Archives For Lady Gaga

There are a lot of inaccurate claims – and bad economics – swirling around the Universal Music Group (UMG)/EMI merger, currently under review by the US Federal Trade Commission and the European Commission (and approved by regulators in several other jurisdictions including, most recently, Australia). Regulators and industry watchers should be skeptical of analyses that rely on outmoded antitrust thinking and are out of touch with the real dynamics of the music industry.

The primary claim of critics such as the American Antitrust Institute and Public Knowledge is that this merger would result in an over-concentrated music market and create a “super-major” that could constrain output, raise prices and thwart online distribution channels, thus harming consumers. But this claim, based on a stylized, theoretical economic model, is far too simplistic and ignores the market’s commercial realities, the labels’ self-interest and the merger’s manifest benefits to artists and consumers.
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By Geoffrey Manne and Berin Szoka

Everyone loves to hate record labels. For years, copyright-bashers have ranted about the “Big Labels” trying to thwart new models for distributing music in terms that would make JFK assassination conspiracy theorists blush. Now they’ve turned their sites on the pending merger between Universal Music Group and EMI, insisting the deal would be bad for consumers. There’s even a Senate Antitrust Subcommittee hearing tomorrow, led by Senator Herb “Big is Bad” Kohl.

But this is a merger users of Spotify, Apple’s iTunes and the wide range of other digital services ought to love. UMG has done more than any other label to support the growth of such services, cutting licensing deals with hundreds of distribution outlets—often well before other labels. Piracy has been a significant concern for the industry, and UMG seems to recognize that only “easy” can compete with “free.” The company has embraced the reality that music distribution paradigms are changing rapidly to keep up with consumer demand. So why are groups like Public Knowledge opposing the merger?

Critics contend that the merger will elevate UMG’s already substantial market share and “give it the power to distort or even determine the fate of digital distribution models.” For these critics, the only record labels that matter are the four majors, and four is simply better than three. But this assessment hews to the outmoded, “big is bad” structural analysis that has been consistently demolished by economists since the 1970s. Instead, the relevant touchstone for all merger analysis is whether the merger would give the merged firm a new incentive and ability to engage in anticompetitive conduct. But there’s nothing UMG can do with EMI’s catalogue under its control that it can’t do now. If anything, UMG’s ownership of EMI should accelerate the availability of digitally distributed music.

To see why this is so, consider what digital distributors—whether of the pay-as-you-go, iTunes type, or the all-you-can-eat, Spotify type—most want: Access to as much music as possible on terms on par with those of other distribution channels. For the all-you-can-eat distributors this is a sine qua non: their business models depend on being able to distribute as close as possible to all the music every potential customer could want. But given UMG’s current catalogue, it already has the ability, if it wanted to exercise it, to extract monopoly profits from these distributors, as they simply can’t offer a viable product without UMG’s catalogue. Continue Reading…

I wasn’t going to comment on LawProf’s attacks on his profession. But now that it has been endorsed by Bruce MacEwen, aka Adam Smith, Esq., an otherwise insightful commentator on the legal profession, I feel compelled to say something.

In a nutshell, MacEwen endorses what he says are LawProf’s three primary points:  that the rising cost of legal education is out of sync with its expected value; that law professors are overpaid (based on LawProf’s findings that a law review article costs $100,000), and the “inarguable” “irrelevance of what law schools teach to what it takes to actually practice law.”

MacEwen accepts LawProf’s reasons for this state of affairs: US News ratings, which create “serious collective action problems” for law schools; regulatory barriers to change; and the ignorance and unconcern of law professors about the problems.  As for the latter, MacEwen blasts the legal academy’s “wrongheaded” and “amazingly blinkered” responses to LawProf.  He summarizes responses he received from a survey of “law professors I’ve asked” over the last few days.

True to this blog’s market focus and title, my response will focus on markets (something I would think one who adopts the “Adam Smith” moniker would have been more attentive to).

One who takes markets seriously would begin with the question raised by what MacEwen calls the main problem:  why would an intelligent group of entering law students overpay for an education that has decreasing economic returns?

The easy answer, of course, is that the law schools lied to or otherwise misled them about their prospects, along with engaging in various forms of price manipulation (aka scholarships).  There is, indeed, evidence that some law schools were lying and the rest were not being totally forthcoming.  That needs to be fixed.  (Law school hypo:  why is this not fraud in the sale of a “security”?).

