Interchange Fee Rate, Merchant Discount Rate and Retail Pricing Decisions for a Credit Card Network: A Game-theoretic Approach

Guo, Hangfei, Leng, Mingming and Wang, Yulan (2010) Interchange Fee Rate, Merchant Discount Rate and Retail Pricing Decisions for a Credit Card Network: A Game-theoretic Approach. In: INFORMS Annual Meeting 2010, 2010-11-07 - 2010-11-10.

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We consider two game-theoretic settings to determine the optimal values of an issuerís interchange fee rate, an acquirerís merchant discount rate, and a merchantís retail price in a credit card network. In the Örst setting, we investigate a two-stage game problem in which the issuer and the acquirer Örst negotiate the interchange fee rate, and the acquirer and the retailer then determine their merchant discount rate and retail price, respectively. In the second setting, motivated by the recent U.S. bill ìH.R. 2695,î we develop a three-player cooperative game in which the issuer, the acquirer, and the merchant form a grand coalition and bargain over the interchange fee rate and the merchant discount rate. Following the cooperative game, the retailer makes its retail pricing decision. We derive both the Shapley value- and the nucleolus-characterized, and globally-optimal unique rates for the grand coalition. Comparing the two game settings, we Önd that the participation of the merchant in the negotiation process can result in the reduction of both rates. Moreover, the stability of the grand coalition in the cooperative game setting may require that the merchant should delegate the credit card business only to the issuer and the acquirer with su¢ ciently low operation costs. We also show that the grand coalition is more likely to be stable and the U.S. bill ìH.R. 2695îis thus more e§ective, if the degree of division of labour in the credit card network is higher as the merchant, the acquirer, and the issuer are more specialized in the retailing, the acquiring, and the issuing operations, respectively

Item Type: Conference or Workshop Item (Paper)
Uncontrolled Keywords: interchange fee rate,merchant discount rate,nash bargaining,stackelberg game,supermodularity, shapley value,nucleolus
Faculty \ School: Faculty of Social Sciences > Norwich Business School
Depositing User: Pure Connector
Date Deposited: 01 Dec 2015 10:00
Last Modified: 21 Oct 2022 23:41
DOI: 10.1002/nav.21505

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