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Holdup Problem, Airline Edition

Posted by Josh Wright on November 18, 2011

Economists are all quite familiar with the “holdup problem,” i.e. one contracting partner exploiting the other after asset specific investments have been made.  One classic law school textbook example is Alaska Packers v. Domenico in which the Alaska Packers’ Association hired Domenico for the salmon season for $50 plus 2 cents per salmon caught, but after leaving the dock and arriving in Alaskan waters for the short salmon season, the workers demanded an increase in their pay.  The defendant agreed, but upon return to San Francisco, refused to pay.  The seaman sued and lost on the theory that the exchange did not involve fresh consideration.  This, Judge Posner has argued, was the right economic result on the grounds that it discourages holdup.  Many of our readers will also be familiar with the famous Fisher Body / GM example of vertical integration solving the holdup problem, and the subsequent debate between Benjamin Klein and Ronald Coase over that particular example.

Now comes another example of the holdup problem at work.  In fact, it is difficult to imagine a better example.  Apparently, half way through a flight from India to Birmingham, England, an airline took advantage of the asset specific investments made by its passengers to alter the terms of the deal:

Passengers aboard two chartered jetliners from India to Britain were hit up for about $200 each, in cash, to continue their trip this week in what one flier compared to a hostage situation.  The charter company, Austria-based Comtel Air, and the Spanish company that owns the planes pointed fingers at each other over the situation Thursday. But Lal Dadrah, a passenger on one of the flights who recorded the crew passing the hat, called the situation “a complete, utter sham.”

Comtel Air passengers on a Tuesday flight to Birmingham, England, from the Indian city of Amritsar were hit up for 130 pounds — about $200 each — during a layover in Vienna. They were allowed off the aircraft to take the money from teller machines, a process that took about seven hours. There were varying accounts of what the money was to pay for, ranging from fuel to fees.

The NY Times story provides a few more details:

Britain’s Channel 4 news broadcast video showing a Comtel cabin crew member telling passengers: “We need some money to pay the fuel, to pay the airport, to pay everything we need. If you want to go to Birmingham, you have to pay.”

Some passengers said they were sent off the plane to cash machines in Vienna to raise the money.

“We all got together, took our money out of purses — 130 pounds ($205),” said Reena Rindi, who was aboard with her daughter. “Children under two went free, my little one went free because she’s under two. If we didn’t have the money, they were making us go one by one outside, in Vienna, to get the cash out.”

The economics don’t stop there.  There is potential for an agency problem as well:

Bhupinder Kandra, the airline’s majority shareholder, told the Associated Press from Vienna that travel agents had taken the passengers’ money before the planes left but had not passed it on to the airline.  “This is not my problem,” he said. “The problem is with the agents.”

A great example for the classroom.

 

Posted in contracts | 2 Comments »

Law Review Publishing Norms and Inefficient Performance

Posted by Thom Lambert on October 20, 2011

One of my colleagues recently accepted a publication offer on a law review article, only to receive a later publication offer from a much more prestigious journal.  This sort of occurrence is not uncommon in the legal academy, where scholars submitting articles for publication do not offer to publish their work in a journal but rather solicit publication offers from journals (and generally solicit multiple offers at the same time).  One may easily accept an inferior journal’s offer before receiving another from a preferred journal. 

I’ve been in my colleague’s unfortunate position three times: once when I was trying to become a professor, once during my first semester of teaching, and once in the semester before I went up for tenure.  Each time, breaching my initial publication contract and accepting the later-received offer from the more prestigious journal would have benefited me by an amount far greater than the harm caused to the jilted journal.  Accordingly, the welfare-maximizing outcome would have been for me to breach my initial publication agreement and to pay the put-upon journal an amount equal to the damage caused by my breach.  Such a move would have been Pareto-improving:  I would have been better off, and the original publisher, the breach “victim,” would have been as well off as before I breached.  

As all first-year law students learn (or should learn!), the law of contracts is loaded with doctrines designed to encourage efficient breach and discourage inefficient performance.  Most notable among these is the rule precluding punitive damages for breach of contract:  If a breaching party were required to pay such damages, in addition to the so-called “expectancy” damages necessary to compensate the breach victim for her loss, then promisors contemplating breach might perform even though doing so would cost more than the value of the performance to the promisee.  Such performance would be wasteful.

