Truth on the Market

Academic commentary on law, business, economics and more

Archive for July, 2007

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Read Marc Hodak

Posted by Geoffrey Manne on July 31, 2007

His short post is here.  The theme is, in essence, Bastiat’s “What is Seen and What is Not Seen.”  Government (and, oh, I don’t know . . . antitrust regulators in particular) thrive on the unseen–as Marc puts it, on the unfortunate reality that “invisible opportunity costs stay[] that way.” 

As I argued at some length in one or more of my posts on the Whole Foods/Wild Oats merger (the hearing starts (started) today, by the way.  Anyone have any scoop?), sometimes, much as we might like to act, much as we might like the government to act, we shouldn’t and it shouldn’t.  Sometimes the costs outweigh the benefits.  More important, sometimes we don’t know enough to act.  We don’t know enough about the costs or the benefits to be sure that the one outweighs the other.  Often, it is those unseen, unintended, unanticipated (or, even worse, intentionally ignored) costs that render action ill-advised (to put it mildly).  Blocked mergers, Sarbanes-Oxley, CAFE standards, smoking bans and an almost unimaginable range of other actions fall into this unfortunate category.  Coase (as usual) said it best:

There is, of course, a further alternative, which is to do nothing about the problem at all [because] the costs involved in solving the problem by regulations . . . will often be heavy [and] it will no doubt be commonly the case that the gain which would come from regulating the actions which give rise to the harmful effects will be less than the costs involved in government regulation.

All solutions have costs and there is no reason to suppose that government regulation is called for simply because the problem is not well handled by the market or the firm. 

Too much regulation, especially antitrust regulation, takes place without a proper error cost analysis.  If we might get it wrong, and the cost of getting it wrong weighted by the probability that we’re wrong is larger than the benefit weighted by the probability that we’re right, we shouldn’t act.  This means we need to pay more attention than we do to assessing the probability of error and the costs of error.  Which in itself is difficult where the costs are uncertain and unintended.  But it is irresponsible to act in the absence of this calculus (particularly when you add in the direct costs of action).  It is such an important–and poorly learned–lesson.

Posted in law and economics, musings, regulation | Comments Off

Antitrust News at GW Law

Posted by Josh Wright on July 31, 2007

GW Law received a $5.1 million award to fund a Center for Competition Law resulting from the settlement of a class-action antitrust suit brought by Michael Hausfield (of Cohen, Milstein, Hausfeld & Toll, P.L.L.C., and a GW alum). 

According to the press release, Hausfeld argued that the Center would focus on the “special challenges to traditional antitrust enforcement due to the globalization of markets [and that the Center's] activities would also inure to the benefit of U.S. consumers by deterring the formation of international cartels that harm U.S. consumers,” and that the mission would include “serving as a resource for those seeking to promote private enforcement in competition law in the United States and abroad.”  HT: Danny Sokol.

Posted in announcements, antitrust, law school | 1 Comment »

A Comeback for Dr. Miles?

Posted by Josh Wright on July 29, 2007

The Antitrust Subcommittee of the Senate Committee on the Judiciary will hold a hearing Tuesday morning on whether the Leegin decision is good antitrust policy.  It is (see, e.g. our TOTM Leegin archives), but I suspect this hearing may be the beginning of the end for minimum RPM’s rule of reason era.

Posted in antitrust, economics, federal trade commission, regulation | 5 Comments »

The EC versus Intel: The SO is issued

Posted by Geoffrey Manne on July 26, 2007

To no one’s great surprise (other than that it took so long), the European Commission issued a Statement of Objections against Intel today.  More information as it becomes available.

For those looking for a little insight into the case, you might be intrested in The FTC’s 1998 Complaint against Intel and the resulting Consent Decree (the entire case file is here). 

Or not.  That case involved something about patents and access to technical information by OEMs.  Today the issue is low prices!  The crux of the European Commission case most certainly involves the sort of alleged anticompetitive issues (you know, rebates, discounts and exclusive deals, oh my!) detailed in this case, a private action brought by competitor AMD against Intel in 2005.  In fact, given that Intel’s worldwide woes have all been brought about at AMD’s behest, I would guess the European S.O. bears a lot of similarities to AMD’s private antitrust actions.

Should be interesting.

