Response to Comments on Antitrust Exemptions and Joint Monopsony Conduct to Countervail Monopoly Power

Cite this Article
Steve Salop, Response to Comments on Antitrust Exemptions and Joint Monopsony Conduct to Countervail Monopoly Power, Truth on the Market (October 19, 2009),

In response to my first post on joint monopsony conduct to countervail monopoly power, Mike Ward raises the issue of justifying a merger among sellers on the basis that it will countervail alleged monopsony power.  Labor unions have an antitrust exemption for just that purpose.   In terms of merger policy, Tom Campbell has written an article proposing just such a defense for merger to monopoly (74 Antitrust Law Journal 521 (2007)).  His article was strongly criticized in a Comment by Jon Baker, Joe Farrell and Carl Shapiro.

I’ll stick to my knitting and take a pass on Geoff’s and Josh’s questions about when antitrust exemptions are appropriate.   Josh framed the question in an interesting way.  We usually think that courts do a better job than the legislature on antitrust issues.   So, when does it make sense to support antitrust exemptions or (for that matter) laws such as a Leegin-repealer.  I’m looking forward to hearing others’ comments on this issue.

Regarding the appropriate welfare standard for antitrust, I’ve been an advocate of the consumer welfare standard.  I also think the Courts have generally favored consumer welfare by placing their main focus on price and output effects.

Regarding the merchants and the Visa/MasterCard issuers, I have never thought about the issue in Coasian property rights terms, but I’ll give it an initial try, with the caveat that a thorough analysis clearly requires more work.  I think that there are market failures here – transaction costs in Coasian lingo – that imply that one cannot count on a laissez faire market for the efficient outcome.

First, Visa and MasterCard arguably are bank card issuer “cartels” that jointly fix the price that merchants pay for acceptance of their cards and have a collectively dominant combined market share.  The membership overlap in the two networks is very high.  Network effects would seem to create barriers to entry.   Regarding this type of “strategic behavior” market failure, Visa and MasterCard also were found liable for anticompetitive exclusionary conduct towards competing credit card companies, American Express and Discover Card.  They also agreed to a multi-billion dollar settlement of allegations that they illegally tied the acceptance credit cards and debit cards to merchants.  (For the record, I consulted for the plaintiffs in this matter.)

Second, the high interchange fees are not “simply a transfer” from merchants to the banks.  They likely raise the price of the merchandise purchased by consumers.  Few merchants surcharge the use of credit cards.  There are transactions costs to inform consumers of the extra set of prices, and I understand that Visa and MasterCard rules may well prohibit such surcharges.  These higher merchandise prices likely are partially — but not nearly fully — offset by the banks redistributing the cartel profits back to the cardholders through lower annual fees, rewards programs or other features.   It appears that a possibly significant fraction of the profits likely have been dissipated in marketing — classic rent-seeking expenditures.

Third, the increase in the price of merchandise likely also inflicts harm on non-users of credit cards, the customers who pay by cash and check.  This external effect would be seen in Coasian terms as a classic third-party effect, and the injured non-users would face coordination costs in attempting to undo the effect.

Finally, the fact that merchants are willing to pay the high interchange fees does not make it efficient.  Paying high fees for credit card acceptance would seem to be a prisoner’s dilemma for merchants.  I assume that Coasian theory applauds the formation of coalitions to coordinate an escape from the prisoner’s dilemma.