To Surcharge or Not To Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule

Abstract

In Electronic Payment Networks (EPNs) the No-Surcharge Rule (NSR) requires that merchants charge the same nal good price regardless of the means of payment chosen by the customer. In this paper, we analyze a three-party model (consumers, merchants, and proprietary EPNs) to assess the impact of a NSR on the electronic payments system, in particular, on competition among EPNs, network pricing to merchants and consumers, EPNs pro ts, and social welfare. We show that imposing a NSR has a number of e¤ects. First, it softens competition among EPNs and rebalances the fee structure in favor of cardholders and to the detriment of merchants. Second, we show that the NSR is a pro table strategy for EPNs if and only if the network e¤ect from merchants to cardholders is su¢ ciently weak. Third, the NSR is socially (un)desirable if the network externalities from merchants to cardholders are su¢ ciently weak (strong) and the merchants market power in the goods market is su¢ ciently high (low). Our policy advice is that regulators should decide on whether the NSR is appropriate on a market-by-market basis instead of imposing a uniform regulation for all markets.