FTC economist Malcolm Coate has posted Unilateral Effects Under the Guidelines: Models, Merits and Merger Policy to SSRN.  Here’s the abstract:

This paper models FTC unilateral effects merger policy using a broad sample of 153 investigations undertaken between 1993 and 2005. Standard unilateral effects analysis proposes a range of models for competitive effects. A review of the files suggests that half of the sample is evaluated with a dominant firm/monopoly model, while the bulk of the other cases use some form of generic spatial analysis. Bertrand and Cournot structures only appear potentially relevant in about a dozen cases each. Statistical modeling shows it is relatively easy to predict the outcomes of the investigations, using models based on either the full sample or a limited sample that excludes the two-to-one mergers. In addition to the standard structural variables (significant rivals, fringe competition, market leadership, and change in the Herfindahl), entry, performance evidence, and vertical variables significantly affect the probability of a merger challenge. Finally, the Bush administration had no statistically significant effect on FTC enforcement policy.

Coate’s work represents an interesting line of inquiry which examines internal FTC files to understand merger enforcement in practice at the agency.

Barak Richman (Duke) and James Blumstein (Vanderbilt) have an interesting exchange at PENNumbra, University of Pennsylvania School of Law’s online forum for debate surrounding scholarship in the U. Penn. L. Rev.  Here’s the abstract from Professor Richman’s article:

Courts reviewing proposed mergers of nonprofit hospitals have too often abandoned the bedrock principles of antitrust law, failing to pay heed to the most elemental hallmarks of socially beneficial competition. This Article suggests that courts’ misapplication of antitrust law in these cases reflects a failure to understand the structural details of the American health care market. After reviewing recent cases in which courts have rejected challenges to proposed mergers between nonprofit hospitals, it documents how courts have engaged in a faulty analysis that ultimately protects nonprofit hospitals from the rigors of standard antitrust scrutiny. It then identifies the core principles of antitrust law—preventing supracompetitive prices, optimizing output, and maximizing allocative efficiency—that have been absent from, if not violated by, the rulings in these merger cases.

And from Professor Blumstein:

The application of the antitrust laws to the health care industry reflects a challenge—a Kulturkampf—to a traditional culture that often has resisted the incorporation of economic considerations into its process of making decisions.

“[H]ow one thinks about an issue and the way an issue is framed shape the way one analyzes it.” In the health care arena, there are two different ways of thinking about the product and the industry—the traditional professional/scientific model and the market-oriented model.

The traditional professional/scientific model “reflects a response to perceived market failure”—an asymmetry of information between professional provider-experts and uninformed (and uninformable) patient-consumers. The response to this perceived market failure is that “professional providers, such as physicians, serve as substitute decision makers, displacing consumers.” In theory, decisions in this paradigm are based on science and are not influenced by economic considerations or financial incentives. Under this model, “economics and trade offs become marginalized in the policy debate,” as “[m]edical care . . . becomes an exclusively technical-scientific enterprise.”

The response of the market-oriented model to the lack of consumer information is not to substitute decision making by experts, but “to provide information and education,” with the “objective of public policy” being to empower consumers by “improv[ing] the flow of comprehensible information to consumers so that they can function better as consumers.” Experts such as physicians become expert-advisers in this paradigm, instead of autonomous substituted decision makers. The recent embrace of so-called consumer-directed health care is a market-based strategy that depends on better-informed consumers with better-aligned financial incentives.

In the battle of the paradigms, the mere use of the term “industry” (above) as opposed to “system” is an empirically and normatively loaded descriptor. “Use of the term ‘system’ suggests a social services delivery model,” which is consistent with the traditional professional/scientific paradigm. In order for the antitrust laws to apply to health care services, those services must constitute “trade or commerce.” The application of the antitrust laws to the health care “industry,” suggests that health care will “be policed through antitrust enforcement against anticompetitive conduct as are other economic sectors”—a position consistent with the market-oriented paradigm.

Enjoy!

See here (it’s from February, but I hadn’t seen it until it was forwarded to me today so it may be a waste of your time BW).

