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on Game Theory |
| By: | Dmitry Dagaev (New Economic School, HSE University); Daniil Starikov (University of Chicago, Harris School of Public Policy); Gleb Vasiliev (HSE University) |
| Abstract: | Sequential games are typically studied in environments where the game tree and payoffs are explicitly specified. In many real-world interactions, however, agents face implicitly formulated dynamic games: while the strategic structure and incentives are well defined, the underlying game form is not directly observed and must be inferred from experience. We study an implicitly formulated version of the centipede game and analyze a natural setting in which professional agents repeatedly engage in a sequential interaction with centipede-like incentives without observing the game tree. Using detailed intra-race data from Formula 1, we show that pit-stop timing decisions between closely competing drivers generate a centipede game once overtaking probabilities are taken into account. We estimate the payoff-relevant components of the game, compute the equilibrium of the resulting interaction, and compare theoretical predictions to observed behavior. We find that drivers respond strategically to each other: pit-stop timing shifts systematically when a nearby rival pits, even after controlling for tire degradation and race conditions. The observed responses broadly follow the equilibrium logic of the model. At the same time, we document substantial heterogeneity across teams: some teams consistently choose pit-stop timings close to the theoretical optimum, while others deviate substantially, and these patterns are associated with di!erences in success rates. By documenting equilibrium behavior in a complex sequential interaction outside the laboratory, the paper provides new evidence on how equilibrium predictions perform in natural dynamic environments. |
| Keywords: | centipede game, equilibrium behavior, implicit strategic environments, field evidence, Formula 1 |
| JEL: | C72 C93 Z20 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:abo:neswpt:w0297 |
| By: | David Ryz\'ak; Tom\'a\v{s} Kroupa |
| Abstract: | We introduce a class of cooperative games induced by weighted directed graphs. Specifically, the coalitional value combines an internal interaction term given by the induced subgraph game with an external component based on minimal incoming edges from outside the coalition. The resulting game has a convenient representation in terms of unanimity games. This representation enables closed-form polynomial-time formulas for the Shapley and Banzhaf values. We further establish that the game has a nonempty core and is totally balanced. The class of such games therefore provides an analytically and computationally tractable example of structured network- induced cooperative games in which stability-based allocations and fairness-based solution concepts do not coincide. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.18157 |
| By: | Giacomo Bonanno (Department of Economics, University of California Davis) |
| Abstract: | Within the context of a symmetric duopoly with linear demand and costs, we construct a parameterized family of price-setting games, where the parameter $\gamma\in[0, 2]$ measures the degree or intensity of competition; $\gamma = 0$ corresponds to collusion, a particular value of $\gamma$ between 0 and 1 corresponds to the Cournot outcome, $\gamma=1$ corresponds to the Bertrand outcome and, in general, as $\gamma$ increases the intensity of competition increases. All the games within the parameterized family share the same strategic properties. We also construct a parameterized family of quantity-setting games, where the parameter $\beta\in[0, 2]$ measures the intensity of competition; $\beta = 0$ corresponds to collusion, $\beta=1$ corresponds to the Cournot outcome and a particular value of $\beta$ between 1 and 2 corresponds to the Bertrand outcome. As $\beta$ increases, the intensity of competition increases. As an example of the potential usefulness of this approach, we show that, contrary to the view first put forward by Schumpeter (but later challenged by Arrow), the incentive to introduce a cost-reducing innovation is an increasing function of the intensity of competition (that is, an increasing function of $\gamma$ in the price-setting case and of $\beta$ in the quantity-setting case). |
| Keywords: | Cournot game, Bertrand game, price competition, quantity competition, strategic substitute, strategic complement, degree of competition |
| JEL: | C7 L0 D4 |
| Date: | 2026–05–27 |
| URL: | https://d.repec.org/n?u=RePEc:cda:wpaper:381 |
| By: | Kiryl Khalmetski (New Economic School); Mark T. Le Quement (School of Economics, University of East Anglia); Florian Hoffmann (Faculty of Economics and Business KU Leuven) |
| Abstract: | We formalize the notion of belief homophily under asymmetric information by introducing a preference for perceived disagreement aversion. We study its implications for information sharing in a disclosure model where a privately informed sender and an uninformed receiver have heterogeneous priors, while the sender is averse to the receiver’s perceived disagreement. Equilibrium disclosure is partial and tends to confirm the prior mean of the more confident player. The receiver earns more from senders whose prior means differ more from his own but whose prior variances are more similar. Perceived disagreement aversion implies qualitatively reverse predictions than aversion to actual disagreement. |
