For a possible antitrust suit following from the players’ decertification:

The National Football League geared up for its antitrust battle against players Saturday by hiring two prominent attorneys for its legal team.

David Boies, who represented Al Gore in the Bush vs. Gore case following the 2000 election, and who last year won a $1.3 billion copyright infringement verdict for Oracle, will represent the N.F.L. in the suit brought by players against the league after the dissolution of the players union Friday. He is considered one of the country’s leading trial lawyers.

Also joining Gregg Levy, the longtime outside counsel for the N.F.L., will be Paul Clement, who served for three years as the U. S. Solicitor General for President George W. Bush and who has argued more than 50 cases before the U.S. Supreme Court.

Hearings in the injunction players are seeking to lift the lockout planned by team owners could begin as early as next week.

NYT.  Michael McCann provides a nice review of the state of play and where things are likely to go from here.

Filed under: antitrust, sports

As I mentioned in my previous post, there is a strong effort to regulate the use of information on the web in the name of “privacy.” The basic tradeoff that drives the web is that firms use information for advertising and other purposes,and in return consumers get lots of things free.  Google alone offers about 40 free services, including the original  search engine, gmail, maps, and the increasingly popular android operating system for mobile devices. Facebook is another set of free services. There are hundreds of others, all ultimately funded by advertising and the use of information.  Any effort to regulate information is going to change the terms at which these services are offered.

To justify regulation, two conditions must be met.  First there must be some market failure.  Second, there must be at least an expectation that the benefits of the proposed regulation will outweigh the costs.  In a market economy, we generally put the burden of proof on those proposing regulation, since the default assumption is that markets provide net benefits.  Proponents of regulating the use of information on the internet have met neither of these burdens.

One main justification for regulation is that people do not want to be tracked. I discussed this issue in my previous post.  Let me just add that, while people express a desire not to be tracked, in practice they seem quite willing to trade information for other services.  The other issue is identity theft — the possibility that information will be misused for illegitimate purposes.  Tom Lenard and I have written extensively about this issue. The bottom line, however, is that consumers are not liable for much if any of the costs of identity theft, and since firms must bear these costs there is no obvious market failure.

With respect to the second issue, there has been virtually no effort to undertake any cost benefit analysis of the proposed regulations.  However, if there were such an analysis, it is unlikely that regulations would be cost justified since the benefits of the free stuff are huge and the costs are small at best.  While it is conceivable that some tweaking would pass a cost-benefit test, it is very unlikely that any regulation which could get through the political process and then be administered by an agency such as the FTC would in fact pass this test.  Moreover, the proposed regulations, such as a “do not track” list or shifting from opt out to opt in are well beyond “tweaking” and might fundamentally change the terms of the tradeoff.

The bottom line is this:  Privacy advocates act as if privacy is free.  But increased privacy means reduced use of information, and no one has shown that altering the terms of this tradeoff would be beneficial to consumers.

Filed under: cost-benefit analysis, privacy Tagged: cost-benefit analysis, privacy

First I would like to thank Geoff Manne for inviting me to join this blog.  I know most of my fellow bloggers and it is a group I am proud to be associated with.

For my first few posts I am going to write about privacy.  This is a hot topic.  Senators McCain and Kerry are floating a privacy bill, and the FTC is also looking at privacy. I have written a lot about privacy (mostly with Tom Lenard of the Technology Policy Institute, where I am a senior fellow).

The issue of the day is “tracking.”  There are several proposals for “do not track” legislation and polls show that consumers do not want to be tracked.

The entire fear of being tracked is based on an illusion.  It is a deep illusion, and difficult or impossible to eliminate, but still an illusion.   People are uncomfortable with the idea that someone knows what they are doing.  (It is “creepy.”)  But in fact no person knows what you are doing, even if you are being tracked. Only a machine knows.

As humans, we have difficulty understanding that something can be “known” but nonetheless not known by anyone.   We do not understand that we can be “tracked” but that no one is tracking us.  That is, data on our searches may exist on a server somewhere so that the server “knows” it, but no human knows it.  We don’t intuitively grasp this concept because it it entirely alien to our evolved intelligence.

In my most recent paper (with Michael Hammock, coming out in Competition Policy International) we cite two books by Clifford Nass ( C. Nass & C. Yen, The Man Who Lied to His Laptop: What Machines Teach Us About Human Relationships (2010), and B. Reeves & C. Nass, The Media Equation: How People Treat Computers, Television, and New Media Like Real People and Places (1996, 2002).)  Nass and his coauthors show that people automatically treat intelligent machines like other people.  For example, if asked to fill out a questionnaire about the quality of a computer, they rate the machine higher if they are filling out the form on the computer being rated than if it on another computer — they don’t want to hurt the computer’s feelings.  Privacy is like that — people can’t adapt to the notion that a machine knows something. They assume (probably unconsciously) that if somethingis known then a person knows it, and this is why they do not like being tracked.

