Archives For Fred McChesney

An ambitious AG, a disgruntled competitor, and the contrived antitrust case against Google in Missouri

Geoffrey Manne —  30 November 2017

The populists are on the march, and as the 2018 campaign season gets rolling we’re witnessing more examples of political opportunism bolstered by economic illiteracy aimed at increasingly unpopular big tech firms.

The latest example comes in the form of a new investigation of Google opened by Missouri’s Attorney General, Josh Hawley. Mr. Hawley — a Republican who, not coincidentally, is running for Senate in 2018 — alleges various consumer protection violations and unfair competition practices.

But while Hawley’s investigation may jump start his campaign and help a few vocal Google rivals intent on mobilizing the machinery of the state against the company, it is unlikely to enhance consumer welfare — in Missouri or anywhere else.  

According to the press release issued by the AG’s office:

[T]he investigation will seek to determine if Google has violated the Missouri Merchandising Practices Act—Missouri’s principal consumer-protection statute—and Missouri’s antitrust laws.  

The business practices in question are Google’s collection, use, and disclosure of information about Google users and their online activities; Google’s alleged misappropriation of online content from the websites of its competitors; and Google’s alleged manipulation of search results to preference websites owned by Google and to demote websites that compete with Google.

Mr. Hawley’s justification for his investigation is a flourish of populist rhetoric:

We should not just accept the word of these corporate giants that they have our best interests at heart. We need to make sure that they are actually following the law, we need to make sure that consumers are protected, and we need to hold them accountable.

But Hawley’s “strong” concern is based on tired retreads of the same faulty arguments that Google’s competitors (Yelp chief among them), have been plying for the better part of a decade. In fact, all of his apparent grievances against Google were exhaustively scrutinized by the FTC and ultimately rejected or settled in separate federal investigations in 2012 and 2013.

The antitrust issues

To begin with, AG Hawley references the EU antitrust investigation as evidence that

this is not the first-time Google’s business practices have come into question. In June, the European Union issued Google a record $2.7 billion antitrust fine.

True enough — and yet, misleadingly incomplete. Missing from Hawley’s recitation of Google’s antitrust rap sheet are the following investigations, which were closed without any finding of liability related to Google Search, Android, Google’s advertising practices, etc.:

  • United States FTC, 2013. The FTC found no basis to pursue a case after a two-year investigation: “Challenging Google’s product design decisions in this case would require the Commission — or a court — to second-guess a firm’s product design decisions where plausible procompetitive justifications have been offered, and where those justifications are supported by ample evidence.” The investigation did result in a consent order regarding patent licensing unrelated in any way to search and a voluntary commitment by Google not to engage in certain search-advertising-related conduct.
  • South Korea FTC, 2013. The KFTC cleared Google after a two-year investigation. It opened a new investigation in 2016, but, as I have discussed, “[i]f anything, the economic conditions supporting [the KFTC’s 2013] conclusion have only gotten stronger since.”
  • Canada Competition Bureau, 2016. The CCB closed a three-year long investigation into Google’s search practices without taking any action.

Similar investigations have been closed without findings of liability (or simply lie fallow) in a handful of other countries (e.g., Taiwan and Brazil) and even several states (e.g., Ohio and Texas). In fact, of all the jurisdictions that have investigated Google, only the EU and Russia have actually assessed liability.

As Beth Wilkinson, outside counsel to the FTC during the Google antitrust investigation, noted upon closing the case:

Undoubtedly, Google took aggressive actions to gain advantage over rival search providers. However, the FTC’s mission is to protect competition, and not individual competitors. The evidence did not demonstrate that Google’s actions in this area stifled competition in violation of U.S. law.

The CCB was similarly unequivocal in its dismissal of the very same antitrust claims Missouri’s AG seems intent on pursuing against Google:

The Bureau sought evidence of the harm allegedly caused to market participants in Canada as a result of any alleged preferential treatment of Google’s services. The Bureau did not find adequate evidence to support the conclusion that this conduct has had an exclusionary effect on rivals, or that it has resulted in a substantial lessening or prevention of competition in a market.

Unfortunately, rather than follow the lead of these agencies, Missouri’s investigation appears to have more in common with Russia’s effort to prop up a favored competitor (Yandex) at the expense of consumer welfare.

The Yelp Claim

Take Mr. Hawley’s focus on “Google’s alleged misappropriation of online content from the websites of its competitors,” for example, which cleaves closely to what should become known henceforth as “The Yelp Claim.”

While the sordid history of Yelp’s regulatory crusade against Google is too long to canvas in its entirety here, the primary elements are these:

Once upon a time (in 2005), Google licensed Yelp’s content for inclusion in its local search results. In 2007 Yelp ended the deal. By 2010, and without a license from Yelp (asserting fair use), Google displayed small snippets of Yelp’s reviews that, if clicked on, led to Yelp’s site. Even though Yelp received more user traffic from those links as a result, Yelp complained, and Google removed Yelp snippets from its local results.

In its 2013 agreement with the FTC, Google guaranteed that Yelp could opt-out of having even snippets displayed in local search results by committing Google to:

make available a web-based notice form that provides website owners with the option to opt out from display on Google’s Covered Webpages of content from their website that has been crawled by Google. When a website owner exercises this option, Google will cease displaying crawled content from the domain name designated by the website owner….

The commitments also ensured that websites (like Yelp) that opt out would nevertheless remain in Google’s general index.

Ironically, Yelp now claims in a recent study that Google should show not only snippets of Yelp reviews, but even more of Yelp’s content. (For those interested, my colleagues and I have a paper explaining why the study’s claims are spurious).

The key bit here, of course, is that Google stopped pulling content from Yelp’s pages to use in its local search results, and that it implemented a simple mechanism for any other site wishing to opt out of the practice to do so.

It’s difficult to imagine why Missouri’s citizens might require more than this to redress alleged anticompetitive harms arising from the practice.

Perhaps AG Hawley thinks consumers would be better served by an opt-in mechanism? Of course, this is absurd, particularly if any of Missouri’s citizens — and their businesses — have websites. Most websites want at least some of their content to appear on Google’s search results pages as prominently as possible — see this and this, for example — and making this information more accessible to users is why Google exists.

To be sure, some websites may take issue with how much of their content Google features and where it places that content. But the easy opt out enables them to prevent Google from showing their content in a manner they disapprove of. Yelp is an outlier in this regard because it views Google as a direct competitor, especially to the extent it enables users to read some of Yelp’s reviews without visiting Yelp’s pages.

For Yelp and a few similarly situated companies the opt out suffices. But for almost everyone else the opt out is presumably rarely exercised, and any more-burdensome requirement would just impose unnecessary costs, harming instead of helping their websites.

The privacy issues

The Missouri investigation also applies to “Google’s collection, use, and disclosure of information about Google users and their online activities.” More pointedly, Hawley claims that “Google may be collecting more information from users than the company was telling consumers….”

Presumably this would come as news to the FTC, which, with a much larger staff and far greater expertise, currently has Google under a 20 year consent order (with some 15 years left to go) governing its privacy disclosures and information-sharing practices, thus ensuring that the agency engages in continual — and well-informed — oversight of precisely these issues.

