At today’s Open Commission Meeting, the FCC is set to consider two apparently forthcoming Notices of Proposed Rulemaking that will shape the mobile broadband sector for years to come.  It’s not hyperbole to say that the FCC’s approach to the two issues at hand — the design of spectrum auctions and the definition of the FCC’s spectrum screen — can make or break wireless broadband in this country.  The FCC stands at a crossroads with respect to its role in this future, and it’s not clear that it will choose wisely.

Read the full piece here.

I will be speaking at a lunch debate in DC hosted by TechFreedom on Friday, September 28, 2012, to discuss the FTC’s antitrust investigation of Google. Details below.

TechFreedom will host a livestreamed, parliamentary-style lunch debate on Friday September 28, 2012, to discuss the FTC’s antitrust investigation of Google.   As the company has evolved, expanding outward from its core search engine product, it has come into competition with a range of other firms and established business models. This has, in turn, caused antitrust regulators to investigate Google’s conduct, essentially questioning whether the company’s success obligates it to treat competitors neutrally. James Cooper, Director of Research and Policy for the Law and Economics Center at George Mason University School of Law, will moderate a panel of four distinguished commenters to discuss the question, “Should the FTC Sue Google Over Search?”  

Arguing “Yes” will be:

• Eric Clemons
  • Professor of Operations and Information Management at the Wharton School of the University of Pennsylvania and author of “The Need to Focus on the Correct Issues in Google, Power and Antitrust”
• Allen Grunes
  • Attorney at Brownstein Hyatt Farber Schreck and author of “Is There a Basis in Antitrust Law for Requiring ‘Neutral’ Search Results?“

Arguing “No” will be:

• Glenn Manishin
  • Partner at Troutman Sanders and author of “No Need for Antitrust Prosecution of Google“
• Geoffrey Manne
  • Lecturer in Law at Lewis & Clark Law School, Executive Director of the International Center for Law & Economics and author of “If Search Neutrality Is the Answer, What’s the Question?“

When:
Friday, September 28, 2012
12:00 p.m. – 2:00 p.m.

Where:
The Monocle Restaurant
107 D Street Northeast
Washington, DC 20002

RSVP here. The event will be livestreamed here and you can follow the conversation on Twitter at #GoogleFTC.

For those viewing by livestream, we will watch for questions posted to Twitter at the #GoogleFTC hashtag and endeavor, as possible, to incorporate them into the debate.

Questions?
Email [email protected]

Filed under: announcements, antitrust, google Tagged: Allen Grunes, Eric Clemons, Federal Trade Commission, ftc, FTC Act, Glenn Manishin, google, James Cooper, search, search neutrality, Section 2, section 5, Sherman Act, techfreedom

Disputes over intellectual property rights permeate our culture. The music and movie industries have brought thousands of copyright infringement lawsuits against users of peer-to-peer systems like BitTorrent. YouTube videos and Facebook postings are regularly taken down because they contain infringing content. Earlier this year, proposed copyright legislation, the Stop Online Piracy Act, was effectively killed by a grassroots uprising on the Internet. After the Internet Blackout Day on Jan. 18, SOPA became the new four-letter word.

Read the full piece here.

My paper with Judge Douglas H. Ginsburg (D.C. Circuit; NYU Law), Behavioral Law & Economics: Its Origins, Fatal Flaws, and Implications for Liberty, is posted to SSRN and now published in the Northwestern Law Review.

