Some retail stores that accept bank credit cards will give the customer a discount if a purchase is paid for in cash. The logic behind this practice is that the banks that process credit-card transactions charge the merchant a service fee, usually between 1 % and 5% of the amount of credit card transactions each month. If a customer pays the merchant in cash rather than by credit card, the merchant avoids incurring that extra cost.
Required:
Answer the following questions:
(1) In establishing a price structure in which both cash and bank credit-card purchases are common, what are the relevant cost objects?
(2) What does this imply about prices in a store in which credit cards are accepted but no discount is given for cash purchases?
(3) What are the competitive implications for a store like the one described in requirement 2?
(4) Instead of offering a discount on cash transactions, why not reduce all the prices in the store and then levy a small additional charge on customers that use credit cards, to cover the banks' processing fees?