In this paper, I consider eight basic fallacies that can arise from using conventional wisdom fro... more In this paper, I consider eight basic fallacies that can arise from using conventional wisdom from one-sided markets in two-sided market settings. These fallacies are illustrated using statements made in the context of regulatory investigations into credit card schemes in Australia and the United Kingdom. I discuss how these fallacies may be reconciled by proper use of a two-sided market analysis, making reference to the relevant economics literature where applicable. The analysis is supported by observations on other two-sided markets. I appreciate helpful discussions on this topic with Henry Ergas of NECG, and comments on the paper by Mark Armstrong and Mark Donoghue. Any errors are my own.
This paper presents a model of competing payment schemes. Unlike previous work on generic twoside... more This paper presents a model of competing payment schemes. Unlike previous work on generic twosided markets, the model allows for the fact that in a payment system users on one side of the market (merchants) compete to attract users on the other side (consumers who may use cards for purchases). It analyzes how competition between card associations and between merchants affects the choice of interchange fees, and thus the structure of fees charged to cardholders and merchants. Implications for other two-sided markets are discussed.
This paper presents a model of a debit or credit card payment scheme, providing a simple determin... more This paper presents a model of a debit or credit card payment scheme, providing a simple determination of the socially optimal structure of fees between those charged to cardholders and those charged to merchants.
We provide a framework for analyzing two-sided markets that allows for different degrees of produ... more We provide a framework for analyzing two-sided markets that allows for different degrees of product differentiation on each side of the market. When platforms are viewed as homogenous by sellers but heterogeneous by buyers, we show that “competitive bottlenecks” arise endogenously. In equilibrium, platforms do not compete directly for sellers, instead choosing to compete indirectly by subsidizing buyers to join. Sellers are left with none of the gains from trade. Despite this, it is sellers who choose to purchase from multiple platforms (multihome). Finally, the role of exclusive contracts to prevent multihoming is explored.
This paper presents a model of a card payment system to address the pricing and rules that govern... more This paper presents a model of a card payment system to address the pricing and rules that govern such systems. It evaluates the social optimality of privately set interchange fees and the adoption of a rule by payment systems to prevent merchants surcharging for card transactions using two extremes of merchant pricing-monopolistic pricing and perfect competition. Both types of merchant pricing constrain the ability of card schemes to use interchange fees and the no-surcharge rule in anticompetitive ways, although for quite di erent reasons. The positive role of the no-surcharge rule in preventing excessive merchant surcharging is also highlighted.
This paper presents a model of competing payment schemes. Unlike previous work on generic two-sid... more This paper presents a model of competing payment schemes. Unlike previous work on generic two-sided markets, the model allows for the fact that in a payment system, users on one side of the market (merchants) compete to attract users on the other side (consumers, who may use cards for purchases). It analyzes how competition between card associations and between merchants affects the choice of interchange fees, and thus the structure of fees charged to cardholders and merchants. Implications for other two-sided markets are discussed.
This note explains why merchants accept expensive payment cards when merchants are Cournot compet... more This note explains why merchants accept expensive payment cards when merchants are Cournot competitors. The same acceptance rule as the Hotelling price competition model of Rochet and Tirole (2002) is obtained. However, unlike the Hotelling model used in the existing literature, in the Cournot setting without free entry of merchants, payment card acceptance expands merchant output and increases merchant profit in equilibrium. With free entry, payment card acceptance increases the number of merchants in the industry and industry output.
Interchange fees and related issues in payment card markets have been the focus of considerable a... more Interchange fees and related issues in payment card markets have been the focus of considerable attention recently. The academic community and public officials have begun to scrutinize these markets. Meanwhile, these markets continue to experience dynamic change as card payments account for an ever-growing share of overall payments. This paper provides an overview of interchange fee developments and issues, and also presents a preliminary analysis of some possible contributing factors. The principal conclusion of the paper is that interchange arrangements vary considerably across countries, and while existing economic theory provides some insight into this market, much remains to be explained.
