Tying in two-sided markets and the honor all cards rule

Jean Charles Rochet*, Jean Marcal Pierre Tirole

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    30 Scopus citations

    Abstract

    Payment card associations offer both debit and credit cards and sometimes engage in a tie-in on the merchant side through the so-called honor-all-cards (HAC) rule. This article analyzes the impact of the HAC rule, using a simple model with two types of transactions subject to different competitive pressures. In the no-HAC-rule benchmark model, the interchange fee (IF, the transfer from the merchant's bank to the cardholder's bank) on the card subject to platform competition is socially too low, and the IF on the card protected from competition is either optimal or too high. In either case, the HAC rule not only benefits the multi-card platform but also raises social welfare, due to a rebalancing effect. The paper then investigates a number of extensions of the benchmark model, including varying degrees of substitutability between the two cards; merchant heterogeneity; and platform differentiation. While the HAC rule may no longer raise social welfare under all values of the parameters, the basic and socially beneficial rebalancing effect unveiled in the benchmark model is robust.

    Original languageEnglish (US)
    Pages (from-to)1333-1347
    Number of pages15
    JournalInternational Journal of Industrial Organization
    Volume26
    Issue number6
    DOIs
    StatePublished - Nov 2008

    Keywords

    • Payment cards
    • Price rebalancing
    • Tie-ins
    • Two-sided markets

    ASJC Scopus subject areas

    • Industrial relations
    • Aerospace Engineering
    • Economics and Econometrics
    • Economics, Econometrics and Finance (miscellaneous)
    • Strategy and Management
    • Industrial and Manufacturing Engineering

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