Economic theory has always had a vital role in shaping the development of antitrust jurisprudence. For example, the law used to treat vertical price restraints—such as where a manufacturer sets a floor on the price a retailer may sell a product—as per se illegal under section 1 of the Sherman Act. Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). In other words, the law was so certain this conduct had such pernicious anticompetitive effects that it would not even consider purported justifications. However, partly in response to economic thinking that such conduct can have procompetitive justifications, the Supreme Court reversed course in 2007, holding that such restraints were no longer per se illegal; instead, they are to be judged according to the rule of reason, a test that balances anticompetitive effects against their procompetitive justifications. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007).
Given the historical relationship between antitrust law and economics, expert witnesses in antitrust litigation have a vitally important role: to aid the court with the necessary tools to define the relevant market and assess the competitive effects of the challenged conduct in that market. The American Express litigation is a recent example of the important role economics and experts play in complex antitrust cases.
Economic Theory of Two-Sided Markets
In two-sided markets, a firm connects two different groups of users, allowing the groups to interact more readily than would be possible without the facilitation of the platform product. Common examples of two-sided markets are computer operating systems (connecting computer users and application developers). See, e.g., United States v. Microsoft Corp., 84 F. Supp. 2d 9, 20 (D.D.C. 1999) (findings of fact), 87 F. Supp. 2d 30 (D.D.C. 2000) (conclusions of law), 97 F. Supp. 2d 59 (D.D.C. 2000) (order). Other examples are health maintenance organizations (patients and health care providers) and real estate listing services (home buyers and sellers). See, e.g., Realcomp II Ltd., No. 9320 (Fed. Trade Comm'n Oct. 30, 2009); United States v. Nat'l Ass'n of Realtors, No. 05-C-5140 (N.D. Ill. Nov. 18, 2008) (final judgment); Stipulation and Proposed Final Judgment, United States v. Consol. Multiple Listing Serv., Inc., No. 3:08-cv-01786-SB (D.S.C. May 4, 2009). Still other examples are online reservation systems (restaurants and diners or hotels and guests), online auction sites (sellers and bidders), and video game consoles (players and game designers). In each case, the value of the platform depends on its ability to join the interests of each side with the other; the more users on the one side, the more valuable the platform is to the other—a phenomenon experts call "network effects." Am. Express, 2015 WL 728563, at *7. For example, a restaurant will use a reservation system only if it connects that restaurant with a large enough diner base to justify the cost of participation.
Two-sided platforms typically derive revenue from both sides of their business model. In some cases, to maximize the overall value proposition, the two sides can be treated asymmetrically. For example, sometimes one side's access is subsidized while the other side of the platform pays a premium for access. With credit cards, for instance, cardholders may enjoy reward points for using a card while an accepting merchant pays a fee to the card issuer for each swipe. Of course, in a traditional market, prices significantly above or below an appropriate measure of cost can raise antitrust concerns. But in the network context, prices may need to be set with different considerations in order to maximize the overall network to compete in the marketplace. See generally David S. Evans & Richard Schmalensee, "The Antitrust Analysis of Multi-Sided Platform Businesses" (Coase-Sandor Inst. for Law & Economics Working Paper No. 623, 2012).
Further, because these platforms coordinate a large number of suppliers and users, barriers to competition from rivals can be high. A new market entrant may have to solve the problem of appealing to both sides of the market, even when it is immature. See e.g., United States v. Microsoft Corp., 84 F. Supp. 2d 9, 20 (D.D.C. 1999); see also Am. Express, 2015 WL 728563, at *36. Not surprisingly, these dynamics can give rise to antitrust issues in two-sided markets with some economists encouraging a holistic assessment of competitive injury that embraces a single-platform product market and in which increased prices or competitive restraints on one side are alone insufficient to show competitive harm without accounting for procompetitive offsets on the other side. See Stephen V. Bomse & Scott A. Westrich, "Both Sides Now: Buyer Damage Claims in Antitrust Actions Involving 'Two-Sided' Markets," 2005 Colum. Bus. L. Rev. 643, 663 (2005) (arguing that in a two-sided market where one set of consumers claim injury, the court should inquire whether competition overall (on both sides of the market) was actually affected and whether, in any event, these effects together constitute antitrust injury); David S. Evans, "Two-Sided Market Definition," at 7 (Nov. 11, 2009), in Market Definition in Antitrust: Theory and Case Studies (ABA Section of Antitrust Law, 2012).