The FTC’s consent order with Google (the result of an investigation into conduct involving Google’s short-lived Buzz social network, allegedly in violation of Google’s privacy policies), requires the company to:

  • “[N]ot misrepresent in any manner, expressly or by implication… the extent to which respondent maintains and protects the privacy and confidentiality of any [user] information…”;
  • “Obtain express affirmative consent from” users “prior to any new or additional sharing… of the Google user’s identified information with any third party” if doing so would in any way deviate from previously disclosed practices;
  • “[E]stablish and implement, and thereafter maintain, a comprehensive privacy program that is reasonably designed to [] address privacy risks related to the development and management of new and existing products and services for consumers, and (2) protect the privacy and confidentiality of [users’] information”; and
  • Along with a laundry list of other reporting requirements, “[submit] biennial assessments and reports [] from a qualified, objective, independent third-party professional…, approved by the [FTC] Associate Director for Enforcement, Bureau of Consumer Protection… in his or her sole discretion.”

What, beyond the incredibly broad scope of the FTC’s consent order, could the Missouri AG’s office possibly hope to obtain from an investigation?

Google is already expressly required to provide privacy reports to the FTC every two years. It must provide several of the items Hawley demands in his CID to the FTC; others are required to be made available to the FTC upon demand. What materials could the Missouri AG collect beyond those the FTC already receives, or has the authority to demand, under its consent order?

And what manpower and expertise could Hawley apply to those materials that would even begin to equal, let alone exceed, those of the FTC?

Lest anyone think the FTC is falling down on the job, a year after it issued that original consent order the Commission fined Google $22.5 million for violating the order in a questionable decision that was signed on to by all of the FTC’s Commissioners (both Republican and Democrat) — except the one who thought it didn’t go far enough.

That penalty is of undeniable import, not only for its amount (at the time it was the largest in FTC history) and for stemming from alleged problems completely unrelated to the issue underlying the initial action, but also because it was so easy to obtain. Having put Google under a 20-year consent order, the FTC need only prove (or threaten to prove) contempt of the consent order, rather than the specific elements of a new violation of the FTC Act, to bring the company to heel. The former is far easier to prove, and comes with the ability to impose (significant) damages.

So what’s really going on in Jefferson City?

While states are, of course, free to enforce their own consumer protection laws to protect their citizens, there is little to be gained — other than cold hard cash, perhaps — from pursuing cases that, at best, duplicate enforcement efforts already undertaken by the federal government (to say nothing of innumerable other jurisdictions).

To take just one relevant example, in 2013 — almost a year to the day following the court’s approval of the settlement in the FTC’s case alleging Google’s violation of the Buzz consent order — 37 states plus DC (not including Missouri) settled their own, follow-on litigation against Google on the same facts. Significantly, the terms of the settlement did not impose upon Google any obligation not already a part of the Buzz consent order or the subsequent FTC settlement — but it did require Google to fork over an additional $17 million.  

Not only is there little to be gained from yet another ill-conceived antitrust campaign, there is much to be lost. Such massive investigations require substantial resources to conduct, and the opportunity cost of doing so may mean real consumer issues go unaddressed. The Consumer Protection Section of the Missouri AG’s office says it receives some 100,000 consumer complaints a year. How many of those will have to be put on the back burner to accommodate an investigation like this one?

Even when not politically motivated, state enforcement of CPAs is not an unalloyed good. In fact, empirical studies of state consumer protection actions like the one contemplated by Mr. Hawley have shown that such actions tend toward overreach — good for lawyers, perhaps, but expensive for taxpayers and often detrimental to consumers. According to a recent study by economists James Cooper and Joanna Shepherd:

[I]n recent decades, this thoughtful balance [between protecting consumers and preventing the proliferation of lawsuits that harm both consumers and businesses] has yielded to damaging legislative and judicial overcorrections at the state level with a common theoretical mistake: the assumption that more CPA litigation automatically yields more consumer protection…. [C]ourts and legislatures gradually have abolished many of the procedural and remedial protections designed to cabin state CPAs to their original purpose: providing consumers with redress for actual harm in instances where tort and contract law may provide insufficient remedies. The result has been an explosion in consumer protection litigation, which serves no social function and for which consumers pay indirectly through higher prices and reduced innovation.

AG Hawley’s investigation seems almost tailored to duplicate the FTC’s extensive efforts — and to score political points. Or perhaps Mr. Hawley is just perturbed that Missouri missed out its share of the $17 million multistate settlement in 2013.

Which raises the spectre of a further problem with the Missouri case: “rent extraction.”

It’s no coincidence that Mr. Hawley’s investigation follows closely on the heels of Yelp’s recent letter to the FTC and every state AG (as well as four members of Congress and the EU’s chief competition enforcer, for good measure) alleging that Google had re-started scraping Yelp’s content, thus violating the terms of its voluntary commitments to the FTC.

It’s also no coincidence that Yelp “notified” Google of the problem only by lodging a complaint with every regulator who might listen rather than by actually notifying Google. But an action like the one Missouri is undertaking — not resolution of the issue — is almost certainly exactly what Yelp intended, and AG Hawley is playing right into Yelp’s hands.  

Google, for its part, strongly disputes Yelp’s allegation, and, indeed, has — even according to Yelp — complied fully with Yelp’s request to keep its content off Google Local and other “vertical” search pages since 18 months before Google entered into its commitments with the FTC. Google claims that the recent scraping was inadvertent, and that it would happily have rectified the problem if only Yelp had actually bothered to inform Google.

Indeed, Yelp’s allegations don’t really pass the smell test: That Google would suddenly change its practices now, in violation of its commitments to the FTC and at a time of extraordinarily heightened scrutiny by the media, politicians of all stripes, competitors like Yelp, the FTC, the EU, and a host of other antitrust or consumer protection authorities, strains belief.

But, again, identifying and resolving an actual commercial dispute was likely never the goal. As a recent, fawning New York Times article on “Yelp’s Six-Year Grudge Against Google” highlights (focusing in particular on Luther Lowe, now Yelp’s VP of Public Policy and the author of the letter):

Yelp elevated Mr. Lowe to the new position of director of government affairs, a job that more or less entails flying around the world trying to sic antitrust regulators on Google. Over the next few years, Yelp hired its first lobbyist and started a political action committee. Recently, it has started filing complaints in Brazil.

Missouri, in other words, may just be carrying Yelp’s water.

The one clear lesson of the decades-long Microsoft antitrust saga is that companies that struggle to compete in the market can profitably tax their rivals by instigating antitrust actions against them. As Milton Friedman admonished, decrying “the business community’s suicidal impulse” to invite regulation:

As a believer in the pursuit of self-interest in a competitive capitalist system, I can’t blame a businessman who goes to Washington [or is it Jefferson City?] and tries to get special privileges for his company.… Blame the rest of us for being so foolish as to let him get away with it.

Taking a tough line on Silicon Valley firms in the midst of today’s anti-tech-company populist resurgence may help with the electioneering in Mr. Hawley’s upcoming bid for a US Senate seat and serve Yelp, but it doesn’t offer any clear, actual benefits to Missourians. As I’ve wondered before: “Exactly when will regulators be a little more skeptical of competitors trying to game the antitrust laws for their own advantage?”

In Antitrust & Competition, Data Privacy & Security, European Union, Federal Trade Commission, Google, Intellectual Property, International, Monopolization, Patent, Platforms, Regulation , , , , , , , , , , , , , , , , , , , ,
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Thom Lambert on Fred McChesney

Thom Lambert —  9 November 2017

I didn’t know Fred as well as most of the others who have provided such fine tributes here.  As they have attested, he was a first-rate scholar, an inspiring teaching, and a devoted friend.  From my own experience with him, I can add that he was deliberate about investing in the next generation of market-oriented scholars.  I’m the beneficiary of that investment.

