Comments on Payment Industry Dynamics  Focus on how paper differs from literature  Discuss nature of asymmetries driving interchange fees  Some other suggestions

Is it really that different? It is … but the differences are different Claimed differences from Rochet & Tirole (2002) Focus on monetary character of payments Implies natural asymmetry – consumers & merchants These are not really different Monetary aspect the same – cost savings in payments R&T (2002), Wright (2004), Guthrie & Wright (2006) and some others have natural asymmetry

So what are the differences? Richer microfoundations Consumers vary in income – rich people spend more Firm vary in size and face contestable market Value of expenditures determines use of payment All fees proportional to value of transaction Adoption costs separate from usage costs As adoption costs gets small, asymmetry disappears A Baxter-type model emerges

Natural asymmetry? There should be a natural symmetry in the model It arises because both sides face adoption costs Correct that merchants take account of cardholder fees But so consumers should take account of merchant fees The asymmetry, if any, should be the standard one Assume merchants accept card if lowers their price In contestable market, merchant accepting card should take into account consumers’ cost saving from using cards otherwise it can be replaced by a merchant that does

Other suggestions Another asymmetry is assumed distributions Social optimum versus Ramsey pricing Can current U.S. puzzles be explained by model based on adoption costs and choices?