The Welfare Implication of Lifting the No Surcharge Rule in Credit Card Markets
Abstract
This dissertation investigates the welfare implications of banning the no surcharge rule (NSR) in credit card markets. Nowadays, Visa and MasterCard have been facing antitrust and regulatory investigations all over the world. They are charged for certain business practices that may adversely affect competition. Among all the business practices, the NSR has been particularly at issue. The NSR is a business practice that prohibits merchants from charging a higher price to purchases made using credit cards than to purchases made using other forms of payment.
Chapter One investigates the welfare implication of banning the NSR using a model in which a monopoly credit card company provides credit card services to both consumers and Hotelling merchants through competitive issuing banks and competitive acquiring banks. The main finding is that banning the NSR decreases social welfare, which stands in contrast with previous core literature-- namely, Rochet and Tirole (2002) (RT2002). Moreover, this unambiguous conclusion for welfare holds in a open payment system, regardless of the degree of competition among issuing banks.
Chapter Two investigates the welfare implication of banning the NSR using a model in which a monopoly credit card company provides credit card services to both consumers and monopoly merchants through competitive issuing banks and competitive acquiring banks. The main finding is that banning the NSR decreases social welfare because banning the NSR results in a double marginalization problem in providing credit card services. Another contribution of this chapter is that it provides an explanation of the surcharging behavior of merchants in Australia.
Chapter Three applies a model of platform competition to investigate the welfare implication of lifting the NSR in credit card markets. This paper finds that lifting the NSR always drives down the provision of credit card service below the level of a typical equilibrium in a Cournot game and always decreases social welfare. Social welfare decreases because banning the NSR opens the door for the merchant to abuse its market power in reselling the credit card service. Therefore, a new distortion is generated after the ban of the NSR, and social welfare decreases.
Description
Keywords
Banking, Economics--Finance
Citation
Tan, H. (2016). The Welfare Implication of Lifting the No Surcharge Rule in Credit Card Markets (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca. doi:10.11575/PRISM/28422