IDEAS home Printed from https://ideas.repec.org/a/eee/indorg/v63y2019icp99-144.html
   My bibliography  Save this article

Shrouded transaction costs: must-take cards, discounts and surcharges

Author

Listed:
  • Bourguignon, Hélène
  • Gomes, Renato
  • Tirole, Jean

Abstract

The proliferation of new payment methods on the Internet rekindles the old and unsettled debate about merchants’ incentive and ability to differentiate price according to payment choice. This paper develops an imperfect-information framework for the analysis of platform and social regulation of card surcharging and cash discounting. It makes three main contributions. First, it identifies the conditions under which concerns about missed sales induce merchants to perceive that they must take the card. Second, it derives a set of predictions about cash discounts, card surcharges and platform fees that shed light on existing evidence. Finally, it shows that the optimal regulation of surcharging is related to public policy toward merchant fees and substantially differs from current practice.

Suggested Citation

  • Bourguignon, Hélène & Gomes, Renato & Tirole, Jean, 2019. "Shrouded transaction costs: must-take cards, discounts and surcharges," International Journal of Industrial Organization, Elsevier, vol. 63(C), pages 99-144.
    • Handle: RePEc:eee:indorg:v:63:y:2019:i:c:p:99-144
    DOI: 10.1016/j.ijindorg.2018.10.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167718718301024
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ijindorg.2018.10.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Jean Tirole, 2009. "Cognition and Incomplete Contracts," American Economic Review, American Economic Association, vol. 99(1), pages 265-294, March.
    2. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    3. repec:bla:jindec:v:50:y:2002:i:2:p:103-22 is not listed on IDEAS
    4. Julian Wright, 2012. "Why payment card fees are biased against retailers," RAND Journal of Economics, RAND Corporation, vol. 43(4), pages 761-780, December.
    5. David S. Evans & Richard Schmalensee, 2005. "The economics of interchange fees and their regulation : an overview," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 73-120.
    6. Glenn Ellison, 2005. "A Model of Add-On Pricing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 585-637.
    7. 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.
    8. Sumit Agarwal & Souphala Chomsisengphet & Neale Mahoney & Johannes Stroebel, 2015. "Regulating Consumer Financial Products: Evidence from Credit Cards," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(1), pages 111-164.
    9. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
    10. Rysman Marc & Wright Julian, 2014. "The Economics of Payment Cards," Review of Network Economics, De Gruyter, vol. 13(3), pages 303-353, September.
    11. ?zlem Bedre-Defolie & Emilio Calvano, 2013. "Pricing Payment Cards," American Economic Journal: Microeconomics, American Economic Association, vol. 5(3), pages 206-231, August.
    12. Zhou, Jidong, 2009. "Prominence and Consumer Search: The Case With Multiple Prominent Firms," MPRA Paper 12554, University Library of Munich, Germany.
    13. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Prominence and consumer search," RAND Journal of Economics, RAND Corporation, vol. 40(2), pages 209-233, June.
    14. 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.
    15. Rochet, Jean-Charles & Wright, Julian, 2010. "Credit card interchange fees," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1788-1797, August.
    16. Nicholas Economides & David Henriques, 2011. "To Surcharge or Not To Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule," Working Papers 11-03, NET Institute.
    17. Kosfeld, Michael & Schüwer, Ulrich, 2011. "Add-on Pricing, Naive Consumers, and the Hidden Welfare Costs of Education," CEPR Discussion Papers 8636, C.E.P.R. Discussion Papers.
    18. Mark Armstrong & John Vickers, 2012. "Consumer Protection and Contingent Charges," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 477-493, June.
    19. Jean‐Charles Rochet & Jean Tirole, 2011. "Must‐Take Cards: Merchant Discounts And Avoided Costs," Journal of the European Economic Association, European Economic Association, vol. 9(3), pages 462-495, June.
    20. Bolt, Wilko & Jonker, Nicole & van Renselaar, Corry, 2010. "Incentives at the counter: An empirical analysis of surcharging card payments and payment behaviour in the Netherlands," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1738-1744, August.
    21. 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.
    22. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    23. Mark Armstrong & John Vickers & Jidong Zhou, 2009. "Consumer Protection and the Incentive to Become Informed," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 399-410, 04-05.
    24. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
    25. Andrew Rhodes, 2015. "Multiproduct Retailing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(1), pages 360-390.
    26. Richard Schmalensee, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-122, June.
