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

41 Pages Posted: 21 Aug 2011 Last revised: 5 Sep 2011

Nicholas Economides

New York University - Leonard N. Stern School of Business - Department of Economics

David Henriques

London School of Economics & Political Science (LSE); Ofcom - UK Regulator and Competition Authority

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Date Written: August 19, 2011

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 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 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 favor 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.

Keywords: Electronic Payment System, Market Power, Network Externalities, No-Surcharge Rule, Regulation, Two-sided Markets, MasterCard, Visa, American Express, Discovery

JEL Classification: L13, L42, L80

Suggested Citation

Economides, Nicholas and Henriques, David, To Surcharge or Not to Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule (August 19, 2011). NET Institute Working Paper No. 11-03. Available at SSRN: https://ssrn.com/abstract=1912951 or http://dx.doi.org/10.2139/ssrn.1912951

Nicholas Economides (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

44 West 4th Street
New York, NY 10012
United States
212-998-0864 (Phone)
212-995-4218 (Fax)

HOME PAGE: http://www.stern.nyu.edu/networks/

David Henriques

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Ofcom - UK Regulator and Competition Authority ( email )

2a Southwark Bridge Road
London, SE1 9HA
United Kingdom

HOME PAGE: http://dthenriques.orgfree.com

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