Retailers in the Netherlands and the U.K. can charge different prices for a commodity depending on whether cash or a debit card is used as payment, whereas retailers in the U.S. generally cannot. These two types of economies with and without a uniform pricing constraint for cash and debit card payments are compared in a microfounded monetary model. We place particular emphasis on the distinctive features of cash and debit cards as payment methods: the cost of a cash transaction for the seller is typically lower than that of a debit card, whereas the cost of cash holdings for the buyer is higher than that of a debit card. Our results suggest that a uniform pricing constraint makes cash-holding costs decline but consumption dispersion between the poor and the rich increase. Numerical examples show that the beneficial effect of the constraint dominates its negative effect.
Bibliographical noteFunding Information:
I wish to thank the anonymous referee whose comments and suggestions were very helpful in improving the quality of the paper. Financial support from the Korea University is gratefully acknowledged. The usual disclaimer applies.
- Constrained price
- Debit card
- Unconstrained price
ASJC Scopus subject areas
- Economics and Econometrics