The economics of interchange fees and their regulation : an overview

Debit cards ; Credit cards

Some Economic Aspects of Antitrust Analysis in Dynamically Competitive Industries

Competition in many important industries centers on investment in intellectual property. Firms engage in dynamic, Schumpeterian competition for the market, through sequential winner-take-all races to produce drastic innovations, rather than through static price/output competition in the market. Sound antitrust economic analysis of such industries requires explicit consideration of dynamic competition. Most leading firms in these dynamically competitive industries have considerable short-run market power, for instance, but ignoring their vulnerability to drastic innovation may yield misleading conclusions. Similarly, conventional tests for predation cannot discriminate between practices that increase or decrease consumer welfare in winner-take-all industries. Finally, innovation in dynamically competitive industries often involves enhancing feature sets; there is no sound economic basis for treating such enhancements as per se illegal ties.

The Economics of Interchange Fees and Their Regulation: An Overview

This essay surveys the economic literature on interchange fees and the debate over whether interchange should be regulated and, if so, how. We consider, first, the operation of unitary payment systems, like American Express, in the context of the recent economic literature on two-sided markets, in which businesses cater to two interdependent groups of customers. The main focus is on the determination of price structure. We then discuss the basic economics of multi-party payment systems and the role of interchange in the operation of such systems under some standard, though unrealistic, simplifying assumptions. The key point of this discussion is that the interchange fee is not an ordinary price; its most direct effect is on price structure, not price level. We then examine the implications for privately determined interchange fees of some of the relevant market imperfections that have been discussed in the economic literature. While some studies suggest that privately determined interchange fees are inefficiently high, others point to fees being inefficiently low. Moreover, there is a consensus among economists that, as a matter of theory, it is not possible to arrive, except by happenstance, at the socially optimal interchange fee through any regulatory system that considers only costs. This distinguishes the market imperfections at issue here for multi-party systems from the more familiar area of public utility regulation, where setting price equal to marginal cost is theoretically ideal. Next, we consider the issues facing policy makers. Since there is so much uncertainty about the relation between privately and socially optimal interchange fees, the outcome of a policy debate can depend critically on who bears the burden of proof under whatever set of institutions and laws the deliberation takes place. There is no apparent basis in today's economics - at a theoretical or empirical level - for concluding that it is generally possible to improve social welfare by a noticeable reduction in privately set interchange fees. Thus, if antitrust or other regulators had to show that such intervention would improve welfare, they could not do so. This, again, is quite unlike public utility regulation or many areas of antitrust including, in particular, ordinary cartels. By the same token, there is no basis in economics for concluding that the privately set interchange fee is just right. Thus, if card associations had to bear the burden of proof - for example, to obtain a comfort or clearance letter from authorities for engaging in presumptively illegal coordinated behavior - it would be difficult for them to demonstrate that they set socially optimal fees. We take a pragmatic approach by suggesting two fact-based inquiries that we believe policymakers should undertake before intervening to affect interchange. First, policymakers should establish that there is a significant market failure that needs to be addressed. Second, policymakers should establish that it is possible to correct a serious market imperfection, assuming one exists, by whatever intervention they are considering (such as cost-based regulation of interchange fee levels) and thereby to increase social welfare significantly after taking into account other distortions that the intervention may create. We illustrate both of these points by examining the recent Australian experience.Technology and Industry, Regulatory Reform

A Survey of the Economic Role of Software Platforms in Computer-Based Industries

Software platforms are a critical component of the computer systems underpinning leading– edge products ranging from third– generation mobile phones to video games. After describing some key economic features of computer systems and software platforms, the paper presents case studies of personal computers, video games, personal digital assistants, smart mobile phones, and digital content devices. It then compares several economic aspects of these businesses including their industry evolution, pricing structures, and degrees of integration.software platforms, hardware platforms, network effects, bundling, multi-sided markets

U.S. v. Microsoft: Did Consumers Win?

