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`EXHIBIT 16
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`UNITED STATES DISTRICT COURT
`EASTERN DISTRICT OF NEW YORK
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`ANTHONY OLIVER, TERRY GAYLE
`QUINTON, SHAWN O’KEEFE, ANDREW
`AMEND, SUSAN BURDETTE, GIANNA
`VALDES, DAVID KOSKOWITZ,
`ZACHARY DRAPER, NATE THAYER,
`MICHAEL THOMAS REID, ALLIE
`STEWART, ANGELA CLARK, JOSEPH
`REALDINE, RICKY AMARO, ABIGAIL
`BAKER, JAMES ROBBINS IV, EMILY
`COUNTS, DEBBIE TINGLE, NANCI-
`TAYLOR MADDUX, SHERIE
`MCCAFFREY, MARILYN BAKER, WYATT
`COOPER, ELLEN MAHER, SARAH GRANT
`and GARY ACCORD on behalf of themselves
`and all others similarly situated,
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`
`Plaintiffs,
`
`v.
`
`AMERICAN EXPRESS COMPANY and
`AMERICAN EXPRESS TRAVEL RELATED
`SERVICES COMPANY, INC.,
`
`Defendants.
`
`EXPERT REPORT OF ERIC EMCH, PHD
`
`January 16, 2023
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`HIGHLY CONFIDENTIAL – SUBJECT TO PROTECTIVE ORDER
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`PUBLIC REDACTED VERSION
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`Expert Report of Eric Emch, PhD
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`Table of contents
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`I. Introduction .......................................................................................................................................................... 1
`I.A. Qualifications ............................................................................................................................................. 1
`I.B. Scope of charge ........................................................................................................................................ 2
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`I.C. Summary of opinions ................................................................................................................................. 2
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`II. Relevant industry background ............................................................................................................................. 5
`II.A. Forms of payment..................................................................................................................................... 5
`II.A.1. General purpose credit and charge cards (“GPCC cards”) ............................................................ 6
`II.A.2. Debit cards ................................................................................................................................... 10
`II.A.3. Other forms of payment ................................................................................................................ 13
`II.B. GPCC card differentiation ....................................................................................................................... 13
`II.B.1. Types of cardholders .................................................................................................................... 13
`II.B.2. Rewards ....................................................................................................................................... 15
`II.C. GPCC card acceptance and payment processing .................................................................................. 18
`II.C.1. Open-loop and closed-loop networks ........................................................................................... 18
`II.C.2. Merchant fees .............................................................................................................................. 20
`
`II.D. Amex pricing to merchants and consumers ........................................................................................... 27
`II.D.1. Amex negotiations with merchants for acceptance have essentially eliminated the Amex
`merchant discount premium in the United States ............................................................................ 27
`II.D.2. Amex competes vigorously with other GPCC networks for consumer usage ............................... 30
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`II.E. Amex policies at issue in this litigation .................................................................................................... 34
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`III. Market definition ............................................................................................................................................... 38
`III.A. Overview of market definition ................................................................................................................ 39
`III.B. Dr. Lamb’s market definition .................................................................................................................. 41
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`III.C. Implications of the market’s two-sidedness ........................................................................................... 42
`III.D. Competition from outside the GPCC transactions market constrains GPCC networks ......................... 43
`III.D.1. Dr. Lamb errs in dismissing debit as a meaningful competitive constraint on GPCC .................. 43
`III.D.2. Debit provides a competitive check on GPCC pricing ................................................................. 45
`III.D.3. Evolution of other forms of payment including electronic alternatives to traditional GPCC
`and debit cards ................................................................................................................................ 55
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`IV. Market power ................................................................................................................................................... 61
`IV.A. Dr. Lamb’s arguments in support of Amex’s market power ................................................................... 64
`
`IV.A.1. Dr. Lamb’s argument that the fact that Amex merchant discount fees “are not determined by
`cost” demonstrates antitrust market power is incorrect ................................................................... 65
`IV.A.2. Dr. Lamb’s argument that Amex’s imposition of profitable price increases on merchants
`demonstrates antitrust market power is incorrect ............................................................................ 67
`IV.A.3. Dr. Lamb’s argument that Amex’s ability to price discriminate against merchants
`demonstrates antitrust market power is incorrect ............................................................................ 72
`IV.A.4. Cardmember loyalty does not create substantial and sustained market power .......................... 76
`IV.B. Indirect evidence is not consistent with Amex holding antitrust market power ...................................... 86
`IV.B.1. Amex’s shares are inconsistent with an inference of substantial and sustained market power .. 86
`IV.B.2. Amex’s
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`..................................................................................................................................... 94
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` ............................................................................. 96
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`IV.C.
