Truth on the Market

Academic commentary on law, business, economics and more

Archive for January, 2008

Free to Choose (and Market) Clone-Free

Posted by Thom Lambert on January 31, 2008

The FDA has determined that milk and meat from some cloned animals (cattle, swine, and goats) is safe to eat. It has therefore lifted a moratorium on such products. But don’t expect to see milk and meat from cloned animals in your local grocery store. Cloning is incredibly expensive, so cloned animals would almost certainly never be slaughtered or used for milking. Instead, they’d be used for breeding. The idea is that we’d use cloning to create exact reproductions of animals with superior qualities, and we’d then breed those cloned specimens to generate superior offspring.

Not surprisingly, lots of folks are aghast over the FDA’s decision. Animal cloning is novel and high-tech, so those who would prefer a back-to-nature approach to food production oppose it on that ground alone. Others invoke the so-called precautionary principle — a “better safe than sorry” stance — and insist that we should avoid the technology in light of its unknown risks. Still others argue that even if cloned animal products are safe to consume, the process of cloning may harm animals, and cloned food should thus be banned on animal welfare grounds.

Fortunately, the FDA rejected all these positions. With respect to the back-to-nature folks, the FDA noted that cloning “falls on a continuum of ARTs [assisted reproductive technologies] that includes artificial insemination, in vitro fertilization, embryo transfer, and embryo splitting. All of these technologies are tools that have allowed farmers to accelerate the propagation of genetically superior animals to provide the public with meat and milk that is safe, wholesome, and of consistent quality.” Thus, the position of the neo-Luddites has already been rejected and would, if accepted, diminish food quality and raise food prices, to the detriment of all–particularly the poor.

With respect to the precautionary principle, the FDA, like most American (but not European) regulatory agencies, has rejected it in favor of some version of cost-benefit balancing. That’s a good move, for it accounts for the fact that foregoing a new technology that could enhance social welfare (e.g., could give us more and better food at lower cost) is itself risky/harmful. A principle forbidding all activities that might cause harm literally forbids everything, for the act of banning an activity, just like the activity itself, might cause some harm. Thus, as Cass Sunstein argues, “The most serious problem with the precautionary principle is that it offers no guidance–not that it is wrong, but that it forbids all courses of action, including inaction.” The FDA therefore wisely chose to forego the precautionary principle and instead compare the likely costs and benefits of permitting cloned food products.

With respect to animal welfare, the FDA acknowledged that cloning enhances some animal risks such as “large offspring syndrome,” but it decided that the magnitude of those risks (which exist to a lesser degree with other assisted reproductive technologies) does not justify banning the procedure. If one is willing to concede that animals may be exploited to feed humans (as all meat-eaters and milk-drinkers must), and if the incidence of cloning-related health problems is small (as it appears to be), then this seems like a sensible decision.

Thus, I’m confident the FDA made the right decision in allowing the sale of milk and meat from cloned animals.

But guess what…not everyone shares my values. Some people have a lower tolerance for risk than I. Many are less price-sensitive (I’m pretty darn cheap at the grocery store!). Others are more concerned about animal welfare. Those people ought to be free to choose clone-free food products — that is, products that are not made from cloned animals or their offspring.

Unfettered markets, of course, can and will accommodate the preferences of people who would prefer — for whatever reason — to avoid cloned animals and their progeny. As long as a substantial number of people would prefer to stay clone-free, enterprising food sellers will respond to their desires by offering food products that include no parts or products of cloned animals or their offspring. That’s one of the many beauties of free markets: they, far better than centralized planners, can accommodate heterogeneous preferences.

But this assumes sellers will be free to market their products as clone-free. Here, they may run into some problems. Business interests that would like to develop cloning technologies and/or to market products from cloned animals and their offspring do not want to lose business to sellers of clone-free products. Those with an interest in cloning technologies may therefore seek to erect regulatory barriers that would make it difficult to market clone-free foods.

