Abstract
The payment card industry is a typical "two-sided market" where two groupsof agents (i.e. merchants and cardholders) interact with each other via a commonnetwork platform (i.e. a card network) and the value of participating in thenetwork for agents in one group depends on the number of participants from theother group. The positive network externalities across the two sides create the"chicken-and-egg problem": without sufficient merchants accepting a particularcard network, few consumers are willing to apply for the card; without sufficientcardholders, few merchants are willing to accept the card. While economists haveaddressed the issue from social welfare perspective, we focus on business strategyimplications. Modeling network externalities in dynamic systems, we show thatnetwork platform owners could overcome the' 'chicken-and-eggproblem" throughstrategies such as merger and acquisition, licensing, forming strategic alliance,as well as adjusting product and pricing strategies, etc. We provide a history ofthe U.S. payment card industry as empirical evidences to support our findings.
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