Two-Sided Market, R&D and Payments System Evolution

IMF Working Papers, March 18, 2019

Source details

It takes many years for more efficient electronic payments to be widely used, and the fees that merchants (consumers) pay for using those services are increasing (decreasing) over time.
The paper addresses these puzzles by studying payments system evolution with a dynamic model in a twosided market setting.
The authors calibrate the model to the U.S. payment card data, and conduct welfare and policy analysis.
The analysis shows that the market power of electronic payment networks plays important roles in explaining the slow adoption and asymmetric price changes, and the welfare impact of regulations may vary significantly through the endogenous R&D channel.

Market power of electronic payment networks is important for:
- Explaining slow adoption of more efficient electronic payments.
- Explaining asymmetric price changes (merchant fees increasing, consumer fees decreasing).
Endogenous R&D channels can significantly alter the welfare impact of regulatory interventions.

Regulatory impact on welfare is not uniform and may vary significantly due to endogenous R&D responses.
Consideration of market power in electronic payment networks is central when designing policies to accelerate adoption or to address asymmetric pricing effects.