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`IV.C.1.
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` .......................................................................................................................................... 97
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`IV.C.2.
`
`
`......................... 107
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`V. Dr. Lamb’s findings of anticompetitive effects from Amex’s NDPs are conceptually and factually flawed ...... 112
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`V.A. Dr. Lamb’s argument that Amex’s NDPs forestall competition ............................................................. 113
`V.A.1. Dr. Lamb’s theory of foreclosure ................................................................................................ 113
`V.A.2. Dr. Lamb’s examples of foreclosed competition ......................................................................... 114
`V.A.3. Dr. Lamb’s predictions of anticompetitive effects from Amex NDPs .......................................... 115
`
`V.B. Dr. Lamb’s analysis of steering and its implications are incorrect ........................................................ 116
`V.B.1. A framework to assess the costs and benefits to merchants of steering .................................... 116
`V.B.2. Other considerations regarding merchant steering .................................................................... 123
`V.C. Dr. Lamb’s theory that merchant steering would cause networks to bid down merchant fees is
`speculative ............................................................................................................................................ 124
`V.D. Dr. Lamb misinterprets the implications of Discover’s lack of success with a low merchant fee
`business model ..................................................................................................................................... 128
`V.D.1. During the class period, Amex’s NDPs did not preclude the strategy Discover attempted in
`the 1990s ....................................................................................................................................... 128
`V.D.2. Dr. Lamb has not established that Amex’s NDPs inhibited Discover’s entry and expansion in
`the US GPCC market .................................................................................................................... 128
`V.D.3. NDPs may make Discover a stronger competitor, not a weaker one ......................................... 130
`
`V.E. Dr. Lamb misinterprets the implications of Amex’s use of NDPs to respond to Visa and Mastercard
`preference campaigns .......................................................................................................................... 131
`V.F. The Australian experience does not support Dr. Lamb’s theory of anticompetitive harm ..................... 131
`V.F.1. Surcharging in Australia has been excessive and harmful to consumers .................................. 132
`
`VI. Dr. Lamb’s claim that issuers would decrease annual fees net of rewards when faced with lower
`merchant fees is conceptually and factually flawed ..................................................................................... 145
`VI.A. Dr. Lamb’s claim that issuers would decrease annual fees net of rewards when faced with lower
`merchant fees is inconsistent with established economic theory .......................................................... 146
`
`VI.B. Evidence cited by Dr. Lamb does not support his claim that issuers would decrease annual fees
`net of rewards when faced with lower merchant fees ........................................................................... 149
`VI.C. Dr. Lamb’s claim that issuers would decrease annual fees net of rewards when faced with lower
`merchant fees is contradicted by
`
`................................................................................................................................................ 150
`VI.D. Dr. Lamb’s claim that issuers would decrease annual fees net of rewards when faced with lower
`merchant fees is contradicted by the empirical evidence ...................................................................... 151
`VI.D.1. Annual fees net of rewards increased in Australia following regulations that reduced credit
`card merchant fees ........................................................................................................................ 151
`VI.D.2. Issuing banks increased debit card fees and reduced rewards in response to lower debit
`card merchant fees following the Durbin Amendment ................................................................... 155
`
`Appendix A. Curriculum Vitae of Eric Emch, PhD ............................................................................................... A-1
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`Appendix B. Materials relied upon ...................................................................................................................... B-1
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`Appendix C. Additional figures .......................................................................................................................... C-24
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`Appendix D. Regression of two-sided price for VR targets ................................................................................. D-1
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`Appendix E. Public sources for cobranded credit cards among Qualifying Merchants ....................................... E-1
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`List of figures
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`Figure 1: Purchase volumes and shares for major payment methods in the United States in 2021 ....................... 5
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`Figure 2: Purchase volume shares for major payment methods in the United States, 2000–2021 ......................... 6
`
`Figure 3: Cobranded credit cards among Qualifying Merchants during the class period ...................................... 10
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`Figure 4: Market share among PIN debit networks in the United States, 2002–2018 ........................................... 11