They might take a page from the playbook of Monsanto, which pushed for and attained an FDA industry guidance that makes it exceedingly difficult for sellers of non-genetically modified foods to label their products as such. Under the FDA’s guidance, sellers of non-GM foods are forced to label their products as though they were playing the boardgame Taboo. In that game, players provide clues to get their partners to identify a word but, in doing so, are forbidden to say any of the words one would most naturally say in conveying clues. When it comes to labeling non-GM foods, the FDA has made the following terms “taboo”:

Acronyms such as “GM” and “GMO” (according to FDA, saying something is “non-GM” or “non-GMO” is misleading because people don’t understand these acronyms);

The term “genetically modified” (according to FDA, saying that a non-gene-transferred organism is not genetically modified is misleading because nearly all foods have been genetically modified through cross-breeding);

References to “organisms” or “GMOs” (according to FDA, a food label touting the absence of GMOs is misleading because it implies that foods which are not GMO-free contain “organisms”–that is, living things);

Claims to be GMO “free” (according to FDA, a claim that a product is GM “free” implies a complete absence of GM material, and it’s very difficult to ensure that there are no trace amounts of GM material in a food item);

Any implication of superiority (according to FDA, any label that implies that the food product is superior because it lacks GM material misleadingly implies that non-GM is superior).

Who could possibly navigate this minefield, especially with the last “taboo”?! Since the only purpose for indicating that a food has no GM ingredients it to appeal to shoppers who believe, for one reason or another, that non-GM foods are superior, this last taboo effectively prohibits any mention of the absence of bioengineered ingredients unless the label also contains a detailed disclaimer indicating that the absence of GM ingredients is actually irrelevant. No marketer is going to use that sort of label.

Because of this stupid, industry-sponsored rule, the most obvious means of accommodating the preferences of GM-opposing and GM-preferring/neutral consumers — voluntary negative labeling of non-GM products — has never really taken off. It’s no big deal to me personally because I’m more than happy to consume GM products. I do, though, recognize that others don’t think the way I do, and I respect their desire to opt for non-GM products. Similarly, I’m fine with consuming milk and meat from cloned critters and their offspring, especially if it’s cheaper and better. At the same time, I don’t want to force my own preferences on others. If the regulators stay their hand this time and allow markets to respond to consumer preferences, we can end up with a world in which I get my cheap tasty clone meat and my back-to-nature (or more risk-averse, or less price-sensitive, or more animal welfare-respecting) friends are able to buy the foods they want. We all win if we stay free to choose.

[For more on the FDA's stupid GM-labeling guidance, see Philip G. Peters and Thomas A. Lambert, Regulatory Barriers to Consumer Information about Genetically Modified Foods, in Labeling Genetically Modified Food: The Philosophical and Legal Debate (Paul Weirich, ed.) (Oxford Press 2007).]

Posted in markets, regulation, technology | 1 Comment »

Amateurism Is What We Do!

Posted by Paul Gift on January 30, 2008

Yesterday, the NCAA settled a horizontal price fixing class action case initiated by former basketball and football players (here, here, and here).  It’s nice to see the student-athletes get something, but I wish they would have received more.  The suit deals with the difference between the NCAA’s grant-in-aid (GIA) cap and the full cost of attendance (whether they were secretly trying to include the opportunity cost of attendance in their damages, I do not know).  The settlement provides $10 million over three years to cover former student-athletes’ “bona fide educational expenses” over the GIA cap and $218 million through 2012-2013 to “use the available funds for such aid to student-athletes with demonstrated financial and/or academic needs, and to include such assistance in their reports to the NCAA describing their uses of these funds.  Consistent with current practice, those reports will not be disclosed outside the NCAA.”  It will be interesting to see what exactly the latter means.

In my opinion, the NCAA has been one of the most blatant cartels in recent history, and I tend to be pretty free-market.  Colluding to lower an input’s wage is just as anti-competitive as colluding to raise the price of outputs like vitamins or lysine.  When you here NCAA President Miles Brand speak about it, you get the same ”Amateurism is what we do” quote (quoting from memory) over and over again.  I bet those vitamin and lysine guys wish they could have had a catch-phrase like that to help keep the law off their backs.

The collusion was so bad that student-athletes weren’t, at a minimum, having their full expenses covered.  It made the lame Reggie Bush story headline news (and I went to UCLA).  And then there’s this part of the settlement:

“Conditioned upon final approval of this Settlement, the NCAA Division I Board of Directors has approved adoption of a rule permitting, but not requiring, Division I member schools to provide year round, comprehensive health insurance to student-athletes.”

