AN ECONOMIC ANALYSIS OF THE 2011 SETTLEMENT BETWEEN THE DEPARTMENT OF JUSTICE AND CREDIT CARD NETWORKS

Posted by D. Daniel Sokol

Scott Schuh (Federal Reserve Bank of Boston), Oz Shy, Joanna Stavins, and Robert Triest undertake AN ECONOMIC ANALYSIS OF THE 2011 SETTLEMENT BETWEEN THE DEPARTMENT OF JUSTICE AND CREDIT CARD NETWORKS.

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 approved settlement between the DOJ and Visa and MasterCard (“the 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 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 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.