Legal Treatment of Two-Sided Markets to Date
The Supreme Court has not jumped at the opportunity to consider the competitive effects of challenged conduct in a two-sided market. See Times Picayune Publ'g Co. v. United States, 345 U.S. 594, 610 (1953) (although the defendant operated in two "separate though interdependent markets" the Court remarked that "[t]his case concerns solely one of these markets" and did not require analysis of the combined effects of the alleged violation on both markets). Even where the Court has seemingly entertained a two-sided market analysis, the inquiry focused on "not only whether small competitors flourish[ed] on one side, but also whether consumers [were] well served on the other." United States v. Phila. Nat'l Bank, 374 U.S. 321, 367 n.43 (1963) (finding that a proposed merger violated section 7 of the Clayton Act where there was risk of consumer harm in the local banking market despite evidence that the merger would benefit competition among national banks, attract new business to the area, and promote economic development).
Since these older Supreme Court cases, lower courts have analyzed or made statements about antitrust claims in two-sided markets with some degree of skepticism. See, e.g., King Drug Co. v. Smithkline Beecham Corp., No. 14-1243, slip op. at 45 n.34 (U.S. June 26, 2015) ("It may also be (though we do not decide) that 'procompetitive effects in one market cannot justify anticompetitive effects in a separate market. . . .'") (internal quotations and citation omitted)); Paladin Assocs., Inc. v. Mont. Power Co., 328 F.3d 1145, 1157 n.11 (9th Cir. 2003); First Wis. Bankshares Corp. v. Bd. of Governors of Fed. Reserve Sys., 325 F.2d 946, 960 (7th Cir. 1963) ("[I]f anticompetitive effects in one market could be intensified by procompetitive consequences in another, the result would be that bank holding companies could acquire control of so many banks that in the end there would be nothing left but large holding companies monopolizing a state's banking system. . . .").
United States v. American Express once again gave the judiciary a chance to weigh in on the role, if any, that two-sided market analyses play in an antitrust analysis.
The United States v. American Express Case Study
In United States v. American Express, the district court considered expert testimony on two-sided market analysis, recognizing that without this gloss, the challenged "anti-steering rules" could be easily misunderstood. "[R]ote application of the standard mechanical market definition exercises—which were developed for single-sided markets—risks significantly overstating or understating the breadth of the relevant market. While these tools remain helpful to the court's definitional analysis, they must be applied in a manner that carefully accounts for the competitive realities in multi-sided platforms." Am. Express, 2015 WL 728563, at *24.
The district court was guided by controlling Second Circuit precedent on market definition in the credit card industry from a prior enforcement action by the Department of Justice, which viewed the credit card industry as interlocking and related, but discrete, separate markets. In particular, in United States v. Visa, 163 F. Supp. 2d 322 (S.D.N.Y. 2001), the Department of Justice sued Visa and MasterCard (but not American Express), alleging that their rules—which prohibited member banks from issuing cards on the American Express or Discover networks—were an unreasonable restraint of trade. In that case, the Second Circuit defined two separate, but complementary product markets: (1) a general-purpose card network services market in which Visa, MasterCard, American Express, and Discover competed to sell network services to merchants and issuing banks; and (2) a general-purpose card market that covered the issuance of cards by issuing banks as well as American Express and Discover to cardholders. Am. Express, 2015 WL 728563, at *22 (discussing United States v. Visa).
American Express urged the district court to depart from the narrower "network services" market definition in favor of a broader market defined by "transactions," encompassing both the services provided to merchants as well as cardholders. Id. at *21–22. However, the district court found that "this takes the concept of two-sidedness too far. . . . [T]he court is aware of no authority—and Defendants have supplied none—that requires the court to define the relevant product market to encompass the entire multi-sided platform." Id. at *22–23.
The district court also concluded that, even if the market were viewed as broadly as American Express argued, suppressing competition on the merchant side could not be justified, as a matter of fact or law, by increased inter-brand competition with Visa, MasterCard, and Discover on the cardholder side of the platform. According to the district court, "the law does not permit American Express to decide on behalf of the entire market which legitimate forms of interbrand competition should be available and which should not" and, "even if such cross-market balancing is appropriate under the rule of reason in a two-sided context, here Defendants [had] failed to establish that [the anti-steering] rules are necessary to robust competition on the cardholder side . . . or that any such gains offset the harm done in the network services market." Id. at *34–35.
Thus, United States v. American Express is a good example of a district court grappling with how best to incorporate the economic realities of a two-sided credit card market into its analysis of the anti-steering practices at issue. The case is on appeal to the Second Circuit. Its decision will be noteworthy, particularly to see how it reviews the legal conclusions about the propriety (or not) of considering the claimed benefits of the anti-steering rules on the cardholder side of the market as well as the factual findings about whether the anti-steering rules were necessary to achieve those benefits or whether they were outweighed by the claimed harm on the merchant side of the market.
Keywords: litigation, expert witnesses, trade, antitrust, two-sided markets, economics
Eric S. Hochstadt is a partner in the New York office of Weil, Gotshal & Manges LLP. Meaghan Thomas-Kennedy is an associate in the firm’s Silicon Valley office.