So why didn’t I — a contracts professor who knows that a promisor’s contract duty is always disjunctive: “perform or pay” — breach my initial publication agreements and offer the jilted journal editors some amount of settlement (say, $1,000 for an epic staff party — an amount far less than the incremental value to me of going with the higher-ranked journal)?  Because of a silly social norm frowning upon such conduct as indicative of a flawed character.  When I was looking for a teaching job, I was informed that breaching a publication agreement is a definite no-no and might impair my job prospects.  After I became a professor, I learned that members of my faculty had threatened to vote against the tenure of professors who breached publication agreements.  To be fair, I’m not sure those faculty members would do so if the breaching professor compensated the jilted journal, effectively “buying himself out” of his contract.  But who would run that risk?

So I empathize with my colleague who now feels stuck publishing in the less prestigious journal.  And, while I recognize the difference between a legal and moral obligation, I would commend the following wise words to those law professors who would imbue law review publishing contracts with “mystic significance”:

Nowhere is the confusion between legal and moral ideas more manifest than in the law of contract.  Among other things, here again the so-called primary rights and duties are invested with a mystic significance beyond what can be assigned and explained.  The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it — and nothing else.  If you commit a tort, you are liable to pay a compensatory sum.  If you commit a contract, you are liable to pay a compensatory sum unless the promised event comes to pass, and that is all the difference.  But such a mode of looking at the matter stinks in the nostrils of those who think it advantageous to get as much ethics into the law as they can.

Oliver Wendell Holmes, Jr., The Path of the Law, 10 Harv. L. Rev. 457 (1897).  

Posted in contracts, law school, musings | 2 Comments »

Law as a Byproduct in Munich

Posted by Larry Ribstein on October 7, 2011

I’m off to the International conference on “Regulatory Competition in Contract Law and Dispute Resolution” at Ludwig-Maximilians-University’s Center for Advanced Studies in Munich.  I’m joining an otherwise illustrious group (here’s the program) to present my and Kobayashi’s Law as a Byproduct.

Blogging may be light for the next week (but eating and drinking may be heavy). Tips on what I must see and do in Munich would be appreciated.

Posted in contracts, Jurisdictional competition, lawyers | 1 Comment »

Natural Disasters and Payday Lending

Posted by Josh Wright on August 28, 2011

There has been plenty of Hurricane Irene blogging, and some posts linking natural disasters to various aspects of law and policy (see, e.g. my colleague Ilya Somin discussing property rights and falling trees).   Often, post-natural disaster economic discussion at TOTM turns to the perverse consequences of price gouging laws.  This time around, the damage from the hurricane got me thinking about the issue of availability of credit.  In policy debates in and around the new CFPB and its likely agenda — which is often reported to include restrictions on payday lending — I often take up the unpopular (at least in the rooms in which these debates often occur) position that while payday lenders can abuse consumers, one should think very carefully about incentives before going about restricting access to any form of consumer credit.  In the case of payday lending, for example, proponents of restrictions or outright bans generally have in mind a counterfactual world in which consumers who are choosing payday loans are simply “missing out” on other forms of credit with superior terms.  Often, proponents of this position rely upon a theory involving particular behavioral biases of at least some substantial fraction of borrowers who, for example, over estimate their future ability to pay off the loan.  Skeptics of government-imposed restrictions on access to consumer credit (whether it be credit cards or payday lending) often argue that such restrictions do not change the underlying demand for consumer credit.  Consumer demand for credit — whether for consumption smoothing purposes or in response to a natural disaster or personal income “shock” or another reason — is an important lubricant for economic growth.  Restrictions do not reduce this demand at all — in fact, critics of these restrictions point out, consumers are likely to switch to the closest substitute forms of credit available to them if access to one source is foreclosed.  Of course, these stories are not necessarily mutually exclusive: that is, some payday loan customers might irrationally use payday lending while better options are available while at the same time, it is the best source of credit available to other customers.

