Several months ago, Geoff posted about Zillow.com, a website purporting to provide “Free, Instant Valuations and Data for 67,000,000+ Homes (…and you don’t have to enter any personal info and no one will contact you).” Several of us played around on Zillow a bit and concluded that it’s not all that accurate at estimating home value (measured in terms of willingness-to-pay), but it’s fun and at least somewhat helpful.

As today’s NYT reports, the National Community Reinvestment Coalition (NCRC) is asking the FTC to “permanently restrain Zillow from providing home value estimates.” The Times report focuses on NCRC’s claim that Zillow’s practices have a disproportionate adverse effect on blacks and Latinos, whose homes are more likely to be undervalued by Zillow’s appraisal methodology. The complaint itself, though, is more general. NCRC basically claims that the valuations Zillow provides are so inaccurate that they ought to be kept from members of the public, who are likely to be misled. NCRC also seeks damages for “victims” of these inaccuracies.

I really hope the FTC stays its hand on this one. Any action it might take against Zillow would impair social welfare by chilling efforts to produce valuable information.

Information is costly to create, is easily transferable, and can be consumed without being depleted. Its creator, who bears all the costs of the information production, can’t capture all the benefits the information provides. Accordingly, information tends to be underproduced.

The Internet has ameliorated this problem to some degree. By publishing their creations on the Web, information producers can capture more benefit from their creative efforts. The benefit may be advertising revenue or, as in the case of bloggers, the psychological benefits associated with having more people read one’s ideas. This means that more information is likely to be produced, which is generally a good thing. Of course, much of the information on the Web is of limited value because it’s unfounded or affirmatively false. But “consumers” of free Web information are on notice that “you can’t believe everything you read,” and reputational considerations do a pretty impressive job of punishing websites that provide misleading information.

Any effort by the FTC to “enhance” the market discipline imposed on Zillow will likely chill the creation of information. Zillow–which doesn’t charge a penny for its “Zestimates”–has been very straightforward concerning the limits of the information it provides (see, for example, here and here). If it can get busted for amalgamating accurately compiled public data and providing its compilations along with a caveat about their reliability, then all sorts of information entrepreneurs are at risk. And as the risk of liability increases, the creation of information will decrease, to the detriment of society in general.

FTC: Please don’t “protect” us this time!

The Law Blog asks “Will the Grasso Ruling Reverberate in Corporate Boardrooms?” The post includes the following quotes from some “executive pay gurus” via Business Week:

• H. Rodgin Cohen, Sullivan & Cromwell: “The precedent-setting issue here: a CEO’s duty to inform the board fully about his or her pay and the board’s duty to learn those details. Pay formulas are so complex today that even sophisticated directors can’t figure out the bottom line.”

• Nell Minnow, co-founder and editor, The Corporate Library: “The important part of the ruling is what it says to directors. It’s a wake-up call that they have to do the math [on CEO pay packages], and ask tough questions. And more important, give tough answers — like ‘No, that’s too much.’”

• Muriel Siebert, Muriel Siebert & Co., first female member on the NYSE: “I feel sorry for Dick. He did a good job. But that money was egregious. You don’t join a non-profit and expect to be paid like that. Did the compensation committee do their homework?”

The first two quotes are in reference to the most notorious holding of Judge Ramos’ opinion: “Mr. Grasso’s duty is to be fully informed [regarding the $100 million plus balance in his SERP account] and to see to it that the Board was fully informed. He failed in this duty. . . . That a fiduciary of any institution, profit or not for- profit, could honestly admit that he was unaware of a liability of over $100 million, or even over $36 million, is a clear violation of the duty of care.”

Although the case’s precedential strength is questionable (a lower court decision applying New York non-profit corporation law), my guess is that it will impact boardroom behavior, in part given the media attention it has received. Directors and officers have little incentive not to take the holding seriously—they don’t pay the bills for having compensation consultants and lawyers better paper the file regarding executive compensation, their corporations do. Conversely, they are potentially personally liable if they are found to have breached their fiduciary duties. Whether the additional thrashing of the waters will lead to lower CEO compensation is another question, but it will certainly generate additional professional fees. Heck, investment banks could start selling executive compensation fairness opinions.

