Retail Credit, Credit Cards and Price Discrimination

Discussions of credit cards in economic literature have focused primarily upon macroeconomic issues, such as their role in influencing the demand for money. The microeconomic aspects of the credit card market have been relatively neglected except for the costs of granting credit. Our analysis provides insight into another important issue, namely the expected increase in revenues obtained by a seller who utilizes credit cards as a means of price discrimination. This study was motivated by the way credit card services are priced-costs of providing credit are apparently borne by the seller. This is true whether the seller operates his own credit facilities or discounts credit invoices for immediate payment to a national credit card company. The costs of the credit operations include not only direct operating expenses, but also the interest foregone on balances due between the date of purchase and the due date of the bill. Ultimately, of course, all costs will be borne by consumers in the price of the seller's product. However, while all customers share in the burden of higher prices, only a subset of these customers-those using credit cardspartake in the benefits of credit cards. Hence