In any event, one important testable implication for the economic theories of payday lending relied upon by critics of such restrictions (including myself) is that restrictions on their use will have a negative impact on access to credit for payday lending customers (i.e. they will not be able to simply turn to better sources of credit).  While most critics of government restrictions on access to consumer credit appear to recognize the potential for abuse and favor disclosure regimes and significant efforts to police and punish fraud, the idea that payday loans might generate serious economic benefits for society often appears repugnant to supporters.  All of this takes me to an excellent paper that lies at the intersection of these two issues: natural disasters and the economic effects of restrictions on payday lending.  The paper is Adair Morse’s Payday Lenders: Heroes or Villians.    From the abstract:

I ask whether access to high-interest credit (payday loans) exacerbates or mitigates individual financial distress. Using natural disasters as an exogenous shock, I apply a propensity score matched, triple difference specification to identify a causal relationship between access-to-credit and welfare. I find that California foreclosures increase by 4.5 units per 1,000 homes in the year after a natural disaster, but the existence of payday lenders mitigates 1.0-1.3 of these foreclosures. In a placebo test for natural disasters covered by homeowner insurance, I find no payday lending mitigation effect. Lenders also mitigate larcenies, but have no effect on burglaries or vehicle thefts. My methodology demonstrates that my results apply to ordinary personal emergencies, with the caveat that not all payday loan customers borrow for emergencies.

To be sure, there are other papers with different designs that identify economic benefits from payday lending and other otherwise “disfavored” credit products.  Similarly, there papers out there that use different data and a variety of research designs and identify social harms from payday lending (see here for links to a handful, and here for a recent attempt).  A literature survey is available here.  Nonetheless, Morse’s results remind me that consumer credit institutions — even non-traditional ones — can generate serious economic benefits in times of need and policy analysts must be careful in evaluating and weighing those benefits against potential costs when thinking about and designing restrictions that will change incentives in consumer credit markets.

Posted in behavioral economics, behavioral economics, consumer financial protection bureau, consumer protection, contracts, cost-benefit analysis, credit cards, economics, regulation | 2 Comments »

Unconscionability for corporate law

Posted by Larry Ribstein on February 17, 2011

So you thought unconscionability was for furniture stores?  Larry Cunningham has news for you:

This Article explains why and how traditional contract law’s theory of unconscionability should be used to create a modicum of judicial scrutiny to strike obnoxious pay contracts and preserve legitimate ones. Under this proposal, pay contracts that are the product of managerial domination of the process and formed on terms massively favoring the executive will be stricken. This will follow direct shareholder lawsuits in state courts where the contract is made or performed and applying that state’s contract law. This new legal theory circumvents today’s dead-end route, where pay contracts are always upheld in derivative shareholder lawsuits applying corporate law that sets no meaningful limits on executive pay. This proposal creates new but modest pressure from sister states on Delaware to take greater responsibility for the effects its production of corporate law has nationally.

For those outraged by lopsided corporate executive compensation, this Article offers an appealing new legal theory of contractual unconscionability to police them. Those who see no or few problems with contemporary pay arrangements, or who are outraged by federal regulatory schemes like the Dodd-Frank Act, will welcome how this proposal is narrowly tailored using common law to address the most obnoxious cases.

The article, among other things, would take the executive pay issue out of the internal affairs doctrine and put it into the morass of general choice of law rules for contracts (footnotes omitted):

[B]ecause they are not matters of internal affairs, they would be governed by the law of the state having the greatest interest.  Managers could name Delaware as the choice of law by contract and maintain Delaware’s quasi-monopoly that insulates the devices from judicial scrutiny. Yet contractual choice-of-law clauses are but one factor relevant to determining what law governs a contract.

To be sure, says Cunningham,

investors may recoil at the prospect of gadfly fellow shareholders challenging corporate pay contracts.

But he sees this as

a way to restore a modicum of external pressure on the State of Delaware, the leading promulgator of corporate law for national use. * * * [T]he practical reality is that the competition has ended, and Delaware faces no such pressure today.

