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Priceless? The Social Costs of Credit Card Merchant Restraints


Adam J. Levitin


Georgetown University Law Center

January 1, 2008

Georgetown Law and Economics Research Paper No. 973970
Georgetown Public Law Research Paper No. 973970

Abstract:     
Who pays for credit card rewards? This Article demonstrates that credit card rewards programs are funded in part by a highly regressive, sub rosa subsidization of affluent credit consumers by poor cash consumers. In its worst form, food stamp recipients are subsidizing frequent flier miles. The subsidization is created by a set of credit card network rules called "merchant restraints" that combines with a cognitive bias known as the framing effect to limit merchants' ability to price payments systems according to cost.

The Article also shows how the subsidization of credit card use increases the use of credit cards for transacting. A set of cognitive biases amplifies increased transacting usage into an increase in credit card debt. Credit card merchant restraints thus ultimately contribute to credit defaults, reduced consumer savings and purchasing power, inflation, and consumer bankruptcy filings.

There are profound policy implications to the social externalities caused by credit card merchant restraints, including whether private control of essential services like payment systems is appropriate. In light of the negative social externalities of credit card merchant restraints, the Article proposes regulatory or legislative intervention to ban merchant restraint rules.

Number of Pages in PDF File: 70

Keywords: credit cards, surcharges, discounts, no-surcharge rule, honor all cards, merchant restraints, debit cards, unbanked, subsidization, interchange, merchant discount, cognitive bias, framing effect, underestimation bias, spending restraint bias, inflation, bankruptcy

JEL Classification: D24, D40, G21, G33, G28, K21, K23, L42, L4, L16

working papers series


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Date posted: March 27, 2007 ; Last revised: March 4, 2014

Suggested Citation

Levitin, Adam J., Priceless? The Social Costs of Credit Card Merchant Restraints (January 1, 2008). Georgetown Law and Economics Research Paper No. 973970; Georgetown Public Law Research Paper No. 973970. Available at SSRN: http://ssrn.com/abstract=973970 or http://dx.doi.org/10.2139/ssrn.973970

Contact Information

Adam J. Levitin (Contact Author)
Georgetown University Law Center ( email )
600 New Jersey Avenue, NW
Washington, DC 20001
United States
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