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Biliana Alexandrova-Kabadjova

30 December 2009
This paper investigates the impact on the network growth of the level of merchant discount, the level of Multilateral Interchange Fee (MIF), and the consumers' and the merchants' awareness of positive network effects. In an artificial market, in which issuers and acquirers belong to the same network, we simulate explicitly the interactions among consumers and merchants at the point of sale. We allow card issuers to charge fixed fees and provide net benefits from card usage, whereas acquirers could charge fixed and transactional fee. End users have homogeneous convenience benefits and are able to internalize network effects, because to a certain degree consumers are aware of the existence of merchants accepting cards and merchants are aware of the existence of consumers having cards. The MIF owes from acquirers to issuers. We assume there is a maximum level of merchants' discount MD' (reservation price) that the retailers are willing to pay, depending on the level of convenience benefits they receive. We study the case of imperfect competition, in which some acquirers charge a merchants' discount (MD) higher than MD', whereas other acquirers charge a MD lower than MD'. We found that in the case, in which consumers' and merchants' awareness is high, retailers face stronger externalities arriving from the set of cardholders that enjoy transactional benefits and the set of merchants that accept cards by paying lower transactional fees. In this conditions retailers could be obliged to pay variable fees higher than MD'.
JEL Code
G20 : Financial Economics→Financial Institutions and Services→General
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
C63 : Mathematical and Quantitative Methods→Mathematical Methods, Programming Models, Mathematical and Simulation Modeling→Computational Techniques, Simulation Modeling
Retail payments: integration & innovation