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`Figure 5: Shares of PIN and signature debit purchase volumes in the United States for the top 50 US debit
`card issuers, 2016–2021 ....................................................................................................................................... 12
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`Figure 6: Extracts of merchant statement (GP_OLVR_000005) ........................................................................... 21
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`Figure 7: Extracts of merchant statement (GP_OLVR_0000496) ......................................................................... 23
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`Figure 8: Acquirer fees by merchant size .............................................................................................................. 25
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`Figure 9: Visa and Mastercard average GPCC interchange rates and cobrand presence at selected
`Qualifying Merchants in 2021 ................................................................................................................................ 26
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`Figure 10: Amex’s US premium over Visa/Mastercard and Discover credit card rates, 2004–2021 ..................... 28
`
`Figure 11: Comparison of Amex Platinum Card, Chase Sapphire Preferred Card, and CapitalOne Venture X
`Rewards Card ....................................................................................................................................................... 33
`
`Figure 12: Amex US net merchant discount rate, cardmember rewards, and two-sided price for merchants
`targeted by Amex’s VR initiative, 2004–2017........................................................................................................ 70
`
`Figure 13: Discover merchant discount rates for Qualifying Merchants in 2021 ................................................... 75
`
`Figure 14: Share of Amex cardmembers who concentrated their GPCC spend on Amex in a given month ......... 81
`
`Figure 15: Amex corporate net incentive payments and net card fees, 2003–2017 .............................................. 86
`
`Figure 16: Amex’s share of US credit card charge volume, 1990–2021 ............................................................... 88
`
`Figure 17: US charge volume for GPCC by network (billions), 1990–2021 .......................................................... 89
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`Figure 18: US charge volume shares for major credit card networks, 1990–2021 ................................................ 90
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`Figure 19: US credit cards in force (millions), 1990–2021 .................................................................................... 91
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`Figure 20: Total US charge volume for credit, debit, and prepaid cards (billions), 1990–2021 ............................. 92
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`Figure 21: Total charge volume shares for credit, debit, and prepaid cards, 1990–2021 ...................................... 93
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`Figure 22: Payment card shares, 2021 ................................................................................................................. 93
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`Figure 23: Amex US gross and net discount rates based on P&L data, 2000–2021............................................. 98
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`Figure 24: Amex’s US internal discount rate and estimated all-in merchant discount rate .................................... 99
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`Figure 25: Amex US gross merchant discount rates for top retail merchants, 2003–2021 ................................. 100
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`Figure 26: Amex US gross merchant discount rates for top Qualifying Merchants, 2003–2021 ......................... 101
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`Figure 27: Amex US gross merchant discount rate adjusting for merchant segment mix, 2004–2021 ............... 102
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`Figure 28: Amex US rewards as a fraction of charge volume, 2000–2021 ......................................................... 103
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`Figure 29: Amex US rewards and cardmember services less cardmember fees as a fraction of charge
`volume, 2000–2021 ............................................................................................................................................ 105
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`Figure 30: Amex US two-sided price, 2000-2021 ................................................................................................ 106
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`Figure 31: Amex’s share of US credit card charge volume, 1990–2021 ............................................................. 109
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`Figure 32: Acceptance locations by payment network in the United States (millions), 1990–2021 ..................... 110
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`Figure 33: Critical walk-away rates for scenarios posited by Dr. Lamb ............................................................... 122
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`Figure 34: Acquirer fees by merchant size .......................................................................................................... 126
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`Figure 35: RBA estimate of incidence of surcharging over time and by merchant size 2005–2011 .................... 133
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`Figure 36: Surcharges and merchant fees by merchants in Australia 2007–2011 .............................................. 135
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`Figure 37: Australian merchant discount rates for Amex, Visa, and Mastercard 2003–2021 .............................. 140
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`Figure 38: Amex Australia charge volume ($MM) 2000–2021 ............................................................................ 143
