Tying in Two-Sided Markets and the Honor All Cards Rule
AbstractPayment card associations offer both debit and credit cards and, until recently, engaged in a tie-in on the merchant side through the so-called honour-all-cards (HAC) rule. The HAC rule came under attack on the grounds that the credit and debit card markets are separate markets and that the associations lever their market power in the 'credit card market' to exclude on-line debit cards and thereby monopolize the 'debit card market'. This article analyzes the impact of the HAC rule, using a simple model with two types of transactions (debit and credit) and two platforms. In the benchmark model, in the absence of HAC rule, the interchange fee (IF, the transfer from the merchantâs bank to the cardholderâs bank) on debit is socially too low, and that on credit is either optimal or too high (depending on downstream membersâ market power). In either case, the HAC rule not only benefits the multi-card platform but also raises social welfare, due to a rebalancing effect: The HAC rule allows the multi-card platform to better perform the balancing act by raising the IF on debit and lowering it on credit, ultimately raising volume. The paper then investigates a number of extensions of the benchmark model, including varying degrees of substitutability between debit and credit; 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 InfoPaper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 440.
Date of creation: Feb 2006
Date of revision: 2007
Publication status: Published in International Journal of Industrial Organization, vol.�26, n°6, novembre 2008, p.�1333-1347.
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Other versions of this item:
- Rochet, Jean Charles & Tirole, Jean, 2008. "Tying in two-sided markets and the honor all cards rule," International Journal of Industrial Organization, Elsevier, vol. 26(6), pages 1333-1347, November.
- Rochet, Jean Charles & Tirole, Jean, 2007. "Tying-in Two-Sided Markets and the Honour All Cards Rule," CEPR Discussion Papers 6132, C.E.P.R. Discussion Papers.
- L5 - Industrial Organization - - Regulation and Industrial Policy
- L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
- L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
- L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-21 (All new papers)
- NEP-COM-2007-04-21 (Industrial Competition)
- NEP-GTH-2007-04-21 (Game Theory)
- NEP-MIC-2007-04-21 (Microeconomics)
- NEP-NET-2007-04-21 (Network Economics)
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