Competing Approaches to Antitrust: An Application in the Payment Card Industry

Category: Print Issues

Competing Approaches to Antitrust: An Application in the Payment Card Industry

Kevin Caves & Hal Singer

Volume 27

, Issue 3

27 GEO. MASON L. REV. 823 (2020)

Introduction

The contrasting approaches to antitrust enforcement across the Atlantic are stark. The European Union uses an abuse-of-dominance standard, which is less tolerant towards exclusionary conduct than the consumer-welfare standard used by US courts.¹ The EU system is decentralized and independent, designed that way to get buy-in from member countries. The Directorate-General for Competition (“DG Comp”) makes an initial decision on whether conduct violates its standard, and the burden of proof is on defendants to appeal that decision.² In contrast, US plaintiffs, whether private or governmental, bear the burden of showing antitrust injury in Sherman Act section 2 cases, as well as substantial burdens when a rule-of-reason framework is applied to Sherman Act section 1 cases.³ Against this backdrop, this Article explores how these differences in antitrust standards lead to different outcomes in the payment card industry. Under an honor-all-cards (“HAC”) regime, a merchant wishing to access any Visa or Mastercard credit card must accept all Visa or Mastercard cards in that category.⁴

The theory of harm in these cases is that the issuing banks no longer must compete on price to obtain market share, leading to higher merchant fees. HAC theoretically dampens the merchant’s elasticity of demand with respect to an increase in interchange fees, by removing substitution possibilities to lower-cost credit cards. The European Union settled with MasterCard in 2007–08, and with Visa in 2014.⁵ Although the HAC rules were cited as supporting a larger horizontal conspiracy across acquiring banks in the European Commission (“EC”) decision, the HAC rules remain, but interchange fees are regulated.⁶ Thus, merchants have achieved relief from high fees despite the lack of empirical proof that HAC policy inflates merchant fees. In contrast, litigation in the United States is ongoing, with plaintiffs bearing the burden of establishing a causal connection between the restraint and merchant fees.⁷ Merchant fees in the European Union are approximately eighty-five percent lower than the prevailing rates in the United States.⁸

Because merchants pass through a percentage of those fees to retail customers, higher merchant fees depress output in the goods market, which is economically inefficient. The lax enforcement policy in the United States thus promotes a regressive outcome—namely, to induce a merchant to raise prices on less wealthy consumers (cash payers), so that issuing banks can give small rewards to its wealthier consumers.

The Article is organized as follows: Part I explains the starkly different and increasingly divergent approaches to antitrust enforcement in the United States and the European Union. The differences that have evolved over time in the extent of their independence and centralization apparently drive the divergences in these two competition law enforcement regimes, resulting in differences in the degree of each system’s susceptibility to business and political influence. Part II shows how these differences in standards appear to have resulted in significant differences in enforcement. In the European Union, the overall trends in competition law enforcement have been stable. In the United States, however, enforcement has declined in important respects. Part III explores how the differences in antitrust standards lead to different outcomes in the payment card industry. Part IV asks whether the United States is any better off under its more permissive antitrust standard. Rather than abandon the consumer-welfare standard, this Article offers more modest reforms.

I. Institutional Differences in Antitrust Standards Across the Atlantic

Over time, the United States and European Union have adopted starkly different and increasingly divergent approaches to antitrust enforcement. The European Union favors an abuse-of-dominance standard, while US courts apply the consumer-welfare standard. In principle, both standards are geared toward maximizing the economic benefits that a free-market system confers on society as a whole. But as currently implemented, the consumer-welfare standard effectively presumes that nearly all exclusionary conduct is procompetitive absent overwhelming evidence to the contrary and tolerates a substantially wider range of exclusionary conduct than does the European abuse-of dominance standard. The US consumer-welfare standard has also evolved to be significantly more tolerant of potentially anticompetitive mergers and acquisitions, and even of potentially collusive conduct among ostensibly competing firms. The differences that have evolved over time in the extent of their independence and centralization apparently drive the divergences in these two competition law enforcement regimes, resulting in differences in the degree of each system’s susceptibility to business and political influence.

A. The European Union’s Abuse-of-Dominance Standard

Despite many similarities between the EU and US antitrust regimes, with the former having evolved from the latter in important respects, there are important differences as well. The European Union is relatively decentralized. Within the European Union, member states have national competition authorities (“NCAs”), and only cases exceeding certain thresholds related to the volume of commerce at stake are subject to review by the EC.⁹ The EU structure is also relatively independent, taking decades for EU member states to agree to cede their ability to shape competition policy to a pan–European body.¹⁰ A key factor in member states’ acquiescence involved developing a structure designed to ensure that the overarching regulator would be independent and not subject to any individual member state’s control.¹¹ Because they are sovereign nations, EU member states exercise broader authority in many policy arenas than do US states, relative to their respective federal authorities.¹² Perhaps somewhat paradoxically, this tends to place greater emphasis on the relatively narrow set of issues in which decision-making authority rises to the EU level, including competition policy governing economic sectors so pervasive that they are guaranteed to exceed the relevant thresholds.

1. Burden of Proof on Defendants

In the European Union, the enforcement of competition law is a joint effort between the NCAs, the European Commissioner for Competition, and the DG Comp.¹³ The DG Comp’s transparency and accountability has evolved in important ways in recent decades. In the mid-2000s, the European Commission on Merger Regulation (“ECMR”) adopted important amendments that advanced these goals for the DG Comp.¹⁴ Around the same time, EU policymaking began to more prominently feature economics with the creation of the Chief Competition Economist position, along with guidelines clarifying the role of unilateral effects in economic analysis.¹⁵ Contrasted with the US system, where antitrust cases are first tried in court, the DG Comp makes the initial decision on whether a given form of conduct violates its standard, placing the burden of proof on defendants to appeal that decision.¹⁶

2. Independence & Smaller Returns to Lobbying

The EU’s current competition law regime is the outcome of decades’ worth of bargaining among member states to arrive at a workable supranational institution. Theoretically, a fully independent regulatory body would act as a benevolent social planner, structuring policy in such a way as to maximize the aggregate economic benefits however measured.¹⁷ In practice, no regulator or competition authority can ever be fully immune from business and political influence, or “regulatory capture.”¹⁸ However, the degree of independence can increase when political representatives from one member state are obliged to negotiate a new, supranational regime with representatives from other member states. Under this scenario, each member state’s political apparatus must weigh the expected benefits of regulatory capture for their own nation against the expected costs of regulatory capture by other member states, whose representatives are captured by a different set of parties representing a different set of local interests.¹⁹ This creates economic and political incentives for all sovereign nations involved in the negotiation to insist on more safeguards than they would otherwise, to guarantee the independence and objectivity of the supranational competition authority that will ultimately govern them. As a result, EU member states ultimately agreed to vest the DG Comp with substantially more authority and independence for competition law enforcement than individual member states had previously granted to their own regulators at the national level.²⁰z Evidence suggests that the DG Comp is, in fact, more independent than the national authorities that preceded it.²¹ The evidence also suggests that, as a result, the returns to and expenditures on political lobbying have become substantially greater in the United States relative to the European Union.²²

