Tying in Two-Sided Markets and the Honor All Cards Rule
Payment 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.
(This abstract was borrowed from another version of this item.)
|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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