Priceless? The Competitive Costs of Credit Card Merchant Restraints

Credit card transactions cost American merchants six times as much as cash transactions. Why, then, do consumers pay the same price for purchases, regardless of the means of payment?The answer lies in a set of credit card network rules known as merchant restraints. Merchant restraints forbid merchants from surcharging for credit and discounting for non-cash payments, while the framing effect, a well-documented cognitive bias, makes discounting for cash ineffective. Merchant restraints thus prevent merchants from pricing according to consumers' payment method and from signaling to consumers the costs of different payment methods. Accordingly, consumers never internalize the costs of their choice of payment system.This article argues that credit card merchant restraints lead to an overconsumption of credit cards as a transacting device and distort competition within the credit card industry and among payment systems in general. The article contends that merchant restraints are antitrust violations and demonstrates that the economic justifications for merchant restraints are unfounded. Rather than being a response to an industrial organization problem inherent in networked industries and necessary for the existence of credit card networks, merchant restraint rules are the response to a no-longer extant legal problem and have outlasted any justifiable purpose. Thus, the article proposes regulatory, legislative, or judicial intervention to ban merchant restraint rules.