Third-party Payment System and E-commerce: An Application of the Monetary Search Model

The third-party payment system has became a new means of payment to cope with fraud in e-commerce and caused great impact on the financial system. In this paper, a model based on Lagos and Wright (2005) is built to discuss the essence of the third-party payments while the potential default behavior in an anonymous market from the seller side was emphasized. The endogenous entry decision made it possible for the existence of multiple equilibria, including one with the coexistence of fiat money and the third-party payment balance. Numerical result showed that: (1) the introduce of P3P system can raise the total welfare, given the feasibility of endogenous entry through improving the volume and the terms of trade; (2) entry proportion increased with the raise of the entry cost, which showed that the externality of the system can raise the incentive for entering, which makes the system remaining desirable even under a higher cost; (3) raising the inflation rate will increase the cost of using the system and then decrease people''s tolerant entry cost; (4) if other economy factors, such as the existence of competitive means of payment or punishment and enforcement in the economy, created serious problem of potential default, then it is easier in this economy for the P3P system to be accepted.