Do Premium Payment Methods Increase Effective Retail Prices?

23 Pages Posted: 19 Sep 2019 Last revised: 14 Mar 2020

See all articles by Takanori Adachi

Takanori Adachi

Kyoto University - Graduate School of Management; Kyoto University - Graduate School of Economics

Mark J. Tremblay

Miami University

Date Written: March 12, 2020

Abstract

In this paper, we determine how premium payment methods impact effective prices (prices that include any consumer payment rewards). This question is fundamentally related to policy, and we provide a robust answer by considering how a variety of retail market structures are impacted by multiple payment methods. We find that, with a no-surcharge rule applied to the premium payment method, effective prices are often higher across all payment methods. In this case, the no-surcharge rule protects a double marginalization effect where the premium payment method inserts an additional margin that harms all consumers and all merchants. We show that this loss in welfare can be rectified by allowing merchant surcharging across payment methods. Our results are robust across merchant market structures, suggesting that protected premium payment methods are generally harmful, except for the payment industry.

Keywords: Credit cards, Merchant fees, Consumer rewards, Ohio v.s. American Express

JEL Classification: L10, L20, L42

Suggested Citation

Adachi, Takanori and Tremblay, Mark, Do Premium Payment Methods Increase Effective Retail Prices? (March 12, 2020). Available at SSRN: https://ssrn.com/abstract=3450855 or http://dx.doi.org/10.2139/ssrn.3450855

Takanori Adachi (Contact Author)

Kyoto University - Graduate School of Management ( email )

36-1 Yoshida-honmachi
Sakyo-ku
Kyoto, 606-8501
Japan

Kyoto University - Graduate School of Economics ( email )

36-1 Yoshida-honmachi
Sakyo-ku
Kyoto, 606-8501
Japan

Mark Tremblay

Miami University ( email )

208 Laws Hall
Oxford, OH 45056
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
73
Abstract Views
679
rank
437,094
PlumX Metrics