Implementation of dual pricing system, prices, and consumer welfare

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Entered 2024.10.31 06:06 Modified 2024.10.31 06:34 Desk ([email protected])

Responsibility battle between franchises and delivery companies continues

Card fees cannot be passed on to consumer prices

Delivery app commission rate increase… adverse effects of price stimulation

Food delivery price image. ⓒYonhap News

Recently, restaurant companies have been implementing the so-called dual pricing system, which sets delivery prices and in-store prices differently. The main goal of this is to increase the price applied for delivery compared to the price of products used in stores, especially for restaurant companies that operate lunch box, hamburger, and chicken franchises.

Franchise companies are blaming the implementation of the dual pricing system on delivery apps that have increased fees without justifiable reason. Moreover, as public criticism of the dual pricing system has expanded, including increasing consumer inconvenience, companies competing for first and second place in delivery apps are shifting responsibility for the dual pricing system to each other.

In the case of some companies, the delivery menu price is more than 1,000 won higher than the store price. Implementing a dual pricing system is actually an act of passing on the delivery app fees paid by franchise companies to the consumer price in order to compensate.

The Specialized Credit Financial Business Act (the Act), which regulates the business activities of credit card companies, has a provision prohibiting price discrimination. In other words, Article 19, Paragraph 4 of the Act stipulates that ‘credit card merchants shall not make credit card members pay merchant fees.’

This means that additional fees cannot be reflected in the product price in order to compensate for merchant fees due to credit card use. This regulation is referred to as the ‘No Surcharge Regulation (NSR)’.

In the United States and Australia, where credit card usage rates are relatively lower than in Korea, NSR was abolished with the intention of promoting autonomous sales of affiliated stores.

It seems that this also partially reflects the so-called NSR, which causes reverse discrimination against those who pay with cash, as cash payments purchase products at the same price compared to credit card holders who receive various additional benefits. However, Australia has experienced the problem of imposing excessively high additional fees on credit card users due to the abolition of NSR.

Recently, Australia is making up for the problems caused by the abolition of NSR by implementing a cap system on additional fees. However, given the domestic environment where the credit card usage rate is very high due to the preference for postpaid payment and the majority of consumers have more than one credit card, NSR is still an absolutely valid system.

In the case of the implementation of this dual pricing system, if the card merchant charged the merchant fee to the sales price, it would violate NSR. Of course, the fee charged on the consumer price is the fee of the delivery app, not the card merchant fee, so it cannot be considered a violation of the current law.

The preferential commission rate for credit card merchants charged to small merchants is currently very low at 0.5-1.5%. However, the brokerage commission rate for delivery apps is very high, approaching 10%. Moreover, if value-added tax and delivery fees are taken into account, franchisees must pay approximately 30% of the order amount as a commission to the delivery app.

As a result, it was previously possible to predict that high levels of delivery app fees that do not violate NSR would be reflected in consumer prices.

In a recent media column, the author mentioned that there is a possibility that high delivery app fees will eventually be transferred to consumer prices. In other words, it was pointed out that in the case of small business owners, they do not have enough cost efficiency capabilities to resolve price increase factors such as delivery app commissions, so they can pass this on to the selling price, which raises concerns about rising consumer prices.

In fact, most businesses run by small business owners are one-person business units with no employees, and there are not many opportunities to reduce purchase prices by purchasing large quantities of materials, making it difficult to reduce costs. Therefore, the fact that franchise companies with many franchises have officially introduced a dual pricing system is a result that is in line with the author’s expectations.

Because delivery app operators are not financial companies, there are no systems or supervisory agencies to limit commission rate increases. In the case of card companies’ merchant fees, the welfare of the majority of domestic consumers who use cards is guaranteed by the provisions of the law that prohibit the transfer of consumer prices.

However, in the case of delivery app businesses, many small self-employed people are suffering due to the indiscriminately increased fees, and the resulting transfer of fees to the sales price significantly reduces consumer welfare. It can also have a negative impact on the national economy by stimulating consumer prices.

Ultimately, there is an urgent need to establish an institutional foundation to regulate delivery app commission rates, which have skyrocketed. Delivery app operators are also similar financial businesses engaged in the payment business. In order to resolve blind spots in market entry and business regulations, financial authorities must be able to actively manage delivery app operators.

As a result, an institutional mechanism must be put in place to quickly suppress the increase in commission rates for delivery apps and limit the transfer of delivery app commissions to consumer prices.

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Written by Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University ([email protected] / [email protected])

Implementation of dual pricing system, prices, and consumer welfare

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