There is, of course, a substantial literature questioning the Bebchuk-Fried-Walker conclusion on which this proposal is based that executive pay is out of whack.  And another substantial literature on whether or not the market for corporate law is out of whack.  But let’s put those questions aside and play along with the premises of the proposal.  Consider the consequences: 

  • Under this proposal, an executive, having negotiated her pay with a corporate board, would have no way of knowing whether, at some point, the pay might be challenged under standards to be named later in some state (her residence state, the corporation’s main place of doing business, somewhere else?) at the instigation of a lawyer seeking to extort a payment from the company. 
  • Executives would retain whatever power they supposedly had over the corporation in negotiating their contract to negotiate protection from or payment for this litigation risk.  Shareholders, of course, would pay.
  • Firms would surely find some way to deal with this new rule.  Would the result be better than the system we have now of entrusting the decision to directors?

I guess you could say I’m not convinced. I prefer to take this article as an interesting thought-experiment on why regulation of corporate pay is misguided.

Posted in contracts, corporate governance, executive compensation, Jurisdictional competition | 4 Comments »

Correcting Herb Kohl (and Kayak and Bing Travel . . .) on Google/ITA

Posted by Geoffrey Manne on December 2, 2010

Today comes news that Senator Kohl has sent a letter to the DOJ urging “careful review” of the proposed Google/ITA merger.  Underlying his concerns (or rather the “concerns raised by a number of industry participants and consumer advocates that I believe warrant careful review”) is this:

Many of ITA’s customers believe that access to ITA’s technology is critical to competition in online air travel search because it cannot be matched by other players in the travel search industry.  They claim that ITA’s superior access to information and superior technology enables it to provide faster and better results to consumers.  As a result, some of these industry participants and independent experts fear that the current high level of competition among online travel agents and metasearch providers could be undermined if Google were to acquire ITA and start its own OTA or metasearch service.  If this were to happen, they argue, consumers would lose the benefits of a robustly competitive online air travel market.

For several reasons, these complaints are without merit and a challenge to the Google/ITA merger would be premature at best—and a costly mistake at worst.

The high-tech market is innovative and dynamic. Goods and services that were once inconceivable are now indispensable, and competition has improved the quality of technology while driving down its costs. But as the market continues to change, antitrust interventions are stuck using a static regulatory framework. As the government develops a strategy for regulating competition in the digital marketplace, it must tread carefully—excessive intervention will stifle innovation, harm consumers, and prevent growth.  And given the link between innovation and economic growth, the stakes of “getting it right” are high. The individual nature of every decision, however, makes errors in antitrust enforcement inevitable. Some conduct that is bad for competition will be allowed to go on while some conduct that is good for competition will be blocked by intervention.

But prosecuting pro-competitive conduct is almost certainly more costly than mistakenly allowing anticompetitive conduct because mechanisms are in place to mitigate the latter but not the former. The cost of erroneous intervention is the loss to consumers directly and a deterrent effect on innovation—for fear of intervention, companies may not take large risks. Meanwhile, allowing conduct to persist amidst uncertainty allows the potential benefits of conduct to materialize while maintaining checks against practices that are bad for consumers: both the competitive marketplace and future enforcers have the power to mitigate specific anticompetitive outcomes that may arise. Unfortunately, current antitrust enforcement—abetted by influential congressmen like Senator Kohl—is more, rather than less, aggressive against innovative companies in high-tech industries. This aggression threatens to stifle growth and deter future innovation in a market with incredible potential.

Google has become a primary target of this scrutiny, and the company’s proposed acquisition of ITA, a software company that compiles and processes travel data, is a good example of aggressive scrutiny threatening to stifle growth.

Google’s acquisition of ITA is a straightforward merger where one company has decided to purchase another outright (instead of merely purchasing its services through contract). There are good reasons for integration. Most notably, Google gets to exercise direct control over ITA’s talented engineers if it owns ITA—influence that it would not have if the company simply signed a contract with ITA. If Google is correct that it can manage ITA’s resources better than ITA’s current management, then integration makes sense and is valuable for consumers.

The primary concern raised over Google’s proposed acquisition of ITA is that acquisition would “leverage” Google’s alleged dominance into another market—the online travel search market—and permit Google to prevent its competitors from accessing ITA’s high-quality analysis of flights and fares.

There are a few problems with this.

