Market Power

Musings by an academic economist on the power of markets and the power over markets.

Tuesday, October 26, 2004

Bank on it - Lower Fees and More Choice

I found the following blurb in the October 9th issue of The Economist. It's from the "The World This Week" section on page 9.

Credit where it is due

"As if American consumers needed greater access to credit-card debt, the Supreme Court upheld a ruling that Visa and MasterCard violated antitrust rules by banning banks that issue their cards from also offering rival cards. American Express, in partnership with MBNA, immediately annonced plans to launch competing cards."

So the Visa and MasterCard rules allowed them to earn economic profits which are now going to be eaten away by competitors, just as we'd expect when barriers to entry are knocked down.

I was perplexed by the first part of the first sentence... it seems the writer of this piece thinks this may not be a good thing. But it is a good thing. I expect that there will be lower fees paid by banks to credit card companies. This should then be passed on to the customer in terms of lower fees. It also gives consumers a wider variety of choices when it comes to plastic - not from the issuing banks but by the credit card companies themselves.

Question: Why did banks allowed Visa and MasterCard to limit their ability to offer the rival cards in the first place?