Tuesday, July 27, 2010

The Firm as Cartel Manager

Posted by D. Daniel Sokol

Herb Hovenkamp, Iowa Law, explains The Firm as Cartel Manager.

ABSTRACT: Historically, Visa and MasterCard were organized as joint ventures whose members were the card issuing financial institutions. After enduring decades of antitrust litigation, however, first MasterCard and later Visa reorganized themselves as publicly traded corporations with a unique dual class share structure under which the “insiders” (the issuing banks) relinquished their voting control over day-to-day operations, and control was left in the hands of public shareholders who presumably have no ongoing separate interest in the bank credit card business. While the Visa and MasterCard IPOs themselves may have sound efficiency explanations, the odd “inverse” dual class share structure was very likely an attempt to turn MasterCard and Visa into single entities for antitrust purposes, thus placing many of the activities attacked in previous litigation outside of the reach of §1 of the Sherman Act. That statute reaches activity only when it is the product of a “contract, combination, or conspiracy” in restraint of trade, all of which involve agreements among two or more actors. By contrast, while §2 of the Sherman Act reaches unilateral activity, it reaches only conduct that “monopolizes,” or excludes rivals from a market with anticompetitive results. This essay argues that if creating a single entity for antitrust purposes was their motive, the promoters of the Visa and MasterCard ventures failed to anticipate the logic and breadth of the Supreme Court’s American Needle decision. The Court unanimously held that the NFL is a multiplicity of actors for purposes of a challenge to a contract that combined the separate intellectual property interests of the 32 NFL football teams. Significantly, the focus of the Supreme Court’s analysis was not on who controls, but rather on who is controlled. A cartel seeks to maximize the profits of the cartel group as a whole. By contrast, individual members of the cartel seek to maximize their own individual profits, which they can do by undercutting the cartel, typically by producing more than its cartel output assignment or by charging less than the cartel price. The question of competitive harm does not depend on cartel members' individual power to make price and output decisions, but rather on the cartel manager’s ability to force its price and output decisions upon the individual members. To the extent that the MasterCard and Visa IPOs limit the conduct of separately owned banks who are able to compete with one another they should continue to be regarded as a multiplicity of actors rather than a single entity.


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