  • First, ITA does not provide or own the underlying data (this comes from the airlines themselves); rather it works only to analyze and process it—processing that other companies can and do undertake.  It may have developed superior technology to engage in this processing, but that is precisely why it (and consumers) should not be penalized by its competitors’ efforts to hamstring it.  Remember—although most of the hand-wringing surrounding this deal concerns Google, it is first and foremost the innovative entrepreneurs at ITA who would be prevented from capitalizing on their success if the deal is stopped.
  • Second, it is hard to see why, under the facts as alleged by the deal’s naysayers, consumers would be worse off if Google owns ITA than if ITA stands on its own.  The claims seem to turn on ITA’s indispensability to the online travel industry.  But if ITA is so indispensable—if it possesses such market power, in other words—it’s hard to see how its incentives to capitalize on that market power would change simply by virtue of a change in its management.  Either ITA possesses market power and is already taking advantage of it (or else its managers are leaving money on the table and it most certainly should be taken over by another set of managers) or else it does not actually possess this market power and its combination with Google, even if Google were to keep all of ITA’s technology for itself, will do little to harm the rest of the industry as its competitors step up and step in to take its place.
  • Third and related to these is the simple repugnance of hamstringing successful entrepreneurs because of the exhortations of their competitors, and the implication that a successful company’s work product (like ITA’s “superior technology”) must be rendered widely-available, by government force if necessary.
  • Meanwhile, Google does not seem to have any interest in selling airline tickets or making airline reservations (just as it doesn’t sell the retail goods one can search for using its site). Instead, its interest is in providing its users easy access to airline flight and pricing data and giving online travel agencies the ability to bid on the sale of tickets to Google users looking to buy. The availability of this information via Google search will lower search costs for consumers and the expected bidding should increase competition and drive down travel costs for consumers.  It is easy to see why companies like Kayak and Bing Travel and Expedia and Travelocity might be unhappy about this, but far more difficult to see how their woes should be a problem for the antitrust enforcers (or Congress, for that matter).

The point is not that we know that Google—or any other high-tech company’s—conduct is pro-competitive, but rather that the very uncertainty surrounding it counsels caution, not aggression. As the technology, usage and market structure change, so do the strategies of the various businesses that build up around them. These new strategies present unknown and unprecedented challenges to regulators, and these new challenges call for a deferential approach. New conduct is not necessarily anticompetitive conduct, and if our antitrust regulation does not accept this, we all lose.

Posted in antitrust, business, contracts, economics, error costs, google, law and economics, markets, mergers & acquisitions, monopolization, technology | Tagged: , , , , , , , | 3 Comments »

Which CFPB Will We Get?

Posted by Josh Wright on September 17, 2010

Todd mentions Elizabeth Warren’s “kick off” speech for the CFPB, in which she accepts the new “President and Special Advisor to the Secretary of the Treasury” gig, and tells us what the new Bureau is all about:

The new consumer bureau is based on a pretty simple idea:  people ought to be able to read their credit card and mortgage contracts and know the deal.  They shouldn’t learn about an unfair rule or practice only when it bites them—way too late for them to do anything about it.  The new law creates a chance to put a tough cop on the beat and provide real accountability and oversight of the consumer credit market.  The time for hiding tricks and traps in the fine print is over.  This new bureau is based on the simple idea that if the playing field is level and families can see what’s going on, they will have better tools to make better choices.

Like Todd, I find this articulation of the mission relatively innocuous.  Of course, that is different from believing that even this narrowly defined mission will be successful in generating new consumer benefits.  And as Todd notes in his post, there are reasons to be skeptical about whether or not even this narrow mission will succeed.

Todd writes that he doesn’t doubt Professor Warren’s sincerity about this mission.  Nor do I.  But I do believe that the “real” mission of the CFPB isn’t simply disclosure of terms and hidden fees.  I suspect so do its supporters — of which I am not one.