Here is the abstract:

Behavioral economics combines economics and psychology to produce a body of evidence that individual choice behavior departs from that predicted by neoclassical economics in a number of decision-making situations. Emerging close on the heels of behavioral economics over the past thirty years has been the “behavioral law and economics” movement and its philosophical foundation — so-called “libertarian paternalism.” Even the least paternalistic version of behavioral law and economics makes two central claims about government regulation of seemingly irrational behavior: (1) the behavioral regulatory approach, by manipulating the way in which choices are framed for consumers, will increase welfare as measured by each individual’s own preferences and (2) a central planner can and will implement the behavioral law and economics policy program in a manner that respects liberty and does not limit the choices available to individuals. This Article draws attention to the second and less scrutinized of the behaviorists’ claims, viz., that behavioral law and economics poses no significant threat to liberty and individual autonomy. The behaviorists’ libertarian claims fail on their own terms. So long as behavioral law and economics continues to ignore the value to economic welfare and individual liberty of leaving individuals the freedom to choose and hence to err in making important decisions, “libertarian paternalism” will not only fail to fulfill its promise of increasing welfare while doing no harm to liberty, it will pose a significant risk of reducing both.

Download here.

 

Filed under: behavioral economics, behavioral economics, consumer financial protection bureau, consumer protection, economics, free to choose, Hayek, law and economics

There are a lot of inaccurate claims – and bad economics – swirling around the Universal Music Group (UMG)/EMI merger, currently under review by the US Federal Trade Commission and the European Commission (and approved by regulators in several other jurisdictions including, most recently, Australia). Regulators and industry watchers should be skeptical of analyses that rely on outmoded antitrust thinking and are out of touch with the real dynamics of the music industry.

The primary claim of critics such as the American Antitrust Institute and Public Knowledgeis that this merger would result in an over-concentrated music market and create a “super-major” that could constrain output, raise prices and thwart online distribution channels, thus harming consumers. But this claim, based on a stylized, theoretical economic model, is far too simplistic and ignores the market’s commercial realities, the labels’ self-interest and the merger’s manifest benefits to artists and consumers.

For market concentration to raise serious antitrust issues, products have to be substitutes. This is in fact what critics argue: that if UMG raised prices now it would be undercut by EMI and lose sales, but that if the merger goes through, EMI will no longer constrain UMG’s pricing power. However, the vast majority of EMI’s music is not a substitute for UMG’s. In the real world, there simply isn’t much price competition across music labels or among the artists and songs they distribute. Their catalogs are not interchangeable, and there is so much heterogeneity among consumers and artists (“product differentiation,” in antitrust lingo) that relative prices are a trivial factor in consumption decisions: No one decides to buy more Lady Gaga albums because the Grateful Dead’s are too expensive. The two are not substitutes, and assessing competitive effects as if they are, simply because they are both “popular music,” is not instructive.

Given these factors, a larger catalog won’t lead to abuse of market power. This is precisely why the European Union cleared the Sony/EMI music publishing merger, concluding that “Customers usually select a song or certain musical works and not a [label] or a [label’s] catalog… In the event that a customer is wedded to a particular song…or a catalog of songs…, even a small [label] would have pricing power over these particular musical works. The merger would not affect this situation (since the size of the catalog does not matter).”

A second popular criticism is that a combined UMG/EMI would control 51 of 2011’s Billboard Hot 100 songs. But this assertion ignores the ever-changing nature of musical output and consumer tastes – not to mention that “top-selling songs of 2011” is hardly a relevant antitrust market (and neither is “top-selling songs of the last 10 years”). A label’s ownership of 51 songs that were popular in 2011 is not suggestive of its ability to price its full catalog of several million songs in negotiations with an online music service. Meanwhile, by other measures (this year independent artists garnered over 50% of Grammy nominations and won 44% of the awards) the major labels are hardly the only purveyors of valuable songs, and competition from Indie labels and artists is significant.

Edgar Bronfman, a director and former CEO and chairman of Warner Music Group, recently testified in Congress against the merger, arguing that a combined UMG/EMI could decide “what digital services live and what digital services die.” But Bronfman himself has elsewhere acknowledged that labels can’t prosper if they can’t sell their music. As chairman of Universal in 2001 he told Congress that, “for us to effectively market and distribute…albums, they are going to have to be on as many different online music sites as possible…. Frankly, if we lock away our catalog, we aren’t generating value for our artists or our shareholders or our fans.” As a competitor of UMG, Bronfman may have changed his tune, but his earlier point is even more true today with digital sales exceeding 50% of the market.

