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Cards on the table: efficiency and welfare effects of the no-surcharge rule

David Henriques

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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; net-work externalities; no-surcharge rule; regulation; two-sided markets (search for similar items in EconPapers)
JEL-codes: G21 L14 L42 (search for similar items in EconPapers)
Date: 2018-11-01
New Economics Papers: this item is included in nep-ban, nep-com, nep-ore, nep-pay and nep-reg
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Published in Review of Network Economics, 1, November, 2018, 17(1), pp. 25-50. ISSN: 1446-9022

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