The Interchange Fees - A Comparison between Optimal Private and Social Levels

In this paper we derived the optimal conditions which allow for a comparison between private and social levels of the interchange fees (IFs). We expand the model developed by Rochet and Tirole (2002) by allowing for several extensions which lead to a more accurate understanding of the determinants of the interchange fees by payment card systems. More specifically, we looked at a card payment system with a for-profit platform, unobservable heterogeneity across merchants and not-fully informed customers. Merchants behave strategically and imperfect competition of both issuers and acquirers is also considered. The simultaneous treatment of these assumptions is the novelty of our work and it is done with the purpose of reflecting more realistically the payment card industry.