Several people, including Josh, have drawn my attention to John Hasnas’ excellent op-ed on the Sotomayor nomination in the WSJ last week.  Just in case you don’t read the same blogs I do, I thought I’d highlight it here.  It is brilliant.  Here’s a taste:

One can have compassion for workers who lose their jobs when a plant closes. They can be seen. One cannot have compassion for unknown persons in other industries who do not receive job offers when a compassionate government subsidizes an unprofitable plant. The potential employees not hired are unseen.

One can empathize with innocent children born with birth defects. Such children and the adversity they face can be seen. One cannot empathize with as-yet-unborn children in rural communities who may not have access to pediatricians if a judicial decision based on compassion raises the cost of medical malpractice insurance. These children are unseen.

One can feel for unfortunate homeowners about to lose their homes through foreclosure. One cannot feel for unknown individuals who may not be able to afford a home in the future if the compassionate and empathetic protection of current homeowners increases the cost of a mortgage.

In general, one can feel compassion for and empathize with individual plaintiffs in a lawsuit who are facing hardship. They are visible. One cannot feel compassion for or empathize with impersonal corporate defendants, who, should they incur liability, will pass the costs on to consumers, reduce their output, or cut employment. Those who must pay more for products, or are unable to obtain needed goods or services, or cannot find a job are invisible.

The point, derived from Bastiat, is extraordinarily powerful, and, as Hasnas notes, the lesson is as important for economists as it is for judges (and for everyone else).  Making decisions on the basis of only the most visible effects of behavior under scrutiny is always a recipe for bad decision-making.  I’d also add that taking advantage of the relative obscurity of broader effects is the essential root cause of the depredations of politics and politicians, who never miss an opportunity to demagogue about a favored interest or idea to the exclusion of the (usually far greater) broader and longer-term effects.

Someone should write a book about the importance of this one idea.

If you haven’t been living under a rock recently, you’ve seen an incredible amount of hand wringing–and proposed regulation–around “excessive compensation.”  I’m a little too lazy to amass all the relevant links here, but both the administration and the congress are introducing regulations/bills and talking about the issue extensively.

Commentators, too, have gotten in on the act, and one of the most respected, Alan Blinder, has recently penned a much-lauded WSJ op-ed on the topic, titled, “Crazy Compensation and the Crisis.”  The op-ed is well-written, and even makes some good points.  Here’s an excerpt I can get behind:

What to do? It is tempting to conclude that the U.S. (and other) governments should regulate compensation practices to eliminate, or at least greatly reduce, go-for-broke incentives. But the prospects for success in this domain are slim. (I was in the Clinton administration in 1993 when we tried — and failed miserably.) The executives, lawyers and accountants who design compensation systems are imaginative, skilled and definitely not disinterested. Congress and government bureaucrats won’t beat them at this game.

I might disagree with the emphasis–I would say that even if government could be successful at regulating pay practices it shouldn’t do it, but the point is certainly a good one.  Blinder is also right on when he notes the benefits in this regard of partnerships over public corporations, a persuasive point Larry Ribstein has been making for a long while.

But the premise of the op-ed–and a lot of corporate governance talk these days–strikes me as problematic, incomplete and revisionist.  Here’s a key bit:

Take a typical trader at a bank, investment bank, hedge fund or whatever. Darwinian selection ensures us that these folks are generally smart young people with more than the usual appetite for both money and risk-taking. Unfortunately, their compensation schemes exacerbate these natural tendencies by offering them the following sort of go-for-broke incentives when they place financial bets: Heads, you become richer than Croesus; tails, you get no bonus, receive instead about four times the national average salary, and may (or may not) have to look for a new job. These bright young people are no dummies. Faced with such skewed incentives, they place lots of big bets. If tails come up, OPM will absorb almost all of the losses anyway.

The op-ed has been cited favorably by commentators ranging from the predictably-tiresome-and-unlikely-to-know-better (Frank Pasquale) to the informative-but-reflexively-pro-regulation (James Kwak) to the always-interesting-and-not-normally-in the-company-of-the-likes-of-Frank-Pasquale (Marc Hodak).

