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Abstract

A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?

The Review of Network Economics

Vol. 5, Issue 1 - March 2006, pp 144 - 174


Author
  Fumiko Hayashi
Payments System Research Department, Federal Reserve Bank of Kansas City
E-mail: [email protected]

Abstract
  This paper presents models that explain why merchants accept payment cards even when the fees they face exceed the transactional benefits they receive from a card transaction. The prevalent assumption - merchants accept cards only when they earn positive net transactional benefits - holds only for a monopoly merchant who faces an inelastic consumer demand. The paper also explores possible explanations for the recent gradual increases in merchant fees in the United States. Three possible explanations are 1) inflexible product price setting by merchants, 2) decreases (increases) in cardholder fees (rebates), and 3) increases in cardholding-customer proportion in a given industry.

Keywords: Credit cards, merchants, interchange fees

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