Given the enthusiasm for application of behavioral economics to antitrust analysis from some corners of the Commission and the academy, I found this remark from Alison Oldale at the Federal Trade Commission interesting (Antitrust Source):

Behavioral economists are clearly correct in saying that people and firms are not the perfect decision makers using perfect information that they are portrayed to be in many economic models. But alternative models that incorporate better assumptions about behavior and which give us useful ways to understand the likely effects of mergers, or particular types of conduct, aren’t there yet. And in the meantime our existing models give us workable approximations. So we haven’t done much yet, but we’ll keep watching developments.

For myself, I wonder whether the first place behavioral economic analysis might be brought to bear on antitrust enforcement will be in areas like coordinated effects or exchange of information. These are areas where our existing theories are not very helpful. For example when looking at coordinated effects in merger control the standard approach focuses a lot on incentives to coordinate. But there are lots and lots of markets where firms have an incentive to coordinate but they don’t seem to be doing so. So it seems there is a big piece of the puzzle that we are missing, and perhaps behavioral economics will be able to tell us something about what to look at in order to get a better handle when coordination is likely in practice.

I certainly agree with the conclusion that the behavioral economics models are not yet ready for primetime.  See, for example, my work with Judd Stone in Misbehavioral Economics: The Case Against Behavioral Antitrust or my series of posts on “Nudging Antitrust” (here and here).

Filed under: antitrust, behavioral economics, behavioral economics, economics, federal trade commission

Louis Kaplow’s Why (Ever) Define Markets? in the Harvard Law Review was one of the most provocative papers in the antitrust literature over the past few years.  We’ve discussed it here.  I wrote:

Kaplow provocatively argues that the entire “market definition/ market share” paradigm of antitrust is misguided and beyond repair.  Kaplow describes the exclusive role of market definition in that paradigm as generating inferences about market power, argues that market definition is incapable of generating reasonable inferences for that purpose as a matter of basic economic principles primarily because one must have a “best estimate” of market power previous to market definition, and concludes that antitrust ought to do away with market definition entirely.  As my description of the paper suggests, and Kaplow recognizes, it is certainly an “immodest” claim.  But it is a paper that has evoked much discussion in antitrust circles, especially in light of the recent shift in the 2010 HMGs toward analysis of competitive effects and away from market definition.

Many economists were inclined to agree with the basic conceptual shift toward direct analysis of competitive effects.  Much of that agreement was had on the basis that the market definition exercise aimed to do a number of things directed toward identifying the potential competitive effects of a merger (identifying market power is certainly one of those things), and that if we had tools allowing for direct inferences we ought to use those instead.  Kaplow’s attack on market definition, however, was by far the most aggressive critique.

Kaplow’s analysis prompted responses from antitrust scholars, including most notably Greg Werden (DOJ).  I discuss Werden’s critique here.

In my view, the debating over the proper scope and function of market definition in antitrust – and in particular the proper relationship between the market definition inquiry and competitive effects analysis – is ongoing.  Thus, it was interesting for me to see Richard Markovits’ (Texas) latest entry on SSRN (HT: Danny Sokol), which appears to attempt to shift the debate from whether market definition should be killed, to whom the credit should be attributed for its execution.  Markovits’ piece, Why One Should Never Define Markets or Use Market-Oriented Approaches to Analyze the Legality of Business Conduct Under U.S. Antitrust Law, argues – well – what the title says.   And in particular, he defends his earlier work against Kaplow’s dismissal of it in footnote – claiming his it is own analysis, not Kaplow’s, that should be credited with the rejection of market definition based approaches (in fact, Markovits’ claim is much broader).  From the abstract:

