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Scholarship Armen Alchian was one of the great economists of the twentieth century, and his 1950 paper, Uncertainty, Evolution, and Economic Theory, one of the most important contributions to the economic literature.
Armen Alchian was one of the great economists of the twentieth century, and his 1950 paper, Uncertainty, Evolution, and Economic Theory, one of the most important contributions to the economic literature. Anticipating modern behavioral economics, Alchian explains that firms most decidedly do not – cannot – actually operate as rational profit maximizers. Nevertheless, economists can make useful predictions even in a world of uncertainty and incomplete information because market environments “adopt” those firms that best fit their environments, permitting them to be modeled as if they behave rationally. This insight has important and under-appreciated implications for the debate today over the usefulness of behavioral economics.
Alchian’s explanation of the role of market forces in shaping outcomes poses a serious challenge to behavioralists’ claims. While Alchian’s (and our) conclusions are born out of the same realization that uncertainty pervades economic decision making that preoccupies the behavioralists, his work suggests a very different conclusion: The evolutionary pressures identified by Alchian may have led to seemingly inefficient firms and other institutions that, in actuality, constrain the effects of bias by market participants. In other words, the very “defects” of profitable firms – from conservatism to excessive bureaucracy to agency costs – may actually support their relative efficiency and effectiveness, even if they appear problematic, costly or inefficient. In fact, their very persistence argues strongly for that conclusion.
In Part I, we offer a short summary of Uncertainty, Evolution, and Economic Theory. In Part II, we explain the implications of Alchian’s paper for behavioral economics. Part III looks at some findings from experimental economics, and the banking industry in particular, to demonstrate how biases are constrained by firms and other institutions – in ways often misunderstood by behavioral economists. In Part IV, we consider what Alchian’s model means for government regulation (with special emphasis on antitrust and consumer protection regulation).
Written Testimonies & Filings "The Telecommunications Act of 1996 has been outdated since the moment it was signed into law, and we applaud the Committee for taking up the task of bringing it up to date..."
“The Telecommunications Act of 1996 has been outdated since the moment it was signed into law, and we applaud the Committee for taking up the task of bringing it up to date. The Act’s siloed approach reflects the assumptions of the pre-Internet era, and is completely out of sync with the market it now governs. The sooner it is replaced with a technologically neutral act focused on how regulated conduct affects consumer welfare, the better, as we argued in our earlier comments in this ongoing inquiry…”
Written Testimonies & Filings "Twenty years ago, Democrats and Republicans agreed on the need to refocus communications competition policy on promoting competition in an era of convergence, focusing on effects rather than formalism..."
“Twenty years ago, Democrats and Republicans agreed on the need to refocus communications competition policy on promoting competition in an era of convergence, focusing on effects rather than formalism. Unfortunately, that focus was lost in the sausage-making process of legislation – and the FCC has been increasingly adrift ever since. The FCC has not waited for Congress to act, and has instead found creative ways to sidestep the formalist structure of the Act. It is high time for Congress to reassert its authority and to craft a new act focused on the effects of competition as a durable basis for regulation.
The antitrust statutes have not been fundamentally modified in over a century because Congress has not needed to do so: antitrust law has evolved on top of them through a mix of court decisions and doctrinal development articulated by the antitrust agencies. At the heart of this evolution of common law has been one guiding concern: effects on consumer welfare, seen through the lens of law and economics. The same concern and same analytical lens should guide the re-write of the Communications Act that is, by now, two decades overdue.
While refocusing competition regulation on effects, Congress should give equal focus to minimizing remaining barriers to competition. In particular, that means minimizing regulatory uncertainty (and, in particular, avoiding any return to mostly archaic Title II regulations); maximizing the amount of spectrum available; simplifying the construction and upgrading of wireless towers to maximize the capacity of wireless broadband; and promoting infrastructure policy at all levels of government that makes deployment cost-effective…”
Popular Media This was previously posted to the Center for the Protection of Intellectual Property Blog on October 4, and given that Congress is rushing headlong into . . .
This was previously posted to the Center for the Protection of Intellectual Property Blog on October 4, and given that Congress is rushing headlong into enacting legislation to respond to an alleged crisis over “patent trolls,” it bears reposting if only to show that Congress is ignoring its own experts in the Government Accountability Office who officially reported this past August that there’s no basis for this legislative stampede.
