What happens when Wal-Mart comes to town?  One thing is for sure, the line for jobs is long:

In contrast, a new Walmart in Cleveland recently received 6000 applicants for 300 positions, and, not long ago, two Walmart stores in the Chicago area received 25,000 and 15,000 applications. The Cleveland store hired one in twenty applicants. The Chicago hiring rates were far more modest.

HT: (American Thinker).

Meantime, in Washington DC, various groups are protesting the prospect of Wal-Mart coming to town, including picketing the home of a developer.  From the group’s website:

We are not interested in negotiating the terms of Wal-Mart’s arrival. We know the harmful impact that Wal-Mart always has, from thousands of case studies around the country, and around the world. We believe in our hearts, and in our minds, that DC must continue to be Wal-Mart Free.

Other labor-backed anti-Walmart groups are insisting on a community benefits agreement extracting concessions from Walmart, including, apparently, reduced hours of operation (see, e.g. here).

One need not look at the long list of job applicants to figure the social benefits.  But often left out when the policy discussion is framed as unions versus corporations are consumers.  Consider Hausman & Ephraig’s (a version of the paper here) analysis of the impact of Wal-Mart on consumer welfare, finding (looking at the benefits of food prices alone) the following:

We find that an appropriate approach to the analysis is to let the choice to shop at
Wal-Mart be considered as a “new good” to consumers when Wal-Mart enters a
geographic market. Some consumers continue to shop at traditional supermarkets while other consumers choose to shop at Wal-Mart. Many consumers shop at both types of stores. Thus, we specify a utility consistent two level model of choice among types of shopping destinations. We then estimate a fixed effects binomial logit choice model to estimate the parameters of the utility model that differs across households. We use the estimated parameters to calculate the exact compensating variation that arises from the direct variety effect of the entry and expansion of supercenters and find the average estimate to be 20.2% of average food expenditure. We similarly estimate the exact compensating variation from the indirect price effect that arises from the increased competition that supercenters create. We find this average effect to be 4.8%. Thus, we estimate the average effect of the total the compensating variation to be 25% of food expenditure, a sizeable estimate.

Since we find that lower income households tend to shop more at these low priced
outlets and their compensating variation is higher from supercenters than higher income households, a significant decrease in consumer surplus arises from zoning regulations and pressure group tactics that restrict the entry and expansion of supercenters into particular geographic markets.

Note again that these are significant benefits in terms of consumer welfare — and just for food.   Further, these gains are disproportionately enjoyed by low-income households.  Hausman & Ephraig find that household incomes below $10,000 benefit by approximately 50 percent more than average.

Jason Furman (yes, this one) points out that this result is a pretty big deal:

[T]hat’s a huge savings for households in the bottom quintile, which, on average, spend 26 percent of their income on food. In fact, it is equivalent to a 6.5 percent boost in household income—unless the family lives in New York City or one of the other places that have successfully kept Wal-Mart and its ilk away.

That’s some pretty low-hanging fruit in terms of policy wouldn’t you say?  Consumers do not have a loud voice in the relevant policy and political debate.   And the anti-Wal-Mart crowd seems to be laboring under the unfortunate assumption that their preferred policy amounts to a mere wealth transfer between Wal-Mart and workers.  Hausman & Ephraig’s results demonstrate the magnitude of the cost to consumers of this economic naivete.  The relative silence of consumer interests should not be confused with the notion that the consumer welfare losses imposed by deterring Wal-Mart entry are not real — or pretending that they are not concentrated precisely on low-income households.

Filed under: business, economics, markets, politics

Call for Papers Announcement

 

AALS Section on Antitrust and Economic Regulation

AALS Section on Law & Economics

 

Behavioral Economics & Antitrust Law

 

January 5-8, 2012

2012 AALS Annual Meeting

Washington, DC

 

The AALS Section on Antitrust and Economic Regulation and the Section on Law & Economics will hold a joint program on Behavioral Economics and Antitrust Law during the AALS 2012 Annual Meeting in Washington, DC.  The program will focus on the influence of Behavioral Economics on Antitrust Law and Policy.   Behavioral economics, which examines how individual and market behavior are affected by deviations from the rationality assumptions underlying conventional economics, has generated significant attention from both academics and policy makers.  The program will feature presentations by leading scholars who have addressed how behavioral economics impacts antirust law and policy.  Confirmed panelists include Maurice Stucke (University of Tennessee), Steve Salop (Georgetown University), Avishalom Tor (Haifa University), and Josh Wright (George Mason University).  We are looking to add at least one additional panelist through this call for papers.

