Yesterday, the Supreme Court of the United States ruled in favor of American Express (Amex) in an antitrust case 11 states had brought against Amex (see here). If you are interested in two-sided markets, platforms, and pricing you will want to read the Supreme Court’s decision written by Justice Thomas and the dissent written by Justice Breyer (see here). (Full disclosure: There’s a fair bit of legalese, so I skimmed it. But, it sounds cool to say I read a Supreme Court opinion.) Just like a two-sided market, the Supreme Court was two-sided on this one, issuing a 5-4 opinion with the conservative justices backing American Express and the liberal justices backing the States.
Now my perspective on the case. Please note: my perspective is blissfully devoid of any knowledge of the antitrust law. I’m just looking at the case from the viewpoint of someone interested in payments, pricing, commercial contracts, and two-sided markets. You lawyers will probably not want to read on!
The American Express Business Model
Remember that Amex charges merchants more than Visa or Mastercard because Amex has a different business model. Amex does not make as much money on lending to cardholders (they are a charge card, not a credit card), they make money on merchant fees. Amex then uses some of this money to attract wealthy clients with a generous rewards programs and upscale branding. Consumers get great rewards and prestige. Merchants pay more to accept the Amex card but get Amex’s well-heeled clients in their store. That’s the two-sided market aspect of the deal.
The American Express “Anti-Steering” Provision
The gist of the case is about a provision in Amex’s contracts with its merchants: the “anti-steering” provision. The SCOTUS opinion describes these clauses as follows:
These anti-steering provisions prohibit merchants from implying a preference for non-Amex cards; dissuading customers from using Amex cards; persuading customers
to use other cards; imposing any special restrictions, conditions, disadvantages, or fees on Amex cards; or promoting other cards more than Amex. The anti-steering
provisions do not, however, prevent merchants from steering customers toward debit cards, checks, or cash.
The bottom line is, as a merchant, you can choose not to accept Amex cards (and some merchants do not), but if you accept the card, you cannot steer clients towards using another credit card, though you can steer them towards cash or debit. (BTW, Amex does not call this the “anti-steering” provision, they call it the “anti-discrimination” provision. They are, after all, supreme marketers!)
On the surface, this clause does sound pretty anti-free market. After all, does it sound so bad for a merchant to say to a cardholder, “I’ll give you extra loyalty points if you use a VISA instead of Amex, because Amex charges me more than VISA does” And would it be so bad for a cardholder to respond, “No thanks, I want the Amex reward points.”. (It happens informally anyway as you may have experienced.)
The Majority Opinion: This Provision Harms No One and Allows Amex To Do Battle with Visa and MasterCard
Basically, the majority of the court felt that the States had not proved this anti-steering/discrimination provision had restrained trade or had the effect of the raising swipe fees. In fact, the majority felt this provision was important to helping Amex compete with Visa and MasterCard, which together have 69% market share. Without the anti-steering provision, the majority felt the Amex network might be threatened. Amex’s demise would then reduce competition–the exact opposite of what antitrust laws are designed to protect.
(By the way, the majority repeatedly cites the work on two-sided markets of Evans and Schmalensee as do I! See here. These are must-reads.)
The Minority Opinion: Poppycock
The minority felt the states had shown that swipe fees had gone up and that competition had been restrained by this provision. But I think the minority’s best argument is stated here in Justice Breyer’s dissent:
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.
So there you have it, the anti-discrimination provision either helps maintain a third competitor with a different business model to survive–which is clearly in the consumer’s interest. Or, the anti-steering provision contractually insulates the third company from price competition–which is not in the consumer’s interest. Now you know why it was a 5-4 decision!