Archives For truth on the market

I have a new post up at TechPolicyDaily that takes a historical perspective on Network Neutrality. The abstract is below. I had to cut a bunch out of the piece — I hope to add a bunch of the cut parts back in and post an extended version here later this week. But for now:

Network Neutrality debates are fundamentally about switching – whether network switches can treat some packets differently from others. In this piece, I look back 100 years to the telephone interconnection debates of the early 20th century – and, in particular, to AT&T’s preference for (non-neutral) manual switchboards over (neutral) automatic switches. This history reminds us that design decisions in complex networks are rarely as simple as network neutrality proponents suggest they are – and that market forces, if given time to operate, can secure the consumer benefits that regulators aspire to promote without the appurtenant risk that regulatory intervention may stunt the market.

Read the full thing here.

Susan Crawford recently received the OneCommunity Broadband Hero Award for being a “tireless advocate for 21st century high capacity network access.” In her recent debate with Geoffrey Manne and Berin Szoka, she emphasized that there is little competition in broadband or between cable broadband and wireless, asserting that the main players have effectively divided the markets. As a result, she argues (as she did here at 17:29) that broadband and wireless providers “are deciding not to invest in the very expensive infrastructure because they are very happy with the profits they are getting now.” In the debate, Manne countered by pointing to substantial investment and innovation in both the wired and wireless broadband marketplaces, and arguing that this is not something monopolists insulated from competition do. So, who’s right?

The recently released 2013 Progressive Policy Institute Report, U.S. Investment Heroes of 2013: The Companies Betting on America’s Future, has two useful little tables that lend support to Manne’s counterargument.

skitch

The first shows the top 25 investors that are nonfinancial companies, and guess who comes in 1st, 2nd, 10th, 13th, and 17th place? None other than AT&T, Verizon Communications, Comcast, Sprint Nextel, and Time Warner, respectively.

skatch

And when the table is adjusted by removing non-energy companies, the ranks become 1st, 2nd, 5th, 6th, and 9th. In fact, cable and telecom combined to invest over $50.5 billion in 2012.

This high level of investment by supposed monopolists is not a new development. The Progressive Policy Institute’s 2012 Report, Investment Heroes: Who’s Betting on America’s Future? indicates that the same main players have been investing heavily for years. Since 1996, the cable industry has invested over $200 billion into infrastructure alone. These investments have allowed 99.5% of Americans to have access to broadband – via landline, wireless, or both – as of the end of 2012.

There’s more. Not only has there been substantial investment that has increased access, but the speeds of service have increased dramatically over the past few years. The National Broadband Map data show that by the end of 2012:

  • Landline service ≧ 25 megabits per second download available to 81.7% of households, up from 72.9% at the end of 2011 and 58.4% at the end of 2010
  • Landline service ≧ 100 megabits per second download available to 51.5% of households, up from 43.4% at the end of 2011 and only 12.9% at the end of 2010
  • ≧ 1 gigabit per second download available to 6.8% of households, predominantly via fiber
  • Fiber at any speed was available to 22.9% of households, up from 16.8% at the end of 2011 and 14.8% at the end of 2010
  • Landline broadband service at the 3 megabits / 768 kilobits threshold available to 93.4% of households, up from 92.8% at the end of 2011
  • Mobile wireless broadband at the 3 megabits / 768 kilobits threshold available to 94.1% of households , up from 75.8% at the end of 2011
  • Access to mobile wireless broadband providing ≧ 10 megabits per second download has grown to 87%, up from 70.6 percent at the end of 2011 and 8.9 percent at the end of 2010
  • Landline broadband ≧ 10 megabits download was available to 91.1% of households

This leaves only one question: Will the real broadband heroes please stand up?

On Debating Imaginary Felds

Gus Hurwitz —  18 September 2013

Harold Feld, in response to a recent Washington Post interview with AEI’s Jeff Eisenach about AEI’s new Center for Internet, Communications, and Technology Policy, accused “neo-conservative economists (or, as [Feld] might generalize, the ‘Right’)” of having “stopped listening to people who disagree with them. As a result, they keep saying the same thing over and over again.”

(Full disclosure: The Center for Internet, Communications, and Technology Policy includes TechPolicyDaily.com, to which I am a contributor.)