David Zaring cuts to the chase.

From the DOJ:

A federal grand jury in Oklahoma returned a one-count indictment today charging Kwik-Chek Food Stores Inc., a Texas-based convenience store company, and one of its agents, Jarrod “Judd” Thomas, with conspiring to fix the price of retail gasoline and diesel fuel sold in Antlers, Okla.  The indictment, filed today in the U.S. District Court in Muskogee, Okla., charges that Thomas, acting on behalf of Kwik-Chek, conspired to fix the prices of retail gasoline and diesel with competing retailers in Antlers. Kwik-Chek, based in Bonham, Texas, distributes and sells gasoline and diesel products at convenience stores located in Oklahoma and Texas, including two stores in Antlers. The indictment further charges that the conspiracy began at least as early as 2002 and continued until at least June 2007.

Finally, the example I use in antitrust class every year the of colluding gas retailers in a small town makes sense thanks to Mr. Jarrod “Judd” Thomas and co-conspirators!

I’ve avoided saying anything at all about the bailout because (1) I’m not an expert on banking, finance, etc. and (2) events are moving so fast I can’t keep up with the latest proposal. Nonetheless, since the bailout bill has just failed, this might be an opportune time to consider an alternative to the plan the House just rejected. The most intriguing alternative plan I’ve seen is that set forth by Havard Law’s Lucian Bebchuk in this paper (which was produced in record time!).

Bebchuk contends that the approach that just failed in the House is flawed in that (1) it doesn’t make adequate effort to ensure that distressed securities are bought at fair market value and thus amounts to a giveaway to financial institutions; (2) it doesn’t directly address the key problem — undercapitalization — but instead improperly ties capital infusion to sales of troubled assets; and (3) it doesn’t adequately induce the provision of private capital to financial institutions. Bebchuk proposes an alternative solution that would remedy these deficiencies.

Bebchuk begins by diagnosing the current problem (or at least summarizing the diagnosis made by the Treasury Department). The problem is that the financial firms have on their books troubled assets (mainly mortgage-backed securities) that are causing creditor runs and making it difficult for the financial firms to raise additional capital to carry out their role in financing the economy. Now, one would normally think that the holders of troubled assets could just sell them, albeit at a loss, for a price resembling their fundamental value (i.e., the discounted present value of their “hold to maturity” value). But the prevalence of these assets on the books of the institutions whose professional money managers are most likely to buy them (at prices reflecting fundamental value) actually prevents those institutions, and thus their money managers, from attaining adequate investor capital to make the trades necessary to get prices to the level of fundamental value. (In other words, we are in a “limits to arbitrage” situation.) The basic problem, then, is a lack of capital, and the primary purpose of the bailout is to use public funds to induce a level of trading that will turn these troubled securities into liquid assets. The trick is to do this while protecting taxpayers as much as possible.

Bebchuk contends that Treasury’s now-failed proposal — i.e., government will buy up to $700 billion of troubled assets at prices established through reverse auctions — was not the best way to go about pursuing the twin goals of liquidity creation and taxpayer protection. He maintains that the defeated proposal (1) would have given Treasury a power it shouldn’t possess, (2) would have denied Treasury a power it should possess, (3) did not adequately specify how government purchases should be made, and (4) would have failed adequately to exploit private sources of capital.

First, the failed proposal would have given Treasury full authority to buy troubled securities without requiring that the purchases be made at a price approaching fair market value (so, for instance, Treasury might pay $700 billion for assets worth only $200 billion — a giveaway of half a trillion dollars from taxpayers to financial firms). Bebchuk contends that “[t]his freedom to confer massive gifts on private parties is highly problematic. It should be constrained: the legislation should direct Treasury to buy assets at fair market value.”

But wait a minute. How are we ever to determine “fair market value” in a “limits to arbitrage” situation in which the trades that will reveal willingness-to-pay, and thus fundamental value, really can’t occur? Bebchuk answers by proposing that Treasury be provided a power it was not given in the failed proposal: the power to buy newly issued securities in financial firms. Bebchuk explains:

Authorizing the provision of capital in return for newly issued securities is far superior to authorizing, as the current draft does, the provision of capital through overpaying for troubled assets. To begin, taxpayers would be better protected; they would get adequate consideration for the capital they are providing rather than nothing at all, as under the Treasury’s plan which provides capital through subsidized purchases of troubled assets.

