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Do the Poor Pay for Card Rewards of the Rich?

Author

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  • Krueger Malte

    () (Department of Business and Law, University of Applied Sciences Aschaffenburg, Wuerzburger Str. 45, D-63743 Aschaffenburg, Germany)

Abstract

Card payment systems are sometimes accused of taking from the poor and giving to the rich. The argument is as follows: High card fees are leading to higher retail prices for both, card users and cash users. However, high-income card holders are receiving rewards when purchasing by card. The result may be a net transfer of, mostly low-income, cash users to, mostly high-income, card users. In this article, models with product differentiation are used to show that rich card-holders may actually be paying for their card rewards themselves. In this case, there is no perverse distribution effect.

Suggested Citation

  • Krueger Malte, 2015. "Do the Poor Pay for Card Rewards of the Rich?," Review of Economics, De Gruyter, vol. 66(2), pages 129-154, August.
  • Handle: RePEc:lus:reveco:v:66:y:2015:i:2:p:129-154
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    References listed on IDEAS

    as
    1. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    2. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
    3. Wright Julian, 2010. "Why Do Merchants Accept Payment Cards?," Review of Network Economics, De Gruyter, vol. 9(3), pages 1-8, August.
    4. Acharyya, Rajat, 1998. "Monopoly and product quality: Separating or pooling menu?," Economics Letters, Elsevier, vol. 61(2), pages 187-194, November.
    5. 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.
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    More about this item

    Keywords

    Two-sided markets; card rewards; surcharging; vertical product differentiation;

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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