U.S. v. Microsoft and the related state suit filed in 1998 appear finally to have concluded. In a unanimous en banc decision issued in late June 2004, the D.C. Circuit Court of Appeals rejected challenges to the remedies approved by the District Court in November 2002. The wave of follow-on private antitrust suits filed against Microsoft also appears to be subsiding. In this paper we review the remedies imposed in the United States, in terms of both their relationship to the violations found and their impact on consumer welfare. We conclude that the remedies addressed the violations ultimately found by the Court of Appeals (which were a subset of those found by the original district court and an even smaller subset of the violations alleged, both in court and in public discourse) and went beyond them in important ways. Thus, for those who believe that the courts were right in finding that some of Microsoft's actions harmed competition, the constraints placed on its behavior and the active, ongoing oversight by the Court and the plaintiffs provide useful protection against a recurrence of such harm. For those who believe that Microsoft should not have been found liable because of insufficient evidence of harm to consumers, the remedies may be unnecessary, but they avoided the serious potential damage to consumer welfare that was likely to accompany the main alternative proposals. The remedies actually imposed appear to have struck a reasonable balance between protecting consumers against the types of actions found illegal and harming consumers by unnecessarily restricting Microsoft's ability to compete.

Failure to Launch: Critical Mass in Platform Businesses

Platform businesses add value by facilitating interactions between customers who are attracted in part by network externalities. Two-sided platform businesses with low costs of reversing participation status have become more important with the rise of the Internet. This essay is concerned with new businesses of this sort and the initial critical mass hurdle that they generally seem to face. In a very general model, we show how this hurdle depends on the nature of network effects, the dynamics of customer behavior, and the distribution of customer tastes. Weak, plausible assumptions about adjustment processes imply that platforms must get a sufficient number of members of both sides on board to launch successfully.Viacom Inc

Applying the Rule of Reason to Two–Sided Platform Businesses

In recent years, the federal courts’ analysis of the competitive effects of conduct challenged under the Sherman Act’s rule of reason, which generally includes market definition as a critical step, has been properly guided by sensitivity to business reality and sound economic analysis of the conduct at issue. When it comes to two–sided platforms, the courts should adhere to that same flexible but principled approach and avoid rigid alternatives that would apply regardless of the platform, conduct, or fact–pattern. In Ohio v. American Express Co., (Case No. 16–1454), now before the U.S. Supreme Court, the U.S. Department of Justice as well as some law professors and economists wrote as amici in support of the Petitioners. They proposed analytical frameworks that would, first, require courts to restrict the relevant antitrust market to the side of the platform that is the subject of the challenged conduct and, second, to then exclude the impact of the conduct on the other side of the platform for the purposes of establishing anticompetitive effects under the first stage of the rule of reason inquiry. Such a rigid approach could lead courts, and possibly require them, to ignore business reality, sound economics, and fact patterns in analyzing alleged anticompetitive conduct by platform enterprises and defining relevant antitrust markets. Following this approach could result in tribunals wrongly exonerating behavior that is anticompetitive or wrongly condemning behavior that is not. This approach should be rejected in favor of accounting for the business realities of two–sided platforms just as the courts have generally done for enterprises

Improved Semileptonic Form Factor Calculations in Lattice QCD

We investigate the computational efficiency of two stochastic based alternatives to the Sequential Propagator Method used in Lattice QCD calculations of heavy-light semileptonic form factors. In the first method, we replace the sequential propagator, which couples the calculation of two of the three propagators required for the calculation, with a stochastic propagator so that the calculations of all three propagators are independent. This method is more flexible than the Sequential Propagator Method but introduces stochastic noise. We study the noise to determine when this method becomes competitive with the Sequential Propagator Method, and find that for any practical calculation it is competitive with or superior to the Sequential Propagator Method. We also examine a second stochastic method, the so-called ``one-end trick", concluding it is relatively inefficient in this context. The investigation is carried out on two gauge field ensembles, using the non-perturbatively improved Wilson-Sheikholeslami-Wohlert action with N_f=2 mass-degenerate sea quarks. The two ensembles have similar lattice spacings but different sea quark masses. We use the first stochastic method to extract ${\mathcal O}(a)$-improved, matched lattice results for the semileptonic form factors on the ensemble with lighter sea quarks, extracting f_+(0)

The Relationship of Organizational Justice and Interpersonal Attraction in Survivors’ Acceptance of Co-Worker Terminations

The main purpose of this study was to examine the relationship of organizational justice and interpersonal attraction in survivors’ acceptance of co-worker terminations. Four scenarios were tested manipulating high and low levels of the two independent variables (organizational justice and interpersonal attraction) and their effects on the dependent variable (level of acceptance of coworker terminations). Findings indicate justice during the termination process is more important than how much the coworker was liked on the survivors’ acceptance of coworker terminations. The practical implication is that organizations must be careful to insure that terminations are done in a just manner in order to engender the acceptance of the surviving workforce