International Journal of Industrial Organization, 2006
We present and estimate a model of competition in a two-sided market: the market for magazine rea... more We present and estimate a model of competition in a two-sided market: the market for magazine readership and advertising. Using data on magazines in Germany, we find evidence that magazines have properties of two-sided markets. The results are consistent with the perception that prices for readers are dsubsidizedT and that magazines make all their money from advertisers. Consistent with advertisers valuing readers more than readers value advertisements, our results imply that higher demand on the reader side increases ad rates, but that higher demand on the advertising side decreases cover prices. D 2005 Elsevier B.V. All rights reserved. JEL classification: C33; L11
We discuss policy towards mobile call termination, illustrated by the 2002 Competition Commission... more We discuss policy towards mobile call termination, illustrated by the 2002 Competition Commission enquiry into the UK mobile market. We present a model of the mobile market which includes both fixed-to-mobile and mobile-to-mobile call termination. In broad terms, the former service is likely to involve monopoly pricing if left unchecked, while the latter service-if the termination charge is jointly chosen by networks-may provide the mobile sector with the means by which to relax competition. Competition is often relaxed by choosing a low mobile-to-mobile termination charge. If feasible, then, unregulated networks often wish to set different termination charges depending on whether traffic originates on the fixed or mobile network. By contrast, social optimality often requires that uniform termination charges be imposed. * We are grateful to Stefan Behringer, John Vickers and Helen Weeds for very helpful comments. † University College London, email [email protected]. Armstrong acted in a limited way as advisor to Oftel, then the telecommunications regulator, during the course of the enquiry discussed in this paper.
International Journal of Industrial Organization, 2008
The existing literature on exclusive dealing is extended to take into account that buyers signing... more The existing literature on exclusive dealing is extended to take into account that buyers signing exclusive deals are typically competing firms that are differentiated from the perspective of their customers. We show, provided such downstream firms are not too differentiated or provided upstream firms can compete in two-part tariffs, exclusive dealing forecloses entry to a more efficient rival. An established upstream firm and competing downstream firms raise their joint profit by signing exclusive deals to protect the industry from upstream competition. Naked exclusion arises despite the Chicago School logic that buyers only sign contracts that make themselves (jointly) better off.
2000) result of naked exclusion in which an incumbent forecloses efficient entry by exploiting th... more 2000) result of naked exclusion in which an incumbent forecloses efficient entry by exploiting the fact a rival needs a sufficient number of buyers to make its entry profitable by signing up some of them with exclusive contracts. FM argue that given that buyers are typically firms that compete downstream rather than final consumers, an efficient entrant needs only a single deviating downstream buyer to cover its fixed costs of entry. They present a model in which buyers are homogenous price competitors, claiming the model implies a unique entry equilibrium whenever entry is efficient. Their result suggests exclusive deals written between an incumbent and competitive downstream buyers are no longer a concern.
International Journal of Industrial Organization, 2010
This paper explores the ability of an incumbent to use introductory offers to dominate a market i... more This paper explores the ability of an incumbent to use introductory offers to dominate a market in the face of a more efficient rival when network effects rather than scale economies are present. Both in the case of one-sided and two-sided markets, for introductory offers to be profitable when consumers can multihome, they need to be discriminatory and exclusive. In this setting, exclusivity as opposed to just commitment to purchase is critical -consumers must commit not to purchase from the rival in the future in order that introductory offers can work. The use of such contracts is anticompetitive and inefficient but does not necessarily result in complete foreclosure.
We model exclusive dealing when the incumbent and potential entrant offer differentiated products... more We model exclusive dealing when the incumbent and potential entrant offer differentiated products and buyers are downstream firms. While the resulting exclusive dealing is always anticompetitive, it does not necessarily involve foreclosure.
International Journal of Industrial Organization, 2010
We re-examine tacit collusion under a simple punishment rule in which firms match any lower price... more We re-examine tacit collusion under a simple punishment rule in which firms match any lower price by their rivals, but otherwise leave their prices unchanged. We provide conditions under which this simple rule sustains collusion and is credible. Provided competition is imperfect, collusion can always be sustained, but never to the point of monopoly. Interestingly, the standard ambiguous relationship between product substitutability and tacit collusion is unambiguous under this new setting. The relationship to existing theories of price matching guarantees, kinked demand curves, and continuous reaction-function equilibria are explained.
Regulators across many different jurisdictions and industries have recently adopted the practice ... more Regulators across many different jurisdictions and industries have recently adopted the practice of setting access prices based on the current costs of providing the relevant facilities. Though widely regarded as being efficient, the efficiency implications of using current costs instead of historical costs have not been formally analyzed. Our analysis shows that given stochastic costs, forward-looking access prices retard investment and are generally dominated by access prices determined by historical cost whenever investment is desired.
