Elizabeth Warren (Credit Slips) points to an interesting empirical study by Agarwal, Liu, Souleses, and Chomsisengphet (”ALSC”) which examines consumer credit card selection in a natural experiment setting in which a card company offers two cards to consumers: (1) a high interest rate, no annual fee card and (2) a low rate card with an annual fee. The results?

• About 60% of consumers get the decision right with the benefit of hindsight
• 40% do not make initially select the right card
• Many of these initial errors are subsequently corrected as a result of consumer card switching, while ALSC report that “a small minority of consumers persists in holding substantially sub-optimal contracts without switching.”

Warren (also check out the comments to the post) asks whether “these data support the notion legal policy can be shaped by the presumption of economic rationality, or do the data support a call for more regulation?” Warren’s answer: is more regulation in light of what she describes as the “staggering” 40% error rate. Professor Warren writes:

Would it help to frame the policy question is from the provider angle? What’s the point of offering two different products, except to hope that the number of consumer who get it wrong will exceed in dollar volume the number who get it right. Or, from an informed consumers’ perspective, perhaps the optimal system is one in which they make good decisions and hope for cross-subsidization from less-clever consumers who help keep credit cards highly profitable and easy to use in a variety of settings (e.g., grocery stores, cabs, pizza deliveries, etc.). I realize it is heresy in many circles to ask if consumers should have fewer choices. But at some point the empirical studies about high error rates bring into question the assumptions that underlie the claim that more choice is always good.

Heresy was not the first thought that came to my mind. Though I admit I am not quite sure what Warren has in mind in terms of undermining the claim that more choice is always good. Nonetheless, I don’t think this study undermines those assumptions at all. Quite the contrary, actually. While the burden of proof is on Warren and others advocating more regulation here to demonstrate that less choice would improve consumer welfare, not only does this study not satisfy the burden, I think a reasonable interpretation of the results cuts the other way. The results suggest that consumers making credit card contract decisions behave rationally, the initial error rate is not strong evidence of consumer irrationality in light of relative costs and benefits of card switching, and the error costs are very small.

A little context is necessary to make the case for this interpretation of the data, as well as the reporting of some key results in the ALSC paper that Warren does not discuss in her post but shed light on the question of consumer rationality in the credit card market. In light of these findings, discussed below the fold, I think it is pretty clear that these findings support a standard economic model of credit card borrowing. (more…)

A project I am working on, and will blog about in the near future, has got me thinking about the following question which I would like to pass along to our readers and my co-bloggers for their thoughts:

What, if any, are the truly pathbreaking contributions to economic analysis of law in the last twenty years?

To be clear, I do not mean good or even important contributions to L&E. Rather, I mean contributions that have or are likely to transform the field or the application of economic thought to a particular subject area (think: Coase and The Problem of Social Cost, Becker on economic analysis of crime, Calabresi on the Cost of Accidents, Manne on Insider Trading, etc.). Is it too early to identify these? Are the L&E trails already blazed such that only marginal contributions (which can be very important but are less likely to be pathbreaking in the sense meant here) are left? Are any post-1986 contributions already “pathbreaking”? Which ones? Be specific! Include the author(s), title(s), and the spirit of the contribution. I’ll return to this topic later on and share my own thoughts then.

Is the retail customer willing to pay for customer service?  Gaggles of books have been written on the topic of customer service, and those books sell based on the belief that customers *care* about customer service.  But do they?  Do we?  Do I?

The idea that somehow customer service matters to the customer is not complex nor uber-creative.(The smarter, funnier, nicer Professor Nowicki dabbles in the topic.)  But does it *really* matter?  Seemingly, it does matter, according to a recent article (to which I cannot link b/c it is on Cornell’s server):

Virtually all Americans (94%) say customer service is an important factor in selecting where to buy goods and services. And 78% say it is a “very important” factor. In fact, at the “very important” level, customer service outweighs price: 61% of Americans say price is a “very important” factor in
deciding where to spend (compared with 78% who said customer service is “very important”). (Overall, customer service is as important as price — 95% of Americans say price is important, and 94% say customer service is important.) Even in the midst of holiday-shopping pressures, 82% of Americans say they are likely to spend more money this holiday season at stores where they receive better service.
I find it hard to believe, however, that customer service really, really matters.  Exhibit A:  Many friends of mine think Wal-Mart’s customer service is not particularly good.  But those friends still shop at Wal-Mart because it is cheap.  Exhibit B:  The closest coffee store to the Law School has employees who have not yet once smiled at me or said “thank you.”  I usually get to overhear internal quibbling while I wait at the counter, hoping someone notices me and is willing to take a pause to wait on me.  Yet I *still* go to that coffee shop because it is the closest one to the Law School.

