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Same Price, Cash, or Card: Vertical Control by Payment Networks

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The no-surcharge rule (NSR) prohibits merchants from charging different prices to consumers that use credit cards instead of cash. We show that, while an NSR raises card company profits, it may reduce both cash and card transactions. If the card company can offer rebates to its cardholders, it will do so. Rebates benefit card users and harm cash users; they raise total surplus if and only if the proportion of cash users relative to card users exceeds some threshold. A similar condition determines whether total surplus rises under the NSR with rebates compared to no NSR; aggregate consumer surplus moves in opposite direction to total surplus. If the card company cannot limit its member banks from competing vigorously, then an NSR, by cross-subsidizing card purchases, can still reduce total surplus.

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File URL: http://www8.georgetown.edu/departments/economics/pdf/201.pdf
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Bibliographic Info

Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~02-02-01.

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Date of creation: 01 Feb 2002
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Handle: RePEc:geo:guwopa:gueconwpa~02-02-01

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Postal: Georgetown University Department of Economics Washington, DC 20057-1036
Phone: 202-687-6074
Fax: 202-687-6102
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Web page: http://econ.georgetown.edu/

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Postal: Marcia Suss Administrative Officer Georgetown University Department of Economics Washington, DC 20057-1036
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Web: http://econ.georgetown.edu/

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Cited by:
  1. Robert M. Hunt, 2003. "An introduction to the economics of payment card networks," Working Papers 03-10, Federal Reserve Bank of Philadelphia.
  2. Chakravorti Sujit & Roson Roberto, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-25, March.
  3. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
  4. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  5. Sujit Chakravorti, 2003. "Theory of credit card networks: a survey of the literature," Payment Cards Center Discussion Paper 03-09, Federal Reserve Bank of Philadelphia.

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