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Platform Competition in Two-Sided Markets: The case of payment networks

Platform Competition in Two-Sided Markets: The case of payment networks Sujit Chakravorti and Roberto Roson discussed by Wilko Bolt Conference on ‘The Economics of Payments’, March 31 - April 1, 2004, Atlanta. Content .

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Platform Competition in Two-Sided Markets: The case of payment networks

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  1. Platform Competition in Two-Sided Markets: The case of payment networks Sujit Chakravorti and Roberto Roson discussed by Wilko Bolt Conference on ‘The Economics of Payments’, March 31 - April 1, 2004, Atlanta

  2. Content Theoretic analysis of competing payment networks, where networks offer differentiated products in terms of benefits to consumers and merchants. As pricing arrangements for payment cards have attracted controversy and triggered antitrust scrutiny, understanding the competitiveness and dynamics of card payment systems is a key policy issue. Punch line: Competition unambiguously increases consumer and merchant welfare, suggesting that policymakers should promote competition among networks.

  3. 1. Social Welfare Duopoly leads to lower consumer and merchant fees. How would this change if more and more networks would enter the market? (as n→∞) In other words, what about social optimal prices? Could you not characterize those prices in your model under a uniform distribution? What if social prices lead to a loss-making business for card networks? (see e.g. Armstrong, 2004)

  4. 2. Pricing and elasticities Demand elasticities are key determinants for platform pricing. But what are their sizes? Can they be estimated empirically with some accuracy? There is not a lot of relevant payment data. Concerning the optimal pricing structure, consumer and merchant fees are proportionally related to elasticities. Perhaps one would expect an inverse relation as in Armstrong (2004). What is the correct interpretation of the pricing rule?

  5. 3. Network competition and efficiency Card payment systems typically have large set-up costs. Duplication of these fixed costs does not seem socially desirable, which may lead to ‘competitive bottlenecks’. The ability of a potential entrant to access the existing network becomes important and triggers the question of ‘access pricing’ and ‘raising rival costs’. Can your model deal with this issue? Network competition induces a trade off between static and dynamic efficiency: low end-user prices may undermine investments in new network technologies.

  6. 4. The importance of multihoming There is a delicate distinction between membership and usage multihoming (Rochet and Tirole, 2004). Rysman (2004) presents evidence that cardholders multihome in membership rather than in usage. What would happen in the model if cardholders multihome in membership and merchants in usage? Would this lead to indeterminacy of prices? Still, this happens in real life! Concerning different modes of payment (cash, debit card, charge card, credit card) singlehoming seems strange, it also depends on the size of the transaction. In Holland, policymakers would like to induce consumers to multihome!

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