What I'd like to know about interchange fees

There is much ado about whether or how much or in what way the government should regulate what are known as "interchange fees." These are the fees a merchant pays every time he or she charges a customer's credit card. So, to take some made up numbers, if a customer uses a credit card to pay for something that costs $10, the credit card company (or the bank with which the merchant has the credit card processing account) charges the merchant, say, 2%, or 20 cents, if my math is correct.

The controversy is that some merchants, presumably smaller merchants who operate on close profit margins, claim that the fees are so high that they often cut into the merchants' profits, especially when credit cards are used for purchases of small dollar prices. The contention, I presume, is that x% of a $1 pack of gum--or at least x$ on several single purchases of $1 packs of gum--takes away the merchant's entire profit margin. According to some merchants, credit card services require that merchants accept credit cards for all transactions. Therefore, some claim, smaller business owners get the short end of the stick. There are other arguments advanced for a more robust regulation of interchange fees: the price of the fees get passed along to consumers, even those who pay cash, in order to subsidize those who pay with credit cards; some credit cards allegedly command higher interchange fees than others, so there is a sense of arbitrariness and unpredictability of costs; the two dominant credit card companies--which I'll call Misa and VasterCard so as not to single anyone out--allegedly operate as near monopolists and unfairly negotiate with smaller merchants who individually lack bargaining power.

The justifications for unregulated/less regulated interchange fees range from arguments that robust regulation would be price fixing and government is generally less than competent to do price fixing, to more practical considerations, such as the assertion that individual merchants could, if they wanted to, negotiate with credit card companies to pass the fees on to customers or use one of the other credit card companies (which I'll call US Express and Uncover); the assertion that having a credit card is to mean anything, it means being able to buy anything at a merchant that accepts a card; and the assertion that interchange fees represent real costs to the authorizing banks and that handling cash and/or checks carries its own costs (the risk of checks bouncing, robberies, counterfeit currency).

I'm not sure where I fall exactly. And before I make up my mind, there are some things I'd like to know the answers to. Some are factual items--I just don't know a lot--and some are hypothetical (the "what would really happen if we did x, y, or z?"). I've heard assertions one way or another on a lot of these points. I assume they can't all be true, or at least not categorically true:

• Are merchants currently forbidden by credit card agreements from allowing discounts to cash only customers? I heard assertions both ways and imagine it might depend on the context. (One would also have to look at the merchant's incentive to offer the cash-only discount. I probably wouldn't base decision to purchase a $2 cup of coffee on a difference of, say 5 cents.)
• Do antitrust laws prevent merchants from organizing collectively to gain a credit card contract more to their liking?
• What would happen if merchants were allowed outright to charge higher prices for credit card holders? Would they simply raise all their prices by x percent and charge cash-only customers what they charge now?
• What would regulation of interchange fees look like? Would they simply be tacked on to the customer's credit card bill? Would there be a set percentage that merchants could charge? Would the government simply declare a "fair" fee? I know that Sen. Durbin has advanced an amendment to the currently pending finance bill that would do a variant of this latter scheme in respect to interchange fees on debit cards: in short, the Federal Reserve would set the rate. But I wonder if "price fixing," as the opponents label attempts to regulate interchange fees, is the only way to go about ending this practice.
  
• How are interchange fees regulated or enabled by currently existing regulation? (Sometimes opponents of "new" regulations, especially those who benefit from the status quo, do not realize or fail to acknowledge the ways in which current regulations play an active role in buttressing their current interests.
  

As someone who uses cash for most purchases--even to the point of being willing to pay the fees charged by out-of-network ATM's instead of using my debit or credit card--my interest in interchange fees is more academic than not. I'm just outlining some of the things I'd need to know before making a decision on the matter.