Centre for Computational Finance and Economic Agents Working Paper Series Wp017-08 Competition Is Bad for Consumers: Analysis of an Artificial Payment Card Market

This paper investigates the competition between payment card issuers in an artificial payment card market. In the market we model the interactions between consumers, merchants and competing card issuers and obtain the optimal pricing structure for card issuers. We allow card issuers to charge consumers and merchants with fixed fees, provide net benefits from card usage and engage in marketing activities. We establish that consumers benefit from a reduction of competing payment cards through lower fees and higher net benefits while merchants remain largely unaffected. The two-sided nature of the market leads to the result that more competitors do actually reduce competition for customers. Preprint submitted to Elsevier 20 July 2007