Far from wanting to constrain supply or hamstring distribution channels, labels have an incentive to make music widely and easily accessible. In fact, power buyers like Apple may have greater control over the marketplace than the labels. As UMG’s CEO Lucian Grainge bluntly noted, “[i]f Apple stops selling our music, we go out of business. Apple does not.” Critics downplay the role of power buyers in disciplining prices, but that assertion goes against the evidence.

Dismissive attitudes about piracy as a constraint on prices also miss the mark. For many consumers, a marginal price increase will indeed induce some piracy. More positively, the opposite also holds true: Increased consumer access to inexpensive and accessible legal content reduce piracy. Given the ravages of pirated music since Napster, it’s no wonder that labels – including both Universal and EMI – are now licensing their music to so many legal digital music services like Spotify. UMG’s incentives to continue to do so can only increase following the merger.

Finally, antitrust reviews must consider the benefits of the merger. Bringing together Universal and EMI could create substantial operating efficiencies. More efficient A&R and production should benefit artists (and fans) directly. And with a larger catalog UMG’s opportunities for pairing similar artists for marketing and concert promotion would increase, helping new and less-popular artists reach larger audiences. And UMG is in a position to breathe new life into EMI’s catalog with investment in human capital and artists’ careers that EMI simply can’t muster.

Claims of this merger‘s anticompetitive effects are not supported either by antitrust analysis or the realities of this market. Regulators should let the music play.

Cross-posted from Forbes

I respect Alex Tabarrok immensely, but his recent post on the relationship between “patent strength” and innovation is, while pretty, pretty silly. The entirety of the post is the picture I have pasted here.

Read the full piece here.

“Real lawyers read the footnotes!”—thus did Harold Feld chastise Geoff and Berin in a recent blog post about our CNET piece on the Verizon/SpectrumCo transaction. We argued, as did Commissioner Pai in his concurrence, that the FCC provided no legal basis for its claims of authority to review the Commercial Agreements that accompanied Verizon’s purchase of spectrum licenses—and that these agreements for joint marketing, etc. were properly subject only to DOJ review (under antitrust).

Read the full piece here.

Einer Elhauge and Abraham Wickelgren, of Harvard and the University of Texas, respectively, have recently posted to SSRN a pair of provocative papers on loyalty discounts (price cuts conditioned on the buyer’s purchasing some amount, usually a percentage of its requirements, from the seller).  Elhauge and Wickelgren take aim at the assertion by myself and others (e.g., Herb Hovenkamp) that loyalty discounts should be per se legal if they result in a discounted per-unit price that is above the seller’s incremental per-unit cost.  E&W would cast the liability net further.

We advocates of per se legality for above-cost loyalty discounts base our position on the fact that such discounts generally cannot exclude aggressive rivals that are as efficient as the discounter.  Suppose, for example, that widgets are normally sold for a dollar each but that a seller whose marginal cost is $.88/widget offers a 10% loyalty rebate to any buyer who purchases 80% of its widget requirements from the seller.  Because the $.90 discounted price exceeds the discounter’s marginal cost, any equally efficient widget producer could compete with the discount by lowering its own price to a level above its cost.

But what if the loyalty rebate actually causes a rival to be less efficient than the discounter? Some have argued that this may occur, even with above-cost loyalty discounts, when scale economies are significant.  Suppose that the market for tennis balls consists of two brands, Pinn and Willson, that current market shares, reflective of consumer demand, are 60% for the Pinn and 40% for Willson,  and that retailers typically stock the two brands in those proportions. Assume also that it costs each manufacturer $.90 to produce a can of tennis balls, that each sells to retailers for $1 per can, and that minimum efficient scale in this market (the lowest production level at which all available scale economies are exploited) occurs at a level of production equal to 35% of market demand. Suppose that Pinn, the dominant manufacturer, offers retailers a 10% loyalty rebate on all purchases made within a year if they buy 70% of their requirements for the year from Pinn.

