Thursday, May 22, 2008

Credit card charges

As my cashless journey presses onwards, I got to thinking: Why don't companies pass along the extra charge for using a credit card to customers? It can't be insignificant; most places have a threshold for charging purchases. Is it illegal vis a vis price discrimination? It's not price discrimination if the cost of providing the good is more; it's no different than charging more for certain pizza toppings. Would bad customer mojo set in? You've got a chance to pay less-- I don't think people would get terribly upset at that.

Or, maybe they do pass it along in the form of higher prices for everyone.

Justin noted that it's an issue of incidence if they did apply it; I'm wavering back and forth. It's not a uniform tax on all goods sold, but the issue of who would bear the additional cost would, in theory, be applicable in an incidence framework. (I happen to think we live in a fuzzy, non-LNS world where many people wouldn't bat an eye at paying twenty cents more to use a credit card, but Walras thinks otherwise.) Would companies be imposing upon themselves some deadweight loss? Still not sure how I feel about this side of the story.

For those keeping track at home, the Great Cash Free Challenge hit a small bump in the road today: the first of many anticipated parking tickets. Though there was no amount on the ticket anywhere, I searched front and back numerous times. Perhaps it was a parking warning?

2 comments:

Justin M Ross said...

I have seen gas stations that have a "credit card price" and a "cash price." The cash price was lower of course, but I can only come up with unsatisfactory explanations of why the option of paying a lower price with cash is not provided. Is our assumption wrong? The handling of cash is costly as well, especially for transporting large amounts back and forth to the bank. Are credit transactions faster and hence increase sales?

Very interesting topic.

Bob said...

My understanding is that the credit card companies require vendors who accept their cards to treat credit card customers on a par with cash customers. So this is a contractual obligation.

Of course, in practice, vendors sometimes offer discounts for cash versus credit cards or require minimums. But this may have as much to do with tax evasion as avoiding the credit card fees.