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Review of Industrial Organization

, Volume 54, Issue 1, pp 129–158 | Cite as

Interchange Fees and Innovation in Payment Systems

  • Marc Bourreau
  • Marianne VerdierEmail author
Article
  • 72 Downloads

Abstract

We analyze the impact of interchange fees on consumers’ and merchants’ incentives to adopt an innovative payment instrument, in a setting with adoption externalities between consumers and merchants. We show that consumer adoption decreases with the interchange fee for high degrees of externality, and varies non-monotonically with it for low degrees of externality. The profit-maximizing interchange fee coincides with the social optimum when externalities are strong, whereas it is too high when they are weak. We also compare the issuers’ incentives to innovate when they cooperate and when they make their innovation decisions independently.

Keywords

Cooperation Innovation Interchange fees Payment systems 

Mathematics Subject Classification

E42 L1 O33 

Notes

Acknowledgements

We thank the Editor, Lawrence White, and two anonymous referees for their valuable comments. We also thank Yossi Spiegel and Raphaël Levy for useful remarks, as well as seminar participants at Mines ParisTech and University of Paris-Dauphine, and participants at the Paris ICT Conference (2011), the Conference on the Economics of Payments (Bank of Canada, 2012), the EARIE Conference (Rome, 2012), and the ECB/Banca d’Italia Workshop on Interchange Fees (Rome, 2014).

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Economics and Social SciencesTelecom ParisTechParisFrance
  2. 2.Centre de Recherches en Economie et Droit (CRED)Université Paris 2 Pantheon AssasParisFrance
  3. 3.CERNA - Center for industrial economicsMINES ParisTech, PSL - Research UniversityParisFrance

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