Tuesday, October 05, 2010

More Fuel for the "Administration is Anti-Business" Fire

The Obama Administration's Justice Department announced an antitrust suit against American Express, after Amex failed to agree to changes to its contracts with retailers. See here.

I have three thoughts on this case. First, I see it as an example of the "economic engineering" philosophy of the Obama administration economics policy. If they see something that they don't think is right, like credit card fees to retailers that seem too high (or health insurance prices), they look for some regulatory scheme to fix it. In this case, the regulatory scheme of choice is antitrust law (which is meant to prevent inefficient exercise of market power, not to simply push down prices that seem too high).

We had a seminar by Ed Leamer of UCLA last week, and in his paper he quoted Frederic Bastiat (1848) as follows: "There is only one difference between a bad economist and a good one: The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen."

Economic engineering of the sort we are seeing is bad economics. It tries to regulate the visible and ignores the unpleasant fact that economic forces will cause adjustments and outcomes that are even worse. Regulating credit card fees sounds great for consumers, but what if it causes less competition in the credit market, or causes companies like American Express to change their very successful and consumer-friendly business model as a result? Or what if threatening insurance companies causes them to stop issuing policies?

My second thought is on why this is essentially an anti-business policy. At best, this policy is a misguided attempt to help "consumers" without consideration of the impact on companies and their owners (also consumers, but in the form of shareholders). That is antibusiness. Even worse, the policy smacks of pitting large business -- banks and payment networks -- against "small" business -- the retailers (is Gap really a small business though)? Even scarier is the hint that just like Secretary Sebelius in threatening insurers, this case is the follow-through of a threat by Justice against Amex: either change your behavior or we will bring you to court. While such threats are OK in many instances, I get the feeling that this Administration likes to flex its muscles a bit too much, and the flexing is usually aimed at getting prices to change from free market levels.

Third thought is on the antitrust case per se. Amex has about a 25% share of the card payments business, a level that is reasonably high but, I believe, below thresholds normally used in such cases. The overall market is somewhat concentrated, at least on some measures (not at the issuing bank level, but on the network level). These facts I agree make the case interesting. However, Amex has a very good efficiency argument for its policy of not permitting retailers to offer consumers discounts for using non-Amex cards: such behavior is free-riding off the investment that Amex has made in its brand name and what "American Express Accepted Here" means. Consumers are attracted to stores that display the Amex logo, but once in the store, the retailer has incentive to induce them to use other payment means. But Amex only collects revenue if the consumer who was brought into the store by the Amex logo then uses the Amex card. Go back and read the classic article, Howard P. Marvel, Exclusive Dealing, 25 J. L. & Econ. 1 (1982).

If the retailer does not think that the Amex logo on its door is worth the restriction, it is perfectly free to drop Amex as a card and no longer display the logo.

That is a pro-business attitude: freedom of contract.

1 comment:

Paul Smith said...

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