Matt Nolan

Do those who pay with cash subsidise credit card users?

/4 Comments/in , , /by

At the Freakonomics blog Steve Levitt mentions how high credit card fees are for retailers.

Now as consumers when we make our purchases we only make a decision on whether to use a credit card or cash/eftpos based on the relative cost to us and the whether the option of different types of payment are avaliable. In fact, since I get charged to use an eftpos card I prefer to use my credit card when I’m in a shop. The information about which you can see more at their website

For some reason firms do not charge a different price based on payment method – and as a result when setting prices they will treat credit card fees as part of the cost of production.

In order to figure out if this translates into higher prices than in the case of price discrimination (and ignoring entry and exit) we need to ask – are the credit card fees seen as a fixed cost, or a variable cost. Assuming for fun that firms believe that some proportion of total sales will involve credit cards, the credit card fee becomes a variable cost – and as a result the price charged will be higher.

This makes me wonder – why do firms not charge me extra for using a credit card? If it is a framing issue why don’t they provide a cash/eftpos discount?

Experts from 53.com (https://www.53.com/content/fifth-third/en/personal-banking/bank/credit-cards/secured-card.html ) can provides full information about credit card usage and the difference between secured and unsecured cards.

Update A reader says it is because credit cards are a two-sided market. So credit card companies effectively “subsidise” consumers so that they can charge retailers more. When this is combined with Grant’s statement that it is a contractual obligation that firms cannot price discriminate based on payment method this all makes sense.

Matt Nolan

Jan 09 OCR decision: Cut 150bp to 3.5%

/6 Comments/in /by

Big cut – bigger than the market expected, bigger than I expected. The deteriorating outlook for world economic activity appears to have been the primary factor driving this reduction in the official cash rate.

Now lets keep an eye on the dollar and on mortgage rates …

Matt Nolan

Fama, Krugman, Cochrane, and all that jazz

/14 Comments/in /by

In all seriousness I’m sick to death of this damned argument over what the accounting identity Savings=Investment means (I am sure you are too – but I get to write the blog posts and I need to vent.  My apologies).

I never, for the life of me, expected such a substantial dispute to develop between economic experts on what it meant. These guys are more than smart enough to know what they are saying – which implies to me that they are hiding/twisting their value judgments to get the solution they want. Grrrrr.

Still Fama started it by stating that S=I always holds (true) and that this implies that government spending can’t influence employment (huh?). Then when the critics came raining in (they are mentioned here) he framed his view a little more – and randomly said that Brad Delong had the only potential criticism of his view. This annoyed me as Arnold Kling and Bryan Caplan had already discussed the enormous logical mis-step that he had taken – and he “answered it” by ignoring them …

Lets get back to his framing of the issue and discuss it:

Read more

Matt Nolan

January OCR Review preview: How low can you go

/6 Comments/in /by

There is a complete consensus that the Reserve Bank will cut the official cash rate.  However, the size of the cut is still uncertain.

Mearly a fortnight ago, safe money was on a 50bp cut with a large number of commentators suggesting 75bp.  To be honest, after coming out of December MPS it felt like another 75 in January was pretty likely.  Of course, since then world economic growth forecasts have collapsed, and domestic economic indicators have deteriorated – leading analysts to push for a 100+bp cut.

It is a tough call in such a fluid environment, but I’d be of the view that the Bank won’t go past 100.  Why?  Well commodity prices have steadied since December, credit markets have started to thaw, and a bunch of essential data points still haven’t been released – namely the December quarter employment figures.  If those figures are bad they can just cut 100 again in March – and they have a set of forecasts (from the MPS) to justify what they are doing.

Still – I have been consistently surprised by how much the Bank has been willing to cut the OCR 🙂 .  We will see tomorrow.

Matt Nolan

Forecast dairy payout down to $5.10: The key is now costs …

/6 Comments/in /by

Homepaddock reports that Fonterra has cut its forecast payout for the coming season to $5.10 – well down on the $7.90 paid last season.

This is a significant decline in returns, however even though prices could go lower it is unlikely they will this season.  As a result this leaves us two other factors to look at when figuring out what will happen to disposable incomes among diary farmers:  quantity and costs.

As we are coming out of drought, quantity will have moved back towards “normality” (for an individual farmer) – this should help to improve returns relative to last year – however, farmers would have already accounted for that when making decisions.

The more important factor for me is costs.  Have fertiliser prices begun to tail off?  Will the sharp pull back in fuel prices help out?  These sorts of questions will be key for figuring out how heavily dairy farmers disposable income will suffer during this lull in dairy prices.

Matt Nolan

More concerns about limited building activity

/5 Comments/in /by

The Dom post has two articles on the potential shortage of property in New Zealand, one on builders capacity (the labour force of traders) and another on the response of rents to the undersupply.

Now we have talked about this before.  Structural factors have prevented developers and builders from getting funding (go credit rationing) which has lead to a collapse in house building activity.  However, a fall off in building will help to support prices by making property more scarce.

In the short term the recent drop in residential building will prevent a free-fall in prices.  The question then is, how many of these structural factors are temporary (credit rationing) and how many are permanent (constraints on land use, RMA?)?

If we only have temporary factors keeping down building then we can expect a sharp decline in prices once this has worked through the system and the “undersupply” has been dealt with.  If there are structural factors (which National and Labour both believed) then there will be some support to prices until these factors are dealt with.

Another thing I would point out.  There is a feeling out there that house price falls=bad, greater housing affordability=good.  However, house price falls=greater housing affordability – so unless bad=good I think this is a factor we have to keep in mind when discussing the housing market …