Perhaps to the surprise of many, I’m going to agree with Feld. But in so doing, I’m going to expand upon his point: The problem with anti-economics social activists (or, as we might generalize, the ‘Left’)[*] is that they have stopped listening to people who disagree with them. As a result, they keep saying the same thing over and over again.

I don’t mean this to be snarky. Rather, it is a very real problem throughout modern political discourse, and one that we participants in telecom and media debates frequently contribute to. One of the reasons that I love – and sometimes hate – researching and teaching in this area is that fundamental tensions between government and market regulation lie at its core. These tensions present challenging and engaging questions, making work in this field exciting, but are sometimes intractable and often evoke passion instead of analysis, making work in this field seem Sisyphean.

One of these tensions is how to secure for consumers those things which the market does not (appear to) do a good job of providing. For instance, those of us on both the left and right are almost universally agreed that universal service is a desirable goal. The question – for both sides – is how to provide it. Feld reminds us that “real world economics is painfully complicated.” I would respond to him that “real world regulation is painfully complicated.”

I would point at Feld, while jumping up and down shouting “J’accuse! Nirvana Fallacy!” – but I’m certain that Feld is aware of this fallacy, just as I hope he’s aware that those of us who have spent much of our lives studying economics are bitterly aware that economics and markets are complicated things. Indeed, I think those of us who study economics are even more aware of this than is Feld – it is, after all, one of our mantras that “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” This mantra is particularly apt in telecommunications, where one of the most consistent and important lessons of the past century has been that the market tends to outperform regulation.

This isn’t because the market is perfect; it’s because regulation is less perfect. Geoff recently posted a salient excerpt from Tom Hazlett’s 1997 Reason interview of Ronald Coase, in which Coase recounted that “When I was editor of The Journal of Law and Economics, we published a whole series of studies of regulation and its effects. Almost all the studies – perhaps all the studies – suggested that the results of regulation had been bad, that the prices were higher, that the product was worse adapted to the needs of consumers, than it otherwise would have been.”

I don’t want to get into a tit-for-tat over individual points that Feld makes. But I will look at one as an example: his citation to The Market for Lemons. This is a classic paper, in which Akerlof shows that information asymmetries can cause rational markets to unravel. But does it, as Feld says, show “market failure in the presence of robust competition?” That is a hotly debated point in the economics literature. One view – the dominant view, I believe – is that it does not. See, e.g., the EconLib discussion (“Akerlof did not conclude that the lemon problem necessarily implies a role for government”). Rather, the market has responded through the formation of firms that service and certify used cars, document car maintenance, repairs and accidents, warranty cars, and suffer reputational harms for selling lemons. Of course, folks argue, and have long argued, both sides. As Feld says, economics is painfully complicated – it’s a shame he draws a simple and reductionist conclusion from one of the seminal articles is modern economics, and a further shame he uses that conclusion to buttress his policy position. J’accuse!

I hope that this is in no way taken as an attack on Feld – and I wish his piece was less of an attack on Jeff. Fundamentally, he raises a very important point, that there is a real disconnect between the arguments used by the “left” and “right” and how those arguments are understood by the other. Indeed, some of my current work is exploring this very disconnect and how it affects telecom debates. I’m really quite thankful to Feld for highlighting his concern that at least one side is blind to the views of the other – I hope that he’ll be receptive to the idea that his side is subject to the same criticism.

[*] I do want to respond specifically to what I think is an important confusion in Feld piece, which motivated my admittedly snarky labelling of the “left.” I think that he means “neoclassical economics,” not “neo-conservative economics” (which he goes on to dub “Neocon economics”). Neoconservativism is a political and intellectual movement, focused primarily on US foreign policy – it is rarely thought of as a particular branch of economics. To the extent that it does hold to a view of economics, it is actually somewhat skeptical of free markets, especially of lack of moral grounding and propensity to forgo traditional values in favor of short-run, hedonistic, gains.

Not surprisingly, we’ve discussed Coase quite a bit here at Truth on the Market. Follow this link to see our collected thoughts on Coase over the years.

Probably my favorite, and certainly most frequently quoted, of Coase’s many wise words is this:

One important result of this preoccupation with the monopoly problem is that if an economist finds something—a business practice of one sort or other—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be rather large, and the reliance on a monopoly explanation, frequent.