Furthermore, the direct approach would do a better job in providing capital where it is most useful. If the proposed legislation were implemented, capital would be inefficiently channeled, as the amount of troubled assets sold by firms would not necessarily be related to the amount of capital that they need and should get from the government. …

Some financial firms [that] would like to sell a substantial amount of financial assets to the government do not need a governmental infusion of capital; and, conversely, some financial firms would need a capital infusion but would not wish to make significant use of the government’s willingness to purchase troubled assets.

In addition to requiring governmental purchases to occur at fair value and authorizing governmental purchases of newly issued securities, an optimal bailout program should, Bebchuk argues, harness competition to ensure that assets (either troubled assets or newly issued securities) really are purchased at fair value.

Treasury has, of course, indicated that it would seek such competition by utilizing such devices as reverse auctions. Bebchuk, though, worries about collusion (or oligopolistic coordination): “[I]n situations in which assets [to be purchased] are owned by a concentrated group or by repeat players that can implicitly coordinate strategies, such auctions may produce inflated prices.”

Bebchuk thus argues instead for a system in which Treasury conducts its purchases “through agents with strong market incentives.” For example,

Suppose that the economy has illiquid mortgage assets with a face value of $1,000 billion, and that the Treasury believes that the introduction of buyers armed with $100 billion could bring the necessary liquidity to this market. The Treasury could divide the $100 billion into, say, 20 funds of $5 billion and place each fund under a manager verified to have no conflicting interests. Each manager could be promised a fee equal to, say, 5% of the profit its fund generates — that is, the excess of the fund’s final value down the road over the $5 billion of initial investment. The competition among these 20 funds would prevent the price paid for the mortgage assets from falling below fair value, and the fund managers’ profit incentives would prevent the price from exceeding fair value. … One could [even] consider taking the competitive idea one additional step: after a pool of candidates that pass threshold conditions in terms of expertise and lack of conflicting interest is selected, the selection could be based on [a] bidding process in which candidates would bid the profit percentage for which they would be willing to manage a fund.

Finally, Bebchuk contends that the government “should require financial firms that have substantial sub-optimal capitalization to raise capital through right offerings to existing shareholders.” In response to the argument that firms would do this on their own if it were in their interest to do so, Bebchuk offers two rejoinders:

To begin, … a ‘lemons’ problem — in particular, fear of negative informational inferences that the market may draw from a decision to make a right offering — might discourage a firm from doing so even if it needs capital. In contrast, when a rights offering is mandated by the government for a substantial set of firms, the market will not draw a negative inference about the managers’ private information from the existence of a rights offering. Furthermore, and importantly, the premise of the Treasury’s plan is that the existence of adequate capitalization in given financial firms has substantial positive spill-over effects on other firms in the economy. The existence of such effects might well make it desirable in the current circumstances to expand the capital available to financial firms even if financial firms’ existing shareholders would privately prefer not to do so in order to avoid diluting their earnings.

So what to make of all this? I’m still digesting it, but my initial hunch is that the first three prongs (limit purchase authority to fair value, authorize purchases of newly issued securities in the financial firms themselves, and set up a system for making purchases through properly incentivized agents) make lots of sense. The final suggestion seems quite heavy-handed and difficult to implement (which firms would be required to issue rights? how many? etc.). Fortunately, Treasury could adopt the first three parts of Bebchuk’s plan without the fourth. I’d probably also add some plan for ensuring that the government eventually divests itself of the equity stakes it takes in distressed financial firms. We really don’t want a People’s Republic of Wall Street.

Should be interesting to see what happens next.

