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Must-Take Cards and the Tourist Test

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  • Jean-Charles Rochet
  • Jean Tirole

Abstract

Antitrust authorities often argue that merchants cannot reasonably turn down payment cards and therefore are forced to accept unacceptably high merchant discounts. The paper attempts to shed light on this �must-take cards� view from two angles. First, the paper gives some operational content to the notion of �must-take card� through the �tourist test� (would the merchant want to refuse a card payment when a non-repeat customer with enough cash in her pocket is about to pay at the cash register?) and analyzes its relevance as an indicator of excessive interchange fees. Second, it identifies four key sources of potential social biases in the payment card associations' determination of interchange fees: internalization by merchants of a fraction of cardholder surplus, issuers' per-transaction markup, merchant heterogeneity, and extent of cardholder multi-homing. It compares the industry and social optima both in the short term (fixed number of issuers) and the long term (in which issuer offerings and entry respond to profitability).

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 127.

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Date of creation: Jan 2007
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Handle: RePEc:dnb:dnbwpp:127

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Keywords: Card payment systems; interchange fee; internalization; multi-homing; tourist test.;

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References

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  1. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
  2. John Vickers, 2005. "Public policy and the invisible price : competition law, regulation, and the interchange fee," Proceedings – Payments System Research Conferences, Federal Reserve Bank of Kansas City, issue May, pages 231-247.
  3. Rochet Jean-Charles, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-28, June.
  4. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  5. 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.
  6. Farrell Joseph, 2006. "Efficiency and Competition between Payment Instruments," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-19, March.
  7. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  8. Wright, Julian, 2003. "Pricing in debit and credit card schemes," Economics Letters, Elsevier, vol. 80(3), pages 305-309, September.
  9. Jean-Charles Rochet & Jean Triole, 2002. "Platform Competition in Two Sided Markets," FMG Discussion Papers dp409, Financial Markets Group.
  10. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
  11. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-70, July.
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Citations

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Cited by:
  1. Kemppainen, Kari, 2008. "Integrating European retail payment systems: some economics of SEPA," Research Discussion Papers 22/2008, Bank of Finland.
  2. Alexandrova-Kabadjova, Biliana & Negrín, José Luis, 2009. "What drives the network’s growth? An agent-based study of the payment card market," Working Paper Series 1143, European Central Bank.
  3. James McAndrews & Zhu Wang, 2007. "Microfoundations of Two-sided Markets: The Payment Card Example," DNB Working Papers 128, Netherlands Central Bank, Research Department.
  4. Verdier, Marianne, 2010. "Interchange fees and incentives to invest in payment card systems," International Journal of Industrial Organization, Elsevier, vol. 28(5), pages 539-554, September.

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