From Competition to Exclusion: Can Discounts Go Too Far?
When does a discount cross the line from competition to exclusion? That question now sits before a federal district court weighing the U.S. Justice Department’s (DOJ) antitrust case against Visa Inc. and its debit-card business, where Visa holds a 60% share. In the waning days of the Biden administration, on Sept. 24, 2024, the DOJ filed a complaint in the Southern District of New York alleging violations of Sections 1 and 2 of the Sherman Act under two primary theories of harm.
First, the DOJ claims Visa imposes “de facto exclusivity” on merchants. The theory: merchants route nearly all debit transactions through Visa to hit volume thresholds that unlock loyalty discounts on transaction fees. That, in turn, deprives rival debit networks of the scale they need to compete.
Second, the DOJ alleges Visa neutralizes potential competitors—such as Apple—by sharing monopoly profits through agreements that turn would-be entrants into partners, rather than threats in fintech (i.e., using online technology to deliver financial services).
As to the first theory, the complaint zeroes in on Visa’s use of loyalty discounts, or rebates, to steer transaction routing. Merchants receive these discounts only after hitting volume thresholds—often 90% or more of total debit transactions. Route more to Visa, pay less. Route less, lose the discount. The DOJ argues this structure operates as a de facto exclusive-dealing arrangement that deters merchants from sending transactions to rival networks.
Step back for a moment. Why do merchants have any routing choice at all? If a consumer uses a Visa debit card at the point of sale, doesn’t the consumer decide the network?
Not quite.
In 2010, Congress enacted the Durbin Amendment as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act; it took effect in 2012. The amendment requires that each debit card connect to at least two unaffiliated networks capable of processing transactions. Typically, one network appears on the “front of the card”—Visa, Mastercard, American Express, or Discover—and another on the “back of the card.” That second option usually involves a PIN-debit network with roots in ATM transactions, such as STAR, NYCE, Accel, Pulse, or Shazam. At the point of sale, the merchant—not the consumer—chooses how to route the transaction.
This post advances three considerations for assessing the legality of loyalty discounts.
First, antitrust law generally resists punishing firms for offering lower prices. As a result, claims of predatory pricing (prices so low they force rivals to exit) or exclusionary discounting (pricing structures that induce buyers to concentrate purchases with a single supplier) face well-defined legal and economic hurdles.
Second, the legality of loyalty discounts often turns on two factors: whether the discounts span multiple products, and how much of a buyer’s demand remains “contestable” versus “non-contestable.” For example, if a merchant processes 100 debit transactions per period but only 20 can be routed to a PIN network, the contestable share is 20%.
Third, the DOJ’s emphasis on harm through denying rivals “scale” raises a threshold problem. The complaint never defines scale, specifies the level required for competition, or ties the concept to market-specific evidence.