 

Submission Procedure:

Those with an interest in the subject are encouraged to submit a draft paper or proposal via email to Bruce H. Kobayashi, at [email protected] by September 1, 2011. 

 

Eligibility:

Faculty members of AALS member and fee-paid law schools are eligible to submit papers.  Foreign, visiting, and adjunct faculty members, graduate students, and fellows are not eligible to submit.

 

Registration Fee and Expenses:

Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

 

How will papers be reviewed?

Paper will be selected after review of submissions by members of the Executive Committee of the AALS Section on Antirust and Economic Regulation and the AALS Section on Law & Economics.  This committee consists of Scott Hemphill (Columbia Law School), Bruce H. Kobayashi (George Mason University Law School), Michael A. Carrier (Rutgers University School of Law), Darren Bush (University of Houston Law Center), D. Daniel Sokol (University of Florida Levin College of Law), Daniel A. Crane (University of Michigan Law School), and Hillary Greene (University of Connecticut School of Law).

 

Will program be published in a Journal? 

Yes, as a symposium in the Journal of Law, Economics & Policy.

 

Deadline date for submission:

September 1, 2011.  Decisions will be announced by September 30, 2011.

 

Program Date and Time:

Friday January 6, 2012, 10:30am-12:15pm.

 

Contact for submission and inquires:

Bruce H. Kobayashi

Chair, AALS Section on Antitrust and Economic Regulation

George Mason Law School

3301 Fairfax Drive

Arlington, VA 22201

703 993-8034

[email protected]

Filed under: antitrust, behavioral economics, legal scholarship

The new Consumer Financial Protection Agency seems designed to be accountable to no one…

Read the full piece here.

Russell Korobkin (UCLA) provocatively declares the ultimate victory of behavioral law and economics over neoclassical economics:

I am declaring victory in the battle for the methodological soul of the law and economics discipline. There is no need to continue to pursue the debate between behavioralists (that is, proponents of incorporating insights previously limited to the discipline of psychology into the economic analysis of legal rules and institutions) and the defenders of the traditional faith in individual optimization as a core analytical assumption of legal analysis.

Behavioral law and economics wins.  And its not close.  Korobkin continues:

[T]he battle to separate the economic analysis of legal rules and institutions from the straightjacket of strict rational choice assumptions has been won, at least by and large.  The fundamental methodological assumption of rational-choice economics, that individual behavior necessarily maximizes subjective expected utility, given constraints, has been largely discredited as an unyielding postulate for the analysis of legal policy.  Yes, such an assumption, even if inaccurate, simplifies the world, but it does so in an unhelpful way, much in the way that it is unhelpful for a drunk who has lost his car keys in the bushes to search under the streetlamp because that is where the light is.

The paper is remarkable on many levels, few of them positive.   I understand Professor Korobkin is trying to be provocative; in this he succeeds.  I — for one — am provoked.  But one problem with claims designed to provoke is that they may sacrifice other virtues in exchange for achieving the intended effect.  In this case, humility and accuracy are the first — but not the last — to go.   Indeed, Korobkin begins by acknowledging (and marginalizing) those would deny victory to the behaviorists while magnanimously offering terms of surrender:

Not everyone has been won over, of course, but enough have to justify granting amnesty to the captured and politely ignoring the unreconstructed.

Unreconstructed.  I guess I’ll have to take that one.  Given the skepticism I’ve expressed (with Douglas Ginsburg) concerning behavioral law and economics, and in particular, the abuse of the behavioral economics literature by legal scholars, it appears capture is unlikely.   Indeed, Judge Ginsburg and I are publishing a critique of the behavioral law and economics movement — Behavioral Law and Economics: Its Origins, Fatal Flaws, and Implications for Liberty — in the Northwestern Law Review in January 2012.   A fuller development of the case for skepticism about behavioral law and economics can wait for the article; it suffices for now to lay out a few of the most incredible aspects of Korobkin’s claims.

