ABSTRACT

We investigate the welfare implications of banning the no-surcharge rule (NSR) in credit card markets. In particular, we introduce a governance mechanism alteration and merchants' heterogeneity into the model of Wright (2003). In doing so, we find two market forces exist in the transition of lifting the NSR. The first force is the classical double marginalization because of merchants being able to deliberately impose a surcharge. The second force arises from a market structure change that merchants, who did not accept credit cards payments, do accept afterwards. Our model shows that the welfare implication hinges on the relative magnitudes of both market forces. More importantly, this article provides an explanation for the surcharging behaviors of merchants in Australia after the removal of the NSR in 2003, which have not been explained in the literature.

KEYWORDS

Credit card market, No-surcharge rule, Surcharging behaviors

JEL CLASSIFICATION

D42; E85; L14

Australian Economic Papers

https://onlinelibrary.wiley.com/doi/full/10.1111/1467-8454.12189