One final point about tracking.  Even if you are tracked, the purpose is to find out what you want and sell it to you.  Selling people things they want is the essence of the market economy, and if tracking does a better job of this, then it is helping the market function better, and also helping consumers get products that are a better fit.  Why should this make anyone mad?

Filed under: advertising, consumer protection, privacy, regulation, truth on the market Tagged: “do not track”, privacy, tracking

In recent years, antitrust scholars have largely agreed on a couple of propositions involving tying and bundled discounting. With respect to tying (selling one’s monopoly “tying” product only on the condition that buyers also purchase another “tied” product), scholars from both the Chicago and Harvard Schools of antitrust analysis have generally concluded that there should be no antitrust liability unless the tie-in results in substantial foreclosure of marketing opportunities in the tied product market. Absent such foreclosure, scholars have reasoned, truly anticompetitive harm is unlikely to occur. The prevailing liability rule, however, condemns tie-ins without regard to whether they occasion substantial tied market foreclosure.

With respect to bundled discounting (selling a package of products for less than the aggregate price of the products if purchased separately), scholars have generally concluded that there should be no antitrust liability if the discount at issue could be matched by an equally efficient single-product rival of the discounter. That will be the case if each product in the bundle is priced above cost after the entire bundled discount is attributed to that product. Antitrust scholars have therefore generally endorsed a safe harbor for bundled discounts that are “above cost” under a “discount attribution test.”

In an article appearing in the December 2009 Harvard Law Review, Harvard law professor Einer Elhauge challenged each of these near-consensus propositions. According to Elhauge, the conclusion that significant tied market foreclosure should be a prerequisite to tying liability stems from scholars’ naïve acceptance of the Chicago School’s “single monopoly profit” theory. Elhauge insists that the theory is infirm and that instances of tying may occasion anticompetitive “power” (i.e., price discrimination) effects even if they do not involve substantial tied market foreclosure. He maintains that the Supreme Court has deemed such effects to be anticompetitive and that it was right to do so.

With respect to bundled discounting, Elhauge calls for courts to forego price-cost comparisons in favor of a rule that asks whether the defendant seller has “coerced” consumers into buying the bundle by first raising its unbundled monopoly (“linking”) product price above the “but-for” level that would prevail absent the bundled discounting scheme and then offering a discount from that inflated level.

I have just posted to SSRN an article criticizing Elhauge’s conclusions on both tying and bundled discounting. On tying, the article argues, Elhauge makes both descriptive and normative mistakes. As a descriptive matter, Supreme Court precedent does not deem the so-called power effects (each of which was well-known to Chicago School scholars) to be anticompetitive. As a normative matter, such effects should not be regulated because they tend to enhance total social welfare, especially when one accounts for dynamic efficiency effects. Because tying can create truly anticompetitive effect only when it involves substantial tied market foreclosure, such foreclosure should be a prerequisite to liability.

On bundled discounting, I argue, Elhauge’s proposed rule would be a disaster. The rule fails to account for the fact that bundled discounts may create immediate consumer benefit even if the seller has increased unbundled linking prices above but-for levels. It is utterly inadministrable and would chill procompetitive instances of bundled discounting. It is motivated by a desire to prevent “power” effects that are not anticompetitive under governing Supreme Court precedent (and should not be deemed so). Accordingly, courts should reject Elhauge’s proposed rule in favor of an approach that first focuses on the genuine prerequisite to discount-induced anticompetitive harm—“linked” market foreclosure—and then asks whether any such foreclosure is anticompetitive in that it could not be avoided by a determined competitive rival. To implement such a rule, courts would need to apply the discount attribution test.

The paper is a work-in-progress. Herbert Hovenkamp has already given me a number of helpful comments, which I plan to incorporate shortly. In the meantime, I’d love to hear what TOTM readers think.

Filed under: antitrust, bundled discounts, economics, error costs, exclusionary conduct, law and economics, price discrimination, regulation, SSRN, tying

I have submitted a comment to the Federal Reserve Board concerning Regulation II, along with the American Enterprise Institute’s Alex Brill, Christopher DeMuth, Alex J. Pollock, and Peter Wallison, as well as my George Mason colleague Todd Zywicki.  Regulation II implements the interchange fee provisions of the Dodd-Frank Act.

