Friday, December 22, 2006

"Market Structure and Credit Card Pricing: What Drives the Interchange?" (Federal Reserve Bank of Kansas City)

Abstract (50 page report): "This paper presents a model for the credit card industry, where oligopolistic card networks price their products in a complex marketplace with competing payment instruments, rational consumers/merchants, and competitive card issuers/acquirers. The analysis suggests that card networks demand higher interchange fees to maximize card issuers' profits as card payments become more efficient. At equilibrium, consumer rewards and card transaction volume also increase, while consumer surplus and merchant profits may not. The model provides a unified framework to evaluate credit card industry performance and government interventions."

[Source: Via Federal Reserve Bank of Kansas City]