Perhaps Wal-Mart’s perceived mediocre service is part of their calculus.  Perhaps Wal-Mart has calculated how particularly mediocre they can become before the savings to customers in dollar value is outweighed by customer frustration with mediocre service and customers therefore stop shopping at Wal-Mart.

I guess I need to make my peace with questionable customer service.  I mean, I *did* just pay $5.40 for a fancy coffee served by a not-so-very-service-oriented person.  (Allow me to note that I worked retail since I was old enough to work.  And I waitressed for years.  So I know a bit about customer service, and what the “front line” employees have to tolerate.  Dealing with customers is a difficult job, to be sure, but it seems to me that the employees who do not like to deal with the public should at least make a small effort to conceal their contempt.  I did not want a happy dance from my coffee barrista this morning - I just wanted . . . a “thank you” or eye contact or a smile or a “enjoy” or something other than being ignored for a bit and then viewed with impatience.  Then again, does my $5.40 entitle me to pleasant service or does it only entitle me to a coffee?)

Ed Morrison (Columbia) has a great series of guest blogs at the always worth reading ELS Blog on a few research questions in bankruptcy and torts as well as a methodological entry. I am a little bit late with the link (his guest stint ended December 8th ), but I really enjoyed the posts. Here are the links:

Why are Small Business Bankruptcies so Rare?;

Propensity Score Matching; and More on Propensity Score Matching;

Do Consumers Want Insurance Coverage for Pain and Suffering? (proposing a diff-in-diff estimation strategy for answering this question based on California’s Prop 213);

and How Inefficient is Tort Law?

The Nowicki family Christmas dinner was tonight.  Michelle, the Nowicki family psychiatrist, said (to my FATHER, not me, the securities wonk)

“How do I know what stock to invest in?  I don’t follow the market.  I don’t watch the stock shows on MSNBC.  Jim Cramer – the mad money guy – all of that.”

After I convinced Michelle that I was credible, given my Wall Street background and my SEC background, I suggested she do two things:

1.  Think about products that SHE and likely the rest of the population need.  Lawn mowers, for example, are a good example of generally needed products.  How ’bout the company that makes ROOF sheeting?  How ’bout the company that makes . . . blinds!?  I suggested that my sister look around and look for companies that make products that are really, honestly, undoubtedly NECESSARY.

2.  Pull from the website of the relevant company the past couple of years’ worth of annual reports.  Take a look at “measures of success” – profit, earnings per share, stock price.  Ask “did the company do well over the past few years?  How has the stock done over the past decade?”

Chew over points one and two above.  Take your $3000 Roth IRA and invest accordingly.  Pay your sister qua financial advisor a small fee when you are wealthy.

SERIOUS POINT:  Joe Common Investor, or my sister, needs to avoid reading the WSJ or watching Squawk Box (etc.) for purposes of seeking “hot” investment tips.  Instead, look for a good, solid company, a fair assessment of the company’s use to the public, and a simple review of recent annual points.

The day-to-day drama of the market, about which I have before blogged, is not anything about which ye olde average investor should much care.  Instead, it seems that the more sensible thing to do is take a LONG view of products that have a LONGER-term, solid future.  Invest in companies in which it makes common SENSE to invest.  Unless you need to worry about cash in the short-term, I am not convinced that paying attention to what is currently “hot” and what is “not” is of the most value.    (Mind you, I am not an investment professional, nor am I giving advice for those who have less than … 20-30 years left to live.)

Airlines and Antitrust.

Kenneth Starr on Sarbox. The punchline:

Even the statute’s co-author, Rep. Mike Oxley, has conceded that Sarbanes-Oxley was hastily written and enacted. In its rush to “do something” about corporate scandals, Congress overstepped the bounds of its authority. It is time to call Congress back, both to help our economy and reaffirm that our constitutional system imposes clear limits on the government’s urgent desire to “do something.” Congress must be reminded that the “solution” is at times worse than the problem.

UDPATE: Ribstein comments on Starr’s constitutional case against the PCAOB.

Dan Markel at Prawfs has posted some reactions to D’Amato’s piece on The Interdisciplinary Turn in Legal Education.  It is an excellent post and well worth reading, as is D’Amato’s article.

Huh? This statement appears in this article by Professor Anthony D’Amato (Northwestern) on the failure of interdisciplinary scholarship in the legal academy. HT: Brian Leiter. Quite frankly, I was very surprised to see a claim like this in a paper written after 1970 or so. Even in corners of the academy hostile to economic analysis, antitrust is conventionally distinguished as a special case where economics is useful, typically along with some statement about the uniqueness of antitrust. D’Amato reserves no such special treatment for antitrust, criticizing that field in the context of a more general critique of what he describes as the “interdisciplinary turn” in the legal academy on three grounds:

First is the unlikelihood that the joint-degreed persons who join the law faculty will happen to be the ones that their colleagues will end up collaborating with. Second is the even greater unlikelihood that any given discipline can communicate usefully with another discipline. Third is the opportunity-cost factor: that the new interdisciplinary courses will crowd out an essential part of the legal discipline, namely, an understanding of the foundations and dialectical evolution of its forms of language.

