Apple has filed its response to the DOJ Complaint in the e-books case.  Here is the first paragraph of the Answer:

The Government’s Complaint against Apple is fundamentally flawed as a matter of fact and law. Apple has not “conspired” with anyone, was not aware of any alleged “conspiracy” by others, and never “fixed prices.” Apple individually negotiated bilateral agreements with book publishers that allowed it to enter and compete in a new market segment – eBooks. The iBookstore offered its customers a new outstanding, innovative eBook reading experience, an expansion of categories and titles of eBooks, and competitive prices.

And the last paragraph of the Answer’s introduction:

The Supreme Court has made clear that the antitrust laws are not a vehicle for Government intervention in the economy to impose its view of the “best” competitive outcome, or the “optimal” means of competition, but rather to address anticompetitive conduct. Apple’s entry into eBook distribution is classic procompetitive conduct, and for Apple to be subject to hindsight legal attack for a business strategy well-recognized as perfectly proper sends the wrong message to the market, and will discourage competitive entry and innovation and harm consumers.

A theme that runs throughout the Answer is that the “pre-Apple” world of e-books was characterized by little or no competition and that the agency agreements were necessary for its entry, which in turn has resulted in a dramatic increase in output.  The Answer is available here.  While commentary has focused primarily upon the important question of the competitive effects of the move to the agency model, including Geoff’s post here, my hunch is that if the case is litigated its legacy will be as an “agreement” case rather than what it contributes to rule of reason analysis.  In other words, if Apple gets to the rule of reason, the DOJ (like most plaintiffs in rule of reason cases) are likely to lose — especially in light of at least preliminary evidence of dramatic increases in output.  The critical question — I suspect — will be about proof of an actual naked price fixing agreement among publishers and Apple, and as a legal matter, what evidence is sufficient to establish that agreement for the purposes of Section 1 of the Sherman Act.  The Complaint sets forth the evidence the DOJ purports to have on this score.  But my hunch — and it is no more than that — is that this portion of the case will prove more important than any battle between economic experts on the relevant competitive effects.

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

One topic that has long interested me is the source of dislike or hatred of capitalism; my Southern Economics Journal article “Folk Economics” (ungated version)  dealt in part with this topic. Today’s New York Times has an op-ed, “Capitalists and Other Psychopaths” by William Deresiewicz, who has taught English at Yale and Columbia, that both illustrates and explains this hatred.  What is interesting about this column is that it is entirely about the character and behavior of “the rich” including entrepreneurs.  The job creating function of business is briefly mentioned but most of the article focuses on “fraud, tax evasion, toxic dumping, product safety violations, bid rigging, overbilling, perjury.”

What is nowhere mentioned is anything to do with the goods and services produced by business.  This is a common attitude of critics of capitalism.  In many cases, capitalists may suffer the same personality defects as the rest of us.  And, as Mr. Deresiewicz points out, scientists, artists and scholars may also be hard working and smart.  But capitalism does not reward moral worth or hard work.  Capitalism rewards providing stuff  that other people are willing to pay for.  While is is easy to point out the stupidity of the critique (Mr. Deresiewicz has written and seems proud of his book, published by a capitalist publisher and available from various capitalist booksellers) that is not my point.  Rather, this column is interesting in that it is a pristine example of a totally irrelevant critique of capitalism, written by what is a smart person.  He does cite Adam Smith, but seems to misunderstand the basic functioning of markets.  Markets reward what one does, not what one is.

Filed under: business, corporate social responsibility, economics, entrepreneurship, markets, social responsibility

The FTC is having a conference in the economics of drip pricing:

Drip pricing is a pricing technique in which firms advertise only part of a product’s price and reveal other charges later as the customer goes through the buying process. The additional charges can be mandatory charges, such as hotel resort fees, or fees for optional upgrades and add-ons. Drip pricing is used by many types of firms, including internet sellers, automobile dealers, financial institutions, and rental car companies.