In 2010, Professor Louis Kaplow published an article Why Ever Define Markets? that argues for the proposition that one should never define markets for the purpose of measuring a firm’s economic power, which is a corollary of the conclusion that I established in 1978. Kaplow’s article includes a lengthy footnote that — after stating that my 1978 article constitutes a “particularly harsh attack on market definition” — denigrates it on a number of accounts. The article I am posting (1) delineates slightly-improved versions of my 1978 arguments against the use of market-oriented approaches to analyzing the legality of business practices under U.S. antitrust law, (2) explains why those arguments and the “idiosyncratic” (Kaplow’s accurate if pejorative characterization) conceptual systems and competition theories they employ imply that Kaplow’s more limited conclusion is correct, (3) delineates and criticizes Kaplow’s “arguments” for his conclusion (the most relevant of which is a correct assertion of a proposition that is an analog to the conclusion of my second argument for the claim my 1978 article establishes — an assertion he does not and cannot justify because he does not develop and use any counterpart to my idiosyncratic conceptual systems and theories, which play a critical role in the justificatory argument), (4) demonstrates that all of Kaplow’s criticisms of my 1978 article are either incorrect or unjustified, and (5) asserts that at least some of the errors Kaplow makes when criticizing my article are important because they are made by others as well and militate against the correct analysis of the legality of various types of business conduct under U.S. antitrust law.

Filed under: antitrust, economics, market definition

From Bloomberg:

The U.S. Supreme Court said it will decide whether states can block antitrust scrutiny of hospital mergers such as Phoebe Putney Health System Inc.’s acquisition of Palmyra Park Hospital in Georgia.

The justices today said they will hear the Federal Trade Commission’s appeal of a U.S. appellate court ruling that the proposed purchase of HCA Inc.-owned Palmyra, based in Albany, Georgia, could be carried out over the agency’s objections.

The Atlanta-based 11th U.S. Circuit Court of Appeals said the Georgia state legislature granted antitrust immunity to the deal, trumping the FTC’s assertion that the acquisition would result in too few health-care options for Albany residents.

“We are pleased that the Supreme Court will consider the Phoebe Putney matter in the coming term,” FTC Chairman Jon Leibowitz said in an e-mailed statement. “This case is important to consumers, who benefit from a competitive health care marketplace. It also may provide crucial guidance on the boundaries of the state action doctrine.”

The State Action doctrine has long been in some need of guidance; see the FTC State Action Report or the Antitrust Modernization Commission Report – both which call for increased guidance and clarity on the contours of the state action doctrine – for details.  As the AMC Report observes:

The lower courts have not always properly implemented Supreme Court precedents outlining what is required to satisfy the clear articulation prong. In Town of Hallie v. City of Eau Claire the Supreme Court held the clear articulation standard was satisfied where the allegedly anticompetitive conduct was a “foreseeable result” of a state law.52 Following Town of Hallie, however, some courts have applied a standard of “foreseeability” (and thus immunity) wherever a state authorizes conduct that does not necessarily, but might, have an anticompetitive effect. 53  To say that anticompetitive effects are a possible result of a statute, however, is not the same as finding “a deliberate and intended state policy” to replace competition with regulation, as the Court subsequently required in FTC v. Ticor Title Insurance Co.54

There are a number of areas within the state action doctrine that could use some attention.  I’m sure we’ll have more discussion of the case here in the weeks to come.

Filed under: antitrust, federal trade commission

I am very pleased to report that Kevin Murphy – economist extraordinaire, recipient of the MacArthur Fellowship, Bates Clark Medal winner, and of course, fellow UCLA Bruin — has agreed to join Charles River Associates as a Senior Consultant beginning May 2013 when his contract with Navigant Economics expires.  As a fellow Senior Consultant at CRA, and a fan of Murphy’s academic and expert work, I’m very pleased that he will be joining the firm.

From the CRA press release:

Charles River Associates (NASDAQ: CRAI), a worldwide leader in providing economic, financial, and management consulting services, today announced that Kevin M. Murphy, the George J. Stigler Distinguished Service Professor of Economics, Department of Economics and Booth School of Business, University of Chicago, has entered into an agreement to become a senior consultant to CRA’s Antitrust & Competition Economics Practice. Professor Murphy is expected to begin working with CRA in May 2013.

“Kevin Murphy is widely regarded as one of the smartest economists in the world and we are honored and thrilled about his decision to become a senior consultant to Charles River Associates,” said CRA’s President and Chief Executive Officer Paul Maleh. “Professor Murphy has an outstanding reputation as an extremely effective expert in numerous antitrust, labor and other engagements. In his academic research, Professor Murphy has developed leading theories and analyses that explain how economic incentives influence social phenomena, such as addiction, and determine economic outcomes, including wage inequality, unemployment, and the economic value of health and medical research. Professor Murphy has a reputation for being exceptionally creative, asking the questions not being asked, and developing innovative and informative economic models. Simply put—he is an economist in a league of his own. We look forward to working with Professor Murphy and continuing CRA’s tradition of teaming our highly-talented consulting professionals with renowned academics and economists to best serve clients.”