    27. Fumiko Hayashi, 2012. "Discounts and surcharges: implications for consumer payment choice," Payments System Research Briefing, Federal Reserve Bank of Kansas City, issue Jun.
    28. Renato Gomes & Jean Tirole, 2018. "Missed Sales and the Pricing of Ancillary Goods," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(4), pages 2097-2169.
    29. Gans Joshua S & King Stephen P, 2003. "The Neutrality of Interchange Fees in Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-18, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rasch, Alexander & Thöne, Miriam & Wenzel, Tobias, 2020. "Drip pricing and its regulation: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 353-370.
    2. Jean Tirole, 2023. "Competition and the Industrial Challenge for the Digital Age," Post-Print hal-04464905, HAL.
    3. Loertscher, Simon & Niedermayer, Andras, 2020. "Entry-deterring agency," Games and Economic Behavior, Elsevier, vol. 119(C), pages 172-188.
    4. Hongru Tan, 2020. "The regulation of merchant fees in credit card markets," Journal of Regulatory Economics, Springer, vol. 57(3), pages 258-276, June.
    5. Tan, Hongru & Chen, Xuezheng, 2024. "The no surcharge rule and its welfare implication," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1369-1384.
    6. Felt, Marie-Hélène & Hayashi, Fumiko & Stavins, Joanna & Welte, Angelika, 2023. "Regressive effects of payment card pricing and merchant cost pass-through in the United States and Canada," Journal of Banking & Finance, Elsevier, vol. 154(C).
    7. Takanori ADACHI & Mark J. TREMBLAY, 2022. "Do No-Surcharge Rules Increase Effective Retail Prices?," Discussion papers e-22-003, Graduate School of Economics , Kyoto University.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tirole, Jean & Gomes, Renato & Bourguignon, Hélène, 2014. "Shrouded Transaction Costs," CEPR Discussion Papers 10171, C.E.P.R. Discussion Papers.
    2. Renato Gomes & Jean Tirole, 2018. "Missed Sales and the Pricing of Ancillary Goods," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(4), pages 2097-2169.
    3. Reisinger, Markus & Zenger, Hans, 2019. "Interchange fee regulation and service investments," International Journal of Industrial Organization, Elsevier, vol. 66(C), pages 40-77.
    4. Julian Wright, 2012. "Why payment card fees are biased against retailers," RAND Journal of Economics, RAND Corporation, vol. 43(4), pages 761-780, December.
    5. Wang, Zhu, 2016. "Price cap regulation in a two-sided market: Intended and unintended consequences," International Journal of Industrial Organization, Elsevier, vol. 45(C), pages 28-37.
    6. Wilko Bolt & Sujit Chakravorti, 2010. "Digitization of Retail Payment," DNB Working Papers 270, Netherlands Central Bank, Research Department.
    7. Tan, Hongru & Chen, Xuezheng, 2024. "The no surcharge rule and its welfare implication," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1369-1384.
    8. 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.
    9. Kim, Young Sik & Lee, Manjong, 2016. "Who should bear the resource cost of electronic transaction?," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 270-280.
    10. Frans Saxén, 2014. "The No Surcharge Rule and Merchant Competition," Journal of Industry, Competition and Trade, Springer, vol. 14(1), pages 39-66, March.
    11. 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.
    12. Ewerhart, Christian & Li, Sheng, 2023. "Imposing Choice on the Uninformed: The Case of Dynamic Currency Conversion," Journal of Banking & Finance, Elsevier, vol. 154(C).
    13. Hongru Tan, 2020. "The regulation of merchant fees in credit card markets," Journal of Regulatory Economics, Springer, vol. 57(3), pages 258-276, June.
    14. Miao Chun-Hui, 2014. "Do Card Users Benefit From the Use of Proportional Fees?," Review of Network Economics, De Gruyter, vol. 12(3), pages 323-341, January.
    15. Marcos Valli Jorge & Wilfredo Leiva Maldonado, 2013. "Diferenciação de Preços e Custos de Menu nos Pagamentos com Cartão de Crédito," Working Papers Series 315, Central Bank of Brazil, Research Department.
    16. Wang, Zhu, 2010. "Market structure and payment card pricing: What drives the interchange?," International Journal of Industrial Organization, Elsevier, vol. 28(1), pages 86-98, January.
    17. Ding, Rong, 2014. "Merchant internalization revisited," Economics Letters, Elsevier, vol. 125(3), pages 347-349.
    18. Marc Bourreau & Marianne Verdier, 2019. "Interchange Fees and Innovation in Payment Systems," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 54(1), pages 129-158, February.
    19. Rasch, Alexander & Thöne, Miriam & Wenzel, Tobias, 2020. "Drip pricing and its regulation: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 353-370.
    20. Zhu Wang, 2013. "Demand externalitites and price cap regulation: Learning from a two-sided market," Working Paper 13-06, Federal Reserve Bank of Richmond.

    More about this item

    Keywords

    Payment cards; Cash discounts; Card surcharges; Hold-ups in two-sided markets; Missed sales;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:indorg:v:63:y:2019:i:c:p:99-144. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505551 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.