Imposing choice on the uninformed: the case of dynamic currency conversion

Christian Ewerhart and Sheng Li

No 345, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: Over the course of the past two decades, it has become a common experience for consumers authorizing an international transaction via credit card to be invited to choose the currency in which they wish the transaction to be executed. While this choice, made feasible by a technology known as dynamic currency conversion (DCC), seems to foster competition, we argue that the opposite is the case. In fact, the unique pure-strategy equilibrium in a natural fee-setting game, with uninformed and possibly inattentive consumers, turns out to be highly asymmetric, entailing fees for the service provider that persistently exceed the monopoly level. Although losses in welfare may be substantial, a regulatory solution is unlikely to come about due to a global free-rider problem.

Keywords: Dynamic currency conversion; credit cards; price competition; monopoly; free-rider problem; rational inattention (search for similar items in EconPapers)
JEL-codes: D21 G21 G28 G53 (search for similar items in EconPapers)
Date: 2020-04, Revised 2023-05
New Economics Papers: this item is included in nep-gen, nep-gth and nep-pay
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Journal Article: Imposing Choice on the Uninformed: The Case of Dynamic Currency Conversion (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:345

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