Everyone loves to hate record labels. For years, copyright-bashers have ranted about the “Big Labels” trying to thwart new models for distributing music in terms that would make JFK assassination conspiracy theorists blush. Now they’ve turned their sites on the pending merger between Universal Music Group and EMI, insisting the deal would be bad for consumers. There’s even a Senate Antitrust Subcommittee hearing tomorrow, led by Senator Herb “Big is Bad” Kohl.

Read the full piece here. 

TOTM friend Stephen Bainbridge is editing a new book on insider trading.  He kindly invited me to contribute a chapter, which I’ve now posted to SSRN (download here).  In the chapter, I consider whether a disclosure-based approach might be the best way to regulate insider trading.

As law and economics scholars have long recognized, informed stock trading may create both harms and benefits to society.  With respect to harms, defenders of insider trading restrictions have maintained that informed stock trading is “unfair” to uninformed traders and causes social welfare losses by (1) encouraging deliberate mismanagement or disclosure delays aimed at generating trading profits; (2) infringing corporations’ informational property rights, thereby discouraging the production of valuable information; and (3) reducing trading efficiency by increasing the “bid-ask” spread demanded by stock specialists, who systematically lose on trades with insiders.

Proponents of insider trading liberalization have downplayed these harms.  With respect to the fairness argument, they contend that insider trading cannot be “unfair” to investors who know in advance that it might occur and nonetheless choose to trade.  And the purported efficiency losses occasioned by insider trading, liberalization proponents say, are overblown.  There is little actual evidence that insider trading reduces liquidity by discouraging individuals from investing in the stock market, and it might actually increase such liquidity by providing benefits to investors in equities.  With respect to the claim that insider trading creates incentives for delayed disclosures and value-reducing management decisions, advocates of deregulation claim that such mismanagement is unlikely for several reasons.  First, managers face reputational constraints that will discourage such misbehavior.  In addition, managers, who generally work in teams, cannot engage in value-destroying mismanagement without persuading their colleagues to go along with the strategy, which implies that any particular employee’s ability to engage in mismanagement will be constrained by her colleagues’ attempts to maximize firm value or to gain personally by exposing proposed mismanagement.  With respect to the property rights concern, deregulation proponents contend that, even if material nonpublic information is worthy of property protection, the property right need not be a non-transferable interest granted to the corporation; efficiency considerations may call for the right to be transferable and/or initially allocated to a different party (e.g., to insiders).  Finally, legalization proponents observe that there is little empirical evidence to support the concern that insider trading increases bid-ask spreads.

Turning to their affirmative case, proponents of insider trading legalization (beginning with Geoff’s dad, Henry Manne) have primarily emphasized two potential benefits of the practice.  First, they observe that insider trading increases stock market efficiency (i.e., the degree to which stock prices reflect true value), which in turn facilitates efficient resource allocation among capital providers and enhances managerial decision-making by reducing agency costs resulting from overvalued equity.  In addition, the right to engage in insider trading may constitute an efficient form of managerial compensation.

Not surprisingly, proponents of insider trading restrictions have taken issue with both of these purported benefits. With respect to the argument that insider trading leads to more efficient securities prices, ban proponents retort that trading by insiders conveys information only to the extent it is revealed, and even then the message it conveys is “noisy” or ambiguous, given that insiders may trade for a variety of reasons, many of which are unrelated to their possession of inside information.  Defenders of restrictions further maintain that insider trading is an inefficient, clumsy, and possibly perverse compensation mechanism.

The one thing that is clear in all this is that insider trading is a “mixed bag”  Sometimes such trading threatens to harm social welfare, as in SEC v. Texas Gulf Sulphur, where informed trading threatened to prevent a corporation from usurping a valuable opportunity.  But sometimes such trading creates net social benefits, as in Dirks v. SEC, where the trading revealed massive corporate fraud.

As regular TOTM readers will know, optimal regulation of “mixed bag” business practices (which are all over the place in the antitrust world) requires consideration of the costs of underdeterring “bad” conduct and of overdeterring “good” conduct.  Collectively, these constitute a rule’s “error costs.”  Policy makers should also consider the cost of administering the rule at issue; as they increase the complexity of the rule to reduce error costs, they may unwittingly drive up “decision costs” for adjudicators and business planners.  The goal of the policy maker addressing a mixed bag practice, then, should be to craft a rule that minimizes the sum of error and decision costs.

Adjudged under that criterion, the currently prevailing “fraud-based” rules on insider trading fail.  They are difficult to administer, and they occasion significant error cost by deterring many instances of socially desirable insider trading.  The more restrictive “equality of information-based” approach apparently favored by regulators fares even worse.  A contractarian, laissez-faire approach favored by many law and economics scholars would represent an improvement over the status quo, but that approach, too, may be suboptimal, for it does nothing to bolster the benefits or reduce the harms associated with insider trading.

