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

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  • Rochet, Jean Charles
  • Tirole, Jean

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.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 26 (2008)
Issue (Month): 6 (November)
Pages: 1333-1347

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Handle: RePEc:eee:indorg:v:26:y:2008:i:6:p:1333-1347

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Tie-ins Two-sided markets Payment cards Price rebalancing;

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References

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  1. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  2. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
  3. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
  4. Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 283-98, March.
  5. Dennis W. Carlton & Michael Waldman, 1998. "The Strategic Use Of Tying To Preserve And Create Market Power In Evolving Industries," University of Chicago - George G. Stigler Center for Study of Economy and State 145, Chicago - Center for Study of Economy and State.
  6. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
  7. Choi, Jay Pil & Stefanadis, Christodoulos, 2001. "Tying, Investment, and the Dynamic Leverage Theory," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 52-71, Spring.
  8. Michael D. Whinston, 1989. "Tying, Foreclosure, and Exclusion," NBER Working Papers 2995, National Bureau of Economic Research, Inc.
  9. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA.
  10. Rey, Patrick & Seabright, Paul & Tirole, Jean, 2001. "The Activities of a Monopoly Firm in Adjacent Competitive Markets: Economic Consequences and Implications for Competition Policy," IDEI Working Papers 132, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2002.
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Citations

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Cited by:
  1. Audrey Boilley, 2013. "Duopoly Competition and Regulation in a Two-Sided Health Care Insurance Market with Product Differentiation," Working Papers 2013-02, CRESE.
  2. Dragoi, Ionut Mihai, 2013. "The Interchange Fees - A Comparison between Optimal Private and Social Levels," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 24-38, March.
  3. Jullien, Bruno, 2004. "Two-Sided Markets and Electronic Intermediation," IDEI Working Papers 295, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Bruno Jullien, 2004. "Two-Sided Markets and Electronic Intermediaries," CESifo Working Paper Series 1345, CESifo Group Munich.
  5. Chen, Kong-Pin & Yen-Chi, Huang, 2009. "A search-matching model of the buyer-seller platforms," MPRA Paper 38372, University Library of Munich, Germany, revised 14 Dec 2011.
  6. Matttia De' Grassi Di Pianura, 2012. "Subsidising network technology adoption the case of publishers and E-readers," Working Papers hal-00714447, HAL.
  7. David S. Evans & Richard Schmalensee, 2013. "The Antitrust Analysis of Multi-Sided Platform Businesses," NBER Working Papers 18783, National Bureau of Economic Research, Inc.

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