Retail Payment Systems
In the OIC Member Countries
25
The pricing of the two-sides of a platform has also elucidated network externalities (Rochet &
Tirole, 2003). In this case, merchants and customers pay different transaction and
participation fees, and thus affect the usage and pricing of the platform. Credit cards are a
classic example of a two-sided payment platform. In this case, merchant fees are levied by
credit card providers on retailers and an interchange fees paid by merchant acquirers to credit
card issuers. These kinds of arrangements might critically influence the take-up of the
platform, particularly when there is competition between different platforms (Rochet & Tirole,
2003). Milne (2005) posits that the use of interchange fees to subsidise card issuing has been a
critical factor in encouraging card holding and thus overcoming this ‘chicken and egg’
problem—customers may not be interested in card holding until there is a large volume of
merchants accepting cards; however, merchants are reluctant to invest resources to accept
cards until there is a large volume of customers holding the cards (Evans and Schmalansee,
1999).
3.4 Retail Payment Industry and Network Effects
More than 60 years ago, Leibenstein (1950) analysed the ‘bandwagon effect’ as ‘the extent to
which the demand for a commodity is increased due to the fact that others are also consuming
the same commodity’ (p. 189). It describes people’s desire and behaviour in purchasing a
commodity to get into ‘the swim of things’ and conform to the people they wish to be
associated with. About 20 years later, economists examined Leibenstein’s bandwagon effect in
terms of networks in the telecommunication sector.11
Network externalities are a natural feature of networks which arise from the existence and
provision of complementary goods (Rohlfs, 1974). The hypothesis asserts that one consumer’s
value for a product increases when another consumer has a compatible or identical good
(Farrell & Saloner, 1985; Katz & Shapiro, 1985). Besides these general effects applying to all
consumer decisions, some markets are determined by strong positive network effects, the so-
called demand-sided economies of scale, deriving from the need for product compatibility.
Liebowitz and Margolis (2002) preferred the term network-effects to substitute for the more
common term network externalities, to account for the possibility that these effects are often
internalised.
11 Other than in the telecommunication sector, however, research on ‘network effects’ was in stagnation until 1980s where
several economic historians such as David (1985), and economic theorists like Farrell and Saloner (1985) and Katz and
Shapiro (1985) began to explore these issues in the context of the economics of standardisation. Those researches have
encouraged another publication on a wider and deeper understanding of network effect. Significant contribution has not
only given by engineers, but also economic theorists, economic historians, applied economists, as well as applied
mathematicians.