As previously reported, there are serious concerns with the studies asserting that a “patent litigation explosion” has been caused by patent licensing companies (so-called non-practicing entities (“NPEs”) or “patent trolls”). These seemingly alarming studies (see here and here) have drawn scholarly criticism for their use of proprietary, secret data collected from companies like RPX and Patent Freedom – companies whose business models are predicated on defending against patent licensing companies. In addition to raising serious questions about self-selection and other biases in the data underlying these studies, the RPX and Patent Freedom data sets to this day remain secret and are unknown and unverifiable. Thus, it is impossible to apply the standard scientific and academic norm that all studies make available data for confirmation of the results via independently produced studies. We have long suggested that it was time to step back from such self-selecting “statistics” based on secret data and nonobjective rhetoric in the patent policy debates.
At long last, an important and positive step has been taken in this regard. The Government Accountability Office (GAO) has issued a report on patent litigation, entitled “Intellectual Property: Assessing Factors that Affect Patent Infringement Litigation Could Help Improve Patent Quality,” (“the GAO Report”), which was mandated by § 34 of the America Invents Act (AIA). The GAO Report offers an important step in the right direction in beginning a more constructive, fact-based discussion about litigation over patented innovation.
The GAO is an independent, non-partisan agency under Congress. As stated in its report, it was tasked by the AIA to undertake this study in response to “concerns that patent infringement litigation by NPEs is increasing and that this litigation, in some cases, has imposed high costs on firms that are actually developing and manufacturing products, especially in the software and technology sectors.” Far from affirming such concerns, the GAO Report concludes that no such NPE litigation problem exists.
In its study of patent litigation in the United States, the GAO primarily utilized data obtained from Lex Machina, a firm specialized in collecting and analyzing IP litigation data. To describe what is known about the volume and characteristics of recent patent litigation activity, the GAO utilized data provided by Lex Machina for all patent infringement lawsuits between 2000 and 2011. Additionally, Lex Machina also selected a sample of 500 lawsuits – 100 per year from 2007 to 2011 – to allow estimated percentages with a margin of error of no more than plus or minus 5% points over all these years and no more than plus or minus 10% points for any particular year. From this data set, the GAO extrapolated its conclusion that current concerns expressed about patent licensing companies were misplaced.
Interestingly, the methodology employed by the GAO stands in stark contrast to the prior studies based on secret, proprietary data from RPX and Patent Freedom. The GAO Report explicitly recognized that these prior studies were fundamentally flawed given that they relied on “nonrandom, nongeneralizable” data sets from private companies (GAO Report, p. 26). In other words, even setting aside the previously reported concerns of self-selection bias and nonobjective rhetoric, it is inappropriate to draw statistical inferences from such sample data sets to the state of patent litigation in the United States as a whole. In contrast, the sample of 500 lawsuits selected by Lex Machina for the GAO study is truly random and generalizable (and its data is publicly available and testable by independent scholars).
Indeed, the most interesting results in the GAO Report concern its conclusions from the publicly accessible Lex Machina data about the volume and characteristics of patent litigation today. The GAO Report finds that between 1991 and 2011, applications for all types of patents increased, with the total number of applications doubling across the same period (GAO Report, p.12, Fig. 1). Yet, the GAO Report finds that over the same period of time, the rate of patent infringement lawsuits did not similarly increase. Instead, the GAO reports that “[f]rom 2000 to 2011, about 29,000 patent infringement lawsuits were filed in the U.S. district courts” and that the number of these lawsuits filed per year fluctuated only slightly until 2011 (GAO Report, p. 14). The GAO Report also finds that in 2011 about 900 more lawsuits were filed than the average number of lawsuits in each of the four previous years, which an increase of about 31%, but it attributes this to the AIA’s prohibition on joinder of multiple defendants in a single patent infringement lawsuit that went into effect in 2011 (GAO Report, p. 14). We also discussed the causal effect of the AIA joinder rules on the recent increase in patent litigation here and here.