Perhaps the most incendiary aspect of Korobkin’s paper is not a statement, but an omission.  Korobkin claims that rational choice economics has been “largely discredited as an unyielding postulate for the analysis of legal policy” — and then provides no citation for this proposition.  None.  Not “scant support,” not “conflicting evidence” — Korobkin dismisses rational choice economics quite literally by fiat.  We are left to infer from the fact that legal scholars have frequently cited two important articles in the behavioral law and economics canon (the 1998 article A Behavioral Approach to Law and Economics by Christine Jolls, Cass Sunstein and Richard Thaler and Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics by Korobkin and Tom Ulen) that the behavioral approach has not only claimed victory in the marketplace for ideas but so decimated rational choice economics as to leave it discredited and “unhelpful.”  One shudders to consider the legion of thinkers chagrinned by Korobkin’s conclusive declaration.

Oh, wait.  The citations prove the behavioral law and economics is popular among legal scholars — and that’s about it.  I’ve no doubt that much is true.  If Korobkin’s claim was merely that behavioral law and economics has become very popular, I suppose that would be a boring paper, but the evidence would at least support the claim.  But the question is about relative quality of insight and analysis, not popularity.  Korobkin acknowledges as much, observing in passing that “Citation counts do not necessarily reflect academic quality, of course, but they do provide insight into what trends are popular within the legal academy.”   Undaunted, Korobkin moves seemlessly from popularity to the comparative claim that behavioral law and economics has “won” the battle over rational choice economics.   There is no attempt to engage intellectually on the merits concerning relative quality; truth, much less empirical validation, is not a mere matter of a headcount.

Even ceding the validity citations as a metric to prove Korobkin’s underlying claim — the comparative predictive power of two rival economic assumptions — what is the relative fraction of citations using rational choice economics to provide insights into legal institutions?  How many cites has Posner’s Economic Analysis of Law received?  Where is the forthcoming comparison of articles in the Journal of Law and Economics, Journal of Legal Studies, Journal of Political Economy, Journal of Law, Economics, and Organization, American Economic Review, etc.?  One might find all sorts of interesting things by analyzing what is going on in the law and economics literature.  No doubt one would find that the behaviorists have made significant gains; but one expecting to find rational choice economics has been discredited is sure to to be disappointed by the facts.

Second, notice that the declaration of victory comes upon the foundation of citations to papers written in 1998 and 2000.  The debate over the law and economics of minimum resale price maintenance took nearly a century to settle in antitrust law, but behavioral law and economics has displaced and discredited all of rational choice economics in just over a decade?  The behavioral economics literature itself is, in scientific terms, very young.  The literature understandably continues to develop.  The theoretical and empirical project of identifying the conditions under which various biases are observed (and when they are not) is still underway and at a relatively early point in its development.  The over-reaching in Korobkin’s claim is magnified when one considers the relevant time horizon: impatience combined with wishful thinking is not a virtue in scientific discourse.

Third, it is fascinating that it is consistently the lawyers, and mostly law professors, rather than the behavioral economists, that wish to “discredit” rational choice economics.  Similarly, rational choice economists generally do not speak in such broad terms about discrediting behavioral economics as a whole.  Indeed, behavioral economists have observed that “it’s becoming clear that behavioral economics is being asked to solve problems it wasn’t meant to address.  Indeed, it seems in some cases that behavioral economics is being used as a political expedient, allowing policymakers to avoid painful but more effective solutions rooted in traditional economics.”  There are, of course, significant debates between theorists concerning welfare implications of models, from empiricists interpreting experiments and field evidence.  It is the law professors without economic training that want to discredit a branch of economics.  It is important to distinguish here between behavioral economics and behavioral law and economics, and between rational choice economics and its application to law.  No doubt there are applications of rational choice economics to law that overreach and warrant deserved criticism; equally, there are abuses of behavioral economics in the behavioral law and economics literature.  It is a very productive exercise, and one in which law professors might have a comparative advantage, to identify and criticize these examples of overreaching in application to law.   But with all due respect to Professor Korobkin, if rational choice economics is going to be discredited — a prospect I doubt given its success in so many areas of the law — some economists are going to have to be involved.