UPDATE:  And so it does (look an awful lot like AMD’s private actions). The EC comments (a bit) on the SO here:

In the SO, the Commission outlines its preliminary conclusion that Intel has engaged in three types of abuse of a dominant market position. First, Intel has provided substantial rebates to various Original Equipment Manufacturers (OEMs) conditional on them obtaining all or the great majority of their CPU requirements from Intel. Secondly, in a number of instances, Intel made payments in order to induce an OEM to either delay or cancel the launch of a product line incorporating an AMD-based CPU. Thirdly, in the context of bids against AMD-based products for strategic customers in the server segment of the market, Intel has offered CPUs on average below cost.

It should be a hard sell to find abuse of dominance in the sorts of price-reducing activities (rebates, discounts), but this is the EC–anything is possible when it comes to successful foreign compnaies, particularly when the actions against them are instigated by other foreign competitors.  It is not at all surprising that Intel is “eagerly anticipating Spetember 17th.” (Bonus points for anyone who knows why, without looking).

Posted in antitrust, markets, technology | Comments Off

Junk Social Science in the Medical Bankruptcy Debate

Posted by Josh Wright on July 26, 2007

My GMU colleague Todd Zywicki and Gail Heriot (USD) have an op-ed in the Washington Times exposing Harvard Professors David Himmelstein and Elizabeth Warren’s study on medical debt and bankruptcy, presented to Congress earlier this week, as “one of the most misleading pieces of research ever placed before Congress — no small dishonor.” 

The punchline of the study is that over 50% of bankruptcies have a medical cause, a conclusion that Zywicki and Heriot say is reached only because the researchers have a fairly odd definition of “medical cause” which includes uncontrolled gambling, drug or alcohol addiction, the birth or adoption of a child, or $1,000 or more in out-of-pocket medical expenses over the two years prior to bankruptcy.  The study has been criticized extensively elsewhere (see, e.g. here). 

Maybe Congress isn’t interested in discovering the “true” causal relationship between medical debt and bankruptcy and is simply looking for a study that is consistent with its priors.  I don’t know.  But I don’t expect much more from a Congress that is apparently willing to pass price gouging legislation in the face of all theory and empirical evidence suggesting that this is a horrible idea.  One potential solution to preventing junk social science from influencing policy decisions is to allow for an adversial process in presenting the data so that spurious correlations can be brought to the surface.  Apparently, this solution was undone by some political manuevering.  From Gail Heriot’s post at the Right Coast:

The agenda as originally prepared called for Donna Smith, who was featured in Michael Moore’s Sicko, to testify first, followed by the experts witnesses on both sides, so that the witnesses invited by the minority would have a chance to respond to the study co-authors.  Minutes before the hearing began, the order of witnesses was re-arranged, so that Zywicki & and Clifford J. White III, Director of the Executive Office of United States Trustees, the other witness invited by the minority, would directly follow Ms. Smith’s emotional testimony.  The co-authors of the study, who were invited by the majority would both go later and thus be unrebutted. 

For TOTM readers interesting in seeing the primary sources themselves: Professor Warren’s testimony is available here, the study is available here, and Professor Zywicki’s testimony is available here.

Posted in bankruptcy, legal scholarship, regulation, scholarship | 12 Comments »

A New Blog: Management R&D

Posted by Josh Wright on July 25, 2007

Luke Froeb and Brian McCann, authors of a leading managerial economics text, have launched a new blog: Management R&D.  The subject matter of the posts so far look like they should be interesting to TOTM readers: the FTC credit-score based pricing report, M&A,  price discrimination, and RPM.

Posted in announcements, blogging, economics | Comments Off

Chicago, Post-Chicago, Post-Post-Chicago: On Using Shorthand Labels Responsibly

Posted by Josh Wright on July 25, 2007

Over the past few weeks I’ve read at least two dozen papers, mostly by legal scholars (but some by economists) employing or critiquing economic analysis of law, that use the term “Chicago School,” in a critical and misleading way.  Conventionally, use of this nomenclature comes along with a claim that “Chicago School” economics is code for a particular form of non-interventionist, politically conservative philosophy based upon only an unjustified “faith” in markets.

In the antitrust context, the “Chicago School” label is frequently use to contrast against the “Post-Chicago” literature.  For those unfamiliar with this branch of economics, the main contribution of what is known as the Post-Chicago literature, I think it is fair to say, has consisted primarily of number of possibility theorems suggesting that conduct previously thought to be universally pro-competitive could harm competition under some conditions.  Frequently, the Post-Chicago narrative goes something like: “Chicago School economists argued that X was always efficient but Post-Chicago authors have shown the Chicago view to be false by demonstrating that X may harm competition.”

