The No Surcharge Rule and Buyer Rebates: Vertical Control by a Payments Networks

Marius Schwartz and Daniel R. Vincent , Review of Network Economics 5(1) , 72-102 , January 2006.
The No Surcharge Rule (NSR) precludes merchants from charging higher prices to
consumers who pay by card instead of other means (‘cash’). We analyze the NSR’s effects when
a payment network faces local monopolist merchants. Importantly, end-users’ demand for the
merchant’s product is elastic. The NSR raises network profit and harms cash users and
merchants, while overall welfare decreases if and only if the ratio of cash to card users is
sufficiently small. If rebates to card users are not feasible, the NSR reduces total consumer
surplus (of cash plus card users) and, if the cash market is sufficiently small, even card users
lose. When rebates are feasible, the network will grant them and raise its merchant fee,
increasing total consumer surplus and overall welfare compared to no rebates but harming cash
users. An increase in the merchant’s gross benefit from card rather than cash sales worsens the
NSR’s effects on overall welfare and total consumer
surplus if rebates are not feasible, but the
reverse holds if rebates are feasible.
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