Archives For International Center for Law & Economics

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eric Fruits, (Chief Economist, International Center for Law & Economics).]

Earlier this week, merger talks between Uber and food delivery service Grubhub surfaced. House Antitrust Subcommittee Chairman David N. Cicilline quickly reacted to the news:

Americans are struggling to put food on the table, and locally owned businesses are doing everything possible to keep serving people in our communities, even under great duress. Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub—which has a history of exploiting local restaurants through deceptive tactics and extortionate fees—marks a new low in pandemic profiteering. We cannot allow these corporations to monopolize food delivery, especially amid a crisis that is rendering American families and local restaurants more dependent than ever on these very services. This deal underscores the urgency for a merger moratorium, which I and several of my colleagues have been urging our caucus to support.

Pandemic profiteering rolls nicely off the tongue, and we’re sure to see that phrase much more over the next year or so. 

Grubhub shares jumped 29% Tuesday, the day the merger talks came to light, shown in the figure below. The Wall Street Journal reports companies are considering a deal that would value Grubhub stock at around 1.9 Uber shares, or $60-65 dollars a share, based on Thursday’s price.

But is that “pandemic profiteering?”

After Amazon announced its intended acquisition of Whole Foods, the grocer’s stock price soared by 27%. Rep. Cicilline voiced some convoluted concerns about that merger, but said nothing about profiteering at the time. Different times, different messaging.

Rep. Cicilline and others have been calling for a merger moratorium during the pandemic and used the Uber/Grubhub announcement as Exhibit A in his indictment of merger activity.

A moratorium would make things much easier for regulators. No more fighting over relevant markets, no HHI calculations, no experts debating SSNIPs or GUPPIs, no worries over consumer welfare, no failing firm defenses. Just a clear, brightline “NO!”

Even before the pandemic, it was well known that the food delivery industry was due for a shakeout. NPR reports, even as the business is growing, none of the top food-delivery apps are turning a profit, with one analyst concluding consolidation was “inevitable.” Thus, even if a moratorium slowed or stopped the Uber/Grubhub merger, at some point a merger in the industry will happen and the U.S. antitrust authorities will have to evaluate it.

First, we have to ask, “What’s the relevant market?” The government has a history of defining relevant markets so narrowly that just about any merger can be challenged. For example, for the scuttled Whole Foods/Wild Oats merger, the FTC famously narrowed the market to “premium natural and organic supermarkets.” Surely, similar mental gymnastics will be used for any merger involving food delivery services.

While food delivery has grown in popularity over the past few years, delivery represents less than 10% of U.S. food service sales. While Rep. Cicilline may be correct that families and local restaurants are “more dependent than ever” on food delivery, delivery is only a small fraction of a large market. Even a monopoly of food delivery service would not confer market power on the restaurant and food service industry.

No reasonable person would claim an Uber/Grubhub merger would increase market power in the restaurant and food service industry. But, it might convey market power in the food delivery market. Much attention is paid to the “Big Four”–DoorDash, Grubhub, Uber Eats, and Postmates. But, these platform delivery services are part of the larger food service delivery market, of which platforms account for about half of the industry’s revenues. Pizza accounts for the largest share of restaurant-to-consumer delivery.

This raises the big question of what is the relevant market: Is it the entire food delivery sector, or just the platform-to-consumer sector? 

Based on the information in the figure below, defining the market narrowly would place an Uber/Grubhub merger squarely in the “presumed to be likely to enhance market power” category.

  • 2016 HHI: <3,175
  • 2018 HHI: <1,474
  • 2020 HHI: <2,249 pre-merger; <4,153 post-merger

Alternatively, defining the market to encompass all food delivery would cut the platforms’ shares roughly in half and the merger would be unlikely to harm competition, based on HHI. Choosing the relevant market is, well, relevant.

The Second Measure data suggests that concentration in the platform delivery sector decreased with the entry of Uber Eats, but subsequently increased with DoorDash’s rising share–which included the acquisition of Caviar from Square.

(NB: There seems to be a significant mismatch in the delivery revenue data. Statista reports platform delivery revenues increased by about 40% from 2018 to 2020, but Second Measure indicates revenues have more than doubled.) 

Geoffrey Manne, in an earlier post points out “while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.” That may be the case here.

The figure below is a sample of platform delivery shares by city. I added data from an earlier study of 2017 shares. In all but two metro areas, Uber and Grubhub’s combined market share declined from 2017 to 2020. In Boston, the combined shares did not change and in Los Angeles, the combined shares increased by 1%.

(NB: There are some serious problems with this data, notably that it leaves out the restaurant-to-consumer sector and assumes the entire platform-to-consumer sector is comprised of only the “Big Four.”)

Platform-to-consumer delivery is a complex two-sided market in which the platforms link, and compete for, both restaurants and consumers. Platforms compete for restaurants, drivers, and consumers. Restaurants have a choice of using multiple platforms or entering into exclusive arrangements. Many drivers work for multiple platforms, and many consumers use multiple platforms. 

Fundamentally, the rise of platform-to-consumer is an evolution in vertical integration. Restaurants can choose to offer no delivery, use their own in-house delivery drivers, or use a third party delivery service. Every platform faces competition from in-house delivery, placing a limit on their ability to raise prices to restaurants and consumers.

The choice of delivery is not an either-or decision. For example, many pizza restaurants who have their own delivery drivers also use platform delivery service. Their own drivers may serve a limited geographic area, but the platforms allow the restaurant to expand its geographic reach, thereby increasing its sales. Even so, the platforms face competition from in-house delivery.

Mergers or other forms of shake out in the food delivery industry are inevitable. Mergers will raise important questions about relevant product and geographic markets as well as competition in two-sided markets. While there is a real risk of harm to restaurants, drivers, and consumers, there is also a real possibility of welfare enhancing efficiencies. These questions will never be addressed with an across-the-board merger moratorium.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Kristian Stout, (Associate Director, International Center for Law & Economics]

The public policy community’s infatuation with digital privacy has grown by leaps and bounds since the enactment of GDPR and the CCPA, but COVID-19 may leave the most enduring mark on the actual direction that privacy policy takes. As the pandemic and associated lockdowns first began, there were interesting discussions cropping up about the inevitable conflict between strong privacy fundamentalism and the pragmatic steps necessary to adequately trace the spread of infection. 

Axiomatic of this controversy is the Apple/Google contact tracing system, software developed for smartphones to assist with the identification of individuals and populations that have likely been in contact with the virus. The debate sparked by the Apple/Google proposal highlights what we miss when we treat “privacy” (however defined) as an end in itself, an end that must necessarily  trump other concerns. 

The Apple/Google contact tracing efforts

Apple/Google are doing yeoman’s work attempting to produce a useful contact tracing API given the headwinds of privacy advocacy they face. Apple’s webpage describing its new contact tracing system is a testament to the extent to which strong privacy protections are central to its efforts. Indeed, those privacy protections are in the very name of the service: “Privacy-Preserving Contact Tracing” program. But, vitally, the utility of the Apple/Google API is ultimately a function of its efficacy as a tracing tool, not in how well it protects privacy.

Apple/Google — despite the complaints of some states — are rolling out their Covid-19-tracking services with notable limitations. Most prominently, the APIs will not allow collection of location data, and will only function when users explicitly opt-in. This last point is important because there is evidence that opt-in requirements, by their nature, tend to reduce the flow of information in a system, and when we are considering tracing solutions to an ongoing pandemic surely less information is not optimal. Further, all of the data collected through the API will be anonymized, preventing even healthcare authorities from identifying particular infected individuals.

These restrictions prevent the tool from being as effective as it could be, but it’s not clear how Apple/Google could do any better given the political climate. For years, the Big Tech firms have been villainized by privacy advocates that accuse them of spying on kids and cavalierly disregarding consumer privacy as they treat individuals’ data as just another business input. The problem with this approach is that, in the midst of a generational crisis, our best tools are being excluded from the fight. Which begs the question: perhaps we have privacy all wrong? 

Privacy is one value among many

The U.S. constitutional order explicitly protects our privacy as against state intrusion in order to guarantee, among other things, fair process and equal access to justice. But this strong presumption against state intrusion—far from establishing a fundamental or absolute right to privacy—only accounts for part of the privacy story. 