My first encounter with Fred came in 1994, when I was fresh out of college and working as a research fellow at Washington University’s Center for the Study of American Business.  I was trying to assess the common law’s effectiveness at dealing with the externalities that are now addressed through complex environmental statutes and regulations.  My longtime mentor, P.J. Hill, recommended that I call Fred for help.  Fred was happy to drop what he was doing in order to explain to an ignorant 22 year-old how the common law’s property rights-based doctrines could address a great many environmental problems.

After completing law school and a judicial clerkship, I took a one-year Olin Fellowship at Northwestern, where Fred was teaching.  Once again, he took time to help a newbie formulate ideas for articles and structure arguments.  But for the publications I produced at Northwestern, I probably couldn’t have landed a job teaching law.  And without Fred’s help, those publications wouldn’t have been nearly as strong.

A few years ago, Fred invited me to join as co-author of the fifth edition of his excellent antitrust casebook (co-authored with the magnificent Charlie Goetz).  How excited was I!  My initial excitement was over the opportunity to attach my name to two giants in the field.  What I didn’t realize at the time was how much I would learn from Fred and Charlie, both brilliant thinkers and lucid writers.

Fred and Charlie’s casebook continually emphasizes the decision-theoretic approach to antitrust – i.e., the view that antitrust rules and standards should be crafted so as to minimize the sum of error and decision costs.  As I worked on the casebook, my understanding of that regulatory approach deepened.  My recently published book, How to Regulate, extends the approach outside the antitrust context.

But for the experience working with Fred and Charlie on their casebook, I may never have recognized the broad applicability of the error cost approach to regulation, and I may never have completed How to Regulate.

In real life, people don’t get the sort of experience George Bailey had in It’s a Wonderful Life.  We never learn what people would have been like had we not influenced them.  I know for sure, though, that I would not be where I am today without Fred McChesney’s willingness to help me along the way.  I am most grateful.

In Amazon, Platforms, Truth on the Market
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Todd Zywicki on Fred McChesney

Todd Zywicki —  8 November 2017

Todd J. Zywicki is a George Mason University Foundation Professor of Law at the Scalia Law School at George Mason University and a former Director of the Office of Policy Planning at the FTC.

I was saddened to read of the passing of my dear friend Fred McChesney. An amazing scholar and an even more amazing friend and perhaps the greatest storyteller I’ve ever met. He is largely responsible for me going into law & economics and eventually the academic profession.

When I was deciding whether to pursue my Masters Degree in Economics at Clemson, Roger Meiners connected me with Fred. Fred was by then at Emory and already an established titan of law & economics. Fred had never taught at Clemson, but knew many of the Clemson professors through the Manne law & economics network. I cold-called him at Roger’s suggestion and much to my delight and (now) surprise, we must’ve talked for 30 minutes as he told me all about Clemson and law & economics. That seeming digression changed my life, leading me to UVA as an Olin Fellow and eventually to GMU. If Henry Manne is my intellectual grandfather then Fred McChesney and the crew at Clemson who passed that tradition on to me are my intellectual fathers.

My initial conversation with Fred embodies the spirit of the man — he was already an academic star with an immensely high opportunity cost. And here I was asking him for advice about seeking an MA at a completely different school. Yet rather than brush me off or rush through a hurried conversation, he was eminently patient and helpful. Only when I later became a professor did I realize how rare it was to find a man of his humility and friendliness in the academic profession. Every encounter with Freed from then on had the same spirit.

As for Fred’s intellectual influence on me, that is hard to overstate. Several years ago I published a co-authored book on “Public Choice Concepts and Applications in Law.” The book, of course, discusses Fred’s profound work on “rent-extraction,” one of the most important refinements of public choice theory since its origins. Even better, many years later, when I became Executive Director of the Law & Economics Center, I had the opportunity to organize Law Professor Workshops on Public Choice, at which Fred was one of our star speakers. The professors in attendance invariably left informed — and amused — by Fred’s lectures. As did I!

I always looked forward with anticipation to my meetings with Fred — I’m going to miss him greatly.

In Truth on the Market
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Dave Haddock Remembers Fred McChesney

Geoffrey Manne —  8 November 2017

David Haddock is Professor of Law and Professor of Economics at Northwestern University and a Senior Fellow Emeritus at PERC.

The day Fred McChesney departed this life, the world lost an intelligent, enthusiastic, and intellectually rigorous scholar of law & economics. A great many of us also lost one of our most trusted and generous friends.

I first met Fred when Emory University, hoping to recruit the then young scholar to the law school faculty, brought him to Atlanta to deliver a research paper. The effort was successful, and Fred joined as an assistant professor in the fall of 1983. Jon Macey joined the law school, also as an entry-level assistant professor, at about the same time. A couple of years earlier Professor Bill Carney and law school Dean Tom Morgan had enticed Henry Manne to Emory to establish a new Law & Economics Center. Although Henry did not know me, upon Armen Alchian’s recommendation he persuaded me to leave Ohio State to join the LEC soon after it commenced operation.

I was only a bit older than Fred and Jon. Each of us had training in economics in addition to our interest in law. We shared a respect for markets. We had noticed how often special interests deflected government interventions away from the public interest that was the ostensible motivation. One might say we three had large Venn diagram intersections of background, interest, and outlook. Fred, Jon and I quickly became friends both at work and – along with our respective girlfriends and eventual wives – at leisure. We began to coauthor journal articles and book chapters, sometimes in pairs and sometimes as a trio.

Alas, though Chris Curran and Matt Lindsay from the economics department shared the law school’s enthusiasm for the LEC, the university administration proved decidedly lukewarm toward Manne’s ambitious blueprint. After flashing onto the national, or rather international, stage for a few bright years, the LEC began to atrophy in the face of limitations issuing from above.

Fred, Henry, Jon and I each spent time at the International Center for Economic Research in Torino, Italy, becoming friends with ICER’s director Enrico Colombatto. Macey moved to Cornell. I spent a year at Yale before returning to join Emory’s economics department. Manne left to become dean of a humble law school in the DC suburbs that had been devoted almost exclusively to teaching. Henry quickly transformed that school into a nationally recognized research and innovative teaching institution now known as the Antonin Scalia Law School of George Mason University, but his departure effectively ended the brief if illustrious history of the Emory LEC.

Fred and I visited the University of Chicago in 1987, and though I then moved directly to Northwestern where I finished my career, Fred returned to Emory for another ten years. The two of us continued to coauthor, sometimes with a third such as Bill Shughart, Terry Anderson, or Menahem Spiegel. I worked diligently to get Fred to Northwestern but Cornell succeeded first, though by then Macey had moved on to Yale. Two years later, Fred finally joined me at Northwestern where both he and Elaine held faculty positions until Elaine’s untimely death.

I have mentioned a number of people. Nearly all of those people have changed location, sometimes repeatedly. Through it all and across the deaths of Elaine, then Henry, and now Fred, we have all remained friends and often continued to work together, though usually at a distance.

Everyone who knew him remembers how easily Fred made friends upon meeting new people. Due to his extensive knowledge of rock music, Fred even became a telephone buddy of the late Casey Kasem, longtime host of the nationally syndicated America’s Top 40. Fred’s cordiality was not only social but extended into the work environment. He was no pushover, demanding careful thought in classroom and seminar, but he made his points calmly without endeavoring to cow or humiliate those with whom he disagreed, a trait that unfortunately is far from universal in the academic world.

Considering Fred’s passion for rock music, perhaps it is appropriate to end this remembrance with a few lightly edited lines from James Taylor’s Fire and Rain:

Just yesterday morning, they let me know you were gone.
The path laid down has put an end to you.
I walked out this morning and I wrote down this song,
I just can’t remember who to send it to.