B. The Consumer-Welfare Standard in the United States

In the United States, there are two primary federal competition authorities: the Federal Trade Commission (“FTC”) and Department of Justice (“DOJ”).²³ Additionally, private litigants may pursue antitrust claims.²⁴ Private antitrust litigation plays an important role in the United States, because it is the only mechanism allowing for market participants harmed by antitrust violations to seek damages.²⁵ US plaintiffs, whether private or governmental, bear the burden of showing antitrust injury in section 2 Sherman Act cases.²⁶ Even in section 1 cases, where liability is generally more clear cut, plaintiffs bear the burden of showing damages, often playing a critical role in both ensuring that injured parties are reasonably compensated for the economic losses sustained by the conduct at issue and disincentivizing the defendants from engaging in similar conduct in the future.²⁷ The burden on plaintiffs is further augmented when section 1 cases are subjected to a rule-of-reason standard.²⁸

1. Burden of Proof on Plaintiffs

Contrasted with EU plaintiffs, US plaintiffs—whether private or governmental—bear the burden of showing antitrust injury and damages, even when the alleged conduct involves per se violations of the antitrust laws.²⁹ In re High-Tech Employee Antitrust Litigation (High-Tech Employee)³⁰ is illuminating. In that matter, the DOJ performed the foundational investigations documenting that top executives at many of the most prominent companies in Silicon Valley had entered into so-called “No Poach” agreements, in which they explicitly agreed not to compete for the services of a range of technical and creative employees.³¹ Although the DOJ concluded that the “No Poach” agreements were clearly per se violations of US antitrust law, and negotiated settlements to which the defendants agreed to halt these practices,³² the settlements did not include any provisions to compensate the Defendants’ employees, whose compensation was allegedly depressed by the conduct at issue.³³ It was left to private plaintiffs to prove in court that a well-defined class of creative and technical employees had suffered substantial and widespread economic injury as a result of the “No Poach” agreements, and that this class was sufficiently cohesive to permit treatment under the US class action litigation regime instead of impractically requiring that each individual employee bring suit on her own.³⁴ The private litigants ultimately prevailed in certifying the class, securing settlements of $415 million on class members’ behalf before the case proceeded to the merits phase.³⁵ Nevertheless, the costs and risks facing plaintiffs in this case, as in most large antitrust cases, were daunting.

High-Tech Employee involved alleged per se violations of section 1 of the Sherman Act.³⁶ The burden of proof on plaintiffs can be substantially higher in rule-of-reason cases under section 1, with a correspondingly lower success rate.³⁷ Well aware of this, US defendants have consistently argued that the rule-of-reason standard should be applied to a range of ongoing “No Poach” cases, which have challenged agreements not to compete for labor among a range of branded franchisees, including McDonald’s, Carl’s Jr., Auntie Anne’s, Arby’s, Cinnabon, and others.³⁸ Significantly, the DOJ itself has intervened to advocate broader application of the rule-of-reason framework to these cases, potentially resulting in additional substantial hurdles for plaintiffs to clear.³⁹

When one moves beyond per se violations of the antitrust laws—alleged violations of section 2 of the Sherman Act or mergers allegedly violating the Clayton Act—the burden on plaintiffs is correspondingly greater.⁴⁰ The lack of any abuse-of-dominance standard in the United States means that a monopoly can generally exploit its market power to the fullest, so long as the exploitation is not assisted via a demonstrably anticompetitive restraint. Monopoly leveraging theories—involving the exploitation of monopoly power in one market to extend dominance into some related market—have generally fallen out of favor, particularly as some courts have embraced the economically dubious “one monopoly profit” theory.⁴¹ In cases involving refusals to deal or exclusive-dealing arrangements, surrogate tests may sometimes be used, often simplifying plaintiffs’ burden by focusing the economic analysis on relatively straightforward criteria, such as whether the share of customers or inputs foreclosed was economically significant.⁴² Otherwise, plaintiffs alleging that monopoly power has been abused to workers’ or consumers’ detriment generally bear the burden of providing rigorous economic evidence demonstrating that the defendants’ allegedly anticompetitive conduct generated substantial anticompetitive effects.⁴³ For example, plaintiffs may be required to demonstrate inflated prices, suppressed output, suppressed compensation, or suppressed hiring. Even if they succeed in demonstrating these anticompetitive effects directly, plaintiffs may—somewhat counterintuitively—also be required to provide indirect proof of market power by demonstrating that the anticompetitive effects at issue were sustained within a well-defined, relevant antitrust market, and that the defendant possessed a dominant share of the relevant market.⁴⁴

2. Susceptibility to Lobbying

Over time, the evidence suggests that US competition authorities have exhibited less independence from regulatory capture compared to their EU counterparts.⁴⁵ By definition, an independent regulatory authority is less vulnerable to lobbying and political influence than a less independent authority because the expected returns of such efforts will tend to be relatively low.⁴⁶ Put differently, the more independent the regulator is, the more difficult it is to sway a given policy decision away from what an objective economic analysis would otherwise yield. Thus, the expenditure of resources to influence the policymaking process is, on average, not expected to cause the ultimate policy outcome to deviate by that much relative to what would have been obtained without such expenditures. Conversely, the less independent the regulator is, the higher the likelihood is that a lobbying campaign will cause policymakers to deviate from the economic optimum, which increases the expected economic returns to lobbying.⁴⁷

Economists have shown that corporations in the United States invest significantly more in lobbying and campaign contributions than their European counterparts.⁴⁸ In both jurisdictions, larger firms tend to invest more in lobbying than do smaller firms.⁴⁹ However, lobbying expenditures by large corporations in the United States are significantly greater compared to expenditures by large corporations in the European Union.⁵⁰ The same pattern holds for smaller- or medium-sized firms.⁵¹ Significantly, these disproportionately large investments in the US political process appear to be predicated on rational expectations.⁵² Empirical evidence indicates that lobbying efforts are substantially more likely to pay off for companies that invest heavily in such efforts in the United States than in the European Union.⁵³ A study spanning over 150 lobbyists and nearly fifty issues concluded that eighty-nine percent of corporate lobbying efforts were successful in the United States, as compared to a sixty-one percent success rate in Europe.⁵⁴ Economists have also found that a doubling of lobbying expenditures in the United States to the FTC and DOJ reduces the number of cases by approximately nine percent.⁵⁵ This statistic may even underestimate the true returns of lobbying in the United States because a case does not have to be dropped altogether for its outcome to be heavily tilted—or watered down—in favor of the lobbying entity.⁵⁶ In any case, lobbying efforts targeting the DOJ and FTC nearly tripled between 1998 and 2008, suggesting that the expected returns to lobbying investments were also rising.⁵⁷ This evidence is consistent with the notion that US antitrust authorities are less independent and thus more vulnerable to lobbying and political influence than their European counterparts.

