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An economic analysis of the 2010 proposed settlement between the Department of Justice and credit card networks

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  • Scott Schuh
  • Oz Shy
  • Joanna Stavins
  • Robert Triest

Abstract

In 2010, the Department of Justice (DOJ) filed a lawsuit against the credit card networks American Express, MasterCard, and Visa for alleged antitrust violations. We evaluate the extent to which the recently proposed settlement between the DOJ and Visa and MasterCard (henceforth, "Proposed Settlement") is likely to achieve its central objective: "…to allow Merchants to attempt to influence the General Purpose [Credit] Card or Form of Payment Customers select by providing choices and information in a competitive market." In word and spirit, the Proposed Settlement represents a significant step toward promoting competition in the credit card market. However, we find that merchants are unlikely to be able to take full advantage of the Proposed Settlement's new freedoms because they currently lack comprehensible and complete information on the full and exact merchant discount fees for their customers' credit cards. We analyze the likely consequences of this information problem, and consider ways in which it could be remedied. We also evaluate the probable welfare consequences of allowing merchants to impose surcharges to reflect the fees associated with the use of payment cards.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Boston in its series Public Policy Discussion Paper with number 11-4.

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Date of creation: 2011
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Handle: RePEc:fip:fedbpp:11-4

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Keywords: Credit cards;

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  1. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
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  10. Santiago Carbó Valverde & Sujit Chakravorti & Francisco Rodríguez-Fernández, 2009. "Regulating two-sided markets: an empirical investigation," Working Paper Series WP-09-11, Federal Reserve Bank of Chicago.
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  13. Robin A. Prager & Mark D. Manuszak & Elizabeth K. Kiser & Ron Borzekowski, 2009. "Interchange fees and payment card networks: economics, industry developments, and policy issues," Finance and Economics Discussion Series 2009-23, Board of Governors of the Federal Reserve System (U.S.).
  14. Monnet, Cyril & Roberds, William, 2008. "Optimal pricing of payment services," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1428-1440, November.
  15. Jeffrey R. Brown & Austan Goolsbee, 2000. "Does the Internet Make Markets More Competitive?," NBER Working Papers 7996, National Bureau of Economic Research, Inc.
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