Attachment A To Joint Filing Of Proposed Redacted Version Of December 5, 2003 Hearing Transcript : U.S., Et Al. V. First Data & Concord EFS, Inc.

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ATTACHMENT A

JOINT FILING OF PROPOSED REDACTED VERSION OF
DECEMBER 5, 2003 HEARING TRANSCRIPT

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA, ET. AL.,

Plaintiffs,

FIRST DATA CORPORATION and
CONCORD EPS, INC.

Defendants.

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Docket No. CA 03-2169

Washington, D.C.
Friday, December 5, 2003
1:00 p.m.

REDACTED VERSION TRANSCRIPT OF HEARING BEFORE THE HONORABLE ROSEMARY M. COLLYER UNITED STATES DISTRICT JUDGE

APPEARANCES:

	For Plaintiff United States:	Craig W. Conrath, Esquire Joshua H. Soven, Esquire Renata Hesse, Esquire N. Scott Sacks, Esquire Arnold C. Celnicker, Esquire UNITED STATES DEPARTMENT OF JUSTICE Antitrust Division 600 E Street, N.W. Suite 9500 Washington, D.C. 20530

	Texas: (and as Coordinating State)	Rebecca Fisher, Esquire Assistant Attorney General Antitrust Division PO Box 12548 Austin, TX 78711-2548

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1	Apperances Continued
2
3	By Phone: For Plaintiff States:
4	New York:	John Ioannou, Esquire Assistant Attorney General
5
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7	Illinois:	Livia West, Esquire Attorney General
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9	Pennsylvania:	Benjamin L. Cox, Esquire Joseph Betsko, Esquire
10	Pennsylvania:	Deputy Attorney Generals
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12	Texas:	Janice Hacker, Esquire Attorney General Office
13	Texas:	Investigator
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15	Washington, DC:	David Blake-Thomas, Esquire Janet Brody, Esquire
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19	For Defendant First Data: (Present)	Frank Hinman, Esquire Christopher B. Hockett, Esquire
20		Geraldine M. Alexis, Esquire BINGHAM MCCUTCHEN, LLP
21		Suite 1800, Three Embarcdero Center San Francisco, CA 94111-4067
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1	Apperances Continued:
2
3	For Defendant First Data:.(By phone)	Nora Cregan, Esquire Zora Braithwait, Esquire
4		Troy Sauro, Esquire May Lee, Esquire
5		Todd Anderson, Esquire Todd Williams, Esquire
6		Christina Wheeler, Esquire BINGHAM MCCUTCHEN, LLP
7		Suite 1800, Three Embarcadero Center San Francisco, CA 94111-4067
8
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10	For Defendant Concord:	Stephen R. Patton, Esquire KIRKLAND & ELLIS LLP
11	For Defendant Concord:	200 East Randolph Drive Chicago, IL 60601
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14	Court Reporter:	Crystal M. Pilgrim, RPR United States District Court
15		District of Columbia 333 Constitution Avenue, N.W.
16		Room 4608-A Washington, DC 20001
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22	Proceedings recorded by machine shorthand, transcript produced by computer-aided transcription.
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THE COURT: Dr. Hausman, hello.

MR. HAUSMAN: Good afternoon, Your Honor.

THE COURT: All right, this is Judge Collyer. We

need everybody who is on the telephone call to identify

themselves and-to identify if there's anyone else in the room

with them.

The Court has ordered this hearing sealed; therefore,

during the course of the hearing people cannot walk in and out

of the rooms in which the people on the telephone are sitting.

You have to keep the door closed. You have to keep other

people from hearing. And you have to remain --or retain the

information sealed whether it's during this hearing or later.

Does everybody understand that?

UNIDENTIFIED SPEAKER: Yes, Your Honor.

THE COURT: All right, so could we take a poll,

please, as to who is in attendance?

MR. IOANNOU: Yes, this is John loannou,

I-O-A-N-N-O-U from the New York State Attorney General's

Office.

THE COURT: And is anyone with you, sir?

MR. IOANNOU: No, Your Honor, no one is here except

me.

THE COURT: Okay, anyone else?

MR. HAUSMAN: I am Jerry Hausman, H-A-U-S-M-A-N,

Professor of Economics, LIP, and there is no one in the room

with me.

THE COURT: Thank you, sir.

MR. BLAKE: David Blake-Thomas for the United States,

B-1-a-k-e hyphen T-h-o-m-a-s, I'm alone.

THE COURT: Where are you?

MR. BLAKE-THOMAS: I'm in my office.

THE COURT: No, did you say you represent the United

States?

MR. BLAKE-THOMAS: I'm with the DOJ.

THE COURT: All right, where is your office?

MR. BLAKE-THOMAS: Washington, in Washington.

THE COURT: Oh, well, we needed to have you on the

phone. Okay, anybody else?

MS. WEST: Yes, Livia West from the Illinois Attorney

General's office. My first name is spelled L-i-v-i-a, last

name is W-e-s-t, and I am alone in the room.

THE COURT: Thank you, ma'am.

Thank you.

THE COURT: Any anyone else?

MS. HACKER: Janice H-a-c-k-e-r. I'm with the Texas

Attorney General's Office in Austin, and I'm alone in the room.

THE COURT: Thank you.

Anyone else?

MS. BRODY: Janet Brody. I'm with the Department of

Justice, it's B-r-o-d-y, and I'm alone in my office in

Washington, D.C.

THE COURT: There was one other speaker I think.

MR. BETSKO: Yes, my name is Joseph Betsko, I'm with

the Pennsylvania office of the Attorney General representing

the Commonwealth of Pennsylvania. Joining me in my office is

another Deputy Attorney General Benjamin Cox.

THE COURT: All right.

MR. BETSKO: And my last name is spelled B as in boy

e-t-s-k-o.

THE COURT: Thank you, sir.

MS. CREGAN: This is Nora Cregan representing First

Data. With me in a conference room with the door closed in San

Francisco are May Lee, Troy Sauro, Zora Braithwait, Todd

Williams and Todd Anderson and Christina Wheeler, who are all

attorneys.

THE COURT: Okay, and everybody understands --is

this it? Do we have them? Good. Everybody understands the

rules of the road as I outlined them because the hearing is

sealed?

UNIDENTIFIED SPEAKERS: Yes, yes, Your Honor, yes.

THE COURT: Thank you.

When we get to trial I don't know if there are going to be

people on the telephone for purposes of trial, but we're going

to have to have the telephone hookups arranged prior to the

time that trial is scheduled to start each day and after breaks

of lunch and stuff because we don't have that much time and

everybody is going to be operating on a chess clock and so we

are going to be zipping through things.

You don't expect to have people on the phone?

MR. CONRATH: No, Your Honor, I don't think so.

MR. HOCKETT: Neither do we, Your Honor.

MS. ALEXIS: I think it will be the States Attorney

General that expects to have somebody on the phone.

THE COURT: Yeah, the states may and if so, we'll

make those arrangements. I just want every one to understand

that because of the time constraints we are going to be dealing

with, we certainly hope that anybody who, particularly the

parties, who want to participate by phone are able to do that,

but we may get going and wait for -- not wait for the phone

hookup to be arranged if that's what is necessary at any given

break, okay. Not to be rude to anybody, but that's the way we

are going to have to do it.

All right. We're ready to begin. I think the ball is

in your court, Mr. Conrath.

MR. CONRATH: All right. I thought maybe we would

each just tell you the order that we are going to proceed and

there's one just preliminary note that I would like to tell you

we received late on December 3rd, a report from an additional,

with an additional expert by defendants named Professor Myers.

I understand that they don't propose to put him forward

today. He was not identified on either of the witness lists

and we think it is severely prejudicial to us and we will be

filing a motion in that regard probably later today, Your

Honor.

MS. ALEXIS: Yes, Your Honor, we'll be prepared to

argue that, Your Honor.

THE COURT: Okay, that's fine. And I understand why

you will and I understand everybody has to recognize that the

people on the telephone can only hear you if you speak into the

microphone. So please, did anybody, did everybody on the phone

hear Mr. Conrath's statements?

UNIDENTIFIED SPEAKER: Yes.

UNIDENTIFIED SPEAKER: Yes, Your Honor.

THE COURT: Mr. Hausman -- Dr. Hausman, I'm most

concerned about you.

DR. HAUSMAN: Your Honor, I'm can hear fine, thank

you.

THE COURT: Okay.

MR. CONRATH: Your Honor, we have two experts we're

presenting in order today. First Dr. Janusz Ordover who is an

expert economist, and second, Dr. Mark Zmijewski who is the

accounting and business expertise.

First of those Dr. Ordover will go first.

MS. ALEXIS: Your Honor, it's Gerri Alexis. We will

have Professor Katz from the University of California in

California who will go first and then, of course, Professor

Hausman who will be heard over the phone who will go after him.

THE COURT: Okay, thank you.

MR. CONRATH: May I introduce the lawyer who will be

making the presentation with Dr. Ordover, that's Arnold

Celnicker.

THE COURT: Good afternoon, sir.

MR. CELNICKER: Good afternoon.

THE COURT: Would you spell your last name for me?

MR. CELNICKER: Yes, C-E-L-N-I-C-K-E-R, Celnicker.

THE COURT: Thank you.

MR. CELNICKER: I think Mr. Conrath exaggerated when

he said I would be making the presentation with Dr. Ordover.

The way we have this planned with the Court's approval is

we have put together a power point presentation. In other

words, we have not treated this as a question and answer

testimony type situation.

THE COURT: That's absolutely right. We don't, I can

promise you I have actually read Professor Ordover, Dr.

Ordover's expert witness reports, I think I have read three

haven't I?

So I, although I need the final one, all you did was add

to the first one?

MR. CELNICKER: What we did, Your Honor, was add to

the first one as a supplemental section based on data that was

obtained post-complaint.

THE COURT: But it's clear where the supplement is?

MR. CONRATH: Yes, it is the final six pages of the

report.

THE COURT: That much I have not read, but I have

read everything else.

MR. CELNICKER: Yeah, my condolences. Hopefully by

doing it orally, and I don't mean any disrespect. These are

tough readings to me at least.

THE COURT: I don't feel disrespected, go ahead.

MR. CELNICKER: What we intend to do, Your Honor is,

is to as I said go through a power point presentation which

will after introducing a little bit about the witness, and a

short introduction to the PIN debit and how it functions, then

get into the meat of it which is first talking about the

concept of product market and how that concept is defined in

the antitrust and why economist look at it a certain way and

these as you see, from reading the papers there are some

differences on how to do that.

So we intend to spend as much time as necessary and as you

allow to try to explain why we think the concept is what we say

it is.

THE COURT: Right.

MR. CELNICKER: Then apply that concept to this

particular case.

THE COURT: Right.

MR. CELNICKER: After that, we are going to turn to

what we view as the second big issue which is the competitive

affects of the merger.

THE COURT: Right.

MR. CELNICKER: And talk about the manner in which we

feel this merger will lessen competition and may lead to higher

prices to merchants. Those two subjects, product market

definition and competitor affects, is the heart of our

presentation.

Time permitting we may say a few words about issues of

entry and efficiencies in particular on efficiences. Dr.

Ordover's input is limited, but he does provide some

perspective on some of the concepts, economic concepts and

underpinning. He has taken no part in performing any

efficiency exercise per se.

THE COURT: Okay, okay.

MR. CELNICKER: So with that introduction if I can,

do you want the witness to sit in the witness box?

THE COURT: That would be great, if he would come sit

in the witness seat and be sworn.

MR. PATTON: Your Honor, could I make one preliminary

objection because I don't want to interrupt Professor Ordover

once he gets started?

THE COURT: All right.

MR. PATTON: We have a preliminary objection, this

should only take a minute.

Your Honor, under the federal rules as you know, it's

okay for an expert to rely on hearsay under Rule 703 of the

Federal Rules of Evidence as a foundation or as a basis for

forming expert opinions.

You may also remember that early on in this case we had

a dispute about a number of declarations whether those would be

admissible or not, the Government had collected a series of

declarations. I think initially had intended to come in and at

least prove up their case or case in chief in whole or in part

through these hearsay statements. Your Honor made it quite

clear that no, we'll have depositions or have live testimony,

we won't have witness declarations.

In fact, as it's turned out, much of the foundation for

Professor Ordover's testimony are these same witness

declarations, and you have read them and portions of them, they

are quoted throughout Professor Ordover's reports.

Here is our objection. It is not that it is

inappropriate for Professor Ordover to rely on hearsay

statements as a basis for expert opinion.

Our belief with all due respect to Professor Ordover is

he goes over the line and does something that the case law is

quite clear he can't do which is that he becomes simply in

large part a vessel for communicating inadmissible hearsay and

injecting it into the record.

Here is the distinction that we try to draw. If an

expert --

THE COURT: Wait, wait. I understand the point you

are making and understanding that it's already 20, 25 after one

and we are on a short clock here. What is it that you would

have me do today?

MR. PATTON": Just be alert to the objection and to

the fact that much of what I think we're going to hear and

that's in the expert reports is not admissible evidence and in

fact, as I think you'll see when we actually see the proof,

there's substantial reliability questions about these

declarations that form the basis for his expert opinions.

THE COURT: I got that.

MR. PATTON: Thanks.

MR. CONRATH: Your Honor, I had spoken with both

counsel for both defendants before this hearing, and no one

mentioned to me that this issue was going to be brought up so

I'm kind of disappointed to hear it this way.

But let me just say it's perfectly appropriate for an

expert to use hearsay in coming to his opinion and also more to

the point by the time we have the trial as many of these

declarants as we're able to fit into this very abbreviated and

difficult schedule will be coming and testifying live and

letting the Court hear their testimony directly.

THE COURT: Okay.

We can now swear the witness.

(GOVERNMENT WITNESS, JANUSZ ORDOVER, SWORN.)

MR. CELNICKER: Your Honor, I am going to, if I

might, hand out a hard copy of the power point presentation and

then technology willing it's also going to appear on the

screens that are present throughout the court.

THE COURT: I have it right here. I have my copy

here.

MR. CELNICKER: Is your screen monitor working?

THE WITNESS: It is.

MR. CONRATH: Your Honor, I think I'll assume the

position of the proverbial potted plant in this proceeding

largely and --

THE COURT: Okay. Dr. Ordover, I don't think that I

need you to spend time on your qualifications. I am impressed

enough by your qualifications and I don't think that anybody is

challenging your expertise or at least your ability to testify

as an expert.

My question about material reviewed which is -- I may be

rushing ahead --

THE WITNESS: Page 2 or 3 on this?

THE COURT: Page 3 on this.

THE WITNESS: Yes.

THE COURT: My only question as to this is to ask you

whether this is the kinds of materials that an expert of your

kind would customarily rely upon?

THE WITNESS: The answer is well first of all, let me

say that skipping over my qualifications, the easiest part of

what I have to do today, so yes, I think this is unquestionably

what I normally would look at and rely upon or consider in any

antitrust case including a merger investigation of this sort.

THE COURT: Perhaps for purposes of Dr. Hausman at

the other end of the line, you could just read the bullets on

the material reviewed slide which is page 3, and then you can

go on to the rest of your presentation.

THE WITNESS: Thank you. Yes, I will be happy to do

that. I am --

MS. ALEXIS: Excuse me, Your Honor.

We could expedite this. This is similar to the same

thing that was sent to us last night by e-mail to Professor

Hausman.

THE COURT: Oh, Dr. Hausman, you have this?

MS. ALEXIS: This is the power point.

DR. HAUSMAN: Yes, I do, Your Honor.

THE COURT: All right, then we can skip page 3 and

just go to page 4.

THE WITNESS: Thank you, I will do that. In fact, I

was considering borrowing slides from Michael Katz, but I also

need to borrow cards from Mr. Celnicker that will help me

illustrate as I go along here today.

This is yet another case involving these pieces of

plastic called credit cards, debit cards. And we are going to

be talking a lot about them so I just wanted to say a few words

about what it is that this case focuses on as opposed to many

other matters involving this electronic transfer market.

What this case involves in my view is the state of

competition what I'll define as a PIN debit market or market

for PIN debit network services, and I'll try to explain in my

view why that transaction is likely to lessen competition in

what I consider to be a properly defined market.

In order to do that I do have to go through some of the

technicalities of that so-called market, of the market because

it differs in certain interesting or important ways from things

that perhaps we are a little bit more familiar.

So if I am going too slow or I am going too fast, of

course, it's your court and please interrupt me as often as you

wish. Maybe we can have Michael sit on the other side and have

an exchange. I have to interject for one second because Jerry

Hausman is in Cairo.

And some years ago, he and I were on an opposing side of

the case in a trial and they have something called a hot tub

hearing. And when I was getting ready for it, my lawyers told

me I was going to be in the hot tub with Jerry Hausman. I was

rather concerned about that fact but I realized that it's not

really what I thought it meant. But anyway. Mow Jerry is off

to Cairo so that will be avoided here as well.

But in any case, I think that I want to go through some

things which are not controversial but I think they are sort of

foundational and important to lay out so that we can all use

the same language. So this is really an introduction to basic

of the PIN debit transactions and PIN debit network services.

The basic idea is that when you come to the store you

can pull out one of these cards and use them to pay for the

merchandise that you purchase whether it's a groceries or

refrigerator or whatever it is, it can be paid for with one of

these cards.

These cards are not the same thing as credit cards even

though when you pay with a credit card you may be paying the

balance at the end of the billing period and have no balances

to carry forward. You may be called a transactor in such a

case as opposed to a revolver.

But here the difference between debit cards in general

and credit cards is that when you pay with debit the balance of

your purchase gets deducted more or less immediately depending

on the type of debit that you use. So if you use one type of

debit that is called signature debit, there's a slight delay,

there's some delay for use, maybe two days. It's now down

perhaps to a day between the time that your purchase and the

amount of your purchase will be deducted from your bank account

with the bank that issued one of these cards.

So my card was issued by what use to be called First

Union. It's no longer and each one of these cards will have on

the back of them -- well, on the front of it, it will have a

Visa or MasterCard sign, a logo. It's going to say something

like check card or it will say master money and those basically

are logos for the signature side of the debit business.

In other words, when you come in and you swipe your card

and if you choose to pay or if you do pay with the debit card

and use it as a signature card, it will go over a MasterCard or

Visa network and it will be treated as a signature payment, and

in order to complete that payment you have to sign the little

sheet of paper that comes out of the cash register the same way

as when you do that if you pay with your credit card. It's

exactly the same in that respect.

However, if you choose to pay using the same credit

card, same card for your transaction using PIN instead of

signing, you will enter your code, the same code that you have

for your ATM transactions generally.

Now, that seems to be just the basics, but we need to go

a little bit more in order to understand what it is that is on

these cards.

We already talked about the check card which is the

signature brand name for Visa, but I want to flip the card and

there's all kinds of things on the other side. Those things on

the other side are called bugs which you probably read in my

declaration and Professor Katz' and Professor Hausman's

declarations, talking about bugs as if it were some kind of

zoological case but it's not.

It's a case about debit and particularly PIN debit.

Each one of the bugs denotes a network. On my card I'm

actually well endowed in networks through my bank because I do

have three PIN debits networks; one is called Interlink which

is actually also on my Visa.

Then I have NYCE which is owned by one of the parties,

First Data, and then I have STAR. I also have PLUS here which

is an ATM. So I have three PIN debit bugs on my card.

So when I swipe this card, as long as my merchant

accepts any one of these networks, my transaction will be

billed to my account instanteously because this is a PIN debit

transaction which basically applies that in the second that I

finish the transaction, my account will be debited.

If I choose at the same time I can ask for some money

back or cash back. In other words, if I say to the clerk

please, I would like to get $50 cash from this transaction,

that's what they will hand out to me, and that will be part of

my transaction also instanteously debited from my account. So

it's no different in that respect from going to a ATM and

withdrawing $50.

If I show you for one second Mr. Celnicker's card you

will notice only that he has an ATM back here but only one PIN

debit network which is STAR. So now if he swipes his card at

the check out point of service, point of sale, the transaction

will not go through unless the merchant takes the STAR network

PIN debit, okay.

