The Government’s Complaint against Apple is fundamentally flawed as a matter of fact and law. Apple has not “conspired” with anyone, was not aware of any alleged “conspiracy” by others, and never “fixed prices.” Apple individually negotiated bilateral agreements with book publishers that allowed it to enter and compete in a new market segment – eBooks. The iBookstore offered its customers a new outstanding, innovative eBook reading experience, an expansion of categories and titles of eBooks, and competitive prices.

And the last paragraph of the Answer’s introduction:

The Supreme Court has made clear that the antitrust laws are not a vehicle for Government intervention in the economy to impose its view of the “best” competitive outcome, or the “optimal” means of competition, but rather to address anticompetitive conduct. Apple’s entry into eBook distribution is classic procompetitive conduct, and for Apple to be subject to hindsight legal attack for a business strategy well-recognized as perfectly proper sends the wrong message to the market, and will discourage competitive entry and innovation and harm consumers.

A theme that runs throughout the Answer is that the “pre-Apple” world of e-books was characterized by little or no competition and that the agency agreements were necessary for its entry, which in turn has resulted in a dramatic increase in output.  The Answer is available here.  While commentary has focused primarily upon the important question of the competitive effects of the move to the agency model, including Geoff’s post here, my hunch is that if the case is litigated its legacy will be as an “agreement” case rather than what it contributes to rule of reason analysis.  In other words, if Apple gets to the rule of reason, the DOJ (like most plaintiffs in rule of reason cases) are likely to lose — especially in light of at least preliminary evidence of dramatic increases in output.  The critical question — I suspect — will be about proof of an actual naked price fixing agreement among publishers and Apple, and as a legal matter, what evidence is sufficient to establish that agreement for the purposes of Section 1 of the Sherman Act.  The Complaint sets forth the evidence the DOJ purports to have on this score.  But my hunch — and it is no more than that — is that this portion of the case will prove more important than any battle between economic experts on the relevant competitive effects.

AALS Section on Insurance Law

“Insurance and Consumer Protection”

2013 AALS Annual Meeting
January 4-7, 2013
New Orleans, Louisiana

The AALS Section on Insurance Law will hold a program on Insurance and Consumer Protection during the AALS 2013 Annual Meeting in New Orleans. The program is scheduled for Sunday, January 6, 2013, from 10:30 AM to 12:15 PM. The program will feature a panel of leading research on consumer protection and insurance markets. Panelists scheduled to participate include: Shawn Cole (Harvard Business School), Kyle Logue (University of Michigan Law School), and Lauren Willis (Loyola Law School Los Angeles). We are looking to add one additional panelist through this Call for Papers.

Submissions: To be considered, a draft paper or proposal must be submitted by email to Joshua C. Teitelbaum, Program Chair, at jct48@law.georgetown.edu. A proposal must be comprehensive enough to allow for a meaningful evaluation of the proposed paper. Submissions must be in PDF format.

Deadline: The deadline for submissions is Tuesday, September 4, 2012. Decisions will be announced by Friday, September 28, 2012.

Eligibility: Full-time faculty members of AALS member law schools are eligible to submit. Faculty at fee-paid law schools; foreign, visiting and adjunct faculty members; graduate students; fellows; and non-law school faculty are not eligible to submit. Papers may already be accepted for publication, provided that the paper will not be published before the AALS meeting.

Expenses: The panelist selected through this Call for Papers will be responsible for paying his or her own annual meeting registration fee and travel expenses.

Inquiries: Inquiries about this Call for Papers may be submitted to Joshua C. Teitelbaum, Georgetown University Law Center, jct48@law.georgetown.edu, (202) 661-6589.

• OPINION
• Updated May 23, 2012, 7:51 p.m. ET

A Tutorial for the President on ‘Profit Maximization’

Profits provide the incentive for firms to do what consumers want.

By PAUL H. RUBIN

In justifying his attacks on Bain Capital, President Obama argues that “profit maximization” might be an appropriate goal for a private-equity firm, but not for more general public policy. This argument ignores one of the most basic premises of economics.

We economists assume that firms always maximize profits, and that profit maximization by firms (all firms, not just private-equity ones) is a very good thing. But this is not because profits are in themselves good. Rather, profit maximization is good because it leads directly to maximum benefits for consumers. Profits provide the incentive for firms to do what consumers want.

