Pricing payment cards

In a payment card association such as Visa, each time a consumer pays by card, the bank of the merchant (acquirer) pays an interchange fee (IF) to the bank of the cardholder (issuer) to carry out the transaction. This paper studies the determinants of socially and privately optimal IFs in a card scheme where services are provided by a monopoly issuer and perfectly competitive acquirers to heterogeneous consumers and merchants. Different from the literature, we distinguish card membership from card usage decisions (and fees). In doing so, we reveal the implications of an asymmetry between consumers and merchants: the card usage decision at a point of sale is delegated to cardholders since merchants are not allowed to turn down cards once they are affiliated with a card network. We show that this asymmetry is sufficient to induce the card association to set a higher IF than the socially optimal IF, and thus to distort the structure of user fees by leading to too low card usage fees at the expense of too high merchant fees. Hence, cap regulations on IFs can improve the welfare. These qualitative results are robust to imperfect issuer competition, imperfect acquirer competition, and to other factors affecting final demands, such as elastic consumer participation or strategic card acceptance to attract consumers. JEL Classification: G21, L11, L42, L31, L51, K21interchange fees, Merchant fees, Payment card associations

Merger Efficiency and Welfare Implications of Buyer Power

This paper analyzes the welfare implications of buyer mergers, which are mergers between downstream firms from different markets. We focus on the interaction between the merger's effects on downstream efficiency and on buyer power in a setup where one manufacturer with a non-linear cost function sells to two locally competitive retail markets. We show that size discounts for the merged entity has no impact on consumer prices or on smaller retailers, unless the merger affects the downstream efficiency of the merging parties. When the upstream cost function is convex, we find that there are "waterbed effects", that is, each small retailer pays a higher average tariff if a buyer merger improves downstream efficiency. We obtain the opposite results, "anti-waterbed effects", if the merger is inefficient. When the cost function is concave, there are only anti-waterbed effects. In each retail market, the merger decreases the final price if and only if it improves the efficiency of the merging parties, regardless of its impact on the average tariff of small retailers.Buyer mergers, non-linear supply contracts, merger efficiencies, size discounts, waterbed effects

Vertical coordination through renegotiation

This paper analyzes the strategic use of bilateral supply contracts in sequential negotiations between one manufacturer and two differentiated retailers. Allowing for general contracts and retail bargaining power, I show that the first contracting parties have incentives to manipulate their contract to shift rent from the second contracting retailer and these incentives distort the industry profit away from the fully integrated monopoly outcome. To avoid such distortion, the first contracting parties may prefer to sign a contract which has no commitment power and can be renegotiated from scratch should the manufacturer fail in its subsequent negotiation with the second retailer. Renegotiation from scratch induces the first contracting parties to implement the monopoly prices and might enable them to capture the maximized industry profit. A slotting fee, an up-front fee paid by the manufacturer to the first retailer, and a menu of tariff-quantity pairs are sufficient contracts to implement the monopoly outcome. These results do not depend on the type of retail competition, the level of differentiation between the retailers, the order of sequential negotiations, the level of asymmetry between the retailers in terms of their bargaining power vis-à-vis the manufacturer or their profitability in exclusive dealing.vertical contracts, rent shifting, renegotiation, buyer power

Sales tax competition and a multinational with a decreasing marginal cost

We examine a multinational firm which has a decreasing marginal cost, and the optimal sales tax policies of the regions where that firm operates. We show that the regions set higher sales taxes than those given by a cooperative equilibrium. Each region fails to fully internalize the effects of its tax level on another region's welfare and the incentives for that region's authority. Exponential cost functions which exhibit economies of scale (for example Cobb-Douglas) and linear demand functions satisfy our assumptions. Our results suggest the need to coordinate sales tax levels between countries and between smaller entities, like states in the United States. Smaller regions benefit more from such coordination. Lowering sales taxes in each region increases welfare for all regions, profits for firms, and consumer welfare.tax competition, sales taxes, multinationals, decreasing marginal cost, economies of scale

Merger efficiency and welfare implications of buyer power

This paper analyzes the welfare implications of buyer mergers, which are mergers between downstream firms from different markets. We focus on the interaction between the merger's effects on downstream efficiency and on buyer power in a setup where one manufacturer with a non-linear cost function sells to two locally competitive retail markets. We show that size discounts for the merged entity has no impact on consumer prices or on smaller retailers, unless the merger affects the downstream efficiency of the merging parties. When the upstream cost function is convex, we find that there are “waterbed effects,” that is, each small retailer pays a higher average tariff if a buyer merger improves downstream efficiency. We obtain the opposite results, “anti-waterbed effects,” if the merger is inefficient. When the cost function is concave, there are only anti-waterbed effects. In each retail market, the merger decreases the final price if and only if it improves the efficiency of the merging parties, regardless of its impact on the average tariff of small retailers.buyer mergers, non-linear supply contracts, merger efficiencies, size discounts, waterbed effects

Pricing payment cards

Payment card networks, such as Visa, require merchants' banks to pay substantial "interchange" fees to cardholders' banks, on a per transaction basis. This paper shows that a network's profit-maximizing fee induces an inefficient price structure, over-subsidizing card usage and over-taxing merchants. In contrast to the literature we show that this distortion is systematic and arises from the fact that consumers make two distinct decisions (membership and usage) whereas merchants make only one (membership). These findings are robust to competition for cardholders and/or for merchants, network competition, and strategic card acceptance to attract consumers.payment card networks, interchange fees, merchant fees