Archives For Mike Baye


totmauthor —  27 August 2015

by Michael Baye, Bert Elwert Professor of Business at the Kelley School of Business, Indiana University, and former Director of the Bureau of Economics, FTC

Imagine a world where competition and consumer protection authorities base their final decisions on scientific evidence of potential harm. Imagine a world where well-intentioned policymakers do not use “possibility theorems” to rationalize decisions that are, in reality, based on idiosyncratic biases or beliefs. Imagine a world where “harm” is measured using a scientific yardstick that accounts for the economic benefits and costs of attempting to remedy potentially harmful business practices.

Many economists—conservatives and liberals alike—have the luxury of pondering this world in the safe confines of ivory towers; they publish in journals read by a like-minded audience that also relies on the scientific method.

Congratulations and thanks, Josh, for superbly articulating these messages in the more relevant—but more hostile—world outside of the ivory tower.

To those of you who might disagree with a few (or all) of Josh’s decisions, I challenge you to examine honestly whether your views on a particular matter are based on objective (scientific) evidence, or on your personal, subjective beliefs. Evidence-based policymaking can be discomforting: It sometimes induces those with philosophical biases in favor of intervention to make laissez-faire decisions, and it sometimes induces people with a bias for non-intervention to make decisions to intervene.

Off to Estes Park for the return of the Mason Law and Economics Center Economic Institute for Law Professors (agenda here) and Law Institute for Economic Professors (agenda here).  I will be team-teaching microeconomics in the Economics Institute with friend and co-author Mike Baye (Indiana) for the first few days — and then some vacation.  Should be a lot of fun.  If you are an economics or law professor interested in attending next year — feel free to contact me via email if you have questions.

Blogging will be a bit slow for me over the next week or so.

This week, I submitted two comments to the Horizontal Merger Guidelines Revision Project.

The first, submitted with a group of economists focusing on the use of price/cost margins in merger analysis.  The submission lays out the basic relationship between margins and elasticities that flows from the profit-maximization assumption, and then discusses several of the factors that arise in the implementation of this analysis in practice and how the proposed HMGs take them into account.  The submission concludes:

In conclusion, the inverse relationship between the price/cost margin and the firm’s own-price elasticity follows from the fundamental working assumption of profit maximization, has a long history in economics and remains relevant for careful and reliable merger analysis, along with econometric estimates and other facts learned during a full merger analysis. The treatment of margins in the proposed HMGs correctly notes that margins are informative about the potential for price increases in a unilateral effects analysis. The proposed HMGs do not conclude that margins are dispositive of the likelihood of a price increase and emphasize the importance of empirical evidence of demand conditions and other factors that might limit the ability and incentive of firms to raise prices post- merger. As recognized by the proposed HMGs, the ultimate goal of merger analysis is to evaluate the likely potential to harm competition, using all the available evidence, not just margins.

The Economists Submission makes a simple but important point, and I was very pleased (and flattered) to be asked to join the list of distinguished economists endorsing the analysis (led by Steve Salop, and including Mike Baye, Aaron Edlin, Richard Gilbert, Jerry Hausman, Dan Rubinfeld, Richard Schmalansee, and Lawrence White).

The Wright Submission was a solo-venture, and originated out of my earlier post discussing some concerns I had with the 2010 HMGs emphasis on close substitutes and narrower markets.  I wrote that the problem with the new HMGs, and one of the reasons for skepticism about the narrow market approach, was that:

Defining narrower markets will inevitably lead to circumstances in which the consumers in the narrowly defined markets are harmed, but others are benefitted.  I suspect the true concern of those skeptical of the “narrow” market approach adopted by the HMGs, which has not been articulated, is that the narrower markets obscure competitive benefits of the merger that are “outside” the market.  Thus, the new approach could lead to Section 7 liability for mergers that result in net increases in consumer welfare.

To relieve this concern, I proposed that the Agencies adopt go beyond should “go beyond ‘cheap talk’ to ‘binding commitment’ in order to avoid imposing needless anxiety on businesses” and adopt “language that would indicate that the Agencies would not bring cases when they believe that the merger, taking into account competitive effects in the narrowly defined relevant market and elsewhere, is pro-competitive.”

