Cards on the Table: Efficiency and Welfare Effects of the No-Surcharge Rule

Henriques David ()
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Henriques David: London School of Economics and Political Science, London, WC2A 2AE, United Kingdom of Great Britain and Northern Ireland

Review of Network Economics, 2018, vol. 17, issue 1, 25-50

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.

Keywords: Competition; Electronic Payment Networks; market power; network externalities; No-Surcharge Rule; regulation (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1515/rne-2017-0036

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