The Stackelberg duel between Central Bank Digital Currencies and private payment titans in China

Abstract

This study presents an in-depth analysis of the rapidly evolving mobile payment market, focusing on the competition between Central Bank Digital Currencies (CBDCs), as exemplified by China's Digital Currency Electronic Payment (DCEP), and well-established private digital payment platforms. This research builds on economic theories, including Metcalfe's Law and the Capital Asset Pricing Model (CAPM). It employs the Stackelberg game model as a strategic framework to dissect these payment systems' interactions and potential equilibrium outcomes. A notable innovation of this study is the application of advanced simulation techniques, as it uses Matlab2018a to model and predict variations in profit margins contingent on the size of the user base for each payment method. This approach yields three insightful and nonintuitive results that deepen our understanding of market dynamics. First, the study underscores the indispensable role of government support, particularly in the nascent stages of DCEP implementation, as a catalyst for competitiveness against entrenched third-party systems. Without proactive and substantial backing from the government, the DCEP might struggle to gain a foothold in a market dominated by private entities. Second, this study highlights the critical interconnectedness among the various user groups. It posits that for DCEP to effectively penetrate the market and challenge the dominance of third-party platforms, it must strategically align itself within the existing networks of these platforms. This aspect emphasises the importance of understanding and leveraging the complex web of relationships and dependencies within the mobile payment ecosystem. Third, the study identifies mutually beneficial cooperative strategies between the DCEP and third-party platforms. Drawing on the concept of Nash equilibrium, this suggests that collaboration, rather than competition, could lead to optimal outcomes for both parties. This cooperative stance can manifest in various forms, such as shared technological infrastructure, joint ventures, and cross-platform compatibility, ultimately enhancing the value proposition for end users. These findings have significant implications for policymakers, financial regulators, and market strategists, as they suggest that a balanced approach that harmonises the strengths of state-led digital currencies and private payment solutions is crucial for the sustainable development of the digital finance sector. This study also provides strategic insights for CBDCs and private payment platforms, guiding them to make informed decisions in a market increasingly characterised by technological innovation, regulatory shifts, and evolving consumer preferences.