But will full disclosure really solve the problem?  We will soon see, because the next entering class surely will know about the decreasing returns to legal education in time for this to have affected their choices.  Yet I predict this knowledge will not drastically reduce law school applications.  Here’s why:

–Law students’ declining opportunity costs in a crappy job market.  Nobody seems to credit the possibility that entering law students actually know what they’re doing.  They are part of a huge cohort of highly educated people who have nowhere else to go.  (Are colleges part of the problem?).

–Although I’m not a big fan of behavioral theories, it’s worth considering how even intelligent people would process gloomy job projections in the legal market: Sure there aren’t many jobs, but I’ll be good enough to get one of them. This reminds me of Baker & Emery’s, “When Every Relationship is Above Average,” 17 L. & Hum. Behav. 439 (1993), which showed that newlyweds way under-estimated their chances of a divorce.

I’m not sure what we can do about the second problem in a market economy that generally forces people to live with their choices.  Does this mean that there’s no fixable problem once disclosure is solved?  No, because even if law students are willing to buy a legal education, it’s only because the market leaves them with too few or the wrong choices.  We need to fix the market for legal education.

But how? LawProf and MacEwen would point the finger at US News ratings, which irrationally stress inputs instead of outputs, driving up cost.  But nobody forces law schools to serve the US News god. MacEwen mumbles vaguely about “collective action” problems.  He probably means that a single law school can’t refuse to play the ratings game because it will suffer the consequences of a low rating.  But the “collective action” problem is in some ways the opposite of how firms generally think in a market economy:  if everybody else is going north, compete by going south.

In other words, why would informed law students reject a sound choice just because US News implicitly advises them to?  Why wouldn’t law schools compete by being different from the herd?  If a law school can deliver a super-normal return on the job market, wouldn’t applicants go there regardless of ranking?  Isn’t that the whole reason for disclosing these statistics?

Maybe the argument is that law schools must bow to the ratings god because law firms bow too and will only hire from top ranked schools.  So US News has covered the eyes not only of law students but of savvy, market-conscious employers.  In other words, the “collective action problem” requires us to ignore the possibility of an efficient market where both buyers and sellers are sophisticated.  If this is realistic then capitalism and not just legal education is in trouble.

This brings us to the most important problem, which LawProf himself noted without elaboration:  regulation of the legal profession constrains meaningful reform of legal education.  Among other things, mandatory accreditation imposes high costs on law schools and requires three strenuous years of education for everybody who wants to “practice law,” which embraces a bewildering variety of jobs.  Those whose interests lie anywhere in this amorphous category must buy this education and only this education or submit themselves to their next best opportunity set, which in the current economy is not too attractive.  Compare, for example, business schools, which are not subject to rigid legally-imposed accreditation requirements and offer students a variety of models from which they can choose.

If we had a free market in legal education, the problem of over-priced law review articles and overpaid law professors would vanish.  How much should a law review article cost?  How much is Lady Gaga’s music worth?  In the absence of a reliable Platonic metric we let the market tell us.  If the demand for the current style of law school persisted in a deregulated market, so would $100,000 law review articles.

Assuming legal education should be changed, what should law schools do now, or be allowed to do in a deregulated regime?  MacEwen and LawProf are both absolutely sure about the irrelevance of modern legal education to the job market.  Presumably they would want law schools to be more practice-oriented.

But MacEwen/LawProf are stunningly over-confident about their ability to see where legal education should go in a world in which the market for law-related jobs is rapidly and fundamentally changing.  I’ve written about these changes recently, in my Death of Big Law and Law’s Information Revolution. In brief, for reasons discussed in Death of Big Law, the high-end jobs in conventional practice are disappearing and not just experiencing a cyclical decline.  Meanwhile, the lower-end jobs are being replaced by technology, a phenomenon that will accelerate rapidly with the inevitable onslaught of better technology and deregulation.

If I’m right, many traditional lawyer jobs will be obsolete.  I predict that law-trained people will be able to prosper in this future only by becoming legal architects and engineers who create new devices and solutions rather than the mechanics who apply the devices of the past that many are today. This means that if law students are trained only for today’s version of law practice they will not be adequately trained for the future in which they will be competing. Which in turn means that the MacEwen/LawProf ideas about what law schools should do, about which they are supremely confident, would lead legal education into its economic grave.

So what should law schools do?  I present some ideas, as well as the above analysis of the important role of regulation, in my recently published article, Practicing Theory. As the title indicates, I see a role for some (not all) of what MacEwen and LawProf confidently reject as “irrelevant.” My specific suggestions and predictions may be wrong, but that would not mean that MacEwen and LawProf’s confidence in their knowledge of the future is justified.

In general, I suggest less name-calling and a lot more serious thinking about markets.