From an excellent short article by Dan McInnis (Akin Gump) on the potential impact of the election on cartel policy in Global Competition Policy:

Antitrust policy has played little role in the election. Indeed, at least for cartel policy, there may be little to differentiate the candidates. Given that both U.S. political parties as well as the competition legal community view the DOJ’s law enforcement efforts against hard-core price fixing to be justified and highly successful, there should be no impetus for a major shift in direction in cartel cases. Nonetheless, only time will tell if a change of administration and personnel will bring change at the margins.

I suspect the stakes in the monopolization area here are the highest in terms of change, with mergers second and cartel enforcement last.  The whole issue is here.

From Peter Klein:

Over and over during the last week we’ve been told that unless Congress, the Treasury, and the Fed “take”bold action,” credit markets will freeze, equity values will plummet, small businesses and homeowners will be wiped out, and, ultimately, the entire economy will crash. Such pronouncements are issued boldly, with a sort of Gnostic certainty, a little sadness for dramatic effect, and only minor caveats and qualifications.

And yet, details are never provided. The analysis is conducted entirely at a superficial, almost literary, level. “If the government doesn’t act then banks will be afraid to lend, and people can’t get credit to buy a house or expand their business, and the economy will tank.” Unless we rescue these particular financial institution, in other words, a massive contagion effect will swamp the entire economy. But how do we know this? We don’t. First, we don’t even know if there is a “credit crunch.” Nobody has bothered to provide any empirical evidence. Second, even if credit markets are tight, how much does it matter? Any predictions about the long-term effects are, of course, purely speculative. Sure, borrowers like cheap and easy credit and tighter credit markets will leave some borrowers worse off. But what are the magnitudes? What are the likely aggregate effects? What are the possible scenarios, what is the likelihood of each, and how large are the expected effects? Where is the cost-benefit analysis? After all, the seizure of Fannie and Freddie, the takeovers of AIG and WaMu, the modified Paulson plan — the effective nationalization of the US financial sector, in other words — ain’t exactly costless. There are direct costs, of course, to be borne by taxpayers, but the possible long-term effects brought about by increased moral hazard, regime and policy uncertainty, and the like are enormous. Even on purely utilitarian grounds, the arguments offered so far are tissue-paper thin.

There is an interesting profile on Intel in the WSJ.   While the profile focuses on some of the technological and competitive challenges facing Intel and CEO Paul Otellini, the CEO mentions the proliferation of antitrust laws across the globe, and the uncertainty associated with regulatory costs in such an environment, as one of the major potential impediments facing the company:

“The problem is that there used to be one set of rules out there — U.S. antitrust laws were the de facto rules of the world. Now with globalization, we have different sets of rules for different regions, such as the EU, written around entirely different philosophies. It would sure make things easier if we decided on a single set of rules once again — whatever they are. Then we’d know how to behave and we could plan better for the future.”

If one reads Nellie Kroes’ recent speech on single firm conduct and effects-based analysis, one might be tempted to conclude that there is much more “convergence” or “agreement” in this area than their actually is in terms of the economic understanding.  The same is true for many speeches and articles that come out of the US side.  It is true that both jurisdictions care about the effect of a given practice on consumer welfare.  That is actually quite an achievement, but it would be misleading to call this convergence if, for example, the US and EU agreed only on the objective and never on the conditions under which certain forms of conduct would leave to negative and actionable effects.  Never is too strong a word.  The US and EU do agree about a few things in these areas.  But the real remaining (and significant) divergence in single firm conduct enforcement theory is not about labels such as consumer welfare or “effects-based” analysis.  Discussions and exchanges where the relevant parties repeat first principles about consumer welfare, protecting competition and not competitors, but reserve the right for healthy disagreement about a few controversial topics don’t advance the ball.  For example, if harm to a competitor is a sufficient condition for finding harm to competition in a single firm conduct case alleging exclusion, there is nothing more than a superficial convergence.  While slogans about convergence on first principles sound promising and quite reasonable, when these declarations simultaneously allow entirely different analytical philosophies to be applied to discounting or exclusive dealing without discussion of the details, an opportunity is being missed to help out folks like Otellini and others run a business with some degree of certainty that they are not running afoul of the law.