In my submission to the Agencies, I elaborated on these ideas, arguing that the new HMGs should be expanded to discuss how the Agencies will exercise their prosecutorial discretion in this area.  I discuss the need for such a commitment by the Agencies in light of the approach envisioned by the new HMGs, some of the potential complications with an approach that would effectively involve the Agencies committing to engage in precisely the sort of cross-market balancing Philadelphia National Bank rules out, and how parties could satisfy their burden to prove these efficiencies under the new Section 10 of the HMGs.  I conclude that:

The proposal to amend note 11 to commit the Agencies to forbear from challenging mergers where out of market efficiencies outweigh anticompetitive effects merely updates the new HMGs in a manner consistent with the modern intellectual foundation of merger analysis.

Check out both proposals and let me know what you think.  Other proposals and comments to the Agencies are available here.

UPDATE: I understand many of the links to the submissions of the FTC Public Comments webpage are not functioning properly.  I’ve noticed over the last several days that a 1-2 day lag between when the link is posted and when it works (sending to pdf of submission rather than error page).  I’ve posted hard copies of the Economists_Submission and the Wright Submission here in the meantime (and replaced the links in the post above).

If you’re in Chicago next week, and even if you’re not, go check out the Second Annual Searle Center Antitrust Economics and Competition Policy conference at Northwestern University School of Law.  The conference will take place September 25th and 26th and has a great lineup including a pretty good mix of theory and empirics.  My co-author (and former Director of the Bureau of Economics at the FTC) Mike Baye will be presenting our paper, Is Antitrust Too Complicated for Generalist Judges?  The Impact of Economic Complexity and Training on Appeals.

The rest of the conference agenda and other details are below:

Preliminary Agenda (as of July, 15, 2009)

Friday, September 25th

7:45-8:15 Continental Breakfast (WB 112)

8:15-8:30 Welcome and Introduction (WB 147)
David E. Van Zandt, Dean and Professor of Law, Northwestern University School of Law
Henry N. Butler, Executive Director, Searle Center, Northwestern University School of Law
William Rogerson, Northwestern University

8:30-9:30 Session One
Competition Policy and Property Rights

John Vickers, Professor of Economics and Warden, All Souls College, Oxford University
Discussant: Scott Stern, Associate Professor of Management and Strategy, Kellogg School of Management, Northwestern University

9:30-10:00 Break

10:00-11:00 Session Two
Toward a Test for Price FixingSocial Objective, Detection, and Sanctions
Louis Kaplow, Finn M. W. Caspersen and Household International Professor of Law and Economics, Harvard Law School
Discussant:  Timothy Bresnahan, Landau Professor in Technology and the Economy, Stanford University Department of Economics

11:00-11:30 Break

11:30-12:30 Session Three
Is Antitrust Too Complicated for Generalist Judges?  The Impact of Complexity & Judicial Training on Appeals
Michael R. Baye, Bert Elwert Professor of Business, Kelley School of Business, University of Indiana
Joshua D. Wright, Assistant Professor of Law, George Mason University School of Law
Discussant: Henry N. Butler, Searle Center, Northwestern Law

12:30-2:00 Lunch
Keynote Address: The Relationship Between Antitrust and Regulation in Light of Trinko
Howard Shelanski, Deputy Director for Antitrust, Bureau of Economics, FTC, and UC Berkeley

2:00-3:00 Session Four
Dynamic Merger Review
Michael Whinston, Robert E. and Emily H. King Professor of Business Institutions Department of Economics, Northwestern University
Discussant: Michael Riordan, Laurans A. and Arlene Mendelson Professor of Economics, Columbia University

3:00- 3:30 Break

3:30-4:30 Session Five
Competition Policy and Financial Distress
Ezra Friedman, Professor of Law, Northwestern University School of Law
Marco Ottaviani, Professor of Management and Strategy, Kellogg School of Management, Northwestern University
Discussant: Jonathan Baker, Professor of Law, American University’s Washington College of Law

