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Cooperation Among Competitors: The Economics of Credit Card Associations


  • Rochet, Jean-Charles
  • Tirole, Jean


The paper analyzes two controversial features of the credit card industry. The first is the cooperative determination of the interchange fee by member banks in credit card associations (Visa and MasterCard). The interchange fee is the ``access charge'' paid by the merchants' banks, the acquirers, to cardholders' banks, the issuers. The second practice is the prohibition for merchants accepting a card from charging different prices depending on the payment method (the no-discrimination or no-cash-discount rule). We analyze these practices in a frawework in which banks and merchants may have market power and consumers and merchants decide rationally on whether to buy or accept a credit card. Under the no-cash-discount rule, an increase in the interchange fee increases the usage of credit cards, as long as the interchange fee does not exceed a threshold level at which merchants no longer accept credit cards. At this threshold level, the net cost for merchants of accepting the card is equal to the average cardholder benefit. The interchange fee selected by the credit card association either is socially optimal or leads to an overprovision of credit card services. Last, if the no-cash-discount rule is lifted, the interchange fee no longer impacts the level of credit card services. The merchant price for cardholders is increased and that for noncardholders decreased. Credit cards services are reduced by merchant price discrimination regardless of whether the interchange fee is set by the credit card association or by a social planner.

Suggested Citation

  • Rochet, Jean-Charles & Tirole, Jean, 1999. "Cooperation Among Competitors: The Economics of Credit Card Associations," CEPR Discussion Papers 2101, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2101

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    References listed on IDEAS

    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, January.
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    Cited by:

    1. repec:wfo:wstudy:19531 is not listed on IDEAS
    2. Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 1-26, March.
    3. Alexander F. Tieman & Wilko Bolt, 2003. "Pricing Debit Card Payment Services; An IO Approach," IMF Working Papers 03/202, International Monetary Fund.
    4. Manchev, Peter, 2006. "Oligopoly Model of a Debit Card Network," MPRA Paper 2460, University Library of Munich, Germany, revised 26 Feb 2007.

    More about this item


    association; credit cards; Discrimination; interchange fee;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts


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