The economics of two-sided markets

Rysman, Marc. “The economics of two-sided markets." Journal of economic perspectives 23.3 (2009): 125-43. [aeaweb];[PDF][**]

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At a local Best Buy, a child places a new Sony PlayStation 3 on the cashier’ scounter while the parents dig out their Visa card. The gaming system and the payment card may appear to have little connection other than this purchase. However, these two items share an important characteristic that is generating a series of economic insights and has important implications for strategic decision making and economic policy making. Both video game systems and payment cards are examples of two-sided markets.

To Surcharge or Not To Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule

Date: 2011-08
By: Nicholas Economides (Stern School of Business, New York University)
David Henriques (Nova School of Business and Economics)
Electronic Payment Networks (EPNs) the No-Surcharge Rule (NSR) requires
that merchants charge the same final good price regardless of the means
of payment chosen by the customer. In this paper, we analyze a
three-party model (consumers, merchants, and proprietary EPNs) to assess
the impact of a NSR on the electronic payments system, in particular,
on competition among EPNs, network pricing to merchants and consumers,
EPNs’ profits, and social welfare. We show that imposing a NSR has a
number of effects. First, it softens competition among EPNs and
rebalances the fee structure in favor of cardholders and to the
detriment of merchants. Second, we show that the NSR is a profitable
strategy for EPNs if and only if the network effect from merchants to
cardholders is sufficiently weak. Third, the NSR is socially
(un)desirable if the network externalities from merchants to cardholders
are sufficiently weak (strong) and the merchants’ market power in the
goods market is sufficiently high (low). Our policy advice is that
regulators should decide on whether the NSR is appropriate on a
market-by-market basis instead of imposing a uniform regulation for all
Keywords: Electronic Payment System, Market Power, Network
Externalities, No-Surcharge Rule, Regulation, Two-sided Markets,
MasterCard, Visa, American Express, Discover.
JEL: L13


Select Papers for nep-net.

To Surcharge or Not To Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule.