Priceless? Costs of Credit Card Merchant Restraints

90 Pages Posted: 10 Oct 2006

See all articles by Adam J. Levitin

Adam J. Levitin

Georgetown University Law Center

Date Written: November 11, 2006


Credit card transactions cost American merchants six times as much as cash transactions. American merchants paid nearly $40 billion to accept credit cards last year. Why, then, do consumers pay the same price for purchases, regardless of their means of payment?

The answer lies in a set of credit card network rules known as merchant restraints. Merchant restraints forbid merchants from surcharging for credit and discounting for non-cash payments, while the framing effect, a well-documented cognitive bias, makes discounting for cash ineffective. Merchant restraints thus prevent merchants from pricing according to consumers' payment method and from signaling to consumers the costs of their choice of payment method. Accordingly, consumers never internalize the costs of their choice of payment system.

Credit card merchant restraints lead to an over-consumption of credit, which has profound anticompetitive and social effects. This article examines how merchant restraints have distorted competition within the credit card industry and among payment systems in general. It also identifies several problematic social impacts of merchant restraints, including a regressive, sub rosa subsidization of affluent credit consumers by poor cash consumers and increased use of credit leading to increased consumer bankruptcy filings, inflation, and decreased consumer purchasing power.

The article contends that the economic justifications for merchant restraints are unfounded, that merchant restraints are better understood in the context of their historical development as a solution to a legal problem that no longer exists, and that merchant restraints are clear antitrust violations. Thus, the article proposes regulatory or judicial intervention to ban merchant restraint rules.

Keywords: credit cards, surcharges, discounts, no-surcharge rule, honor all cards, merchant restraints, debit cards, unbanked, subsidization, interchange, merchant discount, cognitive bias, framing effect, underestimation bias, spending restraint bias

JEL Classification: D24, D40, G21, G33, G28, K21, K23, L42, L4, L16

Suggested Citation

Levitin, Adam J., Priceless? Costs of Credit Card Merchant Restraints (November 11, 2006). Available at SSRN: or

Adam J. Levitin (Contact Author)

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

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