Price Differentiation and Menu Costs in Credit Card Payments

Marcos Jorge and Wilfredo Maldonado ()

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: We build a model of credit card payments where the retailers are allowed to charge differential prices depending on the instrument of payment chosen by the consumer. We follow the approach in Rochet and Wright (2010) but assume a credit card system without any type of non-surcharge rule. In a Hotelling competition framework at the retailers level, the competitive equilibrium prices are computed assuming that the store credit provided by the retailer is less cost efficient than the one provided by the credit card. In accordance with the literature, we obtain that the interchange fee becomes neutral if we eliminate the no-surcharge rule, when the interchange fee loses its ability to distort the individual consumer’s decisions and displace the aggregate consumers’ welfare from its maximum level. We prove that the average price obtained under price differentiation is smaller than the single retail price under the non-surcharge rule, despite the retailer’s margins being the same in both scenarios. In addition, we introduce menu costs to prove that there is a value for the interchange fee such that there is equilibrium with price differentiation if and only if that fee is above this value. It must be interpreted as an endogenous cap for the interchange fee fixed by the credit card industry. Finally, we also obtain that under price differentiation with menu costs there is a non cooperative Nash equilibrium as in the well known “prisoner’s dilemma” game.

JEL-codes: E42 G18 L11 (search for similar items in EconPapers)
Pages: 38 Pages
Date: 2012-10
New Economics Papers: this item is included in nep-ban, nep-com and nep-ind
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Citations: View citations in EconPapers (1)

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Journal Article: Price differentiation and menu costs in credit card payments (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2012-592

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