A Senate panel approved the Leegin Bill on a voice vote (HT: Main Justice).  The story behind the link suggests that there is some Republican opposition brewing.  I suspect there will be hearings.  The Bill’s findings make the following two observations:

(3) Many economic studies showed that the rule against resale price maintenance led to lower prices and promoted consumer welfare, and;

(4) abandoning the rule against resale price maintenance will likely lead to higher prices paid by consumers and substantially harms the ability of discount retail stores to compete. For 40 years prior to 1975, Federal law permitted States to enact so-called `fair trade’ laws allowing vertical price fixing. Studies conducted by the Department of Justice in the late 1960s indicated that retail prices were between 18 and 27 percent higher in States that allowed vertical price fixing than those that did not. Likewise, a 1983 study by the Bureau of Economics of the Federal Trade Commission found that, in most cases, resale price maintenance increased the prices of products sold.

I believe both of these statements are, at best, misleading, and that Leegin was correctly decided.  From an antitrust perspective, the issue of whether RPM should be afforded per se treatment is whether the practice “always or almost always reduces output.”  Judge Douglas Ginsburg has more eloquently explained the empirical logic behind the per se standard in Polygram, noting that the issue is properly understood as whether there exists “a close family resemblance between the suspect practice and another practice that already stands convicted in the court of consumer welfare.”  The real question is whether we know that resale price maintenance — please don’t call it price-fixing — is whether the practice is so likely to generate competitive harm that it should be condemned without rule of reason inquiry.

As we’ve discussed previously, the empirical evidence on RPM simply does not satisfy this standard.  Quite the opposite, an objective assessment of the empirical evidence suggests that RPM is The findings articulated in the Bill are misleading because (1) they rely on studies from the 1960s which have been superseded by better empirical studies and an improved theoretical lens through which to understand RPM, and (2) by emphasizing the “price” test the findings fail to note that the overwhelming majority of the studies suggest that RPM increases output, a finding at odds with the anticompetitive theories.  Of course, a finding that the most likely effect of the legislation restoring the per se rule is to reduce output and consumer welfare would not, I suspect, attract the same number of votes or public support.

For interested readers,  testimony/ presentation slides at the FTC Workshop on Resale Price Maintenance are available.

The TOTM archives on RPM, including a number of great posts from Thom, are here.

From the AP:

Norway’s Opera said Thursday that downloads of its browser more than doubled after Microsoft Corp. was forced to give European users a choice of Web software to settle European Union antitrust charges.  Microsoft started sending updates to Windows computers in Europe in early March that launches a pop-up screen telling them to pick one or more of 12 free Web browsers to download and install, including Microsoft’s Internet Explorer.  Opera Software ASA said European downloads of its newest desktop browser increased 130 percent between March 12-14, after the updates were sent out. It saw the highest increase in Poland, where downloads went up 328 percent.

Here are some details on what the browser choice screen looks like in practice, or here.

The soda industry is trending toward vertical integration, which Coke and Pepsi acquiring their largest bottlers.  From the WSJ:

Coke and PepsiCo sell concentrate to bottlers, which then bottle and distribute the soft drinks in their territories. Many of these smaller bottlers are small businesses that have been run by family members for decades and have perpetual contracts to distribute the sodas.   One concern for some smaller bottlers is that the big cola makers might now push for more price promotions in the regions they control, a move that could also drive down prices and profit margins at smaller bottlers. There are also questions about how both companies will handle distribution of any new drinks they launch.

For Coke and PepsiCo, managing the often delicate relations with their remaining independent bottlers will be key to driving sales and efficiency in their distribution systems.  PepsiCo said it is committed to nurturing “constructive” and “mutually profitable” relationships with its independent bottlers. PepsiCo says it has no plans to acquire the remaining portion of its bottling system, but instead it intends to focus on teaming up with its bottlers.  Coke declined to comment.

