Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Thursday, February 2, 2012

Must Take Cards: Merchant Discounts and Avoided Costs

Posted by D. Daniel Sokol

Jean-Charles Rochet (Toulouse) and Jean Tirole (Toulouse) explore Must Take Cards: Merchant Discounts and Avoided Costs.

ABSTRACT: Antitrust authorities often argue that merchants cannot reasonably turn down payment cards and therefore must accept excessively high merchant discounts. The paper attempts to shed light on this “must-take cards” view from two angles. First, the paper gives some operational content to the notion of “must-take card” through the “avoided-cost test” or “tourist test”: would the merchant want to refuse a card payment when a non-repeat customer with enough cash in her pocket is about to pay at the cash register? It analyzes its relevance as an indicator of excessive interchange fees.

Second, it identifies four key sources of potential social biases in the payment card systems’ determination of interchange fees: internalization by merchants of a fraction of cardholder surplus, issuers’ per-transaction markup, merchant heterogeneity, and extent of cardholder multi-homing. It compares the industry and social optima both in the short term (fixed number of issuers) and the long term (in which issuer offerings and entry respond to profitability).

http://lawprofessors.typepad.com/antitrustprof_blog/2012/02/must-take-cards-merchant-discounts-and-avoided-costs.html

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