Ohio v. Am. Express Co.
| Citation | 138 S.Ct. 2274,201 L.Ed.2d 678 |
| Decision Date | 25 June 2018 |
| Docket Number | No. 16–1454.,16–1454. |
| Parties | OHIO, et al., Petitioners v. AMERICAN EXPRESS COMPANY, et al. |
| Court | United States Supreme Court |
Eric E. Murphy, Solicitor, Columbus, OH, supporting the Petitioners and state Respondents.
Malcolm L. Stewart, Washington, DC, for Respondent United States in support of Petitioners.
Evan R. Chesler, New York, NY, for Respondents.
Michael Dewine, Attorney General of Ohio, Eric E. Murphy, State Solicitor, Counsel of Record, Michael J. Hendershot, Chief Deputy Solicitor, Hannah C. Wilson, Deputy Solicitor, Columbus, OH, for Petitioner State of Ohio.
George Jepsen, Attorney General, State of Connecticut.
Lawrence G. Wasden, Attorney General, State of Idaho.
Lisa Madigan, Attorney General, State of Illinois.
Tom Miller, Attorney General, State of Iowa.
Brian E. Frosh, Attorney General, State of Maryland.
Bill Schuette, Attorney General, State of Michigan.
Tim Fox, Attorney General, State of Montana.
Douglas J. Peterson, Attorney General, State of Nebraska.
Peter Kilmartin, Attorney General, State of Rhode Island.
Herbert H. Slatery III, Attorney General, State of Tennessee.
Ken Paxton, Attorney General, State of Texas.
Sean D. Reyes, Attorney General, State of Utah.
Thomas J. Donovan, Jr., Attorney General, State of Vermont.
Noel J. Francisco, Solicitor General, Makan Delrahim, Assistant Attorney General, Malcolm L. Stewart, Deputy Solicitor General, Brian H. Fletcher, Assistant to the Solicitor General, William J. Rinner, Counsel to the Assistant Attorney General, Kristen C. Limarzi, Robert B. Nicholson, James J. Fredricks, Craig W. Conrath, John R. Read, Nickolai G. Levin, Andrew J. Ewalt, Attorneys, Department of Justice, Washington, DC, for Respondent United States.
Michael K. Kellogg, Aaron M. Panner, Derek T. Ho, Kellogg, Hansen, Todd, Figel & Frederick, P.L.L.C., Washington, DC, Benjamin J. Horwich, Justin P. Raphael, Munger, Tolles & Olson LLP, San Francisco, CA, Evan R. Chesler, Peter T. Barbur, Kevin J. Orsini, Rory A. Leraris, Cravath, Swaine & Moore LLP, New York, NY, Laureen E. Seeger, Mark Califano, Suzanne E. Wachsstock, American Express Company, New York, NY, for Respondents American Express Company and American Express Travel Related Services Company, Inc.
American Express Company and American Express Travel Related Services Company (collectively, Amex) provide credit-card services to both merchants and cardholders. When a cardholder buys something from a merchant who accepts Amex credit cards, Amex processes the transaction through its network, promptly pays the merchant, and subtracts a fee. If a merchant wants to accept Amex credit cards—and attract Amex cardholders to its business—Amex requires the merchant to agree to an antisteering contractual provision. The antisteering provision prohibits merchants from discouraging customers from using their Amex card after they have already entered the store and are about to buy something, thereby avoiding Amex's fee. In this case, we must decide whether Amex's antisteering provisions violate federal antitrust law. We conclude they do not.
Credit cards have become a primary way that consumers in the United States purchase goods and services. When a cardholder uses a credit card to buy something from a merchant, the transaction is facilitated by a credit-card network. The network provides separate but interrelated services to both cardholders and merchants. For cardholders, the network extends them credit, which allows them to make purchases without cash and to defer payment until later. Cardholders also can receive rewards based on the amount of money they spend, such as airline miles, points for travel, or cash back. For merchants, the network allows them to avoid the cost of processing transactions and offers them quick, guaranteed payment. This saves merchants the trouble and risk of extending credit to customers, and it increases the number and value of sales that they can make.