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`Figure 39: Diners Club premium in Australia 2003-2021 .................................................................................... 144
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`Figure 40: Amex consumer segment cardmember fees as a fraction of billed business in Australia, 2000-
`2019 .................................................................................................................................................................... 155
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`Figure 41: Amex US rewards as a fraction of discount business billed, 2000–2021 ......................................... C-24
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`Figure 42: Amex US gross and net discount rates based on P&L data, 2000–2021......................................... C-25
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`Figure 43: Amex US gross and net discount rates based on GMAPS and MIRA data, 2000–2021 ................. C-26
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`Figure 44: Amex US gross and net discount rates excluding OptBlue acquirers, 2000–2021 .......................... C-27
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`Figure 45: Amex US two-sided price, net merchant discount rate, and cardmember rewards of Amex
`transactions for all merchants, 2004–2017 ....................................................................................................... C-28
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`Figure 46: Amex US two-sided price including and excluding GNS, 2000–2021 .............................................. C-29
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`Figure 47: Amex US two-sided price with fixed merchant segment weights, 2004–2017 ................................. C-30
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`Figure 48: Amex US data processing and equipment expenses as a fraction of charge volume, 2000–2021 .. C-31
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`Figure 49: Payment card shares, 2015 ............................................................................................................. C-32
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`Figure 50: Payment card shares, 2016 ............................................................................................................. C-32
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`Figure 51: Payment card shares, 2017 ............................................................................................................. C-32
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`Figure 52: Payment card shares, 2018 ............................................................................................................. C-33
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`Figure 53: Payment card shares, 2019 ............................................................................................................. C-33
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`Figure 54: Payment card shares, 2020 ............................................................................................................. C-33
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`Figure 55: Amex gross discount rates for qualifying merchants, 2003–2012 .................................................... C-34
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`Figure 56: Amex gross discount rates for qualifying merchants, 2013–2021 .................................................... C-35
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`Figure 57: Visa credit interchange rates for qualifying merchants, 2015–2021 ................................................. C-37
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`Figure 58: Mastercard credit interchange rates for qualifying merchants, 2015–2021 ...................................... C-38
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`Figure 59: Discover discount rates for qualifying merchants, 2016–2022 ......................................................... C-39
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`Figure 60: Regression estimates of two-sided price on linear trend and merchant fixed effects for VR targets,
`2005–2010 and 2005–2017 ................................................................................................................................ D-1
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`Expert Report of Eric Emch, PhD
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`I. Introduction
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`I.A. Qualifications
`
`(1)
`
`I am a Partner at Bates White Economic Consulting, where I have worked since 2011 assessing
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`economic issues related to competition and antitrust in litigation, regulatory, and policy settings. I
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`have more than two decades of experience in the economic analysis of competition policy issues,
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`including the competitive effects of horizontal and vertical mergers, collusion, single-firm conduct
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`and monopolization, market definition, and market power. A current copy of my curriculum vitae is
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`attached hereto as Appendix A.
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`(2)
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`I joined Bates White from the Antitrust Division of the US Department of Justice (DOJ). I spent a
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`decade working in the Division’s Economic Analysis Group, serving as Staff Economist and
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`Assistant Chief of the Competition Policy Section. As Assistant Section Chief, I led teams of
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`economists in theoretical and empirical analyses of merger, monopolization, and collusion cases. As a
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`Staff Economist, I conducted theoretical and empirical analyses in support of antitrust investigations
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`and litigation in a wide variety of industries.