Fourth, in the midst of declaring victory over rational choice economics, Korobkin doesn’t even bother to define rational choice economics correctly.  Korobkin writes:

To the extent that legal scholars wish to premise their conclusions on the assumption that the relevant actors are perfect optimizers of their material self-interest, they bear the burden of persuasion that this assumption is realistic in the particular context that interests them.

Elsewhere, Korobkin writes:

My central thesis, which runs through the three parts of the article to follow, is that now that law and economics has discarded the “revealed preferences” assumption of neoclassical economics – that individual behavior necessarily maximizes subjective expected utility . . .

This isn’t the rational choice argument; this barely suffices as a caricature of the rational choice assumption underlying conventional microeconomic analysis.  Korobkin falls victim to the all-too-common misunderstanding that the rational choice assumption is a descriptive assumption about each individual’s behavior.  Not only is that obviously incorrect, and I suspect Korobkin knows it; anyone with even a passing familiarity with rational choice literature realizes that a host of economists — Friedman, Becker, Stigler, and Alchian, to name a few — have long been interested in, understood, and incorporated irrational economic behavior into microeconomics.  The rational choice assumption has never been about describing the individual decision-making processes of economic agents.  Perhaps a model with a different assumption, e.g. that all individuals exhibit loss aversion or optimism bias (or half of them, or a quarter, or whatever), will offer greater predictive power.  Perhaps not.  Economists all agree that predictive power is the criterion for model selection.   That is the right debate to have (see, e.g., here), not whether law professors find uses for the behavioral approach to argue for various forms of paternalistic intervention — and, for note, is still the case that this literature is used nearly uniformly for such purposes by law professors.  Korobkin’s method of declaring methodological victory on the behalf of behavioral law and economics while failing to accurately describe rational choice economics is a little bit like challenging your rival to “take it outside,” and then remaining inside and gloating about your victory while he is waiting for the fight outside.

Korobkin defends his provocative declaration of victory with the argument that it allows him to “avoid an extended discussion” of a number of claims he has already deemed appropriate to dismiss (mostly through conventional strawman approaches) in favor of focusing on new and exciting challenges for the behaviorists.  I offer two observations on the so-called benefits of declaring victory while the battle is still being waged.  The first is that avoiding evidence-based debate is a bug rather than a feature from the perspective of scientific method.  The second is a much more practical exhortation against premature celebration: you can lose while you admire the scoreboard.  Anyone who has ever played sports knows it is best to “play the whistle.”

One final observation.  I recall from Professor Korobkin’s website bio that he is a Stanford guy.  You’d think he’d be a little bit more sensitive to the risk of losing the game while the band prematurely celebrates victory.

Filed under: antitrust, behavioral economics, economics, law and economics, legal scholarship, scholarship

News comes that the DOJ and SEC are “examining whether some of the world’s biggest banks colluded to manipulate a key interest rate before and during the financial crisis, affecting trillions of dollars in loans and derivatives, say people familiar with the situation.”  The Wall Street Journal Reports that:

The inquiry, led by the U.S. Justice Department and Securities and Exchange Commission, is analyzing whether banks were understating their borrowing costs. At the time, banks were struggling with souring assets on balance sheets and questions about liquidity. A bank that borrowed at higher rates than peers would likely have signaled that its troubles could be worse than it had publicly admitted.

Roughly $10 trillion in loans and $350 trillion in derivatives are tied to Libor, which affects costs for everything from corporate bonds to car loans. If the rate was kept artificially low, borrowers likely weren’t harmed, though lenders could complain that the rates they charged for loans were too low. Derivatives contracts could be mispriced because of any manipulation of Libor.

