Why don’t stores pass the transaction fee on to those who use credit cards? Since there are not two separate prices for a good (a credit card price and a separate cash price) at stores, it would seem the cost of all the transaction fees are built in to the prices. Doesn’t this mean those who pay cash are partly paying the transaction fees (and thus the cash back benefit) of those who use credit cards in the form of higher prices?
Two thoughts come to mind 1) people may not use their cards as often if the transaction cost was passed on to them directly, people who use cards generally spend more, so there would be less profit. 2) There may be a law preventing them from passing the cost onto the card user (but I don’t think this is the case in PA, and we don’t see fees that I’m aware).
Anyhow I was wondering if you could explain the motivation for there not being two different prices, or a fee for using a credit card.
Different costs of production for different producers cannot bring about different prices for homogenous units of a good that they sell in the same market at the same moment. The adjustment to higher costs for one input must be compensated for by lower costs for other inputs. Otherwise, the higher cost producer will suffer losses, or at least earn inadequate profit, and be pushed out of the market. It is very common in industries to have producers with varying cost structures. What permits them to coexist in a market is that demand is high enough to generate a price for the good that covers the highest-cost producer’s production costs.
For example, there is widely diverse farmland, in terms of its productivity, devoted to growing corn in America. Lower-cost per bushel producers in Nebraska co-exist with higher-cost per bushel producers in Pennsylvania all of them selling corn at the same price. This equilibrium is reached because the greater profitability of the low-cost producers is arbitraged away by investors who bid more heavily to own the specific factors of production that generate the lower cost. In this case, land. So after land prices are taken into account the rate of return on investing in Nebraska farming and Pennsylvania farming is the same.
Retailers accept whatever costs are involved in credit card transactions because they at least make up these costs in greater revenue from the sales they would miss out on if they didn’t accept credit cards.
Moreover, the existence of these fees gives room for financial innovations like peer-to-peer payment systems.