Most industry watchers say that independent bottlers will continue to have a strong presence and that both companies will likely strive to keep relations cordial with these distributors. Small bottlers will also benefit as the overall beverage system gets more efficient. Nonetheless, the big bottler deals are set to bring major changes to the industry, which is fighting a slump in sales of traditional sodas….

The recent deals will allow Coke and PepsiCo to cut costs sharply and allow them to be more flexible on pricing and in offering retailers better deals, moves that could indirectly push smaller bottlers to do the same.  “The pressure would be that they might lower prices to major customers on some products, where the independent bottlers may not have thought it necessary in the past,” Mr. Glover said.

This trend back toward vertical integration is pretty interesting.  The article suggests that integration will result in greater pricing flexibility and lower overall prices, suggesting that perhaps integration is solving a double marginalization problem.  But has bottler market power increased in the last decade or so?  Why now?

A second possible explanation is that the costs of ameliorating promotional incentive conflicts by contract has increased over the relevant time frame. Like most vertical contracts, the key here is to understand how the incentives of the prospective transacting parties do not coincide and therefore must be controlled contractually rather than left to unrestrained competition and self-interest.  A common incentive incompatibility, identified by Klein & Murphy (1988) and later analyzed by Klein (1995), occurs when: (1) manufacturers sell a product at a significant markup over marginal cost, (2) the retailer provides some input like marketing activity or promotion that has a significant impact on demand for the product, and (3) consumers have heterogeneous demand for these promotional services, i.e. different value placed on placement of the product on eye-level shelf space, product demonstrations, etc.    The basic economic forces under these conditions suggest that the downstream “promotional service provider” such as a franchisee or retailer does not have adequate incentives to promote the product or supply the efficient level of marketing activity. This is because the franchisee does not take into account the franchisor’s (large) profit margin on additional sales induced by provision of promotional services. This is most likely to be the case when products are differentiated, e.g. soda!

Under these conditions, transacting parties will find contractual solutions to these problems (including vertical integration) to induce the supply of the efficient level of promotional services. My analysis with Ben Klein on slotting contracts and solo authored work on category management contracts are examples of the types of contracts one sees put to use in the retail industry to control the transacting parties incentives in favor of non-performance and faciliate self-enforcement of the contract.  But the real question here is whether the incentive conflict has changed in the soda market in recent years such that vertical integration has become a more efficient solution for assuring supply of the desired distribution services than contracting.   I’m not sure what the change could be.  Contractual relationships with bottlers can be governed by franchise termination laws, which render if incredibly difficult and nearly impossible to terminate a bottler for non-performance.  The article notes that many of the bottler contracts are “perpetual.”

Relatedly, Muris, Scheffman & Spiller (1992) provide a similar analysis of the previous shift to vertical integration in the soft drink distribution market following a dramatic increase in the importance of marketing activity in the industry, e.g. supplying retailers with product display, “pushing” product by encouraging retailers to give premium shelf space with “slotting contracts,” and executing local promotions. It is true that one could call this change in optimal contractual form as a response to increasing transactions costs, but that is probably a bit misleading and certainly too vague to really get at the underlying economics.  Most folks assume that this means a response to an increased incentive to engage in hold up over specialized assets. But this incentive to vertically integrate has nothing to do with specialized assets in the conventional Klein, Crawford, and Alchian (1978) or Williamsonian sense.

Justin Wolfers is one of my favorite economics bloggers in large part because of the empirical, evidence-based approach he takes to economics problems and policy issues.  As co-blogger Todd points out, Wolfers recently generated some data (JSTOR citation counts) that he argues supports the assertion that Hayek is out-classed by those mentioned in the title to this post.  Wolfers, who I think very highly of as an economist, seems to think so, and pointing out that Larry Summers (and presumably a ton of others) out-influence Hayek by this measure.  I thought the post was tongue-in-cheek, to be honest, before I saw the recent update where Wolfers sticks to his guns and cannot reject the hypothesis, therefore, that “insisting that high schools teach Hayek is a clear statement of ideology, not of economic science.”