| Keywords: | strategic disclosure, psychological games, disagreement aversion |
| JEL: | D81 D83 D91 |
| Date: | 2026–01 |
| URL: | https://d.repec.org/n?u=RePEc:abo:neswpt:w0293 |
| By: | Allen Vong |
| Abstract: | I revisit the canonical reputation framework in which a long-lived player interacts with a sequence of short-lived opponents and may be either strategic or a commitment type who always plays the same, possibly mixed, action. I depart by allowing short-lived players to be uncertain not only about the long-lived player's type, but also about the signal structure. I show that even vanishingly small misspecified skepticism of short-lived players about commitment as an explanation of the observed signals can completely eliminate reputation effects: a patient strategic long-lived player's equilibrium payoff is bounded above by the canonical complete-information benchmark. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.17090 |
| By: | Marina Núñez (Universitat de Barcelona, Barcelona Economic Analysis Team); Francisco Robles (Universitat de Barcelona, Barcelona Economic Analysis Team) |
| Abstract: | We revisit the classical tension between stability and marginalism in the package allocation model of Milgrom [2007]. Our main finite-market stability results provide multiple necessary and sufficient conditions for the Banzhaf payoff vector to belong to the core. The key condition is the feasibility of an optimal assignment in which each buyer receives one of his most preferred bundles. Further, we show that the Shapley and Banzhaf payoff vectors coincide if and only if the Banzhaf payoff vector is in the core. We then consider replica economies. We construct a market in which, after finitely many replications, neither the Shapley nor the Banzhaf payoff vector belongs to the core of the replicated game. Strikingly, as the number of replicas tends to infinity, none of those payoff vectors converges to the core. Consequently, they do not converge to a competitive-equilibrium payoff vector in the limit. This stands in contrast to Luo et al. [2024], which shows that, in their setting of assignment games with multiple partnership, both payoff vectors converge to a competitive-equilibrium payoff vector as the number of replicas tends to infinity. |
| Keywords: | Package allocations, core, Banzhaf value, Shapley value |
| JEL: | C71 C78 D44 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ewp:wpaper:498web |
| By: | Bingyao Liu; Yao Luo |
| Abstract: | Capacity constraints are central to oligopoly competition in many industries, yet existing multiproduct Bertrand theory does not characterize equilibrium when capacity binds across markets. We establish existence and uniqueness of Bertrand–Nash equilibrium in a multimarket, multiproduct oligopoly under multinomial logit demand, with both linear and convex costs. Capacity creates cross-market spillovers: pricing in one market affects the shadow value of capacity in others. Methodologically, we extend the aggregative-games framework to a nested fixed-point structure separating across-market capacity allocation from within-market pricing, using tools from nonsmooth analysis to handle kinks from binding constraints. The framework yields new insights for merger analysis: binding capacity dampens merger-induced price increases through shadow-cost relief, while post-merger reallocation of scarce capacity can raise consumer surplus. However, the merged firm's privately optimal reallocation generally differs from the social optimum, creating a role for merger remedies. |
| Keywords: | Differentiated Products; Capacity Constraints; Mergers; Aggregative Games; Cross-Market Spillovers; Equilibrium Uniqueness |
| JEL: | L13 D24 |
| Date: | 2026–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-821 |
| By: | Evan M. Calford |
| Abstract: | This paper introduces ambiguity-dominance as a novel equilibrium selection procedure that, in 2x2 games, unifies risk-dominance and payoffdominance as special cases. Ambiguity-dominance provides an intuitive answer to the question "Which equilibrium is most robust to ambiguous beliefs about the behavior of other players?" and is defined for all finite normal form games. Ambiguity-dominance is parametrized by players' ambiguity preference and, using data from three recent experiments we find, on aggregate, ambiguity loving coupled with substantial subject-level heterogeneity. |
| Keywords: | Equilibrium selection, ambiguity aversion |
| JEL: | C70 D81 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:acb:cbeeco:2025-707 |
| By: | Dmitry Dagaev (New Economic School, HSE University); Egor Ivanov (HSE University); Petr Parshakov (HSE University); Alexey Savvateev (Central Economic Mathematical Institute, Russian Academy of Sciences, Adyghe State University, Moscow Institute of Physics and Technology, Innopolis University); Gleb Vasiliev (HSE University) |