I had a wonderful time at the First Annual Conference on Empirical Legal Studies. I presented this paper on the consumer welfare effects of shelf space contracts and commented on Keith Hylton and Fei Deng’s comprehensive empirical analysis of relationship between the scope of competition law (102 different countries) and the intensity of product market competition. The conference, by all accounts, was a resounding success. Congrats to Bernie Black and the conference organizers for putting together such a well-run event with a great set of papers. Here are ten quick post-conference thoughts and ramblings (below the fold):

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Following up on this post, the October issue of Institutional Investor has an article entitled Pipe dreaming (no link available). The article acknowledges the bad reputation of PIPE deals (a reputation enforced by recent articles in the W$J (see here) and NYT (see here)) and then notes:

Pipes are becoming a reliable capital-raising tool for the most respectable companies. Through August of this year, U.S. issuers raised $19.3 billion in 866 Pipes deals . . . . Indeed, money raised through Pipes in the first half of 2006 equaled 28 percent of the proceeds of public secondary offerings, up from 15.3 percent in 2004.

The article gives an example of a $138 million PIPE deal completed in May by Pacific Ethanol:

The Fresno, California-based company completed the transaction in two weeks, a big improvement over the six to 12 weeks that a follow-on offering would have taken, says CEO Neil Koehler. “There’s real value to being first to market with new ethanol plants,” he explains. Consequently, Pacific was happy to do the deal at a 10 percent discount to its public valuation.

So not all PIPEs are “toxic converts” or “death-spiral financings.” Many are efficient and flexible ways for companies to raise capital. According to the article, today only about 2% of PIPE deals can be classified as death-spirals.

I needed a catchy title, to compete with Mann’s title below.  I could find no way to work “crack whore” into my title, however.  But I figured mentioning Robert Monks – shareholder activist qua shareholder primacy radical – would have a small bit of the same impact.  (Mind you, Robert Monks is a very very GOOD thing, while crack whores are very very BAD.  Mentions of either, however, perk up some ears!)

Nowicki’s Interaction With The Famous:  I was lucky enough to meet Robert Monks (of the “full page ad in the WSJ chastizing the Sears board of directors” fame) a few weeks ago at a conference at Columbia Law School.  Robert Monks is the man who spearheaded a surge of shareholder activism dating back . . . to at least the 1980s.  He was critical in the movement to activate institutional investors to exercise their power.  I am currently reading “A Traitor to His Class,” which provides an overview of Monks’s rise to fame and his innovative ways to better corporate governance.  The book is great – consider reading it.

