Professor Bainbridge isn’t fond of empirical legal scholarship; more significantly, he asserts that law professors trained to pursue it fundamentally undercut the purposes of legal academia.  (His judgment on legal academics which moonlight as amateur statisticians remains to be seen.)  Professor Bainbridge has for some time criticized empirical legal scholarship – but now he targets legal scholars themselves.  Stated another way, Professor Bainbridge claims that empirical legal scholars depress the quality of legal education by fusing an underdeveloped corpus of legal knowledge to a second-rate grasp of an extra-legal discipline.  The provocative claims in Professor Bainbridge’s recent National Journal article do not end there.

Read the full piece here.

[UPDATE:  Josh links to a WSJ article telling us that EU antitrust enforcers raided several (unnamed) e-book publishers as part of an apparent antitrust investigation into the agency model and whether it is “improperly restrictive.”  Whatever that means.  Key grafs:

At issue for antitrust regulators is whether agency models are improperly restrictive. Europe, in particular, has strong anticollusion laws that limit the extent to which companies can agree on the prices consumers will eventually be charged.

Amazon, in particular, has vociferously opposed the agency practice, saying it would like to set prices as it sees fit. Publishers, by contrast, resist the notion of online retailers’ deep discounting.

It is unclear whether the animating question is whether the publishers might have agreed to a particular pricing model, or to particular prices within that model.  As a legal matter that distinction probably doesn’t matter at all; as an economic matter it would seem to be more complicated–to be explored further another day . . . .]

A year ago I wrote about the economics of the e-book publishing market in the context of the dispute between Amazon and some publishers (notably Macmillan) over pricing.  At the time I suggested a few things about how the future might pan out (never a god good idea . . . ):

And that’s really the twist.  Amazon is not ready to be a platform in this business.  The economic conditions are not yet right and it is clearly making a lot of money selling physical books directly to its users.  The Kindle is not ubiquitous and demand for electronic versions of books is not very significant–and thus Amazon does not want to take on the full platform development and distribution risk.  Where seller control over price usually entails a distribution of inventory risk away from suppliers and toward sellers, supplier control over price correspondingly distributes platform development risk toward sellers.  Under the old system Amazon was able to encourage the distribution of the platform (the Kindle) through loss-leader pricing on e-books, ensuring that publishers shared somewhat in the costs of platform distribution (from selling correspondingly fewer physical books) and allowing Amazon to subsidize Kindle sales in a way that helped to encourage consumer familiarity with e-books.  Under the new system it does not have that ability and can only subsidize Kindle use by reducing the price of Kindles–which impedes Amazon from engaging in effective price discrimination for the Kindle, does not tie the subsidy to increased use, and will make widespread distribution of the device more expensive and more risky for Amazon.

This “agency model,” if you recall, is one where, essentially, publishers, rather than Amazon, determine the price for electronic versions of their books sold via Amazon and pay Amazon a percentage.  The problem from Amazon’s point of view, as I mention in the quote above, is that without the ability to control the price of the books it sells, Amazon is limited essentially to fiddling with the price of the reader–the platform–itself in order to encourage more participation on the reader side of the market.  But I surmised (again in the quote above), that fiddling with the price of the platform would be far more blunt and potentially costly than controlling the price of the books themselves, mainly because the latter correlates almost perfectly with usage, and the former does not–and in the end Amazon may end up subsidizing lots of Kindle purchases from which it is then never able to recoup its losses because it accidentally subsidized lots of Kindle purchases by people who had no interest in actually using the devices very much (either because they’re sticking with paper or because Apple has leapfrogged the competition).

It appears, nevertheless, that Amazon has indeed been pursuing this pricing strategy.  According to this post from Kevin Kelly,

In October 2009 John Walkenbach noticed that the price of the Kindle was falling at a consistent rate, lowering almost on a schedule. By June 2010, the rate was so unwavering that he could easily forecast the date at which the Kindle would be free: November 2011.