As we'll see as we talk a little bit about it, it

matters in my assessment of this transaction as to what happens

to the result of this deal to the distribution of cards which

have more than one bug that is called multi-bug cards and what

happens in particular to the number of cards that only have the

bugs of STAR and NYCE, okay.

THE COURT: Okay.

THE WITNESS: Anyway, so let me just complete the

story and focus on this diagram. As I said, Michael Katz,

Professor Katz has a much nicer looking one, but so be it.

We talk about these PIN debit transaction as being

taking place in a two-sided market. Again, you must have read

about that in my declaration and Hausman's, Katz' declaration.

Most of it may appear that every transaction has two

sides to it because there's a buyer and there's a seller. But

what differentiates the PIN debit transactions -- Can you hit

the, sir -- from the regular two side what you may think or we

all may think as being a two-sided transaction with the buyer

and the seller and you will find that in this transaction

there's an actor in between.

The actor in between is the PIN debit network or it

would be signature debit network or it would be a credit card

network.

So in order to connect the merchant with the cardholder,

we need to have the network in between which spans the

cardholder's checking account, direct debit account and the

merchant which is why in the phenomenic literature there has

evolved over the past years people talk about the PIN debit

markets to be two-sided because they involve this need to

coordinate with the merchant side, with the card issuer side,

it is that coordination that enables the customer and as the

cardholder to complete the transaction in the first place.

You immediately can see that having the player in the

middle creates economic complications that may not exist when

we are dealing with, I use all of these examples of tofu and

chicken any frozen peas. I don't know, maybe I was hungry when

I wrote this, but be that as it may, what I'm thinking about

here is the network standing the two sides and that network has

to in the way act and I think again, this is a central feature

of what I'm going to talk about.

It has to somehow balance the interests of the merchant

and the interests of the bank that issues these cards.

THE COURT: I actually really read --

THE WITNESS: Oh.

THE COURT: -- what you submitted.

THE WITNESS: Oh, my God.

THE COURT: I actually understand that. I'm ahead of

you on this because you have already made it clear.

THE WITNESS: Oh, I see. If that's the case --

THE COURT: You were more specific and more clear in

your written documentation than maybe you are giving yourself

credit for.

THE WITNESS: Thank you. I'm happy to skip all this

if I may.

THE COURT: What I really want to talk about is the

guidelines analysis of mergers. I understand, I mean, there's

a really critical difference between your view as to how to

analyze the relevant market and Dr. Hausman's. And I think

that possibly is because you very strictly are following the

analysis that the guidelines recommend; that is, your, the

smallest possible market kind of thing.

Whereas Dr. Hausman is saying no, you have to look at

the larger picture because what is happening in the real world

isn't reflected in the small monopolist analysis that you were

using.

So I understand the concepts on page 6, but talk to me

about the hypothetical manopolist and whether or not that is

actually the only way that one can define the relevant market

or whether there aren't alternatives.

So is this it? You have to understand I am not

previously been an antitrust lawyer, so is this it? Is this

the only way to do it?

THE WITNESS: Well, the answer is there's always more

ways than one to skin a cat, but I think that the approach that

I advocate is in fact not removed from the realities of the

market place and what I want to --

THE COURT: Well, I'm sure you would say that.

THE WITNESS: Yes.

THE COURT: I'm just drawing the distinction between

which is a rather crude way of distinguishing the way you were

approaching and the way Dr. Hausman was approaching.

THE WITNESS: Yes, I think that in my view the proper

place to start, I don't think that there's to many ifs and buts

about that, is the test that has been developed in the merger

guidelines. It's over 10 years or 12 years old, versions of it

was available in the earlier versions of the guidelines.

I believe that the approach that I advocated here which

is sensitive to day-to-day market conditions and in fact, is

designed to capture these day-to-day conditions is the most

effective way of approaching the question of whether or not the

products that are those supplied by the two parties compete

what is the market in which these two products compete.

Obviously, there's a lot of evidence that one can bring

to bear on the question as to whether or not this SSNIP, the

small but significant increase in price, nontransitory increase

in price will in fact be implemented would be profitable to

this hypothetical manopolist, and this is where the evidence

that is of the sort that is in some of the portions of the

Professor Bailsman's report and my report and Professor Katz1

report, that's where it all comes in.

I think there were many, many mistakes made in the way

the evidence brought in to answer the question what's the

relevant market. But I don't ignore that information. In

fact, I put it in together with whatever information I have in

order to ask the fundamental question.

What would happen if this hypothetical manopolist were

in fact to increase the price? Would it be profitable to do so

by five or 10 percent and the answer to that depends on all

kinds of issues.

THE COURT: Well, the question in the sense is if

there are as you said two sides to the market, can even the

hypothetical manopolist increase the price to merchants without

worrying about the Interchange price to the banks?

THE WITNESS: Well, I think the answer is because of

the two-sided nature of the market, this hypothetical

monopolist has to understand what will happen on the issuer

side.

THE COURT: Right.

THE WITNESS: If the price of the merchant is

increased, okay. And I go through that in some detail but it

much depends and what it is that the hypothetical monopolist

will attempt to do is a price increase to the merchants, okay.

For example, if the monopolist simply increases those

switch fees, then in terms of the per transaction revenue, the

issuer is left totally indifferent because the issuer only

collects the Interchange minus the Switch fee it pays.

THE COURT: Well, it's not quite indifferent because

you have to assume that at some point the merchant pays both.

The merchant pays the Interchange fee and the Switch fee.

THE WITNESS: But it only pays its own Switch fee.

It doesn't pay for the Switch fee that the issuer pays for.

THE COURT: Okay. But the merchant essentially pays

a sum for use of the network that is both the merchant's Switch

fee and the Interchange fee for the bank, right?

THE WITNESS: No, the merchant pays the Switch fee.

THE COURT: Right.

THE WITNESS: That it pays through the network like

say five cents a transaction, and it pays the Interchange which

flows through its entirety to the, to the issuer.

THE COURT: Right. To the bank.

THE WITNESS: To the bank or financial institution.

THE COURT: So if you add five cents for, we'll say

five cents for it's a nice round number and --

increase in the Switch fee so that's more than a SSNIP.

THE COURT: I thought five cents sounded like a lot

of money.

THE WITNESS: It is a lot of money if you multiply it

by a lot of transactions.

THE COURT: We'll use five cents because I am feeble,

five cents for the Switch fee and forty cents for the

Interchange fee for the bank.

THE WITNESS: That's true.

THE COURT: That's forty-five cents for each

transaction.

THE WITNESS: Yes.

THE COURT: One has to assume that there is a cap on

that; that is, whether the, the increase is in the Switch fee

care.

I mean, the merchant doesn't care whether he is spending

45 cents and it gets forty and five or whether he pays 45 cents

and it gets split 35 and 10, but he is going to care if he has

to pay 47 cents, right?

THE WITNESS: Absolutely, so that's why we -- I'm

sorry --

THE COURT: My point is therefore, that the bank

can't actually be totally untouched by the increase in Switch

fees because if the Switch fee increases from five to seven

cents, the pressure from the merchant may effect the bank's

Interchange fee.

THE WITNESS: The pressure from the merchant, to the

extent that the merchant can exercise any pressure which is

what this case is about, the ability to actually keep those

fees down to some level that would exist.

THE COURT: Oh, well, I didn't think that the issue

was merchants exercising pressure.

Is that what you are thinking?

THE WITNESS: Well, I thought --

THE COURT: Are the merchants and consumers that we

are worried about?

THE WITNESS: The merchants -- well, we are going

through a lot of steps at the same time, so maybe I can try to

unpack it.

THE COURT: Right.

THE WITNESS: I think when you start asking me all of

these difficult questions, the question that we started with

was whether or not the issuer which is the bank --

THE COURT: Right.

THE WITNESS: --or credit union cares about what

happens --

THE COURT: To the Switch fee.

THE WITNESS: --to the Switch fee.

I said that the answer is as long as the Interchange is

unaffected, as long as the Interchange that it receives it gets

the same amount per transaction and therefore, from their

perspective it will be indifferent on a per transaction basis,

okay.

Then we said oh, okay, well what happens if the Switch

fee goes up by a lot and that requires the Interchange to go

down.

THE COURT: Right.

THE WITNESS: That's the next step was that

particular exercise.

THE COURT: On the concept that there's only so much

money that a merchant will pay.

THE WITNESS: Well, this goes precisely to the

question of the effects of that SSNIP. If the merchant is

totally on the margin between willing to pay the extra two and

a half cents, okay, or not, then if you try to impose the

SSNIP, and I think you have got to the right answer very very

effectively, if the merchant says look, you go up by two and a

half cents whether it's an Interchange increase of two and a

half cents or whether it is a switch fee increase of two and a

half cents, I don't care. I pay two and a half cents, it's my

money and I have to pay for it and that will be and translated

If that happens, then obviously the answer would be that

the effect of that SSNIP which we have say is five cents or

whatever it is, would be to drive away transactions from the

hypothetical monopolist that is imposing the increase and

therefore rendering the increase unprofitable.

Now we are asking a question, and I have been trying to

answer that using whatever, all of the evidence that I have at

my disposal, whether or not in this case where we are starting

right now, the 10 percent increase in let's say starting with a

merchant Switch fee would dissuade the merchant in such numbers

from accepting PIN debit or it would cause them to steer away

from PIN debit to other means of payment that the increase that

we are contemplating would in fact be unprofitable for the

hypothetical firm and the answer to that I believe is that it

would not be, that that would be a profitable thing to do for

that hypothetical monopolist.

THE COURT: So if what I was sort of postulating was

that there was only so much money available for each

transaction that a merchant would pay and let's say it's 45

cents, so if the network wants to improve it's profitability in

any way by increasing its Switch fee, it's going to have to

persuade the issuer to decrease the Interchange fee because my

theory is that the merchant will only pay 45 cents.

THE WITNESS: If your theory is that we are all of

limits of willingness to pay, then the answer is yes. If you

want to increase the amount collected in Switch fees, we'll

have to pay less from the, you have to pay less to the issuers

because there is only 45 cents to be divided between the two

parties.

THE COURT: And it's your concept that that is not so

and that the networks can add at least 10 percent to the Switch

fees without having defections, material defections from the

merchants?

THE WITNESS: I could not have stated my conclusions

better than that. It is a clear statement of exactly where I

have come out at looking at this market.

In fact, I think I have made a statement that is even

stronger in my the declarations saying that even if one were to

increase not only just the Switch fee but the Switch fee plus

the Interchange by the five to 10 percent amount which the one

we are contemplating --

THE COURT: Right.

THE WITNESS: -- there would not be enough defections

of merchants or lets make it less simple, more simple, just

simply a reduction of diminution in the number of PIN debit

transactions, then that would make such an increase

unprofitable for the, this hypothetical monopolist.

Now I want to make sure that it's clear that when we are

talking about a hypothetical monopolist imposing that SSNIP, we

are not necessarily saying that this is what is going to happen

post-transaction.

THE COURT: Oh, no, no, no.

THE WITNESS: I want to make sure.

THE COURT: You are using that for purposes of

defining the market?

THE WITNESS: Exactly, Your Honor.

THE COURT: I'm not quite sure -- no, but I

understand that you are using it for defining the market.

But since Dr. Katz and Dr. Hausman say, well, but this

market this year, last year, next year is being so impacted by

But setting that aside, maybe something down here

percentage points, I still have to ask the question whether or

not the effect of these strategies has been to create a market

that comprises both signature debits and that and PIN debit,

even despite all of these increases, and despite all of these

purchases of market share, is there a gap still?

And I have here a slide, slide 12 that tends to, that

summarizes the evidence or statements in the declarations that

were put into this case.

MR. PATTON: Your Honor, I'm going to be very brief

because I must preserve our record on this.

This is precisely the kind of thing we object to. This

is based a hundred percent on hearsay and as the evidence at

been deposed in many cases it's extraordinarily unreliable and

inaccurate hearsay.

So this goes way beyond the pale of Section 703 and the

distinction that I was trying to raise before is it is

appropriate for an expert to say --

THE COURT: No, no, I got it. I understand your

argument.

MR. PATTON: Okay, all right.

THE COURT: I am not as smart as I like to pretend,

but once I understand it -- I really don't need you to belabor

the point.

MR. PATTON: I know you are smart, Judge.

THE COURT: -- once I understand I don't need you to

belabor the point.

Yes, sir.

MR. CONRATH: I think I will just repeat what I said

This is the kind of thing of which experts rely and we will be

bringing many of those witnesses for Your Honor to hear during

the trial.

THE COURT: Okay.

THE WITNESS: So getting back to whatever the

probative value of this evidence is is for you to decide.

The fact of the matter is, and I think that the press

that Professor Katz relies on and Professor Hausman cite to a

great extent as well, everyone tends to agree that on the whole

the PIN debit transactions are substantially cheaper still than

the transactions run over signature networks, signature debit

networks.

THE COURT: And that's because the Interchange fees

are different. The Switch fees aren't the same.

THE WITNESS: There's some, there's some. The sum

total of fees to the merchant whether you are looking at it,

which is what you should be looking at. When one looks at the

total sum of the Switch fees and Interchange or whatever

merchant discounts are on the signature side versus the PIN

debit side, that cost is to a merchant.

THE COURT: I don't dispute that. I was trying to

make that point earlier, but right now we're dealing with

the -- I have forgotten -- somebody called this the payment

market or something like that. Industry I meant, payment

industry or something. The question is does the network -- who

runs the network on which signature debit operates, Visa?

THE WITNESS: Visa or MasterCard.

THE COURT: They are the only ones, right?

THE WITNESS: That's right, Visa with eighty percent

and MasterCard was twenty percent.

THE COURT: And now Visa is Interlink and by using

its resources to buy business away from, at least from STAR, we

don't know how they are doing vis-a-vis First Data.

THE COURT: If I were a merchant and I had to decide

whether I were willing, and I understand the issue about how

much power merchants really can exercise here, but if I were a

merchant and could make the determination as to whether or not

I were willing to accept a PIN debit card or a signature debit

card, and the signature debit card cost more, so you are saying

that I would be inclined to go with the PIN debit card?

THE WITNESS: Absolutely, and you see a lot of that

saying they are going to discontinue or threaten to discontinue

the MasterCard signature debit.

THE COURT: Right. My question is what's the Switch

fee part of a signature debit charge to the merchant?

THE WITNESS: I don't recall. I don't think that

there are any Switch fees there.

THE COURT: So all of the money for the cost of a

signature debit card, it's all a quote Interchange fee of sorts

that goes directly to the bank?

THE WITNESS: That's -- I have to clear by

Mr. Celnicker.

MR. CELNICKER: Your Honor, may I just impose?

The signature card networks both of them, Visa or

MasterCard are run by bank associations. They are set up

slightly different from a legal perspective, but just

associations of banks so that the money --

THE COURT: That's what Visa is.

MR. CELNICKER: That's what I'm saying, Your Honor;

therefore, the money that flows from the merchant to the

association and then it's in some way distributed to the member

banks, that middle entity, the Visa or MasterCard is not in the

same position as an independent network.

THE COURT: I understand.

MR. CELNICKER: Therefore, the concepts don't follow

through directly of Switch and Interchange because it's all one

pot of money that is going to the banks that are members of

Visa and MasterCard with some left over to run the association.

THE COURT: So with Visa such a hot competitor in the

market and finding viable business growing and everything, why

do you conclude that it's anti-competitive for First Data and

Concord to merge?

I mean, I can understand where the Department of Justice

started when this was announced and Concord had 51 percent of

the PIN debit market and First Data had 10 or 12.

THE WITNESS: Around 12 percent, yeah.

THE COURT: And Interlink was sort of down there with

the small guys, but that's not, doesn't seem to be the current

facts or at least that doesn't seem to be the facts that will

be in existence in 18 months.

So why are you concerned and your conclusion is that

there is an anti-competitive result if these two merge?

THE WITNESS: I'm sorry. First of all, two things:

One, we don't know what the market share is, assuming

that that's where we are focusing on which I'm not, will be 18

months down the road.

There have been losses obviously by STAR, and that does

not mean that STAR confronted with these losses will not try to

turn around and get market share for itself.

But I want to get away from market shares being the, the

all and end all of the analysis. In fact, I go on and talk

about many of the other things like the bugs and so forth so I

don't want to get into that right now. I want to answer your

question.

The reason I still believe that this transaction raises

competitive concerns is because it does remove a network as an

alternative to the networks that will, relative to what the

world will look like if this transaction were to come --

THE COURT: What would be your reaction then if Visa

didn't maintain Interlink as a separate network, one that is

distinguishable and you can see there it's a network, absorb it

into the Visa charge card so-called network or the signature

debit network, wouldn't you then be worried that there's the

loss of a network?

I mean, what I don't understand is why Visa isn't bigger

for your analysis? It seems to me that Visa is out there

gobbling up the world and nobody is paying attention.

THE WITNESS: I think just, I think a lot of people

are paying attention to what Visa is doing, including the

parties to the transaction and the merchants.

THE COURT: The defendants who are the ones who are

giving --

THE WITNESS: Yes, and I am paying attention to that

as well because I was trying to in answering your question

whether it is true first of all, whether the fact that Visa is

doing whatever it is doing, whatever its incentives are,

doesn't mean that somehow the relevant market has already now

become PIN debit and signature debit and become a bigger market

than lets say PULSE.

So I said despite all of these actions by Visa to gobble

up business or to buy market share that this has not led to a

circumstance whereby this hypothetical monopolist test, that is

the relevant test I believe still, would fail.

In other words, whatever Visa has accomplished and

whatever it is likely to accomplish over the next 18 months or

two years, whatever the horizon one may want to look at, it's

not going to be resulting in a complete, in a substantial

further compression of the, of the rates as between the

signature and the PIN such that the test would be failed.

It still does not mean that just because the firms

failed the test then the market is what it is, it does not mean

that there's a competitive concern. I may make it clear that

one has to then go on and try to examine whether there will be

a competitive concern.

THE COURT: Okay, but why don't we go to that part

because I think you have -- I don't want to take all of your

time.

THE WITNESS: No, it's whatever is good for you to

understand my views is whichever going to be.

THE COURT: Well, I could spend a lot of time with

just the experts and the lawyers, you know.

THE WITNESS: There is the fun part.

THE COURT: Go to your discussion of your concerns of

the potential anti-competitive effect if in fact this merger

were to take place.

THE WITNESS: All right. So this is on slide 16 if I

may.

Well, my analysis focuses on two things really, others,

there are others that one can worry about. But my assessment

of the effects of the transaction focuses on the cost to the

merchants of dropping the network post-merger, and also focuses

on the cost to STAR/NYCE, the combined network, from the

merchants' least cost routing. And I will take those --

THE COURT: This is your bug issue?

THE WITNESS: One is the bug issue and the other one

is the multi writing issue which also obviously interplays with

the bugs because it's only in those circumstances when there

are more than one bug on the card that the potential for this

least matter even arises.

So where I have come to analyze in connection with this

merger is a question whether or not as a result of this

transaction the merchants would somehow be disadvantaged

vis-a-vis the networks in their continuous efforts to try to

keep the cost to themselves down which is what they are

interested in because these costs will have to be passed onto

customers which is you and I.

THE COURT: Who is the consumer we are suppose to be

worried about in this, in this environment? Is it the merchant

as the consumer of the PIN debit signature, debit other credit

arrangements or is the ultimate private consumer?

THE WITNESS: Well, I think to the extent that we are

worrying about the effects of that transaction on the cost to

the PIN debit customer which is the merchant, if that cost goes

up, then it's also going to follow that the cost to the

customers will have to go up at least in reflection of the

elevation of the cost.

So the merchant is in a way a weigh station between the

PIN debit network and the person who avails himself or herself

of the debit, actually anyone who walks into the store.

Because under the current environment as we have in the United

States unless you go to a store that does not accept cards, the

price that you pay is independent of whether you pay with a

credit card, whether you pay with signature debit, whether you

pay with PIN debit and so on.

You get, you are charged a dollar for a can of peas

irrespective. So that effect of the elevation, of course, will

be felt by all people irrespective of how they pay, but the

initial focus on my assessment is then on the ability of

merchants to resist super competitive pricing but increase of

pricing to them following as a result of this transaction.