I’ll leave that one to the reader.  In summary, I’m happy today but I wish I could be happier.

Posted in Uncategorized | Comments Off

ABA Antitrust Law Fellowship Award

Posted by Josh Wright on January 30, 2008

The ABA has announced a Fellowship Award for $5,000 and travel expenses for unpaid summer employment “within approved government agencies (federal, state, or international) dedicated to the enforcement of antitrust laws, or other institutions whose primary mission is to advance the study of antitrust and competition law.”  The application packet is availabe here, and lists certain institutions that pre-qualify.

This sounds like a great opportunity for a 1L or 2L who is interested in antitrust and competition policy.  The application deadline is March 28th.

Posted in announcements, antitrust, law school | Comments Off

Abramowicz on Prediction Markets at the VC

Posted by Josh Wright on January 29, 2008

GW Lawprof Michael Abramowicz is guest blogging over at the Volokh Conspiracy on the virtues of prediction markets and his new book: Predictocracy.

Posted in announcements, blogging, legal scholarship, markets, technology | Comments Off

Ribstein on Unincorporated Firms

Posted by Josh Wright on January 27, 2008

Motivated by a slate of forthcoming articles, books, and various projects involving unincorporated firms, Professor Ribstein has announced his plans to begin blogging more extensively about partnership, LLCs and agency issues over at Ideoblog. This is good news to anybody interested in issues of business law and finance more generally. Two early installments in this endeavor are already up here and here. With all of Professor Ribstein’s upcoming projects, I was a bit concerned that the cost of these increased efforts might be less time dedicated to exposing the hand waving economic illiteracy of Ben Stein in the NY Times. I guess I don’t have to worry about that.

Posted in blogging, business, corporate law | Comments Off

Antitrust (Over-?)Confidence

Posted by Josh Wright on January 25, 2008

Thom was recently invited to draft a critical response to a symposium at the Institute for Consumer Antitrust Studies on the future of single firm conduct.  The transcript from the Roundtable Discussion is available on SSRN.  Thom graciously asked me to join him in drafting a short critical piece to the symposium. It is difficult to respond to an entire symposium in under 20 pages, and we are quite sure we were not able to get to it all of it. We did our best to hit the highlights and central themes of the conversation and contrast the generally pro-interventionist views expressed by the conference panelists with our more skeptical views about the proper scope of the antitrust enterprise in our modern economy. With that said, Antitrust (Over-?)Confidence is now available on SSRN. It will be published in the Loyola Consumer Law Review. Here is the abstract:

On October 5, 2007, a group of antitrust scholars convened on Chicago’s Near North Side to discuss monopolization law. In the course of their freewheeling but fascinating conversation, a number of broad themes emerged. Those themes can best be understood in contrast to a body of antitrust scholarship that was born six miles to the south, at the University of Chicago. Most notably, the North Side discussants demonstrate a hearty confidence in the antitrust enterprise-a confidence that is not shared by Chicago School scholars, who generally advocate a more modest antitrust. As scholars who are more sympathetic to Chicago School views, we are somewhat skeptical. While we applaud many the of the insights and inquiries raised during the conversation, and certainly this sort of discussion in general, our task in this article is to draft a critical analysis of the October 5 conversation. In particular, we critique the North Side discussants’ vision of a big antitrust that would place equal emphasis on Sections 1 and 2 of the Sherman Act and would expand private enforcement of Section 2.

Download it.

Posted in announcements, antitrust, legal scholarship, regulation, SSRN | Comments Off

More on Liberals, Conservatives and Elasticities

Posted by Robert Miller on January 24, 2008

I want to respond to some of the comments on my blog regarding whether part of the ideological difference between liberals and conservatives can be explained by their differing estimations of the elasticity of various curves.

