A theory of credit cards [An article from: International Journal of Industrial Organization]

This digital document is a journal article from International Journal of Industrial Organization, published by Elsevier in 2007. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
A two-period model is constructed to study the interactions among consumers, merchants, and a card issuer. The model yields the following results. First, if the issuer's cost of funds is not too high and the merchant's profit margin is sufficiently high, in every equilibrium of our model the issuer extends credit to qualified consumers, merchants accept credit cards and consumers face a positive probability of default. Second, the issuer's ability to charge higher merchant discount fees depends on the number of customers gained when credit cards are accepted. Thus, credit cards exhibit characteristics of network goods. Third, each merchant faces a prisoner's dilemma where each independently chooses to accept credit cards, however all merchants' two-period profits are reduced because of intertemporal business stealing across industries.