The Constitution’s limit is a recognition of the fact that we humans are highly social creatures and that privacy is one value among many. Properly conceived, privacy protections are themselves valuable only insofar as they protect other things we value. Jane Bambauer explored some of this in an earlier post where she characterized privacy as, at best, an “instrumental right” — that is a tool used to promote other desirable social goals such as “fairness, safety, and autonomy.”

Following from Jane’s insight, privacy — as an instrumental good — is something that can have both positive and negative externalities, and needs to be enlarged or attenuated as its ability to serve instrumental ends changes in different contexts. 

According to Jane:

There is a moral imperative to ignore even express lack of consent when withholding important information that puts others in danger. Just as many states affirmatively require doctors, therapists, teachers, and other fiduciaries to report certain risks even at the expense of their client’s and ward’s privacy …  this same logic applies at scale to the collection and analysis of data during a pandemic.

Indeed, dealing with externalities is one of the most common and powerful justifications for regulation, and an extreme form of “privacy libertarianism” —in the context of a pandemic — is likely to be, on net, harmful to society.

Which brings us back to efforts of Apple/Google. Even if those firms wanted to risk the ire of  privacy absolutists, it’s not clear that they could do so without incurring tremendous regulatory risk, uncertainty and a popular backlash. As statutory matters, the CCPA and the GDPR chill experimentation in the face of potentially crippling fines. While the FTC Act’s Section 5 prohibition on “unfair or deceptive” practices is open to interpretation in manners which could result in existentially damaging outcomes. Further, some polling suggests that the public appetite for contact tracing is not particularly high – though, as is often the case, such pro-privacy poll outcomes rarely give appropriate shrift to the tradeoff required.

As a general matter, it’s important to think about the value of individual privacy, and how best to optimally protect it. But privacy does not stand above all other values in all contexts. It is entirely reasonable to conclude that, in a time of emergency, if private firms can devise more effective solutions for mitigating the crisis, they should have more latitude to experiment. Knee-jerk preferences for an amorphous “right of privacy” should not be used to block those experiments.

Much as with the Cosmic Turtle, its tradeoffs all the way down. Most of the U.S. is in lockdown, and while we vigorously protect our privacy, we risk frustrating the creation of tools that could put a light at the end of the tunnel. We are, in effect, trading liberty and economic self-determination for privacy.

Once the worst of the Covid-19 crisis has passed — hastened possibly by the use of contact tracing programs — we can debate the proper use of private data in exigent circumstances. For the immediate future, we should instead be encouraging firms like Apple/Google to experiment with better ways to control the pandemic. 

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eric Fruits, (Chief Economist, International Center for Law & Economics).]

In an earlier TOTM post, we argued as the economy emerges from the COVID-19 crisis, perhaps the best policy would allow properly motivated firms and households to themselves balance the benefits, costs, and risks of transitioning to “business as usual.” 

Sometimes, however, well meaning government policies disrupt the balance and realign motivations.

Our post contrasted firms who determined they could remain open by undertaking mitigation efforts with those who determined they could not safely remain open. One of these latter firms was Portland-based ChefStable, which operates more than 20 restaurants and bars. Kurt Huffman, the owner of ChefStable, shut down all the company’s properties one day before the Oregon governor issued her “Stay home, stay safe” order.

An unintended consequence

In a recent Wall Street Journal op-ed, Mr. Huffman reports his business was able to shift to carryout and delivery, which ended up being more successful than anticipated. So successful, in fact, that he needed to bring back some of the laid-off employees. That’s when he ran into one of the stimulus package’s unintended—but not unanticipated—consequences of providing federal-level payments on top of existing state-level guarantees:

We started making the calls last week, just as our furloughed employees began receiving weekly Federal Pandemic Unemployment Compensation checks of $600 under the Cares Act. When we asked our employees to come back, almost all said, “No thanks.” If they return to work, they’ll have to take a pay cut.

***

But as of this week, that same employee receives $1,016 a week, or $376 more than he made as a full time employee. Why on earth would he want to come back to work?

Mr. Huffman’s not alone. NPR reports on a Kentucky coffee shop owner who faces the same difficulty keeping her employees at work:

“The very people we hired have now asked us to be laid off,” Marietta wrote in a blog post. “Not because they did not like their jobs or because they did not want to work, but because it would cost them literally hundreds of dollars per week to be employed.”

With the federal government now offering $600 a week on top of the state’s unemployment benefits, she recognized her former employees could make more money staying home than they did on the job.

Or, a fully intended consequence

The NPR piece indicates the Trump administration opted for the relatively straightforward (if not simplistic) unemployment payments as a way to get the money to unemployed workers as quickly as possible.

On the other hand, maybe the unemployment premium was not an unintended consequence. Perhaps, there was some intention.

If the purpose of the stay-at-home orders is to “flatten the curve” and slow the spread of the coronavirus, then it can be argued the purpose of the stimulus spending is to mitigate some of the economic costs. 

If this is the case, it can also be argued that the unemployment premium paid by the federal government was designed to encourage people to stay at home and delay returning to work. In fact, it may be more effective than a bunch of loophole laden employment regulations that would require an army of enforcers.

Mr. Huffman seems confident his employees will be ready to return to work in August, when the premium runs out. John Cochrane, however, is not so confident, writing on his blog, “Hint to Mr. Huffman: I would not bet too much that this deadline is not extended.”

With the administration’s state-by-state phased re-opening of the economy, the unemployment premium payments could be tweaked so only residents in states in Phase 1 or 2 would be eligible to receive the premium payments.

Of course, this tweak would unleash its own unintended consequences. In particular, it would encourage some states to slow walk the re-opening of their economies as a way to extract more federal money for their residents. My wild guess: The slow walking states will be the same states who have been most affected by the state and local tax deductibility provisions in the Tax Cuts and Jobs Act.

As with all government policies, the unemployment provisions in the COVID-19 stimulus raise the age old question: If a policy generates unintended consequences that are not unanticipated, can those consequences really be unintended?

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Kristian Stout, (Associate Director, International Center for Law & Economics]


The ongoing pandemic has been an opportunity to explore different aspects of the human condition. For myself, I have learned that, despite a deep commitment to philosophical (neo- or classical-) liberalism, at heart I am pragmatic. I would prefer a society that optimizes for more individual liberty, but I am emphatically not someone who would even entertain the idea of using crises to advance my agenda when it is not clearly in service to amelioration of immediate problems.

Sadly, I have also learned that there are those who are not similarly pragmatic, and are willing to advance their ideological agenda come hell or high water. In this regard, I was disappointed yesterday to see the Gurry IP/COVID Letter passing around Twitter calling for widespread, worldwide interference with the property rights of IPR holders. 

The letter calls for a scattershot set of “remedies” to the crisis that would open access to copyright- and patent-protected inventions and content, including (among other things): 

  • voluntary licensing and non-enforcement of IP;
  • abrogation of IPR by WIPO members using the  “flexibility” in the international IP regime; 
  • the removal of geographical restrictions on IP licenses;
  • forcing patents into COVID-19 patent pools; and 
  • the implementation of compulsory licensing. 

And, unlike many prior efforts to push the envelope on weakening IP protections, the Gurry Letter also calls for measures that would weaken trade secrets and expose confidential business information in order to “achieve universal and equitable access to COVID-19 medicines and medical technologies as soon as reasonably possible.”

Notably, nothing in the letter suggests that any of these measures should be regarded as temporary.

We all want treatments for infection, vaccines for prevention, and ample supply of personal protective equipment as soon as possible, but if all the demands in this letter were met, it would do little to increase the supply of any of these things in the short term, while undermining incentives to develop new treatments, vaccines and better preventative tools in the long run. 

Fundamentally, the letter  reflects a willingness to use the COVID-19 pandemic to pursue an agenda that lacks merit and would be dismissed in the normal course of affairs. 

What is most certainly the case is that we need more innovation now, and we need it faster. There is no reason to believe that mandating open source status or forcing compulsory licensing on the firms doing that work will encourage that work to proceed with all due haste—and every indication that the opposite is the case. 

Where there are short term shortages of certain products that might be produced in much larger quantities by relaxing IP, companies are responding by doing just that—voluntarily. But this is fundamentally different from the imposition of unlimited compulsory licenses.