My new book chapter proposes a disclosure-based approach that would help reduce the sum of error and decision costs resulting from insider trading and its regulation.  Under the proposed approach, authorized informed trading would be permitted as long as the trader first disclosed to a centralized, searchable database her insider status, the fact that she was trading on the basis of material, nonpublic in­formation, and the nature of her trade.  Such an approach would (1) enhance the market efficiency benefits of insider trading by facilitating “trade decod­ing,” while (2) reducing potential costs stemming from deliberate misman­agement, disclosure delays, and infringement of informational property rights.  By “accentuating the positive” and “eliminating the negative” conse­quences of informed trading, the proposed approach would perform better than the legal status quo and the leading proposed regulatory alternatives at minimizing the sum of error and decision costs resulting from insider trading restrictions.

Please download the paper and send me any thoughts.

Filed under: 10b-5, corporate law, disclosure regulation, error costs, financial regulation, insider trading, markets, regulation, securities regulation, SSRN

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

In light of yesterday’s abysmal jobs report, yesterday’s Wall Street Journal op-ed by Stanford economist John B. Taylor (Rules for America’s Road to Recovery) is a must-read.  Taylor begins by identifying what he believes is the key hindrance to economic recovery in the U.S.:

In my view, unpredictable economic policy—massive fiscal “stimulus” and ballooning debt, the Federal Reserve’s quantitative easing with multiyear near-zero interest rates, and regulatory uncertainty due to Obamacare and the Dodd-Frank financial reforms—is the main cause of persistent high unemployment and our feeble recovery from the recession.

A reform strategy built on more predictable, rules-based fiscal, monetary and regulatory policies will help restore economic prosperity.

Taylor goes on (as have I) to exhort policy makers to study F.A. Hayek, who emphasized the importance of clear rules in a free society.  Hayek explained:

Stripped of all technicalities, [the Rule of Law] means that government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.

Taylor observes that “[r]ules-based policies make the economy work better by providing a predictable policy framework within which consumers and businesses make decisions.”  But that’s not all: “they also protect freedom.”  Thus, “Hayek understood that a rules-based system has a dual purpose—freedom and prosperity.”

We are in a period of unprecedented regulatory uncertainty.  Consider Dodd-Frank.  That statute calls for 398 rulemakings by federal agencies.  Law firm Davis Polk reports that as of June 1, 2012, 221 rulemaking deadlines have expired.  Of those 221 passed deadlines, 73 (33%) have been met with finalized rules, and 148 (67%) have been missed.  The uncertainty, it seems, is far from over.

Taylor’s Hayek-inspired counsel mirrors that offered by President Reagan’s economic team at the beginning of his presidency, a time of economic malaise similar to that we’re currently experiencing.  In a 1980 memo reprinted in last weekend’s Wall Street Journal, Reagan’s advisers offered the following advice:

…The need for a long-term point of view is essential to allow for the time, the coherence, and the predictability so necessary for success. This long-term view is as important for day-to-day problem solving as for the making of large policy decisions. Most decisions in government are made in the process of responding to problems of the moment. The danger is that this daily fire fighting can lead the policy-maker farther and farther from his goals. A clear sense of guiding strategy makes it possible to move in the desired direction in the unending process of contending with issues of the day. Many failures of government can be traced to an attempt to solve problems piecemeal. The resulting patchwork of ad hoc solutions often makes such fundamental goals as military strength, price stability, and economic growth more difficult to achieve. …

Consistency in policy is critical to effectiveness. Individuals and business enterprises plan on a long-range basis. They need to have an environment in which they can conduct their affairs with confidence. …

With these fundamentals in place, the American people will respond. As the conviction grows that the policies will be sustained in a consistent manner over an extended period, the response will quicken.

If you haven’t done so, read both pieces (Taylor’s op-ed and the Reagan memo) in their entirety.

Filed under: economics, financial regulation, Hayek, politics, regulation

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

Judge Posner’s decision to appoint a expert in the patent dispute before him in the Seventh Circuit between Apple and Motorola has received some attention.  ABA Journal

Though Posner is an appeals judge with the Chicago-based 7th U.S. Circuit Court of Appeals, he likes to volunteer for trials, the Chicago Tribune reports. In a speech at the 7th Circuit Bar Association on Monday, Posner said the court-appointed experts could explain unclear scientific terms to jurors in the case.

“The idea of expert witness who are not beholden to the parties who can provide information to judges and juries on technical issues, I think is a terrific opportunity worth exploring,” Posner said.

In a March 10 court order (PDF), Posner endorsed another idea—a special blue-ribbon jury—to help decipher difficult patent claims in the case, the Patent Lawyer Blog has reported. Posner told lawyers he wanted the claim constructions to be “in ordinary English intelligible to persons having no scientific or technical background” since lay jurors would be deciding the case.

“There is no point in giving jurors stuff they won’t understand,” he wrote. “The jury (actual juries) will not consist of patent lawyers and computer scientists or engineers unless the parties stipulate to a ‘blue ribbon’ jury; I would welcome their doing so but am not optimistic.”