Including Todd’s excellent post, and Bill Easterly’s response, much has already been said on this count. Todd really hammers at the key point, and the value of Hayek in the curriculum, when he writes:

Hayek is the most courageous and important critic of social planning, and if we are going to expose high school students to the poison of Marx, we must give them the antidote of Hayek. Hayek realized the fallacy of central planning and its inevitable failure decades before anyone else. His book “The Road to Serfdom” should be required reading for any literate American. His ideas about the decentralization of knowledge, the important role heterogeneous preferences would play in destabiling attempts at social planning, and the link between progressivism and totalitarianism are some of the most important contributions to human knowledge of the past 100 years.

Absolutely.  But I want to talk a bit more about the data.  Measuring citation counts between economists is probably not a good way to measure the sort of influence that we are talking about in terms of appropriateness for a high school economics curriculum.  I suspect White’s  (1980) “A Heteroskedasticity-Consistent Covariance-Matrix Estimator and a Direct Test for Heteroskedasticity” cites better than anything else since 1970, but I’m not sure I’d recommend it to a high school senior.   Influence is a tough concept to measure.  And Wolfers, to his credit, calls for alternative measures if they exist.  Well, Todd points to one potential measure, noting that Hayek ranks ninth among economists cited in law journals.   But if one restricts attention to Hayek’s influence with other Nobel Laureates, in which he ranks second only behind Ken Arrow.   That sounds pretty influential to me and with a measure that probably matters more for the relevant type of influence than a general JSTOR citation count.

No doubt that data are better than opinion and all of that.  Using data to find answers is a good thing — but we do want to be mindful that the data we are using are measuring the right thing.  Looking for keys under lampposts comes to mind.  I just don’t think that general citation counts are a very good measure of the sort of influence we are talking about when we are deciding the whether “Hayek belongs” in high schools, much less that the data can be used to support claims that insisting that Hayek be taught cannot be supported by the merits and must be the product of ideology (of course, I think everybody understands that in the particular case of the School Board here, there is plenty of ideology involved, but that is separate from the data claim being made).

UPDATE: I should make clear that I find the School Board’s decisions generally troubling, and am skeptical about the role of school boards in picking curriculum in economics as well as other topics.

The Texas Board of Education recently decided to add F.A. Hayek to the high school economics curriculum. The New York Times reports:

In economics, the revisions add Milton Friedman and Friedrich von Hayek, two champions of free-market economic theory, among the usual list of economists to be studied, like Adam Smith, Karl Marx and John Maynard Keynes.

To the Times, this is evidence of the Board’s desire to put a “conservative stamp on . . . economics textbooks.” As usual, the Times gets it wrong.

Hayek is the most courageous and important critic of social planning, and if we are going to expose high school students to the poison of Marx, we must give them the antidote of Hayek. Hayek realized the fallacy of central planning and its inevitable failure decades before anyone else. His book “The Road to Serfdom” should be required reading for any literate American. His ideas about the decentralization of knowledge, the important role heterogeneous preferences would play in destabiling attempts at social planning, and the link between progressivism and totalitarianism are some of the most important contributions to human knowledge of the past 100 years.

Economist, and my friend, Justin Wolfers disagrees. On the ever-interesting Freakonomics blog, Wolfers examines citations to Hayek in economics journals, and concludes the data “suggests that Hayek just doesn’t belong with Smith, Marx, Keynes, or Friedman.”

Others are coming to Hayek’s defense. See comments by William Easterly here.

I offered my own defense of sorts in a 2005 paper for the inaugural issue of the New York University Journal of Law & Liberty. I look at citations to Hayek and other famous “economists” in law journals and by judges. Hayek is the ninth most cited economist, behind only Mill, Smith, Coase, Becker, Stigler, Arrow, Marx, and Friedman. Hayek has been quite influential on law, and like Mill, Smith, and Friedman is accessible to high school students wrestling with big-picture ideas about economics and society.