Filed under: antitrust, banking, cartels, economics, financial regulation

I blogged a bit about the MetroPCS net neutrality complaint a few weeks ago.  The complaint, you may recall, targeted the MetroPCS menu of packages and pricing offered to its consumers.  The idea that MetroPCS, about one-tenth the size of Verizon, has market power is nonsense.  As my colleague Tom Hazlett explains, restrictions on MetroPCS in the name of net neutrality are likely to harm consumers, not help them:

Indeed, low-cost prepaid plans of MetroPCS are popular with users who want to avoid long-term contracts and are price sensitive. Half its customers are ‘cord cutters’, subscribers whose only phone is wireless and usage is intense. Voice minutes per month average about 2,000, more than double that of larger carriers.  The $40 plan is cheap because it’s inexpensively delivered using 2G technology.   It is not broadband (topping out, in third party reviews, at just 100 kbps), and has software and capacity issues. In general, voice over internet is not supported by the handsets and video streaming is not available on the network. The carrier deals with those limitations in three ways.

First, the $40 per month price tag extends a fat discount. Unlimited everything can cost $120 on faster networks. Second, it has also deployed new 4G technology, offering both a $40 tier similar to the 2G product (no video streaming), but also a pumped up version with video streaming, VoIP and everything else – without data caps – for $60 a month. Of course, this network has far larger capacity and is much zippier (reliable at 700 kbps).  PC World rated the full-blown 4G service “dirt cheap”.
Third, to upgrade the cheaper-than-dirt 2G experience, MetroPCS got Google – owner of YouTube – to compress their videos for delivery over the older network. This allowed the mobile carrier to extend unlimited wildly popular YouTube content to its lowest tier subscribers.  Busted! Favouring YouTube is said to violate neutrality. …

So much for the “consumer welfare” case for net neutrality in practice.  Of course, the FCC mandate is one of “public interest,” and not just consumer welfare.  So — perhaps another case can be made to defend the MetroPCS complaint?   Malkia Cyril from the Center for Media Justice offers just such a case in a recent blog post.  The problem with MetroPCS satisfying consumer demand for low-cost prepaid plans? Cyril argues that the “Lowering the price for partial Internet service while calling it “unlimited access” is a fraudulent gimmick that Metro PCS hopes will confuse low-income consumers into buying its phones,” and that it is “un-American to give low-income communities substandard Internet service that creates barriers to economic opportunity and democratic engagement.”

Cyril is wrong that competition for low-price plans makes low-income consumers worse off.  The claim is the same one that is often made in defense of restricting the access to low-income individuals to other products (and especially consumer credit) because their purchasing decisions cannot be trusted, i.e. the revealed preferences of those 8 million consumers should be substituted for by the Federal Communications Commission in this case.  This is precisely the type of claim for which a little bit of economic analysis can go a long way in shedding some light.

David Honig, co-founder of the liberal Minority Media & Telecommunications Council, makes the relevant points (HT: Hazlett):

One of the wireless carriers is offering three packages, all of VOIP-enabled (so they can get services like Skype) with free access to any lawful website, and all of them clearly labeled:

• Plan A: $40, with no multimedia streaming (that is, no movie downloads such as Netflix, porn, etc.)

• Plan B: $50, with metered multimedia streaming.

• Plan C: $60, with unlimited multimedia streaming.

Could you decide which of these three packages meets your needs?

Or is all this just too confusing? Cyril thinks so.

She writes that Plan A “will confuse low-income consumers” into buying this carrier’s cell phones because they won’t be able to figure out that “if you want the WHOLE Internet, you just have to pay more.”

Well, actually you don’t have to pay more. The most expensive option — Plan C — costs $40 less than the least expensive offering of any of the other carriers. And if you later discover you don’t like Plan A, you can upgrade to Plan B or Plan C with no penalty, or you can pay the $100 it would cost to get service similar to Plan C from competing carriers. And you can do that immediately, since none of these plans has an early termination fee. What’s wrong with paying less for the particular services you want?

Cyril is making a common mistake among us lefties when it comes to low income people — she is being paternalistic. Those poor poor people. They can’t think for themselves, so the government has to make decisions for them. In this case, Cyril argues, the FCC should outlaw Plan A (and maybe Plan B) and require every carrier to offer only full-menu service like Plan C. All this in the name of “net neutrality.”

