To answer the question of whether the networks’ (Visa and MasterCard) rules barring member banks from issuing cards on the rival networks were illegal restraints of trade under the Sherman Act, and in what way these rules harmed competition, we need to pay attention to several details. First, under Section 1 of the Sherman Act “every contract, combination in the form of trust or otherwise, or conspiracy, in restraints of trade or commerce among the several States, or wit foreign nations, is hereby declared to be illegal and is felony punishable by a fine and/or imprisonment”. On one hand, Visa, MasterCard, American Express and Discovery are the four major credit- and charge-card networks in the United States. This makes the credit card industry highly concentrated, meaning that a small number of firms control a large percentage of market sales. Although Visa and MasterCard are joint ventures and they bar member banks from issuing cards on rival networks, they still compete against each other. On top of that, Visa and MasterCard may argue that even though the rules that they established with member banks hurt their competitors (American Express and Discovery), it doesn’t necessarily harm competition. Amex and Discovery themselves issue cards to customers, thereby staying in the market. Also, the agreement can be considered a vertical restraint of trade. Vertical restraint is any restraint on the trade created by agreements between firms at different levels. While in case of Visa and MasterCard the banks issue the cards, clear transactions, and collect fees, Amex and Discovery themselves issue cards to customers, process transactions, and collect fees. So, firms operating at different functional levels are not in direct competition with one another. In addition, even though some vertical restraints are per se violations of Section 1; others are judged under the rule of reason. Visa and MasterCard may argue that the agreement with the banks is a part of their business strategy. On the other hand, analyzing the anticompetitive agreement, the court may conclude that the rules are vertical restraints and violate Section 1 of the Sherman act. Even though there is a slight functional difference between these credit card companies, they still compete in the same market. Therefore, the rules harm competition and have a negative effect on the consumers in general. For example, as long as this agreement exists and banks can issue only Visa and MasterCard’s cards, Visa and MasterCard have a great amount of market power. This means that they have a great impact on prices. In other words, if they decided to increase their fees, in this situation the vast majority of consumers would still use their cards and, as a result, merchants would still have to accept them. So, what kind of competition is that, if one/two companies have the ability to set the price at any point they want without losing any customers? Also, the rules reduce consumer choice, taking away the opportunity to enjoy different features of American Express and Discovery. Another negative effect of these restraints is the lack of innovation. Visa and MasterCard have no initiative to offer better service or improve the quality of their product. Obviously, greater competition will make these companies innovate and, therefore, will benefit the consumers. Therefore, to stop any anticompetitiveness, the court should order to eliminate restraints that Visa and MasterCard established years ago.
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In order to determine if in this case the circumstances fit the definition of a price-fixing agreement we need to clarify the definition. Price-fixing agreement is an agreement between competitors to fix the prices of products and services at a certain level. Even though there may be good reasons for the agreement, it still can have the dangerous effects. On one hand, any price-fixing agreement constitutes a per se violation of Section 1 of the Sherman Act. In this situation, Fouad Dagher and other station owners may argue that the agreement between Texaco and Shell to sell their gasoline at a single price under the original Texaco and Shell brand names is horizontal price-fixing and violates the antitrust laws. As two competitors, Texaco and Shell engaged in a joint venture, Equilon Enterprises, and jointly set the price for Equilon. Dagher and other should prove that the creation of Equilon Enterprises unreasonably restrains trade. On the other hand, the pricing decision of a joint venture may not qualify as a price-fixing agreement. Usually, the intent of price-fixing is to push the price point of a product as high as possible. In this case, Shell and Texaco’s intentions are different: they do not represent two competitive companies; instead they consolidate their operations in the western United States through the formation of Equilon and that’s how they participate in the market. Therefore, these two investors (Texaco and Shell) have a legitimate reason to set the price for their venture at the point they find profitable. In addition, the circumstances in this case do not fit “price-fixing” agreement, and the agreement itself is not a horizontal restraint.