This is not a surprise.  Judge Posner has long advocated the use of court-appointed experts in his writing.  I suspect this move — a judge appointing an expert for the purpose of claim construction in a patent case — is not too unusual, but is receiving quite a bit of attention both because it is Judge Posner and because it is a high profile patent case.  John Wiley (my antitrust law professor) has an excellent article on the use of court appointed experts and other strategies for “taming scary patent cases.”

But this got me thinking about how relatively rare court appointment in antitrust cases is.  There are a handful of of anecdotal examples to be sure.  They are very familiar in the antitrust community — Alfred Kahn in New York v. Kraft General Foods, Carl Kaysen as law clerk in United Shoe Machinery — in part because of how rare a phenomenon it is.   A 2006 ABA Task Force memo discusses the pros and cons a bit, but does not reach a conclusion.  Moreover, most of the cons are generally costs of using court appointed experts: identifying a witness both parties agree to might be difficult, witnesses might not be “true neutrals,” judges might give too much deference to the opinion of the expert.  Tad Lipsky analyzes the potential for court appointed experts and other possible solutions to the increasing complexity of economic testimony in antitrust cases here.  Yet, if I’m right that this happens much more often in patent cases than it does in antitrust cases — another area of law relying upon outside disciplines (whether a technological field or economics and statistics) — it raises an interesting question as to why?  I admit I might be wrong about the empirical premise.  But it is certainly the case that court appointment is very rare in antitrust cases.

Here are a few hypotheses to explain the higher judicial demand for outside expertise in patent cases:

• Appeal and reversal rates are higher in patent claim construction cases and reversal-averse judges want the help.
• Judges — rightly or wrongly — have greater confidence in their ability to understand the underlying economics in a complex antitrust case than in their ability to tangle in a “hard science” discipline — is it more embarrassing to “ask for directions” in an antitrust case?
• Closer substitutes are available for economic training for judges (e.g. the LEC Economic Institute) than for the hard science disciplines involved in patent cases
• Other Institutional reasons: does Daubert work differently in antitrust cases than patent cases?

I’m sure there are others.  But it seems to be a potentially interesting puzzle that I’ve been thinking about for awhile.  I know we’ve got some experienced antitrust litigators and consulting economists reading.  I’d be very interested in hearing thoughts on what might explain the judicial reluctance — relative to patent cases, assume I’m right about that (and I think I am) — to appoint their own experts.

Filed under: antitrust, economics

From Competition Policy International (via The Blog of Legal Times):

Matt Reilly, former Assistant Director of the Federal Trade Commission, is joining Simpson Thacher & Bartlett. Reilly will partner the firm’s Antitrust Practice and be based in its D.C. office. His move comes after 13 years at the FTC, where he was the lead litigator in high-profile cases like the agency’s challenge to the Whole Foods-Wild Oats merger. From 2007, Reilly served as head of the Mergers IV decision.

Congratulations to Matt — formerly head of Mergers IV — and to Simpson Thacher.

Filed under: antitrust, federal trade commission, mergers & acquisitions

An interesting new joint venture between Oxford University Press, Ariel Ezrachi, and Bill Kovacic (GW).  Sounds like a fantastic idea and with top notch management and might be of interest to many of our readers.

The Journal of Antitrust Enforcement 

Call for Papers – The Journal of Antitrust Enforcement (OUP) Oxford University Press is delighted to announce the launch of a new competition law journal dedicated to antitrust enforcement. The Journal of Antitrust Enforcement forms a joint collaboration between OUP, the Oxford University Centre for Competition Law and Policy and the George Washington University Competition Law Center.

The Journal of Antitrust Enforcement will provide a platform for cutting edge scholarship relating to public and private competition law enforcement, both at the international and domestic levels.

The journal covers a wide range of enforcement related topics, including: public and private competition law enforcement, cooperation between competition agencies, the promotion of worldwide competition law enforcement, optimal design of enforcement policies, performance measurement, empirical analysis of enforcement policies, combination of functions in the mandate of the competition agency, competition agency governance, procedural fairness, competition enforcement and human rights, the role of the judiciary in competition enforcement, leniency, cartel prosecution, effective merger enforcement and the regulation of sectors.

Submission of papers: Original articles that advance the field are published following a peer and editorial review process. The editors welcome submission of papers on all subjects related to antitrust enforcement. Papers should range from 8,000 to 15,000 words (including footnotes) and should be prefaced by an abstract of less than 200 words.

General inquiries may be directed to the editors: Ariel Ezrachi at the Oxford CCLP or William Kovacic at George Washington University. Submission, by email, should be directed to the Managing Editor, Hugh Hollman.

Further information about the journal may be found online: http://www.oxfordjournals.org/our_journals/antitrust/

Filed under: antitrust, legal scholarship, scholarship