The next installment in a seemingly never-ending series (see here for earlier offenders).

This time, its the California Attorney General Kamala Harris in a press release announcing a settlement with Bioelements, Inc., a Colorado-based company which sells skin care products in salons and online.  The relevant allegation, from the Complaint (Para. 10) is the following:

Beginning in mid 2009, Bioelements entered into many dozens of written contracts, entitled either “Bioelements Agreement for Authorized Professional Account Status” or “Bioelements Internet Only Accounts Agreement,” with third-party companies -several dozen of them physically located in California -that distribute and/or sell, retail to the public, Bioelements products, where such contracts contained resale price maintenance components. The “Authorized Professional Account” contract states, in part, that “Accounts shall not charge less than the Manufacturer’s Suggested Retail Price (MSRP).” The “Internet Only Accounts” contract states, in part, that “Accounts are prohibited from charging more or less than the Manufacturer’s Suggested Retail Price (MSRP).

Its an Resale Price Maintenance case.  No allegation of horizontal conspiracy.  Here’s AG Harris:

“Bioelements operated a blatant price-fixing scheme by requiring online retailers to sell its products at high prices,” Harris said. “Price manipulation harms consumers, competition and our business community. We will continue to be vigilant in protecting our markets from these kinds of abuses.”

The settlement is one of the first applications of California’s strict, pro-consumer antitrust law banning vertical price-fixing in the wake of a controversial 2007 U.S. Supreme Court decision that weakened federal law in this area. Vertical price-fixing occurs when companies along the distribution chain conspire to set the price of a product or service at an artificially high level. In California, prices must be set independently — and competitively — by distributors and retailers.

This is highly misleading on several fronts as a matter of basic antitrust economics.  I’ve covered the difference between “price-fixing” in the general antitrust sense and the use of RPM previously.  The  difference is critical because while the former is known and well understood to have pernicious competitive consequences, the same is not true for RPM.  Indeed, the existing empirical evidence (the evidence overwhelmingly shows (see also here)) suggests that a per se rule against RPM will harm consumers — bold assertions about “protecting our markets from these kinds of abuses” notwithstanding.

Yes, a vertical agreement “fixes prices” but this is a fairly transparent attempt to obfuscate the economic issues by analogizing it to a cartel and thereby make strong claims about the enforcers generating consumer welfare benefits for its constituents.  The data simply do not support that claim.  State AG offices are known to generate these press releases from time to time — or similar ones claiming that the RPM enforcement action generated $X in consumer welfare gains.  I’m not sure if they know better.  But they should.  And perhaps they do, but that knowledge is outweighed by the desire to win in the court of public opinion, in the press, and perhaps with policy makers.

There is a reasonable discussion to be had over the appropriate rule of reason treatment for RPM post-Leegin.   But the policy discussions should take place with a solid understanding of the underlying economics and evidence.   Press releases such as these undermine those efforts in my view.  Again.  I understand that the AG’s are marketing.  But this is all the more reason why groups that think seriously about antitrust, such as the ABA Antitrust Section — who certainly knows better — shouldn’t be making the same mistakes.

The New York State Bar Association is sponsoring a student writing contest focusing on antitrust.  Eligible papers (which must be solo-authored):

may address any antitrust topic including topics relating to civil and criminal antitrust law, intellectual property and antitrust law, competition policy, regulatory policy, consumer protection, international competition law and state antitrust enforcement.

Authors must be written by a “currently enrolled J.D. or LL.M. student at a New York State Law School or by a New York State resident at any ABA-accredited law school outside of New York State.”

The winner gets $5,000 and publication in a NYSBA journal.  You can download the entry form here, and submit the paper electronically (in PDF format) along with the entry form by April 30th to:

Professor Edward D. Cavanagh
St. John’s University School of Law
8000 Utopia Parkway
Queens, NY 11439
[email protected]

Good luck!

