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

Henriques, David (2018) Cards on the table: efficiency and welfare effects of the no-surcharge rule. Review of Network Economics, 17 (1). pp. 25-50. ISSN 1446-9022

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Identification Number: 10.1515/rne-2017-0036

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.

Item Type: Article
Official URL: https://www.degruyter.com/view/j/rne
Additional Information: ©2018 Walter de Gruyter GmbH
Divisions: Media and Communications
Subjects: H Social Sciences > HB Economic Theory
JEL classification: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships; Contracts and Reputation; Networks
L - Industrial Organization > L4 - Antitrust Issues and Policies > L42 - Vertical Restraints; Resale Price Maintenance; Quantity Discounts
Sets: Departments > Media and Communications
Date Deposited: 22 Nov 2018 10:29
Last Modified: 20 Feb 2019 06:57
Funders: Fundação para a Ciência e a Tecnologia
URI: http://eprints.lse.ac.uk/id/eprint/90664

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