The American Express case and income inequality

In “Why the Supreme Court’s decision in Ohio v. AmeEx will fatten the wealthy’s wallet (at the expense of the middle class),” Aaron Klein argues that income inequality is one of the most significant issues of our time and that the Court’s recent decision allowing American Express to prohibit merchants from surcharging its credit cards exacerbates wealth inequality.

I agree with Klein that wealth inequality is a problem that should be addressed. But the decision in the AmEx case had nothing to do with it.

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The case turned on an arcane legal issue: when does the burden of proof flip in an antitrust rule-of-reason case? The government failed to bear its burden, Justice Thomas wrote for the Court, because it did not adequately address the negative effect that merchant discrimination against AmEx cards would have on card users. In dissent, Justice Breyer argued that the government did meet its burden by showing that merchants pay more to accept cards because of AmEx’s non-discrimination policy. Given that showing, Breyer contended, the burden should have shifted to AmEx to prove that the benefits of its policy to card users outweighed any harm to merchants.

Putting aside the legalisms, the case came down to a battle over how to divvy up retail sales revenue. AmEx doesn’t have a monopoly enabling it to raise prices for everybody. Many merchants do not accept AmEx, and if it raised its price too much, others would drop it too. Virtually everyone with an AmEx credit card also has one from another company or could easily get one. The chance that the outcome of this case would significantly impact consumers, much less the wealth inequality gap, is extremely remote.

To be fair, Klein focuses on a ramification that he believes flows from the AmEx case – not the central antitrust issue. His point boils down to this: merchants must recover the cost of accepting credit cards from all of their customers if they can’t discriminate among cards. Everyone pays. But the wealthy get most of the card rewards. Low-income folks using cash -– which costs the merchant nothing to accept – get the shaft.

Klein’s analysis is artificially narrow. If he were right, why would any merchant ever accept a credit card? They must irrationally like paying banks to provide a costly payment system even though they could just accept cash for free.

Of course, that’s implausible. Merchants are overwhelmingly rational and recognize that cash acceptance imposes significant costs, including (1) maintaining change in the register, (2) the risk of loss and theft, (3) human error in making change, and (4) counting the money and transporting it to the bank. Indeed, the law already gives merchants the right to give cash discounts. Yet, very few do so.

Merchants also know that credit card acceptance empowers customers who need credit or simply don’t have cash in their wallet to make more and larger purchases and reduces consumer reluctance to spend by incentivizing them through rewards. Merchants thus accept credit cards because the benefits that they accrue at current card-acceptance prices outweigh any cost saving that a cash-only business would enjoy.

And it is not just merchants and card users that benefit from card acceptance. To the extent it increases a merchant’s revenue through more and larger sales, the merchant can spread its fixed costs over those sales. In a competitive market, merchants would be incentivized to compete away the cost savings. Credit card acceptance may thus lower prices for everyone.

The bottom line is that one cannot definitively predict the direction of the price change resulting from credit card acceptance by focusing solely on the merchant’s nominal costs of acceptance. One must take account of the stimulating effect on sales that puts downward pressure on prices. The precise effect in a particular industry is difficult to predict and will turn on a variety of factors that are not easy to measure. But merchants in competitive industries such as supermarkets and home improvement stores would be the most likely to lower their prices as a result of credit card acceptance because they would be forced by the market to compete away much of the benefit that they receive from accepting those cards. And thus low-income customers who frequent these stores may be better off because the merchants accept credit cards, even if they don’t use them.

A more obvious example of the same effect can be seen when stores provide free parking. This amenity is costly, and merchants do not discriminate in their prices based on who uses the lot. Wealthier customers, of course, are more likely to have cars than poorer ones. Klein’s analysis suggests that free parking contributes to wealth inequality. But it seems more likely that parking increases sales volume allowing supermarkets and home improvement stores to charge lower prices to everyone. Is there nonetheless some effect on wealth inequality? It’s hard to say for certain. But it seems extremely unlikely – if it exists – that it would be big enough to matter.

Steven Semeraro is a professor of law and director of the Intellectual Property Fellowship Program at Thomas Jefferson School of Law.