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Same Price, Cash, or Card: Vertical Control by Payment Networks

The no-surcharge rule (NSR) prohibits merchants from charging different prices to consumers that use credit cards instead of cash. We show that, while an NSR raises card company profits, it may reduce both cash and card transactions. If the card company can offer rebates to its cardholders, it will do so. Rebates benefit card users and harm cash users; they raise total surplus if and only if the proportion of cash users relative to card users exceeds some threshold. A similar condition determines whether total surplus rises under the NSR with rebates compared to no NSR; aggregate consumer surplus moves in opposite direction to total surplus. If the card company cannot limit its member banks from competing vigorously, then an NSR, by cross-subsidizing card purchases, can still reduce total surplus.

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Paper provided by Georgetown University, Department of Economics in its series Working Papers with number gueconwpa~02-02-01.

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Date of creation: 01 Feb 2002
Handle: RePEc:geo:guwopa:gueconwpa~02-02-01
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Order Information: Postal: Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036
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