There are some unfortunately unsurprising economics lessons to be seen in what is starting to result from interchange regulations. First, is that there when the government sets prices there are often unintended consequences:
…McDonald’s and other U.S. retailers that rely on a high volume of small dollar transactions could see an increase in their debit card processing costs, because prior debit costs for smaller purchases had lower fees….
…Richard Peck, 7-Eleven’s senior director for corporate finance, said the company’s gas stations and convenience stores will likely see a mixed impact from the capped fees… But for smaller, everyday purchases, executives said those costs will likely lead to price increases for consumers.
Oops, I don’t think that was supposed to happen. Another lesson is that regulation is often a slippery slope. Walmart seems to think that is the case anyway:
Michael Cook, treasurer for Wal-Mart, said the discounter viewed the debit fee overhaul as a precursor to overhauling credit card processing fees.
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Saturday ~ November 5th, 2011 at 9:56 pm
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Sunday ~ November 6th, 2011 at 2:18 am
Don Lloyd
I find the reference to McDonald’s to be highly unlikely, although I never visit there. I do visit Burger King regularly several times a week, and doubt that I have ever seen a debit card transaction there, as evidenced by the fact that I have never seen a number pad present, needed for entering PIN’s. I do use a BK Crown gift card all the time, auto reloaded from a credit card to eliminate the necessity of dealing with cash or change, and use a debit card exclusively in the supermarket.
Regards, Don
Sunday ~ November 6th, 2011 at 9:34 am
Th
I clicked the link and read the article. This was the end: “Michael Cook, treasurer for Wal-Mart, said the discounter viewed the debit fee overhaul as a precursor to overhauling credit card processing fees.
“It’s a good first start,” he said.”
Richard Peck of 7-Eleven said they planned on passing their savings on to customers.
Sunday ~ November 6th, 2011 at 1:05 pm
BSEconomist
AHHHHHH!!!!!
This is a major bugaboo (great word!) of mine, and I’ve been on your case about it before. That is the old “Slippery Slope” argument is a fallacy (at least it is if it used in the way that it is used here.
A “slippery slope” requires two things, not one: the slip and the slope. A slope just means that the system admits further change, the slip means that the change is accelerating away from the ideal. It is quite easy to recognize in any situation that there is a slope because a very small number of points in your phase space of policy/economics are actually equilibria and only equilibria–in this case of your political economic system–will fail to admit reform.
If you are not at an equilibrium that just means that your political economic system admits reform. This is not a bad thing, in fact, it is a very good thing even when policy starts off good: the reason is that a theme in the literature on optimal experimentation is that that there are almost always unexploited gains to be had from experimentation. The political economic system, in other words, tends to prematurely converge to suboptimal equilibria. Even bad policies can help to explore the phase space.
So, in this process, where exactly is the slip? If you understand the idea of optimal experimentation, the answer is that in political economic systems there is never a slip, the system never accelerates away from the optimum but tends to prematurely converge beforetime. Frankly, to get a slip in economics, you pretty much need a negative sum game somewhere, but economics tends to be positive sum and politics tends to be zero sum.
On to the specifics of this case, I would point out that the credit card industry is almost certainly not efficient. The excessive transactions fees, and more importantly the price discrimination between vendors, both suggest monopoly power for the credit card companies. Now credit cards are in fact a two-sided market, and two-sided markets are complicated–the optimal market structure can certainly be counter-intuitive– but do you really believe that competition for cardholders in the form of “rewards” while increasing fees on the other side of the market… do you really think this is the sign of a healthy market? Rejiggering the political economic system so that it admits reform in the credit card market has to be understood as a win.
Please, no more sloppy “slippery slope” arguments. I think you’re smarter than that.
Tuesday ~ November 8th, 2011 at 5:28 pm
Adam Ozimek
The point of the slippery slope is that moving from A to B makes C more likely, so you should consider the probabilistic cost of pr(C) increasing when deciding B. If proponents of a regulation regard it as “a first step”, as this guy does, then it makes me suspicious that taking this step makes the next step more likely. The statements here indicate that the regulation of credit card payments is more likely now that debit fees are being regulated.
On the specifics of this case, I would point out that identifying inefficiencies does not establish what an efficient level would be. The most that had been established was that fees were too high, that does not establish that fixing price at the given lower rate was more efficient. This was, if I recall correctly, the objection of Richard Schmalensee and other economists: the Fed had provided no economic argument for the fees they were proposing.