Determinants of Interchange Fees (PowerPoint)

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					      Comments on Payment Industry
              Dynamics

 Focus on how paper differs from literature
 Discuss nature of asymmetries driving
  interchange fees
 Some other suggestions
         Is it really that different?
   It is … but the differences are different

   Claimed differences from Rochet & Tirole (2002)
     Focus on monetary character of payments
     Implies natural asymmetry – consumers & merchants



   These are not really different
     Monetary aspect the same – cost savings in payments
     R&T (2002), Wright (2004), Guthrie & Wright (2006)
      and some others have natural asymmetry
    So what are the differences?

   Richer microfoundations
     Consumers vary in income – rich people spend more
     Firm vary in size and face contestable market

     Value of expenditures determines use of payment

     All fees proportional to value of transaction

   Adoption costs separate from usage costs
     As adoption costs gets small, asymmetry disappears
     A Baxter-type model emerges
           Natural asymmetry?
   There should be a natural symmetry in the model
   It arises because both sides face adoption costs
     Correct that merchants take account of cardholder fees
     But so consumers should take account of merchant fees



   The asymmetry, if any, should be the standard one
     Assume merchants accept card if lowers their price
     In contestable market, merchant accepting card should
      take into account consumers’ cost saving from using
      cards otherwise it can be replaced by a merchant that
      does
              Other suggestions

   Another asymmetry is assumed distributions

   Social optimum versus Ramsey pricing

   Can current U.S. puzzles be explained by model
    based on adoption costs and choices?

				
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posted:10/23/2011
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