Cyril Monnet and William Roberds
Working Paper 2006-25
November 2006
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A controversial aspect of payment cards has been the “no-surcharge rule.” This rule, which is part of the contract between the card provider and a merchant, states that the merchant cannot charge a customer who pays by card more than a customer who pays by cash. In this paper we consider the design of an optimal card-based payment system when cash is available as an alternative means of payment. We find that a version of the no-surcharge rule emerges as a natural and advantageous feature of such a system.
JEL classification: D830, E420
Key words: no surcharge, credit cards, payments, money, search
The views expressed here are the authors’ and not necessarily those of the European Central Bank, the Federal Reserve Bank of Atlanta, or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Cyril Monnet, DG-Research, European Central Bank, cyril.monnet@ecb.int; or William Roberds (contact author), Research Economist and Policy Adviser, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, GA 30309-4470, 404-498-8970, william.roberds@atl.frb.org.
For further information, contact the Public Affairs Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street, N.E., Atlanta, Georgia 30309-4470, 404-498-8020.