Less Competition, Higher Prices: Unpacking the Capital One and Discover Merger
A Case Study on Corporate Consolidation and its Implications for Consumer Welfare and Market Dynamics
In recent months, the proposed merger between Capital One and Discover has ignited significant debate and concern across the financial landscape. As these two giants in the credit and debit card industry contemplate joining forces, it’s essential to unpack what this means for consumers, small businesses, and the broader economy.
Corporate Consolidation: A Double-Edged Sword
Corporate consolidation, where fewer companies control more of the market, often brings with it promises of efficiency, innovation, and enhanced services. However, history has shown that such mergers can also lead to higher prices, reduced competition, and diminished choices for consumers. The Capital One and Discover merger is no different.
By combining their resources, these companies aim to streamline operations and increase their market share. However, this consolidation would further entrench the power of a few major players in the credit and debit card transaction processing market. With fewer competitors, the risk of monopolistic behaviors rises, often leading to higher fees and interest rates for consumers and merchants alike.
The Impact on Credit/Debit Card Transaction Fees
One of the most pressing concerns surrounding this merger is its potential impact on credit and debit card transaction fees. Currently, small businesses already bear the brunt of these fees, often referred to as interchange fees. These fees, charged to merchants each time a customer uses a credit or debit card, can significantly eat into profit margins, particularly for small businesses.
With fewer companies controlling the transaction processing market, there’s less incentive to keep these fees competitive. This could result in even higher costs for merchants, which are often passed down to consumers in the form of higher prices.
A Chance to Address Transaction Fees
The public discourse around the Capital One and Discover merger presents a critical opportunity to address the longstanding issue of credit and debit card transaction fees. Advocates for small businesses and consumer rights can use this moment to push for reforms that ensure a more competitive and fair market.
The Way Forward
I support the passage of a bill similar, if not identical to, Senator Amy Klobuchar’s Competition and Antitrust Law Enforcement Act introduced in 2021. This bill amends the Clayton Act to forbid mergers that “create an appreciable risk of materially lessening competition” rather than mergers that “substantially lessen competition.”
By adding a risk-based standard and clarifying the amount of likely harm the government must prove, enforcers can more effectively stop anticompetitive mergers that currently slip through the cracks.
Additionally, the bill clarifies that mergers creating a monopsony (the power to unfairly lower the prices a company pays or the wages it offers due to a lack of competition among buyers or employers) violate the statute.
The bill shifts the burden to the merging parties to prove their merger will not violate the law. For certain categories of mergers that pose significant risks to competition but are still difficult and costly for the government to challenge in court, the merging companies would have to prove that their mergers do not create an appreciable risk of materially lessening competition or tend to create a monopoly or monopsony.
The proposed Capital One and Discover merger serves as a critical reminder of the broader issues associated with corporate consolidation. While the potential for innovation and efficiency exists, the risks to competition, consumer prices, and small businesses are substantial. Supporting legislation like Senator Klobuchar’s Competition and Antitrust Law Enforcement Act can help ensure that such mergers do not harm our economy by maintaining a fair and competitive market. It is imperative that we take this opportunity to advocate for reforms that protect both consumers and small businesses from the adverse effects of reduced competition and higher transaction fees.
“Capitalism without competition isn’t capitalism. It’s exploitation.”
-President Joe Biden