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33 Antitrust 44 (2018-2019)
Another Side to the Story: American Express and the Quest for Efficient Payments Systems

handle is hein.journals/antitruma33 and id is 46 raw text is: C O V E R S T O R I E S Another Side to the Story: American Express and the Quest for Efficient Payments Systems BY ALAN S. FRANKEL ONTROVERSIES REGARDING payment systems were neither born with nor will be laid to rest by Ohio v. American Express.1 In the United States, money and payment sys- tems have been at the center of intense policy disputes since long before the establishment of antitrust laws, and, indeed, before the establishment of the United States. The reason is simple: virtually all other markets depend on payment systems to complete transactions. The exercise of market power in payment system markets is akin to the imposition of a privately collected excise tax that distorts markets throughout the economy. With retail sales approach- ing $6 trillion annually in the United States, the ability to impose and maintain an anticompetitive tax of even a frac- tion of one percent on the value of retail payments can gen- erate harm to the public which likely dwarfs that involved in any other antitrust dispute. I explained 20 years ago that an inefficient outcome aris- es in payment markets when prices do not adjust to reflect cost differences across payment methods, a phenomenon I called price coherence.2 Price coherence has long caused a market failure known as Gresham's Law: Bad money drives out the good.3 Today, Gresham's Law arises from an exter- nality and free-rider problem: each consumer would be bet- ter off if other consumers used payments that cost merchants less (so retail prices would be lower), but many consumers are privately rewarded by credit card issuers for using cards that cost merchants more. Card issuers are deterred from low merchant cost strategies because their rivals are, in econom- ic effect, bribing consumers to use more costly cards. The economically sensible solution to this problem is to permit merchants to align their incentives with those of their customers by charging different prices based on payment cost or otherwise encouraging (steering) their customers to use lower cost payment methods. But American Express's non-discrimination provisions (NDPs) and other credit card networks' anti-steering rules have long restricted mer- chant steering strategies. Defenders of American Express's NDPs contend the eco- nomic framework of two-sided markets justifies the NDPs because the NDPs sustain greater benefits provided to mer- chants' cardholder customers. But that is a fallacy. It is the NDPs themselves that ensure that American Express retains the economic features of a two-sided platform. Without the NDPs, merchants could more effectively reward customers who use lower cost cards, and such private bargaining between merchants and their own customers could efficiently resolve payment externalities and benefit consumers in the aggregate. The harmfulness of the NDPs does not turn on the lan- guage used to describe the relevant market, and even in a two- sided framework the NDPs harm merchants (and the public at large) by more than they benefit American Express's card- holder customers. The Supreme Court nevertheless found in favor of American Express, and thereby thwarted an effort to use antitrust laws to enhance payment efficiency. Although the Court's decision may appear to erect new obstacles to plaintiffs challenging conduct in markets that might be char- acterized as two-sided, the tasks confronting economists in antitrust litigation remain largely unchanged. Background Merchants pay fees to accept credit and debit card payments. Of the major U.S. credit card brands, merchants have tend- ed to pay the highest fees for American Express and the low- est fees for Discover, with Mastercard and Visa occupying similar intermediate positions.4 High merchant fees cause credit card acceptance costs to exceed the cost to accept cash payments.' Credit card acceptance costs also increased sig- nificantly despite the digital revolution of the past quarter century.6 Merchants and their customers-the two sides of this platform-together benefit most when their economic incen- . A N T I T R U S T

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