I do agree with Wolfers’s skepticism about school boards generally and some of the specific decisions of the Texas Board. I also agree that Hayek would be skeptical about attempts to impose knowledge from above. But, since these decisions must be made, it is nice to see some balance being brought to economics education.

Of course, much of this shouldn’t matter. Education starts at home, and I can say that no matter what the high school curriuculum at the University of Chicago Laboratory Schools (where my kids will attend), they will learn about Hayek in the Henderson House.

A number of opponents of Obamacare, such as Wall Street Journal columnist William McGurn, have criticized the President and his people for referring to pending proposals as “health insurance reform” rather than “health care reform.” I suppose these critics think the President is engaging in a sleight of hand in an effort to minimize the significance of the reform proposals — as in, “We’re not reforming the whole health care system, just health insurance. No biggie.” But Mr. Obama is right. This proposal is about insurance rather than the provision of health care itself. And that’s the main problem.

At the outset, the President claimed that a central goal of reform was to reduce the cost of health care itself. While Mr. Obama was always concerned with expanding health insurance coverage to the uninsured, he maintained that health care cost reduction is also key (and, in fact, necessary for expanding coverage without breaking the bank). For example, in a June 2009 radio address setting forth his goals for health care reform, the President insisted, “We must attack the root causes of skyrocketing health care costs,” and he reiterated his “belief that any health care reform must be built around fundamental reforms that lower costs, improve quality and coverage, and also protect consumer choice.” Similarly, his Council of Economic Advisers listed a reduction in actual health care costs as one of the two goals (along with insurance coverage expansion) of health care reform:

CEA’s findings on the state of the current system lead to a natural focus on two key components of successful health care reform: (1) a genuine containment of the growth rate of health care costs, and (2) the expansion of insurance coverage.

So I have a question for supporters of Obamacare (either the House bill, the Senate bill, or the President’s own proposal): What provisions of the proposed legislation will reduce the costs of health care itself? This is an honest question. I’m really trying figure out, if a reduction in health care costs is a primary goal of this legislation (and mustn’t it be?), what is the strongest possible case for the pending proposals?

(more…)

When I was a student at the University of Chicago Law School, our president lectured there. I didn’t take any classes from him — he taught stuff I wasn’t interested in — but I had friends who did; all raved. The other day, I opened up my copy of the Law School directory for reasons of nostalgia. There the president is on page 34, under “Lecturers in Law,” between Judson Miner and Stephen Poskanzer. Although I knew President Obama’s biography by heart at this point, one fact in it surprised me: “Before joining Developing Communities Project, he worked as a financial journalist . . ..” Really? A financial journalist? Am I the only one who had no idea about this? As someone who teaches business law, I would love to see the stories the president wrote when he covered finance. If anyone is out there who has copies, send them my way.

To expand on Geoff’s post about concentration in the seed industry, there has been a consistent line of discussion throughout the day raising the specter of monopoly and anti-competitive behavior, not only in seed but also in livestock.  There are continual references to adverse price effects and limitations in choice for consumers and producers alike, followed by such tagged-on qualifiers as “if there are any”. The implication is that there is good reason to believe such effects exist and simply have yet to be discovered if we look.

But that question has already been answered. The Government Accountability Office conducted a study of the agriculture sector.  In addition, they consulted the academic literature and scholars and other experts in the field. The GAO concluded there is no evidence that concentration has had any adverse price effects on commodities or consumer producers.

One would expect that someone among the panel of enforcers at the state or federal level, particularly the DOJ or USDA, would be aware of and familiar with the GAO report. I submitted a question to that effect, asking if–or how–the GAO report would inform the activities of the state and federal enforcers. That question was not selected by the moderator to be addressed.

Antitrust is an extremely blunt tool that cuts coarsely through an industry. Wielding such a tool blithely before the face of industry is likely to have chilling effects on investment and innovation. Why would (or should) businesses invest in facilities, producers, or innovations when there is such great uncertainty over how the politicization of antitrust enforcement is going to be brought down upon them?