Of course this, a more generalized statement of the above from The Problem of Social Cost, is the essence of his work:

All solutions have costs, and there is no reason to suppose that governmental regulation is called for simply because the problem is not well handled by the market or the firm. Satisfactory views on policy can only come from a patient study of how, in practice, the market, firms and governments handle the problem of harmful effects…. It is my belief that economists, and policy-makers generally, have tended to over-estimate the advantages which come from governmental regulation. But this belief, even if justified, does not do more than suggest that government regulation should be curtailed. It does not tell us where the boundary line should be drawn. This, it seems to me, has to come from a detailed investigation of the actual results of handling the problem in different ways.

 

Ronald Coase, 1910-2013

Gus Hurwitz —  2 September 2013

Many more, who will do far more justice than I can, will have much more to say on this, so I will only note it here. Ronald Coase has passed away. He was 102. The University of Chicago Law School has a notice here.

The first thing I wrote on the board for my students this semester was simply his name, “Coase.” I told them only on Friday that he was still an active scholar at 102.

With thanks to Geoff and everyone else, it’s great to join the cast here at TOTM. Geoff gave a nice introduction, so I won’t use this first post to further that purpose – especially when I have substance to discuss. The only prefatory words I’ll offer are that my work lies at the intersection of law and technology, with a focus on telecommunications and the regulation of technology. Most of my posts here will likely relate to those subjects. But I may occasionally use this forum to write briefly on topics further afield of my research agenda (and to which I therefore cannot dedicate more than blog-post-length musings to develop).

But one paragraph of navel-grazing is enough; on to substance:

The WSJ had a nice piece the other day about the Consumer Product Safety Commission’s (CPSC) ongoing persecution of Craig Zucker. Several years ago, Zucker founded a company that sold small, strong, rare-earth magnets that are a ton of fun to play with. He called them BuckyBalls. In 2011, the CPSC determined that BuckBalls are inherently unsafe because children may swallow them, which can result in serious injury. The CPSC effectively forced the company to shut down in 2012. Unsatisfied with forcing a profitable small firm out of the market, the CPSC is now going after Zucker individually to, at his own expense, recall and refund the purchase price of all BuckyBalls the company sold.

BuckyBalls(Full disclosure: I own a bunch of BuckyBalls. In fact, they’re all over my office. To date, they have not harmed anyone. The photo to the left is of the “BuckyBall decapode” that I have behind my chair. Note: the CPSC is not concerned about BuckyBall decapodes, which could pose a legitimate danger if they became sentient, but about the individual magnets.)

The CPSC’s action is a case study in bad judgment, arguably abusive and vindictive government conduct, and a basic lack of common sense. But I don’t want to focus on common sense here – I want to focus on the common law. My question is why in the world do we need the CPSC protecting consumers from these magnets when the common law clearly offers sufficient protection?

These cases almost always follow a similar pattern. Adults buy BuckyBalls. Adults either give children BuckyBalls or leave BuckyBalls where children can get them. Children, acting as children are wont to act, somehow swallow BuckyBalls.

The CPSC’s complaint identifies 5 specific cases of children ingesting BuckyBalls and notes that “over one dozen” reports have been received. The complaint doesn’t discuss in detail any injuries that resulted, beyond noting that in some cases surgery was required (and in one case, treatment included “monitoring for infection and internal damage”). It doesn’t say whether any of these cases resulted in permanent injury or disability (presumably not, or that would surely be mentioned). There have been no reported deaths or, that I have seen reported, debilitating injuries.

On the flipside, over the few years that Zucker was in business (roughly 2009, when the product became popular, through 2012, when the company closed down), he sold about $75 million worth of BuckyBalls (per the WSJ piece, “’Two and a half million adults spent $30’”). This product wasn’t a mere novelty, but something created substantial economic value for consumers.

So, what do we have? A relatively small number of injuries, with very few disputable facts, and readily identifiable harm. These would be some of the easiest possible cases to bring to court, and would occur in small enough numbers that they wouldn’t burden the court system. After the first of these cases was decided, most of the others – given the similarity of facts – would likely settle. If the harms caused by BuckyBalls were sufficient to outweigh the economic value created by this product, Zucker could have responded by altering the product, seeking insurance, or shutting down. This is exactly the sort of case we have the courts for!

