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Review of Industrial Organization

, Volume 51, Issue 3, pp 257–290 | Cite as

Consumer Payment Preferences, Network Externalities, and Merchant Card Acceptance: An Empirical Investigation

  • David Bounie
  • Abel François
  • Leo Van Hove
Article

Abstract

The two-sided market theory holds that consumer adoption and merchant acceptance of payment cards are interdependent. However, empirical evidence on such network externalities is scarce, especially for the merchant side. This paper addresses this issue by examining merchant card acceptance in France. We exploit shopping diary data to construct a novel and fine-grained measure of French consumers’ payment preferences and match these with data from a nation-wide merchant survey. Controlling for (among other factors) cost, degree of competition, and customer characteristics, we find that the higher the probability that the average basket of a merchant is paid for by card in shops in the same sector and region, the higher the probability that the merchant will accept cards. In other words, we find that consumer preferences drive merchant card acceptance, which underpins the existence of network externalities on the merchant side of the payment card market.

Keywords

Consumer preferences Merchants Network externalities Payment cards Retail payments Two-sided markets 

JEL Classification

E42 L81 D4 

Notes

Acknowledgments

We thank the Editor Lawrence J. White, two anonymous referees, Nicole Jonker, Sibel Aydogan, Yassine Bouhdaoui, Cédric Sarasin, and Ludovic Francesconi as well as participants at the 2015 Bank of Canada Annual Conference for helpful comments on earlier versions of this paper.

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Department of Economics and Social Sciences (ESS)Telecom ParisTechParisFrance
  2. 2.LEMLille 1 University, Science and TechnologyVilleneuve d’AscqFrance
  3. 3.Department of Applied Economics (APEC)Vrije Universiteit BrusselBrusselsBelgium

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