Why do I think the mission is broader than disclosure?  First, I doubt there would quite the fuss that we’ve seen over who runs the Bureau if all that were at stake was who would oversee the imposition of a set of mandatory disclosures on credit cards and other loans.  More importantly, I predict a more ambitious CFPB because both Professor Warren and others have themselves advocated for a much broader vision.  As I’ve observed (and written about elsewhere with economist David Evans):

[T]he blueprint for what was then the Consumer Financial Protection Agency was based in large part on using the insights of behavioral economics to design regulation in consumer credit markets.  Advocates of behavioral law and economics have generally taken a dim view of consumer borrowing, arguing that consumers over-value current consumption and do not adequately account for the costs of repayment in the future.  Policy proposals from this literature include a variety of prohibitions of consumer lending, including restrictions on subprime lending, payday lending, banning credit cards, unbundling the transacting and financing services offered by credit card companies, and usury laws.

An evaluation of the proposals emerging out of the behavioral law and economics literature concerning consumer credit go far beyond mandatory disclosure.  The much-discussed “plain vanilla” requirement, for example, reaches into the realm of product design.  But even a cursory read of this literature, including proposals from Elizabeth Warren and Michael Barr, reveals much more ambitious proposals that run much greater risks for consumers.   Moreover, many of these proposals are grounded in the behavioral economics tradition, and embrace the view that consumers are systematically irrational when it comes to financial products and that the government would make better decisions for consumers for their own protection.

As I’ve pointed out with Evans (and again with Todd Zywicki), the behavioral advocates have not adequately made their case as a matter of economic theory or empirical evidence, nor have they sufficiently overcome concerns that the behavioral approach satisfies a careful cost-benefit analysis that accounts for the dynamic costs of dampening individual incentives to improve decision-making and regulator error.  Unfortunately, it is not difficult to find examples of exactly this type of error.  The potential for false positives with this approach is incredibly high.  And the costs of false positives, and the total costs imposed on consumers, exacerbated by the opportunity for even stricter state law measures.

The CFPB in Elizabeth Warren’s “mission statement” is a different, and less ambitious CFPB than described in Professor Warren’s academic work, and in the work of those advocating a behavioral approach to consumer credit.  Which one will we get?  Theory and data suggest that when confronted with a choice between narrow and less powerful regulator and one with more power and a broader mandate, the smart money is that we’ll observe the latter.  If that prediction holds true, and we get the CFPB promised by its advocates when they contemplated its design, access to consumer credit will fall and there is a significant risk that consumers will be made worse off on the whole.

Here’s to hoping we get the less ambitious CFPB promised in Professor Warren’s press release.

Posted in behavioral economics, consumer financial protection bureau, consumer protection, contracts, economics, markets, regulation | 3 Comments »

Antitrust Formalism Is Dead! Long Live Antitrust Formalism!: Some Implications of American Needle v. NFL

Posted by Josh Wright on August 25, 2010

My take on American Needle, forthcoming in the Cato Supreme Court Review and co-authored with Judd Stone.  I’ll be discussing the paper at the Cato Institute Constitution Day on September 16th, and as luck would have it, on a panel with co-blogger Larry Ribstein (who will be offering his take on Jones v. Harris) is available for download from SSRN here.

Antitrust observers and football fans alike awaited the Supreme Court’s decision in American Needle for months – inspiring over a dozen articles, and even one from the quarterback of the defending champion New Orleans Saints. Yet the implications of the Court’s decision, effectively narrowing the scope of the “intra-enterprise immunity” doctrine to firms with a complete “unity of interests,” are unclear. While some depict the decision as a schism from the last several decades of antitrust law, we explain why this interpretation is meritless and discuss the practical impact of the Court’s holding. The Court’s antitrust jurisprudence over the past several decades, including that of the Roberts Court and American Needle, has broadly embraced rules that are both relatively easy to administer as well as conscious of the error costs of deterring pro-competitive conduct. Intra-enterprise immunity potentially provided such a “filter” that enabled judges to dismiss a non-trivial subset of meritless claims prior to costly discovery. The doctrine, however, proved notoriously difficult to consistently apply in situations involving common organizational structures. Consistent with error-cost principles that have been the lodestar of the Court’s recent antitrust output, American Needle gave the Court an opportunity to effectively abandon intra-enterprise immunity in favor of the Twombly “plausibility” standard. Rather than marking a drastic change in antitrust jurisprudence, therefore, American Needle should be viewed as the Supreme Court substituting an unreliable screening mechanism in favor of a more cost-effective alternative.