Further, private actors have displayed an impressive willingness to provide free or low cost access to technologies and content—without government coercion. The following is a short list of some of the content and inventions that have been opened up:

Culture, Fitness & Entertainment

  • HBO Will Stream 500 Hours of Free Programming, Including Full Seasons of ‘Veep,’ ‘The Sopranos,’ ‘Silicon Valley’”
  • Dozens (or more) of artists, both famous and lesser known, are releasing free back catalog performances or are taking part in free live streaming sessions on social media platforms. Notably, viewers are often welcome to donate or “pay what they” want to help support these artists (more on this below).
  • The NBA, NFL, and NHL are offering free access to their back catalogue of games.
  • A large array of music production software can now be used free on extended trials for 3 months (or completely free and unlimited in some cases). 
  • CBS All Access expanded its free trial period.
  • Neil Gaiman and Harper Collins granted permission to Levar Burton to livestream readings from their catalogs.
  • Disney is releasing movies early onto its (paid) Disney+ services.
  • Gold’s Gym is providing free access to its app-based workouts.
  • The Met is streaming free recordings of its Live in HD series.
  • The Seattle Symphony is offering free access to some of its recorded performances.
  • The UK National Theater is streaming some of its most popular plays for free.
  • Andrew Lloyd Weber is streaming his shows online for free.

Science, News & Education

  • Scholastica released free content intended to help educate students stuck at home while sheltering-in-place. 
  • Nearly 100 academic journals, societies, institutes, and companies signed a commitment to make research and data on COVID-19 freely available, at least for the duration of the outbreak.
  • The Atlantic lifted paywall restrictions on access to its COVID-19-related content.
  • The New England Journal of Medicine is allowing free access to COVID-19-related resources.
  • The Lancet allows free access to research it publishes on COVID-19.
  • All material published by theBMJ on the coronavirus outbreak is freely available.
  • The AAAS-published Science allows free access to its coronavirus research and commentary.
  • Elsevier gave full access to its content on its COVID-19 Information Center for PubMed Central and other public health databases.
  • The American Economic Association announced open access to all of its journals until the end of June.
  • JSTOR expanded free access to some of its scholarship.

Medicine & Technology

  • The Global Center for Medical Design is developing license-free PPE designs that can be quickly implemented by manufacturers.
  • Medtronic published “design specifications for the Puritan Bennett 560 (PB560) to allow innovators, inventors, start-ups, and academic institutions to leverage their own expertise and resources to evaluate options for rapid ventilator manufacturing.” It additionally provided software licenses for this technology.
  • AbbVie announced it won’t enforce its patent rights for Kaletra—a drug that may provide treatment for COVID-19 infections. Israel had earlier indicated it would impose compulsory licenses for the drug, but AbbVie is allowing use worldwide. The company, moreover, had donated supplies of the drug to China earlier in the year when the outbreak first became apparent.
  • Google is working with health researchers to provide anonymized and aggregated user location data. 
  • Cisco has extended free licenses and expanded usage counts at no extra charge for three of its security technologies to help strained IT teams and partners ready themselves and their clients for remote work.”
  • Microsoft is offering free subscriptions to its Teams product for six months.
  • Zoom expanded its free access and other limitations for educational institutions around the world.

Incentivize innovation, now more than ever

In addition to undermining the short-term incentives to draw more research resources into the fight against COVID-19, using this crisis to weaken the IP regime will cause long-term damage to the economies of the world. We still will need creators making new cultural products and researchers developing new medicines and technologies; weakening the IP regime will undermine the delicate set of incentives that cultural and scientific production depends upon. 

Any clear-eyed assessment of the broader course of the pandemic and the response to it gives lie to the notion that IP rights are oppressive or counterproductive. It is the pharmaceutical industry—hated as they may be in some quarters—that will be able to marshall the resources and expertise to develop treatments and vaccines. And it is artists and educators producing cultural content who (theoretically) depend on the licensing revenues of their creations for survival. 

In fact, one of the things that the pandemic has exposed is the fragility of artists’ livelihoods and the callousness with which they are often treated. Shortly after the lockdowns began in the US, the well-established rock musician David Crosby said in an interview that, if he could not tour this year, he would face tremendous financial hardship. 

As unfortunate as that may be for Crosby, a world-famous musician, imagine how much harder it is for struggling musicians who can hardly hope to achieve a fraction of Crosby’s success for their own tours, let alone for licensing. If David Crosby cannot manage well for a few months on the revenue from his popular catalog, what hope do small artists have?

Indeed, the flood of unable-to-tour artists who are currently offering “donate what you can” streaming performances are a symptom of the destructive assault on IPR exemplified in the letter. For decades, these artists have been told that they can only legitimately make money through touring. Although the potential to actually make a living while touring is possibly out of reach for many or most artists,  those that had been scraping by have now been brought to the brink of ruin as the ability to tour is taken away. 

There are certainly ways the various IP regimes can be improved (like, for instance, figuring out how to help creators make a living from their creations), but now is not the time to implement wishlist changes to an otherwise broadly successful rights regime. 

And, critically, there is a massive difference between achieving wider distribution of intellectual property voluntarily as opposed to through government fiat. When done voluntarily the IP owner determines the contours and extent of “open sourcing” so she can tailor increased access to her own needs (including the need to eat and pay rent). In some cases this may mean providing unlimited, completely free access, but in other cases—where the particular inventor or creator has a different set of needs and priorities—it may be something less than completely open access. When a rightsholder opts to “open source” her property voluntarily, she still retains the right to govern future use (i.e. once the pandemic is over) and is able to plan for reductions in revenue and how to manage future return on investment. 

Our lawmakers can consider if a particular situation arises where a particular piece of property is required for the public good, should the need arise. Otherwise, as responsible individuals, we should restrain ourselves from trying to capitalize on the current crisis to ram through our policy preferences. 

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eric Fruits, (Chief Economist, International Center for Law & Economics).]

The Wall Street Journal reports congressional leaders have agreed to impose limits on stock buybacks and dividend payments for companies receiving aid under the COVID-19 disaster relief package. 

Rather than a flat-out ban, the draft legislation forbids any company taking federal emergency loans or loan guarantees from repurchasing its own stock or paying shareholder dividends. The ban lasts for the term of the loans, plus one year after the aid had ended.

In theory, under a strict set of conditions, there is no difference between dividends and buybacks. Both approaches distribute cash from the corporation to shareholders. In practice, there are big differences between dividends and share repurchases.

  • Dividends are publicly visible actions and require authorization by the board of directors. Shareholders have expectations of regular, stable dividends. Buybacks generally lack such transparency. Firms have flexibility in choosing the timing and the amount of repurchases, subject to the details of their repurchase programs.
  • Cash dividends have no effect on the number of shares outstanding. In contrast, share repurchases reduce the number of shares outstanding. By reducing the number of shares outstanding, buybacks increase earnings per share, all other things being equal. 

Over the past 15 years, buybacks have outpaced dividend payouts. The figure above, from Seeking Alpha, shows that while dividends have grown relatively smoothly over time, the aggregate value of buybacks are volatile and vary with the business cycle. In general, firms increase their repurchases relative to dividends when the economy booms and reduce them when the economy slows or shrinks. 

This observation is consistent with a theory that buybacks are associated with periods of greater-than-expected financial performance. On the other hand, dividends are associated with expectations of long-term profitability. Dividends can decrease, but only when profits are expected to be “permanently” lower. 

During the Great Recession, the figure above shows that dividends declined by about 10%, the amount of share repurchases plummeted by approximately 85%. The flexibility afforded by buybacks provided stability in dividends.

There is some logic to dividend and buyback limits imposed by the COVID-19 disaster relief package. If a firm has enough cash on hand to pay dividends or repurchase shares, then it doesn’t need cash assistance from the federal government. Similarly, if a firm is so desperate for cash that it needs a federal loan or loan guarantee, then it doesn’t have enough cash to provide a payout to shareholders. Surely managers understand this and sophisticated shareholders should too.

Because of this understanding, the dividend and buyback limits may be a non-binding constraint. It’s not a “good look” for a corporation to accept millions of dollars in federal aid, only to turn around and hand out those taxpayer dollars to the company’s shareholders. That’s a sure way to get an unflattering profile in the New York Times and an invitation to attend an uncomfortable hearing at the U.S. Capitol. Even if a distressed firm could repurchase its shares, it’s unlikely that it would.