There is some snow still on the ground here in Iowa. It will melt more slowly given the chill cast upon agriculture by the comments of the enforcers…if the comments have more behind them than just saying what a farmer-oriented audience wants to hear. Perhaps Marvel Comics had it right?

A common theme throughout the day has been the declining number of seed companies–increasing concentration–and its effect. Except no one has talked about the effect.  Other than pointing to the structural change itself, no one seems to have any evidence relating to the effect of the change.  One farmer at the open mic session (coincidentally one who had been sued by Monsanto) asserted that the move from 70 seed companies to 4 represented a relevant decline in competition.  But he didn’t talk about any relevant effect; he had nothing to offer on declining return on investment–no evidence that the change actually affected his bottom line.

Unfortunately, Diana Moss is the lone antitrust expert on the seed industry concentration panel (also known as the “is Monsanto an antitrust problem?” panel), and it falls to her to put meat on these bones.  But she fails in the effort, and really just repeats the same mantra as the farmer, with exactly the same amount of evidence (zero, in case I wasn’t clear on this point).  (Moss’s AAI paper on biotech seeds is available here; our ICLE paper partially addressing Moss’s is here).

(more…)

The morning’s panel of farmers represented a variety of perspectives, ranging from more reasoned to more reactionary.  Among the ideas suggested:

More reasoned:

• Find a balance between food and fuel in the policy debate (though no clear directions how)
• Increase trade in global markets (always easy to talk about forcing other countries to buy more of our stuff without addressing the domestic industry issues)
• Invest in new research and technology (and in land-grant universities…now, how can I argue with that?)

More reactionary:

• Take that research and technology and give it away (thereby eliminating any private incentive for investment)
• Limit subsidies going to large farms so only small farms benefit
• Big companies should be busted up (no matter the efficiency implications for consumers or ag producers)
• Prohibit contracting between packers and livestock producers because it creates “captive supply” and thins out the cash market (thereby eliminating packers’ ability to provide consistent quality meat products to consumers and many producers’ abilities to access financial capital)

In short: Farmers want to make more money and want to change the rules to get more of the money in the system. Surprises, anyone?

The question of the morning (from my perspective):
How much of the consequences associated with some of these ideas are intended or simply foreseeable?

Let me say at the outset, some of my prior beliefs. First, I believe in the marketplace of ideas and think that more speech is generally better than less speech. I believe the Founders shared this belief and enshrined it in the “no law” component of the First Amendment. I believe this is especially true for speech about politics. Why else would we allow the Nazis to march in Skokie? Other countries don’t let Nazi’s march because they (rightfully) view their ideas as repugnant. But we let them march. We do so because we are more confident in our citizens’ ability to know right from wrong, to look beyond rhetoric for substance, and to be able to weigh competing claims of truth. If we didn’t trust the people to make decisions based on all available information, if we didn’t trust the people to be able to filter speech according to its source and content, if we didn’t trust the people to know what is good for them, we wouldn’t let the Nazi’s march. But we let them march.

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Bill Northey, IA Ag Sec’y, sounds a bit like an economist (ah, turns out he has a degree in ag business and an MBA . . . ).  Yes, price of seeds has gone up, but so has yield, and so has overall value.  The issue, he says, is how to divide the surplus, and he suggests that it’s dividing the pie that drives farmer concerns.  That’s not at all a surprise, but it’s also not much of an antitrust issue.  Unless the pie could be bigger absent, say, Monsanto’s huge investment in seeds and the resulting relatively-concentrated market structure (and basing enforcement on the theoretical possibility of that counter-factual is a perilous enterprise, as Josh and I have suggested many times), this is just a question of pecuniary transfers.  Sure, they matter a lot to the parties involved and there’s always an incentive to deputize the government to put a thumb on the scale of that dispute, but that’s not a matter of allocative efficiency, and not a matter for the antitrust laws.

Now we hear Iowa AG Miller pushing for the development of “the non-antitrust laws to deal with concentration.”  By which he means the Packers and Stockyards Act.  Maybe the DOJ has their Section 5 after all!

