JEL-Codes: D49; G28; L59; (follow links to similar papers)
38 pages, July 11, 2005
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