The logic behind the plus-one-year ban on dividends and buybacks is less clear. The relief package is meant to get the U.S. economy back to normal as fast as possible. That means if a firm repays its financial assistance early, the company’s shareholders should be rewarded with a cash payout rather than waiting a year for some arbitrary clock to run out.

The ban on dividends and buybacks may lead to an unintended consequence of increased merger and acquisition activity. Vox reports an email to Goldman Sachs’ investment banking division says Goldman expects to see an increase in hostile takeovers and shareholder activism as the prices of public companies fall. Cash rich firms who are subject to the ban and cannot get that cash to their existing shareholders may be especially susceptible takeover targets.

Desperate times call for desperate measures and these are desperate times. Buyback backlash has been brewing for sometime and the COVID-19 relief package presents a perfect opportunity to ban buybacks. With the pressures businesses are under right now, it’s unlikely there’ll be many buybacks over the next few months. The concern should be over the unintended consequences facing firms once the economy recovers.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Ben Sperry, (Associate Director, Legal Research, International Center for Law & Economics).]

The visceral reaction to the New York Times’ recent story on Matt Colvin, the man who had 17,700 bottles of hand sanitizer with nowhere to sell them, shows there is a fundamental misunderstanding of the importance of prices and the informational function they serve in the economy. Calls to enforce laws against “price gouging” may actually prove more harmful to consumers and society than allowing prices to rise (or fall, of course) in response to market conditions. 

Nobel-prize winning economist Friedrich Hayek explained how price signals serve as information that allows for coordination in a market society:

We must look at the price system as such a mechanism for communicating information if we want to understand its real function… The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.

Economic actors don’t need a PhD in economics or even to pay attention to the news about the coronavirus to change their behavior. Higher prices for goods or services alone give important information to individuals — whether consumers, producers, distributors, or entrepreneurs — to conserve scarce resources, produce more, and look for (or invest in creating!) alternatives.

Prices are fundamental to rationing scarce resources, especially during an emergency. Allowing prices to rapidly rise has three salutary effects (as explained by Professor Michael Munger in his terrific twitter thread):

  1. Consumers ration how much they really need;
  2. Producers respond to the rising prices by ramping up supply and distributors make more available; and
  3. Entrepreneurs find new substitutes in order to innovate around bottlenecks in the supply chain. 

Despite the distaste with which the public often treats “price gouging,” officials should take care to ensure that they don’t prevent these three necessary responses from occurring. 

Rationing by consumers

During a crisis, if prices for goods that are in high demand but short supply are forced to stay at pre-crisis levels, the informational signal of a shortage isn’t given — at least by the market directly. This encourages consumers to buy more than is rationally justified under the circumstances. This stockpiling leads to shortages. 

Companies respond by rationing in various ways, like instituting shorter hours or placing limits on how much of certain high-demand goods can be bought by any one consumer. Lines (and unavailability), instead of price, become the primary cost borne by consumers trying to obtain the scarce but underpriced goods. 

If, instead, prices rise in light of the short supply and high demand, price-elastic consumers will buy less, freeing up supply for others. And, critically, price-inelastic consumers (i.e. those who most need the good) will be provided a better shot at purchase.

According to the New York Times story on Mr. Colvin, he focused on buying out the hand sanitizer in rural areas of Tennessee and Kentucky, since the major metro areas were already cleaned out. His goal was to then sell these hand sanitizers (and other high-demand goods) online at market prices. He was essentially acting as a speculator and bringing information to the market (much like an insider trader). If successful, he would be coordinating supply and demand between geographical areas by successfully arbitraging. This often occurs when emergencies are localized, like post-Katrina New Orleans or post-Irma Florida. In those cases, higher prices induced suppliers to shift goods and services from around the country to the affected areas. Similarly, here Mr. Colvin was arguably providing a beneficial service, by shifting the supply of high-demand goods from low-demand rural areas to consumers facing localized shortages. 

For those who object to Mr. Colvin’s bulk purchasing-for-resale scheme, the answer is similar to those who object to ticket resellers: the retailer should raise the price. If the Walmarts, Targets, and Dollar Trees raised prices or rationed supply like the supermarket in Denmark, Mr. Colvin would not have been able to afford nearly as much hand sanitizer. (Of course, it’s also possible — had those outlets raised prices — that Mr. Colvin would not have been able to profitably re-route the excess local supply to those in other parts of the country most in need.)

The role of “price gouging” laws and social norms

A common retort, of course, is that Colvin was able to profit from the pandemic precisely because he was able to purchase a large amount of stock at normal retail prices, even after the pandemic began. Thus, he was not a producer who happened to have a restricted amount of supply in the face of new demand, but a mere reseller who exacerbated the supply shortage problems.

But such an observation truncates the analysis and misses the crucial role that social norms against “price gouging” and state “price gouging” laws play in facilitating shortages during a crisis.

Under these laws, typically retailers may raise prices by at most 10% during a declared state of emergency. But even without such laws, brick-and-mortar businesses are tied to a location in which they are repeat players, and they may not want to take a reputational hit by raising prices during an emergency and violating the “price gouging” norm. By contrast, individual sellers, especially pseudonymous third-party sellers using online platforms, do not rely on repeat interactions to the same degree, and may be harder to track down for prosecution. 

Thus, the social norms and laws exacerbate the conditions that create the need for emergency pricing, and lead to outsized arbitrage opportunities for those willing to violate norms and the law. But, critically, this violation is only a symptom of the larger problem that social norms and laws stand in the way, in the first instance, of retailers using emergency pricing to ration scarce supplies.

Normally, third-party sales sites have much more dynamic pricing than brick and mortar outlets, which just tend to run out of underpriced goods for a period of time rather than raise prices. This explains why Mr. Colvin was able to sell hand sanitizer for prices much higher than retail on Amazon before the site suspended his ability to do so. On the other hand, in response to public criticism, Amazon, Walmart, eBay, and other platforms continue to crack down on third party “price-gouging” on their sites

But even PR-centric anti-gouging campaigns are not ultimately immune to the laws of supply and demand. Even Amazon.com, as a first party seller, ends up needing to raise prices, ostensibly as the pricing feedback mechanisms respond to cost increases up and down the supply chain. 

But without a willingness to allow retailers and producers to use the informational signal of higher prices, there will continue to be more extreme shortages as consumers rush to stockpile underpriced resources.

The desire to help the poor who cannot afford higher priced essentials is what drives the policy responses, but in reality no one benefits from shortages. Those who stockpile the in-demand goods are unlikely to be poor because doing so entails a significant upfront cost. And if they are poor, then the potential for resale at a higher price would be a benefit.

Increased production and distribution

During a crisis, it is imperative that spiking demand is met by increased production. Prices are feedback mechanisms that provide realistic estimates of demand to producers. Even if good-hearted producers forswearing the profit motive want to increase production as an act of charity, they still need to understand consumer demand in order to produce the correct amount. 

Of course, prices are not the only source of information. Producers reading the news that there is a shortage undoubtedly can ramp up their production. But even still, in order to optimize production (i.e., not just blindly increase output and hope they get it right), they need a feedback mechanism. Prices are the most efficient mechanism available for quickly translating the amount of social need (demand) for a given product to guarantee that producers do not undersupply the product  (leaving more people without than need the good), or oversupply the product (consuming more resources than necessary in a time of crisis). Prices, when allowed to adjust to actual demand, thus allow society to avoid exacerbating shortages and misallocating resources.

The opportunity to earn more profit incentivizes distributors all along the supply chain. Amazon is hiring 100,000 workers to help ship all the products which are being ordered right now. Grocers and retailers are doing their best to line the shelves with more in-demand food and supplies

Distributors rely on more than just price signals alone, obviously, such as information about how quickly goods are selling out. But even as retail prices stay low for consumers for many goods, distributors often are paying more to producers in order to keep the shelves full, as in the case of eggs. These are the relevant price signals for producers to increase production to meet demand.

