Research Discussion Paper – RDP 2009-03 Competition Between Payment Systems: Results Abstract

This paper is the second of two companion pieces. In the first we developed a model of competition between payment systems which extends that of Chakravorti and Roson (2006). Here we turn to the results which can be obtained from the Chakravorti and Roson model, from our extension of it, and from a third family of models which we develop in this paper. We obtain two main sets of findings.

First, we shed further light on how competing platforms will set their price level and pricing structure when endogenous multi-homing is allowed on both sides of the market. Our results challenge the general finding in the literature that the greater the propensity of one side of the market to single-home, the more attractive will be the pricing offered to its members by competing platforms. Our results confirm that while this finding generally holds when platforms charge both consumers and merchants on a purely per-transaction basis, it need not hold in the more realistic situation where platforms instead levy flat fees on consumers. Second, we extend findings of Hermalin and Katz (2006) showing that, in certain circumstances, platforms may offer less attractive pricing to the side of the market which holds the choice of payment instrument at the moment of sale.

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