II. Different Standards Lead to Differences in Enforcement and to Potential Differences in Economic Outcomes

The differences in standards documented in prior sections appear to have resulted in significant differences in enforcement. In the European Union, the overall trends in competition law enforcement have been stable.⁵⁸ In the United States, however, enforcement has declined in important respects.⁵⁹ The differences in standards and enforcement postures could also be contributing to differences in the larger economy, specifically in metrics like the labor share of national income, firms’ markups of prices over costs, and industry concentration.

A. Differences in Enforcement

Evidence suggests that US antitrust authorities’ enforcement has been persistently trending downward for some time. An important turning point was United States v. Microsoft Corp.,⁶⁰ in which the DC Circuit on appeal effectively quashed the DOJ’s proposed structural remedy for finding an abuse of market power to consumers’ and platform competition’s detriment—breaking up the tech behemoth to divorce the Windows operating system from other Microsoft lines of business.⁶¹ The DOJ and Microsoft subsequently entered into a settlement that left Microsoft intact.⁶² In the wake of Microsoft, US antitrust authorities’ section 2 enforcement has become a rarity. Specifically, the US authorities have brought only ten such cases since 1990 and just one since 2000.⁶³ In the United States, plaintiffs have lost ninety-seven percent of all rule-of-reason cases brought under section 2, largely due to plaintiffs’ failure to demonstrate price or output effects.⁶⁴

With respect to merger enforcement in the United States, the pace of merger activity has proceeded rapidly in recent decades, and it is recognized as an important factor explaining increased concentration in the US economy overall.⁶⁵ Professor John Kwoka has conducted a meta-analysis covering more than 3,000 mergers and documented a systematic reduction in merger enforcement by the FTC between 1996 and 2011.⁶⁶ The data show a clear shift in enforcement exclusively towards mergers resulting in the highest levels of industry concentration and away from mergers that would result in moderately- to highly-concentrated industries.⁶⁷ Additional evidence of increasingly permissive US merger review standards includes studies documenting US antitrust authorities’ tendency to approve mergers resulting in higher prices without generating sufficient cost-side efficiencies to blunt, let alone reverse, the upward pricing pressure that the acquisitions generated.⁶⁸ For example, in a study on five major consumer products mergers that US authorities allowed to proceed, Professor Orley Ashenfelter and Deputy Assistant Director of the Federal Trade Commission Daniel Hosken found that prices increased in four cases and did not decrease in any case.⁶⁹ Their conclusions were not sensitive to the way in which consumer prices were measured, the control group of products against which the price increases were measured, or to the duration of the timeframe following the consummation of the transaction during which price changes occurred.⁷⁰ In another study, economists Bruce Blonigen and Justin Pierce studied the effects of mergers and acquisitions by using detailed plant-level data drawn from a range of US manufacturing industries.⁷¹ The study showed that merger activity is associated with increases in markups of price over cost—higher profit.⁷² Their analysis provides scant evidence that merger activity in these industries resulted in increased efficiencies, whether through increased plant-level productivity, shifts in production to more efficient plants, or cost savings from increased administrative efficiency.⁷³

In contrast, there has been no corresponding decline in antitrust enforcement in Europe. The DG Comp’s abuse-of-dominance enforcement remained stable—or even increased—for decades.⁷⁴ With respect to merger enforcement, European authorities investigated an average of 264 antitrust cases and 284 merger cases per year between 2000 and 2004.⁷⁵ During this timeframe, the European Union blocked a $42 billion merger between General Electric and Honeywell, despite US antitrust authorities’ decision to approve it.⁷⁶ More recently, the DG Comp levied a €1.49 billion fine against Google for abuse of dominance in online advertising, again despite US enforcers’ decision against pursuing the case years earlier.⁷⁷

More broadly, a comprehensive analysis of European antitrust law enforcement since the mid-twentieth century reveals no evidence of a slackening of enforcement like that seen in the United States.⁷⁸ The overall trend in EC decisions between 1964 and 2004⁷⁹ shows that “from the early 1970s onwards, the number of [violations] found increased relative to exemptions and negative clearances.”⁸⁰ The study’s authors observe that the most recent enforcement period in their data set—1991 to 2004—included enforcement innovations aimed specifically at combatting cartels.⁸¹

B. Potential Differences in Market Outcomes

The differences in standards and enforcement documented above may be contributing to significant differences in broad economic trends in the United States and the European Union. After decades of stability, the share of national income paid to labor has exhibited a significant decline in the United States, declining by approximately five percentage points since the turn of the millennium.⁸² The US nonfarm labor share index declined steadily beginning around 2000, and then experienced additional steep declines during the Great Recession of the late 2000s from which it has still not begun to recover.⁸³ Remarkably, this occurred despite the sustained macroeconomic expansion and record-low unemployment rates that characterized the recovery following the Great Recession.

In contrast, although the global financial crisis also hit European economies hard, labor’s share of income in Europe has remained remarkably stable. An apples-to-apples comparison for the years 1995–2015 shows that the Euro Area labor share held steady at approximately sixty-six percent over this interval, while the US labor share fell from approximately sixty-five percent to less than sixty percent.⁸⁴

A significant increase in both profit margins and industry concentration has accompanied the sustained decline in the US labor share. Numerous economic studies have documented these trends. In 2016, the US Council of Economic Advisors reviewed “three sets of trends that are broadly suggestive of a decline in competition.”⁸⁵ These included “increasing industry concentration, increasing [profits] accruing to a few firms, and lower levels of firm entry and labor market mobility.”⁸⁶ A forthcoming study documents a “large increase in the share of pure profits”⁸⁷—the share of national income neither paid to labor nor accounted for by capital costs—and concludes that “increases in concentration are associated with declines in the labor share.”⁸⁸ A recently published economic study reviews data showing long-term trends in the evolution of market power in the US economy, documenting substantial increases in both markups of price over cost and firm profitability over time.⁸⁹ As shown in Figure 1 below, for example, average profit rates among US firms have risen remarkably steeply since the turn of the millennium, by a factor of three to four:

Figure 1: US Profit Rate (1980–2015)⁹⁰

In contrast, Europe has not seen comparable macroeconomic developments. As recently as the 1990s, US profit margins were significantly below those in Europe, but the situation has reversed itself.⁹¹ From 2000 to 2015, profitability in Europe remained steady or declined, while profitability in the United States shot upwards.⁹² Similarly, industry concentration rose steadily in US markets over this timeframe while remaining stable in Europe, as measured by the change in the eight-firm concentration ratio—the share of the market accounted for by the eight largest firms.⁹³ Other data show relatively mild concentration increases in Europe, compared to greater increases in the United States. A 2019 study calculating concentration after taking into account cross-ownership structures across conglomerates found that the eight-firm concentration ratio within two-digit industries in Europe increased by approximately three to four percentage points—from 21.5% to 25.1%—between 2000 and 2015.⁹⁴ In North America, concentration started higher and increased by approximately eight percentage points—from 30.3% to 38.4%—over the same time period.⁹⁵ Figure 2 compares the weighted-average absolute change in concentration ratios for the top eight firms in an industry between the European Union and United States:

