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Imposing choice under ambiguity: the case of dynamic currency conversion


Ewerhart, Christian; Li, Sheng (2020). Imposing choice under ambiguity: the case of dynamic currency conversion. Working paper series / Department of Economics 345, University of Zurich.

Abstract

It is a common experience for present-day consumers making an international payment via credit or debit card to be invited to choose the currency in which they wish to have the transaction executed. While this choice, made feasible by a technology known as dynamic currency conversion (DCC), seems to foster competition, we show that the opposite is the case. In fact, the unique pure-strategy Nash equilibrium in a natural fee-setting game turns out to be highly asymmetric, entailing fees for the service provider that always exceed the monopoly level. Although losses in welfare may be substantial, a regulatory solution is unlikely to come about due to a global free-rider problem.

Abstract

It is a common experience for present-day consumers making an international payment via credit or debit card to be invited to choose the currency in which they wish to have the transaction executed. While this choice, made feasible by a technology known as dynamic currency conversion (DCC), seems to foster competition, we show that the opposite is the case. In fact, the unique pure-strategy Nash equilibrium in a natural fee-setting game turns out to be highly asymmetric, entailing fees for the service provider that always exceed the monopoly level. Although losses in welfare may be substantial, a regulatory solution is unlikely to come about due to a global free-rider problem.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D21, G21, G28, G53
Uncontrolled Keywords:Dynamic currency conversion, payment cards, ambiguity aversion, price competition, monopoly, free-rider problem
Language:English
Date:April 2020
Deposited On:04 May 2020 12:07
Last Modified:04 May 2020 12:07
Series Name:Working paper series / Department of Economics
Number of Pages:36
ISSN:1664-705X
OA Status:Green
Official URL:https://www.econ.uzh.ch/en/research/workingpapers.html?paper-id=1024

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