4:30- 5:00 Break

5:00-6:00 Session Six
The CC’s margin-concentration analysis in the UK Groceries Inquiry
Jerry Hausman, John and Jennie S. MacDonald Professor, MIT, Department of Economics
Discussant: Aviv Nevo, Professor of Economics and Marketing, Northwestern University, Department of Economics

6:00-7:00 Cocktail Reception (WB 440)

7:00- 9:00 Dinner (WB 540)
Keynote Address: Microeconomic Policy and Competition Policy
Joseph Farrell, Director, Bureau of Economics, FTC and UC Berkeley

Saturday, September 26th

8:00-8:30 Continental Breakfast (WB 112)

8:30-9:30 Session Seven
Insurance, Consumer Choice, and the Equilibrium Price and Quality of Hospital Care
Michael Katz, Harvey Golub Professor of Business Leadership and Professor of Management, New York University Stern School of Business and UC Berkeley
Discussant: David E.M. Sappington, Lanzillotti-McKethan Eminent Scholar, University of Florida, Department of Economics

9:30-10:00 Break

10:00-11:00 Session Eight
Not Good Enough for Government Work: Geographic Market Definition and The FTC’s Case Against Chicagoland Physician Associations
Fred S. McChesney, Class of 1967 James B. Haddad Professor of Law, Northwestern University School of Law
Discussant: John Simpson, FTC

11:00-11:30 Break

11:30-12:30 Session Nine
The Economics of “Radiator Springs:” Industry Dynamics, Sunk Costs, and Spatial Demand Shifts
Thomas Hubbard, John L. and Helen Kellogg Professor of Management and Strategy, Kellogg School of Management, Northwestern University
Discussant: Steven T. Berry, James Burrows Moffatt Professor of Economics, Yale Department of Economics

12:30 Adjourn (Box Lunch Available)

Northwestern University School of Law
Wieboldt Hall
Room 147
340 E. Superior Street
Chicago, IL 60611

Economic theory is essential to antitrust law.  It is economic analysis that constrains antitrust law and harnesses it so that it is used to protect consumers rather than competitors.  And the relationship between economics and antitrust is responsible for the successful evolution of antitrust from its economically incoherent origins to its present state.  In my view, which I’ve expressed in greater detail elsewhere, the fundamental challenge for antitrust is one that is created by having “too many theories” without methodological commitments from regulators and courts on how to select between them.  The proliferation of economic models that came along with the rise of Post-Chicago economics and integration of game theory into industrial organization has led to a state of affairs where a regulator or court has a broad spectrum of models to choose from when analyzing an antitrust issue.

This may have been a positive development for economic science.  This is not the place to have that debate.  But for law and economics the proliferation of theoretical models without attention paid to empirical testing of models, combined with the above-mentioned “model selection” issue allow regulators and courts significant degrees of freedom to select any model they like — why not the one that matches their ideological prior beliefs or policy preferences?  Taken to the extreme, this model selection problem threatens to strip the disciplining force that economics has placed on antitrust law that was a key part of the successful evolution of that body of law over the last fifty years.   The stakes involved in appropriately specifying the link between economic theory and antitrust law, and understanding the role of empirical evidence in that relationship, are high.

The importance of the issue is why I have criticized both what I view to be a trend toward reducing the role of economics and economists in antitrust, as well as those who turn the issue of model selection into an ideological debate rather than one driven by economic theory and evidence.  Readers of TOTM will know that I have, on occasion, criticized Commissioner Rosch on these grounds.  Well — apparently he was reading (see n.3) and has devoted some time in a recent speech to “dispelling a misconception about how I view economics and economists, attributable I fear to not making my views clear.”

I applaud Commissioner Rosch for recognizing the confusion that some of his views on economics may have caused and further applaud him for attempting to set them straight in a public forum.  Transparency is useful in contexts such as these precisely because it allows these views to be strained and tested by those who disagree (and also because it puts the antitrust and business communities on notice).  Here is what the Commissioner had to say about his critics:

More specifically, critics – overwhelmingly Chicago School apologists – have suggested that I am anti-economics and anti-economist and, indeed, that I doubt that economics should play a role in antitrust law enforcement.  Those are not my views. My views are as follows….