I mention Monks, however, because meeting him and looking further into his beliefs gives me concern about the future of corporate governance.  Specifically, at the Columbia conference, I was on a panel addressing the role/achievements/failures of attorneys as Gatekeepers.  My fellow panelists – Professors Robert Gordon, David Wilkins, and Charles Silver, David Boies, and Justice Jack Jacobs – all proffered wonderfully insightful and sophisticated comments as to what lawyers were doing or failing to do as Gatekeepers and why.  My unsophisticated comments were limited to the observation that shareholders of “Corp. X” should sue outside counsel for Corp. X for fiduciary duty breaches when the outside counsel fails miserably at its job in working for those shareholders (due to too much blind deference to executives, the failure to act with due diligence, etc.).  I figured that that would create a fire under outside corporate counsel.
Now, I assumed that my pedestrian comments were the embarrassment of the conference, and I cannot say that I would have expected otherwise, given that scholars of high repute such as Larry Ribstein appear to have little use for litigation as a corporate governance strategy.  I am often alone in my chants of “sue the bastards,” and I expected to be similarly alone at the Columbia conference.  (I used the phrase “sue the bastards” b/c that phrase is so often bandied about pejoratively.  I apologize in advance to Gordon Smith, hierophant of profanity usage in the academy, and I reserve the right to cut my offensive language if needed.)  I failed to account for Robert Monks, however.
Mr. Monks, who was on the very last panel of the day at the Columbia conference, publicly agreed with my position (thus making my year), and he spoke at length about the need for more aggressive action and/or demanding scrutiny in the area of gatekeeping in general.  His comments were outstanding, but they made me think hard about his position, my position, and the next 20 years.
If part of the way to get directors to step in line, part of the way to get lawyers to step in line, and part of the way to get fund managers in line is to sue them, can we have any reasonable hope for meaningful change in the next 20 years?  Remember that Mr. Monks did a lot of what he did with his own money.  He utilized the courts and the proxy solicitation system to agitate for better corporate governance, and he failed a whole lot.  (I say that with admiration.  As we well know, it is the folks who are most ambitious and active who fail the most, simply as a matter of mathematics.)  Despite the existence of various shareholder advocacy groups, the reality is that being a shareholder advocate will not generate wealth with the least possible effort, *and* often it requires a long view.
Go back to my position that suing outside corporate counsel for fiduciary duty breaches should be useful in forcing lawyers like Vinson & Elkins (ala Enron debacle) to . . . do a better job of gatekeeping.  Yet one does not see a slew of lawsuits against big-firm corporate lawyers for breaching their fiduciary duty to shareholders of the corporation that they serve.  I imagine we do not see a slew of these suits b/c (a) lawyers do not like to sue lawyers (which is a view that is now being questioned by the wonks in the area, of which I am not one), (b) the courts have proved painfully protective of lawyers, (c) lawsuits against lawyers on related matters (but based on different legal theories, please note!) tend not to go far (recall how exciting Klein v. Boyd was. . . before it disappeared), and (d) plaintiffs’ lawyers who work on contingency are more likely to take cases that are easier to win (which plaintiff will pay out of pocket to underwrite a few unsuccessful fiduciary duty cases in order to test the system?).  Moreover, courts have proved to do a fairly mediocre job with fiduciary duty cases, such that there is a high risk for creating a track of bad precedent.
I have no answer – I just raise the question.  And I further muse on the question of whether we will ever more often see investors in funds sue the fund managers for breach of fiduciary duty (by failing to be activist shareholders).  Mercer Bullard, correct me if I am wrong, but those cases are not often brought, yes?
I am reaching blindly into the recesses of my brain, and I vaguely recall a recent case in which attorneys’ fees were paid by the corporation (in a derivative action) to the LOSING plaintiff qua shareholder’s counsel for having brought an important issue to public attention, despite the loss in court.  Maybe that is the way to get the plaintiffs’ bar to go out and look for these cases.
P.S.  It is good to be back.  Thanks to all of you who e-mailed and called to see why I had disappeared.  Oh, wait, NOBODY e-mailed or called to see why I disappeared.  Rats.

P.S.S.  I’m still worried about that “crack whore” comment.  You got what I meant, right?  I mean, I wasn’t saying anything BAD about Robert Monks – I am a huge, huge fan of his. . . .

Fred Tung highlights Wal-Mart’s new strategy of selling a month’s supply of 300 different generics for $4, noting that Target will match Wal-Mart’s prices but Walgreens and CVS will not. Isn’t competition grand? Well, not everyone is convinced that low prices for consumers is a good thing.

Unsurprisingly, for instance, this strategy has not gone over well with smaller pharmacies who have much to lose from increased competition. A BNA Health Care Report (HT: David Fischer) notes that “community” pharmacists are planning to ask state AGs to investigate whether Wal-Mart’s $4 generic program is designed to avoid state predatory pricing laws. John Rector, the senior VP and general counsel of the National Community Pharmacists Association, accused Wal-Mart of introducing the program in states (now expanded to 14) without predatory pricing laws.

Wal-Mart has been a popular issue for legal scholars, see e.g., this symposium at UConn, Thom’s post on outsourcing, and this post from Gordon Smith which mentions in passing that a JLR search of Wal-Mart produces 5799 documents!  While I realize that Wal-Mart “the phenomenon” provides fodder for legal discussion across many areas of substantive law, the antitrust issue seems to be picking up traction. The above-mentioned symposium, for instance, includes a panel entitled “Breaking Up the Big Box: Trade Regulation and Wal-Mart.”