Economists and marketing academics will be brought together to examine the theoretical motivation for drip pricing and its impact on consumers, empirical studies, and policy issues pertaining to drip pricing. The sessions will address the following questions: Why do firms engage in drip pricing? How does drip pricing affect consumer search? Where does drip pricing occur? When is drip pricing harmful? Are there efficiency justifications for the practice in some situations? Can competition prevent firms from harming consumers through drip pricing? Can consumer experience or firm reputation limit harm from drip pricing? What types of policies could lead to improved consumer decision making and under what circumstances should such policies be applied?

The workshop, which will be free and open to the public, will be held at the FTC’s Conference Center, located at 601 New Jersey Avenue, N.W., Washington, DC. A government-issued photo ID is required for entry. Pre-registration for this workshop is not necessary, but is encouraged, so that we may better plan for the event.

Here is the conference agenda:

8:30 a.m.	Registration
9:00 a.m.	Welcome and Opening Remarks Jon Leibowitz, Chairman, Federal Trade Commission
9:05 a.m.	Overview of Drip Pricing Mary Sullivan, Federal Trade Commission
9:15 a.m.	Consumer and Competitive Effects of Obscure Pricing Joseph Farrell, Director, Bureau of Economics, Federal Trade Commission
9:45 a.m.	Theories of Drip Pricing Chair, Doug Smith, Federal Trade Commission
[Presentation]	David Laibson, Harvard University
[Presentation]	Michael Baye, Indiana University
[Presentation]	Michael Waldman, Cornell University
[Comments]	Discussion leader Michael Salinger, Boston University
11:15 a.m.	Morning Break
11:30 a.m.	Keynote Address Amelia Fletcher, Chief Economist, Office of Fair Trading, UK
12:00 p.m	Lunch
1:00 p.m.	Empirical Analysis of Drip Pricing Chair, Erez Yoeli, Federal Trade Commission
[Presentation]	Vicki Morwitz, New York University
[Presentation]	Meghan Busse, Northwestern University
[Presentation]	Sara Fisher Ellison, Massachusetts Institute of Technology
[Comments]	Discussion leader Jonathan Zinman, Dartmouth College
2:30 p.m.	Afternoon Break
2:45 p.m.	Public Policy Roundtable
	Moderator, Mary Sullivan, Federal Trade Commission
	Panelists
	Michael Baye, Indiana University
	Sara Fisher Ellison, Massachusetts Institute of Technology
	Rebecca Hamilton, University of Maryland
	David Laibson, Harvard University
	Vicki Morwitz, New York University
	Michael Salinger, Boston University
	Michael Waldman, Cornell University
	Florian Zettelmeyer, Northwestern University
	Jonathan Zinman, Dartmouth College
3:45 p.m.	Closing Remarks

Filed under: antitrust, behavioral economics, economics, federal trade commission, price discrimination, truth on the market

I’ve posted to SSRN an article written for the Antitrust Law Journal symposium on the Neo-Chicago School of Antitrust.  The article is entitled “Abandoning Chicago’s Antitrust Obsession: The Case for Evidence-Based Antitrust,” and focuses upon what I believe to be a central obstacle to the continued evolution of sensible antitrust rules in the courts and agencies: the dramatic proliferation of economic theories which could be used to explain antitrust-relevant business conduct. That proliferation has given rise to a need for a commitment to develop sensible criteria for selecting among these theories; a commitment not present in modern antitrust institutions.  I refer to this as the “model selection problem,” describe how reliance upon shorthand labels and descriptions of the various “Chicago Schools” have distracted from the development of solutions to this problem, and raise a number of promising approaches to embedding a more serious commitment to empirical testing within modern antitrust.

Here is the abstract.

