Cowen Maintains that the Historical Evidence on Collusion under Laissez-Faire Cannot Be Extended to Network Industries

Cowen’s case is almost wholly theoretical. The usual historical evidence on collusion under laissez-faire, he maintains, cannot be credibly extended to network industries: “Although private cartels usually collapse of their own accord, most historical examples of cartel instability do not involve the benefits of joining a common network.” But Cowen provides little in the way of empirical counter-examples to support his belief that networks industries are different.

This section takes a preliminary look at modern and historical network industries. While they definitely standardize products in beneficial ways, there is little evidence that network industries are more prone to collusion than non-network industries. Instances of attempted and temporarily successful collusion do surface. But collusive efforts in network industries appear neither more common nor more successful than in other sectors of the economy. A full-blown comparative history of collusion in network and non-network industries is beyond the scope of this paper. On Cowen’s account, however, the contrast should be too large to miss. . . .

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The market for credit cards has all the defining characteristics of a network industry. The value of a credit card increases with the number of participating consumers, merchants, and banks. As Evans and Schmalensee (1999) observe, “[P]ayment cards are provided through a network industry in which participants are linked economically in unusual ways. Payment cards are useless to consumers unless merchants accept them, but merchants have no reason to accept cards unless consumers carry them and want to use them.” Consumers value widely accepted payment cards more, so issuers typically belong to large networks. But competition persists. The market sustains inter-network competition between networks owned by member banks, such as Visa and MasterCard, proprietary networks like Discover and American Express,and store-specific cards. What is more striking is the scope of intra-network competition. Visa and MasterCard, the two leading networks, are non-profit membership corporations with thousands of member firms. They provide infrastructure and a large network of users, and finance their services with membership fees. Despite strong network features, there is vigorous intra-network competition.

—Bryan Caplan and Edward P. Stringham, “Networks, Law, and the Paradox of Cooperation,” in Anarchy and the Law: The Political Economy of Choice, ed. Edward P. Stringham (New Brunswick, NJ: Transaction Publishers, 2007), 303-304.