Misbehaving: The Making of Behavioral Economics

by Richard H. Thaler

Of course, the credit card industry hated this practice; they wanted consumers to view the use of the card as free. As the case wound its way through the regulatory process, the credit card lobby hedged its bets and shifted focus to form over substance. They insisted that if a store did charge different prices to cash and credit card customers, the “regular price” would be the higher credit card price, with cash customers offered a “discount.” The alternative would have set the cash price as the regular price with credit card customers required to pay a “surcharge.” To an Econ these two policies are identical. If the credit card price is $1.03 and the cash price is $1, it should not matter whether you call the three-cent difference a discount or a surcharge. Nevertheless, the credit card industry rightly had a strong preference for the discount. Many years later Kahneman and Tversky would call this distinction “framing,” but marketers already had a gut instinct that framing mattered. Paying a surcharge is out-of-pocket, whereas not receiving a discount is a “mere” opportunity cost.