Consider what contributes to profit maximization. In simple terms, profit maximization means producing the products earning the highest returns, and producing these products at the lowest possible cost. Both are socially useful behaviors that benefit consumers.

Which products produce the highest returns? The answer is the products that consumers want and are currently underproduced. If there are excess returns (profits) to be earned in some market, that is because consumers are willing to pay more for those products than the current cost of production.

Profits are earned by producing more of these products—that is, by satisfying unmet consumer demands. Profit maximization means doing the best job of satisfying these unmet demands, and so providing benefits to consumers. If the unmet demand is for a currently nonexistent product that consumers will value when it is produced (Facebook, the iPhone, Google search), then of course even more profits can be earned.

A firm such as Bain that is involved in investing capital can only make money if it succeeds in satisfying consumer demands. Of course, its goal in deciding where to invest is to maximize returns for its investors, but that is a detail. It will only succeed in this goal if it does a good job of identifying and satisfying consumer demands for products.

The second trick to maximizing profits is to reduce costs as much as possible. This may involve eliminating some unneeded resources, which may translate into unemployment in the short run. It may involve recombining resources into more productive configurations, or restructuring governance of the firm.

The immediate purpose of reducing costs is to increase the profits of investors, but the ultimate result is to benefit consumers. In the textbook ideal of a purely competitive economy, cost reductions will immediately translate into lower prices for consumers. But in any market structure—competition, monopoly or oligopoly—profit-maximizing behavior translates reduced costs into reduced prices for consumers.

Consider the converse: What if a business does not maximize profits? Then it is either not making the products that consumers want the most, or it is not producing its products at the lowest cost. In either case, consumers are harmed. Any argument against “profit maximization” is an argument against consumer welfare.

Maximizing consumer welfare is the ultimate justification for an economy. Consumers are of course also workers and voters. Contrary to President Obama’s claim, skill at profit maximization does translate directly into skill at governing the economy. Failure to understand this simplest and most basic point is probably itself enough to disqualify someone from the presidency when economic issues are paramount.

Mr. Rubin is a professor of economics at Emory University and president elect of the Southern Economic Association.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

Here is a better explanation.  In the name of “privacy,” the EU greatly restricts the use of consumer online  information.  Josh Lerner has a recent paper, “The Impact of Privacy Policy Changes on Venture Capital Investment in Online Advertising Companies” (based in part on the work of Avi Goldfarb and Catherine E. Tucker, “Privacy Regulation and Online Advertising“) finding that this restriction on the use of information is a large part of the explanation for the lack of tech investment in Europe.  Tom Lenard and I have written extensively about the costs of privacy regulation (for example, here) and this is just another example of these costs, although the costs are much greater in Europe than they are here (so far.)

Santa Monica–and most all community colleges in California apparently–have been slammed with would-be students looking to take classes that would help prepare them for better jobs or for further education and training (that would prepare them for better jobs).  The problem is that state funding for community colleges has been drastically reduced, thereby limiting the number of course offerings schools can offer at the subsidized tuition rate of $36 per credit hour. Santa Monica had the radical idea (well, radical for anyone that fails to understand economics, perhaps) of offering additional sections of high-demand courses, but at full-cost tuition rates (closer to $200 per credit hour).

Students protested. Faculty at other community colleges complained. Santa Monica College relented. So students don’t have to worry about paying more for courses they will not be able to take and faculty at other colleges don’t have to worry about the possibility of more students wanting to go to their schools because the overflow tuition at Santa Monica drives students to find substitutes. Well, that, and no more worries for those faculty at schools who charge even more than $200 for students to get those core courses that they cannot get into at their community college. It didn’t matter much anyhow, since most agreed that Santa Monica College’s proposal would have violated the law.

Now there is a proposal before the California legislature that would allow schools to implement two-tier pricing, but only for technical trade courses, not for high-demand general education-type courses.