If I’ve learned anything from my 45 years working with low income folks, it’s this: they’re intelligent and they’re resourceful. They have to be in order to survive. They don’t appreciate condescension or sloganeering in their name. And they have sense enough to know whether they’d rather use an extra $20 a month for movie downloads or for movie tickets — and would rather get discounts for services they do not want or need. …

What the FCC doesn’t need to do is increase costs for those who can least afford it. As long as there’s full transparency, low income people ought to be able to choose Plan A, B or C. Low income people — the underserved — don’t need the FCC to decide, for them, how they can spend their money.

Well put.

This relates to an important economic point that the proponents of these types of regulation often miss, including in the context of lawyer licensing, but also with respect to the hundreds of state and local regulations impacting hundreds of industries that create barriers to entry in the provision of medical services, dental services, hairdressing, etc.  The introduction of lower quality products provides greater choice and significant economic value.   The fact that not all consumers demand (or can afford) premium brands and services does not mean that consumers are exploited.   Recall Milton Friedman’s statement that lawyer licensing is very much like requiring consumers desiring an automobile to purchase a Cadillac.  In this case, low-income consumers would bear the brunt of a restriction against the type of plan offered by MetroPCS.

There is a longstanding debate over the differences between the FCC’s “public interest” standard and the “consumer welfare” standard used in traditional antitrust analysis.  Sometimes, the two appear to conflict.  Sometimes, as is the case here, with the benefit of economics it is clear the two standards converge.  Here’s hoping the FCC doesn’t take the bait.

Filed under: antitrust, behavioral economics, economics, net neutrality

Larry makes a strong argument below for why the proposed SEC rules changes reported today in the WSJ should not be heralded as some great opening up of US securities markets, but that the changes are little more than political posturing to prevent addressing the real problem of the costs imposed by securities regulation more generally. I don’t disagree that the proposed rules changes Larry targets are, at best, window dressing to release some (well-justified) pressure created by innovative market-based solutions to circumvent the rules that lie more at the root of the securities market problem.  So long as the costs associated with “public” placements are so high, investors and issuers will continue to look for ways to expand their access to capital within the “private” placement market, which by definition excludes many (especially smaller) investors.

That said, I will point out that one of the quotes in the article bemoaning this proposal comes from an institutional investor–one of the groups that is more likely to benefit from the current 500 entity cap. If raising the cap would not open up the market meaningfully to new potential investors, I wouldn’t expect to see such negative comments from one of the groups who will face this greater competition in the supply of private equity. So while the proposed changes certainly don’t address the real problem, it seems they may make the market a bit more open (and less subject to contrived and costly work-arounds like special purpose vehicles) than it currently is.

However, among the rules changes being proposed is one that should open up the market to greater access even to smaller investors (up to whatever new cap might replace the current 500 entity rule). And it’s a rule  change that appears a direct response to something Larry blogged about here just earlier this year.

According to the WSJ report, the SEC “is considering relaxing a strict ban on private companies publicizing share issues, known as the ‘general solicitation’ ban.” The current regulations are currently under Constitutional scrutiny as a potential violation of 1st Amendment speech rights, as a result of a case by Bulldog Investors that Larry discussed in his earlier post.  Again, how far will the ‘relaxing’ go and will it be a substantive change in the underlying problem, or just another hanging of curtains? But there should be no doubt that more open communication about private equity investment opportunities should further open the market to smaller investors.

All this to say, I believe Larry is on point for the big picture, but the proposed regulation changes don’t seem to be all bad. Of course, the devil is in the details–so we’ll have to reserve judgment until the specifics are revealed before having more confidence in that conclusion.

Filed under: disclosure regulation, IPOs, securities regulation, Sykuta

Does anyone really still believe that the threat of antitrust enforcement doesn’t lead to undesirable caution on the part of potential defendants?

Whatever you may think of the merits of the Google/ITA merger (and obviously I suspect the merits cut in favor of the merger), there can be no doubt that restraining Google’s (and other large companies’) ability to acquire other firms will hurt those other firms (in ITA’s case, for example, they stand to lose $700 million).  There should also be no doubt that this restraint will exceed whatever efficient level is supposed by supporters of aggressive antitrust enforcement.  And the follow-on effect from that will be less venture funding and thus less innovation.  Perhaps we have too much innovation in the economy right now?