THE COURT: Was there an increase in consumer cost

when Visa managed to push through an increase in the

Interchange fees?

THE WITNESS: You want to -- Mr. Celnicker, you want

to speak to her?

MR. CELNICKER:

I do think that Dr. Ordover's answer at least from where

I am sitting might not have been the clearest.

The merchant is the customer in the context of the

competitive effects analysis. It's the merchant's costs that

are going up.

THE COURT: Right.

MR. CELNICKER:

MR. CELNICKER: The consumer like you and I come into

play in two ways. The first is that if Safeway is paying more

in PIN debit services, it may raise the price of peas a penny

and we pay more. And that was in effect who ultimately pays

the bill.

THE COURT: Right.

MR. CELNICKER: But it doesn't mean that you and I

are the customer in that sense, we're not, you know, it's being

passed on to us to pay.

THE COURT: No, I understand that. Okay.

MR. CELNICKER:

MR. CELNICKER: But the consumer of the network

services is the merchant, that's one point.

THE COURT: Okay.

MR. CELNICKER:

MR. CELNICKER: Just one related point. You and I

come into the picture in one second way. And that is the

merchant takes our desires into account to how we want to pay

in deciding whether to accept or turn off PIN debit or

signature debit or any other form of payment.

So we do feed in a sense to the merchant's incentives in

what it's going to do. But the customer as it's being used in

these reports --

THE COURT: Are really the merchant.

MR. CELNICKER: -- or at least by the Government are

the merchants.

THE COURT: Are the merchants.

MR. CELNICKER: So you had a pending question which

is whether or not --

THE COURT: No, no, I got an answer, that's okay. I'm

satisfied.

Okay. So then you said post-merger -- I'm on page 18 --

Post-merger of all PIN debit transactions would

involve cards bugged with only STAR, only NYCE or both. Which

means pre-merger, all PIN debit transactions involve cards. I

mean, this is a statement that's true today?

THE WITNESS: That is true. Well, that is based --

sorry.

THE COURT: Is that that's, that's cards,

not transactions?

THE WITNESS: No. This is based on PIN debit

transactions. So when the numbers of cards or people have

cards which they don't use and therefore to focus on the number

of actual cards, we just have no way of knowing.

THE COURT: Right.

THE WITNESS: The only thing that we know is what

happens with these cards.

THE COURT: Okay, but is this statement true today

that of all PIN debit transactions involve cards

bugged with only STAR, only NYCE or both?

THE WITNESS: That is based on the data that we have.

The answer is yes because we have received the data that

enabled us to calculate those shares and they are on page 19,

and the thing to focus on I think is the actual increase in

what happens to single bug percentages of all transactions as a

result of the combining of STAR and NYCE.

So what you will notice is that not simply adding that

,but in fact, what

happens is that there is this added increment in the percentage

of card transactions that are going to be as of right now based

on the data sets that we have available to us right now will in

fact be on cards that only have these two bugs.

As I said earlier, it is that single buggedness -- I

don't know if there is a word -- but let's say it is.

THE COURT: But I'm following you.

THE WITNESS: Single buggedness that is the factor

that is relevant to the merchant in how to react to an attempt

by a network to raise the fees to that merchant and each

merchant will obviously react in possibly some different ways.

Some may decide I'm going to turn off the network, we say

that's highly unlikely given what the fees are now.

THE COURT: Except that right now if you are looking

at these, this is a question of transactions.

If you look at all transactions right now, I thought

STAR.as of March last year anyway, STAR had something like

51 percent of all transactions.

THE WITNESS: That is true, but what this says is

that it had of transactions on cards that had more than

one bug and in particular, had transactions on I think, I don't

recall the exact number, but I think something like -- you can

see that of STAR'S transactions were on cards that

it only had their bug which is like the Celnicker card, this

one. The rest of the transactions were on cards that had more

than one bug.

THE COURT: But if of its transactions,

STAR'S transactions were on cards that had only its bug?

THE WITNESS: Yep.

THE COURT: And after the merger, of the

cards would be on STAR and NYCE and no other,

THE WITNESS: But that's because I hate to say this

to the Judge, but the Judge can be wrong sometimes.

THE COURT: No, that's fine.

THE WITNESS: So what I'm saying here is that you are

skipping.

THE COURT: You are the expert, I'm just a Judge.

THE WITNESS: Well, yeah, who knows?

THE COURT: What am I skipping?

THE WITNESS: Well, you are moving from one column to

another.

MS. ALEXIS: I am sorry to interrupt. I heard

dropping off. I just wanted to make sure that Professor Hausman

do a technical check and make sure he is still there.

THE COURT: Is Dr. Hausman still there?

DR. HAUSMAN: Yes, I am, Your Honor, although you

seem to be fading in and out somewhat. If you, Professor

Ordover, if you would speak in the microphone.

THE COURT: I'm sorry. After I told everybody else

to speak in the microphone, I have been moving around, and I

apologize. I will try to be better.

THE WITNESS: I have been too.

THE COURT: All right. I see your point.

I moved from your own transactions to all transactions.

THE WITNESS: But if you want to go down the same

column.

THE COURT: Right.

THE WITNESS: You would notice and that's an

important number that of combined transactions of

STAR and NYCE post-merger would in fact be under single-bug.

THE COURT: And this depends on, this

depends on a study of transactions from what period of time?

THE WITNESS: Actually, there's one week in the fall

of 2003. This is data that we got from First Data Merchant

Services which is a processor.

THE COURT: Right.

THE WITNESS: And we were able to in fact extract

from the data set information about transactions. So were you

to interpret this number, if I can go for one sentence is to

say if I am a merchant and I see, say I could see a customer

walking in with the card that has -- all I can see is the,

this, I don't see anything else. I see the STAR, Jerry, I'm

showing the STAR logo just in case you are wondering what's

happening here.

If I just show the card and see this, the merchant will

say there's a chance almost that this

card will have no other bugs other than those of the merged

firm and, therefore, from the merchant's standpoint, I believe

that creates a serious concern as to whether or not that

merchant can in fact act to disconnect the network.

THE COURT: No --

THE WITNESS: That's the point.

THE COURT: -- and that follows quite logically.

Let me ask you, that , would that be less if

you took into effect the predations of -- I use predations.

THE WITNESS: Oh, Section 2.

THE COURT: That's the wrong group, wrong audience to

use this term.

The competition from Visa, does that take into effect

the loss of business that STAR projects or is that --or that's

with all of the business that STAR -- it's with their

51 percent of the market?

THE WITNESS: Your Honor, this is based on the

transactions that run over FDMS and therefore, it reflects the

current state of --

THE COURT: Yeah.

THE WITNESS: -- dissimination of cards and

distribution of bugs on these cards.

THE COURT: And is it fair to assume that let's say

we'll just pick Bank of America as an example, if Visa has

managed to persuade Bank of America because of their sterling

sales pitch to move from STAR to Visa Interlink, would you

assume that the STAR bug would be removed from those cards or

would Interlink issue a card that contained STAR bug as well as

the Interlink bug?

THE WITNESS: Well, the Bank of America is already in

here because that occurred before October, October or November

of 2003 which is where this data is from.

THE COURT: Okay.

THE WITNESS: So the answer depends very much on what

Interlink or Visa can convince the bank of doing. What they

can convince the bank of doing is to get rid of any and all

bugs for debit other than Interlink or they could say look, we

want to be a primary bug. We want all of the transactions to

be steered over us unless there's some merchant that doesn't

happen to accept it, so you as a bank have the opportunity to

have, a secondary bug and it could be STAR or PULSE or NYCE or

anyone.

So the answer to that question is that very much depends

on what their financial institution will feel comfortable with.

If the financial institution says to itself well gee, I'm going

to go with Interlink, but Interlink does not have enough

merchant coverage, that's a very risky proposition to me which

is why when Visa or Interlink was negotiating with Bank of

America, they were very much concerned about the very fact and

tried to get the merchants to sign up with them as well as at

the same time, you know, the chicken and the egg problem that

we also talk about.

So you need to get both sides of the market in order to

become a convincing proposition to both the bank and to the

merchant to have acceptance and you have to have distribution,

and you have to pay in some ways for both.

THE COURT: Okay.

THE COURT: That's very helpful thank you. And what

was the other one?

THE WITNESS: The other one is perhaps more complex

in some ways because it talks about the idea of something that

is referred to as least cost routing. So if you go to slide 20

that's sort of the beginning of a fairly complex discussion of

that context concept. So I'm going to try to boil it down to

some slogans because we are running late, I presume.

THE COURT: I understand about lease cost routing and

your point is that given an option, a merchant will choose the

lesser cost and they wouldn't have that option if these two

merged.

THE WITNESS: The range of the options will be

removed if there is a transaction that previously could have

been least cost routed between NYCE and STAR, but following the

merger that option will no longer exist. So the merchant will

now have to route it to NYCE/STAR or you know if the merchant

is willing to disobey all of the rules --

THE COURT: Hello, does anybody know where the sound

comes from?

Dr. Hausman are you still there?

(No response.)

THE COURT: No.

Is everyone gone?

MR. IOANNOU: No, this is John loannou, New York,

still here. I think we lost everyone, Your Honor.

UNIDENTIFIED SPEAKER: We're still here in San

Francisco, Your Honor.

THE COURT: Okay, thank you.

Did Dr. Hausman call in or did we call him?

UNIDENTIFIED SPEAKER: The operator called him and we

had a deal that he would call back to our office and we would

get him back on.

MS. ALEXIS: Sounds like my partner has taken care of

that.

THE COURT: So you will expect if you hear from him

if he gets dropped and then you'll figure out how to add him

again?

UNIDENTIFIED SPEAKER: Yes, that's our plan.

THE COURT: Can you turn to 23 and 24 and tell me

what these are, explain these two.

THE WITNESS: We have two charts to try to illustrate

the issues related to least cost routing.

What these try to depict is the opportunities for

least-cost routing by first focusing on the number of

transactions that are in so-called priority conflicts. Because

I argue unless there is a priority conflict, the merchant may

be reluctant to least-cost

route or at least be in the process of being reluctant because

there are often fines and all kinds of penalties that could be

imposed on the processor that does not route according to the

rule.

So when there's a priority conflict there's an opportunity

to route to the least cost network at least that's when I say

such opportunity arises that is not arising in the other

setting.

So when you look at the two out most columns they have

Xs the first, the third row has Xs in STAR and the NYCE column.

What it says is that on those transactions where there's both

STAR and NYCE, there's a conflict between STAR and NYCE with

both STAR and NYCE wanting to be routed too, okay. And the

study where both STAR and NYCE are claiming priority.

Now what this says is that following the transaction and

that particular when you add this all up the number of this

priority conflicts between STAR and NYCE turns out to be

THE WITNESS: Well those are the transactions under

which both STAR and NYCE bugs are present, but for some obscure

reason somebody forgot because neither of them claim priority,

okay. So that's a small number.

So what we are saying at least that looking for the

study period that we have on FDMS and Concord the numbers

potentially conflicting transactions between STAR and NYCE as

, okay. And we say that as a result of

the transaction if that the merger, if that merger takes place

these conflicts will be resolved, will no longer enable the

merchant to have the ability to least-cost route because

presumably STAR and NYCE will figure out how to avoid being

arbitraged against.

Either they will simply remove one of these bugs away from

the card or it doesn't have to be removed from the card

definitely, but remove one of the networks or lineup the prices

so that there will be no problem that way, or they will simply

put in information into the processors computers which says

that if you see this kind of thing happening you always have to

route to STAR and NYCE will not object and STAR will not

object. So that is lost.

And if you look at the next table which is probably even

more incomprehensible. We are now looking at total STAR and

NYCE transaction over the study period which I guess is quite

cumbersome than the other one. And we are trying to ask

ourselves what is the diminution in the total transactions in

conflict as a result of the merger.

So whereas previously we just looked at the two sets of

the conflict in the STAR and NYCE. We are now trying to scale

it relative to the overall volume of transactions during the

study period, and say and I conclude that the merger will

reduce the percentage of these transactions conflict on the

combined network by which is the right hand number

okay. So that's the bottom line.

In sum, when it comes to the least-cost routing we

acknowledge that this is something that is open to merchants.

It's open to merchants that are obviously willing to violate

the rules, but in some since that is already in the mix.

We are now looking at diminution and the ability to

least-cost route as a result of transactions, we say that there

is a visible reduction in the number of such transactions that

can be used to compete between the two networks against each

other.

THE COURT: But in terms of the two concerns that you

have expressed as to the anticompetitive effect of a merger,

would I properly conclude that the first, that is the

difficulty of getting out of the, getting out of the market

would be more or greater concern to you than the second since

the second is a little harder to predict?

I mean the second depends on STAR and NYCE actually

coordinating their cost structure and being similar instead of

operating as separate parts of the First Data or I don't know

who is going to First Data is acquiring STAR, of the First Data

corporate hiearchy where there are two different businesses in

competition with each other.

THE WITNESS: I think that my view again I'm just

opining here based on what I know. The effect of the

transaction will be for them to coordinate how they put in the

priority rules into the system. So they know what their

relative costs are. They know what their cost of effectuating

the transaction. They know what the cost is to the merchant,

so they know which way the merchant would like to go. All of

that is known to them more or less.

I would think that and based on historical facts we know

that these networks when they merge they do resolve these

issues that come from the overlap of the --

THE COURT: Right.

THE WITNESS: --of routing rules.

THE COURT: Right.

THE WITNESS: So I would think if anything they can

accomplish, they can figure out how not to compete against each

other unless they think that it is a way to incentivise (sic)

the managers of both. I think that that's probably a tertiary

issue for them at this point.

So I again would think that the first concern relating

to the ability of the merchant to disconnect as relates to the

single-buggedness, a lot of people in the industry because of

their view as expressed in the press and in depositions and

declarations that this is almost the only thing they have in

their quiver as a way of trying to limit these increases that

have been taking place.

THE COURT: Okay, thank you sir.

MR. CELNICKER: I'm not going to stand up here and

testify, but can I throw one Softball question that I think --

THE COURT: Yeah.

MR. CELNICKER: -- goes back to a point that is

important.

THE COURT: One Softball question.

MR. CELNICKER: One Softball question.

We were talking earlier about Visa and its incentives and

how it plays into the analysis.

THE COURT: Yes.

MR. CELNICKER: So in that context if the merger goes

through and the merged entity raised its price to merchants

which is our fear, what would we expect Visa to do given its

incentives?

THE WITNESS: That's a hard ball. But the answer is

I think clear that Visa given especially the set of questions

we had from the Judge, from you, Your Honor, would have very

limited interest in trying to act as a maverick competitor that

would keep these fees down.

We already agreed to some extent that their interest is in

fact to raise the fees or to act in the way that will make

these fees go up. So if somebody is taking the leadership and

in fact raising the fees and therefore moving first to the

merchants, I think they would be very happy to piggy back on

that given the kind of incentive that you describe to that

alleged gorilla. I don't think that they would like the

characterization.

THE COURT: I'm sure they wouldn't except that it

really recognizes their great success in the market with the

signature check card which I do understand is an entirely

different animal, but does give them enormous resources.

THE WITNESS: It does, well the fact of the matter

yes it gives them enormous resources because they are able in

some ways not only to tax the banks that benefit from their

program such as those that receive these subventions, but also

the ones that don't which have to pay into the association in

order to generate the funds --

THE COURT: Right.

THE WITNESS: -- that are being disbursed.

So when you ask me about the Switch fees and so on the

signature side Visa acts as a non-profit association what

basically means that they get to spend as much as the

association figures out they need to and, therefore, that's the

way to balance the books, but the notion of what is profit and

what's not in this context is somewhat relaxed concept, let me

put it this way.

THE COURT: And presumably if they were to make

significantly more money than they needed to operate that would

be returned to their member banks as, I don't know,

distribution I guess is the term because I don't know if they

hold shares in Visa or what.

THE WITNESS: I'm not, I'm not privy at this point to

their financial arrangements. My understanding since they are

a non-profit association they have to do what it is that will

maintain their status.

THE COURT: Yes.

THE WITNESS: So they can return it in a variety of

ways. One of which they return it by paying for share to these

banks, that's the way it comes out.

THE COURT: Right, okay, thank you sir.

THE WITNESS: Thank you ma'am.

THE COURT: This is not at all to suggest that

Professor Ordover has said everything that he could possibly

say on the subject, but we are running out of time. So thank

you for the education and the assistance.

MR. CONRATH: Your Honor, I'm more or less in the

role of an MC today and introducing the next act which would

will be Dr. Zmijewski and Scott Sacks will be the lawyer in

respect to that. And I think a little bit in the role of an MC

while things are being set up providing a little entertaining

moment or something I'll offer two thoughts.

THE COURT: All right.

MR. CONRATH: First relates to the question of

whether companies under the same ownership can be thought of to

compete with one another. I think that's a, which kind of came

up in a little in the discussion.

I think one can go back to the Supreme Court in a way

address that in the 1904 in the Northern Securities case in

which two competing railroads were pulled under joint ownership

and tried to defend on the grounds that well, even though we

have the same owners we're going to compete with each other and

the Court said that's not a good defense under the antitrust

laws.

THE COURT: I'll grant you that on easy, that's a

softball.

MR. CONRATH: Thought I'd do a softball with a case

cite attached to it.

And the second that I would just put out there is that

we all talk often about someone becoming a strong competitor

and we think of that often in the context of will they be in,

will they be profitable in a stock market, will the company

grow and stuff. The second question that breeds that with

antitrust law is and will consumers benefit; that is, and will

prices be kept down. That's the context in which strong

competitor arguments have to be made under the antitrust laws.

THE COURT: Thank you.

MR. CONRATH: With that Mr. Sacks.

MS. ALEXIS: May we do a technical check again?

THE COURT: Dr. Hausman are you there?

No, sorry.

All right, we need you to stand so that you can be sworn

in sir.

(PLAINTIFF WITNESS, MARK E. ZMIJEWSKI, SWORN.)

MR. SACKS: Your Honor, I'm Scott Sacks for the

United States. I'm going to mostly stay in the same botanical

garden my colleague Mr. Celnicker was in.

First, I would like to know if I could hand up a copy of a

very short slide deck?

THE COURT: Yes.

MR. SACKS: Professor Zmijewski we're going to have

him turn from over here as Dr. Zmijewski goes through his

presentation.

THE COURT: All right, Doctor if I could ask you to

do me a favor?

THE WITNESS: Of course.

THE COURT: Could you state your name about three

times so I can write it down and get the phonics of it and then

maybe I won't injure it. I know how to spell it.

THE WITNESS: May I give you my business card which

also has a phonetic pronunciation. I have had this problem

before.

THE COURT: Za-nef-ski.

THE WITNESS: Zme-Yev-ski.

THE COURT: Can you tell us whose talking?

Who is on the telephone talking please?

(No response.)

THE COURT: Who is on the telephone?

MR. BLAKE-THOMAS: I'm still here Your Honor, David

Blake-Thomas.

THE COURT: Anybody else?

MR. IOANNOU: This is John loannou from the New York

District Generals office.

THE COURT: Who is the woman speaking?

MS. BRODY: This is Janet Brody at the Department of

Justice.

THE COURT: Was there anyone with you in your office?

THE WITNESS: No Your Honor.

THE COURT: Well we just heard a woman's voice

speaking, who was that?

MS. BRODY: I was not speaking.

MR. COX: Pennsylvania is still on the line as well,

but there's no one else in the room right now.

UNIDENTIFIED SPEAKER: San Francisco is still here, but

we are on mute.

UNIDENTIFIED SPEAKER: Illinois is here and we're on

mute too.

THE COURT: Well someone was just speaking and you

would do us all a favor if you didn't. That's not to be rude,

but we just can't here ourselves. Thank you, sorry.

(Pause, reporter changed paper)

THE COURT: Dr. Hausman, have you joined us yet?

(No response.)

THE COURT: All right, sir. Oh, I'm sorry. I don't

need to know your background.

THE WITNESS: Okay.

THE COURT: I've got that.