For instance, hand sanitizer companies like GOJO and EO Products are ramping up production in response to known demand (so much that the price of isopropyl alcohol is jumping sharply). Farmers are trying to produce as much as is necessary to meet the increased orders (and prices) they are receiving. Even previously low-demand goods like beans are facing a boom time. These instances are likely caused by a mix of anticipatory response based on general news, as well as the slightly laggier price signals flowing through the supply chain. But, even with an “early warning” from the media, the manufacturers still need to ultimately shape their behavior with more precise information. This comes in the form of orders from retailers at increased frequencies and prices, which are both rising because of insufficient supply. In search of the most important price signal, profits, manufacturers and farmers are increasing production.

These responses to higher prices have the salutary effect of making available more of the products consumers need the most during a crisis. 

Entrepreneurs innovate around bottlenecks 

But the most interesting thing that occurs when prices rise is that entrepreneurs create new substitutes for in-demand products. For instance, distillers have started creating their own hand sanitizers

Unfortunately, however, government regulations on sales of distilled products and concerns about licensing have led distillers to give away those products rather than charge for them. Thus, beneficial as this may be, without the ability to efficiently price such products, not nearly as much will be produced as would otherwise be. The non-emergency price of zero effectively guarantees continued shortages because the demand for these free alternatives will far outstrip supply.

Another example is car companies in the US are now producing ventilators. The FDA waived regulations on the production of new ventilators after General Motors, Ford, and Tesla announced they would be willing to use idle production capacity for the production of ventilators.

As consumers demand more toilet paper, bottled water, and staple foods than can be produced quickly, entrepreneurs respond by refocusing current capabilities on these goods. Examples abound:

Without price signals, entrepreneurs would have far less incentive to shift production and distribution to the highest valued use. 

Conclusion

While stories like that of Mr. Colvin buying all of the hand sanitizer in Tennessee understandably bother people, government efforts to prevent prices from adjusting only impede the information sharing processes inherent in markets. 

If the concern is to help the poor, it would be better to pursue less distortionary public policy than arbitrarily capping prices. The US government, for instance, is currently considering a progressively tiered one-time payment to lower income individuals. 

Moves to create new and enforce existing “price-gouging” laws are likely to become more prevalent the longer shortages persist. Platforms will likely continue to receive pressure to remove “price-gougers,” as well. These policies should be resisted. Not only will these moves not prevent shortages, they will exacerbate them and push the sale of high-demand goods into grey markets where prices will likely be even higher. 

Prices are an important source of information not only for consumers, but for producers, distributors, and entrepreneurs. Short circuiting this signal will only be to the detriment of society.  

Goodhart and Bad Policy

Eric Fruits —  18 March 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eric Fruits, (Chief Economist, International Center for Law & Economics).]




Wells Fargo faces billions of dollars of fines for creating millions of fraudulent savings, checking, credit, and insurance accounts on behalf of their clients without their customers’ consent. Last weekend, tens of thousands of travelers were likely exposed to coronavirus while waiting hours for screening at crowded airports. Consumers and businesses around the world pay higher energy prices as their governments impose costly programs to reduce carbon emissions.

These seemingly unrelated observations have something in common: They are all victims of some version of Goodhart’s Law.

Being a central banker, Charles Goodhart’s original statement was a bit more dense: “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.”

The simple version of the law is: “When a measure becomes a target it ceases to be a good measure.”

Economist Charles Munger puts it more succinctly: “Show me the incentive and I’ll show you the outcome.”

The Wells Fargo scandal is a case study in Goodhart’s Law. It came from a corporate culture pushed by the CEO, Dick Kovacevich, that emphasized “cross-selling” products to existing customers, as related in a Vanity Fair profile.

As Kovacevich told me in a 1998 profile of him I wrote for Fortune magazine, the key question facing banks was “How do you sell money?” His answer was that financial instruments—A.T.M. cards, checking accounts, credit cards, loans—were consumer products, no different from, say, screwdrivers sold by Home Depot. In Kovacevich’s lingo, bank branches were “stores,” and bankers were “salespeople” whose job was to “cross-sell,” which meant getting “customers”—not “clients,” but “customers”—to buy as many products as possible. “It was his business model,” says a former Norwest executive. “It was a religion. It very much was the culture.”

It was underpinned by the financial reality that customers who had, say, lines of credit and savings accounts with the bank were far more profitable than those who just had checking accounts. In 1997, prior to Norwest’s merger with Wells Fargo, Kovacevich launched an initiative called “Going for Gr-Eight,” which meant getting the customer to buy eight products from the bank. The reason for eight? “It rhymes with GREAT!” he said.

The concept makes sense. It’s easier to get sales from existing customers than trying to find new customers. Also, if revenues are rising, there’s less pressure to reduce costs. 

Kovacevich came to Wells Fargo in the late 1990s by way of its merger with Norwest, where he was CEO. After the merger, he noticed that the Wells unit was dragging down the merged firm’s sales-per-customer numbers. So, Wells upped the pressure. 

One staffer reported that every morning, they’d have a conference call with their managers. Staff were supposed to to explain how they’d make their sales goal for the day. If the goal wasn’t hit at the end of the day, staff had to explain why they missed the goal and how they planned to fix it. Bonuses were offered for hitting their targets, and staffers were let go for missing their targets.

Wells Fargo had rules against “gaming” the system. Yes, it was called “gaming.” But the incentives were so strongly aligned in favor of gaming, that the rules were ignored.

Wells Fargo’s internal investigation estimated between 2011 and 2015 its employees had opened more than 1.5 million deposit accounts and more than 565,000 credit-card accounts that may not have been authorized. Customers were charged fees on the accounts, some accounts were sent to collections over unpaid fees, cars were repossessed, and homes went into foreclosure.

Some customers were charged fees on accounts they didn’t know they had, and some customers had collection agencies calling them due to unpaid fees on accounts they didn’t know existed.

Goodhart’s Law hit Wells Fargo hard. Cross-selling was the bank’s target. Once management placed pressure to hit the target, cross-selling became not just a bad target, it corrupted the entire retail side of the business.

Last Friday, my son came home from his study abroad in Spain. He landed less than eight hours before the travel ban went into effect. He was lucky–he got out of the airport less than an hour after landing. 

The next day was pandemonium. In addition to the travel ban, the U.S. imposed health screening on overseas arrivals. Over the weekend, travelers reported being forced into crowded terminals for up to eight hours to go through customs and receive screening. 

The screening process resulted in exactly the opposite of what health officials are advising, to avoid close contact and large crowds. We still don’t know if the screenings have helped reduce the spread of the coronavirus or if the forced crowding fostered the spread.

The government seemed to forget Goodhart’s Law. Public demand for enhanced screenings made screening the target. Screenings were implemented hastily without any thought of the consequences of clustering potentially infected flyers with the uninfected. Someday, we may learn that a focus on screening came at the expense of slowing the spread.

More and more we’re being told climate change presents an existential threat to our planet. We’re told the main culprit is carbon emissions from economic activity. Toward that end, governments around the world are trying to take extraordinary measures to reduce carbon emissions. 

In Oregon, the legislature has been trying for more than a decade to implement a cap-and-trade program to reduce carbon emissions in the state. A state that accounts for less than one-tenth of one percent of global greenhouse gas emissions. Even if Oregon went to zero GHG emissions, the world would never know.

Legislators pushing cap-and-trade want the state to address climate change immediately. But, when the microphones are turned off, they admit their cap-and-trade program would do nothing to slow global climate change.

In yet another case of Goodhart’s Law, Oregon and other jurisdictions have made carbon emissions the target. As a consequence, if cap-and-trade were ever to become law in the state, businesses and consumers would be paying hundreds or thousands of dollars of dollars a year more in energy prices, with zero effect on global temperatures. Those dollars could be better spent on acknowledging the consequences of climate change and making investments to deal with those consequences.

The funny thing about Goodhart’s Law is that once you know about it, you see it everywhere. And, it’s not just some quirky observation. It’s a failure that can have serious consequences on our health, our livelihoods, and our economy.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Dirk Auer, (Senior Fellow of Law & Economics, International Center for Law & Economics).]

Republican Senator Josh Hawley infamously argued that Big Tech is overrated. In his words:

My biggest critique of big tech is: what big innovation have they really given us? What is it now that in the last 15, 20 years that people who say they are the brightest minds in the country have given this country? What are their great innovations?

To Senator Hawley these questions seemed rhetorical. Big Tech’s innovations were trivial gadgets: “autoplay” and “snap streaks”, to quote him once more.

