A Study of the Interrelated Bilateral Transactions in Credit Card Networks

Chakravorti, Sujit; Shah, Alpa

doi:10.2139/ssrn.294510

Cited by 11 publications

(7 citation statements)

References 16 publications

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“…In fact, consumers who regularly pay off their balances are sometimes referred to in the industry as "deadbeats" or "freeloaders" (Chakravorti and Shah 2001).…”

Section: Vb Predictions Of Neoclassical Modelsmentioning

confidence: 99%

Exploiting Naïvete about Self-Control in the Credit Market

Heidhues

Kőszegi²

2010

American Economic Review

350

198

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We develop a model of a competitive market for non-linear credit contracts, and analyze the contract choices, loan-repayment behavior, and welfare of sophisticated and non-sophisticated borrowers with a taste for immediate gratification. Consistent with many credit cards and subprime mortgages, the baseline repayment terms of a competitive-equilibrium contract are cheap, but they are also inefficiently front-loaded and delays require paying large penalties.Non-sophisticated borrowers tend to borrow too much despite credit being for future consumption, and then to both pay the penalties and repay in an ex-ante suboptimal back-loaded way, leading to welfare losses that are typically large. Prohibiting large penalties for deferring small amounts of repayment-akin to some recent new regulations in the US credit-card and mortgage markets-can raise welfare.Keywords: hyperbolic discounting, sophistication, partial naivete, screening, consumer protection, subprime markets, credit cards Researchers as well as policymakers have expressed concerns that some contract features in the credit-card and subprime mortgage markets may induce consumers to borrow too much and to make suboptimal contract and repayment choices. 1 These concerns are motivated in part by

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“…In fact, consumers who regularly pay off their balances are sometimes referred to in the industry as "deadbeats" or "freeloaders" (Chakravorti and Shah 2001).…”

Section: Vb Predictions Of Neoclassical Modelsmentioning

confidence: 99%

Exploiting Naïvete about Self-Control in the Credit Market

Heidhues

Kőszegi²

2010

American Economic Review

350

198

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“…In some countries, they have been able to impose uniform pricing (this is called the No Discrimination Rule) on merchants. In the U.S., surcharges for card payments are forbidden (at least in some states: see Chakravorti and Shah, 2001 for a detailed discussion of surcharges and discounts in the U.S.) but cash discounts are allowed. In the U.K. any form of restriction is illegal, yet differentiated pricing is not frequently observed.…”

Section: A Fundamental Externalitymentioning

confidence: 99%

The Theory of Interchange Fees: A Synthesis of Recent Contributions

Rochet¹

2003

Review of Network Economics

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We synthesize the results of the recent theoretical literature on the determination of interchange fees by payment card associations. We analyze in particular the conditions under which these interchange fees are excessively high, as compared with social optimum. These conditions involve several parameters: the intensity of competition between banks and between merchants; the elasticities of demand on both sides of the market, as well as the degrees of heterogeneity among merchants and among cardholders. A crucial element is the competitive edge that merchants can gain by accepting cards. IntroductionInterchange fees are a crucial determinant of price structure and transaction volumes in open payment card networks. Following Baxter (1983), an important antitrust literature 1 has discussed the potential anticompetitive effects of the collective determination of interchange fees within payment card associations. However, no systematic theoretical analysis of price determination in payment card networks was available. The situation has changed in recent years: several formal models of the payment card industry have been developed, allowing a more rigorous analysis of the impact of interchange fees on prices and volumes of activity in payment card networks. These models have also highlighted the existence of common patterns between this industry and other network industries like Internet, media, video games and software, which have been termed "two-sided" markets. 2The objective of this paper is to synthesize the findings of this recent theoretical literature 3 on interchange fees and suggest further directions of research.

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“…Any model that seeks to accurately depict credit-card pricing policies must study the set of interrelated transactions as a whole. However, with the exception of Baxter (1983), researchers have only recently started to investigate the broad array of interlinking relationships among the participants in a typical credit-card transaction (see Chakravorti and To 2003;Gans and King 2002;Rochet and Tirole 2002;Schmalensee 2002;Schwartz and Vincent 2002;and Wright 2003). The key insight of Baxter's analysis is that the demand for and supply of consumer payment services need not generate the same level of output as generated by the demand for and supply of merchant payment services.…”

Section: Credit-card Banks and Networkmentioning

confidence: 99%

Who Pays for Credit Cards?

Chakravorti

Emmons

2003

Journal of Consumer Affairs

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The authors model side payments in a competitive credit‐card market. If competitive retailers absorb the cost of accepting credit cards by charging a higher goods price to everyone, then someone must subsidize convenience users of credit cards to prevent them from defecting to merchants who do not accept cards. The side payment could be financed by card users who roll over balances and pay interest. It is rational for them to do so if their subjective discount rates are high enough. Charging different prices to different customers based on the underlying cost of the payment instrument would be more efficient for retailers. However, banks may offer incentives to attract convenience users because some of them may become interest‐paying users (“revolvers”) in the future.

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A Study of the Interrelated Bilateral Transactions in Credit Card Networks

Cited by 11 publications

References 16 publications

Exploiting Naïvete about Self-Control in the Credit Market

Exploiting Naïvete about Self-Control in the Credit Market

The Theory of Interchange Fees: A Synthesis of Recent Contributions

Who Pays for Credit Cards?

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