Antitrust, Anti-Steering Rules, and American Express: The Justice Department Pursues Unfair Competition In A Business Model
Unfair competition is back in the news. The U.S. Justice Department sued American Express a few years ago for unfair competition in the credit card business. Since such things take time, the trial just began on Monday July 7, 2014. The issues, the accusations, and the justifications seem fairly familiar, especially when you recall the last big antitrust trial and the unintended consequences that followed. Whether the same thing will happen this time, though, is something only time will tell.
The last time, the Justice Department sued Apple, to prevent what it said was anti-competitive practices in the e-book business. As we previously wrote, these included the agency model, in which the publishers set the price of the e-book, and the seller, in this case Apple, takes a set percentage of that price; and most-favored nation clauses, in which the seller, is allowed to match its lowest competitor’s price. Well, Apple lost, the Justice Department won, and, some would say, so did Amazon. Apple was trying to break into the e-book market and its job was made harder; Amazon was the dominant seller in the e-book business and some would say its job was made easier because it could use its market share to leverage ever better deals for itself and, it would say, for its customers, too.
This time, the Justice Department reportedly takes issue with American Express’ rules that prohibit merchants that accept its cards from offering discounts or otherwise steering customers to use cards that are less expensive for the merchants to process. Credit card companies, it seems, make money by charging merchants a set percentage of the sales price for every sale made on one of their credit cards. These swipe fees vary and, reportedly, American Express cards have some of the higher ones. Merchants would be able to keep more of the purchase price if a customer used a credit card that had a lower swipe fee and they could give credit card customers a discount, some portion of the money saved, as an incentive. American Express evidently does not want that to happen because its customers presumably would have to pay more, i.e. not receive a discount or incentive, to use an American Express Card.
The government’s position was summed up nicely in an article in the Wall Street Journal by Robin Sidel that was last updated on July 3, 2014 9:01 a.m. ET:
The government has assailed AmEx’s rules, saying they thwart competition. When the government filed the suit in 2010, Attorney General Eric Holder said “consumers are being held hostage” because AmEx refused to change its rules.
The rules “confront merchants with a take-it-or-leave-it proposition: accept AmEx cards whenever customers present them or refuse AmEx cards at all times and lose customers who insist on using those cards,” according to a pretrial memorandum filed by the government with the court last week.
The similarities with the Justice Department’s case against Apple are clear. The biggest problem, apparently, is when a company uses a rule that affects how other companies, or customers using other companies, do business. In the Apple case it was the way Apple’s agreements with the e-book publishers allegedly made it more likely that every retailer would eventually adopt the agency model and let the publishers set the retail price, which presumably would be higher. In the American Express case, it seems to be the way American Express’ rules prevent merchants from giving discounts to customers who do not use American Express cards. Why should Apple, or American Express, have any control whatsoever over what their competitors do? It does seem like a valid point.
There’s another point, however, that seems to be missed: how does a smaller competitor break into a market and not only survive, but thrive? Apple was only trying to break into the e-book business when it came to the agreements with the major publishers that got it into trouble with the Justice Department. In this case, American Express is by far one of the smaller players in the credit card industry. It has only approximately 53.6 million cards issued in the U.S. compared to 178.3 million for MasterCard and. 254.1 million for Visa. How does such a relatively small company exert so much influence over its many times larger competitors?
Choice, also, is there: There already are 3 million businesses that accept Visa or MasterCard that do not accept American Express. How is it anti-competitive for American Express to say to merchants, who really are its potential customers: If you use our cards you have to give our cardholders the same terms as any others. If a merchant doesn’t want to then it doesn’t have to; 3 million of them apparently already made that decision. Doesn’t that leave the decision right where it should be? Can the merchant make more money by accepting American Express cards and abiding by its rules or by refusing to take American Express Cards and steering customers towards less expensive credit cards with lower swipe fees? That also puts the onus on American Express to make its cards competitive with the same merchants. According to the July 3, 2014, Wall Street Journal article by Robin Sidell, American Express, faced with lower than expected revenue growth, is trying to expand its business into new areas, including trying to get more of the many small businesses who do not accept American Express cards to change their minds.
Whether or not the Justice Department or American Express will win, is unclear; the trial won’t be over until the end of the summer, reportedly. What’s the best outcome for consumers, or even merchants, is unclear, too. We’ll have to wait and see. With some luck, though, this time maybe there won’t be major unintended consequences.
Go raibh maith agat.