But it strikes me as shocking that Blinder (and his supporters)–who expresses surprise as well as dismay at the extent to which compensation schemes reward the upside so heavily and induce risk-taking–doesn’t even mention Agency Theory.

While Blinder may be surprised that corporate boards have been making such silly mistakes for so long, I would think that every professor or finance, corporate governance, corporate law, securities, and a few other disciplines besides would know that one of the fundamental problems of the corporate form is aligning risk-averse managerial interests with risk-preferring, diversified, shareholder interests.  Remove insider trading and short-selling from the equation and you’re left with potentially-large stock options and other forms of performance-based, deferred compensation.  Which have been lauded and paraded around for years as the salvation of entire industries.  So before we stare in amazement that firms are engaging in these sorts of compensation schemes (schemes that may lead to huge upside paydays, and even some large downside paydays, as well) perhaps we should understand the basic theory behind such behavior–as well as the raft of empirical studies supporting the theory.

Look–this isn’t to say that there might not be problems.  Efforts to align incentives may be out of whack, of course–only a fool would presume perfection on the part of market actors.  But only a greater fool would grant the government the power to control compensation schemes, and do so without acknowledging that there are incentive alignment problems; that there are agency costs; and that firms–to say nothing of broader markets–are complex entities not amenable to easy political solutions.  Alan Blinder should know this, and while his restraint is admirable (at least now–I guess he was more ambitious when he was in the Clinton administration) this is just fodder for the corporate governance revisionists who act like agency theory doesn’t exist and only criminals and greedy bloodsuckers design (and receive) executive compensation schemes.  (Actually, come to think of it, once the government starts setting corporate pay, this will almost be true!  I kid, I’m kidding.  Mostly).

Addendum: I should note two more things.  First, I was being a bit flip.  Blinder is clearly (and appropriately) sensitive to the agency problem of the separation of ownership and control inherent in compensation committees’ paying executives with shareholders’ money.  The problem I have is in the failure to acknowledge that there is another agency problem to deal with:  It is too facile to solve the one without concern for the other.

The second point I should make is that Marc Hodak, at least, among the op-ed’s fans, understands the agency problem, and shouldn’t be tarred with my criticism.  His citation to Jensen & Murphy’s “It’s not How Much You Pay, But How” article reflects exactly this concern–the focus should be structuring compensation to account for various agency problems, not blithely limiting its size.  The irony (to answer, I think, Marc’s riddle) is that Jensen and Murphy noted that, at least in 1990, all else equal, the size of executive compensation seemed low.  Again–the real concern was/is with appropriate structure, but at the end of the day, appropriate structure would, I think, for Jensen and Murphy in 1990, have resulted in higher payouts.  Blinder and, to name a few others, Obama, Barney Frank and Chuck Schumer, don’t seem to see it this way at all.

A few blog posts that caught me eye today:

• Justin Wolfers with an accessible explanation of the identification problem with broadband usage data
• WSJ: The rumored EU remedy for the “new” Microsoft browser case — requiring the firm to distribute its product with “a so-called ballot screen that would present a new computer user with a choice of browsers to install, and the option to designate one of them as a default” — appears to erroneously equate the consumer choice or increased variety (measured at a particular point in time) with consumer welfare
• Everybody should read Tom Smith
• Want to advertise on one of Brian Leiter’s blogs?
• RIP UCSD’s Clive Granger

The FTC joined the DOJ brief in American Needle v. National Football League arguing that the Supreme Court should deny certiorari.  The brief characterizes the question presented as:

Whether NFLP, the NFL, and the teams functioned as a “single entity” when granting the company an exclusive headwear license and therefore could not violate Section 1 of the Sherman Act, 15 U.S.C. 1, which requires proof of collective action involving “separate entities,” Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752, 768 (1984).

