Amex and Post-cartesian Antitrust

• Publication year: 2021

98 Nebraska L. Rev. 364. AmEx and Post-Cartesian Antitrust

AmEx and Post-Cartesian Antitrust

Justin (Gus) Hurwitz(fn*)

TABLE OF CONTENTS

I. Introduction .......................................... 364

II. Situating American Express ........................... 367
A. Different Sides of the American Express Opinion . . . 367
1. TwoSided Markets ............................ 368
2. The American Express Opinion ................. 369
B. The Real Issue Is Messy, Not Two-Sided, Markets . 371
C. The Many Messes of Modern Markets ............. 375

III. Competition in Messy Markets ........................ 377
A. Simple Competition in Simple Markets ............ 377
B. More Complex Competition in Messier Markets . . . . 378
C. American Express: The Competition Is in the Pudding ........................................... 380

IV. The Many Sides of AmEx's Rightness .................. 383
A. A Burden Best Born by Plaintiffs .................. 383
B. Economic Theory as a Question of Law or of Fact? . 386

V. Conclusion ............................................ 387

I. INTRODUCTION

The Supreme Court's 2018 opinion in Ohio v. American Express Co.(fn1) is among the most important-and divisive-antitrust opinions in the modern era of antitrust law. The simplest statement of Justice Thomas's opinion for the majority is that it saw a five Justice majority of the Court fully embrace the relatively new economic understanding of two-sided markets. Supporters of the majority opinion almost uni-

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formly view it as an obviously correct application of important and generally accepted recent development in economic theory. Those more amenable to Justice Breyer's dissenting opinion do not necessarily reject the theory of two-sided markets, but instead would treat arguments premised on this theory as a pro-competitive justification (that is, a defense) to what could reasonably be understood as potentially anti-competitive conduct under prevailing antitrust economics.

The central argument of this Article is that both perspectives miss the forest for the trees. The Court's American Express opinion is not narrowly about whether (or how) antitrust law should embrace the theory of two-sided markets. Rather, I argue that this opinion is part of the Court's ongoing efforts to understand how antitrust law should evaluate markets that are not neatly "horizontal" or "vertical."

I call these efforts to understand competition in markets that are not clearly horizontal or vertical "post-Cartesian" antitrust, and describe these markets as "messy markets." At least at this moment in time, the broadest class of these markets are what are typically thought of as platforms. Some of the Court's post-Cartesian cases, however, do not involve what would ordinarily be thought of as platforms. Indeed, one of the defining characteristics of post-Cartesian antitrust is that these messy markets often defy simple classification.

Under this telling, antitrust law is currently undergoing a period of evolution comparable in importance to the period following the Court's embrace of Robert Bork's Antitrust Paradox and the consumer welfare standard in the 1970s. The adoption of the consumer welfare standard saw a rejection of the previously ascendant structure, conduct, performance (SCP) paradigm of market analysis as an overly simplistic model that did not describe many actual markets, and that was particularly inapposite to markets generally of interest to antitrust law.(fn2) The subsequent decade saw the development and adoption of a relatively robust framework for evaluating the competitive effects of conduct that eschewed market structure. It instead based itself upon consumer welfare analysis and constrained itself by market definition and error cost analysis.

While relatively robust, the tools and heuristics used by this framework have largely developed along the orthogonal axes of horizontal and vertical competition. These rules have served the market and American consumer exceptionally well for the past forty years. But the important antitrust cases today do not fit neatly into the mold

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of either horizontal or vertical conduct. Perhaps this is because the certainty provided by clear antitrust law reduces the incidence of litigation or perhaps because the changing technologies of the market-place have given rise to more complicated market structures-regardless the cause, simple horizontal or vertical market structures are not often the subject of antitrust litigation today. We see this in cases ranging from Apple Inc. v. Pepper (and the earlier Apple ebooks litigation),(fn3) to the AT&TTime Warner merger litigation, from Leegin Creative Leather Products, Inc. v. PSKS, Inc.,(fn4) to Federal Trade Commission v. Actavis, Inc.,(fn5) and of course in American Express.(fn6) Indeed, the market structures in these cases are so different from horizontal and vertical markets that the tools developed for analysis of horizontal and vertical markets are as inapposite to them as SCP methodologies are to markets for differentiated products, markets characterized by rapid innovation, entry, or network effect, and high fixed costs. In other words, in light of the messy markets that dominate contemporary antitrust litigation, the established horizontal/vertical competition paradigm is the modern equivalent of SCP, which are too structurally simplistic and too reliant on simple heuristics to be relevant to messy markets.

Antitrust law is currently struggling to address competition concerns that may arise in messy markets. This is a good thing: we generally expect litigation to arise in areas least settled by existing law, and that over time this litigation will clarify that law. Although this author believes that the Court generally, and in American Express in particular, is charting a good path through these markets, it is none-theless reasonable to acknowledge that it is possible that antitrust law may not be up to the challenge of addressing competitive concerns in all messy markets. To the extent that is the case, the appropriate response is to consider market-specific regulations to address concerns that may arise. This contrasts with proposals that would distort existing antitrust law, which has been overwhelmingly effective in addressing concerns in horizontal and vertical markets, to chase after the edge conditions that may arise in certain messy markets.

This Article proceeds in three Parts. Part II provides a brief over-view of the American Express opinion and situates it in recent antitrust case law, arguing that most recent high-profile antitrust litigation involves messy, post-Cartesian markets. Part III looks at how competition occurs in these markets, and demonstrates how prop-

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erly understanding the competitive dynamics of these markets can help to avoid both false positive and false negatives. Part IV turns back to the American Express opinion to argue not only that it was correct on its own terms but that it was the necessary outcome for antitrust law to continue to develop and be relevant to modern markets.

II. SITUATING AMERICAN EXPRESS

This Part provides a brief overview of the American Express opinion and situates it in recent antitrust case law, arguing that most recent high-profile antitrust litigation involves messy, post-Cartesian markets.

A. Different Sides of the American Express Opinion

The majority's opinion in American Express clearly understands it-self as being about the treatment of two-sided markets in antitrust law. It devotes significant effort to explaining the theory of two-sided markets and explaining that the credit card business is such a market.(fn7) The Court flatly rejects petitioners' case on the ground that it is staked entirely on the effects on a single side of this market.(fn8) Using the logic of two-sided markets, the Court rejects every effort petitioners make to directly demonstrate anti-competitive effects.(fn9) The Court clearly accepted respondent's characterization of the question presented by the case: that in two-sided markets the demonstration of seemingly anti-competitive effects on one side of a two-sided market is insufficient to make out a prima facie case under the rule of reason.(fn10)

Yet for all the discussion of two-sided markets-leading up to the case, in the Court's opinion, and in subsequent analysis and discussion of the opinion-the two-sidedness of the market is surprisingly irrelevant to the Court's analysis. Rather, the deciding factor in the case was that the market in question is subject to substantial indirect network effects (which were excluded by the district court decision and plaintiffs' arguments). The Court also went to lengths to note that the credit card market is a specific type of two-sided market (a "transaction platform") such that the Court's conclusions in the American Express opinion may not apply to other types of two-sided markets.(fn11) In other words, the Court's analysis applies both more broadly and narrowly than just to two-sided markets.

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1. Two-Sided Markets

It is hard to imagine that anyone reading this Article is not familiar with the economic theory of two-sided markets. Some definition of the concept is nonetheless necessary. The concept of two-sided markets is still relatively new in the economics literature. It is perhaps most closely associated with Rochet & Tirole's 2003 article...