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`(3) From 2007 to 2008, while on leave from the DOJ, I served as a Senior Economist at the Paris-based
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`Organisation for Economic Co-operation and Development (OECD). In that role, I led the OECD’s
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`Regional Competition Center in Seoul, Korea, where I designed, organized, and conducted
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`competition policy training workshops for staffers of national competition authorities across Asia in
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`subjects such as cartels, monopolization, and merger enforcement, work that I continued after joining
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`Bates White.
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`(4)
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`I have published in journals such as the Journal of Industrial Economics, Review of Industrial
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`Organization, Review of Network Economics, and Antitrust Law Journal on a number of antitrust and
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`competition policy-related topics, including the competitive effects of mergers, market definition, and
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`market power.
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`(5) Bates White Economic Consulting is compensated at a rate of $1,100 per hour for my work in this
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`matter. I was assisted by a team of economists and consultants at Bates White working at my
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`direction. Bates White Economic Consulting’s compensation does not depend on the outcome of this
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`matter.
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`I.B. Scope of charge
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`(6)
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`I have been retained by counsel for Amex to evaluate certain opinions and analyses offered by
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`Plaintiffs’ proffered economic expert, Dr. Russell L. Lamb. These include Dr. Lamb’s opinions that:
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` “The GPCC transaction market in the United States constitutes a relevant antitrust market” and
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`that neither debit card transactions nor transactions facilitated with emerging technologies are
`economic substitutes for GPCC transactions;1
`
` “Amex exercised market power in the market for GPCC transactions in the United States during
`the class period”;2 and
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` “Amex’s continued imposition and enforcement of its anti-steering rules have caused
`anticompetitive effects.”3 I assess both Dr. Lamb’s opinion that the anti-steering rules “caused
`Amex-accepting merchants to incur higher overall GPCC acceptance costs”4 and “caused higher
`Net Two-Sided Prices on GPCC transactions.”5
`
`(7)
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`I understand that counsel for Amex have also retained Professor B. Douglas Bernheim and Dr. Eric
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`M. Gaier, who have been asked to evaluate other aspects of Dr. Lamb’s opinions.
`
`(8)
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`In reaching my opinions in this matter, I considered a variety of publicly available materials as well
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`as materials produced by the parties through discovery. A list of the materials that I considered is
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`provided in Appendix B. These materials contain facts and data that experts in my field (i.e.,
`
`economists) would reasonably rely on in forming an opinion on the subject matter of this report.
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`(9)
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`I reserve the right to update my opinions if new materials become available during the course of this
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`litigation. If I am called upon to testify at trial, I also reserve the right to employ demonstrative
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`exhibits that summarize facts or opinions that are disclosed in this report or any subsequent
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`deposition, as well as any new information that subsequently becomes available.
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`I.C. Summary of opinions
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`(10) My primary conclusions can be summarized as follows:
`
`
`1 Expert Report of Dr. Russell L. Lamb, September 30, 2022 [hereinafter, “Lamb Report”], § IV.
`2 Lamb Report, § V.A.iii. See also Letter from C. Hammarskjold to P. Barbur, February 15, 2022, 2. The Class Period
`varies by state, but generally covers January 29, 2015 (or 2016 or 2017) to June 1, 2022.
`3 Lamb Report, § V.
`4 Lamb Report, § V.A.
`5 Lamb Report, § V.B.
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` Dr. Lamb defines the relevant market in this case to be a two-sided market for “GPCC
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`transactions in the United States,” but this opinion plays little role in his analysis. One of the chief
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`purposes of market definition in antitrust analysis is to facilitate calculation of shares to inform an
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`analysis of market power. But Dr. Lamb does not discuss market shares or any other relevant
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`market in his analysis of market power. Though he explicitly defines the market as two-sided, he
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`largely ignores that fact in his subsequent analysis. The grouping of products into a relevant
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`market does not mean that the products or services within the relevant market do not compete
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`with products outside of the relevant market. His blanket dismissal of debit cards and other
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`evolving payment forms as substitutes for GPCC cards ignores important features of the industry
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`that impact the analysis of competitive effects.