First, Thom reminds us of Posner’s idea that the difference between liberals and conservatives is that liberals think that people are selfless but stupid whereas conservatives think that people selfish but smart. This idea is closely related to the one I proposed. For, if people are selfish but smart, then when the price of something rises, they will take note, seek out substitutes, and adjust their behavior accordingly—and hence the demand curve will be elastic. On the other hand, if people are selfless but stupid, when the price of something rises, either they will not notice or else they will be insufficiently self-interested to substitute other products; either way, they pay the higher price, and so the demand curve will be inelastic. Posner’s account, if true, thus plausibly explains why liberals and conservatives would systematically disagree about elasticities.

Second, the liberal-conservative divide over whether a requirement to show identification will discourage many people from voting may well be independent of questions of the elasticity of demand for voting. For example, suppose that, as liberals seem to think, the demand curve here is highly elastic (e.g., say elasticity of 2.0), but that, as the conservatives seem to think, the increase in cost to voters will actually be quite small, say .01%. Then the law requiring voters to show identification would reduce voter turnout by only .02%, i.e., one voter in 5,000. A conservative could then say that this was a reasonable price for us as a society to pay in order to deter vote fraud. I have no idea what the actual numbers are, but it would seem to make sense to lose one legitimate vote in 5,000 in order to preempt, say, one fraudulent vote in 4,000. Even if the percentage of fraudulent votes was less than the percentage of votes lost through the identification system, the gain from people being more confident in the system might make checking identification worthwhile. The defining difference between liberals and conservatives here may thus relate not to elasticities but to the perceived increase in the cost of voting on a percent basis.

Lest anyone be scandalized by the idea that it could be worthwhile to let some legitimate votes be lost, let’s remember that any system at the polling place that limits who can vote, including the present vote, deters some people from voting. It’s only a question of how many lost votes we think acceptable in this context.

Third, I agree with the many readers who said that any explanation of the difference between liberals and conservatives in terms of disagreements about elasticities is partial at best. It explains nothing, for example, about differing attitudes concerning, say, abortion. Differences on life issues, I think, go to differences on fundamental meta-ethical premises. Here, conservatives tend to think that morality is, in some sense, based on a human nature that is shared by all members of the biological species homo sapiens. Since human fetuses or embryos are members of that species as much as anyone else is, they are generally entitled to the same moral protections as anyone else. Liberals, on the other hand, tend to think that morality is, in some sense, based not on human nature per se but on the human capacity for, say, higher mental functions. Hence, members of the human species that are incapable of such functions (e.g., the very young, the severely disabled, etc.) are not generally entitled to the same moral protections that healthy adult human beings are. If some account along these lines is right, then the philosophical differences between liberals and conservatives run very deep indeed.

Posted in law and economics, politics | 2 Comments »

Conference Announcement: Merger Analysis in High Technology Markets at GMU

Posted by Josh Wright on January 18, 2008

I am very pleased to announce the “Merger Analysis in High Technology Markets” on behalf of my colleague Tom Hazlett, myself, and the Information Economy Project of the National Center for Technology and Law. The conference will be held at George Mason University School of Law on February 1, 2008 from 8:15 am-2:30 pm. Below is the conference agenda and information about attending. We hope to see you there!

INFORMATION ECONOMY PROJECT
THOMAS W. HAZLETT, DIRECTOR
DREW CLARK, ASSOCIATE DIRECTOR
JOSHUA D. WRIGHT, CONFERENCE ORGANIZER

 

MERGER ANALYSIS IN HIGH TECHNOLOGY MARKETS

HAZEL HALL * GMU SCHOOL OF LAW * ROOM 121

8:15 WELCOME * THOMAS HAZLETT (GMU)

8:20 MORNING KEYNOTE

8:45 PANEL 1 * MODERATOR: KEN HEYER (DOJ)

HOWARD SHELANSKI (UC BERKELEY)
TECHNOLOGICAL INNOVATION AND MERGER POLICY’S THIRD ERA

MICHAEL BAYE (FTC)
MARKET DEFINITION IN ONLINE MARKETS

RICHARD GILBERT (UC BERKELEY)
SKY WARS: THE ATTEMPTED MERGER OF DISH/ DIRECTV

10:00 BREAK

10:15 PANEL 2 * MODERATOR: MICHAEL VITA (FTC)

