Who Pays for Credit Cards?

Federal Reserve Bank of Chicago Policy Studies EPS-2001-1

37 Pages Posted: 21 Dec 2001

See all articles by Sujit Chakravorti

Sujit Chakravorti

Independent

William R. Emmons

Federal Reserve Bank of St. Louis - Banking Supervision and Regulation; Washington University in St. Louis

Date Written: February 2001

Abstract

We model side payments in a competitive credit-card market. If competitive retailers charge a single (higher) price to cover the cost of accepting cards, banks must subsidize convenience users to prevent them from defecting to merchants who do not accept cards. The side payment will be financed by card users who roll over balances at interest if their subjective discount rates are high enough. Despite the feasibility of cross subsidies among cardholders, price discrimination without side payments is Pareto preferred because of the costliness of the card network---unless banks have other motives, such as purchasing options on future borrowing by current convenience users.

Keywords: credit cards, payment systems, consumer credit

JEL Classification: D11, D23, G21

Suggested Citation

Chakravorti, Sujit and Emmons, William R., Who Pays for Credit Cards? (February 2001). Federal Reserve Bank of Chicago Policy Studies EPS-2001-1, Available at SSRN: https://ssrn.com/abstract=294482 or http://dx.doi.org/10.2139/ssrn.294482

William R. Emmons

Federal Reserve Bank of St. Louis - Banking Supervision and Regulation ( email )

411 Locust St
Saint Louis, MO 63011
United States

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1208
Saint Louis, MO MO 63130-4899
United States

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