The DC Circuit has reversed the district court in the Whole Foods case.  The opinion is here.  [HT:  Danny Sokol]

As regular readers know, we have covered this case extensively on this blog, including most recently this great, lengthy post from Thom on the proper standard of review.  I wouldn’t be surprised if Thom is disappointed with the standard adopted by the DC Circuit in its appeal, and I look forward to his thoughts.

I’m sure all of us will have more to say about the case in due course.  For now I want to highlight one incredible aspect of the decision:  The claim that relevant market definition can turn on average or “core” customer effects.  Yes, throw out 30-odd years of antitrust economics and the very concept of the marginal consumer.  Here’s the court’s theory:  If a bunch of inframarginal consumers really like products X and Y but not similar-but-slightly-different-and-cheaper product Z, a merger between X and Y would enable the combined firm to gouge the inframarginal consumers, regardless of the effect on the marginal folks.  Sure the marginal guys will shop at Safeway if the price rises too much–but who cares?  There’s always a “core” of super premium and organic supermaket addicts to take advantage of–folks who just can’t resist all those free samples and faux-wood floors! 

OK.  Except–correct me if I’m wrong–if price discrimination were possible before the merger as well as after (and there’s no reason why this would change), the core folks were already being gouged!  Effective product differentiation may make the market price higher for a subset of goods–but this higher market price would prevail even with lots of competition. 

The court here claims that the real damage will occur in prices of perishables, because organic produce bought at a Whole Foods is qualitatively different than organic produce bought at Safeway, and this is what the core shoppers bought at the premium stores.  But if that were true post-merger, it would be tru pre-merger, as well, right?  There aren’t any merger-specific effects that I am aware of.  Again–correct me if I’m wrong–but I don’t think any of the evidence in the case suggested that there could be a significant non-transitory effect on the price of “PNO” produce.  Yes, some evidence suggests produce prices are higher at PNOS’s than at typical grocery stores, but is there evidence that the price could be even higher if Wild Oats exited a market?  The concurrence points to the FTC’s supposition that enough people would be diverted from Wild Oats to Whole Foods to sustain a 5% price increase, but I’m not sure that there was any evidence to support this claim (particularly since the FTC’s economist didn’t look at prices, but rather at profit margins).

Manwhile, if price discrimination is not possible, way more than 30 years of economics tells us that the seller will price to the marginal consumer–the ones who would decamp to Product Z if prices rise too much.  The claim here, however, is that, even if evidence indicates that Whole Foods and Wild Oats compete not only with each other but also many other stores, they are each other’s only competitor for some consumers.  Yes, Virginia, there are inframarginal consumers.  So what?  Did the court forget its Econ 101?  Profit is maximized where marginal revenue equals marginal cost.  Absent price discrimination, it’s a bummer the seller can’t capture the surplus from all those inframarginal shoppers, but profit is still maximized by pricing to the marignal consumer.  There is no reason (other than a new ability to price discriminate) that the post-merger entity would sacrifice profits by jettisoning the marginal shopper just to gouge its regular clientelle.   

Perhaps even more fundamentally–as we have pointed out on this blog before–the differential effect via price discrimination story (if true) suggests a far, far simpler solution:  Better relevant market definition.  If the inframarginal consumers at the grocery store are consuming radically different products than the marginal consumers, perhaps the relevant market is not “premium natural and organic supermarkets” but rather “organic foods,” for example.  In other words, perhaps the relevant market is the products being consumed, not the channel of distribution.  But I would guess that this market definition would have condemned the case from the start given Walmart’s extensive entry into this market, so it wasn’t in the cards. 

“But wait!,” you say.  Some people have idiosyncratic preferences.  They preferer buying organic tomatoes, zucchini and grapes from premium natural stores–it’s a combination, you see, not only of the food being consumed but also the channel of distribution.  These poor sots will be gouged without competition between Whole Foods and Wild Oats, because they don’t want to shop for produce at Safeway.  And Whole Foods without Wild Oats would easily overcharge these 17 or 18 people in any given market.