| Abstract: | The emergence of large language models (LLMs) has spurred economists to study how humans and LLMs behave in strategic settings. We organized a series of round-robin tournaments in the Colonel Blotto game. This game attracts game theorists’ attention due to high-dimensional action space and the absence of pure strategy Nash equilibria. In the first tournament, more than 200 human participants competed against one another. In the second tournament, several popular LLMs were invited to submit strategies. In the third tournament, we matched the number of LLM strategies to the number submitted by humans. We find that humans more often employ better-calibrated intermediate-level allocation heuristics and outperform the simpler, more stereotyped strategies submitted by LLMs. Strategic sophistication is key to success if and only if the necessary level of reasoning depth is reached, while lower and higher levels of reasoning offer no clear advantage over the primitive strategies. Among humans, field of study weakly predicts success: participants with STEM backgrounds perform better in the first tournament. Surprisingly, humans almost do not adjust their strategies across tournaments with different sets of opponents. This result suggests that humans base their choices primarily on the game’s rules rather than on the identity of their opponents, treating LLMs much like human competitors. |
| Keywords: | Colonel Blotto, electoral college, tournament, k-level reasoning, AI, LLM |
| JEL: | C72 C99 D91 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:abo:neswpt:w0295 |
| By: | Takaaki Abe |
| Abstract: | The ratio of voting power between a permanent member and a non-permanent member of the United Nations Security Council varies substantially across indices: approximately 100 to 1 according to the Shapley-Shubik index, 10 to 1 according to the Banzhaf index, and 2.5 to 1 according to the Deegan-Packel index. Such comparisons depend on the choice of power index and are meaningful only in settings where players are divided into two types. To address these limitations, this paper proposes and characterizes a function that measures the level of power concentration in monotonic approval voting games. The proposed measure assigns a single value to each voting game, reflecting the extent to which voting power is unevenly distributed among players. The proposed measure is proportional to the sum of squared Deegan-Packel power indices and can also be interpreted as the degree of overlap among minimal winning coalitions. An application to the United Nations Security Council is also provided. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.05655 |
| By: | Yuhang Wu; Assaf Zeevi |
| Abstract: | On a platform with many sellers, should a pricing algorithm explicitly model competitors' prices when learning demand? Classical learning arguments suggest an affirmative answer: ignoring competitors induces model misspecification and inefficiency. In contrast, recent work on algorithmic collusion suggests that strategic obliviousness -- deliberately ignoring competitor prices -- may facilitate collusive outcomes and improve profits. We study this modeling choice in a stylized competitive market with unknown noisy demand, in which multiple sellers repeatedly set prices and estimate demand via iterated least squares, and either incorporate competitors' prices into their demand models (informed) or ignore them (oblivious). We first show that, relative to a monopolist, an oblivious seller in a competitive market must explore more aggressively to compensate for the loss of dynamic competitor information. Building on this insight, we characterize market dynamics when all sellers are oblivious and show that prices converge to the competitive outcome under sufficient exploration, while a continuum of pseudo-equilibria arises when exploration decays. Analyzing the resulting price trajectories, we uncover an excursion phenomenon that gives rise to transient collusive patterns that dissipate as learning progresses. In markets with both oblivious and informed sellers, the informed strictly out-earn the oblivious. Read as a strategy game, the modeling choice has a unique Nash equilibrium: the all-informed market, in which prices converge to the competitive outcome efficiently. Overall, our results indicate that collusive patterns are not robust and are not sustained by oblivious modeling; therefore, incorporating competitor information, together with sufficient price exploration, remains a reliable strategy for sellers in competitive markets. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.05363 |
| By: | Elias Asproudis (Swansea University, School of Social Sciences, Department of Economics, UK); Eleftherios Filippiadis (Department of Economics, University of Macedonia, Greece) |
| Abstract: | We study a perpetual entry problem in which an entrant chooses both when to enter and whether to enter through price or quantity competition against an incumbent that has already committed to quantity. The two entry modes are mutually exclusive and differ in sunk cost and discounted operating-profit coefficient. We focus on the case in which price entry is cheaper, while quantity entry is more profitable. Although price entry may then have the lower stand-alone trigger, crossing that trigger need not justify immediate entry. We provide a sufficient condition under which there exists a nonempty interval above the lower stand-alone trigger on which immediate entry in either mode is suboptimal. The entrant waits because delay preserves the option of entering later through the more profitable quantity mode. Thus, in a Cournot Bertrand environment with uncertainty and irreversibility, the choice of strategic variable is part of the real-options timing problem itself. |