There’s even a nice graph to go along with it:

So what about the recoupment risk?  Here’s my new theory:  Amazon, having already begun offering free streaming videos for Prime customers, will also begin offering heavily-discounted Kindles and even e-book subsidies–but will also begin rescinding its shipping subsidy and otherwise make the purchase of dead tree books relatively more costly (including by maintaining less inventory–another way to recoup).  It will still face a substantial threat from competing platforms like the iPad but Amazon is at least in a position to affect a good deal of consumer demand for Kindle’s dead tree competitors.

For a take on what’s at stake (here relating to newspapers rather than books, but I’m sure the dynamic is similar), this tidbit linked from one of the comments to Kevin Kelly’s post is eye-opening:

If newspapers switched over to being all online, the cost base would be instantly and permanently transformed. The OECD report puts the cost of printing a typical paper at 28 per cent and the cost of sales and distribution at 24 per cent: so the physical being of the paper absorbs 52 per cent of all costs. (Administration costs another 8 per cent and advertising another 16.) That figure may well be conservative. A persuasive looking analysis in the Business Insider put the cost of printing and distributing the New York Times at $644 million, and then added this: ‘a source with knowledge of the real numbers tells us we’re so low in our estimate of the Times’s printing costs that we’re not even in the ballpark.’ Taking the lower figure, that means that New York Times, if it stopped printing a physical edition of the paper, could afford to give every subscriber a free Kindle. Not the bog-standard Kindle, but the one with free global data access. And not just one Kindle, but four Kindles. And not just once, but every year. And that’s using the low estimate for the costs of printing.

Filed under: antitrust, business, cartels, contracts, doj, e-books, economics, error costs, law and economics, litigation, MFNs, monopolization, resale price maintenance, technology, vertical restraints Tagged: agency model, Amazon, Amazon Kindle, antitrust, Apple, doj, e-book, e-books, iBookstore, Kindle, major publishers, MFN, most favored nations clause, per se, price-fixing, publishing industry, Rule of reason, two-sided markets, vertical restraints

Antitrust investigators continue to see smoke rising around Apple and the App Store.  From the WSJ:

For starters, subscriptions must be sold through Apple’s App Store. For instance, a magazine that wants to publish its content on an iPad cannot include a link in an iPad app that would direct readers to buy subscriptions through the magazine’s website. Apple earns a 30% share of any subscription sold through its App Store. …

A federal official confirmed to The Washington Post that the government is looking at Apple’s subscription service terms for potential antitrust issues but said there is no formal investigation. Speaking on the condition of anonymity because he was not authorized to comment publicly, the official said that the government routinely tracks new commercial initiatives influencing markets.

Investigators certainly suspect Apple of myriad antitrust violations; there is even some absurd talk about breaking up Apple.  There is definitely smoke — but is there fire?

The most often discussed bar to an antitrust action against Apple is the one many regulators simply assume into existence: Apple must have market power in an antitrust-relevant market.  While Apple’s share of the smartphone market is only 16% or so, its share of the tablet computing market is much larger.  The WSJ, for example, reports that Apple accounts for about three-fourths of tablet computer sales.  I’ve noted before in the smartphone context that this requirement should not be consider a bar to FTC suit, given the availability of Section 5; however, as the WSJ explains, market definition must be a critical issue in any Apple investigation or lawsuit:

Publishers, for example, might claim that Apple dominates the market for consumer tablet computers and that it has allegedly used that commanding position to restrict competition. Apple, in turn, might define the market to include all digital and print media, and counter that any publisher not happy with Apple’s terms is free to still reach its customers through many other print and digital outlets.

One must conduct a proper, empirically-grounded analysis of the relevant data to speak with confidence; however, it suffices to say that I am skeptical that tablet sales would constitute a relevant market.

Meanwhile, Google demonstrates the corrective dynamics of markets.  New entry during an investigation period can influence agencies’ decision-making — as it should; Google has recently offered a new service, OnePass, which would allow publishers to keep up to 90% of subscription revenue.  It is unknown — and perhaps unknowable — which business model is “correct;” perhaps both are preferable in their individual contexts.  It appears there is emerging, significant competition in this space, of which regulators should take note.

