Thursday, June 19, 2003

Review of Network Economics

It being June, there is a brand new issue of the Review of Network Economics available on the web. Be sure to check it out. Here's the editors' introduction to the current issue:
In the current issue of the Review of Network Economics, we have eight papers on the topic of the economics of payment networks. Interest in the economics of payment networks has burgeoned over the last few years, in part reflecting the tremendous growth of electronic payment networks, in part reflecting growing policy interest in the workings of these networks, and in part reflecting the development of a general economic framework to study these networks. Several of the authors in this issue have been major contributors to the development of this recent literature.

The first three papers, by Sujit Chakravorti (Federal Reserve Bank of Chicago), Jean-Charles Rochet and Jean Tirole (Toulouse University), and Bob Hunt (Federal Reserve Bank of Philadelphia) provide general perspectives on the policy issues that have arisen in relation to the payment cards offered by the bank associations MasterCard and Visa. These papers also provide an overview of the recent academic literature which speaks to these issues. One important area all three papers deal with is that of interchange fees, the fee paid between different card association members, that has come under fire from policy makers in a number of jurisdictions.

The fourth and fifth papers, by Jean-Charles Rochet, and Joshua Gans and Stephen King (Melbourne University), provide a more in-depth analysis of interchange fees. Rochet's paper surveys the recent academic literature on interchange fees, providing a unified treatment of many of the existing models. While Rochet's focus is on potential difference between the socially and privately optimal level of the interchange fee, Gans and King's focus is on evaluating different methodologies that have been proposed for regulating interchange fees (particularly in the Australian context).

The literature on payment cards emphasises the two-sided nature of payment cards (and the interrelated demand of cardholders and merchants). This is in contrast to ATM cards, which are services offered just to cardholders. Despite this simplification, the use of ATM cards involves a number of interesting and complicated network issues, which are surveyed in the sixth paper, by James McAndrews (Federal Reserve Bank of New York). McAndrews also provides an up-to-date survey of the associated literature that has developed over the last decade. In contrast to the literature on general payment cards, some of this research (including his own) is empirical in nature.

The last two papers have a strong empirical focus. David Humphrey (Florida State University), Magnus Willesson, Ted Lindblom and Goran Bergendahl (University of Gothenburg) provide a survey of the limited data that exists concerning the cost of making and receiving a payment by banks, retailers, and other parties to a transaction. They consider estimates of the relative cost of making a paper-based transaction versus an electronic payment. Fumiko Hayashi (Federal Reserve Bank of Kansas City) and Elizabeth Klee (Board of Governors of the Federal Reserve System) estimate consumers' payment instrument use at the point of sale and for bill payment. Using a unique data set, they study non-financial determinants of payment choice, such as consumers' preference for using electronic services, and the characteristics of the payment transaction (the value and purpose of the transaction).

We hope these papers prove helpful in assessing the state of the literature on the economics of payment network. We also hope the papers stimulate further interest in this area, and that the many important research questions posed by the authors will be addressed in the years to come.

Co-editors: John Panzar and Julian Wright
If you had to pick one paper to read, go for An Economic Analysis of the Determination of Interchange Fees in Payment Card Systems, by Rochet and Tirole (who is one of the leading scholars of industrial organization).


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