The GAO Report next explores the correlation between the volume of patent infringement lawsuits filed and the litigants who brought those suits. Utilizing the data obtained from Lex Machina, the GAO observed that from 2007 to 2011 manufacturing companies and related entities brought approximately 68% of all patent infringement lawsuits, while patent aggregating and licensing companies brought only 19% of such lawsuits. (The remaining 13% of lawsuits were brought by individual inventors, universities, and a number of entities the GAO was unable to verify.) The GAO Report acknowledged that lawsuits brought by patent licensing companies increased in 2011 (24%), but it found that this increase is not statistically significant. (GAO Report, pp. 17-18)
The GAO also found that the lawsuits filed by manufacturers and patent licensing companies settled or likely settled at similar rates (GAO Report, p. 25). Again, this contradicts widely asserted claims today that patent licensing companies bring patent infringement lawsuits solely for purposes of only nuisance settlements (implying that manufacturers litigate patents to trial at a higher rate than patent licensing companies).
In sum, the GAO Report reveals that the conventional wisdom today about a so-called “patent troll litigation explosion” is unsupported by the facts (see also here and here). Manufacturers – i.e., producers of products based upon patented innovation – bring the vast majority of patent infringement lawsuits, and that these lawsuits have similar characteristics as those brought by patent licensing companies.
The GAO Report shines an important spotlight on a fundamental flaw in the current policy debates about patent licensing companies (the so-called “NPEs” or “patent trolls”). Commentators, scholars and congresspersons pushing for legislative revisions to patent litigation to address a so-called “patent troll problem” have relied on overheated rhetoric and purported “studies” that simply do not hold up to empirical scrutiny. While mere repetition of unsupported and untenable claims makes such claims conventional wisdom (and thus “truth” in the minds of policymakers and the public), it is still no substitute for a sensible policy discussion based on empirically sound data.
This is particularly important given that the outcry against patent licensing companies continues to sweep the popular media and is spurring Congress and the President to propose substantial legislative and regulatory revisions to the patent system. With the future of innovation at stake, it is not crazy to ask that before we make radical, systemic changes to the patent system that we have validly established empirical evidence that such revisions are in fact necessary or at least would do more good than harm. The GAO Report reminds us all that we have not yet reached this minimum requirement for sound, sensible policymaking.
Filed under: intellectual property, litigation, patent Tagged: bessen, chien, GAO, Goodlatte Discussion Draft, hr 3309, innovation act, meurer, NPE, PAE, patent freedom, patent litigation, patent troll, report on patent litigation, rpx, statistics
Presentations & Interviews Federal Trade Commissioner Joshua Wright talked about the FTC Act dealing with “unfair or deceptive acts or practices” along with Geoffrey Manne and Berin Szoka. . . .
Federal Trade Commissioner Joshua Wright talked about the FTC Act dealing with “unfair or deceptive acts or practices” along with Geoffrey Manne and Berin Szoka.
“The Need for Limits on Agency Discretion and the Case for Section 5 UMC Guidelines” was the luncheon keynote address that opened “The FTC: Technology & Reform Conference” at the Willard Hotel.
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Presentations & Interviews Federal Trade Commission Structure and Regulatory Practices Panelists talked about the Federal Trade Commission’s (FTC) structure and regulatory practices. ?
Federal Trade Commission Structure and Regulatory Practices Panelists talked about the Federal Trade Commission’s (FTC) structure and regulatory practices.
Popular Media For those in the DC area interested in telecom regulation, there is another great event opportunity coming up next week. Join TechFreedom on Thursday, December 19, the . . .
For those in the DC area interested in telecom regulation, there is another great event opportunity coming up next week.
Join TechFreedom on Thursday, December 19, the 100th anniversary of the Kingsbury Commitment, AT&T’s negotiated settlement of antitrust charges brought by the Department of Justice that gave AT&T a legal monopoly in most of the U.S. in exchange for a commitment to provide universal service.
The Commitment is hailed by many not just as a milestone in the public interest but as the bedrock of U.S. communications policy. Others see the settlement as the cynical exploitation of lofty rhetoric to establish a tightly regulated monopoly — and the beginning of decades of cozy regulatory capture that stifled competition and strangled innovation.
So which was it? More importantly, what can we learn from the seventy year period before the 1984 break-up of AT&T, and the last three decades of efforts to unleash competition? With fewer than a third of Americans relying on traditional telephony and Internet-based competitors increasingly driving competition, what does universal service mean in the digital era? As Congress contemplates overhauling the Communications Act, how can policymakers promote universal service through competition, by promoting innovation and investment? What should a new Kingsbury Commitment look like?