The true disagreement is about whether agreement on these first principles means anything at all if we don’t have some shared understanding of how to think through the economics analysis.  How much and what type of evidence is sufficient to show harm to consumer welfare under a given theory?  How should the social costs of false positives and negatives be weighed in the enforcement calculus?  How much empirical evidence supporting a formal theory of competitive harm should be present before making it the basis of antitrust policy?  These, I think, are more fundamental questions that could allow for a deeper and more meaningful convergence and a better understanding of the reasons for remaining divergence (including, for example, Chairman Kovacic’s hypothesis that the availability of private rights of action and treble damages in the United States is a root cause of a body of law that is more sensitive to false positives).  I hope that we see more detailed discussions of these differences, especially in the area of pricing conduct and exclusivity where there appear to me to be some real and significant differences in how both enforcement agencies and courts are approaching antitrust analysis.

[UPDATE: I misread Kroes’ speech in a rush.  As a loyal blog reader points out, Kroes was obviously referring to the European Commission’s release of its own report, not the Federal Trade Commission.  Oops.]. 

I’ve discussed some problems with the FTC statement in response to DOJ’s release of the Section 2 Report.  In particular, I criticized some of the anti-economic rhetoric in the FTC statement.  I wrote:

What really bothers me is  the Commissioners’ failure to consider, at least seriously consider, the evidence and engaging in this anti-economic rhetoric all while taking the DOJ to task for misstating the consensus….I consider these conclusions tentative, but I would be quite disheartened if I were an economist at the FTC in light of some of the anti-economic rhetoric in the Statement and elsewhere, as well as the fact that it attracted 3 out of 4 Commissioner votes.  In related news, I also suspect that this sort of anti-economic rhetoric significantly weakens the ability of our agencies to persuade international competition agencies to engage in serious “effects-based” analysis.

That last sentence was just speculation.  Of course, everybody says they are doing “effects-based” analysis so it is difficult to tell when any progress is made on this front.  It will take some time before we know the impact of this scuffle, if any, on international efforts to increase convergence with respect to monopolization law. Perhaps the worst possible outcome is that the FTC and DOJ announce completely divergent approaches to Section 2 enforcement.  Interestingly, Nellie Kroes recent (September 25) speech at Fordham, amongst other things, hints at the release of a separate Commission report [JW: The European Commission, not the FTC … I misread this].  Perhaps this wasn’t a secret.  Kroes noted that the DOJ Report “together with the Commission’s own forthcoming document” would “provide a vital opportunity to debate serious issues underlying enforcement policy in unilateral conduct.”

The potential release of a separate FTC report strikes me as an interesting development. The original FTC statement noted a few examples of disagreement with the DOJ Report.  Will the new FTC Report be a comprehensive treatment of the FTC’s view of Section 2?  Will monopolization enforcement depend on which agency is involved?  That can’t be what the agencies had in mind when they kicked off the Section 2 hearings.  At the opening of those hearings, then Chairman Majoras noted that:

[D]isagreement among competition authorities about how to treat unilateral conduct produces uncertainty in national and world markets, reducing market efficiency and imposing costs on consumers.

I’m fairly certain the aim of that statement was European and other international competition agencies.  But it takes on quite a different meaning in light of the recent inter-agency developments in Section 2 enforcement.

To his friends on the left on accepting and understanding the role that regulation has played in the current financial mess despite calls to chalk the whole thing up to knee-jerk ideological deregulatory policies.  Greg Mankiw also calls out Senator Obama for offering a distorted version of history in the Presidential debate.

available here.

From the 8-K:

On September 22, 2008, American International Group, Inc. (“AIG”) entered into an $85 billion revolving credit facility (the “Credit Facility”) and a Guarantee and Pledge Agreement (the “Pledge Agreement”) with the Federal Reserve Bank of New York (“NY Fed”).