By providing these services to cardholders and merchants, credit-card companies bring these parties together, and therefore operate what economists call a "two-sided platform." As the name implies, a two-sided platform offers different products or services to two different groups who both depend on the platform to intermediate between them. See Evans & Schmalensee, Markets With Two–Sided Platforms, 1 Issues in Competition L. & Pol'y 667 (2008) (Evans & Schmalensee); Evans & Noel, Defining Antitrust Markets When Firms Operate Two–Sided Platforms, 2005 Colum. Bus. L. Rev. 667, 668 (Evans & Noel) ; Filistrucchi, Geradin, Van Damme, & Affeldt, Market Definition in Two–Sided Markets: Theory and Practice, 10 J. Competition L. & Econ. 293, 296 (2014) (Filistrucchi). For credit cards, that interaction is a transaction. Thus, credit-card networks are a special type of two-sided platform known as a "transaction" platform. See id ., at 301, 304, 307; Evans & Noel 676–678. The key feature of transaction platforms is that they cannot make a sale to one side of the platform without simultaneously making a sale to the other. See Klein, Lerner, Murphy, & Plache, Competition in Two–Sided Markets: The Antitrust Economics of Payment Card Interchange Fees, 73 Antitrust L.J. 571, 580, 583 (2006) (Klein). For example, no credit-card transaction can occur unless both the merchant and the cardholder simultaneously agree to use the same credit-card network. See Filistrucchi 301.
Two-sided platforms differ from traditional markets in important ways. Most relevant here, two-sided platforms often exhibit what economists call "indirect network effects." Evans & Schmalensee 667. Indirect network effects exist where the value of the two-sided platform to one group of participants depends on how many members of a different group participate. D. Evans & R. Schmalensee, Matchmakers: The New Economics of Multisided Platforms 25 (2016). In other words, the value of the services that a two-sided platform provides increases as the number of participants on both sides of the platform increases. A credit card, for example, is more valuable to cardholders when more merchants accept it, and is more valuable to merchants when more cardholders use it. See Evans & Noel 686–687; Klein 580, 584. To ensure sufficient participation, two-sided platforms must be sensitive to the prices that they charge each side. See Evans & Schmalensee 675; Evans & Noel 680; Muris, Payment Card Regulation and the (Mis)Application of the Economics of Two–Sided Markets, 2005 Colum. Bus. L. Rev. 515, 532–533 (Muris) ; Rochet & Tirole, Platform Competition in Two–Sided Markets, 1 J. Eur. Econ. Assn. 990, 1013 (2003). Raising the price on side A risks losing participation on that side, which decreases the value of the platform to side B. If participants on side B leave due to this loss in value, then the platform has even less value to side A—risking a feedback loop of declining demand. See Evans & Schmalensee 675; Evans & Noel 680–681. Two-sided platforms therefore must take these indirect network effects into account before making a change in price on either side. See Evans & Schmalensee 675; Evans & Noel 680–681.1
Sometimes indirect network effects require two-sided platforms to charge one side much more than the other. See Evans & Schmalensee 667, 675, 681, 690–691; Evans & Noel 668, 691; Klein 585; Filistrucchi 300. For two-sided platforms, " ‘the [relative] price structure matters, and platforms must design it so as to bring both sides on board.’ " Evans & Schmalensee 669 (quoting Rochet & Tirole, Two–Sided Markets: A Progress Report, 37 RAND J. Econ. 645, 646 (2006)). The optimal price might require charging the side with more elastic demand a below-cost (or even negative) price. See Muris 519, 550; Klein 579; Evans & Schmalensee 675; Evans & Noel 681. With credit cards, for example, networks often charge cardholders a lower fee than merchants because cardholders are more price sensitive.2 See Muris 522; Klein 573–574, 585, 595. In fact, the network might well lose money on the cardholder side by offering rewards such as cash back, airline miles, or gift cards. See Klein 587; Evans & Schmalensee 672. The network can do this because increasing the number of cardholders increases the value of accepting the card to merchants and, thus, increases the number of merchants who accept it. Muris 522; Evans & Schmalensee 692. Networks can then charge those merchants a fee for every transaction (typically a percentage of the purchase price). Striking the optimal balance of the prices charged on each side of the platform is essential for two-sided platforms to maximize the value of their services and to compete with their rivals.
Amex, Visa, MasterCard, and Discover are the four dominant participants in the credit-card market. Visa, which is by far the largest, has 45% of the market as measured by transaction volume.3 Amex and MasterCard trail with 26.4% and 23.3%, respectively, while Discover has just 5.3% of the market.
Visa and MasterCard have significant structural advantages over Amex. Visa and MasterCard began as bank cooperatives and thus almost every bank that offers credit cards is in the Visa or MasterCard network. This makes it very likely that the average consumer carries, and the average merchant accepts, Visa or MasterCard. As a result, the vast majority of Amex cardholders have a Visa or MasterCard, but only a small number of Visa and Master–Card cardholders have an Amex. Indeed, Visa and MasterCard account for more than 432 million cards in circulation in the United States, while Amex has only 53 million. And while 3.4 million merchants at 6.4 million locations accept Amex, nearly three million more locations accept Visa, MasterCard, and Discover.4
Amex competes with Visa and MasterCard by using a different business model. While Visa and MasterCard earn half of their revenue by collecting interest from their cardholders, Amex...
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