Finally, in light of Geoff’s recent post, it is also worth discussing whether Tim Wu’s recent appointment to the Commission impacts the likelihood of a suit against Apple.  Geoff thinks it means a likely suit against Google; Professor Wu might bring similar implications for Apple — after all, Professor Wu has described Apple as the company he most fears.  I have no doubt that Professor Wu will spend a good deal of his time at the Commission dealing with issues surrounding both Google and Apple, policy issues concerning both, and potential antitrust theories surrounding business practices such as Apple’s subscription model.  I am skeptical, however, that his presence changes the actual likelihood of a suit: Section 2 law remains a substantial obstacle.  The real value of his creative thinking will be in generating Section 5 claims surrounding these business arrangements — where the Commission must demonstrate substantially less onerous requirements and where the Commission operates within greater legal ambiguities.  In this light, will Professor Wu bring such an aggressive stance to Section 5 so as to make the difference between an Apple challenge or not?  I doubt it — the Commission has already expressed an interpretation of Section 5 that I find unjustifiably aggressive.  The Commission needs no assistance in leveraging Section 5 to intervene in high-tech contexts: just ask Intel.

Predictions are a rough business: that caveat aside, I continue to believe the FTC will file against Apple — and because of the obvious (and likely impassable) hurdles under Section 2, I believe the eventual complaint will be a bare Section 5 suit.

Filed under: antitrust, economics, federal trade commission, monopolization, regulation, technology

The WSJ reports that Carl Shapiro, deputy assistant attorney general for economics in the DOJ’s antitrust division, has been nominated by President Obama to his Council of Economic Advisers.  Also worth noting is that Phil Weiser, also a former deputy assistant attorney general in the antitrust division, is now senior advisor for technology and innovation at the National Economic Council.

Congratulations to both, and I’m delighted to have them out of the DOJ and in the White House where they can do less damage.  Kidding.  Actually, I think both will (and in Phil’s case, already do) offer much-needed and valuable input in the White House.

 

Filed under: announcements, antitrust, economics, politics, technology Tagged: carl shapiro, cea, doj, economists

David Leonhart points out the new Dale & Krueger study on the value of an elite undergraduate education.  His punchline:

A decade ago, two economists — Stacy Dale and Alan Krueger — published a research paper arguing that elite colleges did not seem to give most graduates an earnings boost. As you might expect, the paper received a ton of attention. Ms. Dale and Mr. Krueger have just finished a new version of the study — with vastly more and better data, covering people into their 40s and 50s, as well as looking at a set of more recent college graduates — and the new version comes to the same conclusion.

Indeed, check out the Dale & Krueger abstract:

When we adjust for unobserved student ability by controlling for the average SAT score of the colleges that students applied to, our estimates of the return to college selectivity fall substantially and are generally indistinguishable from zero. There were notable exceptions for certain subgroups, [namley] for black and Hispanic students and for students who come from less-educated families.

So — college prestige doesn’t matter much.    Right?  Not so fast my friend…

The devil is in the details.  Or in this case, the regression tables.  And the real story is that college prestige matters quite a bit for men, but not women.  Robin Hanson is on the case (the study itself is in italics):

To find the truth, you have to study Table 4 carefully, and note footnote 13:

For both men and women, the coefficient was zero (and sometimes even negative) [in] the self-revelation model.¹³ …

[footnote:] 13 This lower return to college selectivity for women is consistent with other literature. Results from Hoekstra (2009), Black and Smith (2004) and Long (2008) all suggest that the effect of college selectivity on earnings is lower for women than for men.

Table 4 shows that attending a college with higher SAT scores clearly lowered the wages of women 17-26 years after starting college (in 1976) — a school with a 100-point higher average SAT score reduced earnings by about 6-7%!  The two estimates there are significant at ~0.01% level! (The other three, for other periods after starting college, are significant at the 5% level.)

