In the WSJ, Professor Macey takes measure of the CFPB’s new mortgage disclosures and finds them lacking:

The CFPB is proposing to revise the old forms into a new Loan Estimate Form and Closing Disclosure Form. The old loan form had been five pages; according to the agency website, the new one is three. The closing form remains at five pages. That’s a net savings of two pieces of paper. But the agency rules required to implement the new forms weigh in at an astonishing 1,099 pages.

In evaluating the substance of the new disclosure themselves, Macey concludes the new forms are likely to harm consumers rather than help them.

Do the new rules expand consumer choice? They would forbid many borrowers from making smaller payments every month, followed by a single, one-time balloon payment to retire the principal at the end. They also would cap late fees—which means borrowers would be unable to get a lower interest rate on a loan by agreeing to pay a penalty if they don’t make their payments on time.

The new rules restrict loan-modification fees, which means mortgagors will offer fewer options to do so. They restrict penalties on borrowers who pay off their home loans early. These prepayment fees compensate lenders for the risk of lower returns on their loans. Without this protection they will either decline to offer loans to some borrowers or charge a higher interest rate.

The government’s proposed rules require high-risk customers in high-cost loan markets to meet with financial counselors before taking out a loan. The regulators also want to expand dramatically the number of mortgages classified as high cost. But financial counselors will have to be compensated, whether their advice is good or bad. The law deprives these consumers of the right to do their own homework.

Oddly, hidden on the new disclosure forms is the Annual Percentage Rate. For decades the APR was front and center on government-mandated disclosure documents. It is the single number that shows borrowers the cost of borrowing including such factors as the interest rate, certain fees, and the maturity structure of the loan.

The CFPB claims its consumer testing showed people didn’t understand the APR. Yet if someone is trying to compare two loans—one with a lower interest rate and $15,000 in fees, the other with lower fees but a higher interest rate—it’s not possible to determine which loan is cheaper without the APR.  The new rules do not attempt to generate a single number that can be used for comparison purposes and instead focus on various components of the loan such as fees, penalties, interest rates and maturity separately. This makes it harder, not easier, for borrowers to compare mortgage options.

Ultimately, we will be able to evaluate the impact of these new disclosures empirically by watching the results of the CFPB’s “experiment.”

Filed under: consumer financial protection bureau, consumer protection, economics

Given the enthusiasm for application of behavioral economics to antitrust analysis from some corners of the Commission and the academy, I found this remark from Alison Oldale at the Federal Trade Commission interesting (Antitrust Source):

Behavioral economists are clearly correct in saying that people and firms are not the perfect decision makers using perfect information that they are portrayed to be in many economic models. But alternative models that incorporate better assumptions about behavior and which give us useful ways to understand the likely effects of mergers, or particular types of conduct, aren’t there yet. And in the meantime our existing models give us workable approximations. So we haven’t done much yet, but we’ll keep watching developments.

For myself, I wonder whether the first place behavioral economic analysis might be brought to bear on antitrust enforcement will be in areas like coordinated effects or exchange of information. These are areas where our existing theories are not very helpful. For example when looking at coordinated effects in merger control the standard approach focuses a lot on incentives to coordinate. But there are lots and lots of markets where firms have an incentive to coordinate but they don’t seem to be doing so. So it seems there is a big piece of the puzzle that we are missing, and perhaps behavioral economics will be able to tell us something about what to look at in order to get a better handle when coordination is likely in practice.

I certainly agree with the conclusion that the behavioral economics models are not yet ready for primetime.  See, for example, my work with Judd Stone in Misbehavioral Economics: The Case Against Behavioral Antitrust or my series of posts on “Nudging Antitrust” (here and here).

Filed under: antitrust, behavioral economics, behavioral economics, economics, federal trade commission

Louis Kaplow’s Why (Ever) Define Markets? in the Harvard Law Review was one of the most provocative papers in the antitrust literature over the past few years.  We’ve discussed it here.  I wrote:

Kaplow provocatively argues that the entire “market definition/ market share” paradigm of antitrust is misguided and beyond repair.  Kaplow describes the exclusive role of market definition in that paradigm as generating inferences about market power, argues that market definition is incapable of generating reasonable inferences for that purpose as a matter of basic economic principles primarily because one must have a “best estimate” of market power previous to market definition, and concludes that antitrust ought to do away with market definition entirely.  As my description of the paper suggests, and Kaplow recognizes, it is certainly an “immodest” claim.  But it is a paper that has evoked much discussion in antitrust circles, especially in light of the recent shift in the 2010 HMGs toward analysis of competitive effects and away from market definition.

