SOLUTION: ECO 308 CSUN Cartelization of Competitive Markets: Visa & MasterCard Case Study


Visa and MasterCard’s Company Potentially Anticompetitive Michael Baye and Patrick Scholten dexterous this event to accommodate as the premise for classroom discussion rather than to reproduce-exhibit economic or juridical event. The event is a laconic and slightly modified statement of the open portraiture of the Complaint filed in United States of America v. Visa U.S.A., Inc. et al. dated October 7, 1998. No. 98-civ.7076. OVERVIEW OF MARKET FOR GENERAL PURPOSE CARD SERVICES Visa and MasterCard contend in the bargain for public mind card network products and labors. Public mind cards, which understand praise cards and arraign cards, are acquittal devices that strengthen consumers to bring-about donations from not allied traders externally forthdelay pathing or reserving investments. Visa and MasterCard are the two greatst public mind card networks. Together, they totality for balance 75% of all donations made delay public mind cards in the United States. Visa and MasterCard are flexure ventures — or, as they wheedle themselves, “associations” — constituted, owned, inferior, and operated by and in the divides of their divide banks. These banks use the companys’ goods and labors either to conclusion cards to consumers, arrange card sanctionance labors to traders, or twain. The similar great banks curb twain companys by conjointly serving on the board of directors of one and on influential committees of the other. In adduction, each of these banks conclusions pointedive total of twain Visa and MasterCard cards. The curb of the two associations by banks that own pointedive divides in twain — unreserved in the toil as “duality” — has perhaps actually lessened emulation betwixt Visa and MasterCard beorigin these banks appear to own been, and remain to appear to appear to be, pointedively less willing to investment and tool competitive initiatives that would origin consumers to switch their divide from one company to the other. In adduction, twain Visa and MasterCard — on bestead of and in collaboration delay the banks that command them — own adopted rules and policies that energy circumscribe the authority of all divide banks to do divide delay American Express, Discover/Novus, or any other network that the curbling banks suppose to be “competitive.” Importantly, Visa and MasterCard do not apdivide these rules to one another. Banks can for-this-reason do divide delay the two greatst public mind card networks, but not delay smaller emulator networks. These exclusionary rules and policies energy exclude true constitutes of emulation floating the Visa and MasterCard divide banks, and energy own effectively precluded American Pointed and Discover/Novus from competing to embody banks in the U.S. to conclusion their cards. Through their sordid curb of twain Visa and MasterCard, the greatst banks energy own muttering emulation betwixt these two networks and energy own thwarted emulation from smaller emulator networks. This practicable decrease in emulation floating public mind card networks energy own hindered and delayed the bud and Managerial Economics and Divide Strategy, 8e Page 1 implementation of improved network goods and labors, and energy own lessened consumer precious. If recognized to remain, the perhaps anticompetitive constituency and practices of the companys could dishearten emulation in the bud and bargaining of new public mind card goods, such as goods that combine praise, obligation, and accumulationd value functions. Since the mid-1960s, Visa and MasterCard own operated public mind card networks throughout the United States. They arrange card network goods and labors in, and those goods and labors wave a material aggregate of interstate barter. In 1997, transaction book on the Visa and MasterCard networks exceeded $600 reckoningion. RELEVANT MARKET General mind cards are acquittal devices that a consumer can use to bring-about purchases (a) from not allied traders and (b) delayout pathing or reserving the consumer’s investments at the convenience of the donation. Thither are two nobleest types of public mind cards:  praise cards — such as Visa and MasterCard Classic and Gold cards, the American Pointed Optima card, and the Discbalance card — that usually sanction the cardholder to either (i) pay all arraigns delayin a set continuance behind a monthly reckoning is rendered, or (ii) pay simply a divide of the arraigns delayin that convenience and pay the balance in monthly installments, including divide; and  arraign cards — such as the American Pointed Green Card — that claim the cardholder to pay all arraigns delayin a set continuance behind a monthly reckoning is rendered. General mind cards do not understand cards that can be used at simply one trader (e.g., line accumulation cards) or cards that forthdelay path investments on certainty in a checking or savings totality (e.g., obligation cards). General mind cards arrange a consumer delay a concert of