I will be discussing the titular topic at a Federalist Society panel (sponsored by the NY City Lawyers Chapter) along with Richard Epstein (NYU Law) and Jonathan Baker (Chief Economist, FCC) Tuesday night at the Cornell Club.  Registration details are available at the link above.  Here is the event description:

The Federal Trade Commission is more active than ever in its assertion of authority in the virtual world. The FTC’s role is generally understood to include competition analysis, consumer protection, and policy advocacy. How are each of these functions best accomplished by the FTC in the virtual world? Are there special attributes of the internet and e-commerce that require the FTC to modify its traditional regulatory approach? Will the FTC’s planned “Do Not Track” policy be an overall good, or a market inhibiter? Our experts will examine these and other questions.

I’m very much looking forward to it.

Prompted by this post at Cafe Hayek, I recently participated in a web experiment sponsored by NPR’s Planet Money.  I was asked to watch three short animal videos and vote for the animal I found cutest.

The videos were all pretty cute.  One featured a polar bear cub sliding along the ice with its mother.  Another featured a loris — a wide-eyed adorable creature with which I was not familiar — being tickled under its arms.  I voted for the critter in the third video, a tiny kittenthat would throw its arms back in surprise when its handler made a certain noise and motion.  That dang kitten was excruciatingly cute.  I watched the video several times.

Earlier this week, the folks at Planet Money explained their experiment.  They were, they say, testing John Maynard Keynes’s famous “beauty contest” analogy.  In Section V of Chapter 12of the General Theory, Keynes explained that investors picking stocks are a bit like participants in a type of newspaper beauty-picking contest that was apparently common in England in the 1930s:

[P]rofessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.

So what has this to do with those cute critters?  Unbeknownst to me when I voted for that adorable kitten, I had been placed, along with half of the 12,000 participants, in “Group A.”  We were asked to vote for the cutest animal.  The other experimental subjects, those in Group B, were asked to vote for the animal they thought participants would say is cutest.  They were, in other words, asked to act as a judge in the sort of “beauty contest” (here, “cuteness contest”) to which Keynes analogized.

My kitten prevailed in both polls (go kitten!), but by substantially different margins.  Of the participants asked to vote for the animal they thought cutest (members of Group A), 50 percent voted for the kitten, 27 percent for the loris, and 23 percent for the polar bear.  The participants directed to vote for the animal they thought would generally be perceived as cutest (members of Group B) voted for the kitten about 75 percent of the time, with the loris and the polar bear capturing 15 percent and 10 percent of the vote, respectively.  If we assume an even distribution of preferences among the members of the two randomly segregated 6,000-person groups, then it seems that a great many members of Group B did not vote for the animal they personally deemed cutest.

The folks at Planet Money claim that they were “trying to get a better sense of how the stock market works.”  They say they were trying to “test” Keynes’ observation and its implication, which is that the stock market often fails as a measure of listed firms’ fundamental values (i.e., investor expectations about the future free cash flows the firms will generate), because investors focus not on expectations about actual future earnings but instead on other investors’ sentiments.  In actuality, the experiment in no way confirms the accuracy of Keynes’ analogy or says anything at all about how the stock market actually works.

Keynes’ notable claim was not that participants in newspaper beauty-picking contests tend to disregard their own preferences and pick according to expected majority sentiment.  Of course they do.  That’s how they win.  Keynes, though, asserted something more controversial:  He contended that investors do, in fact, act like participants in a newspaper beauty-picking contest when they make investment decisions.

The Planet Money experiment may “prove” the incontrovertible claim that a person who is rewarded for following herd mentality will tend to disregard his personal preferences when they diverge from his expectations about majority preferences.  But it says nothing about whether investors do, in fact, merely follow the herd when they are making investment decisions.  In the experiment, many members of Group B disregarded their own preferences in selecting the cutest critter, but that’s because they were directed to do so.  They weren’t simply given a sum of money to “invest” in cute creatures and told that they could keep any profits.  Had they been, a great many who voted for the kitten or polar bear cub might instead have invested in the loris, recognizing that kittens and baby polar bears — while cute today and likely to be quite popular in the short-term — will eventually grow into decidedly less cute cats and mama bears, while lorises, with their huge doe-eyes, tend to retain their cuteness over time.  An investor who bought a bunch of now-hot kitten stock and failed to dump it before the kitten turned into a gawky adolescent could lose his shirt.  Long-term investors, especially institutional investors, would be particularly loathe to invest in a critter whose popular appeal was likely to change so quickly and unpredictably.  (As a proud cat owner, I can attest to the fact that the creatures transition from cute kittens to ungainly young cats in a very short period.  A kitten investor would have to be an awfully scrupulous monitor!)

