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Cards on the table: efficiency and welfare effects of the no-surcharge rule

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  • Henriques, David

Abstract

In Electronic Payment Networks (EPNs), the No-Surcharge Rule (NSR) requires that merchants charge at most the same amount for a payment card transaction as for cash. In this paper, I use a three-party model (consumers, local monopolistic merchants, and a proprietary EPN) with endogenous transaction volumes, heterogeneous card use benefits for merchants and network externalities of card-accepting merchants on cardholders to assess the efficiency and welfare effects of the NSR. I show that the NSR: (i) promotes retail price efficiency for cardholders, and (ii) inefficiently reduces card acceptance among merchants. The NSR can enhance social welfare and improve payment efficiency by shifting output from cash payers to cardholders. However, if network externalities are sufficiently strong, the reduction of card payment acceptance affects cardholders negatively and, with the exception of the EPN, all agents will be worse off under the NSR. This paper also suggests that the NSR may be an instrument to decrease cash usage, but the social optimal policy on the NSR may depend on the competitive conditions in each market.

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  • 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.
    • Handle: RePEc:ehl:lserod:90664
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    File URL: http://eprints.lse.ac.uk/90664/
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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.
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    10. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
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    Cited by:

    1. 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.

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    More about this item

    Keywords

    competition; electronic payment networks; market power; net-work externalities; no-surcharge rule; regulation; two-sided markets;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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