The Anticompetitive Effect of Vertical Most-Favored-Nation Restraints and the Error of Amex

Abstract

This Essay explains why the Supreme Court’s economic reasoning in its recent Ohio v. American Express Co. (“Amex”) decision is wrong. The Amex case involved the use of what are called “antisteering” restraints in which a retailer is not allowed to use a variety of tactics to steer a consumer away from using an American Express (“Amex”) card and toward using another payment mechanism. The reason why a merchant might want to do this is because the cost that the merchant incurs when a customer uses an Amex card can be higher than the cost that the merchant incurs when the customer uses either another credit card, debit card, or cash. Although not challenged in the Amex case, the Amex contractual rules also prevent a retailer from imposing a surcharge on customers who use an Amex card to reflect the higher merchant cost. It is interesting to note that some countries—such as Australia—have regulated certain credit card fees, others have forbidden credit card companies from telling merchants that they cannot surcharge, and some states in the United States—such as New York—have forbidden merchants from surcharging. Restraints on surcharging or steering are examples of restraints that Ralph Winter and I call “vertical most-favored-nation restraints,” (“vMFN”) in which one supplier tells a retailer that the retailer cannot set the retail price of its product higher than that of a rival, even if its wholesale price is higher than that of its rival. Such restraints have been the subject of some litigation already, but I expect that with the increasing use of web based platforms where such restraints are often used, litigation regarding such restraints will increase.

This Article illustrates the underlying economic logic behind the anticompetitive effect of vMFNs. I then apply the reasoning to credit cards and finally, using the economic framework developed, explain the economic errors in the Court’s Amex decision. For a more detailed discussion, please see the Carlton and Winter paper referenced herein.