THE WITNESS: Thank you.

THE COURT: With your report and everything.

And your expertise and your background which is all

somewhat intimidating. So your first opinion is that there's

insufficient documentation to reproduce calculations of alleged

efficiencies?

THE WITNESS: That's correct, Your Honor.

THE COURT: Do the parties anticipate that there is

more documentation to come or have we reached the end of the

production of documentation?

MR. HOCKETT: Your Honor, I think that with possibly

one small exception Concord has additional documents that it

may be producing that the bulk of it has been produced.

However, I believe Dr. Zmijewski indicates in his report that

he may have further opinions depending on further review of the

documents.

THE COURT: Well, but as of today your conclusion is

that it is not possible to reproduce the calculations of the

alleged efficiencies?

THE WITNESS: Correct.

THE COURT: If you cannot reproduce those

calculations, you would conclude that they're not dependable;

is that fair?

THE WITNESS: Yes, Your Honor, I would not rely on

them.

THE COURT: You would not rely on them.

All right. We'll move on. We'll allow somebody if they

want to question you on those issues, but for the moment I

think I understand your conclusion anyway.

Now this, the reasonable documentation, reasonable

factual foundation, reasonable methodologies and reasonable

analysis. I remember your expert opinion tying itself to those

foundational concepts. Is it your opinion --

Did someone just come in or off the phone?

(Response indiscernible)

THE COURT: I'm sorry, could the person who was just

speaking speak again.

THE WITNESS: Yes, it's Jerry Hausman Your Honor. I

was disconnected and just was reconnected.

THE COURT: We're glad to have you. Thank you.

MR. HAUSMAN: Thank you.

THE COURT: Is it the lack of reasonable

documentation is that the most important missing ingredient

here?

THE WITNESS: Well at this point without

documentation I can't completely judge whether or not they use

sufficient facts or whether or not they use reasonable

methodologies because I don't have documentation to review

that.

THE COURT: What would you need that's missing, what

do you think is missing?

THE WITNESS: This is a very large analysis. From my

understanding they have had more than a hundred people working

more than six months trying to calculate these numbers. So

there's a lot of calculations at least I would expect a lot of

calculations. And in the past, what I have seen is a summary

number that's backed up by another spread sheet into computer

terms with another calculation and each one of those numbers

has another spread sheet and there's this big pyramid of spread

sheets and when you have assumptions, assumptions have

documents underneath them that each document explains how an

assumption came to be.

And that's what I was expecting to see. I was expecting to

get a box of documents or notebooks for each synergies and

that's not what I received.

THE COURT: What did you receive?

THE WITNESS: Access to a computer data base where I

believe both parties keep their documents and then through a

deposition by executives at the companies. We asked, the

lawyers asked questions and they gave some indication of some

type of analyses that were conducted, but they did not point us

to specific documents.

They gave names of people who might have kept documents on

this data base, but we looked for those people and looked in

their document section and didn't find the documents.

THE COURT: And so there's no -- excuse me, Dr.

Hausman, there is no presentation or submission that's been

made to the Government that you know of that says I think it's

around million-dollars that we're talking about right in

efficiencies?

THE WITNESS: In total yes.

THE COURT: Yes. There's no document or

documentations to show how they came to those numbers?

THE WITNESS: No, no, that's, there's a summary

spread sheet.

THE COURT: Okay.

THE WITNESS: I'll call it a spread sheet if I may

and beneath that there are multiple line items and for some of

those beneath that there's even another set of line items.

It's pretty much a set of accounts from a department and

then somebody made a decision that here's an expense that's

ongoing and here's an expense that's not ongoing, and here is a

notation that

and there are notations. And

where's all of the documentation behind that, there is where

the documentation stops I believe. At least to the best of my

knowledge, Your Honor.

MR. SACKS: Excuse me, Your Honor, if I might put a

question this might be helpful.

THE COURT: Yes.

MR. SACKS: Professor Zmijewski could you sort of

explain since your analysis is no small measure based on not

finding things, exactly how you went about trying to find them

and what resources and what efforts you went to to try and get

to that?

THE WITNESS: Okay, I have one slide, oh I don't see

it here. What page was that?

Page five Your Honor. So if you look at page five, Your

Honor, this is a list of documents that I looked at. There's

65 boxes in the Department of Justice. I had a team of people

two other PhDs in accounting, as well as MBA students and other

people at our consulting firm Chicago Partners, everybody was

going after documents, getting documents sent to Chicago,

people going to D.C. People getting on the data base in the

one, two, three, four, fifth bullet point down describes that

data base; electronic documents produced at a company this is a

separate third party and it has custodians.

That's how they keep track of the documents and the

custodians, there's a couple integration data base and

integration team that were topic oriented, so we looked there

first. Didn't find this detail and then there are individual

names so we started looking through individual names and again

didn't find the detail that I described.

THE COURT: There are a number of separate areas in

which the defendants project savings.

THE WITNESS: Yes, Your Honor.

THE COURT: Let's talk first about one of the

Is there anywhere that you found that I identified the

nature of the positions that would be redundant in the event of

a merger?

THE WITNESS: No.

THE COURT: So you don't know which ?

THE WITNESS: Correct.

THE COURT: You don't know whether we're talking

about managers, executives, or clerks?

THE WITNESS: Correct.

THE COURT: Do we have a sum of money that's attached

to it?

THE WITNESS: Yes.

THE COURT: Is there any offsetting sum of money to

reach that that would show any separation payments or anything

like that that were part of --

THE WITNESS: There's another section that you call

total cost which is the total cost of implementing integration

and they would be in --

THE COURT: That would be in there?

THE WITNESS: -- that calculation.

THE COURT: Now when you're looking for these things

assuming for the present question that there's actually

documentation that you would be looking at, for purposes of

evaluating efficiencies, are you evaluating efficiencies after

the merger has completed its full integration or more

immediately?

I mean if the parties for instance we have two huge

databases here, two huge networks. Let's assume that Dr.

Ordover is right and that the only sensible thing is to in some

fashion merge those and if they want to do that it might be a

very complicated thing, it might take a year and a half before

it can get done.

When you look at efficiencies do you look at efficiencies

three months out, six months out, two years out; what's it

you're looking at?

THE WITNESS: I was looking at their documents and

the efficiency I was looking at were based on their documents.

And for the most part, for the most part there was a ramp up.

I call it a ramp up until

million-dollar.

THE COURT: From the integration period if you will

you let them define?

THE WITNESS: Yes.

THE COURT: Okay, so for the and it seemed

to me as I recall although I don't have your expert report

right here, it's closer to you than me. The as I

recall there was a significant savings anticipated with the

reduction in personnel. I mean that was a large part of the

million wasn't it?

THE WITNESS: Correct, I gave you for a

line item in the department that we found in the document

somewhere. There are many of those notations.

THE COURT: So it's many more than ?

THE WITNESS: Yes, many more than that was

for one line item and one document that we found, that was just

for a small piece of the merger. I don't know the number of

people. I don't think that there's enough documentation so

that I could calculate the number for the entire integration.

THE COURT: Is there any one of the -- what were the

areas; one was personnel --do you have it in the outline here?

Can you remember what they were?

THE WITNESS: They were by department, Your Honor, or

by area. So there was a set by merchant.

THE COURT: He's looking at his report for those

people who are on the phone.

(Pause.)

MR. SACKS: I could be helpful, Your Honor, might be

easiest to go through it and not by item such as personnel or

the like, but by the functional categories they divided them

into merchant.

THE COURT: Right.

MR. SACKS: Shared IT and shared non-IT and the like.

THE COURT: That's what I was really trying to go for

and the question was whether there was the support of the kind

that you would be looking for any of those?

THE WITNESS: No Your Honor.

THE COURT: Any of those areas?

THE WITNESS: No, Your Honor, other than what I just

described.

THE COURT: So for your purposes and I assume you

have done these kinds of analyses before?

THE WITNESS: Yes Your Honor.

THE COURT: For your purposes you can't tell at all

whether the efficiencies will occur?

THE WITNESS: I can't find foundation for those

efficiencies that are claimed, yes.

THE COURT: Okay, we better get into some trade

secrets here or we'll be in trouble with the press.

MR. SACKS: Are you okay Dr. Zmijewski?

THE WITNESS: Yes, I'm fine. Just warm at the

moment.

THE COURT: You can turn that out.

THE WITNESS: It's all right. If you don't mind a

little perspiration.

THE COURT: I don't mind. Did you have other

specific questions that you wanted to ask?

The essence of the testimony is that I can't really give

you any testimony because I have not gotten any documentation

on which I might opine?

MR. SACKS: That would be the theme of his expert

report to be sure that there isn't any foundation.

I think it might be useful, I don't want to unduly take

the Court's time here, if Dr. Zmijewski could perhaps elaborate

some more on the types of documentation he would expect to see.

The types of documentation he has seen in other context when he

was looking to try and find with his staff on this and that he

didn't see to support the calculations or estimates that the

defendants made. That's not a softball, but I do think it's

relevant.

THE COURT: Okay.

THE WITNESS: It's a softball.

It's very similar to what I just described, it's

schedule after schedule and every calculation has input, some

of those inputs are fact so that you go to the documents for

facts; some of those inputs are assumptions so you try to find

the source of the assumption and then one would expect for an

assumption. If it's a major assumption, there's an analysis

that supports that particular assumption.

THE COURT: What if the merger of these two companies

the whole basis of the efficiencies is then to be able to argue

that there won't be a cost increase to consumers right?

THE WITNESS: Correct.

THE COURT: And there may actually if they're

sufficient deficiencies there may actually be a deduction in

cost to the consumer?

THE WITNESS: That's my understanding of the report,

other expert reports yes.

THE COURT: That's the way they're trying to go?

THE WITNESS: Yes.

THE COURT: If the evidence in support of the alleged

efficiencies, to use your term, is not there then we're left

with the question of whether or not what, that there's just no

evidence to support that there would be a reduction in cost for

the ultimate consumer. No evidence on which you would opine

that they're right or wrong?

THE WITNESS: With respect to the alleged

efficiencies that's correct, Your Honor.

THE COURT: Now if they produced a witness to the

efficiencies I'm not, I think Dr. Katz is the witness for the

efficiencies isn't he? Who is the witness for the

efficiencies?

MR. SACKS: Your Honor we had depositions of 30 (B) (6)

witnesses as recently as this week, that information has just

recently been made available. Professor Zmijewski and some of

it certainly is in his expert report. There was one principal

30 (B) (6) witness designated by each defendant to explain the

efficiencies of the transaction from that defendants

perspective.

THE COURT: And is your testimony today cognizant of

what those people testified to or is that new information that

haven't yet had an opportunity to evaluate?

THE WITNESS: As of Monday, there were people deposed

since Monday, but as of Monday of this week everything has been

incorporated.

THE COURT: When were the 30(B)(6) people deposed?

MR. SACKS: They were deposed last week and as early as

the beginning of this week.

THE COURT: Well my question is since Monday?

MR. SACKS: Monday I believe was Adam Coyle who is a

30(B)(6) designee with respect to the Nysok (phonetic)

deposition.

THE COURT: Well let me ask --

MR. SACKS: Excuse me, Tuesday was the deposition of

Mr. Scott Betts who is an executive in charge of the

integration effort. He's the senior executive. He was just

deposed on Tuesday.

MR. HOCKETT: May I say something, Your Honor, since

these are our witnesses?

THE COURT: Yes.

MR. HOCKETT: The 30(B)(6) witness's depositions on

this issue were complete accept for Adam Coyle's deposition on

Monday of this week.

THE COURT: Well --

MR. HOCKETT: And that deposition concerned only the

whether or not First Data achieved the predicted synergies in

some other transaction that acquired NYCE.

THE COURT: Do the defendants plan to introduce

evidence to counter the expert opinion of Dr. Zmij ewski.

THE WITNESS: Excellent.

THE COURT: How am I doing?

THE WITNESS: Ninety percent good.

MR. HOCKETT: Your Honor, we do have expert evidence

on efficiencies. Dr. Zmijewski as you know is a late arrival

to the scene. We found out what his opinions were for the

first time or his tentative opinions a week ago today at night,

when we got his initial report. He has served another report

two days ago.

We also served a report of a new expert you heard

Mr. Conrath complaining about that because when Dr. Zmijewski

appeared on the scene, we recognized that he had some expertise

that potentially laid outside the economic's expertise that we

had lined up. So we found somebody whose textbook Dr.

Zmijewski cites in his paper and that person has prepared a

report to address Dr. Zmijewski's opinions at least so far.

But the substance of what Dr. Zmijewski is doing is

basically critiquing the extent of the documentation of the

efficiencies and trying to cast doubt on whether this work was

really done or is well founded.

We will present fact evidence to the Court on the

thoroughness of the estimation of efficiencies which I think

will be up to the Court to judge the sufficiency of without

having Dr. Zmijewski opine that it's not sufficient for him.

But there will be expert testimony about whether these are

the kinds of efficiencies that could be taken into account and

to the extent that Dr. Zmijewski develops opinions that

correspond to the expertise that Dr. Meyers, our newest expert,

has then we would seek to introduce those opinions as a sir

rebuttal I guess when Dr. Zmijewski finally gives us his final

opinions. I believe it is the intention of the Government is

to call him as a rebuttal expert and he promise to supplement

his report after the other experts deposition are taken.

THE COURT: Well, one thing is clear is that Dr.

Zmijewski --

THE WITNESS: Ninety-five percent.

THE COURT: -- right now thinks that the information

supplied to him doesn't have a sufficient background for him to

really opine except that the lack of information suggests that

he can't duplicate the savings that are asserted and therefore

he has no basis on which to say that they are valid, do I

understand you correctly?

THE WITNESS: May I expand a little bit on what you

said?

THE COURT: Surely.

THE WITNESS: Thank you. You said duplicate. I can

always take the summary and duplicate those numbers.

THE COURT: No, no.

THE WITNESS: So it's going all the way back to the

foundation of assumptions.

THE COURT: Well it' like any spread sheet is what

you're talking about. I mean I understand.

THE WITNESS: Okay, so it's not just duplication.

THE COURT: No, it's not just adding and subtracting.

THE WITNESS: Your Honor, just to be clear, I read

the deposition of the 30 (B) (6) witnesses, 30 (B) (6) witnesses

and on page two my report is not handy, but on page two of

Appendix E, I have a quote from Ms. Margaret Tully from First

Data who is I believe heading up the integration team and may I

just read a couple of sentences:

, so I went through that.

There was a group of knowledge based really experts and

she lists some experts there and people concluded that they

could get a hundred percent -- I'm paraphrasing now, they could

get a certain percent of that particular line item. So that's

how she described what happened and she did mention financial

analysis that the complex financial analysis to the extent that

it was done in computer form and exists and turned over I

haven't been able to find it.

(Court Reporter asks for clarification, have or have not?)

THE WITNESS: Have not been able to find it, that's

important.

And based on her description it doesn't, it seems like

they were using business judgment, people got together and they

made decisions and that's how people make business decisions.

So I'm not saying they made up numbers or people got together

and they made business decisions. However, it's my job to go

back and try to find foundation other than somebody saying this

is my opinion and I can't find any analysis to substantiate any

of the assumptions that were made.

THE WITNESS: Hopefully that clarifies.

MR. SACKS: Your Honor, may I make one comment, an

additional point that I fear has gotten lost.

The comment is this is an issue upon which the defendants

carry a burden, it's their affirmative defense. They have to

demonstrate the existence of these alleged efficiencies as we

will be arguing later they have to be verifiable.

The burden of going forward and demonstrating that these

numbers are real and reliable is theirs and the fact that

Professor Zmijewski cannot find the documentation has an

independent significance of its own. But before I realize time

is short there are other opinions and other tasks that we put

to Professor Zmijewski and at least one of them I would like to

at least get to and that is task three, as we put it and I

think I'll go back to the garden and let Professor Zmijewski

talk about whether the efficiencies could be achieved without

the merger of NYCE and STAR which is also one of the issues we

put to him.

THE WITNESS: This is on page 10, Your Honor.

THE COURT: Yes, I'm with you.

THE WITNESS: Should I talk, I thought you were

reading.

THE COURT: No, go ahead.

THE WITNESS: I was asked by the Department of

Justice to assess whether or not the alleged synergies could be

achieved without the merger of NYCE and STAR. And I was making

the determination of how it would be used an assessment that I

would make. I made that assessment based on two criteria. One

where are the operation and assets part of STAR that were

involved in this particular synergy and two, were there

alternatives to realizing the synergy even if they didn't

merge?

I went through that and found that of the and

I should actually explain that number. You mentioned

before the synergies, that's for the complete total

merger. On November 27th there was an e-mail that had

synergies related to the PIN debit that were given by the

defendants and that number is a .

MR. SACKS: Excuse me, that's November 21st.

THE WITNESS: Pardon me.

And of the of the alleged synergies, I found

that are not related to the merger at all. Based

on my criteria that they're not related to the NYCE and STAR

operations and assets.

THE COURT: Give me an example of the sorts of things

that you think were listed there and that are not related.

THE WITNESS: And again, I just want you to make sure

that I'm clear on my definition of not related is that they're

not part of the NYCE operations or STAR operations and are not

part of the asset base.

THE COURT: Okay.

THE WITNESS: An example would be Paypoint is a

merchant processor owned by FDC, First Data and one of the

synergies that is accounted in the is that it

will be merged into Concord operations. That to the best of my

knowledge, that particular company is now part of NYCE and

Mr. Betts who is one of the executives from First Data was

deposed and since we knew where we were headed that question

was asked and Mr. Betts confirmed that it's not part of NYCE.

So here is a company that does merchant processing that's

part of First Data, but not part of NYCE. That would be an

example of something that I excluded.

THE COURT: Well, now wait a minute, I just got

educated by Mr. Conrath that you can't distinguish just because

there's separate subsidiaries, they're all part of the same

company. I mean it would be a savings for First Data overall,

wouldn't it, if they didn't have to, I'm not disagreeing with

the point that you make. Paypoint is not part of NYCE, but for

First Data it would be a savings if they didn't have to run

Paypoint and Concord.

THE WITNESS: I'll give you my understanding. Now

we're -- I'm the wrong person here. The economist should be

talking about this okay.

THE COURT: Okay.

THE WITNESS: But let me give you my understanding.

My understanding is that the issue is what would happen if

First Data spun off NYCE, didn't own NYCE what would their

synergies be? That's one way to look at this problem. I don't

know how the economist are doing it. I read the reports, but I

didn't go into that, but the issue is what does the merger look

like with NYCE in it and without NYCE in it and if the assets

aren't part of NYCE then that consolidation can occur even if

they spun NYCE off.

Now I don't know --

MR. SACKS: Your Honor if I might.

THE COURT: Yes, was that the a proposal?

MR. SACKS: This goes to the issue related to the

merger in the market. The market place in which the harm is

occurring involves the PIN debit switching business which is

the business of NYCE and STAR.

What we essentially asked Professor Zmijewski to figure

out is whether the claimed efficiencies related to this

combination of NYCE and STAR. The Government would readily

concede that there are efficiencies that can be obtained by

merging together First Data and Concord the corporate parents

largely in their merchant processing business. That's not a

perfect market place that we are alleging the anticompetitive

harms.

We didn't ask Professor Zmijewski to make a legal

judgment. What we asked him to do was essentially isolate what

part of the efficiencies here are attributable to the merger of

NYCE and STAR and put aside and separate out for us those which

are attributable perhaps to the merger of their merchant

processing business which is a part of the transaction which

the Government did not impose an objection.

THE COURT: And so the reason, therefore, that the

Professor can approach the analysis the way he just described

which surprised me act as if they spun off NYCE, is that you're

saying, the Government's position is that Concord and First

Data can come together and I don't want to misstate this in any

way, but Concord and First Data can come together as long as

they don't have both STAR and NYCE?

MR. SACKS: The Government's allegations of

anticompetitive harm related to PIN, P-O-S, PIN debit switching

businesses to essentially the NYCE network and the STAR

network. We did not bring a case that alleged the problem with

the combination of First Data's merchant processing business

with Concords first, excuse me with Concord's merchant

processing business.

