Industry Concentration and Credit Card Pricing Puzzles

Abstract: This paper provides a new explanation for puzzles surrounding credit card prices. The theory suggests that the consolidation in the US banking industry, particularly the consolidation among major credit card issuers, could be a main driving force of rising merchant (interchange) fees. As a result, card issuers’ profits increase with interchange fees, but merchant profits and consumer welfare are reduced. The theoretical findings are shown to be supported by empirical evidence. Based on our analysis, the pros and cons of policy interventions are discussed.