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Regulatory Comments There are a host of reasons to expect higher prices in the current environment, but virtually none of the evidence points to anticompetitive conduct as one of them.
Dear Chair Khan and Commissioners Phillips, Slaughter, & Wilson:
The International Center for Law & Economics (ICLE) is a nonprofit, nonpartisan research center that promotes the use of law & economics methodologies to inform public-policy debates. We believe that intellectually rigorous, data-driven analysis will lead to efficient policy solutions that promote consumer welfare and global economic growth.
The Commission’s investigation of the impact of supply-chain disruptions on competition in consumer goods and retail coincides with recent interest in the topic demonstrated by some lawmakers. In particular, there have been concerns raised that rising concentration and alleged anticompetitive behavior by both suppliers (e.g., meat packers; oil & gas companies) and retailers (e.g., groceries; online retailers) has been the cause of sharp increases in consumer prices. Under this thinking, vigorous antitrust enforcement is an essential tool to stop the scourge of rising prices.
The most obvious problem with this thesis, however, is that while consumer prices have increased sharply this past year, concentration numbers in the relevant markets have been relatively unchanged for years or even decades. The best case that can be mustered for a linkage between concentration and rising consumer prices is that existing market structures may slightly exacerbate short-term price dislocations whose ultimate cause is exogenous supply and demand shocks brought about by the COVID-19 pandemic and government responses to it.
The purpose of antitrust law is to protect competition, not to guarantee low prices, in and of themselves. Indeed, high or rising prices are not an antitrust violation, as these prices may be the result of the undistorted competition that antitrust ultimately protects. It is widely understood that the price system is the most effective means of resource allocation, even when the process itself is painful. There are a host of reasons to expect higher prices in the current environment, but virtually none of the evidence points to anticompetitive conduct as one of them.
Take retail grocery prices, for example. Some have blamed rising grocery prices on market concentration, going so far as to propose breaking up Kroger.[1] But Kroger and its subsidiaries have less than 10% market share, and retail profit margins are generally minuscule: hardly consistent with monopoly exploitation. While 2020 saw grocery net margins approach 3.0%, in 2021, the margins moved closer to their long-run average of around 1.25%.[2] Over the longer term, U.S. consumers have also enjoyed marked improvements in their grocery shopping experience.[3] From 1990 to 2020, the number of items stocked in grocery stores nearly doubled from 16,500 to 31,119. From 1995 to 2020, the average store size grew by 30%.[4]
Moreover, while food prices have risen in recent years, it hasn’t been by appreciably more than overall consumer prices. The U.S. Department of Agriculture’s Economic Research Service (ERS) finds that all-food CPI rose by 7.8% from 2016 to 2020, the same as all-items CPI.[5] The ERS attributes recent sharp price rises to pandemic-related shifts in consumption patterns. In 2020, for example, food-at-home spending accounted for 51.9% of total food expenditures, the first year it has accounted for more than half of food spending since 2008.[6]
Not coincidentally (and inconsistent with a monopoly-exploitation story), price increases haven’t been homogenous. Much of the rise in beef prices, for example, has been driven by price increases of cuts of beef typically consumed at home, while prices of beef cuts typically consumed in restaurants have fallen. These changes have also closely tracked pandemic-related supply-chain disruptions, further suggesting the pandemic and the ensuing government-mandated lockdowns, and not excessive concentration, are to blame.
Some have also proposed reinvigorated enforcement of the Robinson-Patman Act of 1936, including President Joe Biden in his July 2021 Executive Order on Promoting Competition in the American Economy. But it should be noted that the stated intention behind Robinson-Patman—initially passed to protect smaller retailers and counter the perceived market power of then-dominant A&P—was to raise prices. It did this by constraining the kinds of efficiency enhancements that are seen in industries that enjoy economies of scale and network externalities. The largest grocery chains, for example, are vertically integrated. Many have their own logistics divisions that lead to supply-chain stability and lower prices. Breaking them up or constraining them could reduce their efficiency (and thus raise prices).