THE COURT: But to run a network don't you have to

have a merchant processing business?

MR. SACKS: No, you don't Your Honor.

THE COURT: Who runs a network without a merchant

processing? Actually the history is kind of interesting.

First Data was an extremely large merchant processing business

and it only acquired NYCE in 2001. They were a very large

merchant processor and decided to enter the PIN debit switching

business by acquiring approximately 64 percent of NYCE.

Now the reason we put the --

THE COURT: So let me get back. I think Mr. Conrath

nodded his head yes in response to my question.

If First Data and Concord were to merge and the merged

company were to agree to spin off either STAR or NYCE and

you're presuming it would be NYCE because that has less of the

market in the PIN debit business then the Department of Justice

would be satisfied.

MR. CONRATH: Would be satisfied.

THE COURT: Would be.

MR. CONRATH: Yes.

THE COURT: And so it's approaching the analysis from

that point of view that Dr. Zmijewski, I'm getting worse

instead of better.

Looked at this to try to determine which part of the

efficiencies really went to the merger by theorizing that NYCE

would be spun off.

THE WITNESS: Your Honor, that's not why. I didn't

do it with that theory in mind. I did it because I was asked

to accomplish a certain task. That might have been the

motivation why I was asked, but you're pulling me a little out

of my domain.

THE COURT: Okay, I don't want to pull you out of

your domain, but for purposes of allocating savings or

efficiencies to the merger and not to the merger your approach

to that was to determine what the company would look like if it

didn't have NYCE?

THE WITNESS: What they could accomplish if they

didn't, if what, what they could accomplish if they didn't have

NYCE in the merger, yes, my analysis is consistent with that.

THE COURT: So and by merger here you're talking,

therefore, just about the merger of the two PIN debit entities,

the two PIN debit businesses and not Concord and First Data?

THE WITNESS: That's correct Your Honor.

THE COURT: So the

. "

are from efficiencies related to merging First

Data and Concord and not merging NYCE and STAR?

THE WITNESS: They're not related to the NYCE

operations or STAR operations that's correct.

MR. HOCKETT: Your Honor, if I could be heard briefly

on this please?

THE COURT: Yes.

MR. HOCKETT: There's been a lot of legal argument

and I just feel like I need to respond to it.

MR. CONRATH: If I might just finish up on this

thought to be clear about why we asked that question to Dr.

Zmijewski?

THE COURT: All right. You do me unhonoured, go

ahead.

MR. CONRATH: All right, I lived in Poland for two

years, Your Honor, so I got a little practice.

THE COURT: Well now I know.

MR. CONRATH: All right, there's a legal question

that caused us to ask Dr. Zmijewski to perform this analysis

and it is, are the alleged efficiencies merger specific and the

way to think of that is this, first the question of

efficiencies comes up if there's anticompetitive harm and the

affirmative defense of efficiencies is, well, even if there's

harm it will be overcome by these efficiencies.

And then the logic says, well, should we endure this and

anticompetitive harm in order to get these efficiencies and the

principal is well, only if you need the anticompetitive harm in

order to get the efficiencies.

THE COURT: Okay.

MR. CONRATH: So we asked, could you get the

efficiencies without the harmful part and the harmful part of

this merger is combining STAR and NYCE. If they were just

combining the merchant processing operations, we wouldn't be

here.

So the way -- and that's usually described in the

efficiencies law and literature as merger specificity. And the

question is, do you need the anticompetitive harm to get the

efficiencies?

And so we asked Dr. Zmijewski to look at that so that we

could say, okay, some of this you could get without imposing

the harm.

So the merger guidelines for example direct us to look

and say, well, could you get the efficiency by for example the

divestiture, that's why we're here.

THE COURT: And I appreciate that. I understood the

concept of the merger specific efficiencies, but I didn't

understand the backwards getting into it but now I do.

MR. HOCKETT: Your Honor, with respect we don't agree

obviously with Dr. Zmijewski's conclusions on either front nor

that the question should be framed as it was to him to do his

work.

The transaction that the Government is trying to block is

the merger of Concord and First Data, not of NYCE and STAR.

This isn't an action to try to force the divestiture of NYCE or

STAR. It's an action that would stop the merger and,

therefore, stop the realization of the overall efficiencies

whether they stem from a combination of the assets of NYCE and

STAR or from some other assets that the Government is not

worried about in this deal.

So it is part of the efficiencies analysis to consider

all of the efficiencies from whatever part of the transaction.

THE COURT: Well I think there's some validity to

what you say, but there's also validity to the Government's

point. It as I understand it reviewed this potential merger

from a number of perspectives, not just the merger of the PIN

debit networks and probably even looked at the merchant

processing part of it and came to the conclusion that as to

other aspects of the businesses that are being merged, it

didn't have an antitrust concern, but that it does when it

comes to the PIN debit part of it.

And while its position is that the merger shouldn't occur,

its position that the merger shouldn't occur is because its in

this Court anyway worried about the PIN debit businesses.

So that we now know from the Government now through

Mr. Conrath that if you didn't merge the PIN debit businesses

they wouldn't care if First Data and Concord merged.

Presumably First Data and Concord aren't interested in that

approach and so therefore here we are.

But since that's the Government's position it seems to

me that it is certainly legitimate to try to break out such

efficiencies as would exist only from the merger of those two

businesses. And to the extent that your experts haven't quite

looked at it that way yet, they may want to do that before we

actually get to trial.

MR. HOCKETT: Yes, I appreciate that Your Honor. We

do, we intend to'contest both the facts and the law on this

because I don't believe the law is as clear as the Government

contends it is on that point.

We do not have an expert witness here to testify in

opposition to either Dr. Zmijewski's audit, if you will, of the

paper trail of the efficiences.

I seriously question whether that has any bearing on the

issues before the Court even if accepted, but we don't have

anybody here that's going to address that aspect of it, but we

will have testimony if we get to us.

THE COURT: Yeah, we're going get to you right now.

This is the second of the Government's two witnesses to be

presented right, excuse me, I didn't mean to act as if you

weren't a person, you know.

THE WITNESS: Thank you, Your Honor.

THE COURT: Thank you for coming.

But I think what we should do now and I do understand that

you want to argue about on this point. I really don't want to

hear the legal arguments today on whether or not Dr.

Zmijewski's testimony is, you know, to be taken as gospel or

not. We can argue about that another day.

I just needed to know where he was coming from and what

his conclusions were and for right now I got it. I understand

it. You actually spoke in English and it was very much

appreciated.

THE WITNESS: Thank you.

THE COURT: Thank you.

So what we're going to do is take about a seven minute

break so that everybody can go to other places if they choose

to do so and I can get a fresh cup of coffee and we'll come

back and reconvene at 3:32.

MS. ALEXIS: Could I just add one point Your Honor.

My partner amply argued this, but our trial brief will address

the issue of why this is a very artificial way to approach

efficiencies and you should not break out this so-called PIN

debit issue separately.

THE COURT: Okay.

MS. ALEXIS: Okay, Your Honor, thank you.

THE COURT: I understand that. I'm going to be much

more educated by the time we get to the trial, but I'm feeling

fairly educated by the experts to far.

Thank you, we'll be back in about five minutes.

(Recess.)

MR. CONRATH: May I raise this afternoon at 4 o'clock

we were suppose to file weekend reading, Your Honor, in the

form of transcripts, and I'm informed that unexpectedly perhaps

weather related, the Clerk's office closed at three. So I have

here --

THE COURT: Our Clerk's office?

MR. CONRATH: I'm only repeating what I was told.

THE COURT: Oh, no, it closed for the Christmas

party.

MR. CONRATH: Ah hah!

THE COURT: It's much more important than the

weather.

MR. CONRATH: I understand.

THE COURT: The Courthouse Christmas party is going

on and I want you to know that we are not in attendance.

MR. CONRATH: We are --

THE COURT: That is really sad; isn't it, but you're

all welcome. It's in the jury lounge, it goes until 6 o'clock

so we're going to be done by five.

MR. CONRATH: We'll do our best, but we are prepared

to give you hand delivery if you like.

Do you want the CD or should we save that for filing on

Monday?

THE COURT: Save the CD and give me the hard copies.

That's what I need. Thank you, sir.

MR. CONRATH: You are welcome.

THE COURT: Thank you. Thank you, Mr. Conrath.

Go right ahead, sir.

MR. HOCKETT: Your Honor, for purposes of time

management, we started at 1:20 and I'm just wondering are we

going to go past five or will be ending right at five?

THE COURT: I would like to end right at five if we

could possibly do that. Since the Government bears the burden,

I figured that --

MR. HOCKETT: They get all of the breaks.

MR. CONRATH: Except for the overall schedule.

THE COURT: And I think --

MR. HOCKETT: Thank you, Mr. Conrath.

THE COURT: Oh, Mr. Conrath, I just count on you for

those things.

MR. HOCKETT: Then we'll proceed forthwith and have

Dr. Katz take the stand, please.

THE COURT: Yes, forthwith. Dr. Katz take the stand,

please.

Dr. Hausman, are you with us?

DR. HAUSMAN: Yes, I am, Your Honor, no party here

though.

THE COURT: Oh, I'm sorry, but it's probably not

Christmas either.

DR. HAUSMAN: That's what I meant, no Christmas in

Cairo.

THE COURT: Can I ask a question? Excuse me for

doing this.

Should we ask Dr. Hausman to testify first so that he

doesn't have to hang on the phone?

MR. HOCKETT: Actually, we intended for him to hang

on the phone so that he could go last and listen to all of

this.

THE COURT: I tried, Dr. Hausman. Go ahead.

DR. HAUSMAN: Thank you, Your Honor.

(DEFENDANT WITNESS, MICHAEL KATZ, SWORN.)

MR. HOCKETT: Your Honor, we would like to proceed in

the following fashion. Although we had prepared a free

standing presentation, we really want in the interest of time

to address head on the issues that have been brought to the

floor by Dr. Ordover.

So we thought the most expedient way to do that would be

for Dr. Katz to go over selected slides from Dr. Ordover's

presentation and explain what is wrong with his analysis and

why we think that the Government has not met their burden of

proof and are not going to.

So without further ado, I will turn it over to Dr. Katz

to give a little bit of a framework to you, and then we'll see

some of the individual slides and, of course, respond to the

Court's question.

THE COURT: Okay.

THE WITNESS: If I could I thought I would just jump

around a bit since you have heard the presentation, and

certainly expect that you will ask questions.

So I thought maybe a good place to start would be with

Professor Ordover's fourth slide which is the diagram of the

industry. If I could, I would like to just make a couple of

points with, with this slide because I think in some ways, it

identifies what really is a critical difference in how the two

sides are thinking about this two-sided market.

What I think is missing here is if you look at the

cardholder diagram, it shows the purchasers and the

cardholder's relationship with the merchant. The one thing

that is missing is the cardholder's relationship with the

issuer.

That's a sense in which Professor Ordover I think has

really failed to fully take into account that this is a

two-sided market, you know, all around because what he is

leaving out when he forgets that relationship is that we, you

know, we have talked a lot about Interchange and how it goes

from the merchant through to the issuer, and Professor Ordover

has talked about how that would, an increase in the Interchange

fee could be passed through to consumers in their role as

customers or merchants.

But what he didn't talk about is that the increased

Interchange goes to issuers which is then passed back to

consumers in their role as bank customers and that they see

that, you know, most directly in things like the rewards

programs for some debit cards, but also they see it in overall

fees or the lack of use fees or in account features to the

extent that the bank used this as integrated with their overall

checking account services that they are providing.

And I think that's really important because if you are

going to look at the effects of this transaction on consumers

and if you are going to allege that it's going to change the

Interchange fee, and clearly that's something that is the

subject of dispute here, but you are going to have to take into

account the full effects of consumers. And from what I have

seen, it looks as if Mr. Professor Ordover has not done that.

Another important thing that I think that comes out of

the diagram is the following. And that what we are hearing is

that much of the alleged harm is about an increase in

Interchange. And that's looked at by focusing on the effects

of the merchant.

But again, although Professor Ordover does recognize

issuer at times, it is not fully -- issuers are not fully

integrated into his analysis, and let me just give an example

or analogy to show why.

Suppose the Government had found that their best

prediction is they think that the merger is going to drive

Interchange down.

They could have come in here with the sorts of theories

they are doing today and said, well, you know, that's really

anti-competitive because think what that is going to do to

issuers. Issuers are not getting the money that they were

getting and as a result of this merger, Interchange is going to

be driven down, that's going to harm issuers, and it's going to

harm their customers.

So what you are left with is the position that

Interchange rates go down, you are criticized for one side of

the market, and if they go up, you are criticized for the

other. And the way out of this apparent dilemma is, of course,

you have got to look at both sides at once.

So I think that a fundamental disagreement you are

hearing between the economist is that what we have all have

said, it's a two-sided market I conclude, and I believe

Professor Hausman agrees with me, that Professor Ordover really

hasn't looked at both sides of the market and integrated it

100

into his analysis.

THE COURT: I'm not quite sure that I follow you.

Are you saying that the anti-competitive consequence or harm

that the Government sees here is an increase in Interchange

fees?

THE WITNESS: Certainly it's my impression. I have

some difficulty sometimes telling which things they are worried

about with the anti-competitive harm, but I believe that that

is an important part of what Professor Ordover has talked

about.

He has talked about, you know, the total fees to

merchants. He cited to, to the various declarations and those

were about Interchange fees, not about Switch fees.

THE COURT: Well, I thought that he in terms of the

concern if there were a merger, I thought he had two points.

One was that it would be harder for merchants to extract

themselves, that is at page 16, and the second is that it would

reduce the least cost routing option.

THE WITNESS: That's right, but the question on both

of those is how does that show up? And I thought he was saying

it would increase the charges that the merchants would face

without asking what's happening on the other side.

Maybe -- I think where it's come up, not as a

theoretical matter, but that is an imperical one of looking at

the facts because one of the things that he pointed to was the

101

2002 round of increases.

Those increases were about Interchange rates. Those

weren't increases in Switch fees. Another thing that has been

brought up in this case at various points is people said well,

merchants are complaining because they have seen concentration

go up and they have seen a higher Interchange. Switch fees

have not been increasing.

THE COURT: No, I got that from your materials. And

I understood from your materials that the, one of the arguments

made by the defendants is that the Government's case does

confuse the difference between Interchange and the Switch fees.

That's part of the reason I was questioning Professor Ordover

earlier about it.

But in terms of what he says in this presentation and so

therefore basically what he testified to about today, I thought

that the cost to the merchant of dropping a network was the

cost of substituting one network for another because STAR and

NYCE together would have so much of the market.

THE WITNESS: Yes, but those costs would depend on

the all end costs to the merchant. So if you are talking about

cost from going from one to the other, it wouldn't be just the

Switch fees. It would be the Switch fees, plus the

Interchange.

THE COURT: If a -- maybe you know the answer to

this. Does Interlink charge or get a Switch fee?

102

THE WITNESS: Interlink yes, they do and you maybe

asked this earlier about what happens with Visa's signature.

THE COURT: Right.

THE WITNESS: I believe that they do have some sorts

of network charges that they put on in addition to the

Interchange.

THE COURT: Okay. Okay. But I understand your point

about the difference between Interchange and Switch fees.

THE WITNESS: Okay. One of the points that I could

make about --

THE COURT: If I could just ask one other question.

The network in the middle here doesn't really have much

to do with Interchange fees, does it?

THE WITNESS: Well, I would say the answer is yes and

no. I mean, the network does pick the Interchange fee as a

dimension of competition, but ultimately that Interchange fee

is driven by competition to attract the issuers, to attract

merchants, and again, as you have read, that's one of our

points that the increases in Interchange fees that we have been

seeing is a result not of the exercise of market power, but it

is the result of competition as PIN networks have tried to keep

issuer customers.

THE COURT: Right.

THE WITNESS: I'll stop there.

THE COURT: Okay.

103

THE WITNESS: I say one other thing from the diagram

which comes back later, and it has to do with some of the good

points that Professor Ordover has raised at least, I guess he

get didn't to the slides, but that is the processor is shown

here between the merchant and the network.

I think that an important point here to remember is that

the processor is hired by the merchant and I think that matters

because Professor Ordover has talked about processors doing

various things to favor the networks, but I think it's critical

to remember that a merchant can pick the processor it wants as

we have talked about earlier today, the Government is not

alleging some sort of competitive harm in the process or market

and that that is a central fact then that the processors can be

expected to serve merchant interests.

THE COURT: Hum. And STAR, is STAR a processor?

THE WITNESS: STAR is not. Concord is a processor.

They have a processing operation that then again competes with

other processing operations.

THE COURT: Okay.

THE WITNESS: Okay. As I said, I'll jump around a

bit in the interest of speed.

I would like to touch on one thing and that is talking

about the product market definition, and the issue that came

up. This is on I guess his slide seven.

About saying how where the merger guidelines to the

104

analysis begins with the SSNIP test.

I think the correct statement about where economic

analysis begins, I think Professor Ordover would agree with

this, is you have got to ask the question, why are you doing

market definition or what is the point.

And, you know, it's not to do the SSNIP test. It is to

assess the dimensions of competition. What economist I think

all agree on is the way you do that is to think about

substitution.

And as again, that was something that was mentioned in

the plaintiff's reports, something that I said earlier, that

there are different degrees of substitution. The question is

how close a substitute does something have to be to be a

competitor.

The properly applied and in the right situations the

SSNIP test can be a way to get at that and in fact, it's a

standard way and it is frequently used, but it's by no means

the only way.

And as you saw in my report, I looked at a variety of

other considerations. I did the same thing when I looked at --

I was the Government's expert witness in the credit card case,

U.S. v Visa, the same sorts of factors, other economists look

at those factors as well.

So I think that the one thing there is a consensus on

economist is the key of substitution, but then there are a

105

number of ways to go about looking at that, and I certainly can

go into more detail if you wish, but I just wanted to make that

one essential point.

THE COURT: I am interested in the issue of whether

or not the merger guidelines are the only way to think about

this, and the hypothetical monopolist because and you can

correct me if I've mischaracterized your expert opinion or Dr.

Hausman, of course, can correct me too, but it seemed to me

that in the defendant's articulation of the market one of the

critical points was that Visa's growth spurt has kind of warped

the market and is not accounted for by the Government's

hypothetical monopolist approach.

Is that -- am I misunderstanding your point?

THE WITNESS: I wouldn't say you are misunderstanding

it. I guess I would say there's some different points in there.

in that I think a lot of what we're seeing with Visa is the

intensity of the competition and the fact that the competition

cuts across signature and PIN, and in that way I think it does

show that the mechanical application of the SSNIP test in this

particular market as leading to incorrect conclusions.

But I guess it's more the facts contradict the

conclusion that is reached from the SSNIP test as opposed to it

directly affecting the SSNIP test.

I think that there's another problem that does directly

affect the SSNIP test and that is the use of Interchange in the

106

SSNIP. I think is conceptually incorrect.

THE COURT: Say that, explain yourself, I didn't

understand what you said.

THE WITNESS: So this will take a little bit of time.

But if you think about what happens in ordinary markets, lets

take tofu because that was Professor Ordover's example, and I

have had tofu, to be honest, at his house and it has a certain

linkage here in the grand scheme of things.

If you think about what happens with tofu, suppose you

were to ask does somebody have market power. You say okay,

what happens when they raise their price? Well, what you

figure happens if you charge more, you are going to lose some

sales. So what you have to do is you balance out. Will I get

a higher price for what I keep selling, but then I lose sales,

okay. Well, which effect is bigger, and we say that if the

price increase is profitable over some range, you could talk

about having market power.

Now think about Interchange. When you -- what you are

doing as we have heard and you have read a lot, the network

doesn't keep the Interchange, okay. The network is just

flowing it through, so why does the network care about

Interchange?

They care about it for one reason. They want to

maximize the number of transactions on the network because

that's how they are going to make their money, collecting

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Switch fees.

What that means is when you -- you may have incentives

to raise Interchange to drive up your volume, and in particular

in this market, what happens you are raising Interchange to get

issuers. So if you think about that, the tofu market you raise

your price because you are exercising market power. In this

market you may be raising your price precisely because you are

competing.