If one follows n.3 in that speech, despite the use of the plural, the reference is apparently one that is exclusive to me and this series of posts on Commissioner Rosch’s treatment of economics, economists, and the role of economic theory in antitrust:

Commissioner Rosch on the Smaller Role of Economists in Antitrust Litigation

Inter-Agency Scuffling Over Section 2: What Role for Economists and Economics at the FTC and DOJ?

Commissioner Rosch v. Economics Again

And here are a few that the Commissioner didn’t cite for the sake of completeness:

No Ovation for the FTCs Latest Enforcement Theory

Is the Chicago School Really Dead?  How Do You Know?

“One Thing is Clear to Me: The orthodox and unvarnished Chicago School of economic theory is on life support, if not dead”

In a later speech on the “Redemption of a Republican,” in which the punchline is that the “confessions of sin” from Posner and George Osborne in the UK redeem Rosch’s views and might even save us from clinging to “bankrupt” economics, the Commissioner refers to his “orthodox Chicago School critics” without identification or citation, writing that:

The orthodox Chicago School economist community has been especially dumbfounded. Some economists have denounced my remarks questioning the use of economic formulae as reflecting a general bias against economists. With specific reference to my January remarks, they have both asserted, on the one hand, that the current economic crisis says nothing about microeconomics as opposed to macroeconomics and at the same time have denied that any Chicago School economist has ever asserted that markets are perfect or self-correcting or that businesspeople are rational. They have also asserted that most of the decent post-Chicago School economics thinking has come from orthodox Chicago School economists.  After all of this criticism, I was starting to question whether I really was a loyal Republican.

I suspect I’m also the dumbfounded denouncer  —  though I refer readers to this post to see what I actually said (see also here) because it differs substantially from Rosch’s characterization (if indeed it purports to summarize my positions).  Suffice it so say that one can read very closely and there is no claim there about what Chicago School economists have said or not said about businesspeople being rational.

As for the “assertion” that most of the decent post-Chicago thinking has come from orthodox Chicago School economists — again, this is simply untrue and misleading.  Instead, the claim is that folks like Aaron Director anticipated many of the economic insights of the raising rivals’ cost models, that Chicagoans such as Ben Klein and Tom Hazlett are responsible for some of the leading empirical examples of Post-Chicago phenomena, and that Dennis Carlton (Chicago GSB) extended some of the theoretical work (for more on this, see here).  Don’t, however, take it from a Chicago School apologist.  Instead, here it is straight from the leading thinker of the Post-Chicago economic movement: “it is important to recognize that [the Post-Chicago] approach has its root in the economic analysis of Chicago School commentators.” See Steven C. Salop, Economic Analysis of Exclusionary Vertical Conduct: Where Chicago Has Overshot the Mark, in OVERSHOT THE MARK, at 144. Similarly, try to talk about coordinated effects without invoking Stigler (1968).

This is why the prefix “orthodox” in front of Chicago School is misleading — though perhaps an effective rhetorical device.  Chicagoans have done important empirical work on market failures and helped to develop and test Post-Chicago models.  By what meaningful definition does this constitute “orthodoxy”?  Nevermind the persistent use of the term orthodox to imply a static, monolithic body of economic knowledge.  This term by colloquial implication glosses over important differences between the work and approaches of, for example, Alchian, Klein and Oliver Williamson and in understanding how asset specifity and opportunism influence firm behavior, or between Klein, Telser and Marvel on vertical restraints, or between Demsetz and Coase on the theory of the firm.  The label both misleads, errs as a matter of economic history, and favors ideology and shorthand labels over substance.  None of this, of course, is new to political rhetoric.  To some, to invoke the term Chicago School is not to reference a broad intellectual movement but to utilize a heuristic to describe a reflexively anti-interventionist position that typically involves (in the eyes of the evoker) irrational disdain for government regulation. While current financial times make it somewhat fashionable for journalists and casual observers to toss around without regard to accuracy or evidence caricatured versions of entire schools of economic thought (to which serious scholars have devoted decades of intellectual energy), antitrust experts have generally carefully avoided such style of commentary in favor of careful analysis of competing theories and evidence.