quiet, widespread sanctionance, safety, and courteous acquittal options that are not effectively replicated by any other constitute of acquittal. For a pointedive reckon of consumers and types of transactions, other constitutes of acquittal are not a cork commute for public mind cards. Competition to arrange public mind cards occurs at two planes. First, Visa and MasterCard contend delay American Express, Discover/Novus, Diners Club, and Japan Credit Bureau (JCB) in an upstream bargain, hitherinbehind referred to as the public mind card network bargain. Second, personal Visa and MasterCard divide banks contend delay each other and delay American Express, Discover/Novus, Diners Club, and JCB in two downstream bargains:  the card-issuing bargain -- the bargain for issuing public mind cards to consumers;  the card-response bargain -- the bargain for providing the labors that strengthen merchants to sanction public mind cards for the donation of property or services. Managerial Economics and Divide Strategy, 8e Page 2 The Visa and MasterCard companys contend simply in the upstream network bargain. Their divide banks — delay the exclusion of Citibank, which owns Diners Club — contend simply in the two downstream bargains. American Express, Discover/Novus, Diners Club, and JCB are combined entities that contend in all three bargains. Product Market Certain employments redundant to the sanctionance and use of public mind cards are most efficiently executed by public mind card networks, repeatedly beorigin the employments claim coarse coordination counter the network. For illustration, floating these employments, all public mind card networks:  Invent, expand, and tool orders and technologies, including orders to acknowledge and decide card transactions and refer fraud;  Develop, bargain, inform, and raise their disgrace names floating consumers and traders;  Invent, expand, tool, standardize, bargain, and inmould types of card products;  Develop and tool rules and standards to command their networks;  Set fees and assessments for use of the network’s goods and labors, including the reciprocity fee that totalitys for the greatst keep-akeep-apart-incompact of the consume that merchants pay for the upupdirect to sanction public mind cards; and  Extend card sanctionance to trader members that own not sanctioned cards in the departed. The goods and labors arranged by public mind card networks constitute a network market, which is applicable effect bargain. Banks and other entities that conclusion cards and arrange card sanctionance labors to traders lean on public mind card networks to arrange a kernel set of these goods and labors for which thither is no consume-effective alternative. Card conclusionrs and banks that arrange card sanctionance labors to traders thus cannot commute other goods and labors for the goods and labors arranged by public mind card networks in an aggregate adequate to hinder the practice of bargain authority in the network bargain. In adduction, consumers do not commute other constitutes of acquittal, and merchants do not plug sanctioning public mind cards, in aggregates adequate to hinder the practice of bargain authority in the network bargain. The goods and labors arranged by public mind card networks are hazardous inputs to the entities that conclusion cards to consumers and arrange card sanctionance labors to merchants. Card conclusionrs contend for cardholders delay regard to divide rates, annual cardholder fees, acquittal stipulations and stipulations, card enhancements, and customer labor. Entities that arrange card sanctionance labors to traders contend delay regard to their fees and the quality of labor they arrange. This emulation floating Visa and MasterCard divide banks in the card-issuing bargain and the card-response bargain is not a commute for, and does not replace, emulation at the network plane. Emulation at the downstream planes thus cannot Managerial Economics and Divide Strategy, 8e Page 3 protect consumers from the anticompetitive goods of the practice of bargain authority by public mind card networks. Emulation floating card conclusionrs does, at-last, serepay that if network emulation is nervous, the benefits of that emulation obtain be passed on to consumers. Geographic Market The United States is the applicable geographic bargain for each applicable effect bargain. Almost all of the public mind cards conclusiond by banks viled in the United States are issued to private cardholders, and these consumers use their cards predominantly at merchants located in the United States. Most public mind card transactions delay merchants located in the United States are made using cards conclusiond in the United States, and most traders would not deduce networks playing without the United States to be a commute for networks playing in the United States. Visa and MasterCard deduce the United States to be a unconnected geographic bargain, as demonstrated in keep-akeep-apart-incompact by their establishing unconnected Boards of Directors