To Surcharge or Not To Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule

Nicholas Economides () and David Henriques ()
Additional contact information
David Henriques: Nova School of Business and Economics

No 11-03, Working Papers from NET Institute

Abstract: In Electronic Payment Networks (EPNs) the No-Surcharge Rule (NSR) requires that merchants charge the same final good price regardless of the means of payment chosen by the customer. In this paper, we analyze a three-party model (consumers, merchants, and proprietary EPNs) to assess the impact of a NSR on the electronic payments system, in particular, on competition among EPNs, network pricing to merchants and consumers, EPNs’ profits, and social welfare. We show that imposing a NSR has a number of effects. First, it softens competition among EPNs and rebalances the fee structure in favor of cardholders and to the detriment of merchants. Second, we show that the NSR is a profitable strategy for EPNs if and only if the network effect from merchants to cardholders is sufficiently weak. Third, the NSR is socially (un)desirable if the network externalities from merchants to cardholders are sufficiently weak (strong) and the merchants’ market power in the goods market is sufficiently high (low). Our policy advice is that regulators should decide on whether the NSR is appropriate on a market-by-market basis instead of imposing a uniform regulation for all markets.

Keywords: Electronic Payment System; Market Power; Network Externalities; No-Surcharge Rule; Regulation; Two-sided Markets; MasterCard; Visa; American Express; Discover. (search for similar items in EconPapers)
JEL-codes: L13 L42 L80 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2011-08
New Economics Papers: this item is included in nep-ban, nep-com, nep-ind, nep-net and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: To surcharge or not to surcharge? A two-sided market perspective of the no-surchage rule (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:net:wpaper:1103

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