Credit and the No-Surcharge Rule

Abstract:     
A controversial aspect of payment cards has been the no-surcharge rule. This rule, which is part of the contract between the card provider and a merchant, states that the merchant cannot charge a customer who pays by card more than a customer who pays by cash. In this paper we consider the design of an optimal card-based payment system when cash is available as an alternative means of payment. We find that a version of the no-surcharge rule emerges as a natural and advantageous feature of such a system.

Number of Pages in PDF File: 36

Keywords: no surcharge, credit cards, payments, money, search

JEL Classification: D83, E42

working papers series