Won’t you look down upon us, Jesus,
You’ve got to help us make a stand.
You’ve just got to see us through another day.
My body’s aching and my time is at hand and I won’t make it any other way.

Oh, I’ve seen fire and I’ve seen rain.
I’ve seen sunny days that I thought would never end.
I’ve seen lonely times when I could not find a friend,
but I always thought that I’d see you again.

Rest in peace, pal.

In Constitutional Law, Supreme Court, Truth on the Market , , ,
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Fred S. McChesney In Memoriam: Honorable Man and Incisive Scholar

Richard Epstein —  8 November 2017

Richard Epstein is the Laurence A. Tisch Professor of Law at NYU School of Law, the Peter and Kirstin Bedford Senior Fellow at the Hoover Institution, and the James Parker Hall Distinguished Service Professor of Law Emeritus and a senior lecturer at the University of Chicago.

It was with much sadness that I learned of the all-too-early death of Fred McChesney, whom I have known since the time that he spent at the University of Chicago Law School in the early 1980s when he visited on our faculty. At the time, Fred was at the peak of his powers and he displayed a legal imagination and economic sophistication that few have been able to match, either before or since. Fred’s great skill was being able to take a tough-minded public choice perspective to just about any mundane problem that one might encounter, and then give the entire issue a spin that seemed improbable but made sense. In conversation he was a fount of intellectual energy who had an endless curiosity, and who exhibited a palpable sense of excitement whenever the discussion took an unexpected turn into unknown territory. Those were heady days together, and I still remember the many discussions that we had about Volunteer Fire Fighting in the Nineteenth Century and the wonderful article on the topic that he published with me in the Journal of Legal Studies. I am still grateful over 30 years later for the opportunity to work closely with him during his all too short stay at the University of Chicago.

Fred was a man of exceptionable energy and character.  But there was always a powerful disjunction between the way he carried himself, and the way in which he thought about the larger economic issues that dominated his intellectual life. Fred was not a man for needless subtlety in dealing with human nature. He was always one of the kindest and most communicative of colleagues, but he well understood that while these personal virtues have a great deal to do with the way in which good and honorable people lead their lives, they have far less to do with the way in which various actors, both private and public, act when their function in the political arena, where the stakes are far higher, and their own personal livelihood and success is on the table. In these settings, Fred was of the general view that the fine points washed out, and the dangers of factional politics loomed larger.  

Let me give one example. In his book Money for Nothing, the title expresses with his usual bluntness the dangers that he saw in public affairs. I am happy to report that I was still the editor of the Journal of Legal studies in 1987 when Fred published his widely-cited article Rent Extraction and Recreation Creation in the Economic Theory of Regulation. Like all great articles, Fred’s contribution in this paper had one great idea that seems obvious once it is stated, even if it had never been stated before. Fred well knew that the standard theory of regulation was how well-organized interest groups could pull the political levers in order to gain special favors from the government. He was indeed an ardent believer that actions like that did and could take place on a common basis. But Fred saw that the extraction game was a two-way street. The well-organized group that could extract benefits was also subject to extraction itself—precisely because it was so well organized. Politicians were aware of these possibilities and thus could propose what were called “milker bills” which threatened to impose taxes or regulations on a well-organized firm or industry unless they came across with some campaign contribution, direct or indirect, to the political power groups. Being well organized was a double-edged sword. Once the point is made it cannot be forgotten. The potential domain of political bargains does not have $0 as a lower bound. The payments in question can go in both directions.

Once this simple point is seen, the entire fabric of political negotiation has an extra dimension that we ignore at our peril. The use of this tool helped explain why Fred, with good reason, was so skeptical of so much of behavioral economics. The forces that he was talking about were so pervasive and so powerful that it is hardly likely that they could be displaced by behavioral anomalies, which, if they exist at all, are first found in the laboratory and then are rarely observed in nature. Fred was fond of saying that the behavioral issues were at best a second-order issue, an epicycle on the basic rational choice theory, upon which he was able to deploy neoclassical tools so effectively to explain away many of the more dramatic findings in a 2013 recent article that treated the subject as dealing with “Old Wine in Irrelevant New Bottles.”

Speaking about Fred’s affection with public choice does not negate his many other skills. When I taught antitrust law once some years ago, I gravitated to the book, now in its Fifth Edition, that Fred had prepared with Charles Goetz, which dealt with antitrust law, its interpretation and implementation. The book was an ideal teaching tool, for it understood that it was important to deal with the historical evolution of antitrust law along with its neoclassical foundations in economic theory. Teaching from the book was a pleasure, learning from it was a greater pleasure still.

It is a source of some comfort that Fred remained intellectually active throughout his entire career. It is a source of much sadness to know that he is no longer with us. May his memory be a blessing.

In Amazon, Economic Theory, Platforms, Taxes ,
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Thoughts on Fred McChesney

Paul H. Rubin —  8 November 2017

Paul Rubin is Samuel Candler Dobbs Professor of Economics at Emory University.

I first met Fred in about 1977, when I presented a paper at Miami and Fred was a student in the Law and Economics program. We thought alike and became friends immediately. After that, I saw Fred in Washington, when I worked at the FTC, and we were colleagues at Emory, where Fred had a joint appointment in Economics and Law. I was also on the Board of the Southern Economic Association two times (VP, 1995 and President, 2013) and Fred was of course the long-time General Counsel of the organization. In 1995, Fred was instrumental in an important change in the structure of the organization. Additionally, of course, we met at numerous meetings and conferences over the years, and Fred invited me to present papers at both Northwestern and Cornell. I always enjoyed Fred’s great if somewhat cynical wit. I knew that Fred’s health was deteriorating, but I was shocked and greatly saddened to learn of his death.

Fred was one of the first joint-degree Law and Economics scholars, and one of the best of his generation. All of Fred’s work was interesting. I found his paper “Commercial Speech in the Professions: The Supreme Court’s Unanswered Questions and Questionable Answers” (University of Pennsylvania Law Review, 1985) most directly useful in my own work, and I cited it several times. His work on rent extraction, including his Harvard University Press book, was of profound importance and was a fundamental contribution to Public Choice scholarship, and to the understanding of political behavior and institutions. I was also pleased to contribute a chapter to the book he edited with Bill Shughart, The Causes and Consequences of Antitrust.

The worlds of Law and Economics and of Public Choice have lost a great scholar, and many of us have lost a great friend.  

In Amazon, Platforms, Truth on the Market
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Tim Muris on Fred McChesney

Timothy J. Muris —  8 November 2017

Timothy Muris is a George Mason University Foundation Professor of Law at the Scalia Law School at George Mason University and Senior Counsel at Sidley Austin LLP. From 2000-2004 he was Chairman of the Federal Trade Commission.

I knew Fred for over 40 years, and came to have a deep love and affection for his humanity, vivacity, and keen intellect. In October, 2011, I had the honor of introducing Fred when he was invested in the de la Cruz-Mentschikoff Chair in Law and Economics at the University of Miami School of Law. My remarks follow:

President Shalala, President LaBlanc, Mr. de la Cruz, Dean White, Dean Manne, Dean Gudridge, any deans that I have overlooked, friends of Fred, and last in order, but first in importance today and in our hearts, Fred.

