Competition and Payment Card Interchange Fees : A Brief Note to the OECD Latin American and Caribbean Competition Forum

One cannot be a fully conversant antitrust practitioner or academic in today’s antitrust environment without a basic, if not sophisticated, understanding of markets involving multisided platforms or so-called ecosystems—multiple horizontal and vertical relationships that center around certain platforms. And the goal is not just to understand antitrust enforcement in various jurisdictions, including those that adopt or eschew the U.S. Supreme Court’s analytical approach in AMEX, centering on market definition and the nature and strength of indirect network effects. In today’s rapidly evolving regulatory environment—where numerous jurisdictions are in the process of directly regulating big tech platforms—it is equally important to understand the underlying economics of platforms and, more broadly, the ecosystems in which many of them operate, as well as consequences of proposed or actual regulations. Payment systems are not an exception. What makes the economics of networks interesting is that each new subscriber increases the value to other subscribers, which attracts more subscribers, which increases the value to all again. This positive feedback, known as the “network effect,” creates a virtuous circle and could potentially allow a very large incumbent to corner the market, but it could also allow for significant positive, synergetic value. Hence, the strength of the network effect influences the pricing strategy of the platform as a whole, potentially creating circumstances where it is profit maximizing for the platform to heavily subsidize one side while extracting rents from the other.Besides leading to interesting economic puzzles, the network effect can lead to challenging antitrust puzzles as well. As the AMEX decision famously emphasized, if the rents collected from one side are used to subsidize the other, then it may not be procompetitive to reduce those rents under some circumstances. This is a particularly important focus for payment systems, given the great focus by several jurisdictions over the last many years on regulating one particular price of the platform, for example placing caps on interchange fees. One could think of consequences of regulation on platform pricing as a balloon full of air: if we squeeze one side (cap that the interchange fee), it will stretch and inflate the other side (inflating the other side’s price and potentially giving rise to more or new charges). Have we really thought through all implications of capping interchange fees and the overall effect on consumer welfare, efficiency and competition? What does economic theory and the empirical evidence tell us to date?