Tying-In Two-Sided Markets and the Honour All Cards Rule

30 Pages Posted: 19 May 2008

See all articles by Jean-Charles Rochet

Jean-Charles Rochet

University of Toulouse Capitole - Toulouse School of Economics

Jean Tirole

University of Toulouse 1 - Industrial Economic Institute (IDEI); University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ); Centre for Economic Policy Research (CEPR)

Date Written: February 2007

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.

Keywords: Payment cards, price rebalancing, tie-ins, two-sided markets

JEL Classification: L5, L82, L86, L96

Suggested Citation

Rochet, Jean-Charles and Tirole, Jean, Tying-In Two-Sided Markets and the Honour All Cards Rule (February 2007). CEPR Discussion Paper No. DP6132, Available at SSRN: https://ssrn.com/abstract=1133777

Jean-Charles Rochet (Contact Author)

University of Toulouse Capitole - Toulouse School of Economics ( email )

Toulouse
France

Jean Tirole

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Place Anatole France
21 Allees de Brienne
F-31042 Toulouse Cedex
France
+33 5 61 12 8642 (Phone)
+33 5 61 12 8637 (Fax)

University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ) ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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