Those who study antitrust might be surprised to read the claim that economics has not changed antitrust in any significant way. To give some context, this claim comes as part of D’Amato’s rebuttal case against law and economics as an example of successful interdisciplinary scholarship. D’Amato’s conclusion? Economic analysis earns a “gentlemanly C+” on its report card and claims of success are “misleading if not false.” The rebuttal case consists largely of claims that economic analysis has not been fruitful in many areas of law: contracts (see Eric Posner), torts, criminal law, and includes the statement that the Coase theorem “is hardly helpful to lawyers.” I admit that I found the argument about criminal law difficult to follow (it consists largely of a response to hypothetical examples of crimes that Richard Posner could have but apparently did not write and the obligatory mention of Posner’s comments on the potential benefits of a market in parental rights.

My disagreement is somewhat predictable, as someone engaged in law and economics. But I want to focus on D’Amato’s claim that economic analysis has not even been successful in areas that are “ideal for the division of labor between lawyer and economist,” like antitrust. D’Amato offers as support for the words in the title to this post the following analysis (p.65):

The focus on the quantitative aspects of antitrust — such as Robert Bork’s reductionism of antitrust to the goal of delivering the lowest prices to the consumer — has had a distorting effect on the field. The original impetus for antitrust legislation — combating an incipient fascist tendency of huge corporate combinations to overwhelm and run the government — seems to be an inconvenient memory for those who would like economic analysis to place a price tag on every legal value.

I respectfully dissent. I discuss an objection to D’Amato’s characterization of the antitrust endeavor and ten reasons to think that D’Amato’s claim in the title of this post are wrong below the fold.
(more…)

Do we know when the Law School rankings for 2008 are due out?  Just today, I was having a conversation with a colleague about z-scores and standard deviations and all that, and I found myself yearning to apply my mathmatical skills to the most recent information. 

Do we know what the due date is?

One of the more interesting parts of the November 29 DOJ/FTC hearing on loyalty discounts (where I presented these remarks) was the panelists’ discussion of a number of “propositions” advanced, for purposes of discussion only, by the agencies. Unfortunately, we didn’t have time to discuss all the propositions. I’ve reproduced them below the fold, along with my own thoughts on whether they’re sound. (Please note the agencies’ insistence that “[t]hese propositions are solely for the purpose of discussion and do not necessarily represent the agencies’ views.”) (more…)

My prediction that the Chargers would win it all last month is not looking so bad after the clinic the Bolts put on the Broncos yesterday to clinch the division. Of course, the big news in the game is that Ladainian Tomlinson broke the all-time single season TD record. For those who didn’t see the game, there was something that LT did that caught my eye right after he scored his record-breaking TD.  Immediately, LT motioned to his entire offensive line (and the rest of his teammates) to join him in the celebration, which they did, hoisting him up in the air in jubilation.  Whatever one thinks about the modern day NFL where players can devote significant time to dreaming up post-TD celebrations but can’t stay awake in team meetings or throw teammates under the bus in the media, for my dime nothing beats LT’s traditional celebration of giving the ball to the official without fanfare (a la Barry Sanders), high-fiving a few teammates, going back to the sideline, and acting like he’s been there before. In any event, most of the highlight shows are not likely to show LT’s team-based celebration of this honor, but his post-game comments capture exactly why Tomlinson may be the best the NFL has to offer in more ways than one:

“Once I got over the pylon, my initial thought process was to bring every guy on the offensive unit over to share that moment. When we’re old and can’t play this game anymore, them are the moments we are going to remember, that we’ll be able to tell our kids, tell our grandchildren. We can talk about something special that we did. We made history today. There’s no better feeling than to share it with the group of guys that’s in that locker room.”

Refreshing.

So it looks like Dr. Miles is going down. That’s a good thing.

For non-antitrusters, Dr. Miles is a 1911 Supreme Court decision holding that “minimum vertical resale price maintenance” is per se illegal — that is, automatically illegal without inquiry into the practice’s actual effect on competition. Minimum vertical resale price maintenance (or “RPM”) occurs when a manufacturer requires dealers who sell its product to charge no less than a set price for that product. For example, Ford might require its dealers to charge at least $30,000 for an Explorer.

