Merchant Fee Determination in Unitary Networks with Price Competition Among Merchants

Abstract

This paper investigates the determination of the merchant usage fee of a monopolistic unitary payment card network based on characteristics of the downstream market. Merchants engage in Bertrand price competition that allows for an observation of heterogeneous products. We find that the payment card network extracts a part of the economic rent that merchants obtain. The higher this rent, the higher the corresponding merchant usage fee. The rent, and consequently the merchant usage fee, is increasing in the downstream market size but decreasing in the price elasticity of consumer demand, as well as in the substitutability of products, and, interestingly, in the fraction of consumers preferring card payments.