IDEAS home Printed from https://ideas.repec.org/p/dnb/dnbwpp/127.html
   My bibliography  Save this paper

Must-Take Cards and the Tourist Test

Author

Listed:
  • 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).

Suggested Citation

  • Jean-Charles Rochet & Jean Tirole, 2007. "Must-Take Cards and the Tourist Test," DNB Working Papers 127, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:127
    as

    Download full text from publisher

    File URL: https://www.dnb.nl/binaries/Working%20Paper%20127-2007_tcm46-146784.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Farrell Joseph, 2006. "Efficiency and Competition between Payment Instruments," Review of Network Economics, De Gruyter, pages 1-19.
    2. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International.
    3. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-122, June.
    4. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, pages 549-570.
    5. Lal, Rajiv & Matutes, Carmen, 1994. "Retail Pricing and Advertising Strategies," The Journal of Business, University of Chicago Press, vol. 67(3), pages 345-370, July.
    6. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
    7. 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.
    8. 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 541-588, October.
    9. Wright, Julian, 2003. "Pricing in debit and credit card schemes," Economics Letters, Elsevier, vol. 80(3), pages 305-309, September.
    10. Rochet Jean-Charles, 2003. "The Theory of Interchange Fees: A Synthesis of Recent Contributions," Review of Network Economics, De Gruyter, pages 1-28.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kemppainen, Kari, 2008. "Integrating European retail payment systems : some economics of SEPA," Research Discussion Papers 22/2008, Bank of Finland.
    2. 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.
    3. James J. McAndrews & Zhu Wang, 2006. "Microfoundations of two-sided markets: the payment card example," Payments System Research Working Paper PSR WP 06-01, Federal Reserve Bank of Kansas City.
    4. Ulf Kalckreuth & Tobias Schmidt & Helmut Stix, 2014. "Choosing and using payment instruments: evidence from German microdata," Empirical Economics, Springer, pages 1019-1055.

    More about this item

    Keywords

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

    JEL classification:

    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dnb:dnbwpp:127. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet). General contact details of provider: http://edirc.repec.org/data/dnbgvnl.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.