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Price Regulation in Two-Sided Markets: Empirical Evidence from Debit Cards

This paper studies the impact of price regulation in two-sided markets, where intermediaries must get both sides of the market on board. Since platforms such as debit card networks can only succeed by simultaneously convincing consumers to use cards and merchants to accept them, they often subsidize one side of the market to generate supracompetitive profits from the other side (Rochet and Tirole 2003). Using a novel dataset on card processing fees, we show a regulation restricting banks’ ability to charge high processing fees (the Durbin Amendment of the 2010 Dodd-Frank Act) transferred value from the previously subsidized side of the market—consumers—to merchants. Our evidence adds empirical support to the concern that market failures in two-sided markets are hard to identify, and potentially even harder regulate. We thank Sumit Agarwal, Yakov Amihud, Jeremy Bulow, Sylvain Catherine, Itamar Dreschler, Erik Gilje, Paul Goldsmith-Pinkham (discussant), Sam Hanson, Andres Liberman (discussant), Jack Liebersohn (discussant), Scott Nelson, Pascal Noel, Dev Patel, Jonathan Roth, David Scharfstein, Andrei Shleifer, Larry Summers, Emily Williams, Susan Woodward (discussant); and seminar participants at the American Law and Economics Association, the Australasian Finance and Banking Conference, Berkeley Law, Boulder Summer Conference on Consumer Financial Decision Making, Erasmus University, Georgetown University (McDonough), Harvard Business School, Maastricht University, Midwest Finance Association, NBER Summer Institute Household Finance Session, NYU Law and Finance Conference, Reserve Bank of Australia, Society for Empirical Legal Studies, Tilburg University, University of Virginia (Darden), WAPFIN and Wharton for helpful comments. Joe Kupferberg provided excellent research assistance.