Economics Colloquium, Monday at 4:30

Jonathan Lhost, a Ph.D. candidate at the University of Texas, will visit campus Monday and deliver the next edition of the Economics Colloquium.  The talk will be at 4:30 Monday in Steitz 102.

You can take a look at the paper (see below) and be sure to bring your computer so you can follow along with the interactive appendix.

Credit or Debit? How Surcharging Affects Customers, Merchants, and the Platform

Jonathan Lhost
University of Texas

 

ABSTRACT:  Payment cards were used to complete over 87 billion transactions in the United States in 2012, worth over $4 trillion. The cost for merchants of these transactions is significant, with merchants paying over $66 billion in fees to payment card networks (e.g., Visa) in 2012, and also varies widely based on the type of payment card used, with credit cards often twice as costly for merchants as debit cards. Historically, with limited exceptions, merchants have been prohibited, both by law and by the contract permitting the acceptance of that network’s cards, from what is known as “surcharging,” that is, charging a customer a higher or lower price depending upon the cost to the merchant of the customer’s payment method. Merchants have raised legal challenges against this prohibition on surcharging, claiming it is anti-competitive, increases their costs, and reduces their profits. Recent concessions made by several major payment networks in response to these legal challenges raises the possibility that this paradigm might change in the future.

 

I consider a population of customers who have different valuations for a good sold by two competing merchants, as well as varying preferences over the merchant from which to purchase the good and the payment form with which to make the purchase, and examine what the effects might be if merchants were allowed to surcharge. When the merchants have identical marginal costs, both merchants have higher profits when allowed to surcharge. However, if merchants are asymmetric, the merchant with lower costs, typically a larger retailer, benefits from surcharging, whereas the merchant without an ability to reduce costs, typically a smaller retailer, does not.

 

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