Here’s the FTC announcement:

The Federal Trade Commission has joined the U.S. Department of Justice in filing an amicus brief in the U.S. Supreme Court in the matter of American Needle, Inc. v. National Football League, No. 08-661 (U.S. S. Ct.). The case involves allegations that the NFL’s exclusive licensing agreement restrained trade, in violation of Section 1 of the Sherman Act, and unlawfully monopolized trade, in violation of Section 2 of the Sherman Act.

The joint amicus brief, which can be found on the FTC’s Web site and as a link to this press release, urges the Supreme Court to deny certiorari in this case, in which the U.S. Court of Appeals for the Seventh Circuit upheld a district court’s summary judgment in favor of the NFL and its separately owned teams on the ground that they function as a “single entity” when licensing and marketing their logos and trademarks under an exclusive licensing agreement with Reebok International Ltd. The brief concludes that the case does not merit Supreme Court review because of an absence of a split among the courts of appeals and because it does not present an appropriate vehicle for ruling generally whether a sports league and its member teams should be deemed to function as “single entity.”

The law and economics of RPM have been a frequent topic of discussion here for Thom and I especially, ranging from the empirical evidence on RPM, to competitive resale price maintenance without free riding, to the inappropriate use of the term “price-fixing” by journalists some who should know better to describe RPM,  to the Commission’s recent musical instruments investigation, and of course, Leegin.

Thom’s latest entry into the RPM wars deserves a close read by all who are interested in this subject.  Dr. Miles Is Dead, Now What?  Structuring a Rule of Reason for Minimum Resale Price Maintenance is now available in published form in the William and Mary Law Review (SSRN version available here).  Thom crafts a rule of reason approach to for evaluating RPM in a Post-Leegin (for now!) world.  Thom, I hope that you’ll be submitting this for the record to the FTC hearings.  My testimony at the FTC hearings took an approach very similar to Thom’s in attempting to structure a rule of reason inquiry around the available theory and evidence on competitive effects of vertical restraints and RPM specifically.

In any event, as the RPM battles rages on (and I hope it does, as the consumer welfare upside for the pending legislation is likely negative in my view), Thom’s article is worth the investment.

I have been asked a few times today to opine, as a corporate and securities law scholar, on President Obama’s nomination of Judge Sonia Sotomayor for the Supreme Court.  (Cnn.com has a couple of quotes reflecting my thoughts.)

I have three main comments:

First, this is a pivotal time in American securities and corporate law jurisprudence.  Any appointment to the Supreme Court has the potential to significantly influence the evolution of corporate and securities law.  The Supreme Court has recently granted certiorari for a couple of big-ticket securities and corporate law cases, and there is every reason to believe, particularly in light of the SEC’s recently announced rulemaking and Senator Schumer’s recently proposed Shareholder Bill of Rights Act of 2009, that the Supreme Court will continue to handle important business matters like these in the near future.  Federal preemption, Securities and Exchange Commission rule-making authority, corporate governance reform, damages, and the reach of federal securities laws are all incredibly important topics that are certain to come before the Supreme Court in the next few terms.

Second, it is difficult to gauge where exactly Judge Sotomayor falls on the spectrum of pro-management versus pro-investor jurists.  Is she a shareholder primacist, does she defer to the invisible hand of the market, does she interpret Section 10(b) of the Securities Exchange of 1934 broadly or narrowly?  These are questions to which Judge Sotomayor’s judicial writings provide no clear answers.  Sotomayor was nominated to the federal bench by President Bush, so one might have suspected that she would embrace ardent pro-management leanings.  However, the business and securities opinions she has penned have not evinced such a bent.  For example, she penned the Second Circuit’s relatively recent shareholder-friendly opinion in Merrill Lynch v. Dabit (a detailed summary of the case is available here).  Indeed, upon reflection, one recalls that Sotomayor was viewed as a less conservative Bush nominee (proposed by Moynihan) when she was appointed, and it was President Clinton who elevated her to the Second Circuit.  Yet Judge Sotomayor has dismissed numerous cases in favor of management despite her more liberal affiliations.

