The Economics of Interchange Fees and Their Regulation: An Overview

This essay surveys the economic literature on interchange fees and the debate over whether interchange should be regulated and, if so, how. We consider, first, the operation of unitary payment systems, like American Express, in the context of the recent economic literature on two-sided markets, in which businesses cater to two interdependent groups of customers. The main focus is on the determination of price structure. We then discuss the basic economics of multi-party payment systems and the role of interchange in the operation of such systems under some standard, though unrealistic, simplifying assumptions. The key point of this discussion is that the interchange fee is not an ordinary price; its most direct effect is on price structure, not price level. We then examine the implications for privately determined interchange fees of some of the relevant market imperfections that have been discussed in the economic literature. While some studies suggest that privately determined interchange fees are inefficiently high, others point to fees being inefficiently low. Moreover, there is a consensus among economists that, as a matter of theory, it is not possible to arrive, except by happenstance, at the socially optimal interchange fee through any regulatory system that considers only costs. This distinguishes the market imperfections at issue here for multi-party systems from the more familiar area of public utility regulation, where setting price equal to marginal cost is theoretically ideal. Next, we consider the issues facing policy makers. Since there is so much uncertainty about the relation between privately and socially optimal interchange fees, the outcome of a policy debate can depend critically on who bears the burden of proof under whatever set of institutions and laws the deliberation takes place. There is no apparent basis in today's economics - at a theoretical or empirical level - for concluding that it is generally possible to improve social welfare by a noticeable reduction in privately set interchange fees. Thus, if antitrust or other regulators had to show that such intervention would improve welfare, they could not do so. This, again, is quite unlike public utility regulation or many areas of antitrust including, in particular, ordinary cartels. By the same token, there is no basis in economics for concluding that the privately set interchange fee is just right. Thus, if card associations had to bear the burden of proof - for example, to obtain a comfort or clearance letter from authorities for engaging in presumptively illegal coordinated behavior - it would be difficult for them to demonstrate that they set socially optimal fees. We take a pragmatic approach by suggesting two fact-based inquiries that we believe policymakers should undertake before intervening to affect interchange. First, policymakers should establish that there is a significant market failure that needs to be addressed. Second, policymakers should establish that it is possible to correct a serious market imperfection, assuming one exists, by whatever intervention they are considering (such as cost-based regulation of interchange fee levels) and thereby to increase social welfare significantly after taking into account other distortions that the intervention may create. We illustrate both of these points by examining the recent Australian experience.Technology and Industry, Regulatory Reform

Comptonisation of Cosmic Microwave Background Photons in Dwarf Spheroidal Galaxies

We present theoretical modelling of the electron distribution produced by annihilating neutralino dark matter in dwarf spheroidal galaxies (dSphs). In particular, we follow up the idea of Colafrancesco (2004) and find that such electrons distort the cosmic microwave background (CMB) by the Sunyaev-Zeldovich effect. For an assumed neutralino mass of 10 GeV and beam size of 1'', the SZ temperature decrement is of the order of nano-Kelvin for dSph models with a soft core. By contrast, it is of the order of micro-Kelvin for the strongly cusped dSph models favoured by some cosmological simulations. Although this is out of reach of current instruments, it may well be detectable by future mm telescopes, such as ALMA. We also show that the upscattered CMB photons have energies within reach of upcoming X-ray observatories, but that the flux of such photons is too small to be detectable soon. Nonetheless, we conclude that searching for the dark matter induced Sunyaev-Zeldovich effect is a promising way of constraining the dark distribution in dSphs, especially if the particles are light.Comment: 10 pages, 5 figures, MNRAS, in pres

Spinodal fractionation in a polydisperse square well fluid

Using Kinetic Monte Carlo simulation, we model gas-liquid spinodal decomposition in a size-polydisperse square well fluid, representing a 'near-monodisperse' colloidal dispersion. We find that fractionation (demixing) of particle sizes between the phases begins asserting itself shortly after the onset of phase ordering. Strikingly, the direction of size fractionation can be reversed by a seemingly trivial choice between two inter-particle potentials which, in the monodisperse case, are identical -- we rationalise this in terms of a perturbative, equilibrium theory of polydispersity. Furthermore, our quantitative results show that Kinetic Monte Carlo simulation can provide detailed insight into the role of fractionation in real colloidal systems.Comment: 7 pages, 7 figures, to be published in Phys. Rev.