The comment makes a rather straightforward and simple point:

We write to express our concern that the Federal Reserve Board has not to date taken the prudent and, importantly, legally required step of conducting a competitive impact analysis of Regulation II, which implements the interchange fee provisions of section 1075 of the Dodd-Frank Act (Pub L. 111-203). We consider this to be one of the most significant legal changes to the payment system’s competitive landscape since the Electronic Funds Transfer Act in 1978. This dramatic statutory and subsequent regulatory change will undoubtedly trigger a complex set of consequences for all firms participating in the payment system as well as for consumers purchasing both retail goods and financial services. The Federal Reserve’s obligation to conduct a competitive impact analysis of Regulation II is an appropriate and prudent safeguard against legal change with potentially pernicious consequences for the economy and consumers. Given the Board’s own well-crafted standards, we do not believe it is appropriate for the Board to move forward in implementing Regulation II without the required competitive impact analysis.

The rest of the comment appears below the fold.

The Board’s bulletin setting forth its role in the payments system lays out the policy that the Fed is supposed to follow “when considering … a legal change … if that change would have a direct and material adverse effect on the ability of other service providers to compete effectively with the Federal Reserve in providing similar services due to differing legal powers or constraints or due to a dominant marketing position deriving from such legal differences.” The bulletin explicitly promises that “[a]ll operational or legal changes having a substantial effect on payments system participants will be subject to a
competitive-impact analysis even if the competitive effects are not apparent on the face of the proposal.”

There is little doubt that Regulation II qualifies for the required competitive impact analysis by this standard as it will likely have a “substantial effect on payment system participants.” Further, several aspects of the proposal impose “differing constraints” on different institutions. The proposal, for example, exempts Fed-sponsored payment systems such as the A C H system from the scope of the regulation while sweeping in alternate payment providers, even though such provider systems are functionally indistinguishable in relevant respect.

The bulletin goes on to provide details of the required competitive impact analysis. For example, the Board must “first determine whether the proposal has a direct and material adverse effect on the ability of other service providers to compete effectively with the Federal Reserve in providing similar services.” If so, the Board must then “ascertain whether the adverse effect is due to legal differences or due to a dominant market position deriving from such legal differences.” If legal differences or a dominant market position deriving from those legal differences are detected, the analysis must then turn to assessing the benefits of the proposed legal change and determining whether those benefits could be “reasonably achieved with a lesser or no adverse competitive impact.” Indeed, the bulletin indicates that “the Board would then either modify the proposal to lessen or eliminate the adverse impact on competitors’ ability to compete or determine that the payments system objectives may not be reasonably achieved if the proposal were modified.” As the bulletin anticipates, such a detailed and careful analysis is fully appropriate to better understand the competitive impact of a significant legal change in the payment system before it is implemented.

As Federal Reserve Board Governor Sarah Bloom Raskin observed in recent Congressional testimony, “Commenters also have differing perspectives on the potential effect of the statute and the proposed rule on consumers,” and “the magnitude of the ultimate effect is not clear and will depend on the behavior of various participants in the debit card networks.”

We agree with Governor Raskin’s observations and conclude that an economic impact analysis of the competitive effects of Regulation II, while a complex endeavor, is a critical one to protect competition in the payment system and consumers. We urge the Board to conduct an impact analysis of Regulation II and to make this analysis available for public comment before implementation of Regulation II.

Interesting readers can search for other comments here.

Filed under: banking, consumer financial protection bureau, consumer protection, credit cards, economics, regulation

My good friend and coauthor John E. (Jack) Calfee died suddenly of a heart attack last month. He was bon in 1941 and was 69 years old.

Read the full piece here. 

Congressman Waxman shares that the news that the DOJ Antitrust Division told him that cable or phone companies violating net neutrality principles with exclusive or discriminatory deals are not violating the antitrust laws:

Waxman said during a net neutrality hearing Wednesday that Justice officials informed his office that existing competition laws cannot be used to prevent cable and phone companies from blocking Web traffic.

“DoJ told us that … antitrust does not stop a phone or cable company from blocking websites that don’t pay for access,” said Waxman, the top Democrat on the Energy and Commerce Committee.

“According to DoJ, favoring websites that pay high fees and degrading websites that don’t is perfectly legal under the antitrust laws as long as the phone or cable company isn’t in direct competition with the websites being degraded.”

