Interchange fees in payment networks: implications for prices, profits and welfare

About the seminar topic

This paper develops a 2-sided model of the payment card market incorporating elastic demand, merchant and network market power, ad valorem interchange fees, cardholder rewards and cash as an alternative. Drawing on public finance, we introduce the concept of a credit card tax, an endogenous wedge between consumer and merchant prices driven by interchange fees, rewards and the rate of credit card adoption by consumers. We analyse how this tax affects prices, profits and welfare, showing that when demand elasticity is low, capping interchange fees raises equilibrium rewards and can improve consumer welfare for all consumers. Even when rewards fall, the net benefit to consumers can remain positive. We also identify conditions under which fee caps enhance efficiency and payment choice, offering new theoretical insights into payment market regulation.

Speaker bio

Konstantinos Serfes is a Professor of Economics in the LeBow College of Business at Drexel University. He earned his PhD in Economics from the University of Illinois at Urbana-Champaign. His research interests include industrial organisation, competition policy, applied microeconomics, applied game theory and financial economics. His work has been published in journals such as the Canadian Journal of Economics, Economic Theory, European Economic Review, International Journal of Industrial Organization, Journal of Economics & Management Strategy, Journal of Industrial Economics, Journal of Money, Credit and Banking, Management Science and Review of Economics and Statistics. He currently serves as the Section Editor-in-Chief for GAMES.

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