| Keywords: | real options; endogenous mode choice; Cournot–Bertrand competition; entry timing; uncertainty; strategic commitment. |
| JEL: | C41 D25 D81 L13 |
| Date: | 2026–08 |
| URL: | https://d.repec.org/n?u=RePEc:mcd:mcddps:2026_08 |
| By: | Filipp Ushchev; Roger LR Lagunoff |
| Abstract: | Coordination failures arise when society gets stuck in a “bad” equilibriumwhen a Pareto superior one exists. How does wealth inequality affect coordinationfailure? This paper models a large, heterogeneous society where individuals’ consumptionsavings choices are influenced by investment spillovers. The cost of coordination failure(CCF) in this society is the welfare difference between the “good” (high investment) andthe “bad” (low investment) equilibrium. We provide natural conditions under which theCCF is increasing under mean-preserving spreads in wealth inequality.We also establish a trifurcation result in which high enough inequality creates acoordination failure where none had existed. Starting from a stable equilibrium whereinvestment is unaffected by inequality, the equilibrium becomes unstable as inequalityincreases, and two other stable equilibria — a good one and a bad one — emerge. In thebad equilibrium, inequality always reduces both aggregate investment and aggregatewelfare. In the good one, inequality is always investment-enhancing. Furthermore, there is a range of parameters where inequality is actually Pareto-improving in the goodequilibrium. In all cases, the welfare gap (the CCF) between the two equilibria increaseswith inequality |
| Keywords: | aggregative games; Coordination problems; cost of coordination failure; wealth inequality |
| JEL: | C72 D30 D62 |
| Date: | 2026–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:eca:wpaper:2013/407352 |
| By: | Robert Boyce; Eyal Neuman |
| Abstract: | We model a market with multiple dealers who compete for client order flow by dynamically updating their bid and ask quotes for a risky asset. Dealers aim to maximise expected profits while controlling inventory risk by skewing their quotes to attract offsetting order flow (internalisation) or by directly offloading positions in the market (externalisation). Using a variational approach, we derive a closed-form equilibrium for the resulting Nash competition, shedding light on key features of dealer market dynamics. We show that dealers relying on internalisation are compelled to increase their externalisation activity when competing with externalising dealers. This strategic shift in equilibrium leads to significantly higher hedging costs for all dealers and substantially wider spreads for clients. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.06413 |
| By: | Jaap H. Abbring; Yifan Yu |
| Abstract: | This paper studies interdependent durations as equilibrium outcomes of a synchronization game, a continuous-time stopping game in which the incentive to stop increases when other players stop. We allow the payoffs to vary with both common shocks and observed and unobserved agent characteristics. The common shocks follow a spectrally negative L\'evy process, a semiparametric process that includes Brownian motion as a special case but may also have jumps. We show that equilibrium outcomes can be represented as interdependent hitting times and use this to establish the game's nonparametric identification from data on stopping times and covariates. We develop maximum simulated likelihood and method of simulated moments estimators and evaluate their finite-sample and computational performance in Monte Carlo experiments. The results provide a tractable framework for identifying and estimating synchronization games from interdependent duration data. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.06251 |
| By: | Hamidou Tembine |
| Abstract: | This article develops an intergenerational mean-field-type game (MFTG) to model Mali's and neighbouring countries multi-actor conflict ecosystem, which includes formal state forces, traditional hunters, nonstate militias, jihadists, criminal networks, civil societies, and international proxies. Each decision-maker (agent, a group of agents or representative agent) is defined by a type, state, information structure, and action, with payoffs dependent not only on individual decisions but also on the evolving distribution of all agents' profiles. The model reveals that cycles of violence can persist across multiple generations due to the embedded presence of retaliatory types such as revenger child-soldiers whose trauma-conditioned best-responses favor conflict, and whose behavior reinforces intergenerational transmission of violence. The model also captures the strategic exploitation of institutional fragility by war entrepreneurs who profit from sustained instability through arms sales, militia contracting, and unregistered market mediation. These actors inject minimal resources to trigger profitable escalations, turning latent tensions into self-reinforcing violence economies. We show that in the absence of structural counterincentives, peaceful strategies are non-absorbing, and violence remains dynamically rewarding for war entrepreneurs. However, by embedding incentive-compatible, information-adaptive transfers directly into instantaneous payoffs, rewarding verifiable peacebuilding and penalizing aggression, it is possible to shift the mean-field-type equilibrium distribution intergenerationally toward more peaceful types and drive systemic de-escalation. We also discuss about the funding and the real implementation of such mechanisms in the field. