The payment card industry is a typical "two-sided market" where two groups
of agents (i.e. merchants and cardholders) interact with each other via a common
network platform (i.e. a card network) and the value of participating in the
network for agents in one group depends on the number of participants from the
other group. The positive network externalities across the two sides create the
"chicken-and-egg problem": without sufficient merchants accepting a particular
card network, few consumers are willing to apply for the card; without sufficient
cardholders, few merchants are willing to accept the card. While economists have
addressed the issue from social welfare perspective, we focus on business strategy
implications. Modeling network externalities in dynamic systems, we show that
network platform owners could overcome the' 'chicken-and-eggproblem" through
strategies such as merger and acquisition, licensing, forming strategic alliance,
as well as adjusting product and pricing strategies, etc. We provide a history of
the U.S. payment card industry as empirical evidences to support our findings.
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