While the $.90 per unit discounted price is not below Pinn’s cost, it might have the effect of driving Willson, an equally efficient rival, from the market. Willson could avoid losing market share and thus falling below minimum efficient scale only if it matched the full dollar amount of Pinn’s discount on its smaller base of sales. It wouldn’t be able to do so, though, without pricing below its cost.

Consider, for example, a typical retailer that initially (before the rebate announcement) satisfied its requirements by purchasing sixty cans of Pinn for $60 and forty cans of Willson for $40. After implementation of the rebate plan, the retailer could save $7 on its 100-can tennis ball requirements by spending $63 to obtain seventy Pinn cans and $30 to obtain thirty Willson cans. The retailer and others like it would thus have a strong incentive to shift purchases from Willson to Pinn.  To prevent a loss of market share that would drive it below minimum efficient scale, Willson would need to lower its price to provide retailers with the same total dollar discount, but on a smaller base of sales (40% of a typical retailer’s requirements rather than 60%). This would cause it to lower its price below its cost.  For example, Willson could match Pinn’s $7 discount to the retailer described above only by reducing its $1 per-unit price by 17.5 cents ($7.00/40 = $.175), which would require it to price below its cost of $.90 per unit.

When one considers dynamic effects, examples like this don’t really undermine the case for a rule of per se legality for above-cost loyalty discounts. Had the nondominant rival (Willson) charged a price equal to its marginal cost prior to implementation of Pinn’s loyalty rebate, it would have enjoyed a price advantage and likely would have grown its market share to a point at which Pinn’s loyalty rebate strategy could not drive it below minimum efficient scale. Moreover, a strategy that would prevent a nondominant but equally efficient firm from being harmed by a dominant rival’s above-cost loyalty rebate would be for the non-dominant firm to give its own volume discounts from the outset, securing up-front commitments from enough buyers (in exchange for discounted prices) to ensure that its production stayed above minimum efficient scale. Such a strategy, which would obviously benefit consumers, would be encouraged by a rule that evaluated loyalty discounts under straightforward Brooke Group principles and thereby signaled to manufacturers that they must take steps to protect themselves from above-cost loyalty discounts. In the end, then, any equally efficient rival that is committed to engaging in vigorous price competition ought not to be excluded by a dominant seller’s above-cost loyalty rebate.

Moreover, even if a loyalty rebate could occasionally drive an aggressive, equally efficient rival from the market, a rule of per se legality for above-cost loyalty discounts would still be desirable on error cost grounds.  An alternative rule subjecting above-cost loyalty discounts to potential treble damages liability would chill all sorts of non-exclusionary discounting practices, so that the social losses from reduced price competition would exceed any social gains from the elimination of those rare discounts that could exclude aggressive, efficient rivals. In short, the social costs resulting from potential false convinctions under a broader liability rule would overwhelm the social costs from false acquittals under the per se legality rule I have advocated.

The two new papers by Elhauge and Wickelgren contend that I and other per se legality advocates are missing a key anticompetitive threat posed by loyalty discounts even in the absence of scale economies: their potential to chill price competition.

The first E&W paper addresses loyalty discounts involving “buyer commitment”—i.e., a promise by buyers receiving the discount that they will purchase some percentage of their requirements from the discounter (not its rivals) in the future.  According to E&W, the discounter who agrees to this sort of arrangement will be less likely to give discounts to uncommitted (“free”) buyers in the future.  This is because, E&W say, the discounter knows that if it cuts prices to such buyers, it will have to reduce its prices to committed buyers by the agreed-upon discount percentage.  The discounter’s rivals, knowing that the discounter won’t cut prices to attract free buyers, will similarly abstain from aggressive price competition.  “The result,” E&W maintain, “is inflated prices to free buyers, which also means inflated prices to committed buyers because they are priced at a loyalty discount from those free buyer prices.”  Despite these adverse consequences, E&W contend, buyers will agree to competition-reducing loyalty discounts because much of their cost is externalized:  “[W]hen one buyer agrees to a loyalty discount, all buyers suffer from the higher prices that result from less aggressive competition,” so “an incumbent supplier need not compensate an individual buyer who agrees to a loyalty discount for the losses that all other buyers suffer.”

