Cooperation among competitors: some economics of payment card associations

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Publication Details

Output type: Journal article

Author list: Rochet JC, Tirole J

Publisher: Wiley

Publication year: 2002

Journal: The RAND Journal of Economics (0741-6261)

Volume number: 33

Issue number: 4

Start page: 549

End page: 570

Number of pages: 22

ISSN: 0741-6261

eISSN: 1756-2171

Languages: English-Great Britain (EN-GB)

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Open access status: closed

Abstract

We analyze platforms in two-sided markets with network externalities, using the specific context of a payment card association. We study the cooperative determination of the interchange fee by member banks. The interchange fee is the "access charge" paid by the merchants' banks (the acquirers) to cardholders' banks (the issuers). We develop a framework in which banks and merchants may have market power and consumers and merchants decide rationally on whether to buy or accept a payment card. After drawing the welfare implications of a cooperative determination of the interchange fee, we describe in detail the factors affecting merchant resistance, compare cooperative and for-profit business models, and make a first cut in the analysis of system competition.

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