Third, Judge Sotomayor has a strong background in sophisticated corporate and securities law cases, as she comes from the Second Circuit, a jurisdiction that generates a significant number of these cases (given that Wall Street falls within the jurisdiction of the Second Circuit).  This bodes well, in that pundits often query whether Supreme Court jurists fully appreciate the complex business nuances arising in many securities and corporate matters.  That Judge Sotomayor has been both a district court judge and an appellate judge in a jurisdiction where these difficult business cases arise delights me, and I think she would add a valuable perspective on the Supreme Court.

Taking off the “corporate and securities law scholar” hat, and putting on the “Chair of the American Association of Law Schools Section on Women in Legal Education” hat, I can say that I am thrilled that President Obama has nominated a woman to the Supreme Court.  I was disheartened that Justice O’Connor’s seat was not filled by a woman, but I remain optimistic that someday the number of women on the Supreme Court will mirror, as a percentage, the number of women in the average law school entering class. 

Of course, given that, in the almost 30 years since a woman first ascended to the United States Supreme Court, we appear to have reached a plateau, with only two women serving at any one time over the past 16 years, perhaps my optimism is misplaced.  I remain optimistic nevertheless.

Available here.  An excerpt:

But wholesale rejection of the document — the most complete statement to date on the law and economics of Section 2 — because of disagreement with some of its positions is irresponsible and premature. And the rejection of specific conclusions from among the range of possibilities discussed in the report without any discussion of which other policy positions the DOJ would support, and why, severely undermines the intellectual efforts that the DOJ and FTC staffs put into the original report by summarily dismissing them. Instead, Varney asserts that the report “loses sight of an ultimate goal of antitrust laws — the protection of consumer welfare” — but cites no evidence. (And the report, for its part, mentions “consumer welfare” 31 times.) Meanwhile, the mere reference in Varney’s speech to the idea of returning to “tried and true” principles of Section 2 enforcement is meaningless, since no one knows what those are, and the whole point of the report was to define them. It is difficult to avoid the conclusion that the announcement dismisses the report and its intellectual bases simply because it was inconvenient to the agenda upon which the DOJ’s antitrust division is about to embark.

The NYT ran an unsigned editorial on “Intel and Competition” that, quite frankly, doesn’t make much sense to us.  It offers two basic arguments: (1) that the Bush administration DOJ is responsible for the state of Section 2 law requirement that plaintiffs demonstrate actual consumer harm, and (2) that foreign antitrust jurisdictions’ pursuit of enforcement actions against Intel’s loyalty rebates suggests that the failure of the Federal Trade Commission to do so is a failure of the Bush administration to enforce the antitrust laws to protect consumers.

Both arguments are wrong, but the first is either especially disingenuous or very confused.

The first mistake is evidenced by this confusing statement about the relationship between the tough standards imposed on plaintiffs under Section 2 and the Bush administration DOJ’s Section 2 Report:

In the Bush administration’s view, to get in trouble a monopolist must do worse than use unfair methods to undermine a competitor. Regulators must usually prove that consumers were directly hurt, typically through high prices. When the wrongdoing is to offer a client conditional rebates — meaning lower prices — that can be especially hard to prove.  That view of consumer harm is too restrictive. It often seems to ignore the fact that a dominant firm that uses unfair tactics to marginalize its rivals deprives consumers of choice, another form of harm. Without competitors there is no competition. Without competition there is no incentive for innovation, or to reduce prices.

The Obama administration has a different view. The Justice Department’s antitrust division has rescinded Bush administration guidelines intended to shield monopolies from antitrust accusations. The F.T.C. is also likely to be more active under its new chairman, Jon Leibowitz. He is already considering pursuing future antitrust cases with a little-used provision of antitrust law that directly outlaws unfair methods of competition. The American economy cannot thrive without antitrust laws. It is time to start enforcing them.