But, as any Monty Python connoisseur will tell you, rhetorical questions have a way of being … not so rhetorical. In one of Python’s most famous jokes, members of the “People’s Front of Judea” ask “what have the Romans ever done for us”? To their own surprise, the answer turns out to be a great deal:

This post is the first in a series examining some of the many ways in which Big Tech is making Coronavirus-related lockdowns and social distancing more bearable, and how Big Tech is enabling our economies to continue functioning (albeit at a severely reduced pace) throughout the outbreak. 

Although Big Tech’s contributions are just a small part of a much wider battle, they suggest that the world is drastically better situated to deal with COVID-19 than it would have been twenty years ago – and this is in no small part thanks to Big Tech’s numerous innovations.

Of course, some will say that the world would be even better equipped to handle COVID-19, if Big Tech had only been subject to more (or less) regulation. Whether these critiques are correct, or not, they are not the point of this post. For many, like Senator Hawley, it is apparently undeniable that tech does more harm than good. But, as this post suggests, that is surely not the case. And before we do decide whether and how we want to regulate it in the future, we should be particularly mindful of what aspects of “Big Tech” seem particularly suited to dealing with the current crisis, and ensure that we don’t adopt regulations that thoughtlessly undermine these.

1. Priceless information 

One of the most important ways in which Big Tech firms have supported international attempts to COVID-19 has been their role as  information intermediaries. 

As the title of a New York Times article put it:

When Facebook Is More Trustworthy Than the President: Social media companies are delivering reliable information in the coronavirus crisis. Why can’t they do that all the time?

The author is at least correct on the first part. Big Tech has become a cornucopia of reliable information about the virus:

  • Big Tech firms are partnering with the White House and other agencies to analyze massive COVID-19 datasets in order to help discover novel answers to questions about transmission, medical care, and other interventions. This partnership is possible thanks to the massive investments in AI infrastructure that the leading tech firms have made. 
  • Google Scholar has partnered with renowned medical journals (as well as public authorities) to guide citizens towards cutting edge scholarship relating to COVID-19. This a transformative ressource in a world of lockdows and overburdened healthcare providers.
  • Google has added a number of features to its main search engine – such as a “Coronavirus Knowledge Panel” and SOS alerts – in order to help users deal with the spread of the virus.
  • On Twitter, information and insights about COVID-19 compete in the market for ideas. Numerous news outlets have published lists of recommended people to follow (Fortune, Forbes). 

    Furthermore – to curb some of the unwanted effects of an unrestrained market for ideas – Twitter (and most other digital platforms) links to the websites of public authorities when users search for COVID-related hashtags.
  • This flow of information is a two-way street: Twitter, Facebook and Reddit, among others, enable citizens and experts to weigh in on the right policy approach to COVID-19. 

    Though the results are sometimes far from perfect, these exchanges may prove invaluable in critical times where usual methods of policy-making (such as hearings and conferences) are mostly off the table.
  • Perhaps most importantly, the Internet is a precious source of knowledge about how to deal with an emerging virus, as well as life under lockdown. We often take for granted how much of our lives benefit from extreme specialization. These exchanges are severely restricted under lockdown conditions. Luckily, with the internet and modern search engines (pioneered by Google), most of the world’s information is but a click away.

    For example, Facebook Groups have been employed by users of the social media platform in order to better coordinate necessary activity among community members — like giving blood — while still engaging in social distancing.

In short, search engines and social networks have been beacons of information regarding COVID-19. Their mostly bottom-up approach to knowledge generation (i.e. popular topics emerge organically) is essential in a world of extreme uncertainty. This has ultimately enabled these players to stay ahead of the curve in bringing valuable information to citizens around the world.

2. Social interactions

This is probably the most obvious way in which Big Tech is making life under lockdown more bearable for everyone. 

  • In Italy, Whatsapp messages and calls jumped by 20% following the outbreak of COVID-19. And Microsoft claims that the use of Skype jumped by 100%.
  • Younger users are turning to social networks, like TikTok, to deal with the harsh realities of the pandemic.
  • Strangers are using Facebook groups to support each other through difficult times.
  • And institutions, like the WHO, are piggybacking on this popularity to further raise awareness about COVID-19 via social media. 
  • In South Africa, health authorities even created a whatsapp contact to answer users questions about the virus.
  • Most importantly, social media is a godsend for senior citizens and anyone else who may have to live in almost total isolation for the foreseeable future. For instance, nursing homes are putting communications apps, like Skype and WhatsApp, in the hands of their patients, to keep up their morale (here and here).

And with the economic effects of COVID-19 starting to gather speed, users will more than ever be grateful to receive these services free of charge. Sharing data – often very limited amounts – with a platform is an insignificant price to pay in times of economic hardship. 

3. Working & Learning

It will also be impossible to effectively fight COVID-19 if we cannot maintain the economy afloat. Stock markets have already plunged by record amounts. Surely, these losses would be unfathomably worse if many of us were not lucky enough to be able to work, and from the safety of our own homes. And for those individuals who are unable to work from home, their own exposure is dramatically reduced thanks to a significant proportion of the population that can stay out of public.

Once again, we largely have Big Tech to thank for this. 

  • Downloads of Microsoft Teams and Zoom are surging on both Google and Apple’s app stores. This is hardly surprising. With much of the workforce staying at home, these video-conference applications have become essential. The increased load generated by people working online might even have caused Microsoft Teams to crash in Europe.
  • According to Microsoft, the number of Microsoft Teams meetings increased by 500 percent in China.
  • Sensing that the current crisis may last for a while, some firms have also started to conduct job interviews online; populars apps for doing so include Skype, Zoom and Whatsapp. 
  • Slack has also seen a surge in usage, as firms set themselves up to work remotely. It has started offering free training, to help firms move online.
  • Along similar lines, Google recently announced that its G suite of office applications – which enables users to share and work on documents online – had recently passed 2 Billion users.
  • Some tech firms (including Google, Microsoft and Zoom) have gone a step further and started giving away some of their enterprise productivity software, in order to help businesses move their workflows online.

And Big Tech is also helping universities, schools and parents to continue providing coursework and lectures to their students/children.

  • Zoom and Microsoft Teams have been popular choices for online learning. To facilitate the transition to online learning, Zoom has notably lifted time limits relating to the free version of its app (for schools in the most affected areas).
  • Even in the US, where the virus outbreak is currently smaller than in Europe, thousands of students are already being taught online.
  • Much of the online learning being conducted for primary school children is being done with affordable Chromebooks. And some of these Chromebooks are distributed to underserved schools through grant programs administered by Google.
  • Moreover, at the time of writing, most of the best selling books on Amazon.com are pre-school learning books:

Finally, the advent of online storage services, such as Dropbox and Google Drive, has largely alleviated the need for physical copies of files. In turn, this enables employees to remotely access all the files they need to stay productive. While this may be convenient under normal circumstances, it becomes critical when retrieving a binder in the office is no longer an option.

4. So what has Big Tech ever done for us?

With millions of families around the world currently under forced lockdown, it is becoming increasingly evident that Big Tech’s innovations are anything but trivial. Innovations that seemed like convenient tools only a couple of days ago, are now becoming essential parts of our daily lives (or, at least, we are finally realizing how powerful they truly are). 

The fight against COVID-19 will be hard. We can at least be thankful that we have Big Tech by our side. Paraphrasing the Monty Python crew: 

Q: What has Big Tech ever done for us? 

A: Abundant, free, and easily accessible information. Precious social interactions. Online working and learning.

Q: But apart from information, social interactions, and online working (and learning); what has Big Tech ever done for us?

For the answer to this question, I invite you to stay tuned for the next post in this series.

The following is the first in a new blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available at https://truthonthemarket.com/symposia/the-law-economics-of-the-covid-19-pandemic/.

Continue Reading...

[TOTM: The following is part of a symposium by TOTM guests and authors on the 2020 Vertical Merger Guidelines. The entire series of posts is available here.

This post is authored by Eric Fruits (Chief Economist, International Center for Law & Economics and Professor of Economics, Portland State University).]