One more quick — but related — about misrepresenting views.  Rosch describes George Stigler’s work on oligopoly theory as follows:

Nobel Prize winning economist George Stigler’s 1964 article “A Theory of Oligopoly” in which he explained that it was improper to assume that firms in an oligopolistic market would find a way to agree to raise prices above competitive levels.

This is wrong.  Stigler said it was wrong to assume that firms would inevitably collude.  Rather, he proposed a framework for analyzing the factors that would affect their ability to do so.  That framework provides the basis for much of our modern antitrust understanding on collusion and coordinated effects.  It is simply wrong to insinuate that Stigler thought it was impossible for oligopolists to collude successfully.

Ultimately, I’m far more concerned with the misrepresentation of ideas, theories and evidence than Commissioner Rosch’s description of me as a “Chicago apologist.”  The label Commissioner Rosch assigns to me or others does not resolve the substantive merits of the “model selection” problem or the fundamental question here of whether Rosch’s ideas on the relationship between economics and antitrust are sensible.  It’s true that I’ve written as a positive matter that the Roberts Court’s antitrust jurisprudence is more Chicago than Harvard.  I’ve criticized those who have caricatured and Chicago School scholars and ideas and avoided taking on the substantive merits of those economic ideas in favor of ideological labels.  I’ve also argued that the appropriate way to settle intellectual battles in antitrust between competing models is with reference to the empirical evidence — and that attempts to explain the persistence of Chicago School economics in antitrust jurisprudence without rejecting the hypothesis that it is the body of economic theory that is most consistent with the available empirical evidence is unlikely to lead to good antitrust policy.

In short, an analysis of the existing theory and evidence that suggests that the Chicago School’s contributions to antitrust economics hold up quite well relative to competing theories when the contest is run with reference to empirical data rather than who shouts the loudest is not an apology as I understand the word.  I therefore conclude that I am no Chicago School apologist.  Commissioner Rosch obviously disagrees.   In this context, this is a rhetorical and political term not an economic one, so I don’t have much else to say about it — well, maybe one thing.  Apologist is not a neutral word. I point this out because the use of the term “apologist” contradicts the Commissioner’s anecdotal introduction to his speech wherein he analogizes the intellectual debates in antitrust to the scientific debates over quantum mechanics and general relativity in characterizing the relationship between atoms and sub-atomic particles.  The analogy appears to hint that the Commissioner endorses an approach grounded in the scientific method to settle these disputes.  But the use of rhetoric like “apologists” to describe critics that have taken on the substance of ideas and evaluated the evidence in a manner consistent with social science methodology dispels that notion and suggests mostly interest in superficial labels and t-shirt slogans rather than serious engagement with ideas and evidence.  Its use does not imply that Commissioner Rosch and I simply have different views on the relevant economics that we can debate on the substantive merits.  Rather, it implies that I know that the competing economic approaches he advocates are superior, but I am in a state of denial or perhaps that I am just being intellectually dishonest about the Chicagoans losing the war of ideas in antitrust economics.  I do not read the term as a neutral one.  It’s important, however, not to get too distracted by name calling.  As name calling is a tactic typically relied upon to avoid delving deeply into the substantive merits of an issue, its use signals that it is especially important to ignore it here.  But I will say that, given its use, I’ve granted myself permission in this post to treat the Commissioner as a hostile witness, as it were.

The relevant question is not whether Commissioner Rosch’s  views on economics and antitrust law and whether they do in fact, or do not, have those qualities that I’ve criticized in previous posts.  I’ll focus on that issue in this post, and will argue that Rosch’s attempt to clarify his views on the role of economics and economists on antitrust was unsuccessful in the sense that 1) those views remain unclear in many instances, 2) are a primary example of the “model selection” problem described above, 3) will lead to overly aggressive antitrust enforcement, and 4) thus I conclude are likely to result in significant potential to harm consumers if they express agency enforcement priorities or policies.

Continue Reading…

UPDATE 3:  It just keeps getting better.  Now we’ve added Mike Baye, formerly Director of the Bureau of Economics at the FTC, now returned to his post at Indiana.  He’ll be moderating and I’m sure commenting on many of the papers. 

