To Surcharge or Not to Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule

Abstract

In Electronic Payment Networks (EPNs) the No-Surcharge Rule (NSR) requires that merchants charge the same …nal good price regardless of the means of payment chosen by the customer. In this paper, we analyze 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'pro…ts, and social welfare.We show that imposing a NSR has a number of e¤ects. First, it softens competition among EPNs and rebalances the fee structure in favor of cardholders and to the detriment of merchants. Second, we show that the NSR is a pro…table strategy for EPNs if and only if the network e¤ect from merchants to cardholders is su¢ ciently weak. Third, the NSR is socially (un)desirable if the network externalities from merchants to cardholders are su¢ ciently weak (strong) and the merchants'market power in the goods market is su¢ ciently 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.

Cards on the Table: Efficiency and Welfare Effects of the No-Surcharge Rule

“…Third, it suggests that the social optimal policy on the NSR may differ from market to market (see also Economides and Henriques, 2011). In competitive markets, allowing for card surcharges can be socially preferable to the NSR to incentivise competition at the EPN level.…”

“…This allows us to study the NSR e¤ects on merchant acceptance and quantity of goods transacted. Second, it considers positive network e¤ects of card-accepting merchants on cardholders which, with very few exceptions (Economides and Henriques, 2011), have not been modelled in previous articles on the NSR. This paper contributes to the study of the economic (in)e¢ ciencies entailed by the NSR and highlights the: (i) improvement in retail price e¢ ciency for cardholders, and (ii) ine¢ ciency in merchant acceptance of card payments. Under the NSR, cardholders pay lower prices (closer to marginal cost) at cardaccepting merchants, which improves price e¢ ciency for card transactions, while cash payers pay higher prices.…”

The no‐surcharge rule and surcharging behaviours in credit card markets

“…Tan (2020a, 2020b) discussed the NSR with Hotelling merchants. Studies done by Economides and Henriques (2011) and Henriques (2018) are two other pieces to provide an efficiency and welfare analysis of the NSR. They take an innovative approach in modelling, which is distinct compared to this article.…”