Should-Read: The fear that decreasing competition is hobbling American economic growth is a growing concern. And back when I learned antitrust economics and law, the idea that raising rivals’ costs could be thought of as pro-competition and pro-consumer would have struck my teachers dumb with amazement. Yet here we are: Michael Kades: Credit card competition case before U.S. Supreme Court leaves consumers and competition in the balance: “The Supreme Court next week will hear oral arguments in an antitrust case about competition and credit card merchants’ fees…

…The U.S. Department of Justice and a group of state attorneys general alleged that American Express Co. has effectively eliminated competition between credit card companies that could lower merchant fees. As a result, merchants are paying higher fees and passing those costs on to all consumers. The case exemplifies the challenges of modern antitrust law. The court of appeals, in ruling for American Express, adopted a complex doctrinal analysis that confused what should have been a straightforward antitrust analysis. In practical terms, the decision sanctions a likely transfer from generally less wealthy consumers to more wealthy companies and, in this case, from less wealthy consumers to more wealthy ones….

Credit cards serve two sets of customers: the consumers who use the cards and the merchants who accept them. The demand between the two groups is interdependent. The more people who carry a credit card, the more likely a merchant is to accept the card, and the more merchants who accept a credit card, the more likely a consumer is to carry that card. That relationship affects how credit card companies compete. American Express, for example, charges merchants a relatively high fee to process transactions, but it provides substantial benefits to consumers through its rewards program…. Alternatively, a credit card company might charge merchants a low fee, hoping the merchant will induce customers to use the cheaper card…. Right now, customers can’t make that choice because of nondiscrimination clauses in agreements signed by merchants who agree to use American Express cards…. That clause has a marketwide impact….

The original trial court found that such clauses eliminated competition and increased merchant fees…. Distilled to its essence, American Express is saying that, given a choice with full information and competition, consumers will stop using its cards. That is competition. And the trial court rejected the company’s justification. The court of appeals reversed that decision, finding no antitrust violation…. The court of appeals decided that the government had to prove that increased fees were greater than any increased consumer benefits as a threshold issue. The issue in the case, however, is not that American Express was shifting costs between two sets of customers; the issue is whether the company can prevent its competitors (Visa, MasterCard, and Discover) from competing by incentivizing merchants to prefer one card over another…. The Supreme Court hearing next week and its final decision, announced sometime before the end of June, will go a long way toward determining whether U.S. antitrust law can rise to the challenge of protecting consumers and competition or whether its force will be unduly circumscribed…

AUTHORS:

Brad DeLong

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