In this paper, I consider eight basic fallacies that can arise from using conventional wisdom fro... more In this paper, I consider eight basic fallacies that can arise from using conventional wisdom from one-sided markets in two-sided market settings. These fallacies are illustrated using statements made in the context of regulatory investigations into credit card schemes in Australia and the United Kingdom. I discuss how these fallacies may be reconciled by proper use of a two-sided market analysis, making reference to the relevant economics literature where applicable. The analysis is supported by observations on other two-sided markets. I appreciate helpful discussions on this topic with Henry Ergas of NECG, and comments on the paper by Mark Armstrong and Mark Donoghue. Any errors are my own.
This paper presents a model of competing payment schemes. Unlike previous work on generic twoside... more This paper presents a model of competing payment schemes. Unlike previous work on generic twosided markets, the model allows for the fact that in a payment system users on one side of the market (merchants) compete to attract users on the other side (consumers who may use cards for purchases). It analyzes how competition between card associations and between merchants affects the choice of interchange fees, and thus the structure of fees charged to cardholders and merchants. Implications for other two-sided markets are discussed.
This paper presents a model of a debit or credit card payment scheme, providing a simple determin... more This paper presents a model of a debit or credit card payment scheme, providing a simple determination of the socially optimal structure of fees between those charged to cardholders and those charged to merchants.
We provide a framework for analyzing two-sided markets that allows for different degrees of produ... more We provide a framework for analyzing two-sided markets that allows for different degrees of product differentiation on each side of the market. When platforms are viewed as homogenous by sellers but heterogeneous by buyers, we show that “competitive bottlenecks” arise endogenously. In equilibrium, platforms do not compete directly for sellers, instead choosing to compete indirectly by subsidizing buyers to join. Sellers are left with none of the gains from trade. Despite this, it is sellers who choose to purchase from multiple platforms (multihome). Finally, the role of exclusive contracts to prevent multihoming is explored.
This paper presents a model of a card payment system to address the pricing and rules that govern... more This paper presents a model of a card payment system to address the pricing and rules that govern such systems. It evaluates the social optimality of privately set interchange fees and the adoption of a rule by payment systems to prevent merchants surcharging for card transactions using two extremes of merchant pricing-monopolistic pricing and perfect competition. Both types of merchant pricing constrain the ability of card schemes to use interchange fees and the no-surcharge rule in anticompetitive ways, although for quite di erent reasons. The positive role of the no-surcharge rule in preventing excessive merchant surcharging is also highlighted.
This paper presents a model of competing payment schemes. Unlike previous work on generic two-sid... more This paper presents a model of competing payment schemes. Unlike previous work on generic two-sided markets, the model allows for the fact that in a payment system, users on one side of the market (merchants) compete to attract users on the other side (consumers, who may use cards for purchases). It analyzes how competition between card associations and between merchants affects the choice of interchange fees, and thus the structure of fees charged to cardholders and merchants. Implications for other two-sided markets are discussed.
This note explains why merchants accept expensive payment cards when merchants are Cournot compet... more This note explains why merchants accept expensive payment cards when merchants are Cournot competitors. The same acceptance rule as the Hotelling price competition model of Rochet and Tirole (2002) is obtained. However, unlike the Hotelling model used in the existing literature, in the Cournot setting without free entry of merchants, payment card acceptance expands merchant output and increases merchant profit in equilibrium. With free entry, payment card acceptance increases the number of merchants in the industry and industry output.
Interchange fees and related issues in payment card markets have been the focus of considerable a... more Interchange fees and related issues in payment card markets have been the focus of considerable attention recently. The academic community and public officials have begun to scrutinize these markets. Meanwhile, these markets continue to experience dynamic change as card payments account for an ever-growing share of overall payments. This paper provides an overview of interchange fee developments and issues, and also presents a preliminary analysis of some possible contributing factors. The principal conclusion of the paper is that interchange arrangements vary considerably across countries, and while existing economic theory provides some insight into this market, much remains to be explained.