Many economists were inclined to agree with the basic conceptual shift toward direct analysis of competitive effects.  Much of that agreement was had on the basis that the market definition exercise aimed to do a number of things directed toward identifying the potential competitive effects of a merger (identifying market power is certainly one of those things), and that if we had tools allowing for direct inferences we ought to use those instead.  Kaplow’s attack on market definition, however, was by far the most aggressive critique.

Kaplow’s analysis prompted responses from antitrust scholars, including most notably Greg Werden (DOJ).  I discuss Werden’s critique here.

In my view, the debating over the proper scope and function of market definition in antitrust – and in particular the proper relationship between the market definition inquiry and competitive effects analysis – is ongoing.  Thus, it was interesting for me to see Richard Markovits’ (Texas) latest entry on SSRN (HT: Danny Sokol), which appears to attempt to shift the debate from whether market definition should be killed, to whom the credit should be attributed for its execution.  Markovits’ piece, Why One Should Never Define Markets or Use Market-Oriented Approaches to Analyze the Legality of Business Conduct Under U.S. Antitrust Law, argues – well – what the title says.   And in particular, he defends his earlier work against Kaplow’s dismissal of it in footnote – claiming his it is own analysis, not Kaplow’s, that should be credited with the rejection of market definition based approaches (in fact, Markovits’ claim is much broader).  From the abstract:

In 2010, Professor Louis Kaplow published an article Why Ever Define Markets? that argues for the proposition that one should never define markets for the purpose of measuring a firm’s economic power, which is a corollary of the conclusion that I established in 1978. Kaplow’s article includes a lengthy footnote that — after stating that my 1978 article constitutes a “particularly harsh attack on market definition” — denigrates it on a number of accounts. The article I am posting (1) delineates slightly-improved versions of my 1978 arguments against the use of market-oriented approaches to analyzing the legality of business practices under U.S. antitrust law, (2) explains why those arguments and the “idiosyncratic” (Kaplow’s accurate if pejorative characterization) conceptual systems and competition theories they employ imply that Kaplow’s more limited conclusion is correct, (3) delineates and criticizes Kaplow’s “arguments” for his conclusion (the most relevant of which is a correct assertion of a proposition that is an analog to the conclusion of my second argument for the claim my 1978 article establishes — an assertion he does not and cannot justify because he does not develop and use any counterpart to my idiosyncratic conceptual systems and theories, which play a critical role in the justificatory argument), (4) demonstrates that all of Kaplow’s criticisms of my 1978 article are either incorrect or unjustified, and (5) asserts that at least some of the errors Kaplow makes when criticizing my article are important because they are made by others as well and militate against the correct analysis of the legality of various types of business conduct under U.S. antitrust law.

Filed under: antitrust, economics, market definition

From Bloomberg:

The U.S. Supreme Court said it will decide whether states can block antitrust scrutiny of hospital mergers such as Phoebe Putney Health System Inc.’s acquisition of Palmyra Park Hospital in Georgia.

The justices today said they will hear the Federal Trade Commission’s appeal of a U.S. appellate court ruling that the proposed purchase of HCA Inc.-owned Palmyra, based in Albany, Georgia, could be carried out over the agency’s objections.

The Atlanta-based 11th U.S. Circuit Court of Appeals said the Georgia state legislature granted antitrust immunity to the deal, trumping the FTC’s assertion that the acquisition would result in too few health-care options for Albany residents.

“We are pleased that the Supreme Court will consider the Phoebe Putney matter in the coming term,” FTC Chairman Jon Leibowitz said in an e-mailed statement. “This case is important to consumers, who benefit from a competitive health care marketplace. It also may provide crucial guidance on the boundaries of the state action doctrine.”

The State Action doctrine has long been in some need of guidance; see the FTC State Action Report or the Antitrust Modernization Commission Report – both which call for increased guidance and clarity on the contours of the state action doctrine – for details.  As the AMC Report observes:

The lower courts have not always properly implemented Supreme Court precedents outlining what is required to satisfy the clear articulation prong. In Town of Hallie v. City of Eau Claire the Supreme Court held the clear articulation standard was satisfied where the allegedly anticompetitive conduct was a “foreseeable result” of a state law.52 Following Town of Hallie, however, some courts have applied a standard of “foreseeability” (and thus immunity) wherever a state authorizes conduct that does not necessarily, but might, have an anticompetitive effect. 53  To say that anticompetitive effects are a possible result of a statute, however, is not the same as finding “a deliberate and intended state policy” to replace competition with regulation, as the Court subsequently required in FTC v. Ticor Title Insurance Co.54

There are a number of areas within the state action doctrine that could use some attention.  I’m sure we’ll have more discussion of the case here in the weeks to come.