Dr. Steven C. Salop, a Senior Consultant to CRA and Professor of Economics and Law at Georgetown University Law Center, said, “We are very excited to have Kevin Murphy joining CRA. Besides being one of the most creative economists of his generation, Kevin is both articulate and down to earth. We are looking forward to having him as a colleague and a leader.”

Congratulations to Dr. Murphy and Charles River Associates.

DISCLOSURE: As mentioned, I am a Senior Consultant to CRA.

Filed under: antitrust, economics

Competition Policy International has published an interview with Judge Douglas Ginsburg and me following up on our 2010 article “Antitrust Sanctions.”  The interview ranges from topics such as whether the Occupy movements impact our proposal for use of debarment as an antitrust sanction in the United States to fairness concerns and global trends in antitrust penalties.  I believe one must be a subscriber to read the interview or listen to the audio.   The issue also contains an interview with Don Klawiter discussing the relationship between the evolution of executive penalties in antitrust, the Ginsburg & Wright proposal, and compliance programs.  Check it out.

Filed under: antitrust, cartels, doj, economics

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.

Read the full piece here. 

TOTM friend Stephen Bainbridge is editing a new book on insider trading.  He kindly invited me to contribute a chapter, which I’ve now posted to SSRN (download here).  In the chapter, I consider whether a disclosure-based approach might be the best way to regulate insider trading.

As law and economics scholars have long recognized, informed stock trading may create both harms and benefits to society.  With respect to harms, defenders of insider trading restrictions have maintained that informed stock trading is “unfair” to uninformed traders and causes social welfare losses by (1) encouraging deliberate mismanagement or disclosure delays aimed at generating trading profits; (2) infringing corporations’ informational property rights, thereby discouraging the production of valuable information; and (3) reducing trading efficiency by increasing the “bid-ask” spread demanded by stock specialists, who systematically lose on trades with insiders.

Proponents of insider trading liberalization have downplayed these harms.  With respect to the fairness argument, they contend that insider trading cannot be “unfair” to investors who know in advance that it might occur and nonetheless choose to trade.  And the purported efficiency losses occasioned by insider trading, liberalization proponents say, are overblown.  There is little actual evidence that insider trading reduces liquidity by discouraging individuals from investing in the stock market, and it might actually increase such liquidity by providing benefits to investors in equities.  With respect to the claim that insider trading creates incentives for delayed disclosures and value-reducing management decisions, advocates of deregulation claim that such mismanagement is unlikely for several reasons.  First, managers face reputational constraints that will discourage such misbehavior.  In addition, managers, who generally work in teams, cannot engage in value-destroying mismanagement without persuading their colleagues to go along with the strategy, which implies that any particular employee’s ability to engage in mismanagement will be constrained by her colleagues’ attempts to maximize firm value or to gain personally by exposing proposed mismanagement.  With respect to the property rights concern, deregulation proponents contend that, even if material nonpublic information is worthy of property protection, the property right need not be a non-transferable interest granted to the corporation; efficiency considerations may call for the right to be transferable and/or initially allocated to a different party (e.g., to insiders).  Finally, legalization proponents observe that there is little empirical evidence to support the concern that insider trading increases bid-ask spreads.

Turning to their affirmative case, proponents of insider trading legalization (beginning with Geoff’s dad, Henry Manne) have primarily emphasized two potential benefits of the practice.  First, they observe that insider trading increases stock market efficiency (i.e., the degree to which stock prices reflect true value), which in turn facilitates efficient resource allocation among capital providers and enhances managerial decision-making by reducing agency costs resulting from overvalued equity.  In addition, the right to engage in insider trading may constitute an efficient form of managerial compensation.

Not surprisingly, proponents of insider trading restrictions have taken issue with both of these purported benefits. With respect to the argument that insider trading leads to more efficient securities prices, ban proponents retort that trading by insiders conveys information only to the extent it is revealed, and even then the message it conveys is “noisy” or ambiguous, given that insiders may trade for a variety of reasons, many of which are unrelated to their possession of inside information.  Defenders of restrictions further maintain that insider trading is an inefficient, clumsy, and possibly perverse compensation mechanism.

