The Murky World of Network Mergers: Searching for the Opportunities for Network Competition

• DOI: 10.1177/0003603X9704200401
• Author: David A. Balto
• Published date: 01 December 1997
• Date: 01 December 1997
• Subject Matter: Domestic Antitrust

The Antitrust BulietinlWinter 1997

The

murky

world

of

network

mergers:

searching

for the

opportunities

for network

competition

BY DAVID A. BALTO*

I.

Introduction

793

One

of

the most difficult issues faced by antitrust enforcers is

how to analyze mergers between networks. Part of the difficulty

involves balancing the competitive ledger of network mergers. On

the one hand, network consolidation may often provide fairly

obvious benefits of increasing economies of scale and scope. On

the other hand, networks may become monopolies and the oppor-

tunities for network competition may be lost. This may

occur

because the perception

of

how networks compete may not be par-

ticularly clear. In the past, enforcers and regulators have resolved

these issues with a very permissive view and permitted network

*

Attorney

advisor

to

Chairman

Robert

Pitofsky

of

the

Federal

Trade Commission.

AUTHOR'S NOTE: This article does not necessarily represent the views

of

the Commission,

of

any individual Commissioner. or

of

any other member

of

the staff.

© 1998 by Federal Legal Publications, Inc.

794

The antitrust bulletin

consolidation. More recently these mergers have received more

careful scrutiny.

To illustrate these issues, this article discusses the evolving

views

of

competition in automated teller machine (ATM) net-

works. The article begins by describing how views of network

competition

evolved-from

one of network competition in which

it was

envisioned

that

numerous

competing

networks

would

exist-to

one

of

network

monopoly-where

consolidation was

permitted to achieve economics

of

ubiquity. The second part of

the article describes how ATM network mergers are analyzed. The

article concludes that although enforcers in the 1990s began to

recognize the elements

of

network competition, they mistakenly

are giving too much weight to the economics of ubiquity, with the

result that almost all areas will be served by a single dominant

ATM network. The article examines how the monopoly/public

utility

model

appears

to have

prevailed

in

the

ATM

network

merger context.

II. The search for payment systems competition:

trends in enforcement

Views

of

payment systems competition have evolved during

the past generation. When ATM networks were first created in the

1970s, policy makers considered two models for these emerging

networks:

(1)

amonopoly/public utility network model, with open

access obligations and (potentially) some form of regulation, or

(2) a competing network

model-with

numerous networks com-

peting in a lightly regulated environment. This article describes

how these visions of network competition have evolved. Even

though the network competition model was chosen in the 1970s,

because

of

a history of nonenforcement by antitrust agencies and

regulators,

it

appears

that

by

the

close

of

this

century

the

monopoly/public utility model may be victorious.

Network mergers

795

A. The J

970s-providing

the opportunities

for

network

competition in new markets

As

the

technology for

automated

payment

systems

arose,

Congress perceived the need to address the creation of these sys-

tems in a single forum, and created the National Commission on

Electronic Funds Transfer (NCEFT). The Antitrust Division of the

Department of Justice played an important role in informing the

NCEFT on whether and in what form competition could arise in

the newly formed networks.

One important question was whether these networks would be

"natural monopolies," because

of

the substantial processing effi-

ciencies involved. At the time, some commentators argued that

ATM networks were natural monopolies because asingle network

could serve ATMs at lower cost than multiple networks. Based on

that conclusion, they argued that the networks should be "open,"

i.e., compelled to share their facilities with all financial institu-

tions in a given area. Some states incorporated this concept in

statutes that required sharing.

In

proceedings

before the NCEFT, the

Antitrust

Division

opposed the concept of mandatory sharing, in particular, because

it would deter the incentives to create competing networks.' At the

time, some thoughtful economic studies suggested that an individ-

ual

region

could

support

several

competing

ATM networks.?

The NCEFT adopted the Antitrust Division's view. It observed

that mandatory sharing "would inevitably result in fewer competi-

tors

....

Maximum competition usually spells rapid technologi-

cal

improvement

and

lower

prices to consumers."3 Thus,

the

Commission expressly rejected any sharing requirement, based on

See DEPARTMENT OF JUSTICE, ANTITRUST DIVISION, POLICY STATEMENT

ON SHARING TO THE NATIONAL COMMISSION ON ELECTRONIC FUND TRANSFERS

(Jan. 13, 1977).

See WILLIAM

F.

BAXTER,

PAUL

H. COOTNER &KENNETH

E.

SCOTI,

RETAIL

BANKING

IN THE

ELECTRONIC

AGE:

THE

LAW

AND

ECONOMICS

OF

ELECTRONIC FUNDS TRANSFER (1977).

See

EFT

IN THE

UNITED

STATES,

FINAL

REPORT

OF THE

NATIONAL

COMMISSION ON ELECTRONIC FUND TRANSFERS 57 (1977).