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The no‐surcharge rule and surcharging behaviours in credit card markets

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  • Hongru Tan
  • Zhongqi Deng

Abstract

We investigate the welfare implications of banning the no‐surcharge rule (NSR) in credit card markets. In particular, we introduce a governance mechanism alteration and merchants' heterogeneity into the model of Wright (2003). In doing so, we find two market forces exist in the transition of lifting the NSR. The first force is the classical double marginalisation because of merchants being able to deliberately impose a surcharge. The second force arises from a market structure change that merchants, who did not accept credit cards payments, do accept afterwards. Our model shows that the welfare implication hinges on the relative magnitudes of both market forces. More importantly, this article provides an explanation for the surcharging behaviours of merchants in Australia after the removal of the NSR in 2003, which have not been explained in the literature.

Suggested Citation

  • Hongru Tan & Zhongqi Deng, 2020. "The no‐surcharge rule and surcharging behaviours in credit card markets," Australian Economic Papers, Wiley Blackwell, vol. 59(4), pages 358-375, December.
  • Handle: RePEc:bla:ausecp:v:59:y:2020:i:4:p:358-375
    DOI: 10.1111/1467-8454.12189
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    File URL: https://doi.org/10.1111/1467-8454.12189
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    References listed on IDEAS

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    1. Julian Wright, 2012. "Why payment card fees are biased against retailers," RAND Journal of Economics, RAND Corporation, vol. 43(4), pages 761-780, December.
    2. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
    3. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
    4. Rysman Marc & Wright Julian, 2014. "The Economics of Payment Cards," Review of Network Economics, De Gruyter, vol. 13(3), pages 303-353, September.
    5. Marius Schwartz & Daniel R. Vincent, 2020. "Platform Competition With Cash‐Back Rebates Under No Surcharge Rules," Journal of Industrial Economics, Wiley Blackwell, vol. 68(2), pages 298-327, June.
    6. Schwartz Marius & Vincent Daniel R., 2006. "The No Surcharge Rule and Card User Rebates: Vertical Control by a Payment Network," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-31, March.
    7. Weiner Stuart E. & Wright Julian, 2005. "Interchange Fees in Various Countries: Developments and Determinants," Review of Network Economics, De Gruyter, vol. 4(4), pages 1-34, December.
    8. Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 1-26, March.
    9. John Vickers, 2005. "Public policy and the invisible price : competition law, regulation, and the interchange fee," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 231-247.
    10. Henriques, David, 2018. "Cards on the table: efficiency and welfare effects of the no-surcharge rule," LSE Research Online Documents on Economics 90664, London School of Economics and Political Science, LSE Library.
    11. Benjamin Edelman & Julian Wright, 2015. "Price Coherence and Excessive Intermediation," The Quarterly Journal of Economics, Oxford University Press, vol. 130(3), pages 1283-1328.
    12. Hongru Tan, 2020. "The regulation of merchant fees in credit card markets," Journal of Regulatory Economics, Springer, vol. 57(3), pages 258-276, June.
    13. Richard Schmalensee, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-122, June.
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