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

Author

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  • Rochet, Jean-Charles
  • Tirole, Jean

Abstract

Payment card associations offer both debit and credit cards and, until recently, engaged in a tie-in on the merchant side through the so-called honour-all-cards (HAC) rule. The HAC rule came under attack on the grounds that the credit and debit card markets are separate markets and that the associations lever their market power in the 'credit card market' to exclude on-line debit cards and thereby monopolize the 'debit card market'. This article analyzes the impact of the HAC rule, using a simple model with two types of transactions (debit and credit) and two platforms. In the benchmark model, in the absence of HAC rule, the interchange fee (IF, the transfer from the merchant’s bank to the cardholder’s bank) on debit is socially too low, and that on credit is either optimal or too high (depending on downstream members’ market power). In either case, the HAC rule not only benefits the multi-card platform but also raises social welfare, due to a rebalancing effect: The HAC rule allows the multi-card platform to better perform the balancing act by raising the IF on debit and lowering it on credit, ultimately raising volume. The paper then investigates a number of extensions of the benchmark model, including varying degrees of substitutability between debit and credit; 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.)

Suggested Citation

  • Rochet, Jean-Charles & Tirole, Jean, 2006. "Tying in Two-Sided Markets and the Honor All Cards Rule," IDEI Working Papers 440, Institut d'Économie Industrielle (IDEI), Toulouse, revised 2007.
  • Handle: RePEc:ide:wpaper:1992
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    References listed on IDEAS

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    1. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
    2. 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.
    3. Schmalensee, Richard, 2002. "Payment Systems and Interchange Fees," Journal of Industrial Economics, Wiley Blackwell, vol. 50(2), pages 103-122, June.
    4. Dennis W. Carlton & Michael Waldman, 2002. "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," RAND Journal of Economics, The RAND Corporation, vol. 33(2), pages 194-220, Summer.
    5. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, September.
    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. 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.
    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 837-859, 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 283-298, March.
    11. 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.
    12. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Matttia De' Grassi Di Pianura, 2012. "Subsidising network technology adoption the case of publishers and E-readers," Working Papers hal-00714447, HAL.
    2. Kong-Pin Chen & Yen-Chi Huang, 2012. "A Search-Matching Model of the Buyer--Seller Platforms," CESifo Economic Studies, CESifo, vol. 58(4), pages 626-649, December.
    3. Ryan Rumble & Vincent Mangematin, 2015. "Business Model Implementation: The Antecedents of Multi-Sidedness," Grenoble Ecole de Management (Post-Print) hal-01183388, HAL.
    4. Dragoi, Ionut Mihai, 2013. "The Interchange Fees - A Comparison between Optimal Private and Social Levels," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 24-38, March.
    5. Tamás Briglevics & Oz Shy, 2014. "Why Don’t Most Merchants Use Price Discounts to Steer Consumer Payment Choice?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 44(4), pages 367-392, June.
    6. Chen, Minghua & Rennhoff, Adam D. & Serfes, Konstantinos, 2016. "Bundling, à la carte pricing and vertical bargaining in a two-sided model," Information Economics and Policy, Elsevier, vol. 35(C), pages 30-44.
    7. Jay Pil Choi, 2010. "TYING IN TWO-SIDED MARKETS WITH MULTI-HOMING -super-," Journal of Industrial Economics, Wiley Blackwell, vol. 58(3), pages 607-626, September.
    8. repec:hal:gemwpa:hal-01183388 is not listed on IDEAS
    9. Bruno Jullien, 2005. "Two-sided Markets and Electronic Intermediaries," CESifo Economic Studies, CESifo, vol. 51(2-3), pages 233-260.
    10. David S. Evans & Richard Schmalensee, 2013. "The Antitrust Analysis of Multi-Sided Platform Businesses," NBER Working Papers 18783, National Bureau of Economic Research, Inc.
    11. Caccinelli, Chiara & Toledano, Joëlle, 2017. "Assessing Anticompetitive Practices in Two-Sided Markets: A Comparative Analysis of four Antitrust Proceedings against Booking.com," 28th European Regional ITS Conference, Passau 2017 169452, International Telecommunications Society (ITS).
    12. Audrey Boilley, 2013. "Duopoly Competition and Regulation in a Two-Sided Health Care Insurance Market with Product Differentiation," Working Papers 2013-02, CRESE.

    More about this item

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L82 - Industrial Organization - - Industry Studies: Services - - - Entertainment; Media
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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