UPDATE 2: And now Susan DeSanti, newly-appointed Director of the Office of Policy and Planning at the FTC has signed on for our industry/regulator roundtable.  A not-to-be-missed event! 

UPDATE:  We’re delighted to announce that Bill Kovacic will be joining us to deliver the conference’s morning keynote, as well.  A great conference just got even better!

 For the third year, Josh and I have organized the annual George Mason Law School/Microsoft Conference on the Law and Economics of Innovation.  The conference is at the Arlington Hilton on May 7; registration is free. 

This year’s conference is on “Online Markets vs. Traditional Markets,” and once again we have a stellar line-up.  The (beautifully re-designed) conference website is here.  You can register for the conference here

This year features a keynote address from Susan Athey (Harvard Economics; Clark Medal winner), as well as the following presentations:

Peter Klein (Missouri Economics)– Does the New Economy Need a New Economics?
Thomas W. Hazlett (George Mason Law) – The Role of Exclusive Spectrum Rights in Wireless Network Innovations: Of Newtons, Blackberries, iPhones & G-Phones
Eric Goldman (Santa Clara Law) – The Economics of Reputational Information

Florencia Marotta-Wurgler (NYU Law) – Does Anyone Read Fine Print? A Test of the Informed Minority Hypothesis
Howard Beales (George Washington Business) – Public Goods, Private Information, and Anonymous Transactions: Providing a Safe and Interesting Internet
Peter Swire (Ohio State Law) – Privacy and Antitrust

Philip J. Weiser (Colorado Law; DOJ)— Re-evaluating the Theory and Realities of Online Contracts
Randal C. Picker (Chicago Law) — The Mediated Book
F. Scott Kieff (Wash U. Law (moving to George Washington Law)) — Commerce in the Shadow of the Commons: Business Models in Cyberspace

We’ll also have an industry roundtable to reflect on the day with representatives from Microsoft, Amazon and Facebook.

Should be a great conference–Please join us!

There has been a great deal of speculation and discussion in this blog and around the antitrust community regarding what will happen with the DOJ Section 2 Report.  Rightly so.  It is a document with the potential to influence both agency monopolization enforcement decisions, international antitrust enforcement, and U.S. doctrine itself in federal court.  What precisely happens with the Section 2 Report is also of considerable significance given the confluence of events that suggest, at least to me, a significant increase in monopolization enforcement (see also some more general predictions about the Obama antitrust regime).

One of the earliest opportunities for antitrust action for the Obama regime, at least symbolically, will be whether it decides to, as Danny Sokol predicts, bury the Section Report in “some large room, like the one that houses the Ark of the Covenant in the end credits of Raiders of the Lost Ark,” or whether it goes for one of the other options on the menu.  For example, the DOJ could formally rescind the report and issue a statement rejecting it much in the same flavor as the FTC Majority Statement.  It could go even further and issue a new Report, perhaps jointly with the FTC, in order to maximize its influence on Section 2 jurisprudence?

In the newest edition of the ABA’s Antitrust Magazine, Geraldine Alexis, Troy Sauro and Mamta Ahluwalia (all of Perkins Coie) offer an interesting take on these issues.  The basic argument is that the DOJ Section 2 Report offers, at its core, agency interpretations of the Sherman Act that are similar in nature to the statutory interpretations offered by the NLRB, EPA, NLRB and other administrative agencies.  Relying on the empirical literature on the relationship between political ideology and judicial deference to agency intepretations in federal court, and in particular the work of new regulatory czar Cass Sunstein and Tom Miles (Chicago Law) and a handful of other studies finding such a relationship, Alexis et al argue that the stakes here are quite high as it is likely that at least conservative federal judges will treat the Report as the gospel on Section 2 unless the new administration unequiovocally rebukes the report.

