Tuesday, November 24, 2020
We examine price negotiation in the payment card industry by exploiting a unique merchant-, industry-, and city-level dataset. Motivated by the substantial variation in acquirer fees paid by merchants to the acquirer and the heterogeneous merchant card transactions, we use Nash bargaining to model the negotiation over the acquirer fee between an acquirer and a merchant.
The empirical results show that the average bargaining power is weaker for the acquirer than for the merchants, which results in a larger incremental surplus secured by the merchants than the surplus secured by the acquirer on average. Our counterfactuals show that merchants might face upward pressure on acquirer fees as the card penetration rate rises over time and that policies that weaken the acquirer's bargaining power could relieve the upward fee pressure.