Reuters fleshes out the point in an article titled, “Google’s M&A Machine Stuck in Antitrust Limbo.”  That about sums it up.

Here are the most salient bits:

Not long ago, selling to Google offered one of the best alternatives to an initial public offering for up-and-coming technology startups. . . . But Google’s M&A machine looks to be gumming up.

* * *

The problem is antitrust limbo.

* * *

Ironically that may make it less appealing to sell to Google. The company has announced just $200 million of acquisitions in 2011 — the smallest sum since the panic of 2008.

* * *

The ITA acquisition has sent a warning signal to the venture capital and startup communities. Patents may still be available. But no fast-moving entrepreneur wants to get stuck the way ITA has since agreeing to be sold last July 1.

* * *

For a small, growing business the risks are huge.

* * *

That doesn’t exclude Google as an exit option. But the regulatory risk needs to be hedged with a huge breakup fee. . . . With Google’s rising antitrust issues, however, the fee needs to be as big as the purchase price.

Filed under: antitrust, business, cost-benefit analysis, google, law and economics, merger guidelines, mergers & acquisitions, technology Tagged: error costs, google, ITA, Venture capital

I am disappointed but not surprised to see that my former employer filed an official antitrust complaint against Google in the EU.  The blog post by Microsoft’s GC, Brad Smith, summarizing its complaint is here.

Most obviously, there is a tragic irony to the most antitrust-beleaguered company ever filing an antitrust complaint against its successful competitor.  Of course the specifics are not identical, but all of the atmospheric and general points that Microsoft itself made in response to the claims against it are applicable here.  It smacks of competitors competing not in the marketplace but in the regulators’ offices.  It promotes a kind of weird protectionism, directing the EU’s enforcement powers against a successful US company . . . at the behest of another US competitor.  Regulators will always be fighting last year’s battles to the great detriment of the industry.  Competition and potential competition abound, even where it may not be obvious (Linux for Microsoft; Facebook for Google, for example).  Etc.  Microsoft was once the world’s most powerful advocate for more sensible, restrained, error-cost-based competition policy.  That it now finds itself on the opposite side of this debate is unfortunate for all of us.

Brad’s blog post is eloquent (as he always is) and forceful.  And he acknowledges the irony.  And of course he may be right on the facts.  Unfortunately we’ll have to resort to a terribly-costly, irretrievably-flawed and error-prone process to find out–not that the process is likely to result in a very reliable answer anyway.  Where I think he is most off base is where he draws–and asks regulators to draw–conclusions about the competitive effects of the actions he describes.  It is certain that Google has another story and will dispute most or all of the facts.  But even without that information we can dispute the conclusions that Google’s actions, if true, are necessarily anticompetitive.  In fact, as Josh and I have detailed at length here and here, these sorts of actions–necessitated by the realities of complex, innovative and vulnerable markets and in many cases undertaken by the largest and the smallest competitors alike–are more likely pro-competitive.  More important, efforts to ferret out the anti-competitive among them will almost certainly harm welfare rather than help it–particularly when competitors are welcomed in to the regulators’ and politicians’ offices in the process.

As I said, disappointing.  It is not inherently inappropriate for Microsoft to resort to this simply because it has been the victim of such unfortunate “competition” in the past, nor is Microsoft obligated or expected to demonstrate intellectual or any other sort of consistency.  But knowing what it does about the irretrievable defects of the process and the inevitable costliness of its consequences, it is disingenuous or naive (the Nirvana fallacy) for it to claim that it is simply engaging in a reliable effort to smooth over a bumpy competitive landscape.  That may be the ideal of antitrust enforcement, but no one knows as well as Microsoft that the reality is far from that ideal.  To claim implicitly that, in this case, things will be different is, as I said, disingenuous.  And likely really costly in the end for all of us.

Filed under: antitrust, business, exclusionary conduct, law and economics, markets, monopolization, politics, regulation, technology Tagged: Brad Smith, Competition law, European Commission, google, microsoft, politics, regulation