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Do the Poor Pay for Card Rewards of the Rich?

Author

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  • Krueger Malte

    (Department of Business and Law, University of Applied Sciences Aschaffenburg, Wuerzburger Str. 45, D-63743 Aschaffenburg, Germany)

Abstract

Card payment systems are sometimes accused of taking from the poor and giving to the rich. The argument is as follows: High card fees are leading to higher retail prices for both, card users and cash users. However, high-income card holders are receiving rewards when purchasing by card. The result may be a net transfer of, mostly low-income, cash users to, mostly high-income, card users. In this article, models with product differentiation are used to show that rich card-holders may actually be paying for their card rewards themselves. In this case, there is no perverse distribution effect.

Suggested Citation

  • Krueger Malte, 2015. "Do the Poor Pay for Card Rewards of the Rich?," Review of Economics, De Gruyter, vol. 66(2), pages 129-154, August.
    • Handle: RePEc:lus:reveco:v:66:y:2015:i:2:p:129-154
    DOI: 10.1515/roe-2015-0202
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    References listed on IDEAS

    as
    1. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
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    More about this item

    Keywords

    Two-sided markets; card rewards; surcharging; vertical product differentiation;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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