Tuesday, February 13, 2007

Minimum Credit Card Purchases -- This is Discrimination!

Recently, more and more businesses, such as restaurants, bars, and movie theaters, are requiring a minimum credit card purchase which can force consumers to pay more than what their purchase is worth. This practice is said to be driven by the cost of running the transaction, but often the minimum credit card purchase can range up to $20, which seems to suggest that these minimums more than cover the associated transaction costs. This practice can be seen as a form of price discrimination as it allows firms to classify consumers into groups based on those that are more willing to use credit for small purchases and those that are more willing to use cash for small purchases. One of the main differences between these groups is how the consumers value the relative ease of tracking transactions. Consumers who use cash are more able to easily track transactions, while those who use credit seem to be less concerned with tracking small purchases. Credit card users can be classified as more price inelastic for the given good, and therefore firms implement minimum charge requirements to make them pay a higher effective price. This practice of price discrimination allows firms to transfer more consumer surplus to profits, but it may actually violate credit card company regulations! Visa and Mastercard both prohibit minimum charge amounts, and “American Express’s regulations do not explicitly prohibit minimum charges, but its policy is to discourage any merchant practices that create a ‘barrier to acceptance.’” One of the main advantages of credit cards is convenience, and these minimum charges may punish consumers for using credit cards. Also, the fact that minimum charges vary from business to business suggest that is up to each individual firm to specify their minimum charges. It remains to be seen if businesses will change their policies according to the consumer’s credit cards, but this form of price discrimination may be less than fair.

Posted by Charlotte Pool, Josh Bennett, and Jeff Kerestes

1 comment:

Thomas Li said...

credit cards definitely allow consumers to make purchases easier but at the same time they allow consumers to spend virtually more than they earn.

on the social perspective, making people pay a higher price for using credit cards would discourage people to spend money in advance.

currently the saving rate in US is negative, which is not a very good sign for the economy in general. so forcing people to pay more attention to how they spend their money by using cash would help to avoid the saving rate from falling further.

related article:
http://newsminer.com/2007/02/12/5163/