[tedshroyer]

I guess the paper is using merchant fees to just refer to the transaction fee and base transaction %. Rewards is an additional % on top of the base transaction % and differs for each reward program. I would price my merchandise to cover all costs so I don't understand why this paper is making a claim about subsidy. It should just make a claim about cash customers being penalized (and maybe even some credit card customers who don't have rewards being penalized).

"... cash buyers must pay higher retail prices to cover merchants' costs associated with the credit cards' merchant fees. Because these fees are used to pay for rewards given to credit card users, and since cash users do not receive rewards, cash users also finance part of the rewards given to credit card users."

This doesn't make sense to me at all. What merchant would gamble on having enough cash customers to subsidize his credit card customers? Merchants make the money. They just make more money on cash.