Fred and I met in Washington 35 years ago. Our mutual friend, Senator Phil Gramm, liked to say that he did the Lord’s work in the devil’s city. Fred has done that work in Washington and beyond. Fred came to see me in 1976 at the FTC because he knew we shared many interests and that we would both be at this law school. Neither one of us would be here today without Henry Manne having brought us to Miami, one of the many gifts Henry has given to so many in the law and economics community.

Over the next two years, my first as a professor and Fred’s last two as a student, our life long friendship began. It was built on law and economics, baseball, fine food – especially countless outings at Shorty’s, Miami’s famous barbecue establishment – and myriad other shared interests. We learned together, wrote a joint article, more on that later, and even went on two spring training tours. Six games in three days: baseball, beer, and junk food. We saw The Bird pitch for Fred’s beloved Tigers, and, of course, the Tigers hope to eliminate the Evil Empire in a few hours.

Fred and I also played softball together here at the law school. On one memorable weekend, we won the school tournament, stringing together five or six improbable victories over more talented teams. There is no truth, however, to the rumor that it was Fred’s idea to stall late in the semi­ final because several of our opponents in the final had tickets to the soon-to-start Dolphins game.

In 1981, after a Ninth Circuit clerkship and a short stint with a major D.C. law firm, Fred joined us in the Bureau of Consumer Protection at the FTC. In the 1970s, the Agency had tried to become the second most powerful legislature in Washington, proposing rules to transform dozens of industries. We disagreed. Relying on our law and economics background, we thought that the common-law already provided crucial basic rules for the economy, such as avoiding fraud and deception and keeping your contractual promises. Because of inadequate procedures to enforce those rules in consumer transactions, there was an important role for a federal agency. With Fred’s help, we defined that role and the FTC began the long road to the prominence it enjoys today. There really was a Reagan Revolution at the FTC, and Fred was an important part of it.

Then, Fred began his remarkable academic career, first at Emory, then Cornell, Northwestern, and now Miami. Fred has returned to his original law school home. Let me highlight three themes in the extensive McChesney body of scholarship:

First, rent extraction. Few books have been more aptly titled than Fred’s 1997 Harvard publication, “Money for Nothing: Politicians, Rent Extraction, and Political Extortion.” Most have long understood that politicians offer favors, such as the latest pork barrel project. We see legions of lobbyists trolling Capitol Hill, engaged in rent seeking. But Fred explained that the politicians offer more: not doing something that a particular group finds onerous. Hence, money to politicians for doing nothing. Thus, to Fred, the 1986 Tax Reform Act was the Sistine Chapel of the political art. Not only did that Act simplify the tax code, allowing room for selling thousands of new complexities that plague us today, but the tax writers also threatened numerous onerous provisions that were never enacted. Fred put a new twist on Ronald Reagan’s apt description of Washington mores: “If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it.”

Second, Fred has made important contributions to the property rights literature, perhaps best illustrated in his 2003 Princeton book with Terry Anderson, “Property Rights: Cooperation, Conflict, and Law.” Fred’s work on Native Americans is particularly insightful. Various laws have foreclosed these Americans from exercising the full property rights that others have in their land. As Fred documented, the predictable result has been less wealth for these citizens, only partly alleviated by revenues from casinos.

Third, Fred has insisted on applying public choice economics to antitrust, as illustrated by his 1995 Chicago book with Bill Shughart, “Cases and Consequences of Antitrust: The Public Choice Perspective.” For reasons hard to understand, many in the Chicago school of economics thought that government actors were guided by self-interest, except those in the antitrust field. Fred’s work has been a useful correction and reminder of the importance of economic incentives in all aspects of life.

Of course, there is much more. Did you know that some legal clinics not only charge less for routine legal services, but can also increase quality? Our 1979 article, using empirical data on legal clinic performance, explained that through advertising, legal clinics could obtain a sufficient volume. With that volume, they can specialize on certain services, thereby not only lowering price, but improving quality.
Fred also recently explained the benefits of property rights in one’s parking place on the street following Chicago snowstorms. By giving individuals who clear a space on the street for their car property rights, Chicago encourages snow removal, not only in the space involved, but in contiguous spaces because of increased melting next to the cleared land.

Why were the Indian wars on the plains so intense? As Fred explained, the Civil War created an officer class larger and more skilled then in the antebellum years. Those skills were used-or in the case of Custer, misused – against the Plains Indians.

Fred is not only a world class scholar, he is also a world-class individual. Fred makes friends easier than anyone. To eat at Shorty’s with Fred is to become engaged in a conversation with the entire picnic-style table, most of whom you have never met. Fred also knows more about pre­ Beatles rock’n’roll than anyone alive.

And to be with Fred at a baseball game – well, let me tell you about one particular night in 1982, illustrating another skill at which Fred is world-class. The Angels were playing the Orioles in Baltimore, and we were sitting down the right-field line. Jim Palmer was the winning pitcher for the Orioles, causing Fred to predict that we had probably seen the last game Palmer would ever win. This was not the aspect at which Fred is world-class, for Palmer that night began a long winning streak in the last great year of his Hall of Fame career.

No, it was another event that prompts my admiration for Fred’s skills. When the Angels were in the field, we were sitting close to one Reginald Martinez Jackson. Yes . . . Reggie. . . Mr. October. But it was Spring, and Reggie was playing poorly, both at bat and in the field. Fred, in his booming voice, let the slugger know his opinion. I guarantee you that his words can be used in polite company in virtually any setting, except perhaps “bum”! But that night Mr. Jackson did not appreciate the particular order in which Fred used those words. In an event as rare as a triple play, Mr. October yelled back, in words not necessarily suitable for today’s event.

So, there we have it, Fred McChesney: world-class scholar, world-class friend, and world-class fan. The Law School has gained a very special person.

In Federal Trade Commission, Truth on the Market , ,
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Keith Hylton on Fred McChesney

Keith Hylton —  7 November 2017

Kieth N. Hylton is William Fairfield Warren Distinguished Professor at Boston University School of Law.

The last time I saw Fred McChesney was at a conference at Notre Dame where we both spoke, three years ago. We laughed heartily about how the stock market fools political observers. When a presidential candidate who will do terrible things to the economy is running, the stock market will tank as he appears to gain credibility as a successor, leading journalists and voters to blame the incumbent president for the market fall. As a result, support quickly snowballs in favor of the economy-killing candidate, who wins handily. As the economy-killing president nears the end of his term, the stock market then soars in anticipation of better fiscal management in the future, leading observers to conclude that the economy killer was very good for the economy after all – how else could he have left us with such a soaring stock market on his way out? This was the sort of joke Fred could be expected to tell, and reflects the sort of thinking that Fred devoted his career to trying to correct. He will be missed.

In Truth on the Market
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Louis De Alessi: Remembering Fred S. McChesney

Geoffrey Manne —  7 November 2017

Louis De Alessi is Professor Emeritus of Economics at the University of Miami.

Fred and I met when he enrolled in my graduate course in Microeconomic Theory at George Washington University. The class was small, I used a Socratic approach, and Fred — as you would expect – was an active participant, asking good questions and making insightful comments. We began to get to know each other, and toward the end of the course he came to see me. He said that he had been intrigued by the range of interesting problems that economic theory could be used to explore, and was thinking of studying for the Ph.D. We discussed his interests and constraints, and it seemed to me that the Department of Economics at the University of Virginia would be a very good fit. I encouraged him to look into it, he did, and decided to go there. I was delighted. He was an outstanding student of great academic promise, and UVA was an excellent springboard.

