Cooperation among Competitors: Some Economics of Payment Card Associations

Abstract

The paper analyzes two controversial by-laws of payment card associations Visa and MasterCard. The rst is the cooperative determination of the interchange fee by member banks. The interchange fee is the access charge paid by the merchants' banks, the acquirers, to cardholders' banks, the issuers. The second practice is that merchants accepting a card typically do not charge di erent prices depending on the payment method the no-surcharge rule. The paper develops a framework in which banks and merchants may have market power and consumers and merchants decide rationally on whether to buy or accept a payment card, and it derives the welfare implications of the two policies. Last, the paper provides a detailed description of the factors impacting merchant resistance and social welfare, compares cooperative and for-pro t business models, and makes the rst cut in the analysis of system competition.

Elimination of Competitors: Some Economics of Payment Card Associations

“…Our model is based on the model of Rochet and Tirole's (2002). Accordingly, most of the Then â is the level of the interchange fee at which the net cost to the merchants is equal to the average cardholder benefit.…”

“…To provide a policy analysis, it develops a normative framework of the determination of an efficient interchange fee and of impact of the antitrust agreement. The strength of this paper's approach relative to the previous literature (contrary to Rochet and Tirole (2002)) is that we build in antitrust effects and are able to show a proper welfare analysis. That literature focused on the payment system strategic mechanism based on the market power premises.…”

“…(See Evans and Schmalensee (1999) and Rochet and Tirole (2002).) The cause and the extent of market power is highly country-specific.…”

“…We study the cooperative antitrust determination of the interchange fee by member banks. We use a framework in which banks and merchants may have market power and consumers and merchants decide rationally on whether to buy or accept a payment card developed by Rochet and Tirole (2002). After drawing the welfare implications of a cooperative determination of the interchange fee and antitrust conducts, we describe in detail the factors affecting merchant resistance, compare cooperative and for-profit business models, and make a first cut in the analysis of system competition.…”

Platform intermediation in a market for differentiated products

“…The ''matchmaking'' role of intermediaries has received attention in the recent literature on multi-sided markets (platforms). A great deal of this literature has focused on specific markets, most notably credit card markets (see Rochet and Tirole, 2002;Schmalensee, 2002;Wright, 2003Wright, , 2004, the Internet (see Baye and Morgan, 2001;Caillaud andJullien, 2001, 2003), commercial media markets (see Anderson and Coate, 2005;Dukes and Gal-Or, 2003a, b;Dukes, 2004), B2B marketplaces (Belleflamme and Toulemonde, 2004) and software (Hagiu, 2006). Armstrong (2006) and Tirole (2003, 2006) present general frameworks for the study of two-sided markets, Belleflamme and Toulemonde (2007) explore the role of intra-group externalities when launching new platforms and Nocke et al (2007) study the relation between platform ownership and platform size.…”