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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/31397

Title: To Surcharge or Not To Surcharge? A Two-Sided Market Perspective of the No-Surcharge Rule
Authors: Economides, Nicholas
Henriques, David
Keywords: Electronic Payment System, Market Power, Network Externalities, No-Surcharge Rule, Regulation, Two-sided Markets, MasterCard, Visa, American Express, Discover.
Issue Date: 20-Dec-2011
Series/Report no.: NET Working Papers;11_03
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.
URI: http://hdl.handle.net/2451/31397
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