Research Discussion Papers, Bank of Finland
No 22/2008:
Integrating European retail payment systems: some economics of SEPA
Kari Kemppainen ()
Abstract: Using a spatial competition model of retail payment
networks, this paper discusses the likely economic consequences associated
with the formation of the Single Euro Payments Area (SEPA). The model
considers an expansion of positive network externalities on the demand side
and adjustment cost on the supply side and reveals that the introduction of
SEPA may not lead to a fully competitive and integrated retail payment
markets. This is especially the case when the markets are segments before
the introduction of SEPA. In such a scenario, the post-integrated markets
are likely to remain segmented or will be characterised by a kinked
equilibrium where no significant price competition takes place. In both
outcomes, SEPA leads to increased prices, larger network sizes (ie
increased number of customers) and a higher consumer surplus. Additionally,
if the SEPA-induced adjustment costs for payment networks are not
prohibitively high, SEPA may also lead to an increase in both profits and
social welfare.
Keywords: integration; network effects; retail payments; (follow links to similar papers)
JEL-Codes: G21; L14; L15; (follow links to similar papers)
43 pages, September 24, 2008
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