Now there's one more step in this argument. So let's go

back to the SSNIP test. The SSNIP test says is it profitable

to raise your price?

Well, now in the tofu market, the only way it's

profitable if you have market power, and so, you know, the

SSNIP is one way to do it, but at least conceptually can make

some sense. But here you may be raising your price precisely

because you face competition, so to then interpret the SSNIP

test as proof of market power is just completely backwards.

So it's not that it's, you know, it is not that the

SSNIP is always wrong, I'm not saying that, but I'm saying that

the application of this hypothetical monopolist test in the

SSNIP in using the Interchange is just potentially at least

backwards.

You can interpret competitive behavior as evidence that

you had the, the hypothetical monopolist in action and

therefore, it's just invalid and I, you know, I think it's just

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a mistake I think when Professor Ordover says in his rebuttal

report that those price increases that we saw in 2002, the

Interchange I think the line is something like that was the

SSNIP test seven times over because the Interchange went up 70

percent, and I think that's not true at all.

I think precisely the fact that those 2002 price

increases were competitive price increases shows how wrong this

methodology is when applied the way it's been applied in this

case.

MR. HOCKETT: So perhaps you could talk about some

other ways, some other factors of, that are appropriate to use

in connection with delineating market boundaries.

THE WITNESS: One of the things I went through was

and actually, Professor Ordover mentions it on his slide eight

is looking at the, you know, functional interchangeability of

the products.

Now Professional Ordover says in his slide that's not

the only way to define a relevant market, and I certainly agree

with that, and I didn't just do it that way, but I think that

it is important in this case that what PIN debit and signature

debit are both doing is they are providing a particular card

base form of access to people's checking accounts.

This is a footnote, I'm sorry, I can't resist. There's

also some savings accounts and money markets, but roughly

speaking, it's providing card base access to people's checking

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accounts.

And you know, he makes his point that in earlier

testimony in another matter I talked about wire line and

wireless telephones, but I don't think that they do have the

same functionality but because the whole point, the key selling

point of wireless phones is they're mobile in a way that

obviously a corded telephone isn't. So I think that's an inapt

comparison.

So I think that the fact that they're really doing the

same thing is important here. I also think -- that he

mentions, you know, to try and counter that, he talks about

Staples and Office Depot, and I will just stay away from any of

the legal aspects of it, but I think his point misses the

economics point which is sure, you must be right that you

shouldn't do functional interchangeability in Staples and

Office Depot by saying well, is the typing paper the same.

Just the way here, I wouldn't say you shouldn't do

functional interchangeability by asking is the gasoline you buy

with PIN debit the same as what you buy with signature.

Obviously, it's the same gasoline, but that's not the issue.

It's the service is actually being provided by PIN and

signature debit are the same, that you can use them

differently.

THE COURT: Is there any support for the notion that

the ultimate consumer, the purchaser, someone like me cares

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whether it's signature or PIN debit?

THE WITNESS: I would have to say that the evidence

is mixed on that, there's different opinions in the industry.

I think what is clear is there are people who prefer PIN

and there are people who prefer signature, and there are a lot

of people who either don't care or don't, they don't even know

the difference and a lot of people who go back and forth

between the two which is why we see this battle we see going on

in the debit industry where you have got issuers by and large

not always pushing to get consumers to use signature because

they think you can persuade the consumer, and then you have got

the merchants trying to push them towards PIN. Not in all

cases.

It is one of the things that certainly we'11 be hearing

later in the trial, but

But by and large, because the pre-WAL MART history of

the industry, we don't have the full convergence yet, you have

got this tug of war with merchants and issuers because they

know they can move consumers back and forth.

MR. HOCKETT: Can explain just for a minute why a

merchant might want to steer towards signature?

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THE WITNESS: Well, the particular merchant what they

are talking about is the fact is that where given the pricing

schedules we see today for some merchants and I think we'll see

increasingly, for them signature is cheaper than PIN, and

that's what they indicated in that, and as I said, I expect to

see more of that as we continue seeing the conversions.

THE COURT: But the only signature debit is really

Interlink and Mistro, right or MasterCard?

THE WITNESS: No, it's MasterCard and Visa, the

brands, yes, that's right.

In fact, that's one of the -- this may be too detailed

to get into, but that's one of my points I actually make saying

that if it were right that signature was a separate market and

PIN were a separate market, the WAL MART litigation would not

have made any sense because how would you be claiming that

debit is a competitive market if there's only two people in it,

but that's right, there are only those two in the United

States.

THE COURT: And is your understanding of Professor

Ordover's opinion that signature debit is a stand alone market?

THE WITNESS: I'm, my only understanding on that is

that he wants to exclude it from his analysis of the

competitive facts and doesn't see it as a restraint.

I don't know if he sees other products in it. I would

be surprised if he could because if you thought that signature,

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say if you thought signature and ACH based debit cards

competed, I don't see how you could think that ACH didn't also

compete with PIN debit.

And my understanding of his position, and I may be wrong

about this when I say that he takes the view that ACH is not an

irrelevant market.

THE COURT: And you would put signature debit in the

same market because of the, what you think to be the

interchangeability of them?

THE WITNESS: That's the fundamental.

THE COURT: Substitution.

THE WITNESS: That would be the fundamental driving

force is the substitution. Now there are other pieces of

evidence that support that in addition to surveys of consumer

behavior or industry views on that. It's also the behavior of

the industry participants, as again, we have already talked

about other people talked with you about earlier today with

Visa being concerned with what happened to signature.

Certainly I think when you read the document, various

industry documents where people are talking about the history

of PIN debit, it's been seen as taking business from signature

that there's been a shift that has been going on and, you know,

that's a fundamental part of --

THE COURT: Isn't it really debit cards taking

business from credit cards?

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THE WITNESS: Well, the largest thing -- I have to go

back in my memory because some of this is actually from the

previous case rather than this one. I did look at the credit

card case.

The trend data seems to say what is happening is that

debit cards are taking away from cashing checks, and certainly

if you ask Visa and MasterCard who have the broadest credit

lines, since they are in credit too, certainly what I testified

to in the previous matter, they have targeted their debit

products, financing or taking away business from cash and

checks.

Credit is on the other side; in fact, it's the way I

have thought about payment industry and a lot of people have,

but it's the five years I have been doing this, there's a

critical distinction in what you pay now or pay later, and the

credit is on one side along with charge cards they give you a

month to pay, and then cash and checks and both kind of

signature are on the other side of that because defacto that

you are paying right away.

I mean, you have heard some thing about signature.

MR. HOCKETT: You said both kinds of signature.

THE WITNESS: I mean both kinds of debit, I misspoke.

We have heard some things, and we have read them that

signature, you know, clears more slowly, but my understanding

is that what large issuers do is even if they don't actually

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take the money out of your account for a while, if you go out

and make a signature purchase, they will put a hold on that

amount of money right away, and that most signature

transactions actually clear, the vast majority of them at least

on Visa, clear within a day and in fact, PIN debits sometimes

does clear within seconds as you heard Professor Ordover say,

but my understanding is also that, I don't know if it's the

processor's decision, but somebody in that complicated link

makes the decision that they actually clear a PIN at the end of

the business day or the end of the banking day. So those

things are really very close.

The one that is a little different obviously, the check,

you get more of a float.

THE COURT: You kind of suggested in your opinion I

think that or your report that checks could also be considered

part of this market and checks do seem to me to be a different

breed of cat.

THE WITNESS: Here is the thing and why you are

correct if you read my -- when I say look, signature is in

there, and what I also say is excluding checks from the

analysis I believe is a mistake as a matter of economics.

Now where I certainly I guess it would seem to a critic

is that I am waffling. Okay, did I say checks are in the

market or not. It actually could come down both ways because

the market definition is not the key economic issue. The key

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economic issue is what does competition look like, and I think

that checks absolutely have to be understood to understand the

overall competition in this market.

If somebody wanted to say though okay, the market is PIN

and signature and ACH and checks are outside of the market but

will take them into account, I could live with that. If you

want to say no, no, anything outside of the market we just

don't count at all, then I think I would put checks in, but I

would agree with you and wouldn't contradict that, the checks

are not as close a substitute as the other things, but I think

that they clearly have a competitive influence, but they are

also clearly not as close a substitute.

THE COURT: Hum. Okay. Were there other things in

Professor Ordover's --

MR. HOCKETT: You want to talk about steering or --

THE WITNESS: Well, actually if I could make just a

couple more points. One, some apologies for jumping around,

but some data points, but I do want to make one that comes up I

guess on 13 which is the fundamental conceptual point, and I

think a fundamental conceptual difference.

And that is this whole point about would merchants today

have PIN pads and engage in PIN prompting, would they stop

doing it? And I would disagree that that's the central

question because what we know as a fact is that the majority of

merchant locations in the United States don't have PIN pads.

116

Okay, we know that there are many more merchants that have just

signature than there are that have either just signature or

signature and PIN.

And so I think it's a mistake to forget that the issue

is not necessarily getting people who have PIN to stop, people

have already made the investment in PIN pads to stop, although

that can happen, and I am told that it is happening as people

have to upgrade PIN pads, some merchants reconsider whether

they want to keep them.

-But I think the big part of the issue here is with

merchants have not bought PIN pads, and that's a majority of

them, they have to ask themselves is it worth doing, and so

when they do that, they are going to have to compare signature

Interchange rates and PIN rates and it's a question of going

forward.

And I don't agree that this is what is going to happen

because I think people may actually may move both ways, but for

the sake of argument, but suppose it were true somehow that we

knew that what is going to happen over the next ten years is no

one is ever going to go from PIN to signature, it's only the

other way. Suppose that's what we knew, and again, I don't

agree with that.

There's still a critical issue to the businesses and

then to competition and then to consumers how quickly that will

happen. I mean, nobody thinks that I know of any way that even

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the people who are most pessimistic about signature think it's

going to be around for a while.

So the critical issue is how quickly if you think this

is going to happen, how quickly do you move from signature to

PIN and that is influenced by the PIN Interchange rate and the

signature Interchange rate and the cost of PIN pads

and training employees and things like that and that's a dimension

of competition. Because I mean, that's you know, that's one

view of what signature is all about.

THE COURT: What do you think is the role that Visa

plays in the current competition in the PIN debit market?

THE WITNESS: Well, they certainly Interlink

participates directly in the PIN debit market.

THE COURT: Right. But it only has 10 percent or

something like that, not much.

THE WITNESS: It's actually doing up dramatically, I

mean, given that STAR is losing and Interlink is gaining, and I

mean certainly, I don't have the numbers at the tip of my

fingers but we are talking about STAR, just looking at PIN is

the biggest network

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MR. HOCKETT: Your Honor, there's a graph that shows

the banks that are leaning up on the screen and the reduction

in the share of PIN debit.

THE WITNESS: I believe also there's some questions

-- I mean, the reason we have this graft, the important point

again you have read me saying it several times already is about

STAR losing the business. It appears and I believe people in

the industry expect most of that business to go to Interlink,

but it's not certain that that is what is going to happen, and

I believe as part of the WAL MART settlement, Visa is not

suppose to have exclusive contracts to guarantee these things.

THE COURT: Well, what are the chances that this

business because I don't quite understand the double bugging

issue when it comes to this, that these businesses would retain

a STAR bug?

THE WITNESS: My understanding of it, and when we get

done, I'll go check it is that these are banks that said to

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STAR we are leaving, you know. I mean, particularly if --

THE COURT: So they are not going to have a STAR bug

at all?

THE WITNESS: That's my understanding.

Now if I could touch on another issue that has come up

related to this.

THE COURT: Let me back up, I'm sorry.

How much of this loss is associated with competition

from Visa?

THE WITNESS: I believe that all of these banks have

said that they are leaving STAR and announced that they are

going to Visa's Interlink, but I believe some of them may also

be having other bugs on their cards. So that's why I can't be

sure that this is all going to Interlink, but certainly what I

have read says the industry expectation is that the bulk of

this is going to Interlink.

THE COURT: Okay.

THE WITNESS: Let me if I could say on this I believe

the point has been made by or the assertion has been made by

the plaintiffs is that well, okay, STAR has lost a lot, but how

do we know that they won't gain a lot in the future.

I say two things to that. First, if you can lose

something like a of your business, get a back, lose

a if it's really going around that much, that suggests

that it's pretty easy for people to Switch and there's a lot of

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competition.

The other thing is that I don't think that there's a

reason to think that STAR is going to bounce back up because

these are long term contracts that were entered by and large

when Concord bought up a network and it was part of getting the

issuer owners to commit to staying around. It was what I say

is a one enough event. Those contracts are now expiring and

STAR is losing the people so I think this is a one time thing.

The other is certainly I think going forward STAR, you

know, will get some more issuers, but they also may lose some

more, and I don't think that there's any reason to think that

going forward they are likely to gain more than that. You can

isolate this as a special event.

THE COURT: These are kind of large banks to lose.

Who is bigger than Wachovia?

THE WITNESS: I think Bank of America, they have

already lost them to Interlink.

THE COURT: So they are gone.

What about Wells Fargo, is Wells Fargo bigger than

Wachovia?

MR. HOCKETT: They are I think comparatively sized.

MR. PATTON: They have lost

in just the last several

months. I think Wells Fargo is the second largest issuer of

debit cards in the United States after Bank of America and

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Wachovia is third. Bank One may be third or fourth, but those

are the top four as I understand it. Bank of America --

THE COURT: For what period of time are these

contracts when they're moving over to, are these long term

contracts as well that one would be signing up with Interlink?

MR. HOCKETT: Yes, Your Honor.

MR. PATTON: I think.

THE COURT: I mean, I think it's hard to replace them

then. There isn't another bank like Wachovia or Wells Fargo to

substitute. You would have to go get a lot of little ones.

THE WITNESS: That's right.

THE COURT: All right.

But let me back you up a minute. Because it's very

difficult for me to determine which of you, or how to untie

this knot.

Do you say that we shouldn't use the guidelines

hypothetical monopolist concept in order to define the market?

Do you disagree with the way that Professor Ordover performed

that analysis and you say yes, you can use the hypothetical

monopolist, but that analysis doesn't, doesn't work because of

some other reason or do you say that, that that's fine, he

applied it properly, but the real word is actually somewhere

else? What is the source of the disagreement?

THE WITNESS: It's a combination of things I guess.

First, I would say that even conceptually that it's incorrect

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applied to using Interchange as the price you're changing with

the SSNIP. It's not even the right idea in theory, okay.

THE COURT: Okay. Because that's, because it would

be the right idea in theory if it were the switching fee?

THE WITNESS: Conceptually if you were thinking just

about Switch fee -- actually, I think there is a problem. The

Switch fee is not the merchant price, the merchant pays the

whole thing. There is a different conception.

THE COURT: Mo.

THE WITNESS: Different conceptual problem if you use

the Switch fee because the merchant's price is the Interchange.

Interchange plus the Switch fee, so they have to pay both of

those. So I think that runs into a different difficulty

applying the test.

THE COURT: But the problem with applying the

Interchange fee is that that doesn't actually go to the persons

accused of being monopolists. It's a funny way to monopolize.

THE WITNESS: That's correct.

THE COURT: To make money for somebody else.

THE WITNESS: That's why I say conceptually I think

here it gets you in trouble is the wrong thing because you are

competing to get those people. By getting more money for them,

it's a form of competition, it's not an exercise of the market

power, so I think that's one problem.

There's always, I am not sure the right word is problem.

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One always has to be careful of applying the hypothetical

monopolist test though to make sure that the results you get

out of it makes sense because it is a particular, you know,

mechanical way to do things, and it's a point I make that what

it says is, okay, if you have properly applied it, so let's go

with tofu and suppose we have done it and we really find out

that we are sure that the tofu monopolist could raise price by

five or 10 percent, okay.

Even if you knew that, it doesn't tell you what the

merger of two tofu firms is going to do because they are not

merging to monopoly, and that's why I talk about you have to

worry about expansion and what rivals will do, what Interlink

would do because you are not getting the hypothetical monopoly

when you actually merge so you have got to -- and this is

always the case, you have got to --

THE COURT: But, but the point is that it has or I

thought the point was that it would have an anti-competitive

effect not that you would end up with a hundred percent

monopolist, but that by operation of the hypothetical

monopolist construct, you can demonstrate that it would have an

anti-competitive effect and therefore should be avoided.

THE WITNESS: Okay, and I would say that it, except

that it never does that by itself. That applying the

hypothetical monopolist test would tell you -- I mean, by

construction it says if you have all of the firms selling this

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product together in a perfect cartel, this is what they could

do.

Now I think I haven't heard anybody say here today, they

say we're getting all of the PIN debit firms together in a

perfect cartel. So the idea of it from an economist point of

view is not that it's competitive effects analysis, but it's

they are trying to draw some boundaries to do it, but once you

have got the boundaries, once you have got the boundaries, you

have got, you want to check with the real world or the facts.

These boundaries of the test really make sense to understand

competition.

THE COURT: Well, we have lost everybody.

THE WITNESS: I think we might --we are still on the

line.

(Noise from phones.)

THE COURT: Is anybody there?

DR. HAUSMAN: This is Terry Hausman.

MS. ALEXIS: Hello.

THE COURT: We need you.

Are you still there, Dr. Hausman? Hello.

Why don't you hang up.

(Pause.)

Why don't you go ahead.

THE WITNESS: So as I was saying, I mean, and the

merger guidelines would lay this out too, that it would be a

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first step for drawing the boundaries, but by itself it can't

tell you what the competitive effects are, and I'm sure that

Your Honor would agree with that.

But it's just one step and then a step typically put in

the merger guidelines with the guidelines then say to calculate

market shares and now I guess I am getting into some of the

legal stuff about whether that creates some sort of presumption

or not.

Which I gather it is not Professor Ordover's approach

here so in that sense I think even he is agreeing that you

don't follow the merger guidelines, you know, mechanically and

everything, because at least in these slides he has not tried

to do what the merger guidelines would identify I think as the

third step which would be calculating market shares, you know,

and I think he's correct in that.

I have said that I don't think that market shares are a

very good indicator here, but I think that it does illustrate

that economist recognize that the merger guidelines are not the

only way to do things.

THE COURT: I am sorry, I didn't hear that.

THE WITNESS: Oh, the merger guidelines are not the

only way to do things, and I think that there's generally

consensus among economist as well, that if do you follow the

guidelines you have, you always want to check it against the

facts and other pieces of evidence as well and there are other

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ways to go about it.

THE COURT: Did you get anybody on the phone?

(Pause.)

THE DEPUTY CLERK: Are people still on the phone?

DR. HAUSMAN: I'm still here, Your Honor.

THE COURT: Is that Dr. Hausman?

MR. BLAKE-THOMAS: I'm sorry, it's David

Blake-Thomas.

THE COURT: Washington D.C. can talk to Washington

good. Is there anyone else on the phone?

MR. IOANNOU: This is John loannou from the New York

State Attorney General's office.

MS. HACKER: Janice Hacker in Texas.

MR. BETSKO: Joseph Betsko and Ben Cox from

Pennsylvania.

THE COURT: So did we lose you and you all stayed on

the phone; is that the idea?

MS. ALEXIS: Yes, this is San Francisco, and the

conference operator just called the people. There is some

problem with Dr. Hausman and they are going to try to reconnect him.

THE COURT: Thank you. I'm sorry. I was just trying

to figure out who is attending and who is not.

THE WITNESS: The person from Bloomberg still has not

figured out how to tap the line or at least knows enough to be

127

quiet when you ask.

All right. If I could and also in the interest of time

before we get Professor Hausman back, just jump to two of the

tables Professor Ordover presented; one of them being I guess

his page 19. My set didn't come with numbers, so I hope I

numbered them correctly, but --

MR. HOCKETT: It's on the screen, Your Honor.

THE WITNESS: Yes, the single-bugged and multi-bugged

transactions. And you and Professor Ordover did have a

discussion about what to make of the different columns and as

he I think correctly pointed out, one has to look at the first

column with some caution because he said, and if he hadn't I

would have, you know, that MasterCard has something like

of its transactions, you know, you put the

MasterCard number in there, something like for the

first column.