Reviving such outdated ideas would hurt, not help, consumers. Indeed, competition regulators have an inglorious history of misguided interventions in competitive retail markets. Consider U.S v. Von’s Grocery.[7] The case arose from the U.S. Justice Department’s challenge of the 1960 merger between Von’s and Shopping Bag, in which the combined firm would have had less than 8% of the market. Ignoring the economic environment of the time (the car-induced shift toward supermarkets drawing from a larger geographic area and supplanting small, local stores), the Supreme Court upheld the DOJ’s challenge to “prevent economic concentration” and “keep a large number of small competitors in business.”
There are many possible causes of recent food-price inflation, including increased demand driven by fiscal stimulus; disruptions arising from an unprecedented set of simultaneous supply and demand shocks; the incentive effects of government responses to the COVID-19 pandemic; and an increase in the money supply, among others. There are also any number of concerns arising from the food supply chain that may merit legislative or regulatory attention. It may be important to protect farmers in certain circumstances, or to protect the environment. There may even sometimes be countervailing benefits to regulations that have the effect of increasing prices.
But the specific characteristics of the responses to disruptions from the pandemic are consistent with competitive markets, and antitrust is an entirely inappropriate tool to address economy-wide inflation. Rather, vigorous antitrust enforcement in these markets will not stop the scourge of rising prices.
For a fuller treatment of this topic, we also attach here ICLE’s testimony to the recent hearing by the U.S. House Judiciary Committee’s Antitrust Subcommittee on “Addressing the Effects of Economic Concentration on America’s Food Supply.”[8]
Read the full comments here.
[1] Elizabeth Warren (@SenWarren), Twitter, (Jan 7, 2022, 9:49 AM), https://twitter.com/senwarren/status/1479465304795324422.
[2] Grocery Stores Industry Profitability, CSIMarket, https://csimarket.com/Industry/industry_Profitability_Ratios.php?ind=1305.
[3] Leonard I. Nakamura, The Measurement of Retail Output and the Retail Revolution, Federal Reserve Bank of Philadelphia, Working Paper No. 97-4, (May 1997), available at https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/1997/wp97-4.pdf.
[4] Supermarket Facts, The Food Industry Association, https://www.fmi.org/our-research/supermarket-facts.
[5] Food price inflation over 2017–2021 slower than only housing and transportation, U.S. Department of Agriculture Economic Research Service, (Feb. 23, 2022), https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=58350.
[6] U.S. food-at-home spending surpasses food-away-from-home spending in 2020, U.S. Department of Agriculture Economic Research Service, (Aug. 20, 2021), https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=58364.
[7] Joshua Wright, Von’s grocery and the concentration-price relationship in grocery retail, 48 UCLA Law Rev. 743-771, (February 2001), https://www.researchgate.net/publication/294851918_Von’s_grocery_and_the_concentration-price_relationship_in_grocery_retail.
[8] Geoffrey A. Manne, Written Testimony of Geoffrey A. Manne, Hearing on “Reviving Competition, Part 5: Addressing the Effects of Economic Concentration on America’s Food Supply,” U.S. House Committee on the Judiciary, Subcommittee on Antitrust, Commercial, and Administrative Law, (Jan. 19, 2022), available at https://docs.house.gov/meetings/JU/JU05/20220119/114345/HHRG-117-JU05-Wstate-ManneG-20220119.pdf.
TOTM The acceptance and implementation of due-process standards confer a variety of welfare benefits on society. As Christopher Yoo, Thomas Fetzer, Shan Jiang, and Yong Huang explain, strong . . .
The acceptance and implementation of due-process standards confer a variety of welfare benefits on society. As Christopher Yoo, Thomas Fetzer, Shan Jiang, and Yong Huang explain, strong procedural due-process protections promote: (1) compliance with basic norms of impartiality; (2) greater accuracy of decisions; (3) stronger economic growth; (4) increased respect for government; (5) better compliance with the law; (6) better control of the bureaucracy; (7) restraints on the influence of special-interest groups; and (8) reduced corruption.
