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.
and Andreas Krause, “Competition is Bad for Consumers: Analysis of an Artificial Payment Card Market,” J. Adv. Comput. Intell. Intell. Inform., Vol.15, No.2, pp. 188-196, 2011.
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