The Credit Facility has a two year term and bears interest at 3-month LIBOR plus 8.5%. The Credit Facility provides for an initial gross commitment fee of 2% of the total Credit Facility on the closing date. AIG will also pay a commitment fee on undrawn amounts at the rate of 8.5% per annum. Interest and the commitment fees are generally payable through an increase in the outstanding balance under the Credit Facility. Borrowings under the Credit Facility are conditioned on the NY Fed being reasonably satisfied with, among other things, AIG’s corporate governance.

AIG is required to repay the Credit Facility from, among other things, the proceeds of certain asset sales and issuances of debt or equity securities. These mandatory repayments permanently reduce the amount available to be borrowed under the Credit Facility.

The Credit Facility contains customary affirmative and negative covenants, including a requirement to maintain a minimum amount of liquidity and a requirement to use reasonable efforts to cause the composition of the Board of Directors of AIG to be satisfactory to the trust described below within 10 days after the establishment of the trust.

Under the agreement, AIG will issue a new series of perpetual, non-redeemable Convertible Participating Serial Preferred Stock (the “Preferred Stock”) to a trust that will hold the Preferred Stock for the benefit of the United States Treasury. The Preferred Stock will, from issuance (i) be entitled to participate in any dividends paid on the common stock, with the payments attributable to the Preferred Stock being approximately, but not in excess of, 79.9% of the aggregate dividends paid on AIG’s common stock, treating the Preferred Stock as if converted, and (ii) vote with AIG’s common stock on all matters submitted to AIG’s shareholders, and will hold approximately, but not in excess of, 79.9% of the aggregate voting power of the common stock, treating the Preferred Stock as if converted. The Preferred Stock will remain outstanding even if the Credit Facility is repaid in full or otherwise terminates.

Pursuant to the Credit Facility, AIG is required to hold a special shareholders meeting to amend its restated certificate of incorporation to increase its share capitalization and to lower the par value of its common stock in order to permit the conversion of the Preferred Stock into common stock. Once this amendment is effective, the Preferred Stock will be convertible at any time into 79.9% of the shares of common stock outstanding at the time of issuance.

AIG is required to enter into a customary registration rights agreement that will permit the NY Fed to require AIG to register the Preferred Stock and the underlying common stock under the Securities Act of 1933.

The Credit Facility will be secured by a pledge of the capital stock and assets of certain of AIG’s subsidiaries, subject to exclusions for certain property the pledge of which is not permitted by AIG debt instruments, as well as exclusions of assets of regulated subsidiaries, assets of foreign subsidiaries and assets of special purpose vehicles.

The public comment period has closed and the N-Data settlement has been approved by a vote of 3-1 with Chairman Kovacic voting against (his earlier dissent is here).  I think is a sleeper candidate for one of the most important antitrust events of the year as it potentially signals a remarkable expansion of the Commission’s Section 5 Act.  You can read the public comments on N-Data here.  Bruce Kobayashi and I (in this paper) have criticized the decision on a number of grounds, most importantly the adequacy of alternative state contract and federal patent remedies to mitigate patent holdup problems coupled with the potential for significant welfare losses in the form of allowing antitrust remedies (including private follow-on and state litigation) when we extend antitrust liability to breach of contract or even good faith modifications.

I was reading an article last week about the SEC temporary ban on short-sales and came across the following quote:

Short-selling can contribute to efficiency while adding liquidity to the markets. But a recent wave of the maneuvers — profiting by selling unowned shares of companies in the anticipation their prices will drop — has been blamed in part for the demise of venerable investment firm Lehman Brothers and other big financial companies.

There appears to me to be a growing trend towards a lack of acceptance of personal responsibility (which I’m witnessing more and more over time in the classroom, by the way).  While I know they aren’t blaming the collapse of Lehman Brothers entirely on short-sales, let’s get it straight.  The executives, managers, and decision-makers at Lehman Brothers are responsible for the demise of Lehman Brothers.  Yes, short-selling may have marginally accelerated the inevitable collapse in stock price.  Yes, Alan Greenspan may have aided this mess with almost three years of historically aggressive expansionary monetary policy.  That being said, the people at Lehman Brothers freely made their bad decisions.  Lehman Brothers is responsible for the demise of Lehman Brothers.  Let us not forget that.