Now, there is a substantial value in the Post-Chicago literature and I do not mean to imply otherwise.  It has increased our knowledge about what can and sometimes does happen in markets.  The point of this post is not to disparage what any of these economists have done.  Quite the contrary, it is to make the point that the Chicago v. Post-Chicago labels are being used in an a manner that is neither productive nor descriptive in a helpful way. 

Here are a few reasons why I think the distinction is not as useful as it once was and is generally counterproductive unless used carefully by the author.

Read the rest of this entry »

Posted in antitrust, economics, federal trade commission, law and economics, legal scholarship, markets, mergers & acquisitions, regulation, scholarship | 1 Comment »

The FTC Releases its Credit-Based Insurance Scores Report

Posted by Josh Wright on July 25, 2007

Available here.  Here are a few of the key findings of the study which examined the use of credit-based scores to determine automobile insurance rates:

  1. Scores effectively predict the number of claims consumers file and the total cost of those claims. Their use is likely to make the price of insurance better match the risk of loss that consumers pose. Thus, on average, as a result of the use of scores, higher-risk consumers pay higher premiums and lower-risk consumers pay lower premiums.
  2. Use of scores may result in benefits for consumers. For example, scores permit insurers to evaluate risk with greater accuracy, which may make them more willing to offer insurance to higher-risk consumers for whom they otherwise would not be able to determine an appropriate premium. Scores also may allow insurers to grant and price coverage more efficiently, producing cost savings that could result in lower premiums. Little empirical data was submitted or available to the FTC that would allow the agency to quantify the magnitude of these benefits.
  3. Scores are distributed differently among racial and ethnic groups, and these differences are likely to have an effect on the premiums that these groups pay, on average.
  4. As a proxy for race and ethnicity in statistical models of insurance, scores have a 1.1 percent and 0.7 percent effect for African-Americans and Hispanics, respectively. This means that most of their predictive power is not as a substitute for membership in racial or ethnic groups. In addition, scores effectively predict risk of claims within racial and ethnic groups.
  5. The Commission could not develop an alternative scoring model that would continue to predict risk effectively, yet decrease the differences in scores among racial and ethnic groups. The results of these efforts indicate that there is no readily available alternative scoring model that would achieve those results.

UPDATE: Luke Froeb (Vanderbilt and former Director of the Bureau of Economics at the Federal Trade Commission) offers some thoughts on the FACTA study at his new blog: Management R&D:

So even though credit scores help insurance companies price insurance more accurately, point 3 implies that some groups pay more, on average, than others. The policy issue behind the study is whether the government ought to ban the use of credit history for anything but making loans. As point 4 implies, banning the use of credit scores would result in higher prices for good drivers, regardless of their race or ethnicity.

Theory tells us that in states which ban the use of credit scores to price insurance (California and Massassachusetts) insurance companies would find it more costly to distinguish high from low risks, so they may lump them together (called “pooling”), and price insurance at the average risk. Or they may be concerned that only high risks would be willing to buy high-priced insurance (what economists call “adverse selection”) and price high or, if price controls prevent high prices, exit the market.

    Posted in business, economics, federal trade commission | Comments Off

    More Thoughts on Free Market Orthodoxy in Antitrust

    Posted by Josh Wright on July 16, 2007

    In my last post I claimed that there is a no “free market economics orthodoxy” amongst antitrust economists or those working in the field of law and economics. In response to the post, an anonymous TOTM reader emails the following related, and probably more interesting, questions: “is there a free market orthodoxy amongst (1) legal commentators and (2) the Supreme Court?”

    My answer to the first queston is “no.” There are a wide range of publication outlets for legal scholars in antitrust: general student-edited law reviews, the Antitrust Law Journal, Journal of Law and Economics, Competition Policy International, the Antitrust Bulletin, and others. It has been my experience that antitrust commentators publishing in these and other outlets are not predominantly “free market” types. These journals include doctrinal scholars, “Chicago School” oriented commentators, as well as those influenced heavily by Post-Chicago game theoretic models, and behavioral economics (though to a lesser extent thus far).

