In Electronic Payment Networks (EPNs) the No-Surcharge Rule (NSR)requires that merchants charge the same nal good price regardless ofthe means of payment chosen by the customer. In this paper, we analyze athree-party model (consumers, merchants, and proprietary EPNs) to assessthe impact of a NSR on the electronic payments system, in particular, oncompetition among EPNs, network pricing to merchants and consumers, EPNspro ts, and social welfare. We show that imposing a NSR has a number ofe¤ects. First, it softens competition among EPNs and rebalancesthe fee structure in favor of cardholders and to the detriment ofmerchants. Second, we show that the NSR is a pro table strategy for EPNsif and only if the network e¤ect from merchants to cardholders issu¢ ciently weak. Third, the NSR is socially (un)desirable if thenetwork externalities from merchants to cardholders are su¢ cientlyweak (strong) and the merchants market power in the goods market issu¢ ciently high (low). Our policy advice is that regulators shoulddecide on whether the NSR is appropriate on a market-by-market basisinstead of imposing a uniform regulation for all markets.
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