Filed under: antitrust, federal trade commission

I am very pleased to report that Kevin Murphy – economist extraordinaire, recipient of the MacArthur Fellowship, Bates Clark Medal winner, and of course, fellow UCLA Bruin — has agreed to join Charles River Associates as a Senior Consultant beginning May 2013 when his contract with Navigant Economics expires.  As a fellow Senior Consultant at CRA, and a fan of Murphy’s academic and expert work, I’m very pleased that he will be joining the firm.

From the CRA press release:

Charles River Associates (NASDAQ: CRAI), a worldwide leader in providing economic, financial, and management consulting services, today announced that Kevin M. Murphy, the George J. Stigler Distinguished Service Professor of Economics, Department of Economics and Booth School of Business, University of Chicago, has entered into an agreement to become a senior consultant to CRA’s Antitrust & Competition Economics Practice. Professor Murphy is expected to begin working with CRA in May 2013.

“Kevin Murphy is widely regarded as one of the smartest economists in the world and we are honored and thrilled about his decision to become a senior consultant to Charles River Associates,” said CRA’s President and Chief Executive Officer Paul Maleh. “Professor Murphy has an outstanding reputation as an extremely effective expert in numerous antitrust, labor and other engagements. In his academic research, Professor Murphy has developed leading theories and analyses that explain how economic incentives influence social phenomena, such as addiction, and determine economic outcomes, including wage inequality, unemployment, and the economic value of health and medical research. Professor Murphy has a reputation for being exceptionally creative, asking the questions not being asked, and developing innovative and informative economic models. Simply put—he is an economist in a league of his own. We look forward to working with Professor Murphy and continuing CRA’s tradition of teaming our highly-talented consulting professionals with renowned academics and economists to best serve clients.”

Dr. Steven C. Salop, a Senior Consultant to CRA and Professor of Economics and Law at Georgetown University Law Center, said, “We are very excited to have Kevin Murphy joining CRA. Besides being one of the most creative economists of his generation, Kevin is both articulate and down to earth. We are looking forward to having him as a colleague and a leader.”

Congratulations to Dr. Murphy and Charles River Associates.

DISCLOSURE: As mentioned, I am a Senior Consultant to CRA.

Filed under: antitrust, economics

Competition Policy International has published an interview with Judge Douglas Ginsburg and me following up on our 2010 article “Antitrust Sanctions.”  The interview ranges from topics such as whether the Occupy movements impact our proposal for use of debarment as an antitrust sanction in the United States to fairness concerns and global trends in antitrust penalties.  I believe one must be a subscriber to read the interview or listen to the audio.   The issue also contains an interview with Don Klawiter discussing the relationship between the evolution of executive penalties in antitrust, the Ginsburg & Wright proposal, and compliance programs.  Check it out.

Filed under: antitrust, cartels, doj, economics

Judge Douglas Ginsburg (D.C. Circuit Court of Appeals; NYU Law) and I have posted “Dynamic Antitrust and the Limits of Antitrust Institutions” to SSRN.  Our article is forthcoming in Volume 78 (2) of the Antitrust Law Journal.  We offer a cautionary note – from an institutional perspective – concerning the ever-increasing and influential calls for greater incorporation of models of dynamic competition and innovation into antitrust analysis by courts and agencies.

Here is the abstract:

The static model of competition, which dominates modern antitrust analysis, has served antitrust law well.  Nonetheless, as commentators have observed, the static model ignores the impact that competitive (or anti-competitive) activities undertaken today will have upon future market conditions.  An increased focus upon dynamic competition surely has the potential to improve antitrust analysis and, thus, to benefit consumers.  The practical value of proposals to increase the use of dynamic analysis must, however, be evaluated with an eye to the institutional limitations that antitrust agencies and courts face when engaged in predictive fact-finding.  We explain and evaluate both the current state of dynamic antitrust analysis and some recent proposals that agencies and courts incorporate dynamic considerations more deeply into their analyses.  We show antitrust analysis is not willfully ignorant of the limitations of static analysis; on the contrary, when reasonably confident predictions can be made, they are readily incorporated into the analysis.  We also argue agencies and courts should view current proposals for a more dynamic approach with caution because the theories underpinning those proposals lie outside the agencies’ expertise in industrial organization economics, do not consistently yield determinate results, and would place significant demands upon reviewing courts to question predictions based upon those theories.  Considering the current state of economic theory and empirical knowledge, we conclude that competition agencies and courts have appropriately refrained from incorporating dynamic features into antitrust analysis to make predictions beyond what can be supported by a fact-intensive analysis.

