Unfortunately, as economists since Adam Smith have pointed out, most of our rock-jawed titans of industry don’t really like free markets. They much prefer cozy cartels and opaque pricing, which are far more profitable.
Indeed. The ultimate goal for any capitalist worth his pinstripes is not to compete in a free market, it’s to get control over a market. Merge. Acquire. Consolidate. Squeeze. Fewer competitors means less competition. If that seems like an overly obvious statement, it’s all too often lost on politicians and regulators. Sure monopolists can get fat and lazy and eventually be undercut by some scrappy, inventive upstart (hello, Microsoft!). But that can take decades, and in the meantime we’ve all been paying more than we should have. That’s the point of antitrust laws, properly enforced.
That’s not free enterprise. It’s monopoly (or duopoly if you’re picky). Yglesias understands that, but says this:
But maybe what we really need some super-rich charitably inclined businessmen to do is finance some new ventures in these quasi-utility markets like charge cards, cell phones, mortgage origination, etc. based on a “don’t screw the customer over” business model. The striking thing about the credit card universe, after all, is that there’s very little competition and no meaningful difference in business practices between Visa and MasterCard. But I don’t think it’s written in stone anywhere that there can be only two.
If this were possible it would have already been done, but not by “charitably inclined businessmen.” Visa had net profit margins above 36 percent in the first quarter. MasterCard’s were near 35 percent. These are astronomical margins—ones that in a healthy market would lure capital happy to settle for half that rate of return. Even a government-licensed, unregulated monopolist like Moody’s settled for 24 percent margins.
Why are the plastic guys’ margins so high? Little to no competition. Would-be competitors are daunted by network effects and the steep cost of a nationwide capital-intensive startup from scratch.
But the dearth of competition also comes from a long history of anticompetitive behavior. Let’s not forget that Visa and MasterCard “violated antitrust laws when they barred banks that issued their cards from also issuing cards bearing competing brands” and “work(ed) together to fend off competitors.” They paid a huge $2.8 billion settlement to Discover two years ago for their actions and had to pay American Express $2.25 billion. In 2003, they agreed to a $3.4 billion settlement with retailers for colluding against them. That’s $8.5 billion the two had to fork over.
Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.
Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.
As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.
In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.
That’s not what you would call a textbook free market of “capitalist acts between consenting adults.”
Here’s how Drum puts it:
So let’s try a thought experiment. What if credit and debit cards lived in a real free market with transparent pricing? Suppose that instead of just two payment networks there were a dozen. And suppose that instead of hiding interchange fees by extracting them from merchants, who pass them along to consumers invisibly, the card companies actually charged consumers directly. What would happen?