International Journal of Industrial Organization, 2006
We present and estimate a model of competition in a two-sided market: the market for magazine rea... more We present and estimate a model of competition in a two-sided market: the market for magazine readership and advertising. Using data on magazines in Germany, we find evidence that magazines have properties of two-sided markets. The results are consistent with the perception that prices for readers are dsubsidizedT and that magazines make all their money from advertisers. Consistent with advertisers valuing readers more than readers value advertisements, our results imply that higher demand on the reader side increases ad rates, but that higher demand on the advertising side decreases cover prices. D 2005 Elsevier B.V. All rights reserved. JEL classification: C33; L11
We discuss policy towards mobile call termination, illustrated by the 2002 Competition Commission... more We discuss policy towards mobile call termination, illustrated by the 2002 Competition Commission enquiry into the UK mobile market. We present a model of the mobile market which includes both fixed-to-mobile and mobile-to-mobile call termination. In broad terms, the former service is likely to involve monopoly pricing if left unchecked, while the latter service-if the termination charge is jointly chosen by networks-may provide the mobile sector with the means by which to relax competition. Competition is often relaxed by choosing a low mobile-to-mobile termination charge. If feasible, then, unregulated networks often wish to set different termination charges depending on whether traffic originates on the fixed or mobile network. By contrast, social optimality often requires that uniform termination charges be imposed. * We are grateful to Stefan Behringer, John Vickers and Helen Weeds for very helpful comments. † University College London, email [email protected]. Armstrong acted in a limited way as advisor to Oftel, then the telecommunications regulator, during the course of the enquiry discussed in this paper.
International Journal of Industrial Organization, 2008
The existing literature on exclusive dealing is extended to take into account that buyers signing... more The existing literature on exclusive dealing is extended to take into account that buyers signing exclusive deals are typically competing firms that are differentiated from the perspective of their customers. We show, provided such downstream firms are not too differentiated or provided upstream firms can compete in two-part tariffs, exclusive dealing forecloses entry to a more efficient rival. An established upstream firm and competing downstream firms raise their joint profit by signing exclusive deals to protect the industry from upstream competition. Naked exclusion arises despite the Chicago School logic that buyers only sign contracts that make themselves (jointly) better off.
2000) result of naked exclusion in which an incumbent forecloses efficient entry by exploiting th... more 2000) result of naked exclusion in which an incumbent forecloses efficient entry by exploiting the fact a rival needs a sufficient number of buyers to make its entry profitable by signing up some of them with exclusive contracts. FM argue that given that buyers are typically firms that compete downstream rather than final consumers, an efficient entrant needs only a single deviating downstream buyer to cover its fixed costs of entry. They present a model in which buyers are homogenous price competitors, claiming the model implies a unique entry equilibrium whenever entry is efficient. Their result suggests exclusive deals written between an incumbent and competitive downstream buyers are no longer a concern.
International Journal of Industrial Organization, 2010
This paper explores the ability of an incumbent to use introductory offers to dominate a market i... more This paper explores the ability of an incumbent to use introductory offers to dominate a market in the face of a more efficient rival when network effects rather than scale economies are present. Both in the case of one-sided and two-sided markets, for introductory offers to be profitable when consumers can multihome, they need to be discriminatory and exclusive. In this setting, exclusivity as opposed to just commitment to purchase is critical -consumers must commit not to purchase from the rival in the future in order that introductory offers can work. The use of such contracts is anticompetitive and inefficient but does not necessarily result in complete foreclosure.
We model exclusive dealing when the incumbent and potential entrant offer differentiated products... more We model exclusive dealing when the incumbent and potential entrant offer differentiated products and buyers are downstream firms. While the resulting exclusive dealing is always anticompetitive, it does not necessarily involve foreclosure.
International Journal of Industrial Organization, 2010
We re-examine tacit collusion under a simple punishment rule in which firms match any lower price... more We re-examine tacit collusion under a simple punishment rule in which firms match any lower price by their rivals, but otherwise leave their prices unchanged. We provide conditions under which this simple rule sustains collusion and is credible. Provided competition is imperfect, collusion can always be sustained, but never to the point of monopoly. Interestingly, the standard ambiguous relationship between product substitutability and tacit collusion is unambiguous under this new setting. The relationship to existing theories of price matching guarantees, kinked demand curves, and continuous reaction-function equilibria are explained.
Regulators across many different jurisdictions and industries have recently adopted the practice ... more Regulators across many different jurisdictions and industries have recently adopted the practice of setting access prices based on the current costs of providing the relevant facilities. Though widely regarded as being efficient, the efficiency implications of using current costs instead of historical costs have not been formally analyzed. Our analysis shows that given stochastic costs, forward-looking access prices retard investment and are generally dominated by access prices determined by historical cost whenever investment is desired.
Uploads
Papers by Julian Wright