Research On The Weak Two-sided Market Characteristics Of China's Bank Card Market And Its Price Structure Strategy

From the perspective of industrial chain, the payment service of bankcard is composed of issuing sector, acquiring sector and interbank exchange service sector. Linked by interbank exchange service, issuing sector and acquiring sector evolve into issuing markets and acquiring card market. Due to the attribute of Chicken and Egg between both sub-markets, the relationship between transactional volume and price in two-sided markets dramatically changes. The transactional volume through a platform is not sensitive to price level but price structure.Therefore, we may find that the core words in two-sided markets, i.e. network externality effect and muti-product pricing. Based on them, this thesis carries out an research on the realistic issues in China’s bankcard market, with its focus on the empirical testing of two-sidedness, an estimation of the joint demand function, price structure strategies for a multi-product monopoly, platform co-existence and its frontier, access pricing between networks and the suggestions for a sustainable development in China’s bankcard market. Based on mathematical deduction and empirical analysis, this thesis arrives at some significant conclusions as below.1. China’s paymentcard industry is characterized with an attribute of weak two-sided markets.The second chapter turns to Attachment Curves Model and econometrical method and accomplishes an empirical testing on the two-sided character of China’s bankcard market. The results suggest that China’s paymentcard industry is characterized with a weak and one-way two-sidedness, that is, the expansion of acquiring market necessarily gives rise to a geometric increase in the user-base of cardholder, while a similar cross-network effect is not apparent in turn. The increase in the user-base of cardholder did not result in an expansion of acquiring network until recent years.2. The joint demand function in China’s paymentcard market is neither the sum nor the product of issuing market and acquiring market but a complicated Copula structure between them.The third chapter applies Copula functions to capture the non-linear and complex relationship between marginal demands, and moreover, estimates the joint demand function in China’s paymentcard industry, only to find that the t Copula function fits the relationship between issuing market and acquiring market. The joint demand function increases in the issuing market demand while it does not response sensitively to the acquiring market demand, and the profound and realistic reason lies in the distorted profit distribution system. According to our forecast, undergoing a stable growth, the joint demand function in China’s payment card industry may encounter a watershed.3. Referring to the theory of two-sided markets, the fourth chapter analyzes the pricing strategies under single-product and multi-product circumstance. It reveals that the debit cardholder fee is higher than that of credit while the merchant discount of debit is also higher than that of credit under single-product circumstance, and thus, the ratio of merchants who are willing to accept debit card is much lower that of credit card. However, the merchant discount under multi-product circumstance may be lower than the minimal level of that under single-product circumstance when the market power of merchants is weak enough.4. Each kind of platform has it room to survive, and the winner does not necessarily take all, moreover, if the strength of cross-group network externality is relatively high or low enough, platforms could co-exist.A two-sided market is characterized with cross-group network externality; the fifth chapter builds a two-stage game model and analyzes the effect of cross-group network externality on the competition among platforms and its performance. The theoretical model suggests that each kind of platform has it room to survive, and the winner does not necessarily take all, moreover, if the strength of cross-group network externality is relatively high or low enough, platforms could co-exist.In this sense, an inherent vulnerability can be attributed to paymentcard market. The empirical results reveal that the reason of platform co-existence in China payment card industry lies in its low enough cross-group network externality; strickingly, however, it is the one-way, asymmetric and low enough cross-group network externality that results in a reduction of performance rather than improvement since the first reform in China paymentcard industry.5. The risk heterogeneity of cardholder and the degree of differentiation in acquiring market give birth to three niche markets for new entrants.Issuing market is composed of cardholders with diverse risks, while acquiring market is essential to the whole transactional process. In order to consolidate the operational foundation, a payment card platform must divide and conquer both markets. This sixth chapter puts forward an incumbent-entrant model with payment or tax in acquiring market to explore the effect of risk features on positioning and pricing in issuing market for the entrant and to design the optimal incentive transfer payments in acquiring market. Results suggest that cardholder risk will exert an impressive effect on the positioning and pricing decision through risk Crowding-out channel and demand Crowding-out/in channel. The differentiation degree in acquiring market does not determine the pricing decision directly; however it does affect the pricing decision and profit level in issuing market. An entrant can still seek niche markets to obtain advantages over the incumbents as long as it is well and wisely positioned.6. A discriminant pricing structure may stimulate the incumbent to open its network to competitiors, and an access fee affect the distribution of cardholder fee only.Economic incentive rather than technology compatibility determines the network opening decision for an incumbent; the seventh chapter explores the pricing structure strategy for achieving an interconnection between networks. Under the circumstance of an asymmetric network scale, a discriminant pricing structure may stimulate the incumbent to open its network to competitiors, obtaining the highest price margin. Meanwhile, an access fee affect the distribution of cardholder fee between surcharging fees and transferring fees and thus zeor access fee may not a desirable policy target. As the gap of acquiring networks grows, the incumbent may raise the surcharging fee and reduce its transferring fee, while the new entrant will reduce the surcharging fee and raise its transferring fee.As far as the reform of China’s paymentcard market concerned, an introduction of competitive payment systems does not necessarily result in performance improvement; a secondary and dual reform is needed for China’s payment card market to obtain further development.Scholars in indusrial organization have been entending and deepening the theory of two-sided markets. At present, any small but significant improvement in theoretical model may result in innovative achievements. Based on this logic, there are four solid contributions in this dissertation.Firstly, this dissertation accomplishes a fundamental research on the testing of two-sidedness, clearing the essential feature of paymentcard market.Secondly, this dissertation breaks the confinement of literature and employes the Copula function to construct a well-defined joint demand function in paymentcard market, capturing the Chicken and Egg relationship in two-sided markets.Thirdly, this dissertation returns to the primitive mission of payment system (Evans, 2003; Rochet and Tirole,2006) and defines the survival frontier for open-ended platform and closed platform, and then carries out an empirical testing on the performance of the reform since 2002 in China’s paymentcard market.Lastly, this dissertation synthesizes the risk heterogeneity of cardholder and the degree of differentiation in acquiring market into the model of platform competition, providing us with more insights on market segmenting and targeting, which is significantly different from related literature.