Also, while I’m ranting, interchange fees! Rawr!
The fact that interchange fees, the fees that businesses get hit by that get passed onto consumers, have risen over the past two decades, while, as far as I understand, protection to businesses has decreased and services to consumers has stayed the same while the volume of the market has increased and the technology has also increased strikes me as de facto price fixing.
Crowd-sourcing request: Why don’t businesses, in general, offer cash discounts? Let’s assume that the interchange fee is 2% to the business. If I buy a $100 stereo from a store, they only make ~$98 if you pay with a credit card, but they make $100 if you pay with cash. Now if I pay with a credit card, I get about 1/3rd of that interchange fee in some sort of credit card payment reward. Frequent flyer miles, an inflatable grill, whatever. Let’s say that I end up with a $1 if I use my credit card in this case.
Now I have to decide whether or not to use my credit card, and the business has to decide whether or not to charge $100 or $102, the $102 reflecting a break-even from a customer using their credit card. The stereo costs the business $100 and is worth $100 to me. What’s the payouts?
Note that the consumer always using a credit card, and the business charging the fee is the Nash equilibrium. (Also strongly dominated equilibrium at that.) Even though I’d be better off if I paid cash and they didn’t pass along the interchange fee.
This isn’t an academic exercise. A small business I was at had a sign noting that they get charged over 2% every time a customer used a credit card, so why don’t you pay cash or with a check? But as I was about to pay cash, I wondered: “Don’t the prices already reflect that I will use a credit card? I might as well get points towards my plane ticket or whatever comes with the card.” In other words, my only choice was to go from (-1,0) to (-2,2), since I know what is rational for the business to charge. I do this even though I am indifferent on how much convenience I save with credit cards. Since most stores only charge one price, this cuts the legs out of prices doing their information work. I don’t know what credit card fees are being charged with my prices.
So my question: Why don’t more businesses offer a cash discount? It would move us to the optimal (0,0) space above. Do they get such a sweet deal with how much consumers spend when they have a card they don’t want to draw attention to anything going on behind the curtain? Am I just a weirdo, and this is a weirdo line of reasoning? I know credit card fees are illegal in many places, though I don’t think cash discounts are. Is there something about how people perceive people with cash getting a ‘special deal’ that makes them upset with the business? I have no idea.