Aside from complaints that “the state should be giving away education–even if they are not” (which are the most inane because they have nothing to do with the issue at hand), there are a few other arguments or positions offered that just cause one to scratch one’s head in wonder:

1) Fain reports that Michelle Pilati, president of the Academic Senate of California Community Colleges, asserted that “two-tiered tuition is unfair to lower-income students because it would open up classes to students who have the means to pay much more.” Apparently, Ms. Pilati would prefer all students have equal access to no education than to open up more spaces (to lower-income students) by opening up more spaces to higher-income students at higher prices. Gotcha.

2) The Board of Trustees at San Diego Community College seems to agree, having passed a resolution opposing the proposed legislation because it “would limit or exclude student access based solely on cost, causing inequities in the treatment of students”. Apparently the inequity of some students getting an education and some not is more noble because explicit out-of-pocket costs are not involved and other forms of rationing are used. And yet…

3) According to Fain,  Nancy Shulock, director of the Institute for Higher Education Leadership and Policy at California State University at Sacramento, asserts “wealthier students have a leg up when registering for courses. She said research has found that higher-income students generally have more ‘college knowledge’ that helps them navigate often-complex registration processes. That means wealthier students could more quickly snag spots in classes, getting the normal price, while their lower-income peers would be more likely to pay the higher rates under a two-tiered system.”

So, community colleges have created overly complex registration systems that disadvantage lower-income students. Yet, all that suggests is that the current system already punishes lower-income students because wealthier students can more easily “snag” the limited number of subsidized sections. Perhaps community colleges could make their enrollment processes less complex?

Regardless the fate of the “two-tier pricing” legislation, there is already a two-tier system in place; only the current two-tier plan prevents people from getting educations at any price.

What is nowhere mentioned is anything to do with the goods and services produced by business.  This is a common attitude of critics of capitalism.  In many cases, capitalists may suffer the same personality defects as the rest of us.  And, as Mr. Deresiewicz points out, scientists, artists and scholars may also be hard working and smart.  But capitalism does not reward moral worth or hard work.  Capitalism rewards providing stuff  that other people are willing to pay for.  While is is easy to point out the stupidity of the critique (Mr. Deresiewicz has written and seems proud of his book, published by a capitalist publisher and available from various capitalist booksellers) that is not my point.  Rather, this column is interesting in that it is a pristine example of a totally irrelevant critique of capitalism, written by what is a smart person.  He does cite Adam Smith, but seems to misunderstand the basic functioning of markets.  Markets reward what one does, not what one is.

Litan and I explore a few possible theories of harm under a hypothetical Section 5 case and find them wanting, including (1) claims that specialized search results (such as flight, shopping or map results) “unfairly” harm the independent specialized search websites like Kayak (travel) or MapQuest (mapping and directions), or (2) assertions that Google allegedly has “deceived” users or websites by seemingly reneging on pledges not to favor its own sites. For the sake of brevity, I focus on the FTC’s potential deception theory here, and leave it to interested reader to pursue the “unfairness” theory in the paper.

Deception of Users

The alleged bases of Google’s alleged deception are generic statements that Google made, either in its initial public offering (IPO) or on its website, about Google’s attitude toward users leaving the site. The provision of a lawful service, specialized search, launched several years after the IPO statement certainly cannot be deceptive. To conclude that it is, and more importantly, to prevent the company from offering innovations in search would establish a precedent that would surely punish innovation throughout the rest of the economy.

As for the mission statement that the company wants users to get off the site as quickly as possible, it is just that, a mission statement. Users do not go to the mission statement when they search; they go to the Google site itself. Users cannot possibly be harmed even if this particular statement in the company’s mission were untrue. Moreover, if the problem lies in that statement, then any remedy should be directed at amending that statement. There is no justification for the Commission to hamper Google’s specialized search services themselves or to dictate where Google must display them.

Deception of Rivals

An alternative theory suggests that Google deceived its rivals, reducing innovation among independent websites. In a February 2012 paper delivered to the OECD, Tim Wu explained that competition law can be used to “increase the costs of exclusion,” which if successful, would promote innovation among application providers. Wu argued that “oversight of platforms is conceptually similar” to oversight of standard-setting organizations (SSOs). He offers a hypothetical case in which a platform owner “broadly represents to the world that he maintains an open and transparent innovation platform,” gains a monopoly position based on those representations, and then begins to exclude applications “that might themselves serve as platforms.” Once the industry has committed to a private platform, Wu argues, the platform owner “earns oversight of its practices from that point onward.”

