| dcterms.abstract | This dissertation provides an industry model for the pricing structure in payment card market. The first part studies the strategic interaction among a monopoly card issuer (platform), n competing firms and a unit mass of consumers with a fixed fraction of cash users. It is shown that retail price increases as a result of the introduction of credit cards. Firms' profit and quantity sold depend on the impact of the platform on consumers' utility.The larger the industry size is, the lower is the merchant fee firms pay to the platform and the higher is the effort exerted by the platform to increase cardholders' satisfaction.The Same result holds if the fraction of cardholders increases. As for the welfare, it is shown that the platform actually serves as a transfer device moving consumer surplus from cash users to cardholders. Efficient platform transforms a certain effort level (in monetary terms) into higher demand increase. In this case, the consumer surplus increment of cardholders exceeds the loss of cash users. A sufficiently efficient platform results in higher aggregate consumer surplus compared with an economy without cards. We analyze market competition either by the Cournot model or by the Bertrand model. In the Bertrand model, merchants pay a lower merchant fee, generate a higher consumer surplus, and the platform exerts more effort and increases more consumers' utility than in the Cournot model. As the number of competing firms increases indefinitely, the difference between the two declines to zero. In the second part of this dissertation, we allow the possibility of consumers default, and the fraction of cash users is now a strategic choice for the platform. Hence, this fraction is determined endogenously. We consider two scenarios: in the first one, no consumer defaults (all consumers are perfectly reliable). In the second scenario, every consumer may default with positive probability but consumers with different incomes possess different levels of risk. It is shown that in the equilibrium of the second scenario the merchant fee is higher as well as the profit of the platform. These two increase if the demand elasticity is lower, or the default rate is higher. The result suggests that a monopoly platform prefers risky consumers than perfectly reliable ones. | |
