Pricing Debit Card Payment Services: An IO Approach

Author/Editor:

Alexander F. Tieman ; Wilko Bolt

Publication Date:

October 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper presents a theoretical framework for analyzing pricing structures in debit card schemes featuring cardholders, retailers, their respective banks, and a network routing switch. The network routing switch controls the electronic debit card network and is jointly owned by the banks. In setting its prices, it needs to consider getting both consumers and retailers to participate in the market. In this two-sided market for debit cards, we show that the "double-monopolistic" network routing switch may want to supply consumers with cheap debit cards, deriving profits from charging a high retailer fee per transaction. This theoretic result resembles the current practice in the Netherlands where consumers pay no transaction fee, but retailers do. This corner solution carries over when we analyze socially optimal pricing.

Series:

Working Paper No. 2003/202

Subject:

Banking Competition Demand elasticity Economic theory Expenditure Financial markets Payment systems Price elasticity Prices Public expenditure review

English

Publication Date:

October 1, 2003

ISBN/ISSN:

9781451874426/1018-5941

Stock No:

WPIEA2000203

Pages:

34

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