Imposing Choice under Ambiguity: The Case of Dynamic Currency Conversion

Abstract

It is a common experience for present-day consumers making an international payment via credit or debit card to be invited to choose the currency in which they wish to have the transaction executed. While this choice, made feasible by a technology known as dynamic currency conversion (DCC), seems to foster competition, we show that the opposite is the case. In fact, the unique pure-strategy Nash equilibrium in anatural fee-setting game turns out to be highly asymmetric, entailing fees for the service provider that always exceed the monopoly level. Although losses in welfare may be substantial, a regulatory solution is unlikely to come about due to a global free-rider problem.

Keywords: Dynamic currency conversion, payment cards, ambiguity aversion, price competition, monopoly, free-rider problem

JEL Classification: D21, G21, G28, G53