Several theories have been asserted for why RPM is anticompetitive. Some complain that it interferes with dealer freedom. That’s a non-starter. Manufacturers could eliminate dealers altogether and sell their own goods directly, and they’ll be more likely to engage in such “vertical integration” if they can’t exercise meaningful control over how dealers promote and sell their products. It’s therefore in dealers’ interests to permit manufacturers to tailor the dealer relationship — a creature of contract — as they see fit. In any event, dealers would seem to benefit, at least as much as manufacturers, from minimum RPM. Dealers’ compensation is the difference between wholesale price and retail price, so the larger that difference, the greater their compensation. High fixed retail prices might cause total sales to fall, of course, but that would seem to impact manufacturers more adversely than dealers. (Unless they raise wholesale prices as well, manufacturers only suffer lost sales from supracompetitive retail prices; retailers, by contrast, at least make more money on the smaller number of sales that do occur.) In short, theories of dealer harm are unconvincing.

More promising theories of anticompetitive harm have focused on RPM’s potential to facilitate the creation and enforcement of cartels. It might, for example, make it easier to form and enforce dealer-level cartels. Given the strict rules against horizontal price-fixing, it’s tough for competing dealers to agree on a fixed price. If they can get the manufacturer to dictate that price, formation of the cartel is easier. Moreover, the manufacturer could enforce the cartel by punishing dealers who depart from the minimum price. Dealers might therefore pressure manufacturers to mandate minimum resale prices. On the manufacturers’ side, minimum RPM might facilitate a manufacturer-level cartel by decreasing each manufacturer’s incentive to “cheat” by charging its dealers less than the agreed-upon wholesale price. If the dealers are unable (because of RPM) to pass a price cut on to consumers, then manufacturers won’t be able to sell more of their products to end users by lowering their wholesale price from the fixed level. RPM thus reduces their incentive to cheat on a price-fixing agreement in order to expand their output and increase revenues.

For an explanation of why these competitive concerns do not justify a per se rule against minimum RPM, see below the fold. (more…)

Dan Crane and Thom (who has promised more remarks!) have now both posted their prepared remarks for the Section 2 hearings panel on bundled discounts. Both call for bright-line, administrable liability rules for all forms of unilateral exclusionary conduct, and have important things to say about designing antitrust rules for bundled discounts. Both are worth reading in their entirety. Administrable rules that sensibly balance Type I and II errors are certainly an indisputably admirable goal for antitrust analysis and bundled discounts have proven to be a particularly tricky form of conduct for Section 2 analysis. Despite all of the agreement around here between Thom, Dan and I on the design of antitrust rules in a world of costly Type I errors, I think I have found a topic upon which I can at least offer a mild dissent (or at least a different perspective) regarding the usefulness of the analogy of various anticompetitive theories of bundled discounting practices to exclusive dealing.

The overlap between exclusive dealing and bundled/ loyalty discounts is frequently addressed by commentators, and is a topic of newfound interest in what has become the quest for a “holy grail’, one size fits all standard for Section 2 analysis of exclusionary conduct. At times, I detect a tension between the analysis of bundled discounts and exclusive dealing contracts which both purport to exclude exclude by depriving rivals from the opportunity to compete for distribution sufficient to support minimum efficient scale. For example, I discuss what I perceive to be a tension in Professor Hovenkamp’s very sensible analysis of bundled discounts and exclusive dealing in this post:

Hovenkamp concludes that adminstrative costs justify a predatory pricing-type rule in the context of for bundled discounts where the anticompetitive mechanism is de facto “foreclosure” or deprivation from distribution resources (i.e. shelf space) that would prevent rivals from achieving minimum efficient scale and extend the duration of monopoly by increasing barriers to entry. One would think that it would follow from Hovenkamp’s position that a predatory pricing-type rule would also be sensible for exclusive dealing and tying arrangements where the anticompetitive mechanism is the economic equivalent. To the contrary, Hovenkamp advocates rule of reason analysis (p. 201) for exclusive dealing and tying, noting that “foreclosure concerns can be assessed meaningfully only via the rule of reason” and that “the antitrust law of exclusive dealing,” which generally requires proof of substantial foreclosure as a necessary condition of competitive harm, “seems to be on the right track.”

The basic tension here is that the anticompetitive theories underlying both forms of conduct require foreclosure of a rival sufficient to deprive the opportunity to compete for minimum efficient scale. Of course, the pro-competitive side of the ledger differs. One might sensibly believe that the standard for the two forms of exclusion should be different because lower prices are inherently pro-competitive whereas exclusive dealing may not invoke the same immediate consumer benefits. This is certainly a sensible position. But it only suggests that the standard for bundled discounts ought to be more difficult to satisfy than the exclusive dealing standard given equal administrative costs and the same anticompetitive mechanism. This point is not sufficient to render the exclusive dealing analogy fruitless. I offer below some tentative thoughts on the usefulness of the exclusive dealing analogy to bundled discounts.

(more…)

Photo: Robert Laberge/ Getty Images.