The antitrust community retains something of an inconsistent attitude towards evidence-based antitrust.  Commentators, judges, and scholars remain supportive of evidence-based antitrust, even vocally so; nevertheless, antitrust scholarship and policy discourse continues to press forward advocating the use of one theory over another as applied in a specific case, or one school over another with respect to the class of models that should inform the structure of antitrust’s rules and presumptions, without tethering those questions to an empirical benchmark.  This is a fundamental challenge facing modern antitrust institutions, one that I call the “model selection problem.”  The three goals of this article are to describe the model selection problem, to demonstrate that the intense focus upon so-called schools within the antitrust community has exacerbated the problem, and to offer a modest proposal to help solve the model selection problem.  This proposal has two major components: abandonment of terms like “Chicago School,” “Neo-Chicago School,” and “Post-Chicago School,” and replacement of those terms with a commitment to testing economic theories with economic knowledge and empirical data to support those theories with the best predictive power.  I call this approach “evidence-based antitrust.”  I conclude by discussing several promising approaches to embedding an appreciation for empirical testing more deeply within antitrust institutions.

I would refer interested readers to the work of my colleagues Tim Muris and Bruce Kobayashi (also prepared for the Antitrust L.J. symposium) Chicago, Post-Chicago, and Beyond: Time to Let Go of the 20th Century, which also focuses upon similar themes.

Filed under: antitrust, barriers to entry, behavioral economics, economics, legal scholarship, scholarship

WSJ has an interesting story about the growing number of employer efforts to import “game” like competitions in the workplace to provide incentives for employees to engage in various healthy activities.  Some of these ideas sound in the behavioral economics literature, e.g. choice architecture or otherwise harnessing the power of non-standard preferences with a variety of nudges; others are just straightforward applications of providing incentives to engage in a desired activity.

A growing number of workplace programs are borrowing techniques from digital games in an effort to encourage regular exercise and foster healthy eating habits. The idea is that competitive drive—sparked by online leader boards, peer pressure, digital rewards and real-world prizes—can get people to improve their overall health.

A survey of employers released in March by the consulting firm Towers Watson and the National Business Group on Health found that about 9% expected to use online games in their wellness programs by the end of this year, with another 7% planning to add them in 2013. By the end of next year, 60% said their health initiatives would include online games as well as other types of competitions between business locations or employee groups.

How well do these programs work in practice?  The story reports mixed evidence of the efficacy of the various game-style competitions; this is not too surprising given the complexity of individual incentives within organizations and teams.

Researchers say using videogame-style techniques to motivate people has grounding in psychological studies and behavioral economics. But, they say, the current data backing the effectiveness of workplace “gamification” wellness programs is thin, though companies including WellPoint Inc. and ShapeUp Inc. have early evidence of weight loss and other improvements in some tests.

So far, “there’s not a lot of peer-reviewed evidence that it achieves sustained improvements in health behavior and health outcomes,” says Kevin Volpp, director of the University of Pennsylvania’s Center for Health Incentives and Behavioral Economics.

Moreover, some employees may feel unwanted pressure from colleague-teammates or bosses when workplace competitions become heated, though participation is typically voluntary.

Incentives are powerful; but when and how they matter depends upon institutions.  Gneezy et al have an excellent survey of the literature in the Journal of Economic Perspectives, where they conclude:

When explicit incentives seek to change behavior in areas like education, contributions to public goods, and forming habits, a potential conflict arises between
the direct extrinsic effect of the incentives and how these incentives can crowd out intrinsic motivations in the short run and the long run. In education, such incentives seem to have moderate success when the incentives are well-specifified and well-targeted (“read these books” rather than “read books”), although the jury is still out regarding the long-term success of these incentive programs. In encouraging contributions to public goods, one must be very careful when designing the incentives to prevent adverse changes in social norms, image concerns, or trust. In the emerging literature on the use of incentives for lifestyle changes, large enough incentives clearly work in the short run and even in the middle run, but in the longer run the desired change in habits can again disappear.

HT: Salop.