Read the full piece here.
Presentations & Interviews ICLE Executive Director Ian Adams joined the Regulatory Transparency Project’s Fourth Branch Podcast to discuss a recent online tussle between Tesla CEO Elon Musk and . . .
ICLE Executive Director Ian Adams joined the Regulatory Transparency Project’s Fourth Branch Podcast to discuss a recent online tussle between Tesla CEO Elon Musk and California Insurance Commissioner Ricardo Lara and what it could mean for the future of the state’s insurance regulatory regime. The full episode is embedded below.
Written Testimonies & Filings Opening Statement of R.J. Lehmann Editor-in-Chief and Senior Fellow International Center for Law & Economics “Roundtable on Pandemic Risk” Hosted by Ranking Member French Smith . . .
Congressman Smith, and Members of the Committee and Subcommittee,
My name is R.J. Lehmann, and I am editor-in-chief and senior fellow with the International Center for Law & Economics. ICLE is a nonprofit, nonpartisan research center that works to develop and disseminate academic output in the law & economics tradition, in order to build the intellectual foundation for rigorous, economically grounded public policy.
Two years into the COVID-19 pandemic, it is appropriate that Congress explore whether a more targeted and potentially permanent approach would be preferable to the ad hoc pandemic assistance programs like Paycheck Protection Program, which have directed trillions of dollars of federal relief to affected employers and employees. It is also reasonable to inquire what role, if any, should be played by the insurance industry, the sector traditionally tasked with responding to disaster.
There are almost certainly lessons to be learned from COVID, and there may well be a role to play for insurance companies, agents, and claims adjusters in any future pandemic program Congress might devise. But I want to raise a note of skepticism that insurance products generally—and business-interruption insurance, in particular—are really the best means to respond to the macroeconomic challenges raised by pandemics.
First, the capital that the global insurance and reinsurance industry would ever be willing to devote to the risk of pandemics would never come close to approaching the scale of the problem. Unlike governments, insurers and reinsurers cannot print money. To respond to a loss event like a pandemic, they would need to have those assets on hand. Any world in which the insurance industry had the resources to replace half of global GDP is a world in which people are buying far too much insurance.
Proposals like the Pandemic Risk Insurance Act (PRIA) tacitly acknowledge this limitation, which is why they would have the industry retain only de minimis risk of 5%. Obviously, that risk-share contribution would not significantly offset costs to the taxpayer, but it might be a worthy idea if the goal is to leverage the industry’s expertise and capacity in other ways.
Most frequently cited among these is that insurers know how to price risk. That is true and, in many contexts, assigning risk-weighted premia performs a valuable social function. In the context of the pandemic, for example, it is crucial that businesses’ liability and workers’ compensation insurance rates reflect risk, because that produces the price signals that offer incentives for businesses to adopt safer practices and avoid spreading infection to their customers or their employees. But it is not as clear that assigning pandemic-risk insurance rates according to risk would achieve a socially desirable goal. Indeed, if businesses like bars and restaurants, which are most exposed the risk of closure in the event of a pandemic, had to pay insurance rates that reflected their risk, they would, at the margin, be less likely to buy the coverage. It would undermine the entire purpose of the program if those businesses that need the protection the most would be least likely to afford it.
This question of take-up is particularly important when you remember that only about a third of businesses currently have business-interruption insurance, and that’s with a product that does not cover risks like pandemic. While adding pandemic coverage might make the product more attractive, it will certainly be more expensive, even if it’s subsidized. It would not be ideal to attach a relief program to aid businesses with the risk of pandemic to an insurance product that most businesses do not have.
It’s also notable that, unlike the terrorism insurance crisis in 2002, in which lenders were canceling financing of projects that weren’t insured for terrorism risk, by and large, we are not seeing something similar today—at least, not with business-interruption insurance, which has never covered pandemic risk. There are other insurance products, like events cancellation and production insurance for films and television shows, where there’s more evidence of some degree of market dislocation, and those might be areas more ripe for a targeted solution.