So and I don't believe anyone is saying that, you know,

that MasterCard's debit program is anything approaching a

monopoly, so Professor Ordover pointed you, you know, to focus

on the second column. So in between two columns he and I are

in agreement that the second one would be the one to look at if

you are going to do this because of the things like the

Now a couple of things though about this column, he and

I have different calculations of what that number that appears

128

on his table as , and they are different for two reasons.

One, which I think is the smaller source of the

difference, is that I believe that he only considered certain

networks in his data set and I think there were some

transactions that involve other networks, but that adjustment

is quite small.

And then the other thing in my report you see a number I

think just under percent was projecting out the loss of STAR

issuers, the ones you saw identified in the previous graft so

that the number is percent.

And I would like to make a couple of points, maybe three

points about this.

THE OPERATOR: Pardon the interruption, Jerry Hausman

now joins your conference.

THE COURT: Thank you.

THE WITNESS: And that is and you have heard about

this in a different context for when particularly Professor

Hausman and I thought that Professor Ordover was using market

share as his predictor of competitive harm and we said well, if

that were true you would see STAR charging higher prices.

Well, I would make the same point here that you observed

that STAR is at percent and that NYCE is at percent. Yet

I think there's agreement and there's disagreement on how to

interpret the data, but I believe there's agreement that the

129

MR. HOCKETT: Would you like me to show that graft?

THE WITNESS: It's up to Her Honor. She may have

seen that enough times.

THE COURT: I think that given the way that everybody

-- I don't think that's actually been challenged.

THE WITNESS: Yes. As I say, I believe the

disagreement is on the interpretation, so I think it would be

useful to go back to the other -- okay, so clearly there's

disagreement on the interpretation, but I believe there's

agreement on facts that the

, if anything it's the other way around.

So what I would point to here is that going from

doesn't show up on the data as having an effect and

again, Professor Ordover has his reasons for thinking why it

shouldn't, but then he is saying if you use the number

projecting out for STAR that somehow going from say

would have a significant effect and would harm

consumers.

My point would be that I don't think that the data show

in effect going from at least anyone has been

able to discern and I don't see any that he's offered evidence

and I'm not aware of any that going that same amount upward

from would have an effect.

So that's the first point I would like to make about the

numbers.

130

A second one is I'm not quite sure what to make of

combining these things and sometimes these things STAR and NYCE

don't compete on these things that are uniquely bugged anyway,

but maybe that is more of a throw away point.

I think the more important of the other points for this

is this, that the degree of single bugging and multiple bugging

is a choice made by issuers. Okay, it's not that STAR and NYCE

are getting to pick what happens here. The issuer is making

the choice.

So for example, if the issuers have reasons they want to

have bugs for multiple networks and the issuers see STAR and

NYCE merge and suppose they do combine the networks into one.

It will be the issuer's decision whether then to put the bug of

another network on those cards as well. So I think that's

important to remember that these numbers, they're not set in

stone and in particular they are not set by these two networks.

THE COURT: Well, in that sense isn't that what part

of the in essence the WAL MART litigation was about? It's a

different, it's a different concept, but as I understand it

that Visa and MasterCard had an obligation that it was imposing

that if you took their credit cards, you had to take their

debit cards, right?

THE WITNESS: That's correct.

THE COURT: And it's the -- I mean, I don't quite

understand how the issuer is ruled then by the network. The

131

network like Visa goes and says we'll pay you a lot of money.

Are those your facts or Dr. Hausman's facts, the ones

about -- about how much --

THE WITNESS: He has talked about that, but the

networks can try to influence the issuer decision to the extent

they can create financial incentives to try to run more of the

transactions over their particular network.

And in particular, you know, in the end and if a

network -- and that's the way the competition can work is the

network offers a good enough deal to the issuer, the issuer may

put only that network's bug on it, but that in a sense is, in a

sense it is the outcome of competition by networks to attract

issuers.

THE COURT: What about the concern that Dr. Ordover

testified to using his ,

that the percentage here putting STAR and NYCE together would

make it difficult for a merchant to get out of the market

because that one network would control so much of the debit PIN

market?

THE WITNESS: Okay, I think there a few things here

are relevant here. One, there's a question of whether the

merchants in fact look at these numbers, and I believe that's

an issue Professor Ordover himself raised in his report do the

merchants actually even know these numbers, so that would be

one point, but I think that the other important point, and this

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is where I guess market definition would come into this or the

question of substitution comes in.

You know, the question of where would the people go,

okay. What he's saying is these people couldn't go to another

PIN debit network but they could go to cash or signature debit

or checks or in some cases, people would go to credit cards.

In some cases they go to ACH.

So that's why I think we see another part of the

difference and what you are hearing from the economist saying

that there's enough substitution, that's one of the factors

that goes into it, that the merchants can expect to get the

business on a different payment instrument. I see that's an

important part.

THE COURT: So would you not anticipate a loss of

business? There's a question, it's mentioned in one of these

slides, about what happens if the customer comes in and the

merchant doesn't accept his card. Does the customer actually

walk away or does the customer just pay by an alternative

means?

Is there any fact to support that or is it, is this a

hypothesis of the economist?

THE WITNESS: No, I think there are facts that

suggest in fact that the merchant won't lose very many sales.

I mean, I guess you could question whether it's a fact if it

was made in their pleadings, but as I said, in the WAL MART

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litigation certainly the merchant plaintiffs took the position

that if they didn't accept signature, and that's right, it's

starting with signature, they said if they didn't accept

signature they wouldn't lose any sales because people would go

somewhere else.

I would submit from that that if there, if they are

going to go to PIN or cash or checks, the same thing is going

to be true by and large for people with PIN debit that they

could go somewhere else.

I think that one of the things I think in fact you heard

earlier today and in the graft again is that people's debit

cards tend to have a signature mark on them and also, you know,

one or more PIN marks. So most people when they give the

merchant their card have the, the person, consumer walking in

could be switched over from one to the other and, you know,

again all of this stuff we have heard about trying to -- the

fact that merchants can steer, you see things like

suddenly steering, you know, this big percentage of people away

from signature in the PIN. They were using signature before

they started doing it, so it's all the indications that they

could steer them back.

I think when you do see people going back and forth

there's data that

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All of that suggests that in fact people will just move

to another payment instrument rather than go out, you know,

leave the store.

THE COURT: And not make the purchase at all?

THE WITNESS: That's right. I think particularly

when you think about what goes on with debit and particularly I

guess PIN debit is a significant percentage of those

transactions are things like groceries.

So I mean, you know, someone goes in, they do their

weekly grocery, now it's true you could try to go to another

store, but I think it is important that groceries are so

important here because it also suggests you tend to buy your

grocery, at least most people buy their groceries in the same

store, you can do things like your checks, you know,

preapproved or various forms of verifications, and things like

that, you have a relationship say with your supermarket.

I mean, it may not be a close one but you do have a

commercial relationship with them in a way that say you

wouldn't, certainly going to a hotel and that then makes other

payment mechanisms a better substitute than you might otherwise

think. That's why checks are used a lot at supermarkets.

THE COURT: Supermarkets don't do much steering

though do they between debit and credit cards?

THE WITNESS: Certainly between, actually between

debit and credit or between --

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THE COURT: Between one kind of debit and another?

THE WITNESS: Between one kind of debit and the other

kind they do.

THE COURT: They do?

THE WITNESS: They do do that. They will have ones

like I believe that's right. I may be misremembering which

ones, some of the large chains in fact will have things like,

they will have PIN prompts that when you swipe your card, if it

sees that the card can do either PIN or signature, it will ask

you to put your PIN in. You know, some of them may try, they

may also train their clerks to do it, that supermarkets are

pretty savvy about that.

The other thing is that we have things like Safeway that

has been a leader -- actually and I guess I think it's Publics

as well having their own debit having their own debit network,

and then Safeway having their ACH based debit card for a

variety of reasons they would like people to use. The

supermarkets, these big chains have been quite sophisticated in

looking for other mechanisms or for moving people around in

ways favorable to the merchants.

MR. HOCKETT: I do want to make sure that we leave

enough time for Dr. Hausman. I don't know whether there were a

couple of additional points that Dr. Katz wanted to --

THE WITNESS: I would like to make one additional

point which I will make today and I'm sure you will be hearing

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about in the future, but if I just could turn to slide 23 and

just explain something that Professor Ordover in fact was

careful to explain in his report, but I would like to highlight

it here and then report some additional work that people under

my direction have done in the last say 48 hours.

6 And that is and you went through this with him before

but he reports the top of the first two columns the conflicts

between STAR and NYCE. I guess because of the data he had

available, at least that's my understanding of why this was

done, he used the routing instructions that Concord has when he

looked at the EMS data my understanding is that he didn't have

the FDMS data, because my understanding is that he didn't have

the FDMS routing instructions.

So the total FDMS and which things are conflicts is his

estimation based on applying one company's process to another

company. We were able to obtain, people under my direction,

were able to obtain information in the last couple of days

about what the routing instructions were or are for, for FDMS.

MR. CONRATH: This is material we sought, Your Honor,

and were told was not available.

MR. HOCKETT: I don't think that's true.

MS. ALEXIS: It's been produced, it was produced

months ago. You have routing instructions that were produced

months ago.

MR. CONRATH: Not in this file.

137

THE COURT: Well, why don't you -- we'll let that one

go.

THE WITNESS: I have no idea about that.

THE COURT: No, no, that's a different argument.

THE WITNESS: Anyway, the numbers that people under

my direction calculated that -- I think I have got this right,

it's a dramatic difference. Instead of

THE COURT: Under the FDMS column?

THE WITNESS: Yes, for the percent of total priority

in conflict and the big change is that there just were many

fewer dual bug cards, not just dual bugged, they just had many

fewer transactions that had both an instruction to go to STAR

first and an instruction at the same time to go to NYCE first.

THE COURT: Okay.

THE WITNESS: Again, this one where they would also,

and then I'll stop, make the point again though that to the

extent what we see and I believe this is what I believe we do

see is networks competing for issuers. It's in the network's

interest to figure out ways to end various routing conflicts

and that's true whether or not the networks merge because

otherwise, what you have happening is almost a default, you are

letting the merchant choose and clearly, that's not what the

issuers want.

So the competitive forces of networks trying to attract

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issuers is at work here, and in fact, if I wrote it down

correctly, Professor Ordover talked about something about

arbitrage, you know, merchants arbitraging against the

networks, and then that's what we saw going on here.

But of course, the way to think about it with

Interchange is they are arbitraging against the issuers. It's

obviously both, they are looking at Switch fees and

Interchange, but the bigger component is Interchange and so

when the merchant is trying to find the least cost routing, a

lot of what they are doing is trying to avoid paying the issuer

the money which tells us that the issuers have economic

incentives to, you know, to get the networks to stop doing

these things, and so to the extent that these do turn out to be

significant effects, there are these economic incentives to

stop that happening, and I guess I should say there are also

economic incentives to stop me from talking any more so that

Jerry can, unless you have any questions.

THE COURT: Okay. No, no, I think we need to hear

from Dr. Hausman, and it is getting late.

MR. HOCKETT: Before we let Dr. Katz go, can we just

make sure that Dr. Hausman is still present?

THE COURT: Dr. Hausman, are you still there?

DR. HAUSMAN: Yes, I am, Your Honor. I have been the

whole time.

MR. HOCKETT: Very good. Let me just give the Court

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a copy of the slides that we have already supplied to the

Government.

THE COURT: All right. And could you also inform the

Government as quickly as possible about the Bates number or

whatever it is of the routing instructions for First Data?

MR. CONRATH: Your Honor, if I can address this very

briefly. What we do not have is First Data's bin tables that

identify the conflicts and can't do the routing instructions

without that. We have been asking for that.

If I might, Your Honor, I know we have come to, to be

amused by my repeated references to the same points, but it's a

very serious point. The Government is seriously injured by

this and this is a classic example of the kind of, you know,

non-disclosure, we have to fight. If we are on a regular

schedule, I'm familiar with those kind of litigation games, I

know how to get information.

We don't have time to do it here and therefore, we are

gravely prejudiced.

MS. ALEXIS: Your Honor, and I don't want to take

the time from Professor Hausman, I think it's very late where

he is, but I might add as I said from sitting back there that

there are routing instructions at First Data, those were

produced --

THE COURT: Yes, but what about the bin tables?

MS. ALEXIS -- months ago.

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With respect to the bin tables, I don't think that and I

will go back and check that issue, but they know if they looked

at the documents just exactly how the transaction should be

routed. Under the First Data algorithim it's a computer

algorithim that says first you look at if it's an issuer

selection has there been an issuer routing, if not, then you

default to least-cost routing.

There's nothing to do with looking at STAR next, and

that's been clear from the documents. They have had witnesses

galore that they could have asked for clarification on that

point, and for whatever reason haven't done that.

THE COURT: But the issue according to Mr. Conrath is

bin tables.

MS. ALEXIS: Your Honor, I don't think that bin

tables are not necessarily what tells you how we do the

routing. The routing instruction is an algorithim that says

first you look at this, then you move to that.

Could we reserve this argument for when Professor

Hausman is no longer --

THE COURT: We'll reserve this because we have really

imposed on Professor Hausman's ears. Go ahead.

MS. ALEXIS: Thank you.

Professor Hausman, can you hear me okay?

PROFESSOR HAUSMAN: Yes, I can. I'm trying to figure

out based on the number of questions that have been asked today

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what's left for you to address.

THE COURT: We need to swear the witness.

MS. ALEXIS: Oh, I am sorry, okay. I apologize, Your

Honor.

(DEFENDANT WITNESS, JERRY HAUSMAN, SWORN.)

THE WITNESS: Yes. And would you ask Miss Alexis to

speak directly into the microphone, she's breaking up.

MS. ALEXIS: I am, but you tell me if you can't hear

me, okay.

THE WITNESS: I can hear you now.

MS. ALEXIS: I was trying to figure out what are the

issues that are left that we could assist the Court with and,

of course, I'm sure Judge Collyer will also pipe up and ask

questions throughout.

But there are three that I thought -- actually four that

I thought where we could be useful in the half hour or so

that's left. One is to briefly touch on, you know, your view

of the merger guidelines and how even if, even if Interchange

were used in there in a kind of SSNIP test under the merger

guidelines and looking only at the merchants whether they, the

Justice Department or Professor Ordover has approached this

properly in the way that they have applied their own

guidelines.

Second --

THE COURT: Why don't we just do that one, let's

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start with that.

MS. ALEXIS: Okay, let's start with that one.

THE WITNESS: Okay. That's good, Your Honor, because

I can remember that one.

I do not think that the merger guidelines really can be

applied here. I am not saying that but --

(he's breaking up.)

Under selling tofu or you can be selling many different

products, but the whole thing here is, is that it's a two-sided

market and --

(lost sound.)

THE COURT: Dr. Hausman, we can't hear you, you are

breaking up, so we can't get your testimony into the record.

Can you slow down just a little bit and maybe if you

speak a little more specifically it will come through.

THE WITNESS: Okay. I will try again, Your Honor.

What I was saying is that I do not believe that the

merger guidelines adequately can take into account the dual

status or the dual roles that Interchange and Switch fees take

into account.

(Connection breaking up.)

THE WITNESS: Network by close merchants and issuers.

And the Switches, Interchange has to do both and this -- you

are now confusing competition for getting banks with what looks

like what a monopolist might otherwise be of --

143

THE COURT: You can only take down what you can --

Jerry, it seems to be breaking up, and I don't know if

-- we're not going to get any record on this.

Maybe would it be worthwhile to try to call in again and

get a clearer connection?

THE WITNESS: Yeah, what I do is, there's a number

and I can call in and I'll do that right now.

THE COURT: Thank you.

THE WITNESS: I will hang up and call back.

MS. ALEXIS: I apologize, Your Honor.

(Pause.)

THE COURT: He's in Egypt.

MR. CONRATH: I suppose, Your Honor, that this should

just remind us that defendant's proposed schedule when they

knew their expert would be out of the country.

(Pause.)

THE COURT: That's true.

We cannot go into a conference and sit there listening

MS. ALEXIS: I understand that, Your Honor, and I

apologize. I think there were a couple of key points that he

did want to address with you. And I don't know what the, what

the answer is besides the merger guidelines which I think have

been addressed to some extent.

There he merely wanted to explain to you why Visa, why

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you have to and I think you already picked up on a lot of that

based on his earlier report, on the importance of Visa and how

it views the two markets as very integrated; i.e. signature and

PIN.

THE COURT: Although I don't think that you can

testify for him.

MS. ALEXIS: I know that and I am not trying to. I

am just saying that was the key issue that he wanted to be able

to address with you and answer your questions.

THE COURT: Well, I think that we cannot hear from

the Professor this afternoon which is unfortunate, but more

unfortunate because the defendants are going to have to figure

out how much of his testimony they want to put into the trial

record and --

MS. ALEXIS: From today?

THE COURT: No, not from today. We don't have any

testimony from him today. I mean live testimony and --

MS. ALEXIS: He will be here.

THE COURT: Oh, I understand but you have to

understand that you are going to be running against a clock,

and the longer that you have to take for his testimony, the

less time you are going to have for something else, that's all

I'm saying.

MS. ALEXIS: Oh, I see, Your Honor, yes.

THE COURT: I mean, luckily I have heard from the

145

other experts and so a fair amount of their testimony can be

sculpted for purposes of trial in a way that everybody can know

that I have already heard a lot of what they have to say.

And so hopefully, we can have their testimony without

having to kick everybody out of the courtroom, without having

to seal the record, and they can give their opinions and the

basis for their opinions and you are going to have to figure

out a way to get the testimony from Professor Hausman in

without that advantage. That's all I'm saying because we can't

reach him.

MS. ALEXIS: Again, I apologize. I thought that the

telecommunications was better than it was, at least it was

working this morning.

THE COURT: Well, he could hear us on and off, but I

don't think that he could participate very effectively.

Let's talk about bin tables.

Mr. Conrath, would you tell me what bin tables are?

MR. CONRATH: Perhaps we could seek someone who is a

little more expert than I am.

THE COURT: All right, whomever it is that knows what

bin tables are.

Oh, we'll really getting -- now we're getting to the

real expert.

MR. SOVEN: Exactly. Your Honor, I'm working --my

name is Joshua Soven, and I'm from the United States and I'm

146

working off some incomplete information.

Bin files are bank identification numbers and it's our

understanding the way the process works that what a network

will do will send lists of bin files which refer to debit cards

to merchant processors, and those bin files contain

instructions as to whether or not that network is the priority

network for the particular network at issue.

So STAR on a weekly basis will send lists of files to

the various merchant processor flagging certain ranges of cards

as its cards, and it's my understanding that we do not have

master routing tables from First Data which is what we thought

Mr. Katz, Dr. Katz was testifying about.

And if I have got it wrong, I have got it wrong.

MS. ALEXIS: Let me partner Frank Hinman who is more

familiar with that.

MR. SOVEN: Sure.

MR. HINMAN: Good afternoon, Your Honor, Frank

Hinman.

Let me start by saying that as to the specific analysis

that Dr. Katz1 associate has done in the last 48 hours I don't

know what it was based on, and so I can't tell you that.

I have been involved over the course of these

negotiations in trying to determine what we have and can

provide and what we don't have and can't provide.

That being said, there have been others in my office who

147

are right on the front lines of that issue.

All I guess I can say is that I will work with counsel

immediately. I doubt seriously whether there actually is

something that we have now decided to use at the eleventh hour

and withheld from the Government. I mean, I think that would

either be --

THE COURT: Whether you have withheld it and you're

using it or whether you are not using it but they haven't got

it and you do and they think that they need it --

MR. HINMAN: Oh, of course, Your Honor.

THE COURT: --do you know what bin tables are?

MR. HINMAN: Do I know what bin tables are? I have a

conceptual idea.

THE COURT: Is there anyone on the phone who would

from the defendants who would -- oh, we are not on the phone

any more.

