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Visa Mastercard

In: Business and Management

Submitted By im288
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In 1998 USA filed a complaint against Visa and MasterCard re their dual governance and exclusionary rules of combinations and conspiracy in restraint of trade. (DOJ, 1998)
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My motivation for choosing the abovementioned case comes from my interest in the financial services market, its regulations and their implications on consumers. This case is attention-grabbing, not solely due to the remedy, but also due to the implications it has on domestic and international markets. It also gives the opportunity to analyse the controversy of vertical exclusionary restraints (Whinston, 2006).

When analysing the Visa-MasterCard case, there are two main ‘economic-schools-of-thought’ to be considered. Chicago School(CS) dismisses vertical exclusionary contracts as an anti-competitive tool. While, Post-Chicago School(PCS) offers an opposing explanation by suggesting different models to rationalise anti-competitive behaviour using vertical restrictions. Both schools build their models under the assumption of first-mover advantage and the monopoly power of an incumbent firm. (Motta, 2004)

Using the CS in this case, we could assume that Visa and MasterCard are the combined incumbent on the market, due to their cooperative actions. The banks are the buyers and AmericanExpress is the potential new entrant. It could be assumed that AmericanExpress is a new entrant for the market of issuing cards through intermediaries, rather than through their own network, as it has previously done. As Visa and MasterCard offered the banks voting board member rights as an incentive to issue their cards. One could categorise this as a preemptively foregone “compensation”, justifying signing an exclusionary contract as an efficiency-enhancing scenario.

However, PCS suggests that in a market where several buyers don’t coordinate action, and a potential entrant needs to secure a threshold of buyers to cover its ‘fixed costs of entry’, the incumbent can abuse the lack of coordination of buyers to deter entry. As suggested by Rasmusan (1991) and Segal and Whinston (2000) if all buyers accept exclusive dealing one alone has no incentive to reject it due to the inability to cover this threshold.

This explains Visa-MasterCard’s engagement in exclusionary-contracts with card-issuing banks for entry deterring purposes. A sole bank wouldn’t have the incentive to sacrifice their access to the dominant payment system. While changing to AmericanExpress would potentially offer a more efficient system, it would endanger the banks’ market position as its cards would be less widely accepted among retailers. Simultaneously, if banks are able to coordinate and swap to AmericanExpress, it wouldn’t have the capacity to satisfy the market.

These two contradictory arguments provide a sufficient basis to analyse the effects of the exclusionary practices adopted by Visa and MasterCard. The critical analyses would also question the controversial effects of the dual governance. In 1970 Visa’s attempt to restrain a bank to become a card-issuing member of MasterCard was rejected by the DOJ because of potential anticompetitive effects. This led to the dual governance, which also projects some evidence of anticompetitive behaviour such as less innovation and advertising for both of the companies (Kwoka and White, 2009).
In my opinion Visa-MasterCard’s dual governance harmed the consumers, even-though there wasn’t sufficient evidence. This could be observed by the series of antitrust cases the companies have been settling since the late 90s. Until recently the two companies have never competed with each other, which not only restrains the competition between them, but also allows them to use their combined dominant power on the market (Kwoka and White, 2009). Ultimately, when observing the externalities, I consider the exclusionary restraints inherently anticompetitive.


Boone, J., Muller, W. and Suetens, S. (2014). Naked exclusion in the lab: The case of sequential contracting. The Journal of Industrial Economics, 62(1), pp.137--166.
Department of Justice, (2014). Complaint. [online] Available at: [Accessed 31 Oct. 2014].
Harbord, D. and von der Fehr, N. (2007). The Law and Economics of Vertical Restraints: An Overview. 1st ed. [ebook] Available at: [Accessed 30 Oct. 2014]. Kwoka, J. and White, L. (2009). The antitrust revolution. New York: Oxford University Press
Motta, M. (2004). Competition policy. Cambridge: Cambridge University Press.
Simpson, J. and Wickelgren, A. (2007). Naked exclusion, efficient breach, and downstream competition. The American Economic Review, pp.1305--1320.
Whinston, M. (2006). Lectures on antitrust economics. Cambridge, Mass.: MIT Press.

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