Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2005:1: Two-sided network effects, bank interchange fees, and the allocation of fixed costs

Mats Bergman ()
Additional contact information
Mats Bergman: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: Two-sided network effects in card payment systems are analysed under different market structures, e.g., competition, one-sided monopoly, bilateral monopoly and duopoly; with and without an interchange fee; for the so-called Baxter case of non-strategic merchants. A partial ranking of market structures according to their welfare effects is provided. Fixed central (card) system costs are introduced and analysed under free entry and duopoly. It is shown that under free entry, a per-transaction distribution of fixed costs is preferrable to dividing the fixed cost in equal proportions between the paritcipants. Under duopoly, (and no entry) a fixed division of central costs will yield lower prices.

Keywords: Two-sided markets; card payentd; payment systems; acquiring; issuing; market structure

JEL-codes: G21; L11; L44

32 pages, January 3, 2005

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