 

Filed under: behavioral economics, behavioral economics, economics, health care

An interesting looking empirical piece from David Yermack (NYU), Tailspotting: How Disclosure, Stock Prices and Volatility Change When CEOs Fly to Their Vacation Homes.  I haven’t read it closely yet.  Here’s the abstract:

This paper shows close connections between CEOs’ vacation schedules and corporate news disclosures. Identify vacations by merging corporate jet flight histories with real estate records of CEOs’ property owned near leisure destinations. Companies disclose favorable news just before CEOs leave for vacation and delay subsequent announcements until CEOs return, releasing news at an unusually high rate on the CEO’s first day back. When CEOs are away, companies announce less news than usual and stock prices exhibit sharply lower volatility. Volatility increases immediately when CEOs return to work. CEOs spend fewer days out of the office when their ownership is high and when the weather at their vacation homes is cold or rainy.

HT: Salop.

Filed under: corporate governance, economics, scholarship

On November 3^rd, the president of the United States spoke at the Hotel Lowry in St. Paul, Minnesota, in what was billed repeatedly as a bi-partisan address. The president ridiculed reactionaries in Congress who he claimed represented the wealthy and the powerful, and whose “theory seems to be that if these groups are prosperous, they will pass along some of their prosperity to the rest of us.” The president drew a direct line between prosperity and increased “fairness” in the distribution of wealth: “We know that the country will achieve economic stability and progress only if the benefits of our production are widely distributed among all its citizens.” The president then laid out an ambitious agenda focused on creating jobs, improving education, expanding health care, and ensuring equal rights for all.

Read the full piece here.

 

Fruit trees in a number of cities, including San Francisco, are prevented from bearing fruit in the name of “protecting” pedestrians from slip and falls and keeping away insects and vermin.  In response to these regulations, a group of Guerilla Grafters has emerged to — you guessed it — graft fruit bearing branches onto the non-fruit bearing city trees.

But grafting trees to bear the occasional pear is not all fun and games, apparently.  San Francisco officials consider the renegade arborists to be engaged in a serious offense (San Francisco Examiner):

While the grafters’ activities might seem harmless, Public Works Director Mohammed Nuru said the renegade gardeners are running afoul of the law.

“The trees that are in the right of way, they’re not for grafting,” he said. “The City considers such vandalism a serious offense. There would be fines for damage to city property.”

Nuru had not heard of Guerrilla Grafters, but said he would ask his staff to investigate. Meanwhile, he added, if the grafters have ideas about urban agriculture, they should discuss them with city officials.

NPR embeds one reporter with grafter Tara Hui on a covert grafting operation.  The first thought that crossed my mind as I read the story was skepticism that the costs associated with fallen fruit on city trees could be significant.  The second was hope the story had overestimated the prevalence of this type of regulation.  There is also some interesting law and economics.  The cops and robbers angle in the NPR story with Hui attempting to avoid detection for fear of sanction by the city authorities in the way of fines for vandalism was also interesting.  From the standard Beckerian model of rational criminal behavior we see Hui’s sensitivity to changes in the “price” of engaging in guerilla grafting (that is, the probability of detection weighted by the sanction she will pay if caught) and investments to avoid detection.

But what about the economic benefits?  Here’s Hui’s account:

“If we say where it is, they could come after me,” says Tara Hui, a fruit tree grafter. She’s talking about city officials, who manage the trees and say it’s illegal to have fruit trees on sidewalks.  So let’s just say we’re in some Bay Area city in a working-class neighborhood, at a line of pear trees that bear no pears.

Hui and two assistants pull out a knife, reach into a plastic bag filled with twigs no bigger than your pinkie, and cut from a fruit bearing pear tree. She says it’s an Asian pear, and that she’s grafting it onto a flowering pear tree.  They whittle a wedge into one end of their twig, then cut a groove into a similar-sized twig on the city tree. They join the two, like tongue and groove carpenters. And when their grafted twig eventually grows into a branch.

“There will be a much better looking tree that actually will provide fruit for people that come by,” Hui says.

Hui’s motives to break the law are straightforward.

“We don’t have a supermarket and we have very few produce stores [here],” she says. “What better to alleviate scarcity of healthy produce in an impoverished area than to grow them yourself and to have it available for free.”