The rest of the argument goes something like this: (1) there is some compelling empirical evidence that federal court deference to agency interpretations have a substantial political component, (2) the DOJ Section 2 Report sets out what amount to agency interpretations of the Sherman Act, (3) George W. Bush has appointed more than a third of all federal judges now on the bench and these judges (the article argues with some citations) are quite conservative.  This leads to the punchline:

It does not require a great logical leap to predict that the Antitrust Division’s conservative approach to interpreting Section 2 in its Report will find a receptive judicial audience among Bush’s conservative judicial appointees.  The question remains what impact, if any, a possible withdrawal or repudiation of the Report by the next Administration will have on the willingness of conservative judges, nonetheless, to rely upon the “sound, clear, objective and administrable tests” set forth in the Report to interpret Section 2.

The authors go on to recommend, if the Obama regime disagrees with the Section 2 Report (you bet they do), formal withdrawal of the Report rather than an implicit rejection though they note that even a formal rejection won’t stop the Report from having some influence.  The authors might support the notion of a rejection combined with a joint DOJ/FTC Report that more accurately reflects the policy positions of the Obama regime or at least its interpretation of modern monopolization doctrine.

While I disagree with its ultimate conclusion and recommendation to reject the Report (conditional upon its disagreement with the content of the Report, which seems like a given), I liked this article.  Its thoughtful and well written, and relies on empirical evidence rather than hand-waving.  However, I ultimately disagree with the authors conclusion that the Obama regime should reject the Report — but this is mostly because I think it is in fact sound, carefully documents and supports its conclusions, and represents a consensus of economists and antitrust scholars emerging from the Section 2 hearings (in which I participated).  That said, what about the claim about the relationship between ideology and interpretation of the Sherman Act?  The authors point to Miles and Sunstein’s work on the EPA and NLRB as well as other scholarly work on interpretations of workplace law in the Supreme Court.  But what about antitrust and the interpretations of the Sherman Act specifically?

My recent work with Mike Baye, Is Antitrust Too Complicated for Federal Judges (discussed here), examines litigated antitrust decisions over the last decade.  We are interested in a different research question — whether economic complexity influences the quality of judicial decision-making — but use political ideology as a control variable and so have the data to examine whether conservative judges more frequently find for defendants in antitrust cases, controlling for other factors.  In fact, we did some of this work as a robustness check to ensure that our result that judges with economics training are appealed less often was not really capturing a conservative self-selection effect.  Check out the paper for the full results, and discussion, but the short answer is that we find that political ideology in federal district courts is not a significant predictor of plaintiff win rates once one accounts for case type, circuit, and other factors.  In other words, we find that judicial decision-making at the district court level is far less political than suggested by the authors.  Now, this evidence is not directly responsive to the authors’ argument concerning evidence that of judicial deference to agency interpretations combined with the ideological makeup of district courts.  But it is probative.  In federal court decisions interpreting the Sherman Act, judicial political ideology does not appear to be a significant predictor of win rate, appeal rate, or reversals.  I would tentatively interpret our results as suggesting that political ideology is a less important predictor of antitrust outcomes in federal district court than the authors suggest based upon the agency deference literature (of course, one might argue that political ideology is a much more significant predictor of antitrust outcomes and reasoning in appellate courts, including the SCOTUS).

The Obama administration might well reject the Report for other reasons.  I suspect it will do so formally and publicly rather than simply burying it both because it will have strong substantive disagreements with the Report and because there is some symbolic value in doing so.  But I’m not convinced that fear of ideologically driven adoption of the Section 2 Report’s conclusions in a way that shapes substantive monopolization doctrine is further reason for rejection.

One of the highlights of my recent time as Scholar in Residence at the Federal Trade Commission was the opportunity to work with some of the brightest minds around on antitrust issues on investigations and policy projects as well some academic projects.  The subject of this post is one of those academic projects.  Motivated by the conventional wisdom that the technical demands placed on federal courts in antitrust cases in terms of evaluating expert economic and econometric evidence has increased substantially over the last twenty years or so, Former Bureau of Economics Director (now returned the Kelley School of Business at Indiana University) Mike Baye and I decided to try to take a swing at measuring the empirical effects of economic complexity of judicial decision-making in antitrust litigation.  Both “economic complexity”(as opposed to say, legal complexity) and “judicial performance” (in terms of quality of evaluation of economic evidence) are nebulous and difficult to measure concepts.  But understanding the impact of economic complexity and economic training on the quality and accuracy of judicial decision-making in antitrust is incredibly important as both a legal and policy matter.  Antitrust also seems uniquely suited for such an inquiry since the nearly wholesale integration of economic analysis into antitrust legal standards (e.g. did the merger substantially lessen competition has come to mean something like “are prices going up or down”?) such that most if not all decisions on substantive antitrust issues turn on economic analysis.