So has Google earned itself oversight due to its alleged deception? Google is not perceived by web designers as providing a platform for all companies to have equal footing. Websites’ rankings in Google’s search results vary tremendously over time; no publisher could reasonably rely on any particular ranking on Google. To the contrary, websites want their presence to be known to any and all search engines. That specialized search sites did not base their business plans on Google’s commitment to openness is what distinguishes Google’s platform from Microsoft’s platform in the 1990s. To Wu’s credit, he does not mention Google in this section of the paper; the only platforms mentioned are those of Apple, Android, and Microsoft.

It is even more of a stretch to analogize Google’s conduct to that in the FTC’s Rambus case. Unlike websites that do not depend on a Google “standard”–the website can be accessed by users from any search engine, or through direct navigation–computer memory chips must be compatible with a variety of computers, which requires that chip producers develop a common set of standards for performance and interoperability. According to the FTC, Rambus exploited this reliance by, among other things, not disclosing to chip makers that it had additional divisional patent applications in process. That specialized search sites did not make “irreversible technological” investments based on Google’s commitment to a common standard is what distinguishes Google’s platform from SSOs.

The Freedom to Innovate

A change in a business model cannot be a legitimate basis for a Section 5 case because a firm cannot be expected to know how the world is going to unfold at its inception. A lot can change in a decade. Consumers’ taste for the product can change. Technology can change. Business models are required to adapt to such change; else they die. There should be no requirement that once a firm writes a mission statement, it be held to that statement forever. What if Google failed to anticipate the role of specialized search in 2004? Presumably, Google failed to anticipate a lot of things, but that should not be the basis for denying its entry into ancillary services or expanding its core offerings. As John Maynard Keynes famously replied to a criticism during the Great Depression of having changed his position on monetary policy: “When the facts change, I change my mind. What do you do sir?” If Google exposes itself to increased oversight for merely changing its mind, then other technology firms might think twice before innovating. And that would be a horrible consequence to the FTC’s exploration of alternative antitrust theories.

Call for Papers Announcement

AALS Section on Antitrust and Economic Regulation

Google and Antitrust

2013 AALS Annual Meeting

January 4-7, 2013

New Orleans, Louisiana

The AALS Section on Antitrust and Economic Regulation will hold a program on Google and Antitrust during the AALS 2013 Annual Meeting in New Orleans. The program will explore the Federal Trade Commission’s potential antitrust case against Google and the Google Book Search settlement. The program will feature a roundtable panel involving leading scholars who have addressed these issues: Dan Crane (Michigan), Marina Lao (Seton Hall), Frank Pasquale (Seton Hall), and Pam Samuelson (Berkeley). We are looking to add one additional panelist through this Call for Papers.

Submission procedure:

Anyone interested in participating is encouraged to submit a draft paper (preferred, and roughly in the range of 20-40 pages) or proposal by e-mail to Michael A. Carrier, at mcarrier@camlaw.rutgers.edu by September 4, 2012.

Eligibility:

Full-time faculty members of AALS member law schools are eligible to submit papers. Faculty at fee-paid law schools; foreign, visiting and adjunct faculty members; graduate students; fellows; and non-law school faculty are not eligible to submit. Papers may already be accepted for publication, as long as the paper will not be published before the AALS meeting.

Registration fee and expenses:

Call-for-Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

How will papers be reviewed?

Papers will be reviewed and selected by members of the Executive Committee of the AALS Section on Antirust and Economic Regulation: Darren Bush (Houston), Michael Carrier (Rutgers-Camden), Daniel Crane (Michigan), Hillary Greene (Connecticut), Scott Hemphill (Columbia), and D. Daniel Sokol (Florida).

Will the program be published in a journal?

Yes, as a symposium in the Harvard Journal of Law & Technology Digest.

Deadline date for submission:

September 4, 2012. Decisions will be announced by September 28, 2012.

Program date and time:

Saturday, January 5, 2013, 10:30am – 12:15pm.

Contact for submission and inquires:

Michael A. Carrier

Chair, AALS Section on Antitrust and Economic Regulation

Rutgers Law School – Camden
217 North Fifth Street
Camden, NJ 08102
(856) 225-6380
mcarrier@camlaw.rutgers.edu