I have written in this space before about the unconvincing antitrust case against Wal-Mart. This suit against generics appears to fall in the same category as the general lament against competition and low prices appearing in Barry C. Lynn’s essay in Harper Magazine (to which I respond in this post): “Breaking the Chain: The Antitrust Case Against Wal-Mart,”

“to defend Wal-Mart for its low prices is to claim that the most perfect form of economic organization more closely resembles the Soviet Union in 1950 than 20th century America. It is to celebrate rationalization to the point of complete irrationality.”

The notion that low prices can form the basis of any reasonable argument for an antitrust attack on Wal-Mart is laughable. Of course, antitrust does allow for the remote possibility that predatory pricing strategies allow a firm to use low prices to drive out rivals and recoup monopoly profits in the future. But such consumer welfare losses are not only generally unlikely, but especially improbable in a retail segment characterized negligible barriers to entry and consistently low profit margins. Further, the empirical contradicts this theory at every turn. For instance, Jerry Hausman and Ephraim Leibtag’s econometric analysis of the impact of Wal-Mary entry on consumer welfare suggests that Wal-Mart brings enormous gains to consumers.

At the end of the day, these complaints are transparent. They are not about consumers. They are not about protecting competition. And they are certainly not about efficiency. These are complaints about the competitive process itself. My response to Lynn’s call to arms to use federal antitrust law to level an attack on Wal-Mart designed to equalize distribution chain bargaining power seems equally applicable to private actions under state antitrust law against low priced generics:

The antitrust attack against the retailer that has been a boon to consumers is incredibly misguided because it invokes the wrong tool (antitrust law) to engineer a market structure that will certainly harm consumers without any meaningful benefits. The Antitrust Feds ought to leave Wal-Mart to its consumer welfare increasing ways and focus on endeavors that are more likely to help consumers than hurt them.

The current SSRN top tens for corporate, corporate governance, and securities law are after the jump. (more…)

In a post over at Co-op, Dave Hoffman wonders why so many in the blogoshpere are publicly outraged by Jeff Skilling’s 24-year sentence, but not, seemingly, by similar-length sentences for drug crimes.  Larry and Christine Hurt (hers is the fifth comment down on Dave’s post) deftly handle the response.

As I noted a while back:

there is a huge and under-appreciated difference, even — yes, it’s true — in the business world, between the bad behavior of private individuals and firms and that of the government.  Among other things, the former is generally localized, susceptible to economic pressures, and, quite often, ambiguous in its effect.  The latter is far-reaching, corruptible, difficult to constrain, and largely immune to economic limits.  And these are just the utilitarian concerns.  These differences are all-too-well appreciated in other contexts (and I often find myself in embarrassing agreement with the crackpots on left-wing radio who fulminate against the exercise of excessive state power when it comes to wire-tapping, war-making, the drug war and online gambling), but here, where the social costs are so enormous, there is naive belief in the government rather than skepticism.  It’s outrageous.

The social costs I refer to here are those attributable to over-deterrence of risky, innovative, entrepreneurial behavior.  In point of fact, although I find sentences for minor drug crimes to be outrageous, as well, I seriously doubt that the social consequences of over-deterrence loom as large.  (But if Dave thinks public criticism of one requires public criticism of the other, he should now feel satisfied, right?)

The problem in the drug war context is quite different, at least for me.  Given a social (or at least government) policy of deterring drug use, perhaps draconian sentences are required and appropriate (given the difficulty of deterrence).  But I happen to think the policy itself is idiotic and the practice shouldn’t be deterred in the first place.  In that sense, I think punishments for drug use are approximately infinitely too large.  But there’s little sense in quibbling over the length of sentencing and optimal enforcement policy given my priors.  