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` Dr. Lamb’s analysis of market power confuses technical market power, which most firms possess
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`to some degree, and the type of substantial and sustained market power that gives rise to antitrust
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`concerns. The three criteria that he claims demonstrate Amex’s antitrust market power would
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`hold for the vast majority of firms with any ability to price above marginal cost, and thus do not
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`show anything one way or the other about whether Amex possesses substantial and sustained
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`market power.
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` Dr. Lamb’s analysis of Amex’s market power is based on a one-sided analysis of the merchant
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`side of the market, which is an invalid approach in a two-sided market such as this one. Because
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`pricing and demand are related across the two sides of a two-sided market, analyzing price and
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`cost on one side of the market alone leads to incorrect conclusions. Though Dr. Lamb recognizes
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`that the market is two sided, he ignores that fact in his market power analysis. Dr. Lamb does not
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`show that Amex persistently charged a two-sided price for GPCC transactions that was
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`significantly higher than a competitive price during the class period.
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` Dr. Lamb’s discussion of the “must take” nature of Amex cards ignores important evidence to the
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`contrary and inappropriately condemns customer loyalty derived from Amex’s past competitive
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`investments. Amex cards are generally not “must take” for merchants. Very few cardholders
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`“single home” on Amex cards, and most Amex cardholders do not concentrate their purchases on
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`Amex cards. Though some customers prefer to use their Amex card over other GPCC cards, this
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`loyalty is not a fixed trait that Amex exploits, but a response to Amex’s investments, innovations,
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`and terms of service. In other words, it is a result of effective competition.
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` My assessment of indirect and direct evidence of Amex’s market power demonstrates that it
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`lacked substantial and sustained market power during the class period. Amex’s market shares
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`were inconsistent with substantial and sustained market power, as were trends in Amex’s
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`. In addition, Amex’s
`
`
`
`
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`finding of anticompetitive effects, as Dr. Lamb acknowledges, my finding that Amex had no
`
`. Given that antitrust market power is necessary for a
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`antitrust market power implies that its conduct could not have produced substantial
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`anticompetitive effects.
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` Dr. Lamb’s analysis of merchant surcharging and its implications is superficial and overly
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`speculative. Dr. Lamb’s analysis of surcharging does not properly consider the comparison of
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`costs and benefits to a merchant from surcharging, including the risk that a customer will walk
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`away from a transaction and not return. His analysis does not recognize that barriers to
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`surcharging, which he points to in other contexts, also reduce the impact of a threat of
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`surcharging. Dr. Lamb also ignores the role of acquirers in determining the rates that merchants
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`pay. Empirical evidence indicates that acquirers can play an important role in the determination
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`of the prices that merchants and consumers ultimately face.
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` Dr. Lamb’s misattributes the lack of success of Discover’s “low-cost provider strategy” to Amex
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`Non-Discrimination Provisions non-discrimination provisions (NDPs). When Discover attempted
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`this strategy in the late 1990s, Mastercard and Visa had NDPs in addition to Amex. Dr. Lamb has
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`not shown that the Amex NDPs alone were a substantial barrier to Discover’s expansion
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`subsequent to the removal of the Visa/Mastercard NDPs during the class period, and his analysis
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`ignores evidence to the contrary. He ignores the protection that NDPs provide to a small network
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`such as Discover, as evidenced by its own use of NDPs.
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` The Australian experience does not support Dr. Lamb’s opinion that Amex NDPs harm
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`competition. Dr. Lamb incorrectly claims that the reaction of GPCC networks to regulatory
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`intervention in Australia demonstrates pro-competitive effects of removing NDPs in United
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`States. In attributing decreases in merchant discount rates (MDRs) in Australia to the removal of
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`NDPs, Dr. Lamb does not recognize that the Australian limitations on surcharging were only part
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`of an extensive set of regulatory changes that impacted credit and debit card networks, including
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`direct regulation of Visa and Mastercard rates, and a threat of regulation of Amex rates.
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` Dr. Lamb’s assertion that “annual fees net of rewards” (i.e., net consumer prices) will not
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`increase and may decrease if merchant discount rates fall is inconsistent with e