Vertical MFN's and the Credit Card No-Surcharge Rule

48 Pages Posted: 8 Jun 2017 Last revised: 19 May 2018

Dennis W. Carlton

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Ralph A. Winter

University of British Columbia (UBC) - Division of Finance

Date Written: May 16, 2018

Abstract

A vertical MFN prohibits a multi-product retailer charging more for a supplier's product than for the products of rival suppliers. In the market for credit card services, this restraint takes the form of a no-surcharge rule: that a retailer not surcharge for transactions with a particular credit card. This paper sets out a general theory of the vertical MFN restraint and then applies the theory to credit cards. In a symmetric, differentiated duopoly, the vertical MFN raises price from the Bertrand equilibrium value to a level greater than the fully collusive value. In a monopoly-competitive fringe model, the restraint can allow the dominant firm to leverage its power to extract surplus from the entire set of consumers. The theory applies directly to the credit card market. Contrary to accepted wisdom and an important legal case, the two-sided nature of the credit card market does not mandate new economic foundations.

Keywords: competition policy, vertical restraints, credit cards, two-sided markets

JEL Classification: L00, L4, L42

Suggested Citation

Carlton , Dennis W. and Winter, Ralph A., Vertical MFN's and the Credit Card No-Surcharge Rule (May 16, 2018). Available at SSRN: https://ssrn.com/abstract=2982115 or http://dx.doi.org/10.2139/ssrn.2982115

Dennis W. Carlton

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
312-322-0215 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ralph A. Winter (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8339 (Phone)
604-822-8377 (Fax)

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