Your network or mine? The economics of routing rules

In many markets, including payment cards and telecommunications, service providers operate networks that support customer transactions with each other. When the two sides of a transaction belong to more than one network in common, the question of which network will carry the transaction arises. We show that the answer depends on a combination of who has the formal authority to choose and the parties’ network subscription decisions. Our central finding is that granting formal authority to one side of the market can increase the extent to which transactions run over the network preferred by the other side of the market. We also characterize competing networks’ equilibrium choices of routing rules and prices. ∗ University of California, Berkeley; mail: University of California • Walter A. Haas School of Business • S545 Student Services Bldg. #1900 • Berkeley, CA 94720–1900; email: [email protected], [email protected].