Figure 2: Change In Eight-Firm Concentration Ratios
(2000–2015)⁹⁶

III. Application to the Payment Card Industry

This Part explores how the aforementioned differences in antitrust standards lead to different outcomes in the payment card industry. Visa’s and Mastercard’s Honor-All-Cards (“HAC”) policy has been challenged by both US and EU antitrust enforcers.⁹⁷ In Europe, however, the HAC was a small component of a larger investigation aimed at an alleged horizontal conspiracy across acquiring banks.⁹⁸ Under an HAC policy, a merchant wishing to access any Visa or Mastercard credit card must accept all Visa or Mastercard cards in that category.⁹⁹ The European Union settled with Mastercard in 2007 and with Visa in 2014; the HAC rules remain, but at a regulated rate.¹⁰⁰ Thus, merchants have achieved relief from high interchange fees (merchant fees) despite the lack of empirical proof that HAC policy inflates merchant fees. In contrast, antitrust litigation in the United States is ongoing, with plaintiffs bearing the burden of establishing a causal connection between the restraint and merchant fees.¹⁰¹ The differences in standards have resulted in widely different outcomes. Because merchants pass through a percentage of those fees to retail customers, higher merchant fees depress output in the goods market, which is economically inefficient. The lax enforcement policy in the United States thus promotes a regressive outcome—inducing a merchant to raise prices on less wealthy consumers so that issuing banks can give small rewards to its wealthier consumers.

A. The Economic Theory of Harm

The merchant fee is the cost of accepting card payment from the merchant’s perspective, and it is typically denominated in terms of a percentage of the transaction’s value.¹⁰² A hypothetical one percent merchant fee on $100 of merchandise sold will thus cost the merchant $1. In terms of the mechanics of payment, the merchant fee is retained by the customer’s bank (the issuing bank) and charged to the merchant’s bank (the acquiring bank), which then takes this cost element into consideration when setting its prices for merchants.¹⁰³

The theory of harm in these cases is that, because of the merchant obligations attached to the HAC policy, the issuing banks must no longer compete on price to obtain market share, leading to higher merchant fees. The HAC policy serves to coordinate the pricing decisions of participating Visa and Mastercard banks. Absent that coordination, the banks would compete for merchants by, among other things, offering cards with lower merchant fees. The reason that merchant fees would be lower absent the HAC policy is that credit cards are largely homogenous products—cashless payment methods—and firms competing in such homogenous industries do so on the basis of price.¹⁰⁴ Although it is true that cards try to distinguish themselves to cardholders on the basis of varying reward programs—which are funded by merchant fees in part—the cards compete for merchants largely on the merchant fees.¹⁰⁵ The HAC has the effect of dampening the merchant’s elasticity of demand with respect to an increase in interchange fees by removing substitution possibilities to lower-cost credit cards.¹⁰⁶ The lack of competition among issuing banks attributable to the HAC policy also harms consumers in the form of higher prices via the pass through of merchant fees to end users.

In December 2007, the EC held that Mastercard’s multilateral interchange fees (“MIF”) violated Article 81, the EC Treaty rules on restrictive business practices.¹⁰⁷ The European Union brought these cases against Visa and Mastercard based on the card issuers’ coordinating the terms, via the MIF, of associations of acquiring banks.¹⁰⁸ Although the European investigation focused on Mastercard’s horizontal restraint (the MIF), the EC also scrutinized the vertical restraint (the HAC) imposed on merchants, finding that the “‘honour-all-products’ functionality reinforces the restrictive effects of the MasterCard MIF on price competition between acquiring banks.”¹⁰⁹ It also found that the HAC rule “enables MasterCard’s member banks to exert collective market power through the MIF by allowing issuing banks to introduce new card products in the market while at the same time pre-determining their price through the MIF for merchants who are bound to accept those cards.”¹¹⁰ The EC concluded that the “‘honour all products functionality’ of MasterCard’s [HAC rule] therefore further decreases the countervailing buyer power of merchants in the presence of a MIF.”¹¹¹ During its investigation of Mastercard, the EC concluded that there was no empirical evidence demonstrating any positive effects on innovation and efficiency that justified Mastercard’s MIF.¹¹² In July 2012, the EC informed Visa that the card issuer’s merchant fees could violate EU antitrust laws, citing Article 101 of the Treaty on the Functioning of the European Union.¹¹³

Formally, one can understand the relationship between the merchant fee (P_M) and the elasticity of demand among merchants (E_M) by using Professors Jean-Charles Rochet and Jean Tirole’s two-sided platform framework¹¹⁴:

[P_M + P_C – C] / [P_M + P_C] = 1 / [E_M + E_C]

where P_C is the price to the cardholder, E_s is the elasticity of demand among cardholders, and C is the marginal cost of servicing both sides of the market. The total margin on a given transaction is the sum of the two prices less the marginal cost. The only difference from a one-sided platform is that the total margin will vary with the sum of the elasticities.¹¹⁵ In addition, Professors Rochet and Tirole show that absolute markup of price over cost is chosen as follows:

[P_M + P_C – C] = P_M /E_M = P_C /E_C

Solving the above equations for P_M and P_C yields:

P_M = [E_M(C – P_C)]/[E_M – 1] and P_C = [E_C(C – P_M)]/[E_C – 1]

The final equation above shows how downward pressure on price on one side of the market leads to upward pressure on price on the other side of the market, or what is known more generally as the “seesaw principle” of two-sided markets.¹¹⁶ The corollary is that upward pressure on price on one side due to artificial restraint that dampens the elasticity of demand among merchants, such as the HAC policy, will tend to lead to downward pressure on price on the other side of the market.

B. Differences in Outcomes

In the European Union, regulatory decree eliminated high merchant fees.¹¹⁷ Before 2009, fees were on the order of eighty to 120 basis points, but were reduced to thirty basis points for both Mastercard in 2009 and Visa in 2014.¹¹⁸ Overall, merchant fees in the European Union are approximately eighty-five percent lower than the prevailing rates in the United States.¹¹⁹ Because merchants pass through a percentage of those fees to retail customers, higher merchant fees depress output in the goods market, which is economically inefficient. The lax enforcement policy in the United States thus promotes a regressive outcome—inducing a merchant to raise prices on less wealthy consumers (low-reward cards and cash payers), so issuing banks can give small rewards to its wealthier consumers.

