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Does Market Share Still Matter?

The DOJ’s ongoing civil trial challenging American Express’s merchant rules as a violation of Section 1 of the Sherman Antitrust Act may clarify the significance of market share calculations.

At issue in the case are Amex’s rules barring merchants from steering consumers to cards that charge lower merchant processing fees.  The DOJ contends that these rules “break the fundamental link between lower prices and more sales” resulting in higher merchant processing fees.  Amex on the other hand maintains that the rules are essential to prevent merchants from discriminating against its cards, and in turn, turning consumers off of its brand.

Both sides agree that Amex’s merchant rules are vertical agreements between Amex and merchants.  So, the issue at trial is whether the alleged anticompetitive effects of Amex’s rules outweigh the procompetitive benefits of enhancing the Amex brand and fostering competition against Visa, MasterCard and others.

One of Amex’s defenses is that its rules cannot harm competition because Amex lacks sufficient market power.  Amex relies on its market share, which varies from 15% (for debit and credit cards) to 34% (for travel and entertainment cards) depending on how one defines the relevant market.

In United States v. Visa U.S.A., Inc., 344 F.3d 229, 238-40 (2d Cir. 2003) the Second Circuit affirmed an antitrust market for general purpose credit and charge card network services, in which Amex would have a 26% market share.  Amex argues that the payments industry has evolved since 2003, with more and more consumers adopting debit cards as their preferred method of payment.  Amex is expected to present expert testimony from Dr. George Hay and Dr. B. Douglas Bernheim based on surveys of consumer behavior, changes in the economic literature, and information from merchants to justify its switch to a more inclusive market definition.   And, in June 2014, Judge Garaufis ruled that Amex may argue at trial that debit cards should be included in the market.  However, Judge Garaufis also remains open to considering the DOJ’s narrow Travel & Entertainment market theory.

The DOJ also argues that two additional “indirect” elements demonstrate Amex’s market power: (1) “insistence” by consumers who will not shop at a merchant that does not accept Amex (thereby compelling certain merchants to accept Amex); and (2) price increases by Amex.  In turn, Amex is expected to present expert testimony from Dr. Hay “that Amex’s economic rate of return on its U.S. card business was not supracompetitive and, thus, that Amex lacked market power.”

While the parties fight over market definitions and other proxies for proving market power, the real question in the case may be whether these proxies matter.  The DOJ certainly doesn’t think so.  Instead, the DOJ’s primary argument is that surrogates for market power don’t matter here because Amex’s rules have caused actual harm to competition.  While FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) paved the way for this argument, it has not been clear how to prove harm to competition by “direct evidence” without relying on some kind of proxy.  The DOJ argues that it can do so in this case because Amex’s anti-steering rules prevent merchants “from encouraging customers to use credit cards that cost merchants less.”  According to the DOJ, Amex’s rules thereby “obstruct competition among all four credit card networks at all merchants that accept Amex.”

Relying on Indiana Federation of DentistsJudge Garaufis denied Amex’s motion for summary judgment, rejecting Amex’s argument that its market shares are so low that they preclude a finding of market power.  Instead, Judge Garaufis found that there is a litigable question of fact concerning the DOJ’s direct evidence approach and allowed the DOJ to present direct evidence of an adverse effect on competition without reference to market share.