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Vertical Most-Favored-Nation Restraints and Credit Card No-Surcharge Rules

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  • Dennis W. Carlton
  • Ralph A. Winter

Abstract

A vertical most-favored-nation (vMFN) restraint prohibits a retailer from charging more for one supplier's product than for rivals' products. For credit card services, this restraint takes the form of a no-surcharge rule: the credit card company prohibits the retailer from surcharging transactions using the company's card. This article develops a theory of vMFN restraints and applies it to credit cards. The vMFN clause harms competition among upstream suppliers, which raises price to a level even greater than the monopoly price. The vMFN clause can also be used to extract surplus from customers of products supplied competitively. Applying the theory to credit card antitrust cases, we find that the two-sided nature of the market does not mandate a new set of competition policy principles, contrary to the decision in Ohio v. American Express. Indeed, the economic literature on credit card networks as two-sided platforms rediscovers established principles of price theory.

Suggested Citation

  • Dennis W. Carlton & Ralph A. Winter, 2018. "Vertical Most-Favored-Nation Restraints and Credit Card No-Surcharge Rules," Journal of Law and Economics, University of Chicago Press, vol. 61(2), pages 215-251.
    • Handle: RePEc:ucp:jlawec:doi:10.1086/699165
    DOI: 10.1086/699165
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    Cited by:

    1. Marius Schwartz & Daniel R. Vincent, 2020. "Platform Competition With Cash‐Back Rebates Under No Surcharge Rules," Journal of Industrial Economics, Wiley Blackwell, vol. 68(2), pages 298-327, June.
    2. Dennis W. Carlton & Mark A. Israel, 2021. "Effects of the 2010 Horizontal Merger Guidelines on Merger Review: Based on Ten Years of Practical Experience," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 58(1), pages 213-234, February.
    3. Hongru Tan, 2020. "The regulation of merchant fees in credit card markets," Journal of Regulatory Economics, Springer, vol. 57(3), pages 258-276, June.
    4. Takanori ADACHI & Mark J. TREMBLAY, 2022. "Do No-Surcharge Rules Increase Effective Retail Prices?," Discussion papers e-22-003, Graduate School of Economics , Kyoto University.

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