It was a fun project to work on, and a challenging one since so much had been written in anticipation of the opinion.  We appreciate the invitation from Cato.  As the abstract suggests, we focus on the role of the single entity defense as an early stage filter in the antitrust system designed to minimize error costs, how American Needle (perhaps with good reason) rejects that filter, the relationship between American Needle and Twombly, and how the case fits into the existing and ever-growing Roberts Court antitrust jurisprudence.  Enjoy.

Posted in antitrust, business, contracts, economics, law and economics, sports | 1 Comment »

First reactions to the Intel Settlement

Posted by Dan Crane on August 4, 2010

I just finished watching the FTC webcast announcing the Intel settlement and did a quick read over the agreement itself. Some quick high-level reactions:

  1. The tone of the press conference was triumphant, of course. Leibowitz claimed that the FTC got 22 out of 26 of the remedies proposed in the complaint and that Intel, which had previously criticized the proposed remedies as unprecedented, was suddenly making the remedies “precedented.” Further study required here, but it’s far too glib to count victory based on 22 out of 26. Many of the proposed remedies contained suggestive, open-ended language which, if interpreted reasonably expansively, would have gone far beyond this settlement.
  2. To my ear, there was a big change in emphasis from the theory of the complaint. The complaint was predominantly about Intel’s exclusivity and rebating practices with customer with some deception theories thrown in to make it sound like a proper FTC case. The settlement is much more about intellectual property restrictions that prevent AMD and Via from outsourcing manufacturing when they become capacity constrained.
  3. Section 5 of the FTC Act: Leibowitz made a special point of reiterating his view that Section 5 is “a penumbra around the Sherman Act.” I happen to agree with that view, but it’s an open question whether this settlement really advances this view. It’s notable that the FTC has brought several Section 5 cases in the last few years and hasn’t chosen to litigate any of them all the way. Not saying it’s a bad decision, just pointing out that the status of Section 5 remains open after this settlement.
  4. Predatory design: This is an aspect of the settlement that I really can’t stomach. It makes me nervous to think that the FTC is going to have an open-ended right to decide that Intel’s design changes are predatory because they do not provide “any actual benefit” to the product. Benefits, like beauty, are often in the eye of the beholder.

More to follow.

Posted in antitrust, business, contracts, federal trade commission, law and economics, markets, monopolization | Tagged: , , , , , , | 2 Comments »

Who CAREs About Beer and Wine Consumers?

Posted by Josh Wright on August 3, 2010

The Comprehensive Alcohol Regulatory Effectiveness Act — yes, the “CARE Act” — or HR 5034, is a piece of legislation aimed at supporting “State-based alcohol regulation.”  Recall the Supreme Court’s decision in Granholm v. Heald, which held that states could either allow in-state and out-of-state retailers to directly ship wine to consumers or could prohibit it for both, but couldn’t ban direct shipment only for out-of-state sellers while allowing in for in-state sellers.  Most states thus far have opened up direct shipping laws to the benefit of consumers.    While we occasionally criticize the Federal Trade Commission from time to time here at TOTM, its own research demonstrating that state regulation banning direct shipment and e-commerce harmed consumers is an excellent example of the potential for competition research and development impacting regulatory debates.  Indeed, Justice Kennedy’s majority opinion in Granholm cites the FTC study (not to mention co-blogger Mike Sykuta’s work here) a number of times.  But in addition to direct shipment laws, there are a whole host of state laws regulating the sale and distribution of alcohol.  Some of them have obviously pernicious competitive consequences for consumers as well as producers.  The beneficiaries are the wholesalers who have successfully lobbied for the protection of the state.  Fundamentally, the CARE Act aims to place these laws beyond the reach of any challenge under the Commerce Clause as per Granholm, the Sherman Act, or any other federal legislation.  Whether the CARE Act has any ancillary social benefits is an important empirical question — but you can bet that the first-order effect of the law, if it were to go into effect, would be to increase beer, wine and liquor prices.  More on the CARE Act and state regulation of alcoholic beverages below the fold.

Read the rest of this entry »

Posted in alcohol, antitrust, beer, business, commerce clause, contracts, economics, exemptions, federal trade commission, federalism, markets, regulation, wine | 6 Comments »

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