This is not to say that stock market bubbles — and asset bubbles more generally — do not occur.  Of course they do.  And they are frequently occasioned by precisely the sort of thinking Keynes imagined — i.e., investors, spotting a hot area of investment, disregard their own expectations about the investment’s fundamental value and instead assess the likelihood that they will be able to sell the investment, for a profit, to some “greater fool” in the future.  I’ve blogged about this phenomenon several times and believe it was responsible for the recently deflated real estate bubble (especially since the investors who originated loads of bad mortgages knew there were congressionally created greater fools — Fannie Mae and Freddie Mac — standing ready to buy their bad investments!).

The Planet Money discussion, though, was misleading on a couple of fronts.  First, as noted, the cute animal experiment didn’t really test — and therefore cannot “prove” — Keynes’ descriptive claim about how investors make investment decisions.  Second, the discussion suggests that investors generally take the “greater fool” approach when making investment decisions — not simply that asset bubbles occasionally occur — and it therefore insinuates that the stock prices are generally a poor gauge of firms’ fundamental values.  There’s a good deal of empirical evidence suggesting otherwise.  For a wonderfully lucid summary of it, pick up the brand new (2011) edition of Burton Malkiel’s classic, A Random Walk Down Wall Street.  Malkiel acknowledges asset bubbles (colorfully and in great detail!) but recognizes that they are the exception, not the rule.

There is an excellent interview of Ronald Coase conducted in honor of Coase’s 100th birthday and the creation of the Coase China Society.  Its an excellent interview (HT: Knowledge Problem).  Peter Klein offers some observations on the interview as well.  One part that caught my attention was Coase’s discussion of the role of the Journal of Law & Economics in advancing the law and economics movement:

RC (Ronald Coase): One way for the [Coase China] Society to advance the right kind of economics to China, and encourage Chinese economists to do the right kind of work, is to have a journal of its own. When I was editor of the Journal of Law and Economics, I was very active. I would attend seminars and conferences and talk to people to see what kind of research they were doing. I would solicit their articles if I thought they were good ones. And frequently, I would talk to people and encourage them to conduct certain studies with the promise to publish their article.

WN (Wang Ning): This is indeed very different from the way journals are run now.

RC: I do not believe any other journal was run the same way then. Most journal editors wait for submitted articles and use external reviewers to select the articles for publication. This was not the way I worked. I knew what kind of articles I would like to publish, and I went around to find people to write them.

I’ll give you an example. Bernard Siegan came to the University of Chicago Law School as a Fellow and proposed to write a paper on the pros and cons of zoning. I told him instead to find a place where zoning did not exist and to see what happened to land use in comparison to places with zoning. He wrote a great paper about land use in Houston which did not have zoning (The paper was published as “Non-Zoning in Houston, Journal of Law and Economics (1970)).

Another example is Steve’s article on bees. I knew there were contracts between beekeepers and orchard owners in Washington. I asked Steve to investigate it. He did a splendid study (The paper was published as “The Fable of Bees, in Journal of Law and Economics (1973)). …

WN: … But the opportunity cost was probably very high. At the prime time of your research, you devoted yourself to the Journal instead of your own research. You might have written another one or two articles as great as “The Nature of the Firm” or “The Problem of Social Cost.”

RC: I do not regret my decision at all. This was the main attraction for me to come to Chicago. I think this was the only way to develop a subject. If it were not for the Journal, many articles would not have been published or even written.

WN: Based on your experience, what should the Society do if it launches a new journal?

RC: You should have a clear view of what you want to accomplish, what articles you want to publish and what kind of research you want to encourage. You shall not worry about how other people think about your views. You cannot control what other people think. You will not monopolize the whole field. If you believe in your view, you have to be strong to defend it and promote it in the market for ideas until you are convinced that it is proved wrong. This is the only way to be independent.