Finally, I would caution Congress to be humble in what it can project about future public-health emergencies. The next crisis may look nothing like the current one, and even the current one continues to surprise us. Early in 2020, I consulted with the major insurance trades on the proposal that ultimately became the Business Continuity Protection Plan (BCPP). At the time, we debated whether a program that offered three months of assistance would be exceedingly generous. When I testified before the Subcommittee on this topic in November 2020, vaccines were about to start rolling out and it seemed this all was coming to a close. There are good reasons to want a transparent and predictable set of rules, but it may be that ad hoc solutions designed in the moment to address the problem immediately before us, are the best that we can do.
With that, I look forward to your questions.
Read the full written testimony here.
Scholarship Abstract When parties bring claims under investor-state dispute settlement (‘ISDS’) procedures, who should serve as decision-maker? Relevant par-ties ask the question in different settings and . . .
When parties bring claims under investor-state dispute settlement (‘ISDS’) procedures, who should serve as decision-maker? Relevant par-ties ask the question in different settings and with different criteria in mind. A party in a dispute, contemplating ISDS proceedings, whether by it or against it, likely will focus on the qualities of particular individuals available to serve as arbitrators. Party-appointed panelists charged under the applicable instrument with choosing a neutral or chair, and institutional appointing authorities charged with that task or with choosing arbitrators in default of party choice, will also turn their minds to candidate assessment. Different individuals or institutions might look for somewhat different qualities, but all who are called upon to make the choice will think about how best to assess the candidates.
Popular Media The EARN IT Act, recently cleared for floor consideration by the Senate Judiciary Committee, remains a contentious bill, primarily over concerns that it might dissuade . . .
The EARN IT Act, recently cleared for floor consideration by the Senate Judiciary Committee, remains a contentious bill, primarily over concerns that it might dissuade tech providers from using encryption. But amid ongoing debate about Section 230 and the role of tech platforms in our public discourse, legislation like EARN IT could, if paired with carefully crafted procedural protections, offer a model for how Congress can address bipartisan concerns about child sexual abuse material (CSAM) and other illegal content online.
Scholarship Abstract The value of lawyers to their clients is notoriously difficult to estimate due to endogeneity. We utilize modifications to the collateral source (CS) rule . . .
The value of lawyers to their clients is notoriously difficult to estimate due to endogeneity. We utilize modifications to the collateral source (CS) rule that require reducing trial awards by the amount of payments from first-party insurance as an instrument for hiring a lawyer. The problem with our instrument is that modifications to the CS rule have a direct effect on recovery, and hence violate the exogeneity requirement for a valid instrument. We develop a new identification and estimation method that uses CS rule changes as an invalid instrument and bounds the impact of lawyers. We find that the upper and lower bounds of our estimated impact are lower than estimates that do not correct for endogeneity. Our estimates of the impact of lawyers on total payment are uniformly negative. The upper bound of the effect of hiring a lawyer on total payment received is -$26,000 after fees in our preferred specification, which suggests that even in the most optimistic scenario lawyers appear to reduce total recovery.
TOTM President Joe Biden’s July 2021 executive order set forth a commitment to reinvigorate U.S. innovation and competitiveness. The administration’s efforts to pass the America COMPETES Act would appear to . . .
President Joe Biden’s July 2021 executive order set forth a commitment to reinvigorate U.S. innovation and competitiveness. The administration’s efforts to pass the America COMPETES Act would appear to further demonstrate a serious intent to pursue these objectives.
Popular Media When an obscure provision of a state’s 1988 insurance law makes the news, it’s often confined to the pages of Insurance Journal. However, when the world’s . . .
When an obscure provision of a state’s 1988 insurance law makes the news, it’s often confined to the pages of Insurance Journal. However, when the world’s richest man tweets about that law in the course of a Twitter spat with a state insurance commissioner, it makes mainstream headlines.