    The second question, I think, is much more difficult to answer. As a general matter, I think most antitrust scholars would like to see the Supreme Court engage more seriously with the economic literature. It is important to distinguish what I mean here by engaging more seriously with the economics. This does not mean that every case should involve a full-blown rule of reason analysis characterized by long and drawn out discovery and a battle of the experts. To the contrary, seriously engaging the economic literature might justify the application of per se rules when considering both (1) the probability that the conduct at issue is anticompetitive based upon the evidence; and (2) accounting for error and administrative costs. This is simply to make the point that “more serious economic analysis” might quite logically involve presumptions that markets do or do not work based on theory and evidence.

    But none of that really gets to the heart of the matter. I take a shot at answering the question below the fold.

    Read the rest of this entry »

    Posted in antitrust, economics, law and economics, markets, regulation | 1 Comment »

    How Rough Do Dissenters From "Free Market Economics" Have It Anyway?

    Posted by Josh Wright on July 12, 2007

    There are some good posts from several fine economists in the blogosphere responding to this NY Times article suggesting that the majority of economists are “free market” ideologues and those who dissent from laissez-faire dogma are sanctioned by their peers. All are excellent posts worth reading in their entirety and take on various problems with the NY Times caricature of the economics profession. Here are a few highlights followed by some of my own thoughts about the “dissenters” in the fields I am most familiar with: antitrust economics and law & economics.

    Greg Mankiw at Mankiw’s Blog:

    Many economists in the past have questioned “free-market orthodoxy”–for example, Samuelson, Tobin, Modigliani, Solow, Sen, Stiglitz, Akerlof, Phelps,…. Does the economics profession consider these guys “deluded or crazy?” No, we give them Nobel Prizes! Maybe it’s because I have spent my education and career at Princeton, MIT, and Harvard, rather than Chicago, but I have never viewed the economics profession as being dominated by free-market orthodoxy.

    Don Boudreaux at Cafe Hayek:

    I would say that I have no “faith” in free trade; rather, the evidence and the theory of free trade are powerful enough to convince me that it is practically superior to any form of protectionism if the goal is widespread prosperity. Faith is required when neither evidence nor theory support whatever proposition you choose to (or happen to) believe. Even if Rodrik is correct about the errors and oversights of traditional trade theory and evidence, it is an unjustified smear to say that those who accept these as the basis for supporting a policy of free trade do so as a matter of “faith.”

    Boudreaux goes on to ask whether any of the economists who believe that protectionism leads to economic prosperity would also support intra-national protectionism.

    Alex Tabarrok at Marginal Revolution points out that survey evidence suggests that “only a small percentage of AEA members ought to be called supporters of free-market principles” and opens his post with the following observations:

    It beggars belief when economists at Princeton, Harvard and Berkeley claim that they are lone voices in the wilderness boldly striking heterodox positions against the hegemony of “free market economics.”

    David Card, for example, says “You lose your ticket as a certified economist if you don’t say any kind of price regulation is bad and free trade is good.” Really? Card and Krueger’s famous paper on the minimum wage was a 1993 NBER working paper published in the AER in 1994. What happened then in 1995? Was Card decertified, drummed out of the profession, vilified by his peers? Hardly, in 1995 David Card was honored (deservedly imho) by the American Economic Association with the John Bates Clark medal.

    I find these observations consistent with my experience in the antitrust branch of industrial organization economics where top journal publications are in large part reserved for theoretical models demonstrating the possibility that some conduct might be inefficient or result in market failure under some set of (usually fairly stylized) conditions. As a colleague of mine once warned: “nobody gets tenure for demonstrating that markets really work.” At the end of the day, I highly doubt that any “interventionist leaning” antitrust economists are looking over their shoulder in fear of the AEA taking back their membership.

    While I am not prepared to back the statement with evidence, casual empiricism suggests to me that free market economic principles do not dominate the “law and economics” world either. A look at the ALEA program for the last 5 or so years would probably confirm this suspicion. For example, I don’t believe any law school L&E types would be willing to support the position that those relying on behavioral L&E insights to argue in favor of various intervention proposals have suffered on the job market, in law reviews or peer-reviewed journals, or amongst their peers in recent years. Perhaps I’m wrong about this. If you think I’ve underestimated the plight of the dissenters in the L&E world in particular, I’d love to hear about it in the comments.

    Posted in antitrust, economics, law and economics, law school, legal scholarship, markets, regulation, scholarship | 4 Comments »

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