Post on 01-Jan-2016
CONFERENCECOMPETITION POLICY IN
TWO-SIDED MARKETS
University of Toulouse June 30
Dr Valérie RABASSA*EUROPEAN COMMISSION
DG COMPETITIONCHIEF ECONOMIST TEAM
*The views expressed are those of the author and do not necessarily reflect those of DG COMP or the European Commission
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
Outline
Economics of the Payment Cards Industry
Some Preliminary Results of the Commission’s
Sector Inquiry into Payment Cards Brief Overview of the Cartes Bancaires, the VISA and the MasterCard problematic
Economics of the Payment Cards Industry
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
Why are Card Payment Systems Why are Card Payment Systems considered as Two-Sided Markets?considered as Two-Sided Markets?
Two distinct sides: acquiring and issuing sidesTwo distinct sides: acquiring and issuing sides
Matchmakers intermediate between the two sides Matchmakers intermediate between the two sides
Chicken & egg issues Chicken & egg issues
Every additional cardholder entering the network Every additional cardholder entering the network increases its value for merchants and increases its value for merchants and vice versavice versa indirect network externalities indirect network externalities
“Usage” externality “Usage” externality
The volume of transactions and the profit depends not The volume of transactions and the profit depends not only on the level of prices but also on their decomposition only on the level of prices but also on their decomposition or structureor structure
The The CoaseCoase theorem does not apply theorem does not apply
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
The Role of an ‘optimal’ The Role of an ‘optimal’ Interchange FeeInterchange Fee
Should create sufficient incentive to take both Should create sufficient incentive to take both acquirers and issuers on board in order to acquirers and issuers on board in order to distribute efficiently the costs (for acquirers) distribute efficiently the costs (for acquirers) and the revenues (for issuers) of the payment and the revenues (for issuers) of the payment systemsystem
Should solve the chicken and egg issues by Should solve the chicken and egg issues by internalizing the externalitiesinternalizing the externalities
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
Potential Anti-Competitive Potential Anti-Competitive ConductsConducts
of Interchange Feeof Interchange Fee
May restrict competition between banksMay restrict competition between banks
Could be interpreted as a tool of splitting the Could be interpreted as a tool of splitting the rent between both sides of the market and rent between both sides of the market and therefore as an instrument of potential therefore as an instrument of potential distortion of the cardholders and merchants distortion of the cardholders and merchants price structureprice structure … in particular if no perfect … in particular if no perfect pass-onpass-on
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
Preliminary Results of the Commission’s
Sector Inquiry into Payment Cards
** Available at Available at http://europa.eu.int/comm/internal_market/finances/http://europa.eu.int/comm/internal_market/finances/
docs/white_paper/white_paper_en.pdfdocs/white_paper/white_paper_en.pdf
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
The Sector Inquiry has identified The Sector Inquiry has identified considerable structural, behavioural considerable structural, behavioural and technical barriers to competition and technical barriers to competition in the industryin the industry
Analysis of the cardholders, Analysis of the cardholders, merchants and interchange feesmerchants and interchange fees
Public Public consultation until 21 June consultation until 21 June 20062006
Public Hearing on 17 July 2006Public Hearing on 17 July 2006
December 2007December 2007 Final Report Final Report
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
Structural barriersStructural barriers Vertical integrationVertical integration Joint ventures between acquirersJoint ventures between acquirers
Technical barriersTechnical barriers
Behavioral barriersBehavioral barriers Agreement on preferential interchange feesAgreement on preferential interchange fees Bilateral clearing arrangementsBilateral clearing arrangements Governance arrangementsGovernance arrangements Some memberships requirementsSome memberships requirements
Potential Barriers to competitionPotential Barriers to competition
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
Weighted Average MSC Rates Charged per Country for MasterCard and Visa Credit Cards, 2004, %
0
0,5
1
1,5
2
2,5
3
3,5
A B C D E F G H I J K L M NMember State
Wei
gh
ted
Ave
rag
e M
SC
, %
MasterCard
Visa
Businesses in some countries pay a far higher Businesses in some countries pay a far higher merchant fee on average than othersmerchant fee on average than others
Merchant FeesMerchant Fees
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
Weighted Average Domestic Interchange Fees Charged to Acquirers on MasterCard and Visa Credit Cards, %, 2004
0,00%
0,50%
1,00%
1,50%
2,00%
2,50%
A B C D E F G H I J K L M N O P R S T U V X Y
Member States
Do
mesti
c I
F,
%
MC
Visa
Acquirers in some MS pay much higher interchange Acquirers in some MS pay much higher interchange fees on average than in othersfees on average than in others
Interchange FeesInterchange Fees
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
Country-average fee per credit card, 2004
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
A B C D E F G H I J K L M N O P Q R S T U V W
Member States
EU
RO
MasterCard
Visa
Average fee =24 Euro
Cardholder FeesCardholder Fees
Cardholders in some MS pay much higher fees on Cardholders in some MS pay much higher fees on average than in othersaverage than in others
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
Interchange Fees : empirical Interchange Fees : empirical evidenceevidence
Positive relationship between the Positive relationship between the interchange fee and the merchant feeinterchange fee and the merchant fee
Imperfect pass-on between the interchange Imperfect pass-on between the interchange fee and cardholder fee by the issuing banksfee and cardholder fee by the issuing banks
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
Brief Overview of the Cartes Bancaires, the VISA and
MasterCard problematic
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
A specific issue relevant for competition within the MasterCard and Visa systems is the co-existence of bilaterally and multilaterally agreed interchange fees. The former are
often referred to in the industry as “on-us” fees
A specific issue for the Cartes Bancaires case is a membership fee called MERFA imposed by
the GIE to be paid by new entrants
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
The Flow of Interchange FeesThe Flow of Interchange Fees
AcquirinAcquiring Bankg Bank
MerchantsMerchants
MasterCard/VISA association
CardholderCardholderss
Issuing Issuing BankBank
MIFMIF
MSMSCC
European CommissionEuropean Commission
DG CompetitionDG Competition
Chief EconomistChief Economist Team Team
The Flow of Interchange FeesThe Flow of Interchange Fees
CIPCIP AcquirinAcquiring Bankg Bank
MerchantsMerchants
Cartes Bancaires
CardholderCardholderss
Issuing Issuing BankBank
CIRCIR
MERFAMERFA
ATMATMMSMSCC