The second E&W paper contends that loyalty discounts may soften price competition and injure consumers even when they do not involve buyer commitment to purchase from the discounter in the future.  According to E&W, “[b]ecause the loyalty discount requires the seller to charge loyal buyers less than buyer who are not covered by the loyalty discount, the seller cannot lower prices to uncovered buyers without also lowering prices to loyal buyers.”  Given the increased cost of competing for uncovered buyers  (i.e., any price concession will require further concessions to covered buyers), the seller is likely to cede uncovered buyers to its rival, which will reduce the rival’s incentive to compete aggressively for buyers covered by the loyalty discount.  In short, E&W contend, the loyalty discount will facilitate a market division scheme between the discounter and its rival.

As is typical for an Elhauge paper, there’s some elaborate modeling and math in both of these papers.  The analysis appears to be rigorous.  It seems to me, though, that there’s a significant problem with both papers: Each assumes that loyalty discounts are structured so that the discounter promises to reduce the price from the amount collected in sales to others.  While I’m reluctant to make sweeping claims about how loyalty discounts are typically structured, I don’t think loyalty discounts usually work this way.

Loyalty discounts could be structured many ways.  The seller could offer a discount from a pre-determined price—e.g., “The price is $1 per widget, but if you purchase at least 80% of your widgets from me, I’ll charge you only $.90/widget.”  Such a discount doesn’t create the incentive effect that underlies E&W’s theories of anticompetitive effect, for there’s no reason for the seller not to reduce others’ widget prices in the future.  Alternatively, the seller could offer a discount off a list price that is subject to change—e.g., “If you purchase 80% of your requirements from me, I’ll charge you 10% less than the posted list price.”  This sort of discount might discourage sellers from lowering list prices, but it shouldn’t dissuade them from also giving others a break from list prices.  Indeed, in many industries hardly anyone pays list price.  The only loyalty discounts that threaten the effects E&W fear are those where the discount is explicitly tied to the price charged to others—e.g., “If you purchase 80% of your requirements from me, I’ll charge you 10% less than the lowest price I’m charging others.”

This last sort of loyalty discount might have the effects E&W predict, but I’ve never seen such a discount.  The loyalty discounts and rebates I encountered as an antitrust lawyer resembled the first two types discussed above: discounts off pre-determined prices or discounts off official list prices (from which price concessions were regularly granted to others).  The loyalty discounts that E&W model really just look like souped-up “Most Favored Nations” clauses, where the seller promises not just to meet, but to beat, the price it offers to other favored buyers.  It may make sense to police such clauses, but wouldn’t we do so using the standards governing MFN clauses rather than the rules and standards governing loyalty discounts?  After all, it’s the seller’s promise to beat its other price concessions, not the buyer’s loyalty, that causes the purported anticompetitive harm.

UPDATE:

I just recalled that this is not the first time we at TOTM have addressed Prof. Elhauge’s models of loyalty discounts containing a Most Favored Nations-like provision. FTC Commissioner-Appointee Josh Wright made a similar point about a paper Elhauge produced before these two.  If you found this post at all interesting, please read Josh’s earlier (and more rigorous) post. Sorry about that, Mr. Commish-to-be.

Filed under: antitrust, economics, error costs, law and economics, regulation

Truth on the Market and the International Center for Law & Economics are delighted (if a bit saddened) to announce that President Obama intends to nominate Joshua Wright, Research Director and Member of the Board of Directors of ICLE and Professor of Law at George Mason University School of Law, to be the next Commissioner at the Federal Trade Commission.

Read the full piece here.