Every time we buy something with our credit cards, whether at a high-end restaurant or a local bodega, merchants pay a percentage of the transaction to companies like Visa and MasterCard. These “swipe fees” are the subject of a long-simmering feud between retailers, which have profit margins to protect, and credit card companies, which say the fees are just the (invisible) cost of doing business. Some businesses prefer to steer customers toward using cash by tacking a surcharge onto credit card purchases to cover the cost of the fee, but credit card companies have successfully lobbied legislatures in 10 states to prohibit this practice.
In many of these states, though, retailers are allowed to give discounts for customers who pay cash. In New York, for example, listing a sticker price of $32 for a haircut and offering a $2 discount for consumers who pay with cash is legal, but charging $30 for the cut and imposing a $2 surcharge on credit card transactions is not.
But does that law violate businesses’ free speech rights? Today, the plaintiffs in a Supreme Court case called Expressions Hair Design v. Schneiderman will argue that it does. At the heart of the struggle is whether — and how — merchants should be able to tell consumers about the swipe fees. Should stores be able to advertise a lower price and then add a surcharge at the cash register for buyers who want to use plastic, as the case’s plaintiffs are pushing for? Or should they have to build the swipe fee into the price?
Banning surcharges is necessary, according to the state, because it protects consumers against unfair practices by businesses, which might hide extra fees inside what they claim to be a credit card surcharge and pocket the difference. But the merchants claim that being forced to engage in these linguistic gymnastics is a violation of their First Amendment free speech rights. Although the state is claiming that the law simply regulates prices, the businesses are arguing that the statute is prohibiting them from communicating with their customers. They say that the difference between a surcharge and a discount is semantic and that the only thing that really separates the two is a label.
The stakes for this battle might not seem all that high — after all, why should a business care if that stray $2 is described as a discount or a surcharge, as long as cash customers pay less and credit card customers pay more? But a group of behavioral economics scholars says research has found that the framing has a substantial impact on how consumers make decisions — and that these insights should be taken into account as the Supreme Court evaluates the law. If the justices are willing to consider the possibility that the surcharge ban might be regulating speech, the behavioral economists’ insights could be crucial for helping the justices evaluate the state’s rationale for keeping the law on the books by adding empirical and theoretical weight to the businesses’ claims. Social science research has played a role in Supreme Court decision-making going as far back as Brown v. Board of Education, and as recently as last summer, the court drew on public health findings in striking down a restrictive abortion law in Texas.
Richard Thaler — one of the founders of behavioral economics, which draws on psychological research to understand why people make seemingly irrational economic decisions — hypothesized about the impact of credit card surcharges in 1980, when the discipline was just getting off the ground. He predicted that consumers would view cash discounts and credit card surcharges as fundamentally different things, preferring to avoid a surcharge rather than receive a discount. According to behavioral economic theory, one of the quirks of the human mind is that we hate to lose money more than we like to save it; if that’s true, it means consumers’ negative feelings about a surcharge would be stronger than their positive feelings toward a discount — even if the end result was the same.
“You can imagine that a rational person would look at a cash discount, understand that it’s functionally the same as a credit card surcharge, and make his decision accordingly,” said Todd Rogers, a professor of public policy at Harvard. “But the cool and important contribution that behavioral science can make here is to highlight how people behave in reality, which is not in this so-called rational way.” The word “surcharge,” he said, prompts consumers to think about the price differential in a way that “discount” does not — which, in turn, has an effect on their willingness to use cash.
To show the justices how this theory works, Rogers and several of his colleagues at Harvard devised an experiment to test the law and included it in an amicus brief to the court. They randomly assigned 820 participants to two groups (a surcharge and a discount group) and gave each a scenario to read. The surcharge group received a scenario in which they could pay $130 for food at a convenience store, but only if they paid cash; the price would be $133.90 if they paid with credit. The discount group had the opposite scenario: The groceries added up to $133.90, but they could pay $130 if they used cash. Most of the respondents in both groups opted for cash, but only 11 percent of the surcharge group said they’d use credit, compared with 18 percent of the discount group.
“Essentially we’re trying to show the court that the labels matter for consumer behavior,” said Brigitte Madrian, a professor of public policy and corporate management at Harvard who also signed onto the brief. She said the law, as written, effectively biases consumers toward credit card use; because businesses are only allowed to offer cash discounts, fewer customers are willing to pay with cash. If New York really wanted to prevent businesses from adding inflated surcharges, she said, it should pass a law requiring businesses to include only the cost of the credit card transaction in the surcharge. Meanwhile, she said, consumers’ tendency to spend more when using credit — and Americans’ high rates of credit card debt — should make the state think twice about sanctioning a law that prompts buyers to use credit cards.
These findings are, of course, not a reflection of real consumer behavior, and no actual money was on the line. In an interview, Thomas Miller, a finance professor at Mississippi State University, criticized the study, saying that it was too hypothetical and failed to account for the fact that consumers today rarely carry enough cash to cover an entire $130 purchase. “In the real world, the choice isn’t between paying with the hundreds of dollars in your wallet or paying credit,” he said. “You have to decide if you want to go to an ATM and take out cash to cover the difference. They might not be happy about it, but most people would probably just pay the credit card fee.”
Todd Zywicki, who is a law professor at George Mason University and filed a brief in support of New York, added that a study of consumers and merchants that was conducted after a credit-card surcharge ban was removed in the Netherlands could undermine the Harvard scholars’ findings. (Because a relatively small number of the consumers and merchants surveyed said they had received or given a cash discount or credit card surcharge, the sample sizes are low.) Although the Dutch consumers’ negative feelings about the surcharges were much stronger than their positive feelings about the discounts, both buyers and sellers said that a cash discount was more likely to motivate a switch to cash. “The question here isn’t how consumers feel about surcharges; it’s what they actually do when faced with one,” Zywicki said. Cash discounts, he said, are also preferable because businesses are unlikely to offer a markdown that’s more than the cost of the credit card transaction fee.
A ruling in favor of the businesses might, ironically, undermine forms of regulation that draw on the principles of behavioral economics in nudging consumers toward one choice or another. Amanda Shanor, a doctoral candidate at Yale Law School, said the credit card surcharge challenge is just one part of a bigger effort, led mostly by big businesses, to bring previously unprotected speech — like warning labels on cigarette packages or nutrition information on food labels — under the umbrella of the First Amendment. If businesses can successfully argue that the language of credit card surcharges and cash discounts are protected under the First Amendment, other forms of previously accepted economic regulation that rely on language and information disclosure, like forcing restaurants to state calorie counts, might come under scrutiny.
Madrian acknowledged that a ruling in favor of the businesses could have ripple effects in other regulatory domains. But she said that’s not a reason to refrain from asking the justices to consider a behavioral economics perspective in this particular case. The point, for her, is to help the justices understand how the law functions on the ground. “It’s easy to abstract these issues and imagine how an ordinary person should weigh choices in a particular situation,” she said. “What we’re trying to show is that rational decision-making isn’t always the same as human decision-making and the law should take that into account.”