Credit card issuers charge vendors a transaction fee every time a customer uses a credit card to make a purchase. Vendors who want to discourage the use of credit cards or to pass the transaction fees on to individual customers who use credit cards may want to charge two different prices—one price for customers who pay cash and another, higher price for customers who use a credit card. Such differential pricing could be accomplished by implementing a surcharge on those who use a credit card. Alternatively, the vendor could give a discount to customers who pay in cash.
But these two approaches to differential pricing are not always treated the same under the law. In New York, for example, state law prohibits vendors from imposing a surcharge on credit card users, but allows them to offer a discount to those who pay cash. In Expressions Hair Design v. Schneiderman (2017), several New York businesses—including Expressions Hair Design—challenged the law as violating the First Amendment "by regulating how they communicated their prices" and as unconstitutionally vague given the "blurry difference" between imposing a surcharge for credit and offering a discount for cash. They argued that the law limited their ability to "pass the fees along only to their customers who choose to use credit cards" while making it clear that "they are not the bad guys—that the credit card companies, not the merchants, are responsible for the higher prices."
Finding that the law regulates "the communication of prices rather than the prices themselves," the U.S. Supreme Court concluded that the law was a regulation on speech and remanded the case to the lower court for a determination of the law's constitutionality. The court noted that there are a "wide array" of pricing methods—beyond a surcharge or discount from a single reference price—that could be used to implement the same price differential. And some justices argued that it was not clear precisely which options were prohibited by the New York statute. These questions of statutory interpretation may have implications for the lower court's analysis of the statute's constitutionality on remand.
This case raises questions of interest to psychologists. It has long been known that how options are framed has important psychological implications. While a surcharge and a discount accomplish the same economic price differential, they are experienced differently by the consumer as a psychological matter. As noted by psychologists Daniel Kahneman and Amos Tversky (1984, p. 3461), "[t]he two labels frame the price difference as a gain or as a loss by implicitly designating either the lower or the higher price as normal. Because losses loom larger than gains, consumers are less likely to accept a surcharge than to forgo a discount." In addition to responding differently to gains (a discount) and losses (a surcharge), consumers also react differently to these than to nongains (not being able to take advantage of the discount) and nonlosses (not having to pay the surcharge) (Idson, Liberman, & Higgins, 20002). Less is known about what inferences consumers make about the vendor or the credit card company from the structure of any differential pricing. Such inferences might usefully be the subject of additional research in this domain.
1Kahneman, D., & Tversky, A. (1984). Choices, values, and frames. American Psychologist, 39, 341–350.
2Idson, L.C., Liberman, N., & Higgins, E.T. (2000). Distinguishing gains from nonlosses and losses from nongains: A regulatory focus perspective on hedonic intensity. Journal of Experimental Social Psychology, 36, 252–274.
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