In 1975 Henry Manne, a good friend, approached me about joining the Law & Economics Center at the University of Miami as co-director of the John M. Olin Fellowship Program. One of his inducements was that Fred was going to be one of the Fellows in the first class, and that helped me decide to accept the offer. When the LEC moved into its own building, Fred had the office directly across the hallway from mine, and we saw a lot of each other. Fred did extremely well in the LEC courses and seminars as well as in the UM School of Law, where he made law review and graduated at the top of his class.

Fred and I became good friends. He inevitably had a good story to tell – usually the long version – and time spent with him was always entertaining and informative. We had other interests in common besides economics, including history and — during his stint at LEC — sailing. He and three colleagues owned an O’Day Daysailer that they docked at our house and used to explore Biscayne Bay and its keys, and occasionally our boats crossed paths.

Fred was thoughtful and kind. He and Tim Muris used to spend an occasional Spring weekend making a tour of baseball Spring training camps in Florida. One weekend they took along my son Michael, a 9-year old baseball fan. Michael had a marvelous time, and my wife Helen and I were deeply appreciative.

After Fred graduated from law school, I followed his career with great interest and I was delighted that he fulfilled his promise. We corresponded, and we met at conferences, meetings, and similar events. We were members of many of the same professional organizations and we had a lot of friends in common, so it was easy and rewarding to keep in touch.  We exchanged reprints and I contributed a chapter to the book on antitrust that he co-edited with William Shughart. For a time I taught a few days a year in a master’s program in Napoli, Italy, and in 1992 I asked Fred to teach a segment on law. We overlapped, and Fred – with his usual flair – opened his first lecture in Italian. The next day he joined my wife and me in Roma, and we spent a day or two wending our way to Torino, where he stayed with us for a couple of days. He was bright, cheerful, witty, and a great companion.

When Fred returned to the University of Miami School of Law, first on a visiting basis and then as a chair professor, I was utterly pleased. We began to meet periodically for mid-morning coffee (Fred always had a banana as well) at a Starbucks with an outdoor patio and spend an hour or two chatting. As usual, he was bubbling with research and writing ideas and travel plans. Life here was good to him for a while. Then a close friend died suddenly of cancer and not too long afterwards his own health began to deteriorate.

The last time we met he did not look well and was quite subdued. I thought it was just a temporary setback, and he certainly seemed to think so. Even after his family moved him to the Washington, DC  area for better care, I expected him to recover, as he had before. His demise was a shock.

Fred had a long and brilliant career. It spanned legal practice with a major law firm, an influential position at the Federal Trade Commission, and a series of distinguished academic appointments. Those in the profession will remember him for his many research contributions as a leading scholar in law and economics. His friends will also remember him for his good humor, warmth, and erudition.  We had been friends for some forty-five years, and I will miss him.

He loved his family, and it is comforting that he was with them at the end.

In Amazon, Economic Theory, Federal Trade Commission, Platforms, Truth on the Market
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Bill MacLeod: A Personal Reflection on Fred McChesney

Geoffrey Manne —  7 November 2017

William C. MacLeod is a partner at Kelley, Drye & Warren LLP, where he chairs the firm’s Antitrust and Competition practice group. He is a former director of the Bureau of Consumer Protection at the FTC.

It is only with hindsight that we can appreciate the naïveté of conventional wisdom. In 1970, when Fred McChesney left Holy Cross College, serious economists were advocating the dismantling of large American companies, supposedly because they had grown too large to compete effectively.  Regulations were multiplying, as were the bureaucracies Congress created to impose them. OSHA, EPA, CPSC, to name a few, were reordering behavior from the factory floor to the family room. A Republican president outdid them all with an executive order freezing wages and prices across the economy, divorcing the dollar from the gold standard, and taxing imports to protect US producers. These measures met the acclaim of the intelligentsia and the media by and large. The learned classes were already concerned that communist economies were performing better than the capitalism in the US.

The legal profession offered a coveted career in those days of expanding government. A regulatory state needs tens of thousands lawyers to promulgate, enforce, observe and resist the rules that direct economic activity and restrict property rights. Fresh out of college, Fred wanted to be a lawyer. He left for the Ivy League and entertained visions of practice in elite institutions of law. The visions evaporated in the drudgery of cases. Fortunately for us, Fred found that preparing for a traditional practice neither challenged his intellect nor inspired his passion.

For those who knew Fred, whose passion for good people and great ideas was unmatched, it is no surprise that the encounter that changed his life came in an economics class. Nor is it a surprise, for those who have heard Louis DeAlessi, that the class was his course in price theory. There Fred started to explore the myriad ways in which people enjoy life, liberty and the pursuit of happiness (or maximize utility within budget constraints, as the economists eloquently put it). Many of those pursuits, this young Washingtonian saw, found riches and faced ruin on Capitol Hill.

Louis told Fred of a place not far away where a future Nobel laureate, James Buchanan, had broken ground in the largely uncharted territory of public choice. Fred packed his bags for Charlottesville and the University of Virginia. By that time, Buchanan had decamped, but UVA remained a hub of the discipline that explored the economic implications of public and private ownership of property, and the costs of collective control of the means of production. Among their many accomplishments, the economists in Rouss Hall examined the Soviet economy through the lens of their new learning, and they were among the first to predict the economic decline of that supposed juggernaut. Rumor has it that they were working for the CIA, economic spies at your service. If you wanted to learn the economic consequences of government activity, UVA was a great place to go.

That is why I went, that is where I met Fred, and that is when he became my friend for life. Together we studied, wrote, worked, and spun rock and roll records, sometimes all at once, as we tried to absorb the wisdom of Bill Breit, Ken Elzinga, Roland McKean, John Moore, Warren Nutter, Roger Sherman and Leland Yeager. We treated the radio station like a lending library for oldies unattainable anywhere else. We took our final exam in public finance the gray day after Bobby Darren died. And we learned to appreciate the magic of markets. Perhaps most gratifying, we saw weary refuges return from Washington’s war on free markets, every one sadder, wiser, and ready to teach a new generation that Hayek and Friedman were right. Not even brilliant believers in the market can run it better than free customers and competitors can.

Charlottesville was paradise, but it couldn’t hold Fred. That great academic entrepreneur and talent scout, Henry Manne, looked to UVA for the core of his team at the Law and Economics Center in the University of Miami. Fred was one of Henry’s first recruits. A year later, I was one of Fred’s. He returned to Charlottesville, helped me pack my old Ford, and joined me for a twenty-four-hour rolling concert with Dion, Chubby, Fats, the Marvelettes, Ronettes and Searchers serenading the countryside all the way.

We enjoyed every minute of L&EC. When judges and professors came to Miami to teach and learn economics at Henry’s Institutes, we welcomed them, and Fred made more friends for life. He wrote his dissertation and published a pathbreaking study with Tim Muris on the economic effects of legal restrictions in the legal profession. Fred joined the law review, played with the champions of UM Intramural Softball, acquired academic honors, and landed a clerkship in the Ninth Circuit Court of Appeals.

Then the elite law firms came calling, but a life of law practice had gained no power over Fred after he’d seen economics. Tim Muris lured him to the FTC, where Fred evaluated enforcement proposals with the eye of an economics professor and supervised the Commission’s advocacy of competition where public and private barriers had kept it at bay. A career capstone for many a student of law and economics, wielding the power of the government was not what Fred wanted to do. He wanted to explain it. He left the FTC and embarked on the career that would make his own name in public choice economics.

I cannot do justice to the body of Fred’s prodigious scholarly contributions in this note. Instead, I will describe just one and invite you to sample another.