1. EU Litigation

Before the EC’s intervention in 2007, Mastercard’s merchant fee on consumer credit cards ranged between 0.80% and 1.20%.¹²⁰ Due to the intervention, Mastercard was compelled to reduce its weighted-average MIF to 0.3%.¹²¹ Mastercard was not required to make any changes to its HAC rules.¹²² However, its acquiring banks were required to inform merchants that they were free to accept the most efficient card for a transaction, including non-Mastercard cards.¹²³ Acquirers’ invoices to merchants also were required to show separately for each card the unblended merchant fee.¹²⁴ In May 2012, the General Court rejected Mastercard’s appeal of the EC’s 2007 decision.¹²⁵

In February 2014, the EC made Visa’s commitment to reduce merchant fees binding, capping the MIFs for consumer credit card transactions at a weighted average of 0.3% per transaction.¹²⁶ Invoked by HAC policy proponents, the EC rejected the notion that fees charged to cardholders would rise as merchant fees fell, citing the experience in France as a natural experiment.¹²⁷ In 2015, the EC codified the lower merchant fee regulations for both Mastercard and Visa.¹²⁸

2. US Litigation

In the United States, a merchant wishing to accept a Visa card must accept any valid Visa card in its category of acceptance.¹²⁹ For example, a merchant who accepts any Visa credit card must accept all Visa credit cards, including cards with higher merchant fees such as generous rewards cards.¹³⁰ Before January 1, 2004, Visa and Mastercard each maintained a single HAC rule applicable to both credit and debit cards.¹³¹ The Visa rule thus provided that if a merchant accepted any Visa-branded credit card or Visa-branded debit card, it was required to accept all Visa-branded credit cards and Visa-branded debit cards from all Visa issuers.¹³² In the 1990s, “retailers . . . filed class action litigation against Visa and MasterCard challenging their [HAC] rules.”¹³³ A 2003 settlement of this litigation required Visa to untie credit and debit acceptance by creating a separate HAC for credit cards.¹³⁴ Visa still offers a default interchange schedule, which could permit its member banks to coordinate on a particular rate.¹³⁵

In 2005, a class of merchants sued Mastercard and Visa, several of their issuing banks, and American Express separately over payment card rules that allegedly inflated merchant fees, including the HAC policy and a “no-surcharge” rule that barred merchants from charging customers a higher price for using a high-fee card.¹³⁶ The parties reached settlements in 2012.¹³⁷ In 2013, a federal district court approved the Mastercard and Visa settlement, which awarded approximately $7 billion in damages and injunctive relief permitting merchants to impose surcharges on consumers paying with cards from Visa or Mastercard, but would have preserved the HAC policy.¹³⁸ In August 2015, a federal district court rejected the American Express settlement because certain lawyers for the plaintiffs and Mastercard had allegedly exchanged confidential information relating to American Express.¹³⁹ In June 2016, the US Court of Appeals for the Second Circuit in New York vacated the Visa and Mastercard settlement because of a purported divergence of interests among the merchants in the class.¹⁴⁰ On remand, the parties continued to litigate until September 2018, when the defendants reached an approximately $6 billion settlement.¹⁴¹ In January 2019, the US District Court for the Eastern District of New York granted preliminary approval of the settlement.¹⁴²

During the first half of 2019, several opt-out merchants who elected to not be part of the class settlement, including Walmart and Target, sued Visa.¹⁴³ Mastercard reported that merchants representing slightly more than one quarter of the interchange volume generated by the damages class had opted out, reducing the settlement fund to $5 billion.¹⁴⁴ Mastercard and Visa reported settlement discussions with these injunctive-relief merchants in November 2019.¹⁴⁵ As of March 2020, however, no injunctive relief had been achieved.¹⁴⁶ The settlement fund will remain inaccessible to plaintiffs until the appeals process concludes and the funds are administered, perhaps not until 2023.¹⁴⁷

One challenge in demonstrating price effects for private plaintiffs in a US antitrust court is that the HAC policy has been in existence since the beginning of the Visa network. Put differently, there has been little to no change in the treatment variable, which thwarts the use of traditional economic tools such as regression analysis.¹⁴⁸ Even though the merchant fees in Europe are lower than those in the United States, the HAC policy exists in Europe, albeit at a regulated rate.¹⁴⁹ It is possible to construe those lower rates as an approximation of competitive merchant fees absent the challenged restraints,¹⁵⁰ but it is not clear whether a court would accept such evidence as proof of antitrust injury and causation. The second major obstacle is the Supreme Court’s recent decision in Ohio v. American Express Co. (Amex),¹⁵¹ which placed new evidentiary burdens on plaintiffs in certain cases, including demonstrating output effects and considering antitrust “offsets.”

C. Additional Evidentiary Burdens from Ohio v. American Express Co.

The Supreme Court’s recent decision in Amex presents a formidable obstacle for plaintiffs seeking recovery in section 2 cases (single-firm monopolist) involving “two-sided transaction platforms.”¹⁵² Determining the qualifications for a two-sided transaction platform, the Court imposed two requirements: (1) the sale of the platform’s service requires “simultaneous” exchange between two third parties to the platform; and (2) the platform must offer “indirect network effects” that are relatively strong.¹⁵³ To understand the nature of the new evidentiary burdens, a brief history of the case is in order. In 2010, the DOJ filed an antitrust suit against Visa, MasterCard, and American Express challenging the payment card companies’ anti-steering rules, which prohibited merchants from steering customers toward cheaper payment methods by providing information about a card’s costs, for example.¹⁵⁴ Visa and Mastercard immediately settled with the DOJ, but American Express elected to litigate and lost initially.¹⁵⁵ In February 2015, the US District Court for the Eastern District of New York found that American Express’s anti-steering restrictions on merchants—which restrict merchants from steering their customers to lower-priced or lower-merchant-fee credit cards by offering consumers a portion of the savings—were anticompetitive and thus an illegal restraint on trade.¹⁵⁶ The court also found that the additional fees American Express charged merchants caused consumer prices to rise on net, even after accounting for potentially higher cardholder rewards.¹⁵⁷ In September 2016, the Second Circuit reversed the district court’s decision, asserting that the plaintiffs failed to examine the benefits of the anti-steering restraints to American Express’s cardholders on the other side of the “two-sided” platform.¹⁵⁸ On June 25, 2018, the Supreme Court affirmed the Second Circuit’s decision, delivering a victory for American Express and potentially altering the playing field for a large swath of future single-firm monopolization cases involving vertical restraints.¹⁵⁹

1. The New Output Requirement

Amex understandably established a requirement that plaintiffs—at least in vertical cases involving two-sided transactional platforms—must prove an output effect when using direct evidence to establish competitive effects under the rule of reason.¹⁶⁰ There is some ambiguity, however, as the output requirement appears as one of three ways to establish anticompetitive effects: “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.”¹⁶¹ Yet, the plaintiffs presumably lost because the Court decided that proving a price effect without a concomitant output effect did not satisfy the plaintiff’s initial burden under the rule of reason; an additional showing of an output effect is necessary.¹⁶² Indeed, during oral argument, Associate Justice Neil Gorsuch insisted that output is paramount in antitrust law and was the only way to get around the district court’s finding that fees net of any rewards to cardholders had increased.¹⁶³ The Court pointed to the increase in credit card transactions over time as evidence of the lack of an output effect.¹⁶⁴ However, the correct counterfactual would preserve all other forces pushing towards more credit card transactions—income growth, online purchases—and isolate the incremental effect of the restraint. Thus, it is possible that card transactions would have increased even faster but for the presence of the restraint.