The same doesn’t go for corporate fraud:  It should be deterred.  The question there, however, is how to do so optimally, given the staggering social costs of over-deterrence; the risk of self-aggrandizing, politically-motivated, error-prone prosecution; and the reality of pretty good, existing agency-cost controls.  Was Skilling’s prosecution, conviction and sentencing here optimal from a deterrence standpoint?  I doubt it, and so do many others.

So Skilling’s sentence is problematic not only because, as Larry points out, it is probably disproportionate to the actual crime (which I take it is the point Dave wants to see the rest of us make about drug prosecutions), but also and primarily because the costs of excessive prosecution are so large.

(I hasten to add that the costs of the drug war are also large and socially wasteful.  But I think almost all of the waste in the drug war comes not from over-deterrence (although that probably causes some social harm) but from the misdirected costs of prosecution.  Which seems like a relevant distinction to me.)

UPDATE:  Christine expands magisterially on her comments to Dave’s post.

In January, Washington, D.C. will join the nearly 500 cities nationwide that have thwarted the free market’s accommodation of heterogeneous preferences and have ordered private property owners to forbid their invitees from engaging in otherwise legal behavior. I am speaking, of course, of Washington’s forthcoming smoking ban.

The Washington Post was gracious enough to permit me to explain on its website why I think this is a bad idea. A longer version of the argument — which should be wholly familiar to regular TOTM readers — is here.

(By the way, TOTM’s policies permit this sort of shameless self-promotion.)

Since 1997, the SEC’s Manual of Publicly Available Telephone Interpretations has been available online (see here). It is also searchable on Westlaw (see the FSEC-MISC database). The manual contains a bevy of interpretations of various SEC regulations. As to legal status of these interpretations, the manual states as follows:

The responses discussed in this manual do not necessarily reflect the views and policies of the Commission or the Division of Corporation Finance. These responses are not rules, regulations, or statements of the Commission. Further, the Commission has neither approved nor disapproved these responses. The responses discussed in this manual do not necessarily contain a discussion of all material considerations necessary to reach the conclusions stated. Accordingly, these responses are intended as general guidance and should not be relied on as definitive. There can be no assurance that the information in this manual is current, as the positions expressed may change without notice.

Nonetheless, securities practitioners routinely rely on manual statements in large part because it provides the only “authority� on the minutiae of various securities regulations. This is similar to widespread reliance on SEC no-action letters notwithstanding SEC pronouncements that no-action letters do not constitute official expressions of SEC views (for an excellent analysis of the legal status of no-action letters, see Donna Nagy, Judicial Reliance on Regulatory Interpretation in SEC No-Action Letters: Current Problems and a Proposed Framework, 83 Cornell L. Rev. 921 (1998)). And courts do frequently defer to interpretations reflected in no-action letters, although Professor Nagy argues automatic deference is inappropriate.

So what about the legal status of manual interpretations? My quick research found nothing definitive on the issue. While nine SEC releases and twenty-eight no-action letters cite the manual, only a single judicial opinion does. Should manual provisions be viewed the same as no-action letters? They seem less formal than no-action letters but, unlike no-action letters, are not addressed to a specific party under a backdrop of specific facts.

Those of us who defend the right to outsource are frequently criticized for lacking compassion and for being concerned only with the bottom line. I’ll admit that profitability concerns generally motivate decisions to outsource (and most other business decisions), but I won’t concede that outsourcing imposes a net harm on the economically disadvantaged. If we’re really concerned with alleviating the worst instances of poverty and are not focused only on protecting our own kind, we should support the right to outsource.

John Tierney makes this point in today’s NYT. Echoing comments of Michael Strong, the head of “a nonprofit group promoting entrepreneurship abroad,” Tierney observes that the evilest outsourcer of them all — Wal-Mart — can rightly claim to have done more than just about anyone else to alleviate the suffering of the poor:

Making toys or shoes for Wal-Mart in a Chinese or Latin American factory may sound like hell to American college students — and some factories should treat their workers much better, as Strong readily concedes. But there are good reasons that villagers will move hundreds of miles for a job.

