I just found this in David Warsh's Economic Principles site, which I like very much.
http://www.economicprincipals.com/issues/07.07.08.html But it was the bitter antitrust battles of the 1990s that now seem to have broken the case wide open, at least where economics is concerned: US v. Microsoft, of course, and, especially, the battles among Visa, Mastercard, Discover and their would-be issuers in particular, culminating in the US v/ Visa and MasterCard in 1998. It was in 1991 that Visa hired Richard Schmallensee and David Evans to help fend off a private antitrust suit by Sears, which wanted to issue Visa cards to its customers. Schmallensee was professor of economics at the Massachusetts Institute of Technology, trained there in the golden age of the 1960s; Evans, consultant for National Economics Research Associates with a 1983 PhD from University of Chicago, the very end of its golden age of "price theory." Before long, Microsoft signed up the pair as well. A decade of furious briefing followed. In 1999, Schmallensee and Evans published Paying With Plastic: The Digital Revolution in Buying and Borrowing. The book was framed as a defense of the credit card industry. It was true, the authors wrote, that credit cards encouraged some people to spend beyond their means and to become mired in debt. But plastic also had allowed millions of people to "enjoy life earlier than their current incomes and savings permit" and created a boom in the process. The authors had a subsidiary aim as well: to demonstrate how competition worked in an industry that did not fit the standard models that lawyers brought with them to court. It began with a series of novel solutions to the "chicken and egg problem" -- consumers don't want cards that merchants won't accept, and merchants don't want cards that consumer do not carry. Most of these solutions involved collaboration, a tactic that had become ubiquitous in the modern age, but one viewed with suspicion at least since Adam Smith wrote that "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." The book was a tour de force of thick description, a narrative history of the development of payment cards, plus an analysis of the unique "interdependent pricing" of the industry. Charge card systems such as American Express had two sources of revenue: merchant fees and cardholder fees. Credit card systems backed by banks enjoyed finance charges paid by cardholders as well. Michael Perelman Economics Department California State University michael at ecst.csuchico.edu Chico, CA 95929 530-898-5321 fax 530-898-5901 michaelperelman.wordpress.com