Yes, indeed.  One can always define a market by focusing on idiosyncratic preferences or product variations.  This is what Justice Fortas decried in his dissent in Grinnell:  

The trial court’s definition of the “product” market even more dramatically demonstrates that its action has been Procrustean - that it has tailored the market to the dimensions of the defendants. It recognizes that a person seeking protective services has many alternative sources. It lists “watchmen, watchdogs, automatic proprietary systems confined to one site, (often, but not always,) alarm systems connected with some local police or fire station, often unaccredited CSPS [central station protective services], and often accredited CSPS.” The court finds that even in the same city a single customer seeking protection for several premises may “exercise its option” differently for different locations. It may choose accredited CSPS for one of its locations and a different type of service for another.

But the court isolates from all of these alternatives only those services in which defendants engage. It eliminates all of the alternative sources despite its conscientious enumeration of them. Its definition of the “relevant market” is not merely confined to “central station” protective services, but to those central station protective services which are “accredited” by insurance companies.

There is no pretense that these furnish peculiar services for which there is no alternative in the market place, on either a price or a functional basis. The court relies solely upon its finding that the services offered by accredited central stations are of better quality, and upon its conclusion that the insurance companies tend to give “noticeably larger” discounts to policyholders who use accredited central station protective services. This Court now approves this strange red-haired, bearded, one-eyed man-with-a-limp classification.

Tailoring market definition to inframarginal consumers who may be willing to pay more than market prices for certain product characteristics is neither sound economics nor sound antitrust doctrine.

Stay tuned.

UPDATE:  A great post from Manfred Gabriel at Antitrust Review makes much the same case.  A couple of really good parts:

Maybe I shouldn’t be surprised by this. But the passage does more than accept that, given the difficulties of economic analysis, we can supplement it with some common-sense heuristic insights to come up with markets. This approach seems to undermine the acceptance of the theoretical foundations of economic analysis. 

* * *

I read this to mean that the “practical indicia” have become the trump card to beat economic analysis.

* * *

The only economic evidence of price discrimination between core and marginal customers cited in the opinion is the fact that Whole Foods stores enjoyed lower margins (not prices!) in cities where they competed with Wild Oats stores. One would have hoped for a discussion of how Whole Foods identifies core customers (the ones in Birkenstocks, perhaps?) and manages to charge them higher prices than the marginal customers (in wingtips and high heels).

An interesting new paper by Ferri and Maber entitled Say on Pay Vote and CEO Compensation: Evidence from the UK has recently been posted on SSRN. Here’s the abstract:

In this study, we examine the effect on CEO pay of new legislation introduced in the United Kingdom (UK) at the end of 2002 that requires publicly-traded firms to submit an executive remuneration report to a non-binding shareholder vote (”say on pay”) at the annual general meeting. Based on a large sample of UK firms over the period from 2000 to 2005, we find no evidence of a change in the level and growth rate of CEO pay after the adoption of say on pay. However, we document an increase in the sensitivity of CEO cash and total compensation to negative operating performance, particularly in firms with excessive compensation in the “pre” period (2000-2002) and in firms with high voting dissent. To assess whether the results are driven, respectively, by other governance changes in the UK or global trends in the CEO labor market, we use a control sample of UK firms not subject to the new rule (within-country test) and a control sample of US firms (between-country test). These tests confirm the increase in sensitivity of CEO cash and (more weakly) total pay to negative operating performance. Our findings are consistent with widespread calls for less “rewards for failure” that led to the legislation’s introduction and may be of interest to regulators and investors who are pondering the merits of a similar rule in the US and in other countries.

New Institutional Economics: A Guidebook (Brousseau and Glachant eds., CUP 2008) is available.  HT: Peter Klein.  This looks like a wonderful collection of papers and a must-have resource for those interested in NIE, law and economics, or institutions more generally.

My colleague Tom Hazlett (George Mason University) has a characteristically thoughtful and provocative column in the Financial Times on the recent Clearwire joint venture and what it tells us about the “innovation commons” and current public policy debates such as network neutrality, spectrum property rights, and municipal wi-fi. Here’s an excerpt:

Clearwire-Sprint-Intel-Google-Comcast-TimeWarner-McCaw blasts away barriers to broadband and a flock of public policy myths. Stories about the coming era of municipal wi-fi, the obsolescence of property rights to radio spectrum and the desperate need for “net neutrality” fall to pieces. For years these tales were spun from the triumphal assertion that the “innovation commons” of the post-internet economy changed everything. The “Chicago School” tools to prosperity – establish property rights, deregulate, let market competition rip – were dusty relics of a bygone era.