U.S. v. Microsoft: Did Consumers Win?

U.S. v. Microsoft and the related state suit filed in 1998 appear finally to have concluded. In a unanimous en banc decision issued in late June 2004, the D.C. Circuit Court of Appeals rejected challenges to the remedies approved by the District Court in November 2002. The wave of follow-on private antitrust suits filed against Microsoft also appears to be subsiding. In this paper we review the remedies imposed in the United States, in terms of both their relationship to the violations found and their impact on consumer welfare. We conclude that the remedies addressed the violations ultimately found by the Court of Appeals (which were a subset of those found by the original district court and an even smaller subset of the violations alleged, both in court and in public discourse) and went beyond them in important ways. Thus, for those who believe that the courts were right in finding that some of Microsoft's actions harmed competition, the constraints placed on its behavior and the active, ongoing oversight by the Court and the plaintiffs provide useful protection against a recurrence of such harm. For those who believe that Microsoft should not have been found liable because of insufficient evidence of harm to consumers, the remedies may be unnecessary, but they avoided the serious potential damage to consumer welfare that was likely to accompany the main alternative proposals. The remedies actually imposed appear to have struck a reasonable balance between protecting consumers against the types of actions found illegal and harming consumers by unnecessarily restricting Microsoft's ability to compete.

A model colloidal fluid with competing interactions: bulk and interfacial properties

Using a simple mean-field density functional theory theory (DFT), we investigate the structure and phase behaviour of a model colloidal fluid composed of particles interacting via a pair potential which has a hard core of diameter $\sigma$, is attractive Yukawa at intermediate separations and repulsive Yukawa at large separations. We analyse the form of the asymptotic decay of the bulk fluid correlation functions, comparing results from our DFT with those from the self consistent Ornstein-Zernike approximation (SCOZA). In both theories we find rich crossover behaviour, whereby the ultimate decay of correlation functions changes from monotonic to long-wavelength damped oscillatory decay on crossing certain lines in the phase diagram, or sometimes from oscillatory to oscillatory with a longer wavelength. For some choices of potential parameters we find, within the DFT, a $\lambda$-line at which the fluid becomes unstable with respect to periodic density fluctuations. SCOZA fails to yield solutions for state points near such a $\lambda$-line. The propensity to clustering of particles, which is reflected by the presence of a long wavelength $\gg \sigma$, slowly decaying oscillatory pair correlation function, and a structure factor that exhibits a very sharp maximum at small but non zero wavenumbers, is enhanced in states near the $\lambda$-line. We present density profiles for the planar liquid-gas interface and for fluids adsorbed at a planar hard wall. The presence of a nearby $\lambda$-transition gives rise to pronounced long-wavelength oscillations in the one-body densities at both types of interface.Comment: 14 pages, 11 figure

A physics-based life prediction methodology for thermal barrier coating systems

A novel mechanistic approach is proposed for the prediction of the life of thermal barrier coating (TBC) systems. The life prediction methodology is based on a criterion linked directly to the dominant failure mechanism. It relies on a statistical treatment of the TBC's morphological characteristics, non-destructive stress measurements and on a continuum mechanics framework to quantify the stresses that promote the nucleation and growth of microcracks within the TBC. The last of these accounts for the effects of TBC constituents' elasto-visco-plastic properties, the stiffening of the ceramic due to sintering and the oxidation at the interface between the thermally insulating yttria stabilized zirconia (YSZ) layer and the metallic bond coat. The mechanistic approach is used to investigate the effects on TBC life of the properties and morphology of the top YSZ coating, metallic low-pressure plasma sprayed bond coat and the thermally grown oxide. Its calibration is based on TBC damage inferred from non-destructive fluorescence measurements using piezo-spectroscopy and on the numerically predicted local TBC stresses responsible for the initiation of such damage. The potential applicability of the methodology to other types of TBC coatings and thermal loading conditions is also discussed