Vertical MFN's and the Credit Card No-Surcharge Rule
48 Pages Posted: 8 Jun 2017 Last revised: 19 May 2018
Date Written: May 16, 2018
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: Suggested Citation