Tying in Two-Sided Markets and the Honor All Cards Rule
AbstractPayment 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 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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