Plastic Clashes: Competition Among Closed and Open Payment Systems*

This paper analyses market competition between two different types of payment schemes: card associations and proprietary systems. The main focus is on the role of the collective setting of the interchange fee by members of the association. We describe the sterilizing role of the interchange fee: when the interchange fee is set so as to maximize the sum of issuers' and acquirers' profits, the equilibrium values of platforms' profits, of the sum of the fees charged by each platform and their market shares are independent of the competitive conditions within the associated members on the two sides of the market and are affected by the strength of inter-platform competition. We also show that the privately set interchange fee is socially inefficient, although this is not due to anti-competitive reasons.