So broadband was a crummy cable-DSL duopoly, and local governments’ wireless networks would fix that. Mobile telephony was a crummy oligopoly, and more unlicensed spectrum – as used for wi-fi and cordless phones – would fix that. And to protect it all, the internet’s “open end-to-end” environment needed some regulatory muscle: rules prohibiting discrimination by internet service providers, control freaks who, left to their grabby impulses, would increasingly squeeze customer choices. Network neutrality rules would fix that.

But here’s “New Clearwire”. The chief advocates of muni networks are shelling out to build private networks, instead; the lobbyists for more unlicensed spectrum are paying to purchase licensed spectrum; the champions of net neutrality are getting preferential non-neutral customer access by buying the internet service provider…. New Clearwire tells us that a “fully-open, third pipe” has arrived in the broadband market – and their corporate network, crafted with exclusive spectrum and preferential access, and gobs of private capital — will deliver it. That, truly, is a great leap forward. Thank goodness for the “innovation commons”. The Chicago School could not have said it better.

There’s been a bit of discussion about the “most destructive” decision that is good law around the blogs, e.g. here and here, in response to John McCain’s criticism of Boumedine calling it “one of the worst decisions in the history of this country.” The line of discussion led me to think about the titular question. Antitrust law has the fairly odd feature that lower court decisions are overturned at a fairly low rate. There are a handful of SCOTUS reversals of old, “bad” precedent, e.g. Leegin overturned Dr. Miles, State Oil overturned Albrecht, Independent Ink overturned the rule that a patent holder was presumed to have market power in tying cases (my analysis here). In fact, prior to Leegin, the SCOTUS had been routinely reversing some bad prior precedent with little discussion (compare the reaction to Leegin to the unanimous State Oil decision on Max RPM in 1997 in which there was zero talk of stare decisis!).

On the other hand, consider that some of the classic “infamous” antitrust cases are still good law. Bad cases are left to die a slower death, whittled away indirectly by subsequent cases over time. The phenomenon hasn’t gone unnoticed by commentators. Milton Handler argued that the merger opinions of the Supreme Court as well as nearly all pre-1980 rulings could not “be taken at face value” though “none have been expressly overruled.” Examples are not hard to find. The most obvious examples are in merger cases, and probably nowhere more evident that vertical mergers. Robert Bork has noted: “the connoisseur of bad antitrust opinions must take into account Fortner I, Utah Pie, Sealy, Schwinn, Procter & Gamble, Von’s Grocery, and many others.” There are also the exclusive dealing cases finding liability with tiny foreclosure rates. Not to mention Jefferson Parish, which I’ve argued (along with others) is ripe for reversal.

Let me first defend the titular question against an obvious objection. One typical response to this sort of question about the Supreme Court’s outdated and discredited antitrust jurisprudence is that outdated precedents are of little important to modern antitrust enforcement because they would not be prosecuted in today’s agency-centric enforcement regime. Therefore, the argument goes, it simply does not matter whether these decisions are overturned or left alone to accumulate dust. Indeed, a prominent antitrust commentator emailed me this precise response to my student note on the Von’s Grocery which made an empirical and legal case for overturning that decision (Vons Grocery and the Concentration-Price Relationship in Grocery Retail, 48 UCLA L. Rev. 743 (2001) — sorry, unavailable on SSRN).

Without more, this response strikes me as incomplete and inadequate. Most antitrust claims involve at least the possibility of state and private enforcement even if can trust that the agencies would never bring such nonsensical claims. Indeed, federal interpretation of the Sherman Act can significantly influence enforcement at the state level. Further, allowing “bad” cases to stick around can cause other sorts of havoc. Take the existence of Jefferson Parish or the patent holder market power rule reversed by Independent Ink. I believe both caused significant social welfare losses in terms of both deterring efficient business practices and litigation costs. So what’s my answer? My instinct is that the agency-centric nature of merger enforcement does at least minimize (but not eliminate) the social costs of failure to reverse cases like Vons, and so to look elsewhere despite the fact that I would like to see the Supreme Court take a merger case to clarify some important areas and clean house a bit. My best guess is that the Jefferson Parish decision is probably the worst remaining culprit on a consumer welfare basis as it interferes with all sorts of efficiency enhancing marketing and distribution efforts. The practice is prevalent in the modern economy, and there is an economic consensus (see also here) on the view that tying is generally pro-competitive and that a per se approach (even a “modified” one) is inappropriate. For now, I’ll stick with Jefferson Parish.

