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Must-take cards: Merchant discounts and avoided costs


Rochet, Jean-Charles; Tirole, Jean (2011). Must-take cards: Merchant discounts and avoided costs. Journal of the European Economic Association, 9(3):462-495.

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 and 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).

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 and 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).

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Citations

15 citations in Web of Science®
19 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2011
Deposited On:16 Jan 2012 15:39
Last Modified:07 Dec 2017 11:07
Publisher:Wiley-Blackwell
ISSN:1542-4766
Publisher DOI:https://doi.org/10.1111/j.1542-4774.2011.01020.x
Other Identification Number:merlin-id:4999

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