The one thing that is clear in all this is that insider trading is a “mixed bag”  Sometimes such trading threatens to harm social welfare, as in SEC v. Texas Gulf Sulphur, where informed trading threatened to prevent a corporation from usurping a valuable opportunity.  But sometimes such trading creates net social benefits, as in Dirks v. SEC, where the trading revealed massive corporate fraud.

As regular TOTM readers will know, optimal regulation of “mixed bag” business practices (which are all over the place in the antitrust world) requires consideration of the costs of underdeterring “bad” conduct and of overdeterring “good” conduct.  Collectively, these constitute a rule’s “error costs.”  Policy makers should also consider the cost of administering the rule at issue; as they increase the complexity of the rule to reduce error costs, they may unwittingly drive up “decision costs” for adjudicators and business planners.  The goal of the policy maker addressing a mixed bag practice, then, should be to craft a rule that minimizes the sum of error and decision costs.

Adjudged under that criterion, the currently prevailing “fraud-based” rules on insider trading fail.  They are difficult to administer, and they occasion significant error cost by deterring many instances of socially desirable insider trading.  The more restrictive “equality of information-based” approach apparently favored by regulators fares even worse.  A contractarian, laissez-faire approach favored by many law and economics scholars would represent an improvement over the status quo, but that approach, too, may be suboptimal, for it does nothing to bolster the benefits or reduce the harms associated with insider trading.

My new book chapter proposes a disclosure-based approach that would help reduce the sum of error and decision costs resulting from insider trading and its regulation.  Under the proposed approach, authorized informed trading would be permitted as long as the trader first disclosed to a centralized, searchable database her insider status, the fact that she was trading on the basis of material, nonpublic in­formation, and the nature of her trade.  Such an approach would (1) enhance the market efficiency benefits of insider trading by facilitating “trade decod­ing,” while (2) reducing potential costs stemming from deliberate misman­agement, disclosure delays, and infringement of informational property rights.  By “accentuating the positive” and “eliminating the negative” conse­quences of informed trading, the proposed approach would perform better than the legal status quo and the leading proposed regulatory alternatives at minimizing the sum of error and decision costs resulting from insider trading restrictions.

Please download the paper and send me any thoughts.

Filed under: 10b-5, corporate law, disclosure regulation, error costs, financial regulation, insider trading, markets, regulation, securities regulation, SSRN

Judge Douglas Ginsburg (D.C. Circuit Court of Appeals; NYU Law) and I have posted “Dynamic Antitrust and the Limits of Antitrust Institutions” to SSRN.  Our article is forthcoming in Volume 78 (2) of the Antitrust Law Journal.  We offer a cautionary note – from an institutional perspective – concerning the ever-increasing and influential calls for greater incorporation of models of dynamic competition and innovation into antitrust analysis by courts and agencies.

Here is the abstract:

The static model of competition, which dominates modern antitrust analysis, has served antitrust law well.  Nonetheless, as commentators have observed, the static model ignores the impact that competitive (or anti-competitive) activities undertaken today will have upon future market conditions.  An increased focus upon dynamic competition surely has the potential to improve antitrust analysis and, thus, to benefit consumers.  The practical value of proposals to increase the use of dynamic analysis must, however, be evaluated with an eye to the institutional limitations that antitrust agencies and courts face when engaged in predictive fact-finding.  We explain and evaluate both the current state of dynamic antitrust analysis and some recent proposals that agencies and courts incorporate dynamic considerations more deeply into their analyses.  We show antitrust analysis is not willfully ignorant of the limitations of static analysis; on the contrary, when reasonably confident predictions can be made, they are readily incorporated into the analysis.  We also argue agencies and courts should view current proposals for a more dynamic approach with caution because the theories underpinning those proposals lie outside the agencies’ expertise in industrial organization economics, do not consistently yield determinate results, and would place significant demands upon reviewing courts to question predictions based upon those theories.  Considering the current state of economic theory and empirical knowledge, we conclude that competition agencies and courts have appropriately refrained from incorporating dynamic features into antitrust analysis to make predictions beyond what can be supported by a fact-intensive analysis.

You can download the paper here.

Filed under: antitrust, doj, economics, entrepreneurship, error costs, exclusionary conduct, federal trade commission, merger guidelines, mergers & acquisitions, monopolization, settlements, technology