That penultimate sentence should be dwelt upon: the incremental approach of the common law would allow the firm to alter and improve its product, to avoid or reduce future harm. In this way, the law develops along with new products and technologies, supporting a dynamic market. Compare this to the CPSC approach, which was to demand that Zucker comply with the agency’s demands in a short period of time (which he did), and then, the very next day, to bring the administrative suit that forced Zucker to shut the company down. The CPSC could not have reviewed his response to its demands in that timeframe; even if it did and found the response lacking, its next step should have been to engage him to address any problems, with the twain objectives of both remedying any problems but also preserving the business. Rather, the CPSC’s purpose seems to have been from the outset to shut Zucker down. It seems that in its fervor to protect the children from negligent adults, it is willing to harm the consumers who enjoy these products — perhaps we should rechristen it the Children’s Product Safety Commission.

Others have written about the CPSC’s lack of common sense in this matter. My contribution to that discussion would be to say that the CPSC has become the FTC’s successor as the “National Nanny” (not to say the FTC does not deserve the title, as demonstrated by the POM Wonderful case – but today CPSC may be even more deserving of the title).

But the BuckyBalls case raises a more fundamental concern. The CPSC surely should be lambasted for its decision to pursue this matter at all; and even more for persecuting Mr. Zucker. But beyond that, this case raises fundamental questions about the need for, and the basic legitimacy of, the CPSC.

Guest post by Dan Crane, responding to Steve’s post responding to Dan’s earlier post and Thom’s post on the appropriate liability rule for loyalty discounts.

Something that Thom and I both said in our earlier posts needs to be repeated at the outset:  I don’t know of anyone who disagrees with Steve and Josh that raising rivals’ costs (“RRC”) and economic analysis drawn from exclusive dealing law belong in an analysis of loyalty discounts.  There’s also no claim on the table that a loyalty discount that fails the “contestable share”/discount attribution test that Steve mentions should be treated anything like presumptively illegal.  The current debate is solely about whether there should be a price-cost screen in loyalty discount cases.  We aren’t even talking about what the measure of cost should be or how that screen should work (although, with Steve, I’m happy to assume marginal or average variable cost and the aforementioned contestable share/discount attribution approach for the sake of argument).  Josh and Steve are well justified in pointing out how aspects of RRC theory can apply in loyalty discount cases—but that doesn’t meet the objection that a screen should also apply.

It’s also important to recognize that the argument in favor of a price-cost screen for loyalty rebates does not need to entail a general argument in favor of a “profit sacrifice” theory for all monopolization offenses.  What we’re talking about here is unilaterally determined discounts to customers—something that is presumptively procompetitive, although potentially exclusionary under some circumstances.  Such discounts could be harmful if they resulted in customer foreclosure, but they would not result in customer foreclosure if the rival could profitably match the loyalty discount.  That is the point of the price-cost screen.  You might wonder why a rival would ever complain about a loyalty discount if they could profitably match it.  The reasons are many.  The rival might be losing sales because customers don’t like its product.  It might have failed for reasons completely apart from the accused firm’s loyalty discounts. It might be attempting to use antitrust law to thwart price competition, as a large body of literature suggests.  (See work by Will Baumol and Janusz Ordover, Preston McAfee and Nicholas Vakkur, and Edward Snyder and Tom Kauper, among others).

One thing I didn’t just mention—although it could often be true—is that the complaining rival isn’t an equally efficient competitor (“EEC”).  Steve is wrong to suggest that the price-cost test depends on adopting an EEC theory.  Although there is much merit to the EEC test (heck, even the Europeans have adopted it), one could formulate a version of the price-cost screen that simply requires the rival to show that the discount foreclosed a hypothetically equally efficient competitor or even this particular rival given its actual costs, as some have suggested.  The current argument is not over the formulation of the test, but whether we should dispense with a price-cost screen altogether in loyalty discount cases.