for — and unconnected rules commanding the wave of — their card networks in the United States. For illustration, the Visa and MasterCard rules sanctionting the divide banks to conclusion Visa and MasterCard, but no other network’s cards, apdivide simply in the United States. VISA AND MASTERCARD HAVE MARKET POWER IN THE NETWORK MARKET Visa and MasterCard’s disputable actions cognate to anticompetitive goods occur largely in the network bargain. Visa and MasterCard simultaneously own and practice bargain authority in the network bargain. Visa and MasterCard are the two greatst public mind card networks in the United States. Their simply pointedive emulators are the American Express and Discover/Novus networks, and initiation into the network bargain is exceedingly opposed. Visa and MasterCard Dominate the Market In 1997, Visa totalityed for closely 50% of the dollar book of transactions on all public mind cards in the United States and closely 53% of the reckon of public mind cards conclusiond. In 1997, MasterCard totalityed for closely 25% of the dollar book of transactions on all public mind cards in the United States and closely 33% of the reckon of public mind cards conclusiond. Together, Visa and MasterCard totality for closely 75% of public mind card dollar book and closely 86% of the reckon of public mind cards conclusiond. In the United States, closely 3.4 pet trader outlets sanction twain Visa and MasterCard. Practically perfect trader that sanctions Visa too sanctions MasterCard and vice versa. This sordid trader vile is pointedively greatr than the vile of any other network competitor. In 1997, American Pointed totalityed for closely 18% of dollar book and 5% of public mind cards conclusiond in the United States. Cards on the American Express network were sanctioned at closely 2.5 pet trader outlets in the United States. In 1997, Discover/Novus totalityed for closely 6% of dollar book and 8.5% of public mind cards conclusiond in the United States. Cards on the Novus network were sanctioned at closely 3.1 pet trader outlets in the United States. Managerial Economics and Divide Strategy, 8e Page 4 Thither are two other public mind card networks that contend in the United States:  Diners Club/Carte Blanche (Diners), which is owned by Citicorp — the bank that has conclusiond the greatst reckon of Visa and MasterCard cards — and  JCB, a network viled in Japan that conclusions cards in the United States largely to Japanese expatriates. Both networks own competitively inexpressive bargain divides and scant trader response in the United States. Competition floating Card Issuers is Not a Commute for Network Competition Card conclusionrs may contend on divide rates, fees, enhancements, and customer service. This emulation, at-last, cannot repay the wound to consumers arising from a failure of emulation floating card networks, nor does it intercept the Visa and MasterCard divide banks from synthetically exercising authority in the network bargain to the deterioration of consumers. Thither Are Expressive Barriers to Network Entry The anticipation of initiation by new card networks does not intercept Visa and MasterCard from exercising bargain authority in the network bargain. Initiation is exceedingly opposed accordingly establishing a new public mind card network claims great investments to expand twain cardholder and trader viles. Coordinated bud of twain cardholder and trader bases is hazardous beorigin the service of a keep-afeature card effect to cardholders and traders depends not simply on the consume and features of the card, but too on the ubiquity of its response and use. Since Visa and MasterCard were constituteed in the mid-1960s, simply one network has successfully invadeed the applicable bargain. In 1985, Sears constituted that new network, then wheedleed Discbalance and now unreserved as Novus, by architecture on the infraconstituency and the cardholder and trader viles of the Sears single-retailer card order. At the convenience, Sears was one of the largest retailers and card conclusionrs in the United States. In the forthcoming 1980s, Citicorp — the greatst conclusionr of Visa and MasterCard cards and, at the convenience, a great arranger of card sanctionance labors to traders — unsuccessfully attempted to invade the network bargain. Other companies that deduceed invadeing the network bargain concluded that the noble consume of architecture a trader and cardholder vile made initiation too opposed. For illustration, in the slow 1980s, AT&T deduceed constituteing a new public mind card network. Behind analyzing the Discbalance and Citicorp experiences, at-last, it decided not to invade the network bargain. AT&T instead invadeed simply at the card-issuing plane by graceful a divide of Visa and MasterCard. Visa and MasterCard own adopted and maintained practicable anticompetitive rules and policies that advance acception an entrant’s consume of expanding cardholder and trader viles. By value of their dominant bargain divides and the opposedy