Topic 16: SELECTED TOPICS – Antitrust of Payment cards

1. Antitrust Economics 2013 David S. Evans University of Chicago, Global Economics Group Elisa Mariscal CIDE, Global Economics Group Topic 16: SELECTED TOPICS – Antitrust of Payment cards Topic 16| Part 2 23 January 2014 Date

2. Overview Topic 16

3. Currency Platforms

4. Currency Platforms

5. Critical Mass Problem for Payment Systems

6. Igniting New Payment Platforms: Bitcoin

7. Payment Card Platforms

8. The Birth of the Modern Payment Card Industry

9. Ignition: Diners’ Club 1950

10. Lessons for Payment System Ignition First-mover advantage and positive feedback effects don’t guarantee permanent success: Diners Club eclipsed by American Express in 15 years. Discover Card bought Diners for $165 million in 2008.

11. Three and “Four” Party Payment Card Systems

12. Cooperative Model

13. The Structure of the Payment Card Ecosystem Often called “4-party” or “open-loop” systems: (consumer |issuer | acquirer and merchant) like Visa Versus “3 party” or “closed-loop” systems (consumer | system | merchant) like Amex

14. The Payment Card Industry in Spain Issuers BancoSantader, Banesto, BBVA, Caja Madrid, Citibank, Euro 6000, La Caixa MBNA GrupoBancoPopular, Unicaja Networks Domestic and international schemes Acquirers Banc Sabadell, BancoSantader, Bankia, BBVA, Comercia GrupoBancoPopular

15. The Payment Card Supply Chain • Value-Addedproviders (PayPal) have solutions that rely on the rest of the chain. Integration into layers varies by country.Innovation is occurring at all of these layers and especially value-added.

16. The Payment Card Business Model • Network makes money from fees it charges acquirers and issuers • Issuer makes money from “interchange fees” acquirers pay when cards are used plus fees and interest charges to consumers; bundled with checking account for debit • Acquirer makes money from fees on top of interchange fees it charges merchants • Merchant and card processors charge transaction fees • Equipment manufacturers sell or lease equipment to acquirers or merchants • Value-added providers charge additional fees or earn arbitrage fees

17. The Interchange Fee Controversy

18. Merchant Pays Model for Cards

19. Interchange Fee

20. Interchange Fees: Is There A Problem?

21. And Whose Problem Is It?

22. Antitrust Claims Against Interchange Fees

23. Two-Sided Antitrust Issues

24. Net Impact on Consumers

25. Economics of Pass Through Estimated pass through rates vary considerably and depend on market details including demand, cost, structure, behavior. Median pass-through from studies about 50 percent.

26. Whose Welfare? Again

27. Market Failure and Remedy

28. Merchant Rule Controversy

29. Platforms Harness Externalities

30. Platform Design and Rules Promote Positive Externalities

31. Platforms and Bad Behavior Web Businessman Sentenced for Threats By DAVID SEGAL Published: September 6, 2012 A Brooklyn man who terrified customers of his online eyewear store with threats of violence, including rape, was sentenced on Thursday to four years in federal prison and ordered to pay nearly $100,000 in restitution and fines. Borker told the New York Times in 2010 that negative publicity had vaulted his site to the top of Google’s organic rankings. “I’ve exploited this opportunity because it works. No matter where they post their negative comments, it helps my return on investment,” he explained. “So I decided, why not use that negativity to my advantage?”

32. Rule to Reduce Negative Externalities

33. Welfare Effects of Rules

34. Vertical Restraints and Platform Governance

35. End of Topic 16, End of the Antitrust Economics Course