In any event, observe that the entire structure of modern predatory pricing law is premised on an EEC assumption.  If an incumbent firm with marginal costs of $50 and a current price of $100 faces entry by a new rival with marginal costs of $75 and drops its price to $74 in order to exclude the new rival, it enjoys categorical immunity under a long line of Supreme Court cases.  In another forum, Steve suggested that the difference in those cases is that the customer is getting the benefit of a lower price, so the law is hesitant to condemn the price as predatory.  But that exposes something problematic about Steve’s starting premise—he assumes that it’s uncertain whether loyalty discounts generally lower prices.  Prima facie, that seems wrong.  Customers routinely offer to trade loyalty for lower prices precisely because the prices are . . . lower.

Steve suggests that maybe loyalty discounts aren’t really discounts at all.  Maybe the seller, who was previously charging a price of $100, raises the price to $105 and then gives a discount back down to $100 in exchange for customer loyalty.  Steve notes that Thom and I didn’t consider this scenario.  That’s because Josh didn’t raise it in his speech.  It would have been very surprising if Josh had raised it in his speech, since Josh and I co-authored a paper several years ago debunking this same theory in the bundled discount context.  I discuss the “disloyalty penalty” theory at length in a forthcoming article in the Texas Law Review, really just extending the work that Josh and I started several years ago.

There are many problems with this “disloyalty penalty” theory, including the empirical one that it doesn’t fit the pattern of almost any of the recent loyalty discount cases.  But there is also a problem of basic economics.  Unless it is engaging in limit pricing, the accused firm’s $100 price is a monopoly (or market power) profit-maximizing price.  By definition, any price increase will be unprofitable to the seller.  Obviously, the $105 price would be unprofitable.  But it’s also true that a price of $100 coupled with a new obligation to buy a certain percentage of requirements from the seller to achieve that price is unprofitable because it exceeds the profit-maximizing price.  The addition of a contractual term that restricts the buyer’s freedom is economically equivalent to a price increase if the buyer valued the prior freedom from the restriction (if the buyer didn’t value the prior freedom from the restriction there’s no effective price increase but also no anticompetitive effect, since the buyer wouldn’t have bought from the rival anyway).  Hence a price of $100 with loyalty term is effectively higher than a price of $100 without a loyalty term that restricts the buyer’s purchasing freedom.  By adding a loyalty term to obtain the $100 price, the seller exceeds its profit-maximizing monopoly price.

My claim is not that “penalty pricing” for disloyalty is impossible, but that the presumption should be that loyalty discounts are true discounts off the but-for price.  Loyalty discounts belong squarely in the “hospitability” tradition for unilaterally determined pricing structures—all those judicial decisions that talk about how important it is not to chill vigorous price competition.

Steve argues that loyalty discounts may “tie up customers” before competitors arrive on the scene.  I’m not sure what Steve means by “tie up customers.”  Suppose that a monopolist, knowing that rivals are about to enter the market, goes to all of its customers and offers  them a 5% discount if they will agree to purchase 95% of their requirements from the monopolist for the next three years.  At that point we have a partial exclusive dealing contract and the cost-price screen shouldn’t be required.  But, there, the exclusionary mechanism—the thing that keeps rivals from competing—is not the loyalty discount but rather the contractual commitment not to buy any more than 5% of requirements from rivals.  Customers would have to breach their contract in order to consider even the most advantageous offers from rivals.  The point that amici made in our Meritor v. Eaton brief was that when the claimed mechanism of exclusion is a price term and not a contractual restriction on purchasing from rivals, some version of the price-cost screen should apply.

The example I’ve just attributed to Steve (and sorry Steve if this is not what you have in mind) is not what we’re talking about in almost any of the current generation of loyalty discount cases.  In Meritor, for example, the Third Circuit acknowledged that the loyalty provisions at issue did not require customers to buy any of their requirements from Eaton.  It’s just that if the customers didn’t meet the loyalty thresholds, they would lose a possible rebate.  Meritor could compete for that business by offering its own counter-rebates so long as it wouldn’t have had to price unprofitably to do so.

Steve’s point about economies of scale is one that I covered in my post and is fully accounted for by the cost-price screen.  A rival who can profitably match a loyalty discount scheme is not foreclosed from operating at any particular scale.

The same is true of Steve’s point about loyalty discount schemes foreclosing a new seller’s ability to make incremental sales that don’t reduce the accused firm’s own sales.  Again, so long the rival can profitably match the discounts, there is no reason that output should be reduced.