To frame the first, remember (as Ken Elzinga’s students all do) Alfred Marshall’s famous illustration of supply and demand: the two forces are like blades of a scissors, neither of which can serve without the other. Public choice for years had recognized how the economic incentives of individuals in the private and public sectors could create thriving throngs of rent seekers, bent on shaping rules to their benefit. One would have thought that the counterpart would have been equally obvious to political economists, but it wasn’t. The literature had largely neglected the other blade of the scissors, until Fred described it in Money for Nothing, Politicians, Rent Extraction, and Political Extortion, which explained that rent seekers need scarce resources. Of course, no entity can create scarcity better than government can. Its ability to do so, Fred observed, spawned eager rent extractors, as well as rent seekers. People with the power to take property or impair its full enjoyment could exact payments simply by threatening to do it. They could even forbear – do nothing – and still reap rewards of extraction, just by posing the threat. If scarcity can be made, and government has been doing it for centuries, markets will form on both sides of it. A young Fred McChesney had lived through a painful episode of socially engineered scarcity in the 1970s. He wrote the book on it twenty years later.

Finally, for an invitation to the economics of property rights, here is a link to a lecture Fred gave thirty years ago in the heart of a country he loved but could not explain. The setting was France, and at the time a socialist government was taking property rights from the private sector and appropriating them for a public purpose. You can see in the lecture that Fred was pondering the mystery he later solved in Money for Nothing. French rent creators were keeping seekers and extractors fully occupied. Consumers and sellers of goods and services suffered the consequences.

A new administration in France is still struggling to repair the damage of the rent creation in the 1980s. Meanwhile, back in the USA, as a new tax code makes its way through the halls of Congress, we all would do well to watch out for politicians, extortion, and rent extraction. They could be coming to a wallet near you.

Thanks, Fred.  We owe you a lot of rent.

Yours always,

Bill MacLeod

In Legal Profession, Regulation, Truth on the Market ,
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In Memoriam: Fred McChesney

Geoffrey Manne —  7 November 2017

As many Truth on the Market readers likely know, law and economics scholar, Fred McChesney, passed away last month. As we prepare to lay Fred to rest later this week, I have asked some of Fred’s friends and colleagues to contribute their thoughts about Fred’s life, and his influence as a scholar and as a friend. Over the next few days we will post those remembrances on the main page (and they will be collected here).

Fred was a lifelong friend, mentor, and intellectual influence — to me, as to so many others. I first met Fred when I was something like four years old, and he has been a significant influence in my life ever since. Like many others, I came to know Fred through my father, Henry Manne, who invited Fred to become one of the first Olin Fellows at the nascent Law and Economics Center at the University of Miami. Whatever his professional success in that role, in those early years he was to me a source of education about good music and a respite from the boredom of the interminable professional gatherings of various LEC events.

Later, as my interests and my career brought me further within Fred’s orbit, he graciously advised me on my studies and my career, and provided his insightful thoughts on my scholarship. Still later, he unhesitatingly agreed to serve as one of the initial members of the board of directors of the International Center for Law & Economics, and, unlike some other members of the board who thoughtlessly saw fit to take government jobs (you know who you are…), served on the board without interruption until his death.  

As others will recount, his scholarship was incredibly influential. It was Fred who explained that rent seeking is a two-way street, and that the price and quantity of political influence is not just some abstract function of what would-be influencers want from the government, but of what politicians and regulators provide — or threaten to impose. Many a critic of crony capitalism will unflinchingly lay blame at the capitalists’ feet, without understanding that there would be little worth influencing if politicians didn’t strategically manipulate the supply of regulation, extracting “money for nothing” simply to forbear from cynically exercising their power to impose regulatory costs. Yet, ignorant of this dynamic — even, remarkably, in the Age of Trump — self-appointed protectors of the public interest go on advocating that the government have more and more authority in order, ostensibly, to combat the unseemly power of private enterprise — without ever seeing that the cure can actually cause the disease. If only they read — and understood — Fred McChesney….    

And Fred was a titan of antitrust and consumer protection law and economics. His contributions to these areas are legion, and they have influenced all of us in the fields — whether we know it or not. Among many others are his articles bringing key economic insights to bear on issues like the faulty (or absent) assessment of materiality in the FTC’s deception actions, the faulty assumption of consumer benefit from the FTC’s Funeral Rule (and other disclosure-based regulations), and the influence of special interests on FTC merger enforcement decisions. His edited volume with Bill Shughart, The Causes and Consequences of Antitrust: The Public-Choice Perspective, and his antitrust casebook with Charlie Goetz (and later TOTM’s own Thom Lambert) are among the standards in the field.

And maybe most important of all, Fred edited the Liberty Fund’s three-volume collection of Henry Manne’s papers and conducted its excellent “Intellectual Portraits” series interview with my dad, as well.

The worlds of public choice, antitrust, consumer protection, and much else have lost a great scholar. And many of us have lost a great friend.

In addition to the encomiums that will appear here, readers should read the wonderful remembrance of Fred by his friend and co-author, Bill Shughart. Also worthwhile are the obituaries in the Chicago Tribune and the Washington Post, and the University of Miami’s tribute to Fred. A remembrance by David Henderson also highlights some of Fred’s best insights.

In Amazon, International Center for Law & Economics, Platforms , ,
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FCC restrictions on joint sales agreements: Yet another FCC rule without basis in evidence or economics

Geoffrey Manne —  8 May 2015

Recently, Commissioner Pai praised the introduction of bipartisan legislation to protect joint sales agreements (“JSAs”) between local television stations. He explained that

JSAs are contractual agreements that allow broadcasters to cut down on costs by using the same advertising sales force. The efficiencies created by JSAs have helped broadcasters to offer services that benefit consumers, especially in smaller markets…. JSAs have served communities well and have promoted localism and diversity in broadcasting. Unfortunately, the FCC’s new restrictions on JSAs have already caused some stations to go off the air and other stations to carry less local news.

fccThe “new restrictions” to which Commissioner Pai refers were recently challenged in court by the National Association of Broadcasters (NAB), et. al., and on April 20, the International Center for Law & Economics and a group of law and economics scholars filed an amicus brief with the D.C. Circuit Court of Appeals in support of the petition, asking the court to review the FCC’s local media ownership duopoly rule restricting JSAs.

Much as it did with with net neutrality, the FCC is looking to extend another set of rules with no basis in sound economic theory or established facts.

At issue is the FCC’s decision both to retain the duopoly rule and to extend that rule to certain JSAs, all without completing a legally mandated review of the local media ownership rules, due since 2010 (but last completed in 2007).

The duopoly rule is at odds with sound competition policy because it fails to account for drastic changes in the media market that necessitate redefinition of the market for television advertising. Moreover, its extension will bring a halt to JSAs currently operating (and operating well) in nearly 100 markets.  As the evidence on the FCC rulemaking record shows, many of these JSAs offer public interest benefits and actually foster, rather than stifle, competition in broadcast television markets.

In the world of media mergers generally, competition law hasn’t yet caught up to the obvious truth that new media is competing with old media for eyeballs and advertising dollars in basically every marketplace.

For instance, the FTC has relied on very narrow market definitions to challenge newspaper mergers without recognizing competition from television and the Internet. Similarly, the generally accepted market in which Google’s search conduct has been investigated is something like “online search advertising” — a market definition that excludes traditional marketing channels, despite the fact that advertisers shift their spending between these channels on a regular basis.