WN: I totally agree. But I don’t think we have got the second Coase yet. When you started editing the Journal of Law and Economics, you were already well established in the profession. Your view, no matter whatever it was, would be considered seriously and readily command agreement.

RC: I do not think that was the case. I always find myself in disagreement with the prevailing view. Even today, my view of the subject is not accepted by the profession. …

Very interesting.  I cannot think of many examples of journals that take this approach, at least to the same degree as Coase’s JLE.  But that sort of focus was probably necessary to get the law and economics movement off the ground.  Are there examples of journals with this kind of agenda, i.e. where the editor “knew what kind of articles [they] would like to publish, and [] went around to find people to write them”?  Do any of the modern law and economics journals operate this way?  I don’t think so.  But maybe I’m wrong.  What about in empirical legal studies?  David Evans’ very successful Competition Policy International journal operates largely through soliciting articles on antitrust topics from specific authors — and so has some of this flavor, but (and I should disclose I am an editor of that journal) I do not think it has a “mission” in the same sense as Coase’s use of the term in describing the role of the JLE.

Check out the entire interview.

As a result of the FTC’s “Operation Short Change,” a number of firms and individuals have settled claims that they swindled millions from consumers by making unauthorized charges and debits to their bank accounts.  The FTC press release highlights that, in addition to a $2.08 million fine (judgment suspended due to bankruptcy filing), the FTC barred the principal from engaging in a number of related business activities:

Under the settlement Greenberg is banned from owning, controlling, or consulting for any Internet-related business that handles consumers’ credit card or debit card accounts.  He also is prohibited from making unauthorized charges to consumers’ accounts, making false or misleading statements while selling any goods or services, and using any false or assumed name, including an unregistered, fictitious company name, in his business dealings.

As Douglas Ginsburg and I point out in our piece on Antitrust Sanctions in Competition Policy International, debarment of this sort is common in these FTC enforcement actions, at the SEC for other forms of white collar crime (e.g. debarring a director from sitting on the board of a publicly traded company), and as an antitrust sanction for naked price-fixing in a number of countries, e.g. in the U.K. pursuant to the Company Directors Disqualification Act of 1986.

Debarment, however, is not currently in the mix of antitrust sanctions employed by the DOJ in criminal antitrust enforcement actions.  In the article, we make the case that debarment is desirable from an optimal deterrence perspective:

The U.S. Department of Justice should consider taking a similar approach to sentencing individuals convicted of a criminal violation of § 1 of the Sherman Act. We are aware of no reason for which the Department needs to wait for statutory authority to get started, as did the SEC, by negotiating consent orders providing for debarment.74 Prosecutors might, for example, if the conditions for leniency are met, agree to allow individual defendants to reduce or avoid jail time, in return for debarring them from working as a manager or director of any publicly traded corporation or for any company in a particular industry if it is either located in or sells into the United States.75

Negotiated orders of debarment would allow the Antitrust Division to accrue much of the benefit of a prison sentence—publicizing the offense and keeping the offender from recidivating— without undertaking the risk and cost of a criminal trial. The period of debarment should be calibrated to have the same average deterrent effect as jail.76 Further, as we have pointed out, debarment would bolster currently weak reputational penalties, thereby reducing the need for individual fines, which are less likely to deter efficiently because of individuals’ wealth constraints.

Read the whole thing.

The WSJ reports that the DOJ is getting itself ready to challenge the Google-ITA merger (see earlier TOTM posts here and here):

Justice Department staff lawyers have begun preparing legal documents for use in a possible court challenge to the $700 million deal for ITA Software Inc., but no decision to proceed has been made, one of the people familiar with the matter said.  Google, of Mountain View, Calif., recently told the government it had complied with all requests for information about the ITA deal, this person said. That milestone typically gives the agency 30 days to decide whether to take action, though such deadlines can be extended. The government is expected to make its decision later this month or in early February, this person added.

