Competition is Bad for Consumers: Analysis of an Artificial Payment Card Market
Biliana Alexandrova-Kabadjova*, Edward Tsang**,
and Andreas Krause***
*General Directorate of Central Banking Operations, Bank of Mexico, Avenida 5 de Mayo No.6, Colonia Centro, Delegacion Cuauhtemoc, 06059 Distrito Federal, Mexico City, Mexico
**Department of Computer Science, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, Great Britain,
***School of Management, University of Bath, Bath BA2 7AY, Great Britain
This paper investigates the competition between payment card network platforms in an artificial payment card market. In the market, we model the interactions between consumers, merchants, and competing card schemes and obtain their optimal pricing structure. We allow platform operators to charge consumers and merchants with fixed fees, provide net benefits from card usage/acceptance, and engage in marketing activities. We assume that the consumer side exhibits lower demand elasticity. With these settings, we establish that consumers benefit from a reduction of the numbers of competing payment cards through lower fees and higher net benefits, while merchants remain largely unaffected. The two-sided nature of the market leads to the result that having more competitors actually reduces prosperity for customers.
-  BIS, “Statistics on payment and settlement systems in selected countries – figures for 2007,” Report 86, Bank for International Settlements, 2009.
-  ECB, “Payment statistics,” Report, European Central Bank, 2008.
-  J. Vickers, “Public policy and the invisible price: competition law, regulation and the interchange fee,” In: Int. Policy Payments Conf. Interchange Fees in Credit and Debit Card Industries.What Role for Public Authorities?, Federal Reserve Bank of Kansas City, pp. 231-247, 2005.
-  W. Bolt and S. Chakravorti, “Economics of Payment Cards: A Status Report,” DNBWorking Paper No.193, De Nederlandsche Bank, 2008.
-  S. Weiner, “The federal reserve’s role in retail payments: Adapting to a new environment. Economic Review,” Federal Reserve Bank of Kansas City Fourth Quarter, pp. 36-63, 2008.
-  RBA, “Payments system board annual report,” Tech. rep., Reserve Bank of Australia, 2008.
-  S. G. Castellanos, R.Medina, A.Mendoza, J. L. Negin, and F. Solis, “The Role of Interchange Fees in Mexicos Retail Payment System: from Theory to Practice,” Working paper, Banco de Mexico, 2008.
-  D. Evans and R. Schmalensee, “The economics of interchange fees and their regulation: An overview,” Working Paper 4548-05, MIT Sloan, 2005.
-  J. Gans and S. King, “A Theoretical Analysis of Credit Card Regulation,” Working paper 2002-11, Melbourne Business School, 2002.
-  J. C. Rochet and J. Tirole, “Cooperation among competitors: Some economics of payment card associations,” RAND J. of Economics Vol.33, No.4, pp. 549-570, 2002.
-  J. C. Rochet and J. Tirole, “Tying-in two-sided markets and the honour all cards rule,” CEPR Discussion Papers 6132, C.E.P.R. Discussion Papers, 2007.
-  R. Schmalensee, “Payment systems and interchange fees,” J. of Industrial Economics, Vol.50, pp. 103-122, 2003.
-  J. Wright, “Optimal card payment systems,” European Economic Review, Vol.47, pp. 587-612, 2003.
-  J. Wright, “Pricing in debit and credit card schemes,” Economics Letters, Vol.80, pp. 305-309, 2003.
-  D. Cruichshank, “Competition in UK Banking, Report to the Chancellor of the Exchequer,” 2000.
-  S. Chakravorti and R. Roson, “Platform competition in two-sided markets: The case of payment networks,” Working Paper, WP-04-09, Federal Reserve Bank of Chicago, 2005.
-  B. Alexandrova-Kabadjova, A. Krause, and E. Tsang, “An agentbased model of interactions in the payment card market,” Proc. of the 8th Int. Conf. Intelligent Data Engineering and Automated Learning – IDEAL 2007, H. Yin, P. T., E. Corchado, W. Byrne, and X. Yao (Eds.), Vol.4881 of Lecture Notes in Computer Science. University of Brimingham, UK, pp. 1063-1072, 2007.
-  B. Alexandrova-Kabadjova, E. Tsang, and A. Krause, “Evolutionary learning of the optimal pricing strategy in an artificial payment card market,” Natural Computing in Computational Economics and Finance, Studies in Computational Intelligence, A. Brabazon and M. O’Neill (Eds.), pp. 233-251, 2008.
-  B. Alexandrova-Kabadjova, “The impact of the interchange fees on a non-saturated multi-agent payment card market,” Intelligent Systems in Accounting, Finance and Management, Vol.16, pp. 33-48, 2009.
-  S. Baluja, “Population-based incremental learning: A method for integrating genetic search based function optimization and competitive learning,” Working paper CMU-CS-94-163, School of Computer Science, Carnegie Mellon University, 1994.
-  M. Kern, “Parameter adaptation in heuristic search: A populationbased approach,” Ph.D. thesis, Department of Computer Science, University of Essex, 2006.
-  B. Alexandrova-Kabadjova, E. Tsang, and A. Krause, “Market structure and information in payment card markets,” Int. J. of Automation and Computing, 2011. (to be appeared)
-  K. O. Nti, “More potential entrants may lead to less competition,” J. of Economics, Vol.49, pp. 47-70, 1989.
-  K. O. Nti, “Potential competition and coordination in amarket-entry game,” J. of Economics, Vol.71, pp. 149-165, 2000.
-  W. Elberfeld and E. Wolfstetter, “A dynamic model of bertrand competition with entry,” Int. J. of Industrial Organization, Vol.17, pp. 513-525, 1999.