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.18779 |
| By: | Suñas, Zygphryd |
| Abstract: | I develop a simple theory of supervised training under multitask incentives in which participation is valuable independently of completion. When completion-inducing effort is not contractible and supervisors allocate time across competing activities, equilibrium completion effort may be pinned to the minimum required for participation. The model yields two regimes: an alignment regime, where effort is determined by marginal incentives, and a captive regime, where it is pinned by the participation constraint. Comparative statics are regime dependent and can be counterintuitive: higher completion payoffs and participation benefits may reduce effort under a captive regime, while portable benefits and competition can mitigate this distortion by raising outside options. I discuss this mechanism as an explanation for low completion rates and extended time-to-degree in graduate education in developing contexts. |
| Keywords: | multitask incentives, supervision, participation constraints, graduate completion, higher education, human capital, development |
| JEL: | D23 D86 M5 |
| Date: | 2026–04–07 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:128702 |
| By: | Seungjin Han; Siyang Xiong |
| Abstract: | We study contracting with imperfect commitment and identify minimal canonical contract spaces that fully characterize equilibrium outcomes under general preferences. Different from previous solutions, our framework accommodates infinite agent type spaces (unlike Bester and Strausz (2001)), non-quasi-linear utilities (unlike Skreta (2006)), and settings where the principal lacks the commitment power typically assumed in information design (unlike Doval and Skreta (2021)). Moreover, our results apply to both single- and multi-principal environments, providing a unified and tractable approach to contracting under limited commitment. |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2605.19884 |
| By: | Hugh Montag; Randal J. Verbrugge |
| Abstract: | Shelter inflation, driven by continuing-tenant rents, accounts for one-third of the consumer price index (CPI). Yet continuing-tenant rent inflation, notoriously sticky, has attracted almost no theoretical attention. Standard sticky price theories cannot explain the basic facts. We provide a simple theory yielding implicit contracts as an equilibrium. The landlord will wish to renege when costs rise; reputation is unavailable to enforce the contract. A well-established mechanism serves: landlord off-equilibrium-path play might result in renter frustration and endogenous breakup. Our implicit-contracts theory gracefully explains nominal (rather than real) rigidity, and provides a microfounded explanation of key rental market facts. |
| Keywords: | continuing-tenant rent; inflation; frustration; customer anger; costly punishment |
| JEL: | R31 R21 E31 |
| Date: | 2026–05–27 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedcwq:103313 |
| By: | Cremer, Helmuth; Borsenberger, Claire; Joram, Denis; Lozachmeur, Jean-Marie; Malavolti, Estelle |
| Abstract: | We study environmental policy in imperfectly competitive markets where firms differ in their objectives. Alongside standard profit-maximizing firms, we consider welfareoriented firms that partially or fully internalize environmental externalities but are subject to financial viability constraints. Wedevelop a Cournot model in which production generates emissions and firms may differ in the extent to which they account for environmental damages. We characterize market equilibria and examine the effects of environmental taxes and output subsidies on emissions, output, profits, and welfare. Our analysis shows that standard Pigouvian prescriptions are modified by the presence of market power and by the break-even constraints faced by welfare-oriented firms. While emissions taxes reduce environmental damages, they may also exacerbate underproduction and threaten the viability of socially responsible firms. Conversely, output subsidies may improve welfare despite increasing emissions. The welfare ranking of policy instruments depends critically on the interaction between environmental externalities, imperfect competition, and firms’ financial constraints. These findings suggest that environmental policy design should account not only for emissions reduction, but also for the market structure and sustainability of firms with socially oriented objectives. |