2. The New “Offset” Requirement

Amex also understandably established a requirement that plaintiffs—at least in vertical cases involving two-sided transactional platforms—must prove that any increase in fees on one side of the platform attributable to the restraint is not fully offset by a decrease in fees charged to the other side.¹⁶⁵ Effectively, this is a “net harm” requirement. Specifically, the harms to one side of the platform—the merchants—must exceed the benefits to the other side of the platform—the cardholders.¹⁶⁶ In US Airways, Inc. v. Sabre Holdings Corp.,¹⁶⁷ a section 2 case challenging Sabre’s vertical restraints, the Second Circuit interpreted this requirement to be a net harm test: “Two-sided damages must, in this case, then, be lower than one-sided damages would have been.”¹⁶⁸ The Second Circuit elaborated on this requirement: “In a market encompassing both sides of the platform, then, if prices charged to travel agents are less—or incentive payments made are greater—than those that would be observed in a competitive market, then that difference must be accounted for in determining US Airways’s damages, if any.”¹⁶⁹ This appears to suggest that any lost benefits to travel agents made possible by Sabre’s vertical restraint must be deducted from US Airways’s overcharges. This makes little sense from an economic perspective, as the forgone subsidy was an ill-gotten gain to the extent the restraint is deemed anticompetitive. There should be no requirement in the law that parties who benefited from an illegal restraint should later be made whole when said restrained is removed.

In contrast, the district court in United States v. Sabre,¹⁷⁰ a case challenging a Sabre–Farelogix merger, interpreted Amex to require plaintiffs to demonstrate a harm to both sides of the platform:

Rather, Amex provides that if the government seeks to stop a [global distribution system] from buying a “one-sided competitor,” it must show that this purchase will harm competition on both sides of the two-sided market – i.e., the market for travel services to airlines and the market for travel services to travel agencies. Here, however, the government only attempted to demonstrate harm to the airlines side of the two-sided market. It has thus failed to meet its burden.¹⁷¹

This supposed Amex requirement of showing harm to both sides is an impossible burden. Suppose a two-sided platform charges the A side and subsidizes the B side with a portion of A-side revenues. Suppose further that a one-sided rival, before being acquired, constrains the platform’s ability to raise A-side prices. The platform’s acquiring the one-sided rival allows A-side prices to rise, which permits for an even greater subsidy on the B side. The B-side customers are not harmed, thus waving the merger through under the harm-to-both-sides requirement. That two courts could read Amex so differently is highly disconcerting.

Note that a defendant accused of engaging in a price-fixing conspiracy cannot claim that it used a portion of the ill-gotten gains from one set of customers to subsidize the price of a different or complementary service to another set of customers as the conduct is considered illegal per se.¹⁷² Moreover, under United States v. Philadelphia National Bank,¹⁷³ a merger-related gain of one set of customers cannot offset a merger-related harm to another.¹⁷⁴ Assuming offsets are even considered, standard antitrust jurisprudence would treat them just like any other efficiency, and the burden of proof should be on defendants to establish their connection to the restraint and to quantify their magnitude.¹⁷⁵ However, the Amex majority determined that offsets should be addressed by plaintiffs in the initial step of the rule-of-reason analysis.¹⁷⁶ Thus, in light of Amex, antitrust law now treats offsets differently in vertical cases than in horizontal cases. Because there is no mechanism by which the beneficiaries of a hypothetical vertical restraint may compensate the injured consumers, one can legitimately question an antitrust regime that tolerates a set of persistent economic losers.

D. Higher Merchant Fees Lead to Regressive Results

US plaintiffs’ inability to achieve any relief from high merchant fees or HAC policies means that fees are substantially higher than those achieved on credit card transactions in the EU via regulation, equaling 0.3% of the transaction.¹⁷⁷ Based on a recent study, the average interchange fees for Mastercard and Visa credit cards in 2019 ranged from 1.15% to 2.5%.¹⁷⁸ Others estimate the average interchange fees for all credit cards in the United States at 1.81%.¹⁷⁹ In 2016, the Federal Reserve Bank of Kansas estimated that the average interchange fees for Mastercard ranged from 1.5% (no premium) to 2.1% (premium) and that the average interchange fees for Visa ranged from 1.4% (no premium) to 2.1% (premium).¹⁸⁰ Because of heightened antitrust standards in the United States, US merchants pay approximately six times more for interchange fees to credit card companies than their European counterparts: approximately 1.8% versus 0.3% of the transaction.¹⁸¹ Merchants pass through some or all of those merchant fees in the form of higher end-user prices.¹⁸² A portion of those excess merchant fees are used to subsidize rewards for wealthier cardholders, such as celebrity-chef-catered American Express airport lounges, complicating the welfare impact for those cardholders.¹⁸³ But the restraint unequivocally raises prices for low-reward cardholders and cash payers without any offsetting benefit, a regressive result.

IV. Policy Implications

Is the United States better off under its more permissive antitrust standard? There is some evidence that byproducts of lax antitrust enforcement are higher prices (markups), larger concentration of economic power, and lower wage shares.¹⁸⁴ The resulting power imbalances and income inequality may be contributing to societal fissures. Rather than abandon the consumer-welfare standard, however, this Article offers more modest reforms: (1) shifting the presumptions in vertical merger review under certain fact patterns, such as a merger involving a dominant platform; (2) filling the current gaps in section 2 cases with regulations outside of antitrust, such as a Net Tribunal housed at the FTC or new digital agency to police self-preferencing by dominant platforms; and (3) reversing bad case law, such as the antitrust exemptions in two-sided markets in Amex¹⁸⁵ and the forced arbitration in American Express Co. v. Italian Colors Restaurant¹⁸⁶ and Epic Systems Corp. v. Lewis.¹⁸⁷

A. The Inadequacy of Existing Monopolization Laws

Antitrust is an imperfect remedy for certain categories of potentially anticompetitive conduct.¹⁸⁸ This is particularly true for the tendency of the dominant “tech platforms,” such as Amazon, Apple, Google, and Facebook, to engage in “self-preferencing,” which disadvantages rivals with whom they compete horizontally on a portion of the platform. It is true that some types of exclusionary conduct by tech platforms fall within existing antitrust frameworks, such as Facebook’s discriminatory refusal to deal in restricting independent apps’ access to Facebook’s API or Amazon’s tying the purchase of its fulfillment services to unencumbered access to its e-commerce platform.¹⁸⁹ Nevertheless, self-preferencing generally does not fit into any well-received antitrust paradigm.¹⁹⁰ And if one could stretch or reinterpret the antitrust laws to accommodate this type of exclusion, antitrust litigation is too slow, uncertain, and costly “to address the potential harms that flow from self-preferencing—namely, an innovation loss at the ‘edges’ of the platforms, as independents throw in the towel as a response to an unlevel playing field.”¹⁹¹ In traditional antitrust cases, exclusionary conduct can be measured as an overcharge to purchasers (or underpayments to sellers or workers). This makes the snail’s pace of antitrust more tolerable since courts can award treble damages.¹⁹² In contrast, antitrust provides little to no useful guidance on the much thornier economic problem of adequately compensating innovators whose opportunity to profit from their innovations was foreclosed by exclusionary conduct. Accordingly, “[t]he relief in these cases must come quickly.”¹⁹³

