Second Circuit Rules on AMEX

The Second Circuit recently ruled for defendant American Express (AMEX) in a case brought by the Department of Justice (DOJ) and several states. DOJ argued, and the district court agreed, that AMEX’s non-discrimination provisions (NDPs) were anti-competitive. NDPs restricted merchants who accepted AMEX cards from expressing preferences for other payment products. The Second Circuit found that DOJ had not established an antitrust violation and reversed the district court.

The Second Circuit stressed that AMEX’s credit card was a two-sided platform, one that had to attract two distinct groups of customers where each group’s demand was affected by the demand of the other group. AMEX had to appeal both to merchants and to cardholders. The more merchants who accepted the card, the more attractive the card would be to cardholders. Conversely, the more people who carried the card, the more attractive the card would be to merchants. The Second Circuit found that the district court erred by concentrating on merchants and not paying sufficient attention to cardholders.

For example, the district court defined the market as the sale of network services to merchants. The Second Circuit found that market definition to be a “fatal” error because it ignored cardholders. The court could not define the market by looking only at the price charged merchants because any price increase that reduced the number of merchants accepting the card would necessarily affect cardholder demand which in turn would have a feedback effect on merchant demand and thus on merchant price. Defining the market in terms of only one side might be legitimate when judging a horizontal restraint, where the question would be a possible loss of competition among platforms. In this case, however, the restraint was vertical—AMEX imposed restrictions on merchants accepting its cards. Under those circumstances, defining a market in terms of only one side risked condemning procompetitive behavior.

Similarly, the district court found evidence that AMEX had market power because when it raised price to merchants, few merchants dropped the card. The Second Circuit rejected this analysis because the higher prices to merchants paid for greater rewards to cardholders, and the resulting increased use of the card increased its value to merchants. Moreover, while the district court found that higher prices to merchants were evidence of anticompetitive effects, the Second Circuit rejected that analysis because it did not involve a “two-sided net price” that would account for effects on both merchants and cardholders.

DOJ has petitioned for reconsideration. If the decision stands, however, it may have important implications for how courts treat antitrust questions involving two-sided platforms.


Henry B. McFarland frequently consults concerning antitrust issues in financial services and other industries. He previously was an economist in the Antitrust Division of the U.S. Department of Justice.