Most “sweatshop� jobs — even ones paying just $2 per day — provide enough to lift a worker above the poverty level, and often far above it, according to a study of 10 Asian and Latin American countries by Benjamin Powell and David Skarbek. In Honduras, the economists note, the average apparel worker makes $13 a day, while nearly half the population makes less than $2 a day.

[NOTE: Powell and Skarbek discuss their study here.]

This is not to say, of course, that there are no “victims” of outsourcing. Some Americans lose their jobs. Others find they can’t command as much for their services because of cheap foreign labor.

Yet, that cheap foreign labor produces benefits at home — lower prices. Moreover, Wal-Mart’s job offerings are routinely oversubscribed (there are typically around ten applicants per open position — sometimes many more), suggesting that lots of workers think the jobs aren’t that bad.

This is not enough for many Wal-Mart critics, who maintain that consumer savings don’t justify the economic dislocation caused by Wal-Mart’s cost-cutting and, as Tierney explains, would “rather see Wal-Mart and other retailers paying higher wages to their employees, and selling more products made by Americans instead of foreigners.”

That position, though, is ethically suspect. In Tierney’s words:

[T]his argument makes moral sense only if your overriding concern is saving the jobs and protecting the salaries of American workers who are already far better off than most of the planet’s population. If you’re committed to Bono’s vision of “making poverty history,� shouldn’t you take a less parochial view? Shouldn’t you be more worried about villagers overseas subsisting on a dollar a day?

Indeed.

Prof. Bainbridge has announced that it is time to shift from a general interest, punditry-style blog to a more narrow focus on issues of business law and economics:

I plan to be more active over at Mirror of Justice, where I’ll blog about Catholic issues. And I may look around for a group blog to join for occasional pundity posts. But as far as day-to-day blogging goes, I’ve pretty much decided to rebrand ProfessorBainbridge.com by repositioning it as what it started out to be; namely, a niche blog focused on business law and economics. So I’ll be taking a brief hiatus while I start the rebranding process.

While I’m sure that many of Prof B’s readers will be disappointed from Steve’s exit from the punditry-style blogging game, this is an exciting development for the world of business law and economics blogging. The more” Blog Juice” devoted to these issues the better, right? I look forward to seeing the fruits of his rebranding efforts, and to future discussions of business and economics developments in the blogosphere.

Hanno Kaiser at Antitrust Review discusses the implications of Google’s acquisition of YouTube for the net neutrality debate. Hanno opines that the deal may increase the likelihood of a neutrality result even without legislation. While Google’s public pro-neutrality stance is well known, GMU’s Tom Hazlett (my office neighbor and fellow UCLA Economics alum) has a great column in the Financial Times highlighting the difference between Google’s “public policy” stance on net neutrality and its business model. Here’s Hazlett on Google’s now well-known position on net neutrality legislation:

The company became the leading champion of the hottest topic in technology policy over the past year, asserting that if web innovation such as theirs was to be retained, new laws were warranted. The specific fear was that internet service providers delivering last-mile broadband would shift their pricing strategies, charging not only end users for their connections but application vendors (say, search engines) for access to their customers. Worse, they might move into content and then favour their own web products over those of competitors. “Network neutrality� rules were needed, Google argued, because the architecture of the internet demanded it. That structure relies on traffic flowing freely over a network that is “open, end to end�.

But Hazlett points out that Google’s business model sends a different message — to the benefit of investors and consumers:

The internet lurches forward in spasms of business model discovery, as when Google figured out how to auction off search-targeted advertising slots, leaving banner advertisements behind. Today, Google’s absorption of its little video cousin is part of this jockeying for positions of competitive superiority. The internet really is not open – if, as Google hopes, it is doing it right.

Google has been doing it flawlessly – forging exclusive bargains nonpareil. Mr Vise [ed. -- author of "The Google Story"] declares the watershed business event in the company’s history to have occurred on May 1 2002 when its search engine was licensed to AOL. “Web properties that connected more than 34m subscribers . . . had a small search box on every page that said, ‘Search Powered by Google.’� To land this deal, Google extended to “AOL a very large financial guarantee�, including stock options. An ISP getting paid to feature a favoured search engine? What net neutrality would presumably end is what helped launch Google.

