Must-Take Cards and the Tourist Test

Jean Charles Rochet () and Jean Tirole

DNB Working Papers from Netherlands Central Bank, Research Department

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).

Keywords: Card payment systems; interchange fee; internalization; multi-homing; tourist test. (search for similar items in EconPapers)
JEL-codes: L10 D40 O30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com and nep-tur
Date: 2007-01
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Persistent link: http://EconPapers.repec.org/RePEc:dnb:dnbwpp:127

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