Platforms, American Express, and the Problem of Complexity in Antitrust

• Publication year: 2021

98 Nebraska L. Rev. 389. Platforms, American Express, and the Problem of Complexity in Antitrust

Platforms, American Express, and the Problem of Complexity in Antitrust

Chris Sagers(fn*)

TABLE OF CONTENTS

I. Introduction .......................................... 389

II. The Great Generalization ............................. 394

III. Antirust Without Platform Theory ..................... 398
A. Are Credit Cards Really a Boon to Society and Would Non-Platform Antitrust Wreck It? .......... 398
1. Do Credit Cards Do Anything Special? ......... 399
2. How a Platform Player Causes Harm on One Side ........................................... 404
B. Will the Cat Really Stay in the Credit Card Bag? . . 405

IV. Conclusion: How Antitrust Complexity Devolves to Conservative Simplicity ............................... 408

I. INTRODUCTION

Everything about Ohio v. American Express(fn1) was wrong and the adoption of "two-sided platform" reasoning into American antitrust law might be one of its worst, most regrettable wrong turns in decades. That is not because the original theoretical model of two-sided interaction has anything wrong with it at all. It is rather that nothing

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could be gained by incorporating it that could be worth the result in the American Express case itself, or the difficulty that has likely been invited into antitrust litigation. The consequences are hard to predict, but they may be severely limiting to our already moribund antitrust enforcement. I will offer two major responses in this Article. Part II states a simple theoretical argument to demonstrate an important mistake in American Express. It was crucial for the American Express majority to characterize its decision as simply a problem in product market definition, but for the strictly strategic purpose of requiring plaintiffs to prove that where markets are two-sided, the challenged conduct reduces the quantity of the jointly demanded product. However, quite contrary to the majority's self-assured confidence, the anti-steering rule at issue indeed could cause serious harm without reducing the quantity of the jointly demanded cards-wipe transactions. The harm is dynamic and depends on the fact that, contrary to platform theory's presumption, elasticities are neither fixed nor exogenous. Part III then explains how a deeper epistemological problem inherent in cases like American Express, and in conservative antitrust law more generally, poses very serious risks for the policy.

This reflects an old problem in antitrust. Ronald Coase once famously mocked the "preoccupation" of mid-century economists "with the monopoly problem."(fn2) When such "an economist finds something . . . that he does not understand," said Coase, "he looks for a monopoly explanation."(fn3) Like some others of his little witticisms, that line has been quoted dozens of times, usually to show how laughable the economic mainstream of his day was, and really the antitrust enterprise itself. Because Coase further believed that "in this field we are very ignorant," he thought that "the number of ununderstandable practices tends to be rather large, and reliance on the monopoly explanation, frequent."(fn4) It was all quite absurd, you see.

If anything was absurd about it, though, it was just that the monopoly preoccupation generated policy that seemed to Coase contrary to prudent common sense. When Coase said that thing in 1972, the Warren Court had effectively outlawed non-conglomerate acquisitions of any size and literally all limits on intra-brand resale competition.(fn5) The Court had very recently held components of seemingly desirable

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joint ventures per se illegal,(fn6) and the enforcement agencies were in the midst of several huge, long-running monopolization challenges. But even following those strictures, a popular clamor, led in part by Ralph Nader, was gaining ground, stressing that American antitrust had been much too soft on monopoly, and Congress was considering blue-ribbon-panel recommendations for the nation's first general, no-fault deconcentration law.(fn7) From Coase's point of view, the antitrust law of his day risked serious harm to the American economy to protect against the merest possibility of confiscated surplus or deadweight loss. The monopoly preoccupation seemed like it was wagging the whole dog of competition policy, so much and so knee-jerkingly so that it seemed driven more by the economists' ideology than by the search for empirical truth.

Well, if that sort of thing was absurd in Coase's day, then it is absurd today as well. It was accordingly frustrating to read yet another opinion like American Express. That was only partly because listening to Clarence Thomas talk about American Express was like listening to Donald Trump talk about Vladimir Putin.(fn8) What was not merely tedious was that something seems pretty far out of whack in American payment systems, and yet the Court allowed the merest possibility of accidental impediment to private enterprise to wag the entire dog of competition policy. On the one hand, credit cards are in hugely common use even though they are more costly to society than other payment systems, and there is no strong evidence that (absent cardholder premiums) they especially benefit either merchants or cardholders.(fn9) Something has apparently gone wrong in these markets that shouldn't happen if they were working well. On the other hand, the challenged conduct seemed like a grossly, facially anticompetitive restraint im-posed by the number two firm in a three-firm oligopoly, preserving a practice the three of them had long followed until the other two gave it up in the course of the same litigation. The restraint seemed ugly even within the terms of the "two-sided" or "platform market" theory the Court would adopt for it. It went to intersystem competition of the kind that William Baxter condemned in his famous original formula-

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tion of the problem.(fn10) It also involved massively mature platforms, in which the incremental network value of additional participants closely approximates zero. Yet American academia and a majority of the Supreme Court bent over backwards to give that conduct the benefit of the doubt. The Court invoked the prohibitive machinery not only of the rule of reason but of a new, bespoke variation on it that may be quite a bit more demanding. It did that on no more than an a priori demonstration that any stricter rule might jeopardize some possible benefit, the size of which we can only guess.

It is not just the American Express case that is put in issue by this sort of thing, or its particular economic theory. A deeper and generalizing purpose lurks within any such case, and in all conservative antitrust law. Much more than mere mockery, Coase and those quoting him have meant to imply a claim of fundamental epistemology and policy. The claim is that law and social science should work in the same way, so that where social science would be cautious the law must be too. That claim defines the conservative ideology that has dominated American antitrust law for fifty years.

But, in turn, American Express entails a strong empirical assumption for which there is no systematic confirmation of any kind. It presumes that in the presence of ignorance it is better not to act than to act. Putting it a different way, it presumes that choosing not to act in the administration of public policy is the same thing as choosing not to decide in science. But that does not follow at all. In science, to reject a hypothesis typically has no real consequences. It is a protocol of intellectual hygiene that is usually just the equivalent of keeping an open mind and thinking some more. Choosing not to enforce the law is not like that at all. It is deliberate and practically significant, because it might permit conditions to fester that threaten worse loss than mistaken government action. It is emphatically not just some neutral stance of healthy caution; it is ideological, no less than the monopoly preoccupation of yore. That is so because whether reticence is always or even usually better than action is empirical, and it seems fraught, complex, and unknown.

This Article will ask as an initial question whether the stance taken in American Express was a worthwhile prophylaxis, comparing the cost of its rule to the likelihood that some good was done by giving credit cards this much leeway. I think the answer is no. It was a counterproductive mistake. On the one hand, the history of the industry is not easy to explain; it seems complicated and it could be explained in different ways. But it is still not so hard to answer the question. The likelihood that enforcement would inadvertently cause

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harm to the industry seems very small and the cost of failing to enforce the law seems large. As a great appellate advocate wrote in briefing before the American Express Court: "whether theoretically accurate or not," special rules for purportedly special cases "introduce occasions for lower courts to miss the forest for a tree they have misunderstood and that was never necessary to plant."(fn11)

The problem in letting theory like this invade antitrust law is not just that it gets one case or one narrow context wrong. It may very well be that liberals like me have overreacted to American Express, and that it will seem limited in hindsight. Many critics of my persuasion took Credit...