Very interesting. The Google story reinforces an important economic lesson that exclusive contracts are frequently part of the normal competitive process. Go read it.

I am becoming increasingly interested in the antitrust-related components of the net neutrality debate, and have heard the argument that antitrust law isn’t sufficient to handle the competitive problems implicated in this space. Specifically, I have read and heard the claim that Trinko renders Section 2 enforcement impotent to deal with the harm caused by these types of contracts. As I understand it, the primary competitive concern is the use of exclusive or exclusionary contracts (or exclusion of rivals via vertical integration) to the detriment of consumers. In other words, this is a conventional “raising rivals’ cost” story. Assuming this is an accurate characterization of the competitive argument for neutrality, there is much to be said for Section 2 enforcement here if it is agreed (and I have no reason to believe otherwise) that consumer welfare is the appropriate standard for evaluating potential restrictions on these types of contracts.

One obvious point is that the antitrust is designed to identify and distinguish pro-competitive from anticompetitive contracting. Agencies and courts have been doing this for a long time. There is hundreds of years of common law and agency expertise involved in tackling this tough problem. Obviously, antitrust enforcement is not perfect. And Section 2 is arguably the source of the most lively existing debate between antitrust scholars. But this is precisely because this task is so difficult. I’m skeptical that would-be neutrality legislation offers a superior alternative.

A second point is that the content of antitrust law imposes sensible boundary conditions on enforcement efforts. For instance, the firm making use of these contracts must have monopoly power in order to establish an antitrust claim. This is a critical boundary on limitations on exclusive contracting since we know that firms without market power frequently engage in these types of contracts, which are part of the normal competitive process. It is important for consumer welfare that we not chill this form of competition.

A related, are more pertinent point in this setting, is that antitrust law also requires that the contracts generate an anticompetitive effect. Because many exclusive contracts are pro-competitive, liability under Section 2 sensibly requires that plaintiffs demonstrate an anticompetitive effect. There are other conditions, but these two suffice to make the point for my purposes. While there are conditions under which exclusive contracts may harm competition, the conditions are narrow and sometimes difficult to distinguish from the normal competitive process. This is why the anticompetitive effect requirement is such an important component of enforcement efforts.

To be clear, I’m not suggesting there are no sensible reasons why neutrality advocates might prefer neutrality legislation to Section 2 jurisprudence (and specifically, Trinko). But my sense of the neutrality debate is that there has been insufficient attention paid to the role of exclusive and exclusionary contracts in the competitive process, as evidenced by Google’s AOL deal among many others in the same space, and harm to consumers sure to follow from a rule that prohibits these contracts. Economists have identified the necessary conditions for competitive harm via exclusionary contracts. The limitations offered by Section 2 enforcement are offered to enhance consumer welfare by ensuring that enforcement does not deter pro-competitive conduct. To my knowledge, and I readily admit that I am relying on descriptions of the legislation I have read, the proposed neutrality legislation is not concerned with these types of limitations and thus appears only to be interested “cheap talk” about enhancing consumer welfare.

The Unlawful Internet Gambling Enforcement Act of 2006 era has begun. Today, the first part of my online poker and football watching research and writing weekend was interrupted with this message on my computer screen:

The President of the United States has signed legislation that now causes PartyGaming to have to cease taking wagers from US customers. We will also suspend accepting deposits from US customers while we reevaluate our business model for the US and assess potential offerings to US customers that would be within the new law. This will not affect the Play For Free games and we will be seeking to provide additional products and services to our US player community. Non-US players and all Play For Free services will not be affected.

As Tom Bell notes, the Act excludes certain forms of intrastate, intratribal, or interstate horseracing gambling and cannot reach overseas financial services intermediaries (though Firepay will not currently allow payments by U.S. consumers for online gambling merchants). Ultimately, legal alternatives are likely to emerge to satisfy U.S. consumers.  In addition to Tom Bell’s post, Christine Hurt has been covering this legislation from the start (for example, here and here).