This volume consists of seven articles on the economics and regulation of interchange fees. All rely on the multi-sided platform framework. The first two chapters examine whether there is a market failure in setting interchange fees and present principles for considering correction to a market failure. One of the themes of these articles is that regulating one side of a two-sided market necessarily has effects on the other side of the market: lower prices for merchants means higher prices for consumers. Chapters 3-5 address that tradeoff which is sometimes called a waterbed effect. Chapter 3 presents an empirical study of what happened following the imposition of price controls on interchange fees in Australia in the mid 2000s. Chapters 4 and 5 estimate the prospective impact on consumers in the US and EU of interchange fee caps. These chapters rely heavily on the economic concept of pass-through, which concerns the extent to which business change their prices in response to changes in costs. The net impact of reductions in interchange fees on consumers depends on the extent to which issuing banks raise fees and merchants lower prices in response to a reduction in interchange fees which are revenues to banks and ultimately costs to merchants. Chapter 6 examines a related question: how do interchange fee price caps affect investment and innovation for payment systems. Chapter 7 examines arguments that merchant representatives have made concerning debit card interchange fee regulation. That is followed by a short chapter with a few concluding thoughts.
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