Following a luncheon keynote address by FCC Commissioner Ajit Pai, a diverse panel of experts moderated by TechFreedom President Berin Szoka will explore these issues and more. The panel includes:
Space is limited so RSVP now if you plan to attend in person. A live stream of the event will be available on this page. You can follow the conversation on Twitter on the #Kingsbury100 hashtag.
When: Thursday, December 19, 2013 11:30 – 12:00 Registration & lunch 12:00 – 1:45 Event & live stream
The live stream will begin on this page at noon Eastern.
Where: The Methodist Building 100 Maryland Ave NE Washington D.C. 20002
Questions? Email [email protected].
Filed under: federal communications commission, net neutrality, regulation, technology, telecommunications, wireless Tagged: at&t, Berin Szoka, Commissioner Pai, Federal Communications Commission, Fred Campbell, Hance Haney, Harold Feld, Jeff Eisenach, Kingsbury Commitment, Rob Atkinson, techfreedom
Popular Media As it begins its hundredth year, the FTC is increasingly becoming the Federal Technology Commission. The agency’s role in regulating data security, privacy, the Internet of Things, high-tech . . .
FTC Commissioner Josh Wright will give a keynote luncheon address titled, “The Need for Limits on Agency Discretion and the Case for Section 5 UMC Guidelines.” Project members will discuss the themes raised in our inaugural report and how they might inform some of the most pressing issues of FTC process and substance confronting the FTC, Congress and the courts. The afternoon will conclude with a Fireside Chat with former FTC Chairmen Tim Muris and Bill Kovacic, followed by a cocktail reception.
Full Agenda:
Filed under: antitrust, consumer protection, federal trade commission, international center for law & economics, law and economics, scholarship Tagged: Bill Kovacic, ftc, FTC Commissioner, FTC Technology & Reform Project, geoffrey manne, Josh Wright, Keynote, Law and economics, Technology & Reform Project, Tim Muris, todd zywicki
Popular Media Please join us at the Willard Hotel in Washington, DC on December 16th for a conference launching the year-long project, “FTC: Technology and Reform.” With . . .
Please join us at the Willard Hotel in Washington, DC on December 16th for a conference launching the year-long project, “FTC: Technology and Reform.” With complex technological issues increasingly on the FTC’s docket, we will consider what it means that the FTC is fast becoming the Federal Technology Commission.
The FTC: Technology & Reform Project brings together a unique collection of experts on the law, economics, and technology of competition and consumer protection to consider challenges facing the FTC in general, and especially regarding its regulation of technology.
For many, new technologies represent “challenges” to the agency, a continuous stream of complex threats to consumers that can be mitigated only by ongoing regulatory vigilance. We view technology differently, as an overwhelmingly positive force for consumers. To us, the FTC’s role is to promote the consumer benefits of new technology — not to “tame the beast” but to intervene only with caution, when the likely consumer benefits of regulation outweigh the risk of regulatory error. This conference is the start of a year-long project that will recommend concrete reforms to ensure that the FTC’s treatment of technology works to make consumers better off.
Convened by TechFreedom and the International Center for Law & Economics, the FTC Technology & Reform Project includes academics, practitioners, policy experts and several former FTC Commissioners and staffers. Our initial report, to be released around the December 16th event, will identify critical questions facing the agency, Congres, and the courts about the FTC’s future and will propose a framework for addressing them.
FTC Commissioner Joshua Wright will kick off the half-day conference with a luncheon keynote. Following his remarks, Project members will discus principal aspects of our initial report. The event will conclude with a networking reception. Attendees will include a wide variety of practitioners and scholars with expertise working at the Commission or counseling businesses about it.
RSVP Today!
When: Monday, December 16, 2013 11:30 – Registration opens 12:00 – 5:30 pm – Luncheon keynote & conference 5:30 – 6:30 p.m. – Reception
Where: The Willard Hotel 1401 Pennsylvania Ave NW Washington, DC 20004
Filed under: antitrust, consumer protection, federal trade commission, international center for law & economics, law and economics, truth on the market Tagged: Commissioner, Commissioner Wright, consumer, Federal Trade Commission, ftc, technology, Washington DC
