Thursday, September 11, 2014

The Credit Card Premium Effect: Higher Spending Per Item

From Bloomberg, "Apple Pay Could Make You Poorer" by Cass R. Sunstein:
A little social science: People who use credit cards tend to give bigger tips at restaurants and spend more at department stores. They are also more likely to forget, or to underestimate, the amounts of their recent purchases.

A study in 2001 by the Massachusetts Institute of Technology's Drazen Prelec and Duncan Simester found that people pay a substantial "credit-card premium," meaning a higher expenditure for a given good simply because they are using a credit card rather than cash. Their experiment showed that the premium may be as high as 100 percent, at least when the market price of the good is uncertain (such as tickets for a sold-out sporting event). Even for ordinary goods, where market prices are easy to find, they found a credit-card premium of as much as 36 percent.

You might think that credit cards are special, because people are essentially borrowing money. Maybe the credit-card premium is a product of the time lag between consumption and payment. But a study in Denmark, made public this year, finds that when university students use debit cards rather than cash, they are willing to spend significantly more on coffee and beer.

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