This paper presents models that explain why merchants accept payment cards even when the fees they face exceed the transactional benefits they receive from a card transaction. The prevalent assumption – merchants accept cards only when they earn positive net transactional benefits – holds only for a monopoly merchant who faces an inelastic consumer demand. The paper also explores possible explanations for the recent gradual increases in merchant fees in the United States. Three possible

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... ions are 1) inflexible product price setting by merchants, 2) decreases (increases) in cardholder fees (rebates), and 3) increases in cardholding-customer proportion in a given industry.