At one time, merchants tried to pass on the cost of credit card purchases to consumers by charging a premium for using the card instead of cash.
This didn’t catch on, in part because credit card purchasers disliked it so much and could take their business elsewhere. Instances in which consumers recoil from offers that strike them as unfair are more common than you might think. Even marketing giants are sometimes surprised by what they can’t get away with.
In 1999, for example, Coca-Cola tested vending machines that could automatically raise prices in hot weather. The backlash was quick — and the company abandoned the idea just as quickly. So regular folks who find certain transactions particularly distasteful do have some recourse when they can take their business elsewhere or simply withhold it — and this, too, plays a role in shaping markets.
Incidentally, the fact that most purchases cost the same whether they are paid for by credit card or by cash opens the door to an attractive-looking kind of competition among credit cards that may not be as attractive as it seems.
Many credit cards now compete on how much “cash back ” they offer to consumers. Those refunds come out of the fees that credit card companies charge to merchants and are reflected in the prices that merchants charge their customers. So when two customers stand in line at the cash register with identical purchases, and one pays with a credit card and one pays cash, the one who is paying cash is paying for the discount that the credit card customer is receiving.
That is, as more consumers are attracted to higher cash-back deals, and as credit cards successfully compete for customers by raising these kickbacks, merchants pay larger credit card fees and raise prices in response. And a discount from a higher price isn’t such a good discount, especially for those who are paying cash.
To put it another way, we pay a cost for the convenience of using a middleman, and that is partly because the middlemen — in this case, the credit card companies — compete for our business in a way that mutes the price competition among merchants that might otherwise bring prices down. It’s something to remember: competition can take many forms, and it isn’t always easy to see who gains and who loses.
Excerpted from “WHO GETS WHAT — AND WHY: The New Economics of Matchmaking and Market Design” by Alvin E. Roth. Copyright © 2015 by Alvin E. Roth. Used by permission of Eamon Dolan Books / Houghton Mifflin Harcourt Publishing Company. All rights reserved.
Business Insider Emails & Alerts
Site highlights each day to your inbox.