Credit Card Surcharges And Relative Price Differentials Across Various Market Structures

Abstract

Recent changes in federal credit card laws will lead to higher prices for consumers and heftier profits for retailers especially in monopolistic markets. This is due to the way that the surcharges are usually levied which is as a percentage of the base price of the good or service. This paper explains how prices are formed by a profit maximizing firm under the assumption of a production function that is homogeneous of degree one. This paper also demonstrates the relationship between markups and the price elasticity of demand. An analysis of how the new credit card rules would impact relative prices in markets of varying levels of competition is then performed.