Credit Cards and Buyer Price Protection

Gail Cohen

No 978, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: In a duopoly model with homogeneous products, I show that allowing credit cards to offer buyer price protection will have both pro- and anti-competitive effects. Because of the buyer price protection, customers will be indifferent between purchasing an inexpensive and an expensive product as long as the difference in price is less than the cap on the refund allowed by the credit card. in order to obtain the entire market, a more efficient firm must charge prices lower than the marginal cost of the more inefficient firm. This is in contrast to the results obtained in pure Bertrand competition or when the firms themselves offer "meet the best price" clauses. The anti-competitive effects are similar to the results obtained when firms themselves offer "meet the best price" clauses. The anti-competitive effects strengthen as the cost difference between the firms decreases and as the cap on the refund allowed by the credit card increases.

Date: 1992-01
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