Working Paper: CEPR ID: DP6132
Authors: Jean-Charles Rochet; Jean Tirole
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 Codes: L5; L82; L86; L96
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| HAC rule (I18) | interchange fee on debit cards (E40) |
| HAC rule (I18) | interchange fee on credit cards (E40) |
| interchange fee structure (D49) | transaction volume (G15) |
| interchange fee structure (D49) | social welfare (I38) |
| HAC rule (I18) | social welfare (I38) |
| HAC rule (I18) | flexibility of card associations in setting fees (F33) |
| merchant competition (D41) | social welfare (I38) |