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Your Network or Mine? The Economics of Routing Rules

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  • Benjamin Hermalin
  • Michael L. Katz

Abstract

In many markets, including payment cards and telecommunications, service providers operate networks that support customer transactions with each other. When the two sides of a transaction belong to more than one network in common, the question arises as to which network will carry the transaction. We show that the answer depends on a combination of who has the formal authority to choose and the parties' network subscription decisions. Our central finding is that granting formal authority to one side of the market can increase the extent to which transactions run over the network preferred by the other side of the market. We also characterize competing networks' equilibrium choices of routing rules and prices.

Suggested Citation

  • Benjamin Hermalin & Michael L. Katz, 2006. "Your Network or Mine? The Economics of Routing Rules," RAND Journal of Economics, The RAND Corporation, vol. 37(3), pages 692-719, Autumn.
    • Handle: RePEc:rje:randje:v:37:y:2006:3:p:692-719
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    Cited by:

    1. Fumiko Hayashi & Zhu Wang, 2008. "Product innovation and network survival in the U.S. ATM and debit card network industry," Research Working Paper RWP 08-14, Federal Reserve Bank of Kansas City.
    2. Ron Borzekowski & Elizabeth K. Kiser & Mark D. Manuszak & Robin A. Prager, 2009. "Interchange fees and payment card networks: economics, industry developments, and policy issues," Finance and Economics Discussion Series 2009-23, Board of Governors of the Federal Reserve System (U.S.).
    3. Wilko Bolt & Heiko Schmiedel, 2013. "Pricing of payment cards, competition, and efficiency: a possible guide for SEPA," Annals of Finance, Springer, vol. 9(1), pages 5-25, February.

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