While there is now little doubt that complex economic and econometric analyses are standard fare in modern antitrust litigation, but there is a dearth of empirical evidence addressing what impact, if any, this complexity has had on judicial decision-making.  An ABA Task Force survey of 42 antitrust economists revealed that only 24 percent believe that judges “usually” understand the economic issues in a case. The ABA Task Force Report and other commentators have suggested a number of possible solutions to the “problem” of economic complexity and expert evidence ranging from increasing use of court appointed experts pursuant to Federal Rule of Civil Procedure 706 (a), expanded use of Daubert to deter unsupported economic testimony, introduction of concurrent evidence procedures, creating specialized courts, and supplying basic economic training to judges.

We undertook to empirically examine these issues directly by evaluating the relationship between economic complexity and appeals in district court decisions reaching substantive antitrust matters from 1996-2006.  We also have some unique data that we’ve collected on which federal judges attended the George Mason University Law and Economics Center economics training and examine how that training impacts the appeal rate in economically simple and complex cases.  Check out the paper for details on our measure of complexity, a defense and discussion of the appeal rate as a measure of “judicial economic error” holding all else constant, and various other methodological issues.  Now seems like a good place and time to thank my team of research assistants that worked tirelessly at putting this database of decisions and coding various aspects of those decisions and information about the judges together over the past few years as well as very helpful comments we received presenting the paper at workshops at UCLA, Stanford, and Texas.  I envision the paper as addressing two related research questions: (1) what is the impact of economic complexity on the quality of judicial-decision making in antitrust? and (2) does basic economic training (at the LEC) improve judicial decision-making in antitrust cases?

I also note that readers who have been following the occasional controversy over the George Mason Law and Economics Center, the Feingold-Kyl Amendment, and allegations that “economics training” is some sort of proxy for “right wing conspiracy” to teach “conservative economics” to federal judges might have an interest in the paper as well.  Our results suggest that economics training has some real but limited benefits for judicial-decision making and do not support the critics’ accusations.  I’ll discuss some results that pertain to this issue below.

Here’s the abstract:

Modern antitrust litigation sometimes involves complex expert economic and econometric analysis. While this boom in the demand for economic analysis and expert testimony has clearly improved the welfare of economists-and schools offering basic economic training to judges-little is known about the empirical effects of economic complexity or judges’ economic training on decision-making in antitrust litigation. We use a unique data set on antitrust litigation in district courts during 1996-2006 to examine whether economic complexity impacts decisions in antitrust cases, and thereby provide a novel test of the frequently asserted hypothesis that antitrust analysis has become too complex for generalist judges. We also examine the impact of one institutional response to economic complexity: basic economic training by judges. We find that decisions involving the evaluation of complex economic evidence are significantly more likely to be appealed, and decisions of judges trained in basic economics are significantly less likely to be appealed than are decisions by their untrained counterparts. Our results are robust to a variety of controls, including the type of case, circuit, and the political party of the judge. Our tentative conclusion, based on a revealed preference argument that views a party’s appeal decision as an indication that the district court got the economics wrong, is that there is support for the hypothesis that some antitrust cases are too complicated for generalist judges. 

I discuss some of our results below the fold, but you’ll have to check out the full paper for details.

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Northwestern University’s Searle Center on Law, Regulation and Economic Growth is one of the most intellectually interesting and active centers for law and economics around.  Here’s a lineup of research roundtables and conferences scheduled for this fall.  I’ll be lucky enough to be a Visiting Fellow at the Searle Center for a week this September, which will coincide with the Searle Center Conference on Antitrust Economics and Policy this September, which has a fantastic lineup of papers and keynotes from Mike Baye and Jerry Hausman.  If antitrust isn’t your thing, check out the upcoming events on empirical studies of civil liability, property rights economics and innovation, or bad public goods.