Class 24 Antitrust, Winter, 2018 Platform Industries: Payment Systems 11/19/2018 Class 24 Antitrust, Winter, 2018 Platform Industries: Payment Systems Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2017-18 Randal C. Picker. All Rights Reserved.

Understanding Jointness/Two-Sidedness Two Hypos The Room/The Bar Messages between A and B November 19, 2018

November 19, 2018

November 19, 2018

U.S. v Visa (CA2 2003): Key Facts In United States Mastercard and Visa are both non-profits Mastercard: 20,000 member banks Visa: 14,000 member banks Amex started as closed-loop system but willing to be open since 1995 November 19, 2018

Visa By-Law 2.10(e) Text “The membership of any Member shall automatically terminate in the event it, or its parent, subsidiary or affiliate, issues, directly or indirectly, Discover Cards, or American Express Cards, or any other card deemed competitive by the Board of Directors.” November 19, 2018

Mastercard Competitive Programs Policy Text “With the exception of participation in Visa, which is essentially owned by same member entities, and several pre-existing programs to the extent individual members participate … members of MasterCard may not participate either as issuers or acquirers in competitive general purpose cards.” November 19, 2018

Market Power? Per the Opinion “In addition, the court inferred market power from the defendants’ large shares of a highly concentrated market: In 1999, Visa U.S.A. members accounted for approximately 47% of the dollar volume of credit and charge card transactions, November 19, 2018

Market Power? Per the Opinion “while MasterCard members accounted for approximately 26%. (American Express accounted for 20%; Discover, for 6%.)” November 19, 2018

Visa Mastercard Amex Discover B1 B2 B3 B4 BN M1 M2 MK Network Services Market B1 B2 B3 B4 BN Visa Mastercard Amex Discover M1 M2 MK Competing for BN: Is this Standard Fashions again? November 19, 2018

SA1 Violation Per the Court “In the market for network services, where the four networks are sellers and issuing banks and merchants are buyers, the exclusionary rules enforced by Visa U.S.A. and MasterCard have absolutely prevented Amex and Discover from selling their products at all.” November 19, 2018

SA1 Violation Per the Court “We find no fault with the district court’s finding that the exclusion of Amex and Discover from the ability to market their cards and programs to banks has harmed competition in the market for network services, and that Visa U.S.A. and.” November 19, 2018

SA1 Violation Per the Court “MasterCard would be impelled to design and market their products more competitively if the banks to which they sell their services were free to purchase network services from Amex and Discover.” November 19, 2018

US v. Amex Original Complaint Amended Complaint Opening Statement Oct 4, 2010 Amended Complaint Dec 21, 2010 Opening Statement July 7, 2014 November 19, 2018

Looking at the Opening Statement Here https://www.justice.gov/atr/case-document/file/485771/download November 19, 2018

Network Market Shares 2013 (1999) (1990) Reactions? Visa: 45% (47%) Amex: 26.4% (20%) (25%) MasterCard: 23.3% (26%) Discover: 5.3% (6%) Reactions? November 19, 2018

Amex Merchant Regulations Section 3.2: Nondiscriminatory Provisions (NDPs). A merchant who accepts Amex cards may not engage in the following behaviors: indicate or imply that [it] prefer[s], directly or indirectly, any Other Payment Products over [Amex’s] Card, November 19, 2018

Amex Merchant Regulations try to dissuade Cardmembers from using the Card, criticize or mischaracterize the Card or any of [Amex’s] services or programs, try to persuade or prompt Cardmembers to use any Other Payment Products or any other method of payment (e.g., payment by check), November 19, 2018

Amex Merchant Regulations impose any restrictions, conditions, disadvantages or fees when the Card is accepted that are not imposed equally on all Other Payment Products, except for electronic funds transfer, or cash and check, engage in activities that harm [Amex’s] business or the American Express Brand (or both), or November 19, 2018

Amex Merchant Regulations promote any Other Payment Products (except [the merchant’s] own private label card that [it] issue[s] for use solely at [the merchant’s] Establishments) more actively than [it] promote[s] [Amex’s] Card. November 19, 2018

Market Definition in Amex Key Question How should the existence of two-sides of the market influence the assessment of market definition and market power? November 19, 2018