Finally, Steve asserts that loyalty discounts obtained by intermediaries may not be passed onto ultimate consumers.  That’s equally true of conventional single-firm price reductions that are categorically immunized from antitrust liability under a long line of precedent.  One may not like the price-cost test in any context for that reason or others, but there’s nothing special about its application to loyalty discounts. The common denominator of all of these points is that loyalty discounts aren’t exclusionary unless they force rivals to price below cost in order to match the customer’s loss of the loyalty discounts if they fail to meet the loyalty threshold.

Steve thinks the price-cost screen exhibits “formalism”—that dreaded epithet in the post-realist world—but it’s actually just an expression of economic common sense.  Steve and Josh are excellent economists and it’s hard for me to imagine a case in which they would condemn a loyalty discount if there was undisputed evidence that the allegedly excluded rival could have completely neutralized the financial inducement of the loyalty discount by offering a counter-discount of its own without pricing below cost.  If they can offer an example of a circumstance where such a loyalty discount should be condemned, I would be very interested to hear it.  If they can’t, then they have implicitly adopted a version of the price-cost screen and, to repeat a point from my earlier post, all we’re haggling over is the price.

If we’ve learned anything from the pending IRS scandal, it’s that bureaucrats matter.  Senate Minority Leader Mitch McConnell apparently thinks so.  According to a recent National Review article, McConnell, unlike most minority leaders, has put a great deal of effort into recommending highly qualified individuals for spots on the more than 100 bipartisan agencies and commissions in the federal bureaucracy.  He views his role in recommending appointees as a way to combat regulatory overreach and equip a “farm team” that will be poised to take over the reins of agencies the next time there’s a Republican in the White House.

The article reports that while most minority leaders have made recommendations to reward patronage and keep party operatives happy, McConnell acts more systematically.  His adviser charged with identifying potential nominees looks at five criteria:

First, [a]re the nominees competent in the subject matter? Second, [a]re they philosophically compatible with Senator McConnell? Third, d[o] they possess high character and integrity? Fourth, [a]re they tough? Fifth, [a]re they team players?

In light of these criteria, it’s not surprising that one of the McConnell recommendations highlighted in the article is TOTM co-founder, now FTC Commissioner, Josh Wright.  As the article observes (correctly, IMHO), Wright is “widely considered his generation’s greatest mind on antitrust law.”

Of course, that doesn’t mean Wright’s always right.  More about that to come….

The State of the Patent System: A Discussion with Chief Judge Rader

A teleforum on Thursday, April 11, at 2pm. Hosted by George Mason Law School’s Center for the Protection of Intellectual Property Teleforum and the Federalist Society‘s Intellectual Property Practice Group.

Today, people read daily complaints about the “broken” patent system, and thus it’s unsurprising that there are numerous and wide-ranging attempts to “reform” the patent system. Legislative reform efforts include the proposed SHIELD Act, which would impose a losing-plaintiff-pays litigation system solely on patent-licensing companies and further revisions to the America Invents Act of 2011. Regulatory agencies also have skin in the patent reform game: the FTC recently reached settlements with Bosch and Google that restricted their rights to enforce their patents in standardized technology, and the FTC is currently considering whether to condemn the patent-licensing business model as “anti-competitive.” The courts are heavily involved as well: in addition to the many patent cases it has decided in recent years, the U.S. Supreme Court has four major patent cases on its docket this year, which suggests that it also agrees that the patent system is in serious need of legal reform. Yet, patents today secure innovation once imagined only as science fiction – tablet computers, smart phones, genetically modified seeds, genetic testing for cancer, personalized medical treatments for debilitating diseases, and many others – and these technological marvels are now a commonplace feature of our lives. This Teleforum with the Honorable Randall Rader, Chief Judge of the Court of Appeals for the Federal Circuit – a digital “fireside chat” – will explore these and other issues in assessing whether the patent system is broken or whether it is fundamentally sound.

Featuring:

Hon. Randall R. Rader, Chief Judge, U.S. Court of Appeals, Federal Circuit
Moderator: Prof. Adam Mossoff, Co-Director, Academic Programs and Senior Scholar, Center for the Protection of Intellectual Property, George Mason Law School

Agenda:

Call begins at 2:00 p.m. Eastern Time, Thursday, April 11, 2013.

More information here.

 

 LEC