HAL SINGER (CRITERION) & ROBERT HAHN (AEI)
AN ANTITRUST ANALYSIS OF GOOGLE’S PROPOSED ACQUISITION OF DOUBLECLICK

MARY COLEMAN (LECG)

NICE THEORY BUT WHERE’S THE EVIDENCE?:
THE
USE OF ECONOMIC EVIDENCE TO EVALUATE VERTICAL AND CONGLOMERATE MERGERS IN THE US AND EU

LUKE FROEB (VANDERBILT)

MERGERS AMONG FIRMS THAT LICENSE COMMON INTELLECTUAL PROPERTY

11:30 BREAK

11:45 PANEL 3*MODERATOR: JONATHAN BAKER (AMERICAN)

BRUCE ABRAMSON (CRAI)

ARE “ONLINE MARKETS” REAL AND RELEVANT?

THOMAS HAZLETT (GMU)

ANTITRUST IN ORBIT: SOME DYNAMICS OF HORIZONTAL MERGER ANALYSIS IN THE CASE OF XM-SIRIUS

J. GREG SIDAK (GEORGETOWN)

EVALUATING MARKET POWER WITH TWO-SIDED DEMAND AND PREEMPTIVE OFFERS TO DISSIPATE MONOPOLY RENT: LESSONS FOR HIGH-TECHNOLOGY INDUSTRIES FROM THE PROPOSED MERGER OF XM AND SIRIUS SATELLITE RADIO MERGER

1:00 LUNCH

LUNCH KEYNOTE

2:30 ADJOURN

VENUE: The George Mason University School of Law, Hazel Hall, 3301 Fairfax Drive, Arlington, VA 22201 (near the Virginia Square-GMU Metro — Orange Line). Admission is free, but seating is limited. To reserve your spot, please email Drew Clark: iep.gmu@gmail.com. Parking (at market rates) is available in the GMU Foundation Bldg., 3434 Washington Boulevard. An Arlington campus map is found here: http://www.gmu.edu/departments/infoservices/ArlingtonMap07.pdf.

Posted in announcements, antitrust, economics, mergers & acquisitions, technology | Comments Off

Two on SCOTUS Antitrust Cases

Posted by Josh Wright on January 18, 2008

Courtesy of Larry Solum’s Legal Theory Blog, the following two papers have been posted on SSRN and may be of interest to our readers. First is Keith Hylton’s analysis of the Weyerhaueser decision, Weyerhaeuser, Predatory Bidding, and Error Costs.  Here is the abstract:

In Weyerhaeuser v. Ross-Simmons the Supreme Court held that the predatory pricing standard adopted in Brooke Group also applies to predatory bidding claims, because the two types of predation are “analytically similar”. I argue that predatory bidding is likely to be more harmful to consumer welfare than is predatory pricing. Successful input market predation may lead to a “dual market power” outcome in which the firm has market power in both the input and the output market. In spite of the analytical distinction, consideration of error costs leads me to conclude that Brooke Group remains the best standard to apply to predatory bidding claims.

Also, my GMU colleague Bruce Kobayashi has posted Spilled Ink or Economic Progress? The Supreme Court’s Decision in Illinois Tool Works vs. Independent Ink.  Kobayashi argues that while the rejection of the presumption market power is a positive step:

“the Court’s decision may be limited by the flawed and outdated modified per se rule used to evaluate tying arrangements generally. Moreover, while the Court undermined the underlying rationale for the modified per se rule against tying, it chose not to revisit this issue. In addition, while the Court’s opinion implicitly adopts a robust standard for market power, it failed to address its contradictory holding in Kodak v. ITS, its most recent decision evaluating a tying arrangement.”

Professor Kobayashi’s analysis is spot on and he joins a number of commentators, including myself in this Cato Supreme Court Review article, who have characterized Independent Ink as a decision that moves antitrust doctrine in the right direction but also as plagued by missed opportunities.  In my analysis, I focus on the missed opportunity to clarify the status of competitive price discrimination in antitrust analysis.  I argue that the failure to reject the view that price discrimination implies antitrust relevant market power

“is costly because it deters competitive price discrimination, which despite widely perpetuated economic myths, is not generally associated with consumer welfare losses and may benefit all consumers. While antitrust law has come a long way in terms of economic sophistication, the persistent association of anticompetitive inferences with an inherently competitive practice is evidence that it has not yet fully incorporated fundamental lessons from the economic literature.”