of initiation into the noblelyconcentrated network bargain, Visa and MasterCard simultaneously own undeveloped authority to injure emulation in that bargain. As described underneath, they energy own practiced that authority to the deterioration of consumers by reducing competitive investments in the alteration, bud, Managerial Economics and Divide Strategy, 8e Page 5 and bargaining of improved network goods and labors, and perhaps by restraining the competitiveness of smaller networks. THE SAME BANKS HAVE TAKEN CONTROL OF BOTH VISA AND MASTERCARD Both Visa and MasterCard are unconfused as divideship confirmations that ostensibly operate on a not-for-profit premise. Their activities are financed through fees and assessments levied on their divides. Twain card networks sanction a diversity of financial institutions to behove divides, including retail banks, thrifts, praise unions, and entities that are engaged largely in the card divide, sordidly unreserved as “non-bank banks” or “monoline banks.” From hither on, all types of financial institutions that are preferable to behove divides of Visa and MasterCard are referred to synthetically as “banks,” and all financial institutions that are divides of Visa and/or MasterCard are referred to synthetically as “divide banks.” Under Visa’s and MasterCard’s corporate constituencys, a divide bank in either company has the upupdirect to conclusion cards mien the company’s trademark and to adduce card response labors for the company’s cards. Most divide banks — including all of the largest ones — too behove owners of the company and take a lot of uphues similar to those of a divideholder in a confirmation. These uphues understand the convenience to pointedion for a board of directors, keep-ajoin-in in the commandance of the company, and divide in the association’s proceeds upon disruption. Voting and disruption uphues are apportioned according to the dollar book of transactions that the bank has communicated through the network. Member banks too tally to remain by the companys’ bylaws, rules, regulations, and policies. Visa and MasterCard Began As Entilean Unconnected Systems Prior to 1970, Visa and MasterCard were curbled by unanalogous groups of banks. In 1970, one of Visa’s divide banks, Worthen Bank of Arkansas, sought to behove a cardissuing divide of twain networks. MasterCard did not sight, but Visa responded by adopting a bylaw that prohibited divide banks from issuing any other network’s cards. Worthen then sued Visa and the purlieus granted resume belief for Worthen. The Eighth Circuit, at-last, reversed and remanded for gauge. While the event was awaiting trial, Visa asked the Line of Justice to pointed its views — pursuant to a Department procedure wheedleed a “Business Review” — on the juridicality of a past circumscribeive bylaw that would own prohibited Visa divides from twain issuing cards and providing card sanctionance services for “any other [card] program immediately tangible or which may expand.” The Department responded that it would not sight to a bylaw that circumscribeed Visa divides to issuing Visa cards exclusively “to the quantity it is indispensable to stabilitate remaind intersystem competition.” But the Line pointeded regret that Visa’s designed inhibition on banks providing card sanctionance labors to traders for twain networks “energy well-behaved handicap efforts to constitute new bank praise card orders and may too retrench emulation floating the banks in diverse bargains.” The Visa and MasterCard Controlling Banks Adopted Duality Notwithstanding the Divide Review Letter, the divide banks on Visa’s Board of Directors, balance the sightions of Visa’s Public Counsel, pointediond to sanction Visa divide banks to own and keep-ajoin-in in the commandance of MasterCard, and to sanction MasterCard divides Managerial Economics and Divide Strategy, 8e Page 6 to own and keep-ajoin-in in the commandance of Visa. MasterCard’s Board of Directors too permitted MasterCard divide banks to behove owners and commandors of Visa, and Visa members to behove owners and commandors of MasterCard. This balancelapping ownership and governance constituency has behove unreserved in the toil as duality. Since 1975, virtually all pointedive card-issuing banks own behove owners of twain Visa and MasterCard. Almost all of the greatst card-issuing banks own reproduce-exhibitatives on one of the companys’ boards of directors as well-behaved-behaved as own reproduce-exhibitatives on the influential committees that wave plan for each network. For illustration, MasterCard’s Business Committee and Visa’s Marketing Advisors Committee instruct their regardive network’s professional staff and skill on key strategic and competitive conclusions. In 1996, twelve of the twenty-one banks reproduce-exhibited on Visa’s Board of Directors were too reproduce-exhibited on MasterCard’s Divide Committee. Seventeen of the twenty-seven banks on MasterCard’s Business Committee ...
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