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Imposing choice under ambiguity: the case of dynamic currency conversion

Christian Ewerhart () and Sheng Li

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

Abstract: It is a common experience for present-day consumers making an international payment via credit or debit card to be invited to choose the currency in which they wish to have the transaction executed. While this choice, made feasible by a technology known as dynamic currency conversion (DCC), seems to foster competition, we show that the opposite is the case. In fact, the unique pure-strategy Nash equilibrium in anatural fee-setting game turns out to be highly asymmetric, entailing fees for the service provider that always 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; payment cards; ambiguity aversion; price competition; monopoly; free-rider problem (search for similar items in EconPapers)
JEL-codes: D21 G21 G28 G53 (search for similar items in EconPapers)
Date: 2020-04, Revised 2020-07
New Economics Papers: this item is included in nep-gen, nep-gth and nep-pay
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