Exploring Supplier Network Fees: Positive and Negative Externalities for Participants [Plus+]

Every semester, I give a guest lecture on economics at Columbia College in Chicago. As I was driving to class yesterday, I tried to put supplier fees in context of a core economic construct: externalities. But it’s not a perfect concept to slot supplier fees into. A true economic externality is one that tangentially exposes or affects an outside third-party – or parties – to a decision or transaction in which they have not participated, such as a consumer who must spend more for a given item based on the consequence of legislation aimed at reducing greenhouse gas emissions. Narrowly defined, an economic externality is “a consequence of an economic activity that is experienced by unrelated third parties.” So the supplier fees that are imposed and paid to a network are not a perfect externality given that a supplier is party to the transaction. Yet, the supplier has no say in the matter and is required to pay these fees, even in cases where a relationship with an end customer pre-dated the supplier network fees via a third-party being imposed. So by extension we could argue that the consequence (i.e., fee imposition) is an externality, at least loosely. But externalities can be both positive and negative. This Spend Matters Plus brief will provide examples of positive and negative externalities based on the imposition of supplier network fees.

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