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Why don’t most merchants use price discounts to steer consumer payment choice?

Author

Listed:
  • Tamás Briglevics
  • Oz Shy

Abstract

Recent legislation and court settlements in the United States allow merchants to use price discounts to steer customers to pay with means of payment that are less costly to merchants. This paper suggests one method of calculating merchants’ change in profit associated with giving price discounts to buyers who pay with debit cards and cash. We use data from the pilot of the Boston Fed’s Diary of Consumer Payment Choice to compute rough estimates of the expected net cost reduction by merchant type that may result from debit card and cash price discounts. We find that steering consumers to debit and cash via price discounts reduces some merchants’ card costs. However, this cost reduction may be insufficient to offset the cost increase of administering price menus that vary by payment instrument. In addition, rewards buyers receive on credit card transactions may exceed the price discounts that merchants can provide. These factors may explain why steering via price discounts is not widely observed.

Suggested Citation

  • Tamás Briglevics & Oz Shy, 2012. "Why don’t most merchants use price discounts to steer consumer payment choice?," Public Policy Discussion Paper 12-9, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbpp:12-9
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    References listed on IDEAS

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    1. How monetary systems cope with a multitude of dollars
      by JP Koning in Moneyness on 2015-06-25 19:34:00

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    Cited by:

    1. John Bagnall & David Bounie & Kim P. Huynh & Anneke Kosse & Tobias Schmidt & Scott Schuh, 2016. "Consumer Cash Usage: A Cross-Country Comparison with Payment Diary Survey Data," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 1-61, December.
    2. Stavins, Joanna & Shy, Oz, 2015. "Merchant steering of consumer payment choice: Evidence from a 2012 diary survey," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 55(C), pages 1-9.
    3. Stavins, Joanna & Wu, Huijia, 2017. "Payment discounts and surcharges: the role of consumer preferences," Working Papers 17-4, Federal Reserve Bank of Boston.
    4. Daniel Flores & Vitaliy Kalashnikov, 2017. "Parking Discounts: Price Discrimination with Different Marginal Costs," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 50(1), pages 91-103, February.
    5. Oz Shy, 2014. "Measuring Some Effects Of The 2011 Debit Card Interchange Fee Reform," Contemporary Economic Policy, Western Economic Association International, vol. 32(4), pages 769-783, October.
    6. Arango, Carlos & Huynh, Kim P. & Sabetti, Leonard, 2015. "Consumer payment choice: Merchant card acceptance versus pricing incentives," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 130-141.

    More about this item

    Keywords

    Payment systems ; Credit cards ; Debit cards ; Cash transactions;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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