Visa and MasteCard Antitrust1
Duality, Monopoly and Government Failure
Duality or illegal business practices which one contributed to Visa and MasterCard attaining over seventy-five percent of market shares. Who is really to blame for Visa and MasterCard obtaining the ability to monopolize the market; the government; member banks; or Visa and MasterCard collaboration. The Department of Justice investigation will bring forth many issues to closely review and consider.
Reviewing the courts transcript, released by the Department of Justice on the governments antitrust case investigation; United States of America verses Visa International and MasterCard International Incorporated. reveals how the government may have been a major contributor to Visa and MasterCard effectively obtaining market power of the general-purpose card networks. The government should have evaluated the Worthens suit more closely. When the Worthen Bank of Arkansas, a Visa member bank, wanted to issue MasterCards general-purpose cards, Visa adopted Bylaw 2.16 prohibiting members bank from issuing any other network card. Worthen sued Visa; stating the Bylaw 2.16 violated section 1 of the Sherman Act. The courts agreed with Worthen; stating bylaw 2.16 in itself was per se a violation of the Sherman Act and ruled judgment in Worthens behalf. However, the Eighth Circuit court reversed the decision and sent the case for retrial using the rule of reason as the foundation. While awaiting trail Visa wanted to impose a more restrictive bylaw, so they asked the Department of Justice to review their new proposed Business Review letter. The new policy would not only prohibit members from issuing other general purpose cards, but also prohibit banks from providing card acceptance service for any other card presently in existence or card that may develop in the future as well. The Department of Justice stated, it could support the more restrictive bylaw of Visa member banking only issue Visa cards, but it was concerned about the restriction of banks providing card acceptance services to merchants for both networks. The Department of Justice believed the bylaw might handicap the entry of new banking cards and possibly lessen competition in the industry. Before the case was retried, Visas Board of Directories overturned Visas General Counsel decision and permitted Visa member banks to issue MasterCards general-purpose cards and MasterCards Board of Directories agreed to allow their member banks to issue Visas general-purpose cards. The government had no objections to Visa and MasterCard joint venture of allowing overlapping ownership and the dual governing structure of the banks, that later became known as duality. Both Visa and MasterCard Board of Directors sent the Department of Justice letters stating their business intentions; the letter stated, when one board acts with respect to a matter the results of those actions are disseminated to the members that are members in both organizations. As a result, each of the associations is a fishbowl and offices and board members are aware o f what the other is doing, much more so than in the normal corporate environment. One point of interest to consider is, if the government could foresee the negative externalities that Visas Business Review policy would have on the market structure, why did it not foresee the full implication that duality would have in the industry?
Visa and MasterCard may have initially entered into an association, because they believed duality would be the easiest and fastest way of resolving their legal differences. They had no clue of the impact their decision would have on the industry and market structure. On several occasions, member banks violated both section 1and 2 of the Sherman Act. Although there were no written policies or safeguards in placed preventing Visa and MasterCard from competing against each other, governing banks would often reject any implementations of or refuse to investments in any competitive initiatives proposed by the separate management.Officials at the highest level of Visa and MasterCard corporations have publicly and under oath acknowledge co-ownership and governance has significantly lessened competition. Visas International president and Chief Executive Officer testified, Visa was a better organization before duality. He also stated their groups of banks wanted to support Visa and go beat up MasterCard and those who supported MasterCard banks wanted to go beat up on Visa. However, it was hard for them to take an aggressive step against each other, because some Board of Directors was a member of both banks and they would not allow any competition. The President of MasterCard International and General Counsel wrote a letter to the Department of Justice claiming member banks viewed Visa and MasterCards association as complementary and are displeased when one attempt to enhance itself at the others expense; therefore, making it impossible to compete in certain areas. He testified: It is clear that because of duality you do not see MasterCard and Visa attacking each other in the marketplace.
The member banks defended the actions by focusing on the accessibility of general-purpose cards in the marker and competition between card issuers; responding that card issuers compete for cardholders with respect to interest rates, annual cardholder fees, payment terms and conditions. Therefore, it is not necessary for Visa and MasterCard to compete with one another.
As time passed, Visa and MasterCard realized the advantages duality provided them and they began collaborating with governing banks by adopted rules and policies prohibiting member banks from doing business with other general-purpose card networks such as American Express and Discover/Novus. In an attempt to complete in the card networks, American Express developed a single merchant terminal that would accept and process all network general-purpose cards, Visa and MasterCard violated Section 2 of the Clayton by enacting a new regulation forbidding member banks to process their cards. However, the demands by merchants for a single terminal forced Visa and MasterCard to modify this policy, so they allowed merchants to process their cards using other general-purpose card networks, but charged merchants higher fees for using non-Visa/MasterCard network systems. Even though Visa and MasterCard adjusted their position on a single terminal processing system, the Department of Justice investigation revealed Visa and MasterCard still remained in control of 85% of the market power; leaving very little market shares to American Express who had only 5% and Discover/Novus with 8.5%.
Visa and MasterCard enacted several exclusionary practices that restrained competition. For example, they prohibited banks from during business with other general-purpose card networks; prohibited American Express and Discover/Novus access to their ATM machines for cash advances; and terminated any member bank that issued American Express and Discover/Novus card networks.
Entry into the general-purpose card network market is a difficult task within itself. The ability of producers to establish new banking cards and network system requires large investments and the success in the market depends upon the consumers willingness to accept and use the product. Visa and MasterCard further complicate matters, by implementing anti-competitive polices that injured competition, and increased entrants costs. Member banks restrained critical competitive initiatives that were developed by Visa and MasterCard management. When MasterCard developed its Smart card, the governing banks refused its release, and only after Visa had developed a similar card, did the member banks allow Visa and MasterCard to banks all Master card to release theothe card was released only after Visa had developed a similar card. The government antitrust laws were established to ensue consumers receives good quality products; there are enough producers in the industry to provide such products, and the price of the product is sold at a fair market price. The Federal Trade Commission is the government agency responsible for monitoring business practices of organizations within the industry and take legal actions against violators of antitrust laws. As for the Visa and MasterCard monopolization antitrust case, evidence presented by the Department of Justice investigation revealed actions by the government, member banks, as well as Visa and MasterCard contributed to the market failure of the general-purpose card networks.
Complaint for Equitable Relief for Violations of 15 U.S.C. s 1 Civil Action No. 98-civ.7076. http://www.usDepartment of Justice.gov/atr/cases/f1900/1973.htm 15 Jun 2000.
Micheel Smith 26 Female