I'd been thinking of something recently. I'd been wondering for a while why my bank would give me a no-fee credit card and then even give me cash back for using it to boot. Pretty generous of them eh? It's like cash falling from heaven. But where does this cash from heaven come from?
Anyway, recently I'd come across a shop asking that had put up a sign asking us to use debit or cash, informing us that when we use our credit card, it costs the business a lot of money.
Then I started thinking about this. Essentially, the bank is giving me money to encourage me to use my credit card. But then it charges the shop for my using my credit card. Needless to say, unless the shop passes that cost on to me as a customer in some way, it would go bankrupt, so if it is not charging me directly for the product, or giving me some kind of discount for not using my credit card, then I must assume it's just included in the price.
Also, equally needless to say, the only way the credit card company can stay in business is if the amount it gives me is less than the amount it charges the shop. This means that the shop is topping the price up more than the credit card company is giving me back in cash-back 'rewards'. Essentially it's a hidden fee, apparently disconnected from my action but in fact a direct consequence of it, an attempt to hide the true cost of my transaction from me.
This also creates a prisoners' dilemma. If I use my credit card but no one else does, then, unless the shop passes the cost on to me directly in some way, I find myself benefitting from the cash-back rewards while everyone else is helping to pay for the transaction. In that case I'm likely coming up on top (even if the price of the product goes up by 1 cent as a result, but I get two cents cash back, I'm still coming out on top).
If everyone else is using their credit cards, but I'm not using mine, then the overhead cost to the company skyrockets, resulting in higher fees for everyone, including me, yet I don't even get any cash-back rewards.
This is a classic prisoners' dilemma. The ideal scenario is that no one uses their credit cards. As a result, the shop can drop its prices for everyone. If some people use their cards and others don't, those who don't are at a disadvantage over those who do. And if everyone uses their credit cards, tehn everyone is on an equal footing paying higher fees while receiving less in rewards, but at least equal as inefficient as it may be.
This also creates a prisoner's dilemma for the shop. If the cardholder gives no thought to this, he may insist on shopping where his card is accepted to get the cash back, without actually thinking about how this affects the price he actually pays for the product. This therefore puts pressure on the shop for customer satisfaction reasons to not pass the cost on to the customer and instead absorb it into the price of the product.
If the government passed some kind of law preventing businesses from exploiting game theory in any unethical manner, this would essentially prevent this kind of thing to happen. For instance, it might prohibit credit card companies from charging businesses for allowing their customers to use their credit card, thus forcing the credit card to charge only the credit-card holder for any transaction made on his card. This woudl make us more aware of the real cost of using our credit card while also ensuring that any costs incurred for the use of one's credit card is accrused to the user only and not shared by other customers.
If we extended such a law to unethical psychological manipulation to encourage people to buy more than what they normally would (depending on how exactly the law were worded), this could lead to preventing companies from introducing any kind of loyalty programme like Subway points, etc. and compete instead on just the best product at the best price. In that way, people don't feel like they need to buy one more meal to get their free meal for example.
Any thoughts on this?