What would be the first antitrust decision that the Supreme Court should overturn?

Available here.

First from McCain, who first claimed that there was “strong evidence of a link between vaccines and autism” and now has since revised his position acknowledging that there is no scientific evidence supporting such a link and emphasized his support for autism research.  See also Overlawyered, and here, and here.   Obama has made similar references to the vaccine link and underlying science.   More recently, Savage with a few dreadfully ignorant and attention-seeking claims (the link is to the NY Times post, not to Savage … here is an alternative link).   Here is more on how the discredited theory has been kept alive.

Wow…:

GSA officials were asked recently to reassess the total cost of donated items in what the agency called a routine audit.  “In doing so, it was determined that some of the unit costs were ‘eaches’ and others were ‘for-case’ lots. The final adjustments reveal there was a significant overstatement in the total asset valuation,” GSA officials reported to FEMA, which released the findings Monday.  For example, each spork was assigned the value of an entire case, inflating the original estimated value of the supplies a thousandfold to $36 million from $36,000. Packs of toilet paper originally estimated to be worth $1.5 million dropped to about $18,000, and plastic cutlery kits, from $6.3 million to about $25,000.

“The actual total value of the surplus property was determined to be approximately $18.5 [million], and this figure was validated by both FEMA and the GSA Office of Personal Property Management,” FEMA told CNN in an e-mail.  GSA spokeswoman Viki Reath said Monday she would investigate whether it is unusual for the agency to make such a large accounting mistake … . The agency told CNN in February that the value of the FEMA items was about $85 million.

The August issue of the Antitrust Source will feature several short contributions from lawyers, judges, professors, and economists in the antitrust community suggesting some recommended reading (a book, scholarly article, or judicial opinion) for the transition team members of the new administration.  A preview of my submission appears below the fold:

(more…)

Professor Bainbridge sees an interesting tension in the successful initial hiring at the UCI Law faculty:

Liberals like Chemerinsky say that affirmative action is necessary so that a school can “look like” the community it serves. In this case, however, it seems to be okay with just about everybody that Chemerinsky’s law school doesn’t reflect the ideological diversity of Orange County so long as it looks like the liberal academy. The sad thing is that prominent conservatives like Pushaw and Eastman seem to have accepted the state of things.

I’m the first to admit that the ideological bent of the academy is not entirely the result of discrimination against conservatives (although God knows that exists), but I also think law schools need to do a better job of conducting broad searches that have a reasonable chance of kicking up qualified conservatives.

Chemerinsky claims he’s doing such a search, but the proof will be in the pudding.

Brian Leiter lists the starting faculty with links to the press release here.

David Glenn brings us the latest in the filesharing dispute.  HT: Peter Klein, who says sensible things about the newest, and ugliest piece of the controversy:

Strumpf suggests that Liebowitz is pressing the issue so zealously because Liebowitz’s center at UT-Dallas receives funding from the RIAA and “other commercial interests,” a charge I find shockingly inappropriate and unprofessional. (Anyone who knows Liebowitz can attest to his zeal on a number of unpopular issues, such as his defense of QWERTY and his attack on the Boston Fed study of mortgage discrimination.)

I don’t know the primary sources well but one gets the definite impression that Oberholzer-Gee and Strumpf are being less-than-fully candid about their work. Their defenses against various critics (not only Liebowitz) seem weak and unconvincing. Overall, this episode reminds me of the Card-Kreuger controversy over the minimum wage: an empirical paper finds the opposite of what everyone expects and makes a big splash, but the authors don’t have a solid explanation for their findings, there are questions about the data and methods, and specialists aren’t convinced by the results. My conjecture is that in this case, like the minimum-wage episode, the spashy result will not stand the test of time.