Vertical mergers are messy. They’re messy for the merging firms and they’re especially messy for regulators charged with advancing competition without advantaging competitors. Firms rarely undertake a vertical merger with an eye toward monopolizing a market. Nevertheless, competitors and competition authorities excel at conjuring up complex models that reveal potentially harmful consequences stemming from vertical mergers. In their post, Gregory J. Werden and Luke M. Froeb highlight the challenges in evaluating vertical mergers:

[V]ertical mergers produce anticompetitive effects only through indirect mechanisms with many moving parts, which makes the prediction of competitive effects from vertical mergers more complex and less certain.  

There’s a recurring theme throughout this symposium: The current Vertical Merger Guidelines should be updated; the draft Guidelines are a good start, but they raise more questions than they answer. Other symposium posts have hit on the key ups and downs of the draft Guidelines. 

In this post, I use the draft Guidelines’ examples to highlight how messy vertical mergers can be. The draft Guidelines’ examples are meant to clarify the government’s thinking on markets and mergers. In the end, however, they demonstrate the complexity in identifying relevant markets, related products, and the dynamic interaction of competition. I will focus on two examples provided in the draft Guidelines. Warning: you’re going to read a lot about oranges.

In the following example from the draft Guidelines, the relevant market is the wholesale supply of orange juice in region X and Company B’s supply of oranges is the related product

Example 2: Company A is a wholesale supplier of orange juice. It seeks to acquire Company B, an owner of orange orchards. The Agencies may consider whether the merger would lessen competition in the wholesale supply of orange juice in region X (the relevant market). The Agencies may identify Company B’s supply of oranges as the related product. Company B’s oranges are used in fifteen percent of the sales in the relevant market for wholesale supply of orange juice. The Agencies may consider the share of fifteen percent as one indicator of the competitive significance of the related product to participants in the relevant market.

The figure below illustrates one hypothetical structure. Company B supplies an equal amount of oranges to Company A and two other wholesalers, C and D, totalling 15 percent of orange juice sales in region X. Orchards owned by others account for the remaining 85 percent. For the sake of argument, assume all the wholesalers are the same size in which case Company B’s orchard would supply 20 percent of the oranges used by wholesalers A, C, and D.

Orange juice sold in a particular region is just one of many uses for oranges. The juice can be sold as fresh liquid, liquid from concentrate, or frozen concentrate. The fruit can be sold as fresh produce or it can be canned, frozen, or processed into marmalade. Many of these products can be sold outside of a particular region and can be sold outside of the United States. This is important in considering the next example from the draft Guidelines.

Example 3: In Example 2, the merged firm may be able to profitably stop supplying oranges (the related product) to rival orange juice suppliers (in the relevant market). The merged firm will lose the margin on the foregone sales of oranges but may benefit from increased sales of orange juice if foreclosed rivals would lose sales, and some of those sales were diverted to the merged firm. If the benefits outweighed the costs, the merged firm would find it profitable to foreclose. If the likely effect of the foreclosure were to substantially lessen competition in the orange juice market, the merger potentially raises significant competitive concerns and may warrant scrutiny.

This is the classic example of raising rivals’ costs. Under the standard formulation, the merged firm will produce oranges at the orchard’s marginal cost — in theory, the price it pays for oranges would be the same both pre- and post-merger. If orchard B does not sell its oranges to the non-integrated wholesalers C, D, and E, the other orchards will be able to charge a price greater than their marginal cost of production and greater than the pre-merger market price for oranges. The higher price of oranges used by non-integrated wholesalers will then be reflected in higher prices for orange juice sold by the wholesalers. 

The merged firm’s juice prices will be higher post-merger because its unintegrated rivals’ juice prices will be higher, thus increasing the merged firm’s profits. The merged firm and unintegrated orchards would be the “winners;” unintegrated wholesalers and consumers would be the “losers.” Under a consumer welfare standard the result could be deemed anticompetitive. Under a total welfare standard, anything goes.

But, the classic example of raising rivals’ costs is based on some strong assumptions. It assumes that, pre-merger, all upstream firms price at marginal cost, which means there is no double marginalization. It assumes all the upstream firm’s products are perfectly identical. It assumes unintegrated firms don’t respond by integrating themselves. If one or more of these assumptions is not correct, more complex models — with additional (potentially unprovable) assumptions — must be employed. What begins as a seemingly straightforward theoretical example is now a battle of which expert’s models best fit the facts and best predicts the likely outcome. 

In the draft Guidelines’ raising rivals’ costs example, it’s assumed the merged firm would refuse to sell oranges to rival downstream wholesalers. However, if rival orchards charge a sufficiently high price, the merged firm would profit from undercutting its rivals’ orange prices, while still charging a price greater than marginal cost. Thus, it’s not obvious that the merged firm has an incentive to cut off supply to downstream competitors. The extent of the pricing pressure on the merged firm to cheat on itself is an empirical matter that depends on how upstream and downstream firms react, or might react.

For example, using the figure above, if the merged firm stopped supplying oranges to rival wholesalers, then the merged firm’s orchard would supply 60 percent of the oranges used in the firm’s juice. Although wholesalers C and D would not get oranges from B’s orchards, they could obtain oranges from other orchards that are no longer supplying wholesaler A. In this case, the merged firm’s attempt at foreclosure would have no effect and there would be no harm to competition.

It’s possible the merged firm would divert some or all of its oranges to a “secondary” market, removing those oranges from the juice market. Rather than juicing oranges, the merged firm may decide to sell them as fresh produce; fresh citrus fruits account for 7 percent of Florida’s crop and 75% of California’s. This diversion would lead to a decline in the supply of oranges for juice and the price of this key input would rise. 

But, as noted in the Guidelines’ example, this strategy would raise the merged firm’s costs along with its rivals. Moreover, rival orchards can respond to this strategy by diverting their own oranges from “secondary” markets to the juice market, in which case there may be no significant effect on the price of juice oranges. What begins as a seemingly straightforward theoretical example is now a complicated empirical matter. Or worse, it may just be a battle over which expert is the most convincing fortune teller.

Moreover, the merged firm may have legitimate business reasons for the merger and legitimate business reasons for reducing the supply of oranges to juice wholesalers. For example “citrus greening,” an incurable bacterial disease, has caused severe damage to Florida’s citrus industry, significantly reducing crop yields. A vertical merger could be one way to reduce supply risks. On the demand side, an increase in the demand for fresh oranges would guide firms to shift from juice and processed markets to the fresh market. What some would see as anticompetitive conduct, others would see as a natural and expected response to price signals.Because of the many alternative uses for oranges, it’s overly simplistic to declare that the supply of orange juice in a specific region is “the” relevant market. Orchards face a myriad of options in selling their products. Misshapen fruit can be juiced fresh or as frozen concentrate; smaller fruit can be canned or jellied. “Perfect” fruit can be sold as fresh produce, juice, canned, or jellied. Vertical integration with a juice wholesaler adds just one factor to the myriad factors affecting how and where an upstream supplier sells its products. Just as there is no single relevant market, in many cases there is no single related product — a fact that is especially relevant in vertical relationships. Unfortunately the draft Guidelines provide little guidance in these important areas.

The 2020 Draft Joint Vertical Merger Guidelines:

What’s in, what’s out — and do we need them anyway?

February 6 & 7, 2020

Welcome! We’re delighted to kick off our two-day blog symposium on the recently released Draft Joint Vertical Merger Guidelines from the DOJ Antitrust Division and the Federal Trade Commission. 

If adopted by the agencies, the guidelines would mark the first time since 1984 that U.S. federal antitrust enforcers have provided official, public guidance on their approach to the increasingly important issue of vertical merger enforcement. 

As previously noted, the release of the draft guidelines was controversial from the outset: The FTC vote to issue the draft was mixed, with a dissent from Commissioner Slaughter, an abstention from Commissioner Chopra, and a concurring statement from Commissioner Wilson.

As the antitrust community gears up to debate the draft guidelines, we have assembled an outstanding group of antitrust experts to weigh in with their initial thoughts on the guidelines here at Truth on the Market. We hope this symposium will provide important insights and stand as a useful resource for the ongoing discussion.