Filed under: antitrust, net neutrality, technology

Tomorrow I will be attending a symposium on small business financing sponsored by the Entrepreneurial Business Law Journal‘s at the Moritz College of Law at the Ohio State University. I’m on a panel entitled “Recessionary Impacts on Equity Capital,” which is a bit misleading–or at least a bit different that the topic I offered to speak on, which is the effect of the recession and recent financial crisis on small business financing more generally. The rest of the day includes presentations governmental and policy responses to the crisis and practical implications of constricted capital. A copy of the schedule and list of speakers is available. I’m not very familiar with any of the other panelists, but the luncheon address will be given by Al Martinez-Fonts, Executive Vice President, U.S. Chamber of Commerce.

I’m going to focus on a few basic points and highlight some of the myths around small businesses and small business financing that drives poor policy. My first objective is to lay out a simple framework for thinking about financing deals, or any deal for that matter. Namely, the idea that every transaction involves allocations of value, uncertainty and decision rights; and the deal itself provides structure on those allocations by specifying the incentive systems, performance measures and decision rights that address both parties’ interests. How those structures are designed determine the nature of risk exposure and incentive conflicts that may affect the ex post value and performance of the deal.

In a sense, there is nothing new in small business financing post-crisis.  The fundamentals are the same. There is a multitude of contractual terms to address the various kinds of incentive issues and uncertainties that exist in the current market environment. To the extent there is anything truly unique about the current context, they are less about the financial market itself than about broader regulatory and economic issues. For example, much of the uncertainty affecting credit-worthiness have to do with economic and cash flow uncertainties stemming from upheavals in the regulatory landscape for small businesses, including health care. Uncertainty concerning implementation of financial market reforms passed in July 2010 create uncertainties for lenders. These uncertainties exacerbate the usual economic uncertainties of new and small businesses during an economic recovery period.

During the recession itself, “stimulus” spending distorted the credit-worthiness of small businesses in industries that were more directly benefited by government handouts and by the security provided small businesses that supply large, publicly-administered and guaranteed businesses (such as in the auto industry).  Thus, federal and state economic policy to “create jobs” in some sectors distorted the incentives to lend to different groups of small businesses, likely reducing employment in other sectors.

Finally, I’m going to suggest that talking about “small business” financing is a misnomer if we are truly motivated by a care of job creation. A recent paper by John Haltiwanger, Ron Jarmin, and Javier Miranda illustrates that business size is not the key determinant of job creation in the US, as is often argued in the media and policy circles. (HT: Peter Klein at O&M) They find that it is young firms, which happen to be small, not small firms in general that provide the job creation. Ironically, these young firms are also the ones for whom financing is most difficult due to the nascent stage of development and uncertainty. Thus, policies directed to firms based on size alone further distort capital availability from other (larger) companies that are equally likely to create jobs. Since this distortion is not costless, the policies are not welfare-neutral by simply switching where jobs are created, but likely to reduce welfare overall.

So now you don’t need to rush to Columbus, Ohio, to hear what I’ll have to say–unless you want to see the fireworks in person. But now you’ll know what’s going on in case there is news of more upset around the horse shoe in Columbus.

Filed under: financial regulation, markets, regulation, Sykuta

Ed Whelan chimes in on the perennial debate with the most recent data:

Those sneaky “corporatist” justices are at it again, cleverly disguising their biases by ruling in favor of employees and/or against corporations in two Supreme Court decisions issued today:

1. In Staub v. Proctor Hospital, the Court, reversing the Seventh Circuit, ruled unanimously that an employer could be held liable for employment discrimination based on the discriminatory animus of an employee who influenced, but did not make, the ultimate employment decision. Justice Scalia wrote the lead opinion.

2. In FCC v. AT&T, the Court, in a unanimous opinion by Chief Justice Roberts, ruled that corporations do not have “personal privacy” for purposes of a Freedom of Information Act exemption. The ruling reversed a Third Circuit decision.

In the third decision rendered today, Henderson v. Shinseki, the Court also ruled unanimously for the “little guy,” as it held, in an opinion by Justice Alito, that a 120-day deadline for a veteran to appeal an administrative denial of benefits did not amount to an absolute jurisdictional bar. The Court reversed a contrary ruling by the Federal Circuit.

(Justice Kagan did not take part in any of these cases.)

I’ve discussed the analytical incoherence of these “pro-business bias” claims in the antitrust context here and here; in that context, the argument is commonly raised but usually avoid serious claims that any specific decision was wrongly decided.

In somewhat related news, the Supreme Court denied cert in another patent settlement case, Louisiana Wholesale Drug Co., Inc., et al. v. Bayer AG, et al.  WSJ has more.

Filed under: antitrust, Supreme Court