Mike Munger Says We Should Allow The Capital One-Discover Merger

From Cafe Hayek.

"Mike Munger’s letter in today’s Wall Street Journal is important:

Sen. Elizabeth Warren (D., Mass.) called for the Biden administration to block Capital One’s acquisition of Discover (“Block Capital One’s Merger With Discover,” op-ed, March 8) because she believes that two firms are always better than one. But this is a misunderstanding of how competition works. One need only look at the broader industry—Visa, Mastercard and American Express control more than 95% of credit-clearing transactions—to realize the folly of the many-small-firms approach. If the deal is approved, there will be more competition in the industry, not less.

Competition in the market over the past three decades has streamlined technology and reduced costs to the point where credit-card acceptance is nearly universal. Providing a smaller network like Discover with the financial power of Capital One creates an environment where fees can fall and security can improve.

It’s time to put the Econ 101 definition of competition back on college blackboards and bring real competition to the financial-services industry.

Mike Munger
Duke University

[DBx: In the Econ 101 course that I regularly teach, I never describe competition as being a simplistic function of the number of firms in an industry (a surprisingly vague concept, btw). Instead, I teach competition as Mike here describes it: as rivalry among firms experimenting with different methods to better enable them to attract consumers – rivalry that is ultimately hampered only by government-imposed restrictions on the ability of businesses to enter different avenues of enterprise and to so experiment.]"