Behavioral Law & Economics Goes to Court: the Fundamental Flaws in the Behavioral Law & Economics Arguments Against No-surcharge Laws

Geoffrey A. Manne (International Center for Law & Economics)
Todd J. Zywicki (Scalia Law School, George Mason University)
Kristian Stout (International Center for Law & Economics)

Abstract: Recent efforts of behavioral law and economics scholars have been directed toward challenging a number of state laws that regulate retailers’ use of surcharge fees for consumer credit card payments. In 2016 the issue reached the Supreme Court. The case, which centers on a decades-old New York state law that prohibits merchants from imposing surcharge fees for credit card purchases, represents the first major effort to ground constitutional law (here, First Amendment law) in the claims of behavioral economics. In this article, we examine the merits of that effort. The Petitioners in the case and their amici (scholars of both behavioral law and economics and First Amendment law) argue that New York’s ban on surcharge fees but not discounts for cash payments violates the free speech clause of the First Amendment. The argument relies on a claim derived from behavioral economics: that a surcharge and a discount are mathematically equivalent, but that, because of behavioral biases, a price adjustment framed as a surcharge is more effective than one framed as a discount in inducing customers to pay with cash in lieu of credit. Because, Petitioners and amici claim, the only difference between the two is how they are labeled, the prohibition on surcharging is an impermissible restriction on commercial speech. Assessing the merits of the underlying economic arguments, we conclude that neither the behavioral economic theory, nor the evidence adduced to support it, justifies the Petitioners’ claims. The indeterminacy of the behavioral economics underlying the claims makes for a behavioral law and economics “just-so story” that happens to lack any empirical support. In fact, the evidence strongly suggests that consumer welfare would be harmed by such fees, as they expose consumers to potential opportunistic holdup and rent extraction.

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