Imposing choice on the uninformed: the case of dynamic currency conversion

Christian Ewerhart, Sheng Li

Research output: Contribution to journalArticlepeer-review

Abstract

Over the course of the past two decades, it has become a common experience for consumers authorizing an international transaction via credit card to be invited to choose the currency in which they wish the transaction to be executed. While this choice, made feasible by a technology known as dynamic currency conversion (DCC), seems to foster competition, we argue that the opposite is the case. In fact, the unique pure-strategy equilibrium in a natural fee-setting game, with uninformed and possibly inattentive consumers, turns out to be highly asymmetric, entailing fees for the service provider that persistently exceed the monopoly level. Although losses in welfare may be substantial, a regulatory solution is unlikely to come about due to a global free-rider problem.
Original languageEnglish
Article number106917
Number of pages41
JournalJournal of Banking and Finance
Volume154
Early online date24 Jun 2023
DOIs
Publication statusPublished - 30 Sept 2023

Keywords

  • dynamic currency conversion
  • payment cards
  • price competition
  • monopoly
  • free-rider problem
  • rational inattention

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