I share Peter’s view that the Strumpf allegations about Liebowitz are remarkably unprofessional.  This is especially true given the consensus view that many of Liebowitz’s critiques have gone unanswered (Glenn writes: “in several cases, the authors have not replied to Mr. Liebowitz’s criticisms, either in public or in Mr. Strumpf’s referee report”).  The leading alternative theory to Strumpf’s concerning Liebowitz’s interest in the topic, is as Craig Newmark puts it, “maybe he’s just upset that a 40+-page lead article in one of the profression’s top journals has serious errors.”  Indeed.  Glenn’s article is worth reading.  It contains a nice summary of the “summer sales” test and I also learned that the OS paper “grandfathered” out of the new Journal of Political Economy policies on replication.

The following email from Henry Manne takes up our previous discussion of the future of law and economics (available here in downloadable form) and is published with permission. I’ve inserted a few links where Manne references a few blog posts responding to our earlier discussion. With that said, here is Manne:

It is a little disappointing that there has not been a larger debate stirred up by our efforts, but that may tell us something about the level of interest either in L&E or in what happens in law schools today. Frankly I think I would put my money on the latter explanation. I think the entire legal education enterprise has become so politicized and ideological (and you know in which direction that leans) that there really are comparatively few law professors, especially among the younger ones, who even identify with the problem we were discussing. They don’t even know that law schools not too many years ago were intellectual wastelands. They still are, but the field is ersatz social science instead of doctrinal law.

That is what more and more leads me to regret losing the old approach of lawyers teaching doctrine to would-be lawyers. At least they did a creditable job of that. And incidentally I think Solum is too parochial when he asserts that there is no social justification for that approach to law. I think Hayek’s defense of common law is just that and very powerful.

There may be room for Solum’s PhD idea, but I do not think it will be occur
in the law schools (Harvard and Michigan and Stanford would never forego the training of practicing lawyers). His third possibility, the mixed interdisciplinary law school is the model that I think we have already seen won’t work, if for no other reason than the low quality of the non-law discipline scholarship. (His model of universities as a market for truth instead of a more traditional market just won’t fly unless he can adduce some far different evidence than I have seen.) The other blog, discussing engineers and physicists does nothing more than repeat the problem in an
analogy which is far from perfect. Engineers, unlike lawyers, do not have much choice of careers after graduation, and woe be unto the bridge builder whose ends don’t meet - unlike the would-be philosopher kings among self-described L&E scholars, who don’t know one end from another.)

Having said all that I want to warn against predicting the future in anything as chaotic as our universities. I don’t think there is much that is systematic in any not-for-profit organizations, and the problems are just compounded in our universities. One really good charismatic academic entrepreneur could do more to set the tone of future law schools than anything we have discussed. But whether such a person will ever exist and what he or she will look like I have not a clue.

Program is here (HT: Spontaneous Order).  Attendees and presenters include Coase, Cheung, Tullock, Demsetz, North, Peltzman, and many others.  The conference is from July 14th-18th.

Dan Drezner raises the plausible possibility that the real reason for the objection of some 8% (101) of the full-time faculty to the Milton Friedman Institute at the University of Chicago, which we blogged about earlier here, is “grounded less on ideology and more on an effort to ensure these departments get a bigger slice of the pie.”  HT: Jon Adler.  The letter itself concedes that funding is a motivating factor for some dissenters:

Many of us are also perturbed that other units of the University that routinely engage the issues that the Friedman Institute is designed to address were not included in the planning, nor included in the ongoing core scholarly endeavors of the Institute….

Still others believe that, given the influx of private contributions to the MFI, the University now has the opportunity to provide roughly equivalent resources for critical scholarly work that seeks out alternatives to recent economic, social, and political developments.

And for more support for Drezner’s theory, he points out that: “the modal department affiliations of the petitioners are Anthropology, East Asian Languages, English, History, and Political Science.”

In my prior post, I noted that “I’m particularly interested to know whether any members of the University of Chicago Law School signed this or alternatively, have publicly supported the Milton Friedman Institute.”  Well, from the list of signatories, we can answer the first question.  None from the law school.     But what about the lack of public support?  I’ve seen a few economists come out in defense of the Milton Friedman Institute, e.g. Steve Levitt, but nothing so far from Chicago’s law school faculty unless I’ve missed it.