This paper provides one of the first empirical analyses of the cost inefficiency problem in private retail payment circuits. Regarding the Italian credit card market in the last decade, the following aspects emerge: the credit card industry would have been benefited from significant increasing returns to scale but the more extensive the "network" (in terms of value of transactions handled) the more intermediaries tend to veer from their best practice cost frontier. Moreover, the cost structure borne by companies is strongly dependent on network agreements, and “interchange” commission flows represent significant intermediate input costs for the firms, playing an important role as a component of the final price in a concentrated and vertically integrated market. These factors tend to be related to the “network size” managed by each company and would determine a “low powered incentive environment”: the link between revenues and efficient production costs is no longer ensured over time.
Until now, efficiency problems in the retail payments systems have been of primary interest for the ex post and potential intervention of the antitrust authorities. Nevertheless, recent studies have also emphasized the need to establish ex ante systematic rules and principles for intra-network pricing schemes in the payment systems in order to guarantee greater transparency and efficiency over time.
In this context, the “theory of incentives” (see Laffont-Tirole 1993) might offer some solutions to the problem of fostering the low-cost provision of services considered to be essential to citizens and consistent with the objectives of welfare economics in the presence of information asymmetries, scale and/or network economies. For instance, pricing or cost recovery methods on the intermediate market might be based on costs expected under efficiency conditions according to a “best practice” frontier of the system, taking into account average gains in productivity across the time. However, more theoretical and empirical studies are required to investigate the topic more fully within the context of self- regulated payment networks.
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