Wednesday, 7 November 2018

Two sides to the story

You might think the ugly process of nominating US Supreme Court judges and the predictably  5 - 4 conservative/liberal votes in many of the Court's decisions wouldn't matter a hoot to us humble toilers in the vineyard of New Zealand competition and regulation. But you'd be wrong.

The US Supreme Court, in the Amex case, said something important in June about two-sided markets: formally it's Ohio. v American Express Co. and even has its own Wikipedia entry if you'd like a quick recap of what went on. Two-sided and multiple-sided markets and platforms are everywhere these days - I'm writing this post on one - and even if US jurisprudence doesn't always get a lot of traction in our Anglosphere courts, sooner or later the latest American anti-trust thinking tends to find its way through to us too, not least because the same economic experts front up here.

So Amex is relevant to us, and indeed we've traversed this territory ourselves in the past. I was involved at the time, so I'll just refer to the public material on the credit cards 'interchange case' of 2006-09, where an agreed settlement was reached pretty much on the steps of the High Court (the announcement of the Commerce Commission's proceedings in 2006 is here, one of the settlement announcements in 2009 is here)

This latest US case was about whether credit card companies can include 'anti steering' provisions in their contracts with retailers. 'Anti steering' means that a retailer, if it's signed up with Amex, say, can't nudge ('steer') the Amex-card-using shopper to some other means of payment. The retailer will be wont to steer the shopper to use the card system that costs the retailer least. That's usually not Amex: it charges relatively high fees to retailers to fund a relatively generous rewards programme for its cardholders.

Amex would argue that its card brought its (typically higher spending, upmarket) customer into the shop in the first place, and that at least one of the thoughts going through the buyer's mind when they spend up big in the store is the payoff from the Amex rewards programme. It's a swizz, on this reasoning, for the retailer to benefit from the Amex-initiated deal but put it through the till on someone else's card network.

Before reading Amex, I had sympathised with the plaintiffs (the Feds and 17 American states initially, but down to just 11 states at the Supreme Court). Language along the lines of "you mustn't mention there are competing alternatives to this card" doesn't sound good at all, and both Visa and MasterCard had agreed to stop doing it, with only Amex ploughing on all the way through the American courts. My first instincts would have been along the lines of the minority in the Supreme Court, which said
If American Express’ merchant fees are so high that merchants successfully induce their customers to use other cards, American Express can remedy that problem by lowering those fees or by spending more on cardholder rewards so that cardholders decline such requests. What it may not do is demand contractual protection from price competition (p26)
But to my considerable surprise (I didn't ever expect to find myself agreeing with the conservative majority of the current Supreme Court) the 5 - 4 decision in favour of Amex looked the right call.

The majority found that the credit card market is a two-sided market, which you would think is beyond much doubt. The District Court first hearing the Amex case had, however, oddly found separate single markets for retailer and shopper card services. The District Court got put right by the US Court of Appeal, and the Supreme Court affirmed it.

Following on from that market definition, the majority in Amex said that you mustn't draw anti-competitive conclusions from looking at high prices on one side of a two-sided market, a conclusion which is now a commonplace in competition economics but doesn't seem to have been considered by the Supreme Court before (the minority referred to a case from 1953, but that was long before the modern theory of two-sided markets):
Evidence of a price increase on one side of a two-sided transaction platform cannot by itself demonstrate an anticompetitive exercise of market power. To demonstrate anticompetitive effects on the two-sided credit-card market as a whole, the plaintiffs must prove that Amex’s antisteering provisions increased the cost of credit-card transactions above a competitive level, reduced the number of credit-card transactions, or otherwise stifled competition in the credit-card market ... They failed to do so (pp15-6)
The Amex majority pointed to a variety of evidence that showed no anti-competitive detriment: for example
the evidence that does exist cuts against the plaintiffs’ view that Amex’s antisteering provisions are the cause of any increases in merchant fees. Visa and MasterCard’s merchant fees have continued to increase, even at merchant locations where Amex is not accepted and, thus, Amex’s antisteering provisions do not apply ... This suggests that the cause of increased merchant fees is not Amex’s antisteering provisions, but rather increased competition for cardholders and a corresponding market wide adjustment in the relative price charged to merchants (pp16-7)
and they also cited a wide variety of other evidence (on pp18-9) showing ongoing vigorous competition between the card networks, which made the plaintiff's claim of harm rather difficult to sustain.

They also dealt to the "inherently anticompetitive" argument which I would have been attracted to - that it is inherently wrong to forbid retailers to mention the competition. Amex said that the anti-swizz justification ("you can't welcome our customer and then do a switcheroo against us") was okay, or in the majority's words
there is nothing inherently anticompetitive about Amex’s antisteering provisions. These agreements actually stem negative externalities in the credit-card market and promote interbrand competition ... This externality endangers the viability of the entire Amex network. And it undermines the investments that Amex has made to encourage increased cardholder spending, which discourages investments in rewards and ultimately harms both cardholders and merchants (p19)
If you're still sceptical about ultimately harming cardholders, it helps to think of Amex as an agent aggregating the collective purchasing power of its well-heeled membership to wrest what is effectively a larger discount from retailers.

The minority saw things completely differently, but struggled with their arguments. They persisted with the manifestly uphill notion that there are two separate markets:
the relationship between merchant-related card services and shopper-related card services is primarily that of complements, not substitutes (p11)
Since only substitutes are in the same market, there must must be two markets:
there is no justification for treating shopper-related services and merchant-related services as if they were part of a single market, at least not at step 1 of the "rule of reason" (p12)
The reference to "step 1" is to the 3-step process American jurisprudence follows (plaintiff says anti-competitive harm, defendant can rebut as pro-competitive, plaintiff can respond that it could be achieved less intrusively).

In any event, as a market definition, this looks a somewhat contrived description of what the majority better characterised as two sides of a single transaction. The minority also argued (which they needed to, since their first line of attack was weak), that market definition didn't matter, since evidence of higher prices was enough to establish anti-competitive effect:
The District Court’s findings of actual anticompetitive harm from the nondiscrimination provisions thus showed that, whatever the relevant market might be, American Express had enough power in that market to cause that harm. There is no reason to require a separate showing of market definition and market power under such circumstances. And so the majority’s extensive discussion of market definition is legally unnecessary (p14)
Not convincing at all: if a price increase is sufficient evidence of market power, every business in the country would be in the dock. But when a judgement opens with wrap-me-in-the-flag huffing ("For more than 120 years, the American economy has prospered by charting a middle path between pure laissez-faire and state capitalism") it's a good bet that wrap-me-in-the-logic is in short supply.

The judgment was met with outrage in some quarters. A piece from the Brookings Center on Regulation and Markets reacted with "Why the Supreme Court’s decision in Ohio v. AmEx will fatten the wealthy’s wallet (at the expense of the middle class)", for example, and the Open Markets Institute's Lina Khan wrote on Vox that "The Supreme Court just quietly gutted antitrust law".

I can understand the sentiment: 'anti steering' had initially looked wrong to me, too. But this is now the second time for me in recent months where something that initially looked deeply suspicious from a pro-competition point of view was judged okay (the other one was the Australian Pfizer case). For me, both cases correctly avoided a Type 1 error (wrongly finding anti-competitive detriment). But I'd also accept that in dynamic industries like pharma (Pfizer) and platforms (Amex) the safe path between Type 1 and Type 2 errors is getting harder and harder to spot.

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