One obvious explanation is that women at more elite colleges married richer classmate men, and so felt less need to earn money themselves. Why don’t the study’s authors want us to hear about that?

See also here and here.

Filed under: economics, Education, universities

From the WSJ:

The U.S. Supreme Court on Tuesday refused to take another look at its controversial 2007 antitrust ruling that allowed manufacturers to set retail prices for their products.  The court, without comment, rejected an appeal by the Texas boutique retailer that was on the losing end of the court’s 5-4 decision nearly four years ago, which was condemned by consumer advocates.

The ideologically divided ruling overturned nearly 100 years of legal precedent and held that manufacturers did not automatically violate federal antitrust law by imposing pricing restraints on retailers. Such restraints can bar stores from selling a manufacturer’s products at a discount.  The high court said in its 2007 ruling that pricing agreements should be judged individually to determine whether there are valid pro-competitive reasons for imposing the price restrictions.

The decision reverberated quickly as manufacturers in sectors like baby goods, consumer electronics, home furnishings and pet food blocked discounters.  Texas retailer Kay’s Kloset, which challenged the pricing policies of Brighton Inc., a maker of handbags and other accessories, said a lower court had taken the Supreme Court’s ruling too far, effectively rendering all vertical price-fixing policies legal.

The retailer enlisted the help of a noted Harvard law professor for its second effort at the Supreme Court.

Lawyers for Brighton said the lower courts faithfully applied the Supreme Court’s ruling. The company said its pricing agreements were pro-competitive because higher prices for Brighton goods encouraged retailers to invest more in marketing, displays and customer service.

This is consistent with our earlier analysis here, in which we observed that “I do not think that such a ruling threatens the ability of plaintiffs, in the appropriate case with appropriate evidence, to bring a rule of reason RPM case.  Further, there does not appear to be much for the Supreme Court to do here.”

Filed under: antitrust, economics, Supreme Court

The Federal Trade Commissioners have posted a letter to Congressmen John Mica and Nick Rahall, members of the House Transportation and Infrastructure Committee, “in response to legislative action by the Committee to transfer the historic FTC Building to the National Gallery of Art.”  I had not heard about any planned legislative action to move the FTC to the National Gallery of Art and thought this might be of interest to our readers.

I’ve copied the Commissioners’ letter below:

Dear Chairman Mica and Ranking Member Rahall:

As the bipartisan Commissioners of the Federal Trade Commission, we write to state respectfully our strong opposition to efforts to remove the FTC from the historic FTC Building to transfer it to the National Gallery of Art. Forcing the FTC out of its federally-owned headquarters would displace our agency from a building that it has continuously occupied since it was designed and built for us over 70 years ago. Since 1938, the FTC Building, located at 600 Pennsylvania, NW, in Washington, D.C., has served as the FTC’s headquarters, housing management, administrative, and adjudicative functions. The building is currently home to approximately 700 people who support the FTC’s missions of protecting American consumers and maintaining competition in the American marketplace.

More critically, a forced move of the FTC could impose additional costs on the American taxpayer from the need to replicate important functions of the FTC Building in a new building. As major examples, the FTC would have to build new courtrooms for conducting adjudications as well as replace its extensive information technology infrastructure, including infrastructure for tracking, investigating, and fighting online and offline fraud.

Yet another significant cost could be for securing more space for the federal government. This would include finding new space for a federal agency that might be displaced by the FTC’s move into a building that the other agency occupies or plans to occupy. And the taxpayers would still have to pay for the maintenance of the FTC Building. While we understand that the National Gallery’s existing buildings were paid for with private funds, monies are appropriated annually for the National Gallery’s operation and maintenance. Thus, even if the National Gallery were to use private funds to remodel the FTC Building for its own use, taxpayers apparently would be responsible for maintenance and operations of yet another National Gallery building (the FTC Building, which the legislation proposes to rename National Gallery of Art-North).