MR. PATTON: Your Honor, I could take a stab at --

and Mr. Hinman feel free. As I understand bin tables --

THE COURT: I don't want an explanation about what

they are, the Government has given me one.

I want to know whether they exist for First Data, and

then I want to know why if the Government has asked for them,

it doesn't have them?

MR. HOCKETT: Your Honor, I have asked Dr. Katz to

step outside and to verify with his associate what exactly it

148

was that she used to run the calculations.

THE COURT: That's fine, and that would be helpful.

What I want to know is does First Data have bin tables,

and if so, why doesn't the Government have them?

MR. HINMAN: Your Honor, to my knowledge, there is

nothing that we have that they don't have. I mean, that's all

I can tell you.

To the extent that I'm mistaken about that, which I

don't think that I am, if I am, all we can do is remedy that

immediately and that's what we will do. But I have no basis to

think that's the case.

THE COURT: Okay. So as far as you are familiar and

unfortunately, you happen to be very familiar, as far as you

know, everything that you have, all of the documentation that

you from First Data they have?

MR. HINMAN: Absolutely.

THE COURT: Okay. I'm not sure that answers

Mr. Conrath's question but it certainly means that the lawyers

have produced what they have. Yes, sir.

MR. SOVEN: Yes, Your Honor, I just have one point of

clarification.

It's our understanding that we do have bin files. We

asked for the data in a way that would identify the conflicts,

and we were told that the data did not exist.

If the Court would like a more precise explanation I can

149

offer Scott Thompson who is an economist in our office who can

explain it more fully.

MR. THOMPSON: Your Honor --

THE COURT: Wait, wait. Do I understand that you got

something in a fashion or information from Concord that you did

not get from First Data? That was the suggestion.

MR. HINMAN: There are differences in what the two --

what the companies.

THE COURT: I'm sure there are.

MR. HINMAN: So yes.

MR. SOVEN: That's correct.

THE COURT: As to this issue?

MR. SOVEN: Yes.

THE COURT: It's your opinion in the Department of

Justice that the information that you think that you need from

First Data must exist and you can't find it?

MR. SOVEN: No, Your Honor what we are -- Dr. Katz

said several things in his testimony which suggested he had

information from First Data which could identify the conflicts

between network routing rules. That's the information we had

sought from First Data and it was our understanding from them

that that data did not exist.

THE COURT: Okay. Now I understand. So it's not

exactly bin tables?

EURBGS: No, it's data which indicates the conflict

150

between the routing instructions of the various networks.

MS. ALEXIS: If I could interject, Your Honor, and

we'll double check on this point, but I think it's exactly what

I said before, it's the routing instructions, there is an

algorithim, it's all done by computer as to what happens when

you get a notification as to whether an issuer has designated a

particular network as for its primary routing.

And First Data adopted this back in the late '90s and it

follows it, and those instructions have been given and so they

don't, as far as I know, there is no variance, it's a computer

algorithim and that's what is followed and I believe that's

what Dr. Katz is relying on, but we will confirm that.

THE COURT: Is there any -- As I understand it, NYCE

is willing to use any network at all?

MS. ALEXIS: First Data will use -- what First Data

does with its routing and as I said, they adopted this in the

late '90s is they will look to see and this is by computer,

they will look to see whether an issuer has designated a

particular network as its primary network when they get a

transaction through that might have several bugs on it.

If there is no issuer designation then --

THE COURT: Sorry, I am interrupting you. I have a

note that says every one is back on the main conference line.

MS. ALEXIS: Okay, sorry.

THE COURT: Hold on.

151

(Pause.)

THE COURT: In the meantime, the expert is checking

with his associates to find out?

MS. ALEXIS: Yes, he is.

THE COURT: Is every one there?

THE WITNESS: Yes, I'm here, this is Jerry Hausman.

THE COURT: My goodness.

MS. ALEXIS: He actually sounds clear.

THE WITNESS: Yes, we got a fiberoptic cable this

time, Your Honor. I teach telecommunications so I can tell

what happened.

THE COURT: We were deep into talking about bin

tables and things, and maybe we'll slow down that conversation

and give you a few minutes.

Dr. Hausman, you were just saying when we were so rudely

interrupted as I say that, that the analysis used by the

Government confuses competition with market --

THE WITNESS: Market power.

THE COURT: Market power, thank you, thank you.

Why don't you finish your thought.

THE WITNESS: Yes. Well, what I was saying is that

in a one-sided market if done correctly, the SSNIP test usually

is okay. But in a two-sided market where you have both

Interchange and Switch and you have to satisfy two parties, the

merchants and the banks -- I am going to call the issuers the

152

banks, Your Honor.

THE COURT: I tried that and got corrected.

THE WITNESS: Okay, well I will not do so.

The problem is that what is actually competition which

is trying to get issuers by raising the Interchange. If you

only look at the other side of the market, looks like you are

exercising market power, and so that's why that SSNIP test

which, you know, is designed to look at only one side of the

market in my view is not designed to look at two-sided markets

such as we are talking about here.

THE COURT: Okay. I got that. What was the second

point? Second question that you had?

MS. ALEXIS: Well, the second question I had under

the merger guidelines is that Professor Ordover says that he is

looking at the current price. Even if you include interchange

fees and just look at the merchant side of the market, he says

that he is looking at the current price of signature debit

versus PIN debit and says that it's so much more expensive.

Under the merger guideline approach if you were to

follow that should you be looking at the current price given

the situation that, you know, that's or the conditions under

which signature debit has been sold over the last many years?

THE WITNESS: No, because what happened before was

that Visa and MasterCard tied their credit card to signature

debit so all economic theory would say that would lead to

153

decreased credit card rates and increase signature debit rates.

And with the WAL MART settlement said you are not

allowed to do that any more, economic theory would then say

that the credit card rates are going to go up which they have

already started to, MasterCard has announced they are going to

raise their rates, and that signature debit is going to come

down and we have already seen that happen as well.

Now the merger guidelines are very careful to make two

points. The first is that you are suppose to look to the

future when the merger will happen. I don't think that

Professor Ordover has done that, but secondly, there's

something called the cellophane fallacy which is known to

antitrust economists and judges, Judge Closner talked about

this a long time ago and that is that if the prices in the

market are artificially distorted and are not competitive

prices, the Government is suppose to come in and use

competitive prices. It says that right in the merger

guidelines, I don't have the section handy, Your Honor, but if

someone can point you to that.

So we know that the prices have not been competitive

prices, they have been distorted by this tie which is no longer

going to exist and the competitive prices is as Professor

Ordover I think has argued is, is that signature doesn't really

have very many advantages over debit, so we expect that --

over PIN debits -- so we expect the prices under competitive

154

conditions to come closer together.

report and most particularly, I think I got it from your

rebuttal report, which if I misunderstood you, I need your

correction.

Which was that Visa because of its strength in the

signature end of credit and debit was able through Interlink to

force an increase in the Interchange fees to the benefit of its

member banks and thereby an increase to the cost of the

merchants through good old fashioned competition with the

networks including the two defendants here, and that was the

result of competition from Visa and not the result of any,

anything else and really these parties ought to be able to

merge because you need somebody with a little weight as against

Visa.

155

THE WITNESS: Okay. I'm totally with you; however,

there is an argument which I heard one of the Government

lawyers make, I think it was probably Craig Conrath, saying

that the question is whether prices will go up and it's not

just whether you, you know, create another gorilla to contend

with Visa.

So I'm completely with you and I don't think that

there's really any argument that Visa has led to an increase in

Interchange rates for PIN debit and has forced the networks

through competition to raise their Interchange rates, and of

course, that helps Visa.

But I would like to make an additional point which I

don't think that has come out in the hearing. Now as you know,

I didn't hear the whole hearing, but I don't think that anyone

said this.

We know that there's the graph that was shown to you

that STAR is going to go from its current approximately

51 percent down to my latest calculation is that

was in my rebuttal report.

We know also that Interlink is going to go up by quite a

amount -- quite a bit. I think there is a

But what hasn't come out in this hearing is that under

156

the WAL MART settlement, Interlink is allowed --or Visa is

allowed to create a new tie and the new tie is that if you take

Interlink you have to take their signature debit. That has

been agreed to in the WAL MART. So in other words, if you take

one debit instrument which is Interlink, you are going to have

to take both.

Once Visa gets up to, and I'm going use a number here

which is just approximate, of , that's going to mean,

according to Professor Ordover's argument, that it's very

difficult for a merchant not to take Interlink because they're

going to be on a lot of cards and again, Professor Ordover

testified, I heard him say that Interlink usually goes for

either a single bug or an exclusive.

Now of course, under the settlement they are not allowed

to do an exclusive for I think it's two years, but you can

certainly fix it up from an economic point of view that it will

be in the issuer's best interest to have only a single bug in

many cases. And I can explain that at trial, of course.

But once Interlink gets up to a large share which they

are going to have, and there is going to be a single bug or an

exclusive on a card, then it's going to be difficult for

merchants not to take them.

Once merchants take them and they are also making

special deals with a lot of large merchants like WAL MART --it

was in the paper this week -- then you are also going to have

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to take Visa signature debit so this whole 800-pound gorilla

thing is going to be re-enforced by Interlink growing and

therefore requiring merchants to take signature debit as well,

and it will be in Visa's best interest then to continue to

increase the Interchange on Interlink, force up the networks

and drive the merchant fees even closer together in the future.

THE COURT: Now do you -- I think I even follow that.

Do you understand that there really isn't a switching fee in

the Visa arrangements because it runs its own network or it's

already --

THE WITNESS: That's not correct, Your Honor. I

So there's no separate Switch fee for merchants but they

do charge the issuers a Switch fee. That's how they make their

money and they do other charges as well.

And the person's name is a

THE COURT: That's for signature debit, right?

THE WITNESS: Yes. I thought that was your question,

Your Honor.

THE COURT: No, I was really thinking about

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Interlink.

THE WITNESS: Oh, Interlink. Interlink has a --

excuse me -- has a merchant Switch fee which they charge and

then they have Interchange as well.

report, you believe that as a practical matter, putting aside

for a moment the, how the guidelines might work, as a practical

matter it's impossible to look at the debit PIN -- the PIN

debit market without taking into account the aggressive growth

that Visa is engaged in to enlarge its position in the PIN

debit market but also to contract PIN and signature debit?

THE WITNESS: That's absolutely correct, Your Honor.

Would you like me to explain or --

THE COURT: Yeah.

THE WITNESS: You certainly understood it.

Yes. What's going on there is what, if you don't put in

signature debit you are missing the competitive dynamic of the

market. Because remember, the Government has argued that STAR

has market power now from the mergers that have taken place in

the past, that's right in their complaint.

So if we look at STAR and that's a form of market power,

they are acting in an economically irrational manner because

what they are doing is they are raising the Interchange which

they don't get to keep at all, and that means that there's

going to be less demand for PIN debit because demand curve

159

slopes downward, but at the same time, the total Switch fees

which they do get to keep are going down in real terms.

So they are just, you know, shooting themselves in the

foot or harming themselves and since STAR is certainly a profit

maximizing enterprise, that doesn't make economic sense. And

so the only way to understand that is to bring in signature

debit and say what Visa is up to is trying to protect its

signature debit franchise and then it's undertaking the

strategy that you and I were just discussing here.

THE COURT: Okay.

THE WITNESS: Because otherwise, you just don't have

an economic explanation for what is going on. I mean, it's

unheard of for a firm with market power to be harming itself

and lowering its price, you know, which is here the combination

of the Switch fees, yet that is what the Government is arguing.

16 THE COURT: Okay. Thank you.

Did you have another question for the Professor? It's

five after five. I know that I said 5 o'clock, but we did run

into technical problems.

MS. ALEXIS: Well, there are two other issues and I

will let Jerry decide for himself whether he wants to follow

it.

One is whether you wanted to address the competitive

affects, the two issues that Professor Ordover addressed that

he had on his slides.

160

And then the last was efficiencies in your view of how

efficiencies should be addressed.

THE COURT: Why don't you go to the efficiencies

point rather than the competitive effects.

THE WITNESS: Okay. Sure. The efficiencies and I am

going to call them Professor Z if I might, because I don't have

his business card in front of me. If that's okay with the

Court?

THE COURT: Of course.

THE WITNESS: What Professor Z said was that he

thinks that, and this is just under instructions from the

Justice Department lawyers, that you should only look at

effects that come directly from the merger. This is when they

are talking, Your Honor, about what would happen if they -- and

this is incorrect.

And I actually talked about this in the paper I

published in 1999 at the conference which was partly held by

the Department of Justice.

I mean, what do we do mergers for -- you said this

exactly right, we look at the effect of prices on consumers.

Now I told First Data and they did this, I said, you

know, there may be efficiencies for things like Western Union

but most merchants don't sell or buy Western Union so you

shouldn't take that into account and they did not.

But what he wants to do is to get rid of processor

161

efficiencies. Remember you were talking about FDMS or FDC,

First Data Corp. and Concord. But who pays those processing

fees and who will benefit from the efficiencies?

Well, it's the same mergers -- the same merchants --

excuse me -- who use the PIN debit networks because you can't

use a PIN debit network unless you can process and so it seems

to me that if it's going to be, if they're going to argue that

prices might go up to merchants from the merger, we want to

take into account both direct and indirect effects that are

going to cause prices to go down to merchants because at the

end of the day we want to know are merchants going to pay more

or less for PIN debit. So I think --

THE COURT: If I can interrupt.

THE WITNESS: Sure.

THE COURT: If we took into effect the efficiencies

at the processor level that I think that Dr. Zmijewski --

MS. ALEXIS: Sounds right.

THE COURT: Yes, I really apologize to the doctor for

slaughtering his name.

But anyway, if we take into effect the

that he attributes to processor efficiencies

are you saying that that would reduce the cost of processing

and so therefore, you could increase your Switch fees and the

merchants wouldn't mind?

THE WITNESS: No. The merchants would like to have

162

the prices go down period, they don't want you to increase the

Switch fees either.

And I don't think that Switch fees will go up, you know,

for all of the reasons that STAR --

; But no, my point is --

THE COURT: Seems to me you are going too fast, we

need to change the paper for the court reporter. That's where

you dropped off.

THE WITNESS: Sure. Just tell me when to start

again.

THE COURT: Yeah, but you are absolutely resorting to

your fast talking too.

THE WITNESS: Oh, I apologize, Your Honor.

THE COURT: No, I don't mind, but the court reporter

can't get it.

Did you just hang up?

THE WITNESS: No, I am here, Your Honor.

THE COURT: Good. If you could just read the last

sentence for him.

(Last sentence read by the court reporter.)

THE COURT: That's where you dropped.

THE WITNESS: Why don't I just start that sentence

again.

THE COURT: All right.

THE WITNESS: Okay. So what I'm saying is that I do

163

not believe that the merchant fees for the network will go up

for the reason that we know now that

, so I don't think that this merger is going to

allow that to happen, but I think that lawyers, you know, talk

about arguing in the alternative.

So let me alternatively assume that the Government is

correct and that the, that the merchant fees could go up, you

know, that the combination of Switch plus Interchange could go

up.

What I'm saying is that merchants would then pay higher

fees but the efficiencies in processing which will lead to

lower processing fees are an offset to that because the

merchants have to pay for processing and so that will be a

negative number which would offset the positive number that the

Government is claiming that merchants would have to pay.

THE COURT: Okay, I understand that. I mean, I

understand the argument that you are making and now I can let

the lawyers just argue about whether or not I should even take

that kind of offset into account, but I understand where you

are coming from.

All right. It's 10 after five and you have been about

the most patient witness that I have ever met or not met as the

case my be.

I think that you should hang up the telephone and go

talk to your wife.

164

THE WITNESS: Okay. Could I just ask if I have done

that fine, I just want -- Ms. Alexis had one other area, but --

MS. ALEXIS: No, I think we in fact are done.

THE COURT: I think we have run out of time, we have

run out of time for the day.

MS. ALEXIS: Thank you, Jerry. What time is it in

Cairo?

THE WITNESS: It's 12 past 12, so I think it is time

for bed.

THE COURT: I would say a drink but all right. Have

a nice evening. Thank you very much.

MS. ALEXIS: Good night.

THE WITNESS: Okay, bye.

THE COURT: Is everybody else still on the phone?

MR. COX: Pennsylvania is still on.

MS. HACKER: Texas is still on.

THE COURT: More patient people. All right, let's

get back to the question of bin numbers.

Did we have any response from the expert?

MR. HOCKETT: Your Honor, we couldn't get any

definitive information in this interval, so we'll just have to

follow up. I don't think that anything is amiss, but we'll

just have to double check to make sure.

MR. CONRATH: Your Honor, I reacted simply to the

fact that Dr. Katz criticized Dr. Ordover for making, using an

165

assumption --

THE COURT: No, no I understand.

MR. CONRATH: -- for something that we had been

asking and asking for. So if it exists and we didn't get it,

that's a real problem.

THE COURT: Okay. Well, let's figure that out.

What he was relying on and how he reached his

calculation and then we can determine whether that's actually

already in the Government's hands and they didn't read it the

same way or whatever. Okay.

MR. HOCKETT: Very good, Your Honor, we'll do that.

THE COURT: All right. Now are there any other

matters that we needed to address? I think there is an issue

of the late blooming expert but the Government was going to

file something?

MR. CONRATH: Yes, I didn't think that we need to

address that now, Your Honor.

THE COURT: Okay.

MR. HOCKETT: That's fine with us, Your Honor.

THE COURT: Okay. Is there anything else we need to

address?

MR. CONRATH: I don't think so. I take it from what

you said and I think we have been taking it this way but maybe

we should clarify that the testimony of these people is

basically included as if it were given at trial ultimately and

166

so it can be cited and whatnot?

THE COURT: Yes.

MR. CONRATH: Is that what you intended?

THE COURT: Yes, I think that's right, and I think

that it's for that reason that we will need to come up with a

public and private version or sealed version of the transcript.

It is probable that there are large portions of

transcripts that will not need to be sealed as it turns out.

My greatest interest was for purposes of what might be

confidential information was the Visa competition argument

that's advanced most particularly by Dr. Hausman who turns out

to be in Egypt and very briefly on the telephone.

So if you could review the transcript for that purpose,

that purpose as quickly as possible, you would serve all of our

interests since I did seal the hearing.

MR. HOCKETT: We'll do that, Your Honor.

THE COURT: All right. And but I agree with the

point that you just made, Mr. Conrath, that it will not be

necessary for any of these witnesses to specifically repeat the

testimony that they gave here today, and certainly not to take

any time to give me their backgrounds and their expertise and

all of that.

I really accept them all as clearly the experts that

they are and the fact that they don't agree doesn't do anything

but perhaps help me, so.

167

MR. CONRATH: Very well, Your Honor.

THE COURT: Okay, good. I really want to thank

everybody for making the effort given the schedule and I note

the difficulty of this schedule for everybody and most

particularly, for the Government trying hard to put this case

together. But I do want to thank you very much for taking the

time to put this hearing together because it has been of

material assistance to me and just understanding some of the

issues that we're dealing with, and I will now take some things

home with me over the weekend and have something to work on.

MR. CONRATH: We thank you for the time to make these

presentations, Your Honor.

MR. HOCKETT: Defendants thank you as well.

THE COURT: Very, very valuable. Thank you all a

lot. I hope you have a good weekend, travel safely. And I

think we're done for the day.

The party is actually open if anyone would like to

attend.

(Recess at 5:25 p.m.)

-oOo-

168

TABLE OF CONTENTS

On behalf of the Plaintiffs

Page

Janusz Ordover
Mark E. Zmijewski

14
64

On behalf of the Defendants

Michael Katz
Jerry Hausman

96
140

169

Certificate

I certify that the foregoing is a true and correct

transcript, to the best of my ability, of the above pages, of

the stenographic notes provided to me by the United States

District Court, of the proceedings taken on the date and time

previously stated in the above matter.

I further certify that I am neither counsel for,

related to, nor employed by any of the parties to the action in

wich this hearing was taken, and further that I am not

financially nor otherwise interested in the outcome of the

action.

_______________/s/________________
Crystal M. Pilgrim, RPR

12/8/03
Date

Updated August 14, 2015