Public payment platforms: Optimal pricing and welfare impacts
A Bank of Canada working paper examines competition between public and private payment platforms in a two-sided market. It finds that public platforms generally raise aggregate welfare and financial inclusion, but optimal pricing must balance competition benefits against network fragmentation costs.
Optimal public pricing: A strategic balance
The paper characterizes optimal public pricing in a mixed duopoly, where a welfare-maximizing public platform competes with a profit-maximizing private platform.
Unlike a social planner, the public platform acts strategically, refraining from aggressive undercutting of its private rival.
This 'benevolent adjustment' prevents inefficient diversion of users, which would undermine the private platform's network effects and diminish surplus for its users.
This finding, consistent with mixed-oligopoly literature, highlights a novel channel through which two-sided network interactions lead to restrained public competitiveness.
The study also finds that private platforms respond to public competition by lowering consumer fees while raising fixed fees for merchants.
This outcome, where increased competition leads to higher merchant fees, aligns with the theory of competitive bottlenecks, as platforms compete more intensely for single-homing consumers and recoup losses from multi-homing merchants.
Policy mandates: Context-dependent welfare
Common public policy mandates, such as zero pricing for consumers or strict cost recovery, are generally not welfare-optimal in competitive two-sided markets.
While these policies aim to promote financial inclusion and fiscal sustainability, their welfare effects depend critically on flexible implementation.
Forcing aggressive public pricing can exacerbate inefficient diversion from private platforms, while overly restrictive rules reduce welfare gains.
Optimal public pricing is context-dependent, requiring a clear understanding of market conditions, network effects, user switching behavior, and platform differentiation.
Rigid application of these mandates may fail to deliver intended welfare gains.
Overall, public-private competition enhances market participation, increasing both consumer digital payment adoption and merchant acceptance.