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Tying in two-sided markets and the honor all cards rule

Jean Rochet and Jean Tirole

International Journal of Industrial Organization, 2008, vol. 26, issue 6, 1333-1347

Abstract: 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.

Keywords: Tie-ins; Two-sided; markets; Payment; cards; Price; rebalancing (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Working Paper: Tying-in Two-Sided Markets and the Honour All Cards Rule (2007) Downloads
Working Paper: Tying in Two-Sided Markets and the Honor All Cards Rule (2007) Downloads
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