In addition, it is not clear to us the impact of the proposed legislation on historic preservation. The FTC Building is part of the Pennsylvania Avenue National Historic Site, which is registered under the National Historic Preservation Act of 1966. As such, the building’s exterior and countless features of its interior are protected by that Act and its procedures. This includes the building’s iconic man and horse statues, entitled “Man Controlling Trade.”

When laying the cornerstone for the FTC building in 1937, President Franklin Roosevelt said “[m]ay this permanent home of the Federal Trade Commission stand for all time as a symbol of the purpose of the Government to insist on a greater application of the Golden Rule to the conduct of corporations and business enterprises in the relationship to the body politic.” It is our hope that the building’s dedicated purpose can continue to be honored.

Thank you for your consideration of this matter.

More detail is available here.  Representative Mica was apparently not swayed by the pleas of the Commissioners, observing that “It would spoil the view for the five commissioners, and they are upset because they have one of the best views of the Capitol.”  The bill (HR 690) apparently was approved by the committee today by voice vote.

Here is the the House analysis purporting to support its claim of $540 in taxpayer savings from kicking the Commission out of 600 Pennsylvania in favor of the National Gallery (who would apparently raise $200 million for renovations).

Filed under: antitrust, federal trade commission

Dan Crane’s new book is now available from Oxford University Press (HT: Danny Sokol).  Dan has been a repeat visitor to TOTM, is a co-author, and his scholarship on is always insightful.  I suspect this book will become a standard reference in the growing antitrust institutions literature.  Here is the book description from the OUP website:

The Institutional Structure of Antitrust Enforcement , by Daniel A. Crane provides a comprehensive and succinct treatment of the history, structure, and behavior of the various U.S. institutions that enforce antitrust laws, such as the Department of Justice and the Federal Trade Commission. It addresses the relationship between corporate regulation and antitrust, the uniquely American approach of having two federal antitrust agencies, antitrust federalism, and the predominance of private enforcement over public enforcement. It also draws comparisons with the structure of institutional enforcement outside the United States in the European Union and in other parts of the world, and it considers the possibility of creating international antitrust institutions through the World Trade Organization or other treaty mechanisms. The book derives its topics from historical, economic, political, and theoretical perspectives.

Go buy it.

 

Filed under: antitrust, scholarship

There is an interesting story developing on antitrust enforcement and collaboration between hospitals and doctors encouraged by the new health care law.  The New York Times reports:

An influential Republican member of the Federal Trade Commission, J. Thomas Rosch, said that without “vigorous antitrust enforcement,” the new alliances of health care providers could reduce competition and increase costs to consumers.  Mr. Rosch set forth his concerns in private letters to the White House and the federal Medicare agency. The letters, obtained by The New York Times, reveal a struggle between the Justice Department and the commission over who should police the market.

The Rosch letter purportedly asserts that ““The creation and operation of accountable care organizations potentially conflict with the antitrust laws … . The Supreme Court long ago prohibited competing providers from jointly contracting to provide their services, except in specified circumstances.”

David Balto (Center for American Progress) describes the FTC position on collaboration between hospitals as “unreasonable skepticism.”   The Times also reports that the FTC and DOJ are trying to work out a joint policy statement on the issue:

Officials of the two agencies, which normally share responsibility for enforcing antitrust laws, are trying to devise a joint statement explaining how they will evaluate proposed collaborations by doctors and hospitals. The agencies said, in response to questions, that their goal was to have one consistent policy, but they refused to give details of their talks.

Apparently, the letter spurred this response from nine senators encouraging collaboration and shared jurisdiction between the agencies.

And while we’re on Obamacare, though on a completely unrelated note, MIT economist Jonathan Gruber will be releasing a comic book to explain the misunderstood virtues of the bill to the American public:

Gruber said he will illustrate how the president’s plan will lower health-care costs and end discriminatory insurance practices that make it much harder for sick people to get coverage.  “My family made me realize that there’s such a misunderstanding of the bill, and that it’s important to explain why we need this, and what it does,” he said. “I’ve found that when people understand it, they like it.”

That is all.

Filed under: antitrust, economics, health care reform debate, markets, regulation