You can download the paper here.

Filed under: antitrust, doj, economics, entrepreneurship, error costs, exclusionary conduct, federal trade commission, merger guidelines, mergers & acquisitions, monopolization, settlements, technology

Recently, the FTC announced that Howard Shelanksi would be taking charge of the Bureau of Economics on July 1st.  Now comes news that DOJ economist Ken Heyer (and UCLA Bruin!) — longtime Economics Director at the Division — will be moving over to the Commission as Deputy Director for Antitrust.  Leemore Dafny (Northwestern) will also come to the Commission to serve in a newly created role as Deputy Director for Health Care.

From the FTC press release:

“I am very pleased that we will have two such distinguished economists joining the Bureau,” said Howard Shelanski, who was named Director of the Bureau last month and is slated to assume the position on July 1. “Ken’s skill and wealth of experience will be invaluable to our competition mission, and Leemore will bring cutting-edge expertise to our antitrust enforcement in health care markets and more broadly as well. I am also very thankful to Alison Oldale, who Ken replaces, for her expert guidance of the Bureau’s antitrust mission during her year as Deputy on detail from the UK Competition Commission.”

Heyer has held a variety of management positions since joining the DOJ’s Antitrust Division in 1982. Most recently, he was Chief of the Economic Analysis Group’s Competition Policy Section, and from 2001 to 2010 he served as the Division’s Economics Director, the highest position held by a career economist in DOJ’s Antitrust Division. Prior to being promoted to management, he had worked at the Division for many years as a staff economist. In 1999 Heyer received the Antitrust Division’s first William F. Baxter Award for outstanding contributions in the area of economic analysis. Heyer holds a Ph.D. in Economics from U.C.L.A., and a B.A. from Queens College, CUNY.

Dafny is an Associate Professor of Management and Strategy, and the Herman Smith Research Professor in Hospital and Health Services at the Kellogg School of Management at Northwestern University, where she has served on the faculty since 2002. She is a microeconomist whose research focuses on competition in healthcare markets. Her work has appeared in the American Economic Review, the Journal of Law and Economics, and the New England Journal of Medicine. Dafny graduated summa cum laude from Harvard College and earned her Ph.D. in Economics from the Massachusetts Institute of Technology. From 1995-1997, she worked as a consultant with McKinsey & Company in Washington, DC. She is a Research Associate of the National Bureau of Economic Research, a Faculty Associate of the Institute for Policy Research, and a Faculty Affiliate of the Center for the Study of Industrial Organization at Northwestern.

Filed under: antitrust, economics, federal trade commission, health care

Yale Law Journal has published my article on “The Antitrust/ Consumer Protection Paradox: Two Policies At War With One Another.”  The hat tip to Robert Bork’s classic “Antitrust Paradox” in the title will be apparent to many readers.  The primary purpose of the article is to identify an emerging and serious conflict between antitrust and consumer protection law arising out of a sharp divergence in the economic approaches embedded within antitrust law with its deep attachment to rational choice economics on the one hand, and the new behavioral economics approach of the Consumer Financial Protection Bureau.  This intellectual rift brings with it serious – and detrimental – consumer welfare consequences.  After identifying the causes and consequences of that emerging rift, I explore the economic, legal, and political forces supporting the rift.

Here is the abstract:

The potential complementarities between antitrust and consumer protection law— collectively, “consumer law”—are well known. The rise of the newly established Consumer Financial Protection Bureau (CFPB) portends a deep rift in the intellectual infrastructure of consumer law that threatens the consumer-welfare oriented development of both bodies of law. This Feature describes the emerging paradox that rift has created: a body of consumer law at war with itself. The CFPB’s behavioral approach to consumer protection rejects revealed preference— the core economic link between consumer choice and economic welfare and the fundamental building block of the rational choice approach underlying antitrust law. This Feature analyzes the economic, legal, and political institutions underlying the potential rise of an incoherent consumer law and concludes that, unfortunately, there are several reasons to believe the intellectual rift shaping the development of antitrust and consumer protection will continue for some time.

Go read the whole thing.

Filed under: antitrust, behavioral economics, bundled discounts, consumer financial protection bureau, consumer protection, economics, federal trade commission