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Externalities and Regulation in Card Payment Systems

The Review of Network Economics

Vol. 5, Issue 1 - March 2006, pp 1 - 14

  Jean-Charles Rochet
IDEI, Toulouse University
E-mail: [email protected]

Jean Tirole
IDEI, Toulouse University, and MIT

  The paper offers a roadmap to the current economic thinking concerning interchange fees. After describing the fundamental externalities inherent in payment systems and analysing merchant resistance to interchange fee increases and the associations' determination of this fee, it derives the externalities' implications for welfare analysis. It then discusses whether consumer surplus or social welfare is the proper benchmark for regulatory purposes. Finally, it offers a critique of the current regulatory approach, and concludes with a call for more novel and innovative thinking about how to reconcile regulators' concerns and the industry legitimate desire to perform its balancing act.

Keywords: Two-sided markets, credit cards, interchange fees, regulation

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