As if on cue, AG Miller trots out the pendulum story of antitrust enforcement–”how to bring the antitrust law back to the middle.”  This is not really an accurate description, unfortunately.  Even worse, it’s not an economically-sensible concept, and measuring the efficiency of antitrust enforcement by counting enforcement actions (or looking at rhetoric) is usually just flimsy cover for an essentially-political determination.  Combine that with Miller’s suggestion that the P&S Act’s “unfair practices” language should be enlisted in the service of dealing with concentration, and the risk of false positives is much magnified.  Which, of course, is a perfect lead-in for Christine Varney. (more…)

As readers may know, Eric Holder was added to the workshop at the last minute (see the latest agenda here).  So the day starts out with Holder and Vilsack, and they are joined by Varney and Tom Miller (the Iowa AG) and a host of other politicos including Senator Grassley and Congressman Boswell.

Vilsack is introducing the event, and seems to be lamenting the extraordinary increase in productivity in the farm sector–by which I mean, he laments the loss of farm jobs even though output has increased by leaps and bounds.  That’s an unfortunate framing of the issue, but it suggests that economic efficiency won’t be at the core of the discussion.

Some choice quotes from Vilsack:

“Great efficiencies have led to consolidation.  They’ve also led to lower prices for consumers.  . . . Is marketplace providing a fair deal to ranchers and farmers.”

“We know seed companies control the lion’s share of certain commodities–does that help or hurt farmers?”

“The purpose of the workshops is to determine if the system is fair [not efficient, fair --ed.].”

And now Eric Holder:

“erosion of free competition is one of the greatest threats to our economy.”

“We’ve learned the hard way that reckless deregulation can foster conduct that is harmful [this is a paraphrase . . . ]”

“Enforcement of the antitrust laws does not fully address the concerns of farmers and other stakeholders.  [Which explains why this isn't an antitrust event . . . ]“

And now comments from the panel, moderated by Vilsack . . . I’ll focus on the most relevant (if any) . . .

Holder:

“commitment to enforcing the antitrust laws in the ag sector.”

Grassley:

refers to “concentration and lack of competition in agriculture”

“not enough competition and too much concentration [I'll assume that's not an economic conclusion]“

“bigger isn’t per se bad but it can lead to predatory practices and behavior.”

“I don’t want anything to be done that stifles innovation.”

Well, as the political speeches proceed, there’s not much to report.  I’ll post this and await Varney’s comments . . . .

As Geoff noted, we’re stationed at the DOJ/USDA workshop to witness the goings on and provide some comments.

US Secretary of Agriculture Tom Vilsack opened this session with a laundry list of statistics concerning rural America and the agriculture sector. The statistics focused on national concentration ratios and national averages, which are tremendously deceiving for understanding the agriculture sector.

For instance: the top four beef packing firms comprise 80% of the industry; the top four pork packers comprise 65% of that industry.  The percent of cattle and hogs sold in cash markets have dropped precipitously.  The majority (vast, in the case of hogs) are sold under some type of contractual arrangement. These are significant increases relative to 20 years ago.

However, these national statistics belie the fact that concentration at the local market level may not have changed as much as the national statistics suggest, as much of the consolidation at the national level has occurred as regional-based agribusinesses have merged or acquired businesses in other regions and lines of business.  While downstream firms would see fewer suppliers at the national scale, the number of firms buying from farmers in any given local market may not have changed so drastically.

Likewise, the statistics Secretary Vilsack offered about the portion of farm household income earned off the farm (suggesting an dependent vulnerability) is extremely misrepresentative.  As I noted in an earlier blog, the dependence of farming operations on off-farm income is tremendously skewed toward the small farms that produce a very small fraction of the value of agricultural production.

In this type of arena, it is too easy to fall into one of two traps: using national averages to describe a very heterogeneous industry, and using individual stories and anecdotes (on schedule later today) to draw broad inferences. Both fail to properly inform the issue.