The government’s anti-trust case against American Express is predicated on a straight-forward concept: retail card fees would drop if Amex abandoned its exclusivity strategy. An economist argued to the federal judge, though, that such a premise is flawed and “has a gaping hole in it.”
B. Douglas Bernheim, a Stanford University economics professor, argued to the Brooklyn-based jurist that “the credit card giants may nominally lower their interchange fees, but they could easily make up the difference through other fixed charges, creating a problem with the U.S. Department of Justice’s claim that only AmEx’s rules now stand in the way of price competition among credit card providers,” reported Law360.
In short, Bernheim testified, halting Amex’s arrangement where merchants are prohibited from encouraging shoppers to pay with other devices “won’t actually force (Discover and others) to lower their overall merchant charges to compete.”
“If Visa is thinking through its response, it will realize it has a response here that completely defeats the competition mechanism that the government is interested in,” Bernheim said. “The thing that the government has consistently gotten wrong is (that) they say merchants will have incentives to steer toward networks with the lowest merchant fees and that’s not right.”
Amex’s expert witness also testified that Amex is an important part of the payment card infrastructure and that it fills a meaningful and important competitive role. “They’ve done that by pursuing what turned out to be an extremely successful strategy by differentiating itself [and] providing cardholders a reason to only use American Express cards,” Bernheim said, according to the Law360 report. “That’s been a critical competitive force in this market and it’s been enabled only because American Express can guarantee welcome acceptance.”
The essence of the arguments in this six-week-long U.S. Department of Justice case against Amex’s arrangement is hurting other competitors, especially Discover. Discover President Roger Hochschild himself testified to that point during the trial.
How much does Amex’s “do not encourage” rule truly hurt other card brands? If that rule was stricken, would it meaningfully limit Amex’s ability to compete? If a brand wants to offer special services in exchange for such a merchant agreement, is it illegal to do so? Court watchers are not expecting a decision for more than a month.
The case is U.S. et al. v. American Express Co. et al., case number 1:10-cv-04496, in the U.S. District Court for the Eastern District of New York.
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