Response to Steve Salop on credit card antitrust

Cite this Article
Geoffrey A. Manne, Response to Steve Salop on credit card antitrust, Truth on the Market (October 20, 2009),

Steve’s post responding to me and Josh on antitrust exemptions and buyer cartels raised a number of interesting issues.   A few points in response:

1.  Constantine’s book is quite a measured look at the case (not).  I love how he risked everything — everything! — for the case.  He and the country’s other contingency fee lawyers are true American heroes.  (For the record, I’m not against contingency fee lawyers, only the implicit claim (not your claim–just Constantine’s mantle) that they are selfless do-gooders whose cases just must be right because they could lose everything– everything! — and so, you know, only someone who was fighting for Truth and Justice would be so pure at heart).  There is, of course, another side, and I think it’s fair to say that not everyone shares his conclusions, particularly the ones that stretch far beyond the contours of the settlement and into the marketing ploy (talk about rent seeking!) of “too big to fail.”

2.  On the merits, of course you know that David Evans and Michael Salinger have a different view, and the post-settlement evidence suggests that the tying was not in fact anticompetitive.  The credit card companies settled because the fix was in when the court adopted the Jefferson Parish standard (it could have followed the Microsoft court’s lead and of course even the Supreme Court moved us in that direction with Independent Ink (on which see Josh here), but that doesn’t mean the result was correct.

3.  Also, I’m not sure why network effects are a problem here.  It’s easy to throw around the term “network effects,” wave hands, and–voila–antcompetitive effect, but I don’t think it’s that simple, and generally taking advantage of network effects is a good thing, not an inherent problem.

4.  Actually, the best evidence is that the interchange fees don’t raise the prices consumers pay.  The well-studied Australia experiment that I mentioned in my previous credit card post suggested that after fees were lowered, prices to consumers did not change.

5.  Cash discounts are allowed (I think by law, but if so that does beg the question whether the card companies would prohibit them if they could).  But the fact that cash customers might subsidize credit card customers strikes me as a feature, not a bug.  There are subsidies of that sort all over two-sided markets, and there is no reason to think them inefficient.  Moreover, because cash discounts are allowed, if cash customers are being harmed by anyone it’s not the card companies, but the merchants–the very Davids seeking dispensation from congress to fight the big bad credit card Goliaths.  I’m not sure it’s in consumers’ interests to put a thumb on the merchant side of that battle.

6.  I completely agree with your last point.  As I said in my original post: Interchange fees may be too high, too low, or just right.  I object to congress sticking its nose into a commercial dispute between sophisticated players where it is not clear that movement in either direction would help consumers.  But I don’t see the merchants as hapless victims, and I don’t see high transaction costs in their bargaining with the credit card companies–they are already in contractual arrangements with them.  I know this doesn’t guarantee an efficient outcome (Cooter’s Hobbes Theorem), but nor does it seem like a special case meriting special treatment.  Wal-Mart is pretty powerful itself.

7.  Finally, there are competing credit card networks.  There are thousands of banks that issue cards.  There has been entry in the industry.  Consumers have continued to pay lower and lower fees (remember annual fees?) and receive more and more benefits.  I’d like to see a much bigger problem before assuming market failure here.