But the FCC fares even worse here. The FCC’s duopoly rule is premised on an “eight voices” test for local broadcast stations regardless of the market shares of the merging stations. In other words, one entity cannot own FCC licenses to two or more TV stations in the same local market unless there are at least eight independently owned stations in that market, even if their combined share of the audience or of advertising are below the level that could conceivably give rise to any inference of market power.

Such a rule is completely unjustifiable under any sensible understanding of competition law.

Can you even imagine the FTC or DOJ bringing an 8 to 7 merger challenge in any marketplace? The rule is also inconsistent with the contemporary economic learning incorporated into the 2010 Merger Guidelines, which looks at competitive effects rather than just counting competitors.

Not only did the FCC fail to analyze the marketplace to understand how much competition there is between local broadcasters, cable, and online video, but, on top of that, the FCC applied this outdated duopoly rule to JSAs without considering their benefits.

The Commission offers no explanation as to why it now believes that extending the duopoly rule to JSAs, many of which it had previously approved, is suddenly necessary to protect competition or otherwise serve the public interest. Nor does the FCC cite any evidence to support its position. In fact, the record evidence actually points overwhelmingly in the opposite direction.

As a matter of sound regulatory practice, this is bad enough. But Congress directed the FCC in Section 202(h) of the Telecommunications Act of 1996 to review all of its local ownership rules every four years to determine whether they were still “necessary in the public interest as the result of competition,” and to repeal or modify those that weren’t. During this review, the FCC must examine the relevant data and articulate a satisfactory explanation for its decision.

So what did the Commission do? It announced that, instead of completing its statutorily mandated 2010 quadrennial review of its local ownership rules, it would roll that review into a new 2014 quadrennial review (which it has yet to perform). Meanwhile, the Commission decided to retain its duopoly rule pending completion of that review because it had “tentatively” concluded that it was still necessary.

In other words, the FCC hasn’t conducted its mandatory quadrennial review in more than seven years, and won’t, under the new rules, conduct one for another year and a half (at least). Oh, and, as if nothing of relevance has changed in the market since then, it “tentatively” maintains its already suspect duopoly rule in the meantime.

In short, because the FCC didn’t conduct the review mandated by statute, there is no factual support for the 2014 Order. By relying on the outdated findings from its earlier review, the 2014 Order fails to examine the significant changes both in competition policy and in the market for video programming that have occurred since the current form of the rule was first adopted, rendering the rulemaking arbitrary and capricious under well-established case law.

Had the FCC examined the record of the current rulemaking, it would have found substantial evidence that undermines, rather than supports, the FCC’s rule.

Economic studies have shown that JSAs can help small broadcasters compete more effectively with cable and online video in a world where their advertising revenues are drying up and where temporary economies of scale (through limited contractual arrangements like JSAs) can help smaller, local advertising outlets better implement giant, national advertising campaigns. A ban on JSAs will actually make it less likely that competition among local broadcasters can survive, not more.

OfficialPaiCommissioner Pai, in his dissenting statement to the 2014 Order, offered a number of examples of the benefits of JSAs (all of them studiously ignored by the Commission in its Order). In one of these, a JSA enabled two stations in Joplin, Missouri to use their $3.5 million of cost savings from a JSA to upgrade their Doppler radar system, which helped save lives when a devastating tornado hit the town in 2011. But such benefits figure nowhere in the FCC’s “analysis.”

Several econometric studies also provide empirical support for the (also neglected) contention that duopolies and JSAs enable stations to improve the quality and prices of their programming.

One study, by Jeff Eisenach and Kevin Caves, shows that stations operating under these agreements are likely to carry significantly more news, public affairs, and current affairs programming than other stations in their markets. The same study found an 11 percent increase in audience shares for stations acquired through a duopoly. Meanwhile, a study by Hal Singer and Kevin Caves shows that markets with JSAs have advertising prices that are, on average, roughly 16 percent lower than in non-duopoly markets — not higher, as would be expected if JSAs harmed competition.

And again, Commissioner Pai provides several examples of these benefits in his dissenting statement. In one of these, a JSA in Wichita, Kansas enabled one of the two stations to provide Spanish-language HD programming, including news, weather, emergency and community information, in a market where that Spanish-language programming had not previously been available. Again — benefit ignored.

Moreover, in retaining its duopoly rule on the basis of woefully outdated evidence, the FCC completely ignores the continuing evolution in the market for video programming.

In reality, competition from non-broadcast sources of programming has increased dramatically since 1999. Among other things:

  • VideoScreensToday, over 85 percent of American households watch TV over cable or satellite. Most households now have access to nearly 200 cable channels that compete with broadcast TV for programming content and viewers.
  • In 2014, these cable channels attracted twice as many viewers as broadcast channels.
  • Online video services such as Netflix, Amazon Prime, and Hulu have begun to emerge as major new competitors for video programming, leading 179,000 households to “cut the cord” and cancel their cable subscriptions in the third quarter of 2014 alone.
  • Today, 40 percent of U.S. households subscribe to an online streaming service; as a result, cable ratings among adults fell by nine percent in 2014.
  • At the end of 2007, when the FCC completed its last quadrennial review, the iPhone had just been introduced, and the launch of the iPad was still more than two years away. Today, two-thirds of Americans have a smartphone or tablet over which they can receive video content, using technology that didn’t even exist when the FCC last amended its duopoly rule.

In the face of this evidence, and without any contrary evidence of its own, the Commission’s action in reversing 25 years of agency practice and extending its duopoly rule to most JSAs is arbitrary and capricious.

The law is pretty clear that the extent of support adduced by the FCC in its 2014 Rule is insufficient. Among other relevant precedent (and there is a lot of it):

The Supreme Court has held that an agency

must examine the relevant data and articulate a satisfactory explanation for its action, including a rational connection between the facts found and the choice made.

In the DC Circuit:

the agency must explain why it decided to act as it did. The agency’s statement must be one of ‘reasoning’; it must not be just a ‘conclusion’; it must ‘articulate a satisfactory explanation’ for its action.

And:

[A]n agency acts arbitrarily and capriciously when it abruptly departs from a position it previously held without satisfactorily explaining its reason for doing so.

Also:

The FCC ‘cannot silently depart from previous policies or ignore precedent’ . . . .”

And most recently in Judge Silberman’s concurrence/dissent in the 2010 Verizon v. FCC Open Internet Order case:

factual determinations that underly [sic] regulations must still be premised on demonstrated — and reasonable — evidential support

None of these standards is met in this case.

It will be noteworthy to see what the DC Circuit does with these arguments given the pending Petitions for Review of the latest Open Internet Order. There, too, the FCC acted without sufficient evidentiary support for its actions. The NAB/Stirk Holdings case may well turn out to be a bellwether for how the court views the FCC’s evidentiary failings in that case, as well.

The scholars joining ICLE on the brief are:

  • Babette E. Boliek, Associate Professor of Law, Pepperdine School of Law
  • Henry N. Butler, George Mason University Foundation Professor of Law and Executive Director of the Law & Economics Center, George Mason University School of Law (and newly appointed dean).
  • Richard Epstein, Laurence A. Tisch Professor of Law, Classical Liberal Institute, New York University School of Law
  • Stan Liebowitz, Ashbel Smith Professor of Economics, University of Texas at Dallas
  • Fred McChesney, de la Cruz-Mentschikoff Endowed Chair in Law and Economics, University of Miami School of Law
  • Paul H. Rubin, Samuel Candler Dobbs Professor of Economics, Emory University
  • Michael E. Sykuta, Associate Professor in the Division of Applied Social Sciences and Director of the Contracting and Organizations Research Institute, University of Missouri

The full amicus brief is available here.

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