Is Visa and MasterCards' Association Potentially Anticompetitive - Essay Example

Case Analysis: Visa and MasterCard’s Association Potentially Anticompetitive Visa and MasterCard arecompetitors in the ‘‘general purpose card network’’ offering similar products and services (Baye and Scholten 1). Their products and services comprises of credit cards, charge cards and payment instruments enabling their customers to make purchases from different vendors without having to immediately access or reserve funds. The two enjoy the majority market share; accounting for over 75 percent of all purchases accomplished using general purpose cards in US (Baye and Scholten 1). Despite, their dominance in the market, the ownership and management of Visa and MasterCard reduces their chances of competing effectively thereby exposing them to shift competition from others players in the industry. Nevertheless, Visa and MasterCard do not face shift competition and there are not new entrants into the lucrative market. Visa and MasterCard are owned by a joint venture with large banks that control, govern and operate for and in the interest of the member banks (Baye and Scholten 1). Visa and MasterCard are in alliance with the same banks which use their products and services to issue cards to customers or to offer card acceptance services to merchants (Baye and Scholten 1). Consequently, due to their interests in the two companies, member banks participate in their management. The banks attend the board of directors meetings of both companies and have members in critical committees of the Visa and MasterCard. Baye and Scholten (1) explain that the form of management control observed in the case of Visa and MasterCard is known as duality whereby they are control by banks having significant interests in both associations. The impact of this form of management is that the partners would be unwilling to fund and initiate competitive programs that would cause ‘‘customers to move their business from one association to the other’’ (Baye and Scholten 1). Visa and MasterCard competitors in providing general purpose cards are stratified into two levels; upstream market and downstream markets (Baye and Scholten 2). On the upstream market, they compete with American Express, Diners Club, Discover/Novus and Japan Credit Bureau. Individually, the members banks of Visa and MasterCard compete among each other and the competitors listed in the upstream market in card issuing and card acceptance market. Baye and Scholten (3) point out that Visa and MasterCard associations only compete among each other in the upstream market. Furthermore, Baye and Scholten (4) note that the significant competitors of the two are American Express and Discover/Novus networks and they limit new entrants into the market. New entrants into the general purpose card market is difficult to new firms given that such an initiative requires huge investment to gain a significant merchant and cardholder base (Baye and Scholten 5). Presently Visa and MasterCard enjoy a large merchant and cardholder base and it would be difficult to convince consumers to switch to a new company yet those holding cards issued their current company are accepted by majority of merchants in America. Visa and MasterCard came up with anticompetitive rules and policies that raise the costs of entrants in acquiring merchant and cardholder base (Baye and Scholten 16). Visa and MasterCard have imposed rules to the banks they partner with such that they only do business with them and not their competitors. Consequently, new entrants would have limited sources of capital to invest in the business. Dual ownership of Visa and MasterCard has resulted in reduced competition between the two. The two associations are controlled by the same banks having considerable financial interests in both networks thereby curtailing competition between the two (Baye and Scholten 14). Banks cannot support decisions that will see customer crossing from one association to the other since they have interests in both. Banks governing Visa earn significant profit by issuing MasterCard cards and vice versa and it would therefore be impossible for members from those banks sitting in the Board of Directors meetings and critical Committee meetings to propose ideas that would increase competition with the other association as the bank would loss profit they gain in offering cards from the two networks. To restrict their competitors from enjoying a large market share, Visa and MasterCard have restrained their governing banks from doing business with other networks in the market by developing policies and rules that prohibit such. The exclusionary rules rock out both American Express and Discover/Novus from working with the governing banks. They reduce the ability of other networks to persuade merchants to accept their cards since merchants generally prefer using a single terminal to process transactions for all brands of general purpose cards (Baye and Scholten 14). Additionally, Visa and MasterCard hampers the ability of other network to offer cash advances. An important feature of general purpose card is the ability of network to provide cash advances in convenient ways; which is mostly through ATMs. Since Visa and MasterCard control the two worldwide ATM networks, Cirrus and Plus, their competitors can not effectively offer cash advances from different locations and therefore they have to remain either as Visa or MasterCard customers. Lastly, Visa and MasterCard limits the ability of their competitors to contract with banks issuing general purpose cards due to the exclusion clause (Baye and Scholten 15). There is available evidence that demonstrate that MasterCard can compete effectively in case it is not subjected to duality ownership. The association has a well developed distribution channel which can facilitate the network’s program of rolling out ambitious competitive products. Moreover, MasterCard has large banks that can provide the required investment to research and develop new products. In case the MasterCard was of owned in duality with Visa card international, the management would have a chance to come up with proposals that would see the company have attractive products without the banks worrying about losing out on the profits in issuing Visa cards. Game theory is a formal study in decision-making in which various players ought to make decisions that are likely to affect the interests of others in the game. The concepts of game theory are applied whenever actions of different agents are interdependent. Agents may include persons, groups, organizations or a combination of all. The situation in the general purpose market can be represented in a tree diagram which is one of the graphical representations used in the game theory. The basis of game theory is that decision makers use rational decisions. Using the game theory, competitors decide to quit competition given that their chances of accessing finances and having a big merchant and cardholder in the market are diminished by the exclusionary policies developed by Visa and MasterCard. Work cited Baye, Michael and Scholten, Patrick. ‘‘Visa and MasterCard’s Association Potentially Anticompetitive’’. Managerial Economics and Business Strategy, 6e (n.d). web 13th April, 2012. Read More