The Visa fees article

Everyone is blogging about it, here is the link.  Kevin Drum has one good summary, or here is Yves Smith or Felix Salmon, both of whom are upset.  The upshot is that the supermarket pays Visa a fee if you use a "sign for it" card rather than entering a PIN number for a debit card, though it's a little more complicated than that.

My practice does not match the setting of the article exactly, but here's how it goes.  As Natasha forced me to internalize years ago, when I use my Visa credit card, and sign for payment, I receive frequent flyer miles.  When I use my Visa BB&T debit card (yes, my two main payment cards are both Visa), I don't get anything back.  By using the credit card, resources are redistributed away from the store and to both Visa and me.  On net that's a better deal for me and that's why I end up signing so often.  This could be efficient too, in a constrained second best sense.  For one thing, it indicates the supermarket was earning ex ante monopoly profit; is it so tragic for some of that profit to be split by Visa and me?  One way to understand Visa is that it is supplying countervailing power by "organizing" consumers against the retail monopoly and distributing the gains from the new bilateral monopoly arrangement.

There's nothing to stop the store from offering me frequent flyer miles, or other forms of discount, if I use a means of payment which they prefer.  I've yet to see a deal good enough to make me switch.  (When Sears pushes this on me, I just say no because Visa offers me a better deal.)  And I find it easy enough to believe that the petty monopoly of the local grocer is more significant than the market power in the potentially more contestable cards and payment market.

Again, I don't know how much of the entire market works on the basis that I experience.  But it's one simple example of how "higher fees" can be good rather than bad. 

Not long ago Ronald Coase turned 99 years old and I am delighted to see he is still alive.  His ideas are still alive too.

Addendum: When issues of this sort arise, there is a common pattern in blogospheric discussion: Blogger A criticizes a market practice with tones of absolute condemnation.  Blogger C (in this case, me!) responds with a plausible scenario, and a microeconomics-consistent first-order explanation, that things aren't so bad after all.  Blogger D tries to defend Blogger A by shifting the burden of proof to Blogger C to demonstrate that markets are efficient in such a case and by leveling charges of market fundamentalism and by citing some second or third best arguments that the market can fail after all.  Don't be fooled by that polemic slide in emphasis; the burden of proof is on the critics here — those asserting the existence of an evil and asking us to move beyond a loose agnosticism – not on me.


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