Yes Says CA2 Per the Opinion “Separating the two markets here--analyzing the effect of Amex’s vertical restraints on the market for network services while ignoring their effect on the market for general purpose cards--ignores the two markets’ interdependence.” November 19, 2018

Yes Says CA2 Per the Opinion “Separating the two markets allows legitimate competitive activities in the market for general purposes to be penalized no matter how output-expanding such activities may be.” November 19, 2018

Yes Says CA2 Per the Opinion “Application of the HMT to a two-sided market must consider the feedback effects inherent on the platform by accounting for the reduction in cardholders' demand for cards (or card transactions) that would accompany any degree of merchant attrition.” November 19, 2018

Burden Allocation with Two-Sided Markets Per the Opinion “Because the NDPs affect competition for cardholders as well as merchants, the Plaintiffs’ initial burden was to show that the NDPs made all Amex consumers on both sides of the platform — i.e., both merchants and cardholders — worse off overall.” November 19, 2018

Burden Allocation with Two-Sided Markets Per the Opinion “Plaintiffs’ argument that the language ‘as a whole’ means only that they were required to show harm to competition in general (rather than to only a single competitor) is unavailing.” November 19, 2018

Burden Allocation with Two-Sided Markets Per the Opinion “Whether the NDPs had pro-competitive effects on cardholders — let alone whether any alleged procompetitive effects on cardholders outweigh ‘anticompetitive effects on merchants — has no bearing on whether Plaintiffs carried their initial burden under the rule-of-reason analysis to show” November 19, 2018

Burden Allocation with Two-Sided Markets Per the Opinion “anticompetitive effects on the relevant market ‘as a whole.’ See K.M.B., 61 F.3d at 127. It was not Amex’s burden to disprove anticompetitive effects; it was Plaintiffs’ burden to prove them.” November 19, 2018

Sup Ct Oral Argument Transcript Here https://www.supremecourt.gov/oral_arguments/argument_transcripts/2017/16-1454_f2ah.pdf November 19, 2018

Ohio! v. Amex U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Ohio v. Amex U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Gorsuch: Output? U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Kennedy: Output Again? U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Output Again? U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Output Again? U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Gorsuch: And Deadweight Loss November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Gorsuch: Prices to Consumers? November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Sotomayor: Impacts on Consumers November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Impacts on Consumers U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Gorsuch: Vertical Restraints November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Ginsburg: A Single Market and One Step or Two Steps? November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

A Single Market and One Step or Two Steps? November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

A Single Market and One Step or Two Steps? November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Breyer: Understanding Two-Sided Markets November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Understanding Two-Sided Markets November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Understanding Two-Sided Markets November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Sotomayor: A Single Market and One Step or Two Steps? November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

A Single Market and One Step or Two Steps? November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

A Single Market and One Step or Two Steps? November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Amex Wants Honest Agents November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Visa Mastercard Amex Discover B1 B2 B3 B4 BN M1 M2 MK Merchant Market and Multihoming B1 B2 B3 B4 BN Visa Mastercard Amex Discover M1 M2 MK Competing for MK: Is this Standard Fashions again? November 19, 2018

Breyer: Just Normal Vertical Dealing November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Just Normal Vertical Dealing November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Breyer: Clearly Anticompetitive at Step 1 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Breyer: Clearly Anticompetitive at Step 1 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Kagan: Possible Market Equilibria with Anti-Steering Rule November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Kagan: Possible Market Equilibria with Anti-Steering Rule November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

See Low/Low All of the Time November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Understanding Merchant Steering Why/when does merchant steering matter? Consider three market equilibria: Low/low Amex: Low consumer benefits, low charges to merchants Visa/MasterCard: Ditto November 19, 2018

Understanding Merchant Steering High/high Amex: High consumer benefits, high charges to merchants Visa/MasterCard: Ditto High/low Visa/MasterCard: Low consumer benefits, low charges to merchants November 19, 2018

Understanding Merchant Steering Impact of Steering Irrelevant in low/low or high/high Might matter in high/low: how would that work? November 19, 2018

Sotomayor: Benefits at Step 2, not Step 1 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Benefits at Step 2, not Step 1 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Gov’t Has to Prove Prima Facie Case November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018

Breyer on Market Power U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018 November 19, 2018 U.S. Sup Ct Oral Arg Transcript, Feb 26, 2018