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Information Costs

Gerald P. O'Driscoll

• Iowa State University

“The American Express Case: Public Good or Monopoly?” The Journal of Law and Economics 19 (1976): 163–175.

In 1974 the Consumers Union battled the American Express Company and the U.S. Shoe Retail Corporation, appealing to the Sherman Act. “Restraint of trade” was charged along with “restrictive contract” because American Express obliged retail stores not to give discounts to money paying customers in preference to American Express card purchasers. Consumers Union intimated that credit cards were unjustified by any service provided by the cards, and raised prices unfairly. Eventually American Express settled out of court and waived its “restrictive” contract stipulations.

An important theoretical issue raised by the suit is the effect of credit card usage on pricing. One important motive for using credit cards has generally been overlooked. This factor mitigates the effects of credit cards on prices. Credit card companies provide advertising and “brand name” services, which generally reduce search and information costs for both customer and retailer. Other explanations for the use of credit cards focus primarily on the motivation of the customer in using a credit card; they fail to explain the motivation of the retailer in accepting credit cards. In addition, credit cards provide certain benefits not provided by other instruments (e.g., travelers checks). Advertising services provided by credit cards are generally neglected in any study.

In the long-run, economic reasoning suggests that the granting of cash discounts for money purchases (in contrast to credit card purchases) will not be wide-spread.