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

  • Rochet, Jean-Charles
  • Tirole, Jean

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.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 440.

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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.
Handle: RePEc:ide:wpaper:1992
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  1. Dennis W. Carlton & Michael Waldman, 1998. "The Strategic Use Of Tying To Preserve And Create Market Power In Evolving Industries," University of Chicago - George G. Stigler Center for Study of Economy and State 145, Chicago - Center for Study of Economy and State.
  2. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-22, June.
  3. 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 541-88, October.
  4. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  5. Julian Wright, 2004. "The Determinants of Optimal Interchange Fees in Payment Systems," Journal of Industrial Economics, Wiley Blackwell, vol. 52(1), pages 1-26, 03.
  6. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
  7. Choi, Jay Pil & Stefanadis, Christodoulos, 2001. "Tying, Investment, and the Dynamic Leverage Theory," RAND Journal of Economics, The RAND Corporation, vol. 32(1), pages 52-71, Spring.
  8. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
  9. Whinston, Michael D, 1990. "Tying, Foreclosure, and Exclusion," American Economic Review, American Economic Association, vol. 80(4), pages 837-59, September.
  10. Carbajo, Jose & de Meza, David & Seidmann, Daniel J, 1990. "A Strategic Motivation for Commodity Bundling," Journal of Industrial Economics, Wiley Blackwell, vol. 38(3), pages 283-98, March.
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