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I participated yesterday in a webinar panel hosted by the Federalist Society’s Regulatory Transparency Project. The video was livestreamed at YouTube. Below, I offer my opening remarks, with some links.

Thank you for having me. As mentioned, I’m a senior scholar in innovation policy at the International Center for Law & Economics (ICLE). This means I have the institutional responsibility to talk to you today about Ronald Coase and transaction costs. Don’t worry, I’ll define my terms and explain why these things are important. In fact, I think it could help to frame our discussion, before offering my own preliminary thoughts on the debates over a duty of care to protect minors online and online age-verification and parental-consent laws.

Read the full piece here.

Concentration is a terrible measure of [insert basically anything people actually care about]. Have I said that before? Concentration tells us nothing about market power, efficiency, or whether policy changes can do anything to increase welfare. Economists know that, especially industrial organization (IO) economists.

If we want to measure market power for a seller, a better measure is the markup, defined as the ratio of price over marginal cost. If we want to measure market power for a buyer, we can look at the markdown. Either one is a better measure of market power (possibly bad) and often the very definition of market power.

Read the full piece here.

Abstract

Evidence of rising market power in the U.S. economy has received widespread attention in macroeconomics literature. Recent research has linked trends in measured market power to other secular trends in the U.S., including multi-decade trends of declining rates of job reallocation and business entry (or “business dynamism”). Intuitively, firms with more market power are less responsive to shocks, and industries characterized by market power may have (or create) significant barriers to entry. Both forces predict a negative correlation between market power and business dynamism. However, industry-level data shows zero, or often a positive, correlation between markups and business dynamism; industries that experienced larger increases in markups had smaller decreases in dynamism on average. Those few industries that saw both large declines in markups and large declines in dynamism do not account for a significant share of the aggregate trends in markups and dynamism. Our results suggest that market power does not explain the decline in dynamism.

A market with 1,000 tiny sellers is not some ideal market. Concentration can be extremely beneficial, leading to economies of scale and stiffer competition to win a big share of the market.

Yet the Federal Trade Commission (FTC) and U.S. Justice Department’s (DOJ) draft merger guidelines double down on the idea that concentration is inherently a problem. They add new structural presumptions against concentration, for both horizontal and vertical mergers. Even worse, the agencies won’t recognize any efficiencies “if they will accelerate a trend toward concentration.”

The problem? Concentration is not a good proxy for competition. This post will go through some of the empirical work that generally finds that competition increases concentration. The FTC/DOJ are completely at odds with the economic literature on this point.

Read the whole piece here.

Definition

The Federal Trade Commission (FTC) recently announced that it would sue to block Amgen’s proposed $27.8 billion acquisition of Horizon Therapeutics. The challenge represents a landmark in the history of pharmaceutical-industry antitrust enforcement, as the industry has largely been given license to engage in permissive mergers and acquisitions of smaller companies without challenge.

In Part One, I reviewed the basic structure and function of the pharmaceutical industry, as well as the theory of harm that the FTC is bringing. In this part, I take a much deeper dive into the economic literature to determine whether the FTC’s theory of harm is likely to hold up in court and whether the commission has picked the right forum in which to bring its claims.

Read the full piece here.

Abstract

Ronald Coase famously exposed the limitations of economic analyses that rely upon assumptions of frictionless markets. He highlighted the importance of including transaction costs in economic analyses and issued a challenge to economists to think seriously about how transaction costs impact economic systems. Harold Demsetz, extended Coase’s analysis to show how these costs alter the way firms price and market their products. Demsetz’ analysis underscored that the costs of providing a market sometimes exceed the benefits of creating one in the first place and examined conditions where transaction costs imply that zero amounts of explicit market pricing will be efficient.

This article focuses upon extending Demsetz’s insights concerning non-linear pricing contracts that seem not to “price” key side effects of the economic exchange. In particular, we analyze the welfare and output effects of two examples of such contracts commonly used by firms that are frequently subject to antitrust scrutiny: metered pricing and loyalty discounts. The analysis demonstrates how a firm’s choice to set prices for its products are influenced by transaction and information costs and examines whether changes in output caused by the use of these non-linear pricing schemes are positively correlated with changes in total and consumer welfare. The article then discusses conditions under which measuring output effects can reliably differentiate between welfare-increasing and welfare-reducing uses of non-linear pricing.

One of the biggest names in economics, Daron Acemoglu, recently joined the mess that is Twitter. He wasted no time in throwing out big ideas for discussion and immediately getting tons of, let us say, spirited replies.

One of Acemoglu’s threads involved a discussion of F.A. Hayek’s famous essay “The Use of Knowledge in Society,” wherein Hayek questions central planners’ ability to acquire and utilize such knowledge. Echoing many other commentators, Acemoglu asks: can supercomputers and artificial intelligence get around Hayek’s concerns?

Read the full piece here.

ICLE Chief Economist Brian Albrecht joined the Human Action Podcast to discuss the work of economists Armen Alchian and Robert Lucas. Video of the full conversation is embedded below.