Do No-Surcharge Rules Increase Effective Retail Prices?

Abstract

In this paper, we determine how a no-surcharge rule (NSR) affects effective prices in retail markets (prices that include payment rewards for consumers). This question is fundamentally related to policy, and we address it by considering how effective prices respond to multiple payment methods and different surcharging rules across a range of retail market structures, which we capture through a conduct parameter. We find that when a no-surcharge rule is applied, effective prices in a particular market are often higher across all payment methods. In this case, the no-surcharge rule protects a double marginalization effect where the premium payment method inserts an additional margin that harms all consumers and all merchants, and this loss in welfare can be rectified by allowing merchant surcharging across payment methods. Our qualitative conclusions hold across retail market structures, while the closed-form characterizations that support them are derived under uniform consumer values, together suggesting that NSRs are generally harmful (except for payment companies).