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Nicholas Economides

28 October 2011
WORKING PAPER SERIES - No. 1388
Details
Abstract
In Electronic Payment Networks (EPNs) the No-Surcharge Rule (NSR) requires that merchants charge the same final good price regardless of the means of payment chosen by the customer. In this paper, we analyse a three-party model (consumers, merchants, and proprietary EPNs) to assess the impact of a NSR on the electronic payments system, in particular, on competition among EPNs, network pricing to merchants and consumers, EPNs' profits, and social welfare. We show that imposing a NSR has a number of effects. First, it softens competition among EPNs and rebalances the fee structure in favour of cardholders and to the detriment of merchants. Second, we show that the NSR is a profitable strategy for EPNs if and only if the network effect from merchants to cardholders is sufficiently weak. Third, the NSR is socially (un)desirable if the network externalities from merchants to cardholders are sufficiently weak (strong) and the merchants' market power in the goods market is sufficiently high (low). Our policy advice is that regulators should decide on whether the NSR is appropriate on a market-by-market basis instead of imposing a uniform regulation for all markets.
JEL Code
L13 : Industrial Organization→Market Structure, Firm Strategy, and Market Performance→Oligopoly and Other Imperfect Markets
L42 : Industrial Organization→Antitrust Issues and Policies→Vertical Restraints, Resale Price Maintenance, Quantity Discounts
L80 : Industrial Organization→Industry Studies: Services→General
Network
Conference on the future of retail payments: opportunities and challenges