| Keywords: | Environmental policy; imperfect competition; heterogeneous firm objectives; corporate social responsibility; Pigouvian taxation; break-even constraints. |
| JEL: | H23 L13 D62 Q58 |
| Date: | 2026–05–22 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131729 |
| By: | Lana Friesen (School of Economics, University of Queensland); Ian MacKenzie (School of Economics, University of Queensland); Peiyao Shen (Faculty of Business and Economics, University of Basel, Peter-Merian-Weg 6, 4002 Basel, Switzerland.) |
| Abstract: | Markets are an increasingly popular regulatory choice to cost effectively control negative externalities. Traditionally, market designs have employed a cap-and-trade format that places an absolute limit on the quantity of emissions. In contrast, many new schemes—including the world’s largest in China—limit the aggregate emissions intensity of production. This article theoretically and experimentally compares intensity- and capbased markets. We design a novel laboratory experiment, where firms choose both output and allowance exchange. Consistent with our theoretical predictions, we find that employing an intensity-based market rather than an equivalent cap-and-trade scheme significantly increases aggregate output, average allowance prices, aggregate abatement, and decreases industry profits. Overall, both markets perform as expected and close to the cost effective allocation of pollution abatement but with lower levels of aggregate profit as high production costs types produce significantly more output than predicted. |
| Keywords: | auction, intensity-based, cap-and-trade, experiment |
| JEL: | C92 H23 Q54 Q58 |
| Date: | 2026–05 |
| URL: | https://d.repec.org/n?u=RePEc:qld:uq2004:673 |
| By: | Balado-Naves, Roberto; Garcia-Valinas, Marian; Zaporozhets, Vera |
| Abstract: | This paper analyzes the determinants of the EU budget bargaining process across different expenditure sections for each EU member state. The central hypothesis is that the countries may accept lower allocations in one budget section in exchange for higher shares in others. To explore this, we first develop a theoretical bargaining model that captures member states’ preferences across budgetary items. We then empirically test the model using an unbalanced panel dataset covering EU member states from 1976 to 2020, estimating the marginal rate of substitution between different types of expenditure. The results reveal significant trade-offs among certain budgetary items. On average, structural funds emerged as the most valued expenditure category, followed by agricultural and natural resources policies. |
| Keywords: | EU budget; bargaining; agricultural policy; structural funds |
| JEL: | D72 H61 O52 Q18 |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131796 |
| By: | Robert M. Hunt; Konstantinos Serfes; Yin Zhang |
| Abstract: | This paper develops a two-sided model of the payment card market with elastic consumer demand, merchant and network market power, ad valorem interchange fees, cardholder rewards and cash as an alternative payment method. Drawing on insights from public finance, we define a credit card tax—an endogenous wedge between consumer and merchant prices generated by interchange fees, rewards, and credit card adoption. We show how this tax affects equilibrium prices, platform profits and welfare. Our analysis yields a novel and policy-relevant result: Contrary to conventional wisdom, capping interchange fees can increase equilibrium rewards when consumer demand is relatively inelastic. This, in turn, raises credit card adoption and intensifies cross-subsidization, benefiting card users, potentially at the expense of cash users. By contrast, when demand is more elastic, fee caps reduce rewards and card usage, improving outcomes for both groups. We also characterize the conditions under which interchange fee caps enhance allocative efficiency and encourage socially desirable payment choices. Overall, the paper offers new theoretical insights into the regulation of two-sided payment markets. |
| Keywords: | credit cards; two-sided networks; merchant competition; interchange fees; regulation |
| JEL: | L13 L40 G28 E42 |
| Date: | 2026–05–28 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedpwp:103315 |
| By: | Shan Erfang; Liying Kang |
| Abstract: | The weighted center of imputations (CIS) value allocates the surplus of the grand coalition equally after granting each player a fixed proportion of his individual worth. This paper provides three axiomatic characterizations of this value by generalizing the individual rationality and subgame order preservation axioms. The first characterization employs individual rationality with respect to the weights together with the equal surplus increment property. The second relies on efficiency, additivity, symmetry adjusted by the weights, and a dummifying player property adapted to the weights. The third builds on efficiency and a weak subgame order preservation axiom that incorporates the weights. These results unify and extend recent findings, covering both the equal division and the standard CIS values as special cases. |
| Date: | 2026–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2606.05582 |