For a recent and illuminating paper on the law and economics of criminal behavior which attempts to incorporate conventional critiques of the economic approach — for example, that criminals lack self-control, have non-standard preferences or do not act in their own self-interest — into the standard model, see Murat Mungan’s Law and Economics of Fluctuating Criminal Tendencies.  Mungan’s main goal is to show that the standard economic approach is capable of modification so as to absorb more realistic assumptions and that it gains explanatory power by doing so.

HT goes to Steve Salop for pointing me to the Guerilla Grafter story.

Filed under: behavioral economics, economics, regulation

New York Times columnist Gretchen Morgenson is arguing for a “pre-clearance”  approach to regulating new financial products:

The Food and Drug Administration vets new drugs before they reach the market. But imagine if there were a Wall Street version of the F.D.A. — an agency that examined new financial instruments and ensured that they were safe and benefited society, not just bankers.  How different our economy might look today, given the damage done by complex instruments during the financial crisis.

The idea Morgenson is advocating was set forth by law professor Eric Posner (one of my former profs) and economist E. Glen Weyl in this paper.  According to Morgenson,

[Posner and Weyl] contend that new instruments should be approved by a “financial products agency” that would test them for social utility. Ideally, products deemed too costly to society over all — those that serve only to increase speculation, for example — would be rejected, the two professors say.

While I have not yet read the paper, I have some concerns about the proposal, at least as described by Morgenson.

First, there’s the knowledge problem.  Even if we assume that agents of a new “Financial Products Administration” (FPA) would be completely “other-regarding” (altruistic) in performing their duties, how are they to know whether a proposed financial instrument is, on balance, beneficial or detrimental to society?  Morgenson suggests that “financial instruments could be judged by whether they help people hedge risks — which is generally beneficial — or whether they simply allow gambling, which can be costly.”  But it’s certainly not the case that speculative (“gambling”) investments produce no social value.  They generate a tremendous amount of information because they reflect the expectations of hundreds, thousands, or millions of investors who are placing bets with their own money.  Even the much-maligned credit default swaps, instruments Morgenson and the paper authors suggest “have added little to society,” provide a great deal of information about the creditworthiness of insureds.  How is a regulator in the FPA to know whether the benefits a particular financial instrument creates justify its risks? 

When regulators have engaged in merits review of investment instruments — something the federal securities laws generally eschew — they’ve often screwed up.  State securities regulators in Massachusetts, for example, once banned sales of Apple’s IPO shares, claiming that the stock was priced too high.  Oops.

In addition to the knowledge problem, the proposed FPA would be subject to the same institutional maladies as its model, the FDA.  The fact is, individuals do not cease to be rational, self-interest maximizers when they step into the public arena.  Like their counterparts in the FDA, FPA officials will take into account the personal consequences of their decisions to grant or withhold approvals of new products.  They will know that if they approve a financial product that injures some investors, they’ll likely be blamed in the press, hauled before Congress, etc.  By contrast, if they withhold approval of a financial product that would be, on balance, socially beneficial, their improvident decision will attract little attention.  In short, they will share with their counterparts in the FDA a bias toward disapproval of novel products.

In highlighting these two concerns, I’m emphasizing a point I’ve made repeatedly on TOTM:  A defect in private ordering is not a sufficient condition for a regulatory fix.  One must always ask whether the proposed regulatory regime will actually leave the world a better place.  As the Austrians taught us, we can’t assume the regulators will have the information (and information-processing abilities) required to improve upon private ordering.  As Public Choice theorists taught us, we can’t assume that even perfectly informed (but still self-interested) regulators will make socially optimal decisions.  In light of Austrian and Public Choice insights, the Posner & Weyl proposal — at least as described by Morgenson — strikes me as problematic.  [An additional concern is that the proposed pre-clearance regime might just send financial activity offshore.  To their credit, the authors acknowledge and address that concern.]

Filed under: economics, financial regulation, Hayek, Knowledge Problem, law and economics, regulation