The potential theory is that Google, post-merger, would exclude rivals from cutting off access to ITA’s software:

Government lawyers have asked executives in the $80 billion online travel market if Google could unfairly disadvantage potential new rivals by cutting off their access to ITA’s software, people familiar with the questioning have said.  The lawyers also inquired about whether Google would direct users of its search engine to the travel-search service it plans to build around ITA’s technology, to the detriment of soon-to-be rivals that currently get traffic from Google’s search engine, these people said. Google currently directs users searching for travel itineraries to Kayak.com and other sites.

Some commentators have discussed the inclusion of Section 2 in the list of statutes enforced by the antitrust agencies through merger policy and the language in the HMGs overview stating that “Enhanced market power may also make it more likely that the merged entity can profitably and effectively engage in exclusionary conduct.”   Section 2.2.3 of the new HMGs also observes that  “rival firms may provide relevant facts, and even their overall views may be instructive, especially in cases where the Agencies are concerned that the merged entity may engage in exclusionary conduct.”   It looks like these new sections of the Guidelines may be tested early on.

I’m tentatively skeptical about the value of embedding this exclusion analysis so prominently within the Guidelines, and more specifically, bringing merger challenges on the grounds of the likelihood of future exclusion.  In my view, we know so little about the relevant inputs to designing such a policy (how often do exclusion problems arise, how large are the anticompetitive effects, can we identify these cases ex ante?) that it seems unwise.  As antitrust analysts well know, there is much more disagreement over issues surrounding exclusion than purely horizontal mergers (see, e.g., the Section 2 Report episode).  Predicting the effects of horizontal mergers can be difficult enough in its own right.  But this raises the issue of why the DOJ would make a challenge under Section 7 of the Clayton Act rather than waiting.  It appears that the DOJ is quite willing to use Section 2 of the Sherman Act.  If there is some uncertainty over whether Google’s post-merger incentives will lead to increased efficiencies (as Google claims) or conduct that excludes rivals and makes consumers worse off — and as with most monopolization cases there appears to be significant debate on this issue — why not wait and see?  If Google’s conduct is anticompetitive, surely the DOJ or FTC can bring suit under Section 2 or even Section 5 of the FTC Act.    The conventional argument in merger cases is that a post-consummation remedy requires “unscrambling the eggs.”  Is that true here?  Wouldn’t the remedy that would be imposed here some non-discriminatory licensing requirement?  There are other costs of inserting a pre-emptive exclusionary conduct review into merger analysis.  Nearly any merger that might increase a firm’s market power could potentially increase incentives to discriminate against or foreclose rivals.  However, the same merger also can lead to greater efficiencies.  It is hard to imagine a horizontal merger where one could not imagine some form of exclusion theory with all sorts of forward-looking statements from the agencies about the likelihood of exclusion post-merger.  Embedding the Section 2 mess into merger analysis hardly seems a step toward certainty and providing guidance to firms.

The treatment of these theories in Google-ITA will be watched very closely.

In conjunction with Ronald Coase’s new book on China, he’s given a new interview to his co-author Ning Wang. (HT: Paul Walker via Mike Giberson.) Excerpt…

Read the full piece here.

 

The titular question is posed by Louis Kaplow (Harvard) in a recent piece in the Harvard Law Review that I suspect will attract a fair amount of attention.   I may have more to say about this later, but for now, here is the abstract:

Competition law is dominated by the market definition / market share paradigm, under which a relevant market is defined and pertinent market shares therein are examined in order to make inferences about market power. This Article advances the immodest claim that the market definition process is incoherent as a matter of basic economic principles and hence should be abandoned entirely. This conclusion rests on four arguments. First, meaningful inferences of market power in redefined markets cannot be made. Second, the paradigm relies on an unarticulated notion of a standard reference market whose necessity and prior omission signal a serious gap. Third and most important, determining what market definition is best is impossible without first formulating a best estimate of market power, rendering further analysis pointless and possibly leading to erroneous outcomes. Finally, the need to define markets engenders a mistaken focus on cross-elasticities of demand for particular substitutes rather than on the market elasticity of demand, which further reduces the quality of resulting market power inferences. Although the inquiry is conceptual, brief remarks on legal doctrine suggest that creating conformity may not be unduly difficult.

Check out the whole thing.