This doesn't make sense to me. It's not the behavior of the credit card company that's a problem here. It's the behavior of the merchant. He's quoting the same price to people who pay with cash and people who pay with credit, even though he makes more money on the people who pay with cash.

Why is he doing that? He should be offering them a discount or something. Heck, why is he absorbing the transaction fees and folding them into prices in the first place? Doesn't that just make his prices look bad? Shouldn't he pass the fees on transparently?

That's all that would be needed for competition. Not regulation. The people doing the paying just need to see the price.