Many modern courts have interpreted section 2 of the Sherman Act as requiring plaintiffs to prove that the exclusionary conduct at issue inflicted economic harm, most commonly measured as the extent to which the conduct inflated prices above competitive levels or restricted output below competitive levels.¹⁹⁴ Professor Michael Carrier found that, between 1999 and 2009, courts dismissed ninety-seven percent of section 2 “rule-of-reason” cases owing to plaintiffs’ inability to prove that the conduct at issue caused anticompetitive effects.¹⁹⁵ When tech platforms engage in self-preferencing to exclude or marginalize edge innovation, they are unlikely to cause empirically demonstrable short-run price or output effects, given that the platform simply replaces the offerings of the edge innovator with its own vertically integrated alternative.¹⁹⁶ One potential exception is Google’s self-preferencing in search results, which may cause quality degradation over the short run: at least one study has found that Google’s affiliated content generates fewer click-throughs—and thus lower quality from advertisers’ perspective—than its downstream independent rivals.¹⁹⁷ Yet in practice, plaintiffs have rarely (if ever) been successful in an antitrust case turning primarily on a showing of quality degradation.¹⁹⁸ Far more frequently, degradation in product quality is relegated to an “and also” category in antitrust.¹⁹⁹

Although exceptions exist to the requirement that plaintiffs demonstrate short-run anticompetitive effects, self-preferencing is not encompassed by them. For example, in FTC v. Qualcomm Inc.,²⁰⁰ the district court held Qualcomm liable for its exclusive dealing without requiring any demonstration of short-run economic harm.²⁰¹ Instead, the court laid out an alternative set of economic criteria that could serve as a substitute for direct empirical proof of anticompetitive harm, sometimes referred to by economists as a “surrogate test.”²⁰² For example, a plaintiff in a refusal-to-deal case can prove liability by documenting (among other things) that the defendant exhibited a pattern of engaging in such conduct with independents, and these systematic refusals were motivated by a desire to impede horizontal rivals through a “discriminatory refusal to deal.”²⁰³ On the other hand, when a tech platform discriminates in favor of its own content, there is no outright refusal to deal; the independent is instead governed by less favorable economic conditions that are imposed by the platform.²⁰⁴ Thus, to prevail under this standard, an antitrust plaintiff would have to take the position that self-preferencing is tantamount to a refusal to deal. When a defendant engages in exclusive dealing, one path available to the plaintiff is to show that the exclusionary conduct at issue foreclosed a substantial proportion of the commerce at issue (the “foreclosure share”).²⁰⁵ As before, self-preferencing is not the same as exclusive dealing, so this surrogate test may not be available either.

United States v. Microsoft Corp. is commonly invoked by those searching for an antitrust framework applicable to tech platform self-preferencing; however, this case is unhelpful at best. What the Microsoft court actually found was that a showing of anticompetitive effects is a prerequisite to the imposition of structural remedies:

Microsoft’s concerns over causation have more purchase in connection with the appropriate remedy issue, i.e., whether the court should impose a structural remedy or merely enjoin the offensive conduct at issue. As we point out later in this opinion, divestiture is a remedy that is imposed only with great caution, in part because its long-term efficacy is rarely certain. . . . Absent some measure of confidence that there has been an actual loss to competition that needs to be restored, wisdom counsels against adopting radical structural relief.²⁰⁶

Given that anticompetitive injury in Microsoft—and in virtually any potential self-preferencing case brough against virtually any modern tech platform—would primarily take the form of innovation harms, and given the inherent difficulty in proving such harm, the Microsoft precedent would appear to pose significant barriers to securing a structural remedy within existing antitrust frameworks. The inherent vagaries of the innovation process itself make it doubtful that the expected future loss in consumer welfare flowing from untimely exit by independents could be established with any “measure of confidence.”²⁰⁷

The Microsoft court was also reluctant to impose a milder form of nonstructural injunctive relief, which would have required that the defendant unbundle Internet Explorer from its operating system. The court instead latched on to an efficiency justification proffered by Microsoft so broad that it could arguably be invoked by virtually any tech platform:

As for the other challenged act that Microsoft took in integrating IE into Windows—causing Windows to override the user’s choice of a default browser in certain circumstances—Microsoft argues that it has “valid technical reasons.” Specifically, Microsoft claims that it was necessary to design Windows to override the user’s preferences when he or she invokes one of “a few” out “of the nearly 30 means of accessing the Internet.” . . . The plaintiff bears the burden not only of rebutting a proffered justification but also of demonstrating that the anticompetitive effect of the challenged action outweighs it. In the District Court, plaintiffs appear to have done neither, let alone both; in any event, upon appeal, plaintiffs offer no rebuttal whatsoever. Accordingly, Microsoft may not be held liable for this aspect of its product design.²⁰⁸

This shield against antitrust scrutiny is referred to as the “firm-boundary” protection.²⁰⁹ In general, courts are reluctant to find antitrust liability in section 2 cases as long as the conduct at issue does not directly implicate a third-party buyer or seller, and thus remains within the firm’s boundaries.²¹⁰ Since Microsoft, the landscape facing plaintiffs has become increasingly hostile, with many courts disfavoring monopoly-leveraging theories.²¹¹

Importantly, even if antitrust enforcement could be expanded through new “push-the-boundary” precedents or new legislation tailored to address self-preferencing, there remains the fundamental problem that the lumbering machinery of antitrust is ill suited to provide relief from conduct that inflicts innovation harms in a timely manner.²¹² Modern section 2 cases take, on average, thirty-five months to be adjudicated, not including appeals.²¹³

Professors Carl Shapiro and Fiona Scott Morton, both prominent antitrust scholars and practitioners, have recently authored separate reports describing how tech platform practices elude traditional antitrust scrutiny.²¹⁴ As Professor Shapiro explains, “The second area where antitrust enforcement has become inadequate is the treatment of exclusionary conduct by dominant firms. The fundamental problem in this area is that the Supreme Court has, over the past 40 years, dramatically narrowed the reach of the Sherman Act.”²¹⁵ Professor Shapiro also explains that bringing section 2 cases against tech platforms generally would be “difficult,” and that pursuing Amazon specifically for manipulating its platform to favor its own merchandise would be “very difficult”²¹⁶ under current antitrust laws. Professor Shapiro does not explicitly endorse a regulatory remedy; however, in a Stigler Center report, Professor Scott Morton and her co-authors observe that “a sectoral regulator is likely to be better than antitrust laws at enforcing fairness norms.”²¹⁷

B. Remedies

This Section discusses some remedies, inside and outside antitrust, to address the gaps in protection identified above. Congress should authorize the FTC or some new digital agency to enforce a new nondiscrimination standard, distinct from an antitrust standard or unfair- or deceptive-acts standard. Legislatures could refine merger statutes to make vertical acquisitions under certain fact patterns, such as by dominant platforms, presumptively illegal, thereby shifting the burden of proof onto the merger proponents. Finally, courts should vacate case law weakening antitrust enforcement.