Professor Kobayashi explores different “missed opportunities” in the Court’s Independent Ink decision.  Specifically, he rightfully criticizes the failure of the Court to revisit its last, and highly controversial, tying decision in Kodak.

Both of these papers look very interesting and apply an error-cost framework to understand appropriate rules for predatory bidding and tying.  Both are worth reading.

Posted in antitrust, economics, legal scholarship, scholarship, SSRN | Comments Off

Does Interdisciplinary Education in Law Schools Work?

Posted by Josh Wright on January 17, 2008

The value of interdisciplinary legal education is coming up once again. This time, Brian Tamahana argues that the interdisciplinary movement is a bad idea:

the notion that interdisciplinary studies within law schools promises to improve the practice of law is an old idea backed up by little evidence. Non-elite law schools might not be serving their students well if they get caught up in this trend.

Tamahana’s argument is largely empirical: “there is no evidence that it will make their students better lawyers.” He also argues that such a move may not be cost-effective for non-elite law schools and that students might suffer if they are taught in by an increasing fraction of JD/PhDs with little or no practice experience. There has been plently of blog commentary on this issue (see, e.g., Dan Solove, Ethan Leib, and some very interesting comments at Brian Leiter’s Law School Reports). Predictably, as one of those JD/PhDs with little practice experience teaching at a school that prides itself on interdisciplinary legal education, I tend to believe there is considerable value in interdisciplinary education — especially economics.

But I don’t want to turn this into a general defense of law and economics. Nor do I want to spend any time with the second and third aspects of Tamahana’s arguments. The commentary from Solove and others covers those issues. But what about the empirical question? Is there any evidence that such education will make students better lawyers?

What about this study from Craft & Baker (2003) in the Journal of Economic Education that we blogged about awhile back? The most pertinent finding is that undergraduate education in economics lead to higher earnings as a lawyer. I suspect that the level of interdisciplinary education in law school is similar to the subject matter that one would learn in an undergraduate program. Here’s the abstract:

Using nationally representative data, the authors examine the effects of preprofessional education on the earnings of lawyers. They specify and estimate a statistical earnings function on the basis of well-established theory and principles. Along with standard control variables, categorical variables are included to represent graduate degrees in addition to the law degree and an assortment of undergraduate major fields. Holding a Ph.D. or M.B.A. degree, with the law degree, is associated with significantly higher earnings in some sectors. Lawyers with undergraduate training in economics earn more than other lawyers, ceteris paribus, and economics is the only undergraduate field associated with earnings that differ significantly. The available evidence supports the hypothesis that economics training increases a lawyer’s human capital compared with other undergraduate majors.

Apparently, at least some employers tend to believe that there is something value in this type of education for lawyers. That’s certainly a start to answering Tamahana’s empirical challenge. Of course, there are some obvious concerns with endogeneity and selection effects here (which the authors discuss at 278-279 at the link above). But the most interesting result appears to be that neither undergraduates in other majors with high average LSATs or other majors with similar content (business, accounting) generate the same increase in lawyer earnings. The authors properly and cautiously conclude with some reservatation about whether they have identified a causal relationship here:

Although firm conclusions cannot be drawn from this analysis, the available evidence suggests that the effect of an economics bachelor’s degree on the earnings of lawyers results from more than simply self-selection effects. Hence, it appears that the development of additional human capital may be playing some role.

I’m certainly not arguing that the study is dispositive of a link between economics education and quality of legal education in terms of producing value. And perhaps there is something different about undergraduate education in economics and integrating in economics to the general legal curriculum. Though I doubt any differences in that vein are really significant to the debate here. The question of what exactly produces value in the legal education process is an incredibly important one. But if this evidence cuts in any direction, it is that economics education does indeed tend to make students better lawyers.  If further study was to support this finding, perhaps it would suggest that the more important question for legal education is not whether interdisciplinary education makes for better lawyers, but what types of programs improve legal education under what conditions?

Posted in economics, law and economics, law school, universities | 6 Comments »

 
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