Date Added: Nov 2008
The authors study the ability of banks and merchants to influence the consumer's payment instrument choice. Consumers participate in payment card networks to insure themselves against three types of shocks; income, theft, and their merchant match. Merchants choose which payment instruments to accept based on their production costs and increased profit opportunities. The key results can be summarized as follows. The structure of prices is determined by the level of the bank's cost to provide payment services including the level of aggregate credit loss, the probability of theft, and the timing of income flows.