The scholars and practitioners who will participate in the symposium are:

  • Timothy J. Brennan (Professor, Public Policy and Economics, University of Maryland; former Chief Economist, FCC; former economist, DOJ Antitrust Division)
  • Steven Cernak (Partner, Bona Law PC; former antitrust counsel, GM)
  • Eric Fruits (Chief Economist, ICLE; Professor of Economics, Portland State University)
  • Herbert Hovenkamp (James G. Dinan University Professor of Law, University of Pennsylvania)
  • Jonathan M. Jacobson (Partner, Wilson Sonsini Goodrich & Rosati) and Kenneth Edelson (Associate, Wilson Sonsini Goodrich & Rosati)
  • William J. Kolasky (Partner, Hughes Hubbard & Reed; former Deputy Assistant Attorney General, DOJ Antitrust Division) and Philip A. Giordano (Partner, Hughes Hubbard & Reed LLP)
  • Geoffrey A. Manne (President & Founder, ICLE; Distinguished Fellow, Northwestern University Center on Law, Business, and Economics) and Kristian Stout (Associate Director, ICLE)
  • Jonathan E. Nuechterlein (Partner, Sidley Austin LLP; former General Counsel, FTC; former Deputy General Counsel, FCC)
  • Sharis A. Pozen (Partner, Clifford Chance; former Vice President of Global Competition Law and Policy, GE; former Acting Assistant Attorney General, DOJ Antitrust Division), Timothy Cornell (Partner, Clifford Chance), Brian Concklin (Counsel, Clifford Chance), and Michael Van Arsdall (Counsel, Clifford Chance)
  • Jan Rybnicek (Counsel, Freshfields Bruckhaus Deringer; former attorney adviser to Commissioner Joshua D. Wright, FTC)
  • Steven C. Salop (tent.) (Professor of Economics and Law, Georgetown University; former Associate Director, FTC Bureau of Economics)
  • Scott A. Sher (Partner, Wilson Sonsini Goodrich & Rosati) and Matthew McDonald (Associate, Wilson Sonsini Goodrich & Rosati)
  • Margaret Slade (Professor Emeritus, Vancouver School of Economics, University of British Columbia)
  • Gregory Werden (former Senior Economic Counsel, DOJ Antitrust Division) and Luke M. Froeb (William C. Oehmig Chair in Free Enterprise and Entrepreneurship, Vanderbilt University; former Chief Economist, DOJ Antitrust Division; former Chief Economist, FTC)
  • Lawrence J. White (Robert Kavesh Professor of Economics, New York University; former Chief Economist, DOJ Antitrust Division)
  • Joshua D. Wright (University Professor of Law, George Mason University; former Commissioner, FTC), Douglas H. Ginsburg (Senior Circuit Judge, US Court of Appeals for the DC Circuit; Professor of Law, George Mason University; former Assistant Attorney General, DOJ Antitrust Division), Tad Lipsky (Assistant Professor of Law, George Mason University; former Acting Director, FTC Bureau of Competition; former chief antitrust counsel, Coca-Cola; former Deputy Assistant Attorney General, DOJ Antitrust Division), and John M. Yun (Associate Professor of Law, George Mason University; former Acting Deputy Assistant Director, FTC Bureau of Economics)

The first of the participants’ initial posts will appear momentarily, with additional posts appearing throughout the day today and tomorrow. We hope to generate a lively discussion, and expect some of the participants to offer follow up posts and/or comments on their fellow participants’ posts — please be sure to check back throughout the day and be sure to check the comments. We hope our readers will join us in the comments, as well.

Once again, welcome!

Truth on the Market is pleased to announce its next blog symposium:

The 2020 Draft Joint Vertical Merger Guidelines: What’s in, what’s out — and do we need them anyway?

February 6 & 7, 2020

Symposium background

On January 10, 2020, the DOJ Antitrust Division and the Federal Trade Commission released Draft Joint Vertical Merger Guidelines for public comment. If adopted by the agencies, the guidelines would mark the first time since 1984 that U.S. federal antitrust enforcers have provided official, public guidance on their approach to the increasingly important issue of vertical merger enforcement: 

“Challenging anticompetitive vertical mergers is essential to vigorous enforcement. The agencies’ vertical merger policy has evolved substantially since the issuance of the 1984 Non-Horizontal Merger Guidelines, and our guidelines should reflect the current enforcement approach. Greater transparency about the complex issues surrounding vertical mergers will benefit the business community, practitioners, and the courts,” said FTC Chairman Joseph J. Simons.

As evidenced by FTC Commissioner Slaughter’s dissent and FTC Commissioner Chopra’s abstention from the FTC’s vote to issue the draft guidelines, the topic is a contentious one. Similarly, as FTC Commissioner Wilson noted in her concurring statement, the recent FTC hearing on vertical mergers demonstrated that there is a vigorous dispute over what new guidelines should look like (or even if the 1984 Non-Horizontal Guidelines should be updated at all).

The agencies have announced two upcoming workshops to discuss the draft guidelines and have extended the comment period on the draft until February 26.

In advance of the workshops and the imminent discussions over the draft guidelines, we have asked a number of antitrust experts to weigh in here at Truth on the Market: to preview the coming debate by exploring the economic underpinnings of the draft guidelines and their likely role in the future of merger enforcement at the agencies, as well as what is in the guidelines and — perhaps more important — what is left out.  

Beginning the morning of Thursday, February 6, and continuing during business hours through Friday, February 7, Truth on the Market (TOTM) and the International Center for Law & Economics (ICLE) will host a blog symposium on the draft guidelines. 

Symposium participants

As in the past (see examples of previous TOTM blog symposia here), we’ve lined up an outstanding and diverse group of scholars to discuss these issues, including:

  • Timothy J. Brennan (Professor, Public Policy and Economics, University of Maryland; former Chief Economist, FCC; former economist, DOJ Antitrust Division)
  • Steven Cernak (Partner, Bona Law PC; former antitrust counsel, GM)
  • Luke M. Froeb (William C. Oehmig Chair in Free Enterprise and Entrepreneurship, Vanderbilt University; former Chief Economist, DOJ Antitrust Division; former Chief Economist, FTC)
  • Eric Fruits (Chief Economist, ICLE; Professor of Economics, Portland State University)
  • Douglas H. Ginsburg (Senior Circuit Judge, US Court of Appeals for the DC Circuit; Professor of Law, George Mason University; former Assistant Attorney General, DOJ Antitrust Division)
  • Herbert Hovenkamp (James G. Dinan University Professor of Law, University of Pennsylvania)
  • Jonathan M. Jacobson (Partner, Wilson Sonsini Goodrich & Rosati)
  • William J. Kolasky (Partner, Hughes Hubbard & Reed; former Deputy Assistant Attorney General, DOJ Antitrust Division)
  • Tad Lipsky (Assistant Professor of Law, George Mason University; former Acting Director, FTC Bureau of Competition; former chief antitrust counsel, Coca-Cola; former Deputy Assistant Attorney General, DOJ Antitrust Division) 
  • Geoffrey A. Manne (President & Founder, ICLE; Distinguished Fellow, Northwestern University Center on Law, Business, and Economics)
  • Jonathan E. Nuechterlein (Partner, Sidley Austin LLP; former General Counsel, FTC; former Deputy General Counsel, FCC)
  • Sharis A. Pozen (Partner, Clifford Chance; former Vice President of Global Competition Law and Policy, GE; former Acting Assistant Attorney General, DOJ Antitrust Division) 
  • Jan Rybnicek (Counsel, Freshfields Bruckhaus Deringer; former attorney adviser to Commissioner Joshua D. Wright, FTC)
  • Steven C. Salop (tent.) (Professor of Economics and Law, Georgetown University; former Associate Director, FTC Bureau of Economics)
  • Scott A. Sher (Partner, Wilson Sonsini Goodrich & Rosati)
  • Margaret Slade (Professor Emeritus, Vancouver School of Economics, University of British Columbia)
  • Kristian Stout (Associate Director, ICLE)
  • Gregory Werden (former Senior Economic Counsel, DOJ Antitrust Division)
  • Lawrence J. White (Robert Kavesh Professor of Economics, New York University; former Chief Economist, DOJ Antitrust Division)
  • Joshua D. Wright (University Professor of Law, George Mason University; former Commissioner, FTC)
  • John M. Yun (Associate Professor of Law, George Mason University; former Acting Deputy Assistant Director, FTC Bureau of Economics)

We want to thank all of these excellent panelists for agreeing to take time away from their busy schedules to participate in this symposium. We are hopeful that this discussion will provide invaluable insight and perspective on the Draft Joint Vertical Merger Guidelines.

Look for the first posts starting Thursday, February 6!