1. Filling the Gaps in Antitrust with Regulations

One option for filling the gaps in antitrust described above would be for Congress to implement “a particular form of non-antitrust intervention—a nondiscrimination regime, patterned off of the nondiscrimination regime created by Congress as part of the 1992 Cable Act.”²¹⁸ In section 616 of the Cable Act, the Federal Communications Commission (“FCC”) was directed “to create a venue in which independent cable networks could bring program-carriage complaints against vertically integrated cable operators, the dominant platform of that era.”²¹⁹ By conveying the right of private action to victims of discrimination, section 616 “ensured that the level of enforcement would remain steady across different administrations.”²²⁰ Several independent networks, including the NFL Network and the Mid-Atlantic Sports Network (“MASN”) achieved relief under this standard.²²¹ Two other networks, Tennis Channel and Game Show Network (“GSN”), “secured findings of discrimination by the FCC’s Administrative Law Judge, only to lose on appeal.”²²² There is evidence that these protections have fostered innovation by independent cable networks: since the Cable Act was passed, independent cable networks have grown faster than vertically integrated networks owned by cable companies,²²³ suggesting that independent networks feel sufficiently confident to pursue risky investments in new programming, knowing that they have at least some protection against cable operators that might otherwise have incentives to appropriate or discriminate against independent programming. Significantly, such cases have taken an average of approximately eighteen months to adjudicate; although this arguably still imposes too long of a delay, it remains significantly more rapid than the generally glacial pace of antitrust cases.²²⁴

In principle, disputes between edge providers and dominant tech platforms could be adjudicated using an analogous venue. The FTC could house this “NET Tribunal,” or it could operate as a newly minted digital agency tasked with enforcing a new nondiscrimination standard. Other standards such as interoperability might also fall within its purview.²²⁵ As it did with the FCC in 1992, Congress would have to instruct the agency to develop an evidentiary standard that the tribunal could apply to a complainant’s case.²²⁶ Under the program-carriage regime, a complainant must show that: (1) its content is “similarly situated” to that of the dominant platform’s vertical affiliate; (2) it received inferior treatment attributable to its lack of affiliation as opposed to some legitimate business reason; and (3) as a result, it has been materially impaired in its ability to compete effectively.²²⁷ The evidentiary standard is different than antitrust standards, which require plaintiffs to demonstrate harm to competition. Rather than requiring a complainant to establish an innovation harm, a showing of harm to the independent serves as a surrogate for innovation harm.

Applied to digital platforms, such a regime would permit private complainants to seek injunctive relief and lost profits reasonably connected to the discriminatory conduct. When the agency acts as a complainant, by contrast, both injunctive and structural remedies could be available. A private right of action for complainants is missing under the current FTC complaint process, whereby only the agency can bring cases before its administrative law judge under existing standards like antitrust.²²⁸

Some scholars have expressed skepticism over the sufficiency of a standalone nondiscrimination regime.²²⁹ Yet the mere existence of a nondiscrimination regime should blunt some of the most blatant forms of discrimination. Moreover, any private enforcement brought by complainants with sufficient means to prosecute a case should provide blanket benefits to all independent merchants or content providers, including small ones. And in its capacity as complainant, the agency tasked with housing the Net Tribunal could bring cases of its own; for example, on behalf of small merchants on Amazon’s platform or on behalf of small app designers on Apple’s platform.

2. Shifting the Presumption in Merger Review

The legal landscape for prosecuting vertical mergers is challenging, potentially discouraging enforcement against future anticompetitive vertical mergers. Because antitrust laws struggle with how to effectively police vertical and conglomerate mergers,²³⁰ Congress should alter the landscape itself. Recent DOJ enforcement actions highlight the rigorous evidentiary burdens the current standards create for enforcers.²³¹

Congress should create a presumption against mergers involving dominant platforms, as proxied with very high shares and entry barriers in a relevant market. Professors Jonathan Baker, Nancy Rose, Steven Salop, and Fiona Scott Morton suggest that the agencies should adopt anticompetitive presumptions when certain conditions are met, including, among others, input- and customer-foreclosure and dominant-platform presumptions.²³² A number of large platforms, such as Amazon, Apple, Facebook, and Google are obvious candidates for dominant platforms. In certain local markets, a cable operator or internet service provider could be characterized as a dominant platform as well.

Vertical merger enforcement is particularly important because monopoly leveraging is said to be a dead letter in antitrust,²³³ and because few pathways remain to challenge ex post vertical foreclosure by a vertically integrated firm. The inability to police discriminatory conduct by a vertically integrated firm under the antitrust laws is yet another reason for more vigorous policing of vertical merger enforcement.

3. Reversing Bad Case Law

In several cases, the Supreme Court has overstepped its bounds and twisted the purpose of the antitrust laws to disperse economic power, including by altering the traditional evidentiary standards in favor of defendants. Under traditional antitrust approaches, defendants bear the burden of establishing efficiency defenses—connecting a purported benefit to the restraint that redounds to plaintiffs and quantifying it.²³⁴ In Amex, which condoned the use of “anti-steering” provisions in merchant contracts to discourage efforts to persuade customers to use lower-cost credit cards, the majority wrongly decided to place the burden of accounting for offsetting benefits (“offsets”) on plaintiffs. In Philadelphia National Bank, the Supreme Court ruled that an offset to a third party could not negate the harms to an injured party.²³⁵ At worst, benefits to third parties should be considered a special type of efficiency in two-sided markets, where defendants bear the burden of proof, as suggested in Associate Justice Stephen Breyer’s dissent in Amex.²³⁶

Congress should also overturn the Supreme Court’s decision in American Express Co. v. Italian Colors Restaurant and Epic Systems Corp. v. Lewis, which removed legal rights for customers and workers, respectively, to pursue antitrust claims as a class action. The Court demonstrated a bias in favor of dominant firms that forced a weaker counterparty to sign an agreement mandating individual arbitration.

Conclusion

Is the United States better off under its more permissive antitrust standard? Some evidence seems to suggest no. Specifically, evidence suggests that the byproducts of lax antitrust enforcement include higher prices (markups), larger concentration of economic power, and lower wage shares. These resulting power imbalances and income inequality may be contributing to societal fissures. However, the United States should not abandon the consumer-welfare standard in antitrust enforcement. Congress should implement more modest reforms like the following: (1) shifting the presumptions in vertical merger review under certain fact patterns, like mergers involving dominant platforms; (2) filling the current gaps in section 2 cases with regulations outside of antitrust, like a Net Tribunal housed at the FTC or new digital agency to police dominant platform self-preferencing; and (3) reversing bad case law, like antitrust exemptions in two-sided markets and forced arbitration. In the post–Microsoft world, the pendulum has shifted in favor of antitrust defendants in monopolizations cases. It is time for a reset.

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Competing Approaches to Antitrust: An Application in the Payment Card Industry

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