First, lets begin with the obvious point that “that view” of consumer harm is not just the Bush administration’s view bent to help out its monopolist buddies; its the law, developed over years, many of those years transcending the Bush administration and much of that development at the hands of Supreme Court and lower court judges from appointed by presidents from both parties.

Next, lets turn to another disturbing tension in this argument.  Lets get this straight: the NYT simultaneously laments the Bush DOJ’s failure to bring Section 2 cases (indeed, to enforce the antitrust laws altogether) and yet blames it for the state of Section 2 law.  Huh?  If they didn’t bring any cases, and didn’t move the law in any particular direction by inviting federal courts to interpret Section 2, how can the Bush DOJ be responsible for the state of the law?  The truth is that the Section 2 law that the NYT op-ed complains about is pretty well established doctrine and the DOJ has very little to do with its evolution in the federal courts which has largely been driven by suits from private plaintiffs.

This isn’t just a rhetorical point.  A fundamental issue underlying the new administration’s desire to bring monopolization cases is that the agencies will run into the tough standards in Section 2 which have evolved over time in federal courts.  Whatever one thinks about the portions of the Section 2 Report where the DOJ endorses various tests over other alternatives, it is more than fair to say that the Report offers a comprehensive and accurate summary of Section 2 law.  If that point is overlooked by the agencies, and it won’t be, because both agencies are interested in winning cases not just bringing them, they may quickly learn about the difference between activity level and success.

But the bottom line is that it is a nonsensical argument to assign either the credit or blame for the state of Section 2 law to the outgoing Antitrust Division.

On a related note, the NYT also claims that the Intel case provides the FTC an opportunity to finally enforce the antitrust laws that they’ve ignored over the last eight years.  I imagine that the folks at the FTC will be surprised to learn that they’ve been asleep behind the wheel for nearly a decade.  But more importantly, it should be noted that the Commission has had the votes to bring the Intel case if they so please for quite some time.   But they haven’t.  I suspect the state of Section 2 law on discounting and exclusive dealing has something to do with that.  Now, I’m on the record here as saying that I believe the EU enforcement action does make it more likely that the FTC will get involved with Intel in one way or another.   I’ll stand by that largely because I think the current Commission and DOJ, with various statements and commitments made in speeches and such, have committed themselves to bringing some high profile Section 2 cases.  But if this case was a no-brainer under Section 2 law, the complaint would already be filed.  Of course, the Commission has been talking quite a bit about Section 5 as a route to avoid the rigorous proof requirement of monopolization law….

The second mistake, pointing to decisions in foreign jurisdictions to bring cases under completely different antitrust standards, is an example of conflating activity level with success in an especially peculiar way.  Moreover, counting jurisdictions is an especially analytically lazy approach to identifying desirable monopolization enforcement because analyzing the welfare effects of single firm conduct is an especially difficult problem that deserves a more serious approach.  If one is to believe it is sound policy to sacrifice the obvious benefits that accrue to consumers from lower prices created by loyalty rebates in exchange for future gains associated with preventing higher prices tomorrow, consumers who are losing those gains today deserve a more rigorous explanation than “other jurisdictions are doing it,” don’t they?  But, one might ask, doesn’t evidence that foreign jurisdictions have found something wrong with Intel’s loyalty rebates provide some probative value for whether that conduct is illegal under Section 2 law?  The answer is no.  Antitrust analysis in those jurisdictions, while sometimes peppered with language about consumer welfare and effects-based methodologies, is quite different than under US law where the proof requirement of consumer harm is much more rigorous.  This is not merely a difference of degree.  It is a difference in mode of analysis.  The fact that other jurisdictions have brought suits is inapposite when it comes to an appropriate antitrust analysis of Intel or any other single firm conduct case in the U.S.

Peter Klein of Organizations and Markets blog-fame kicked off the George Mason/ Microsoft Conference on the Law and Economics of Innovation a few weeks back with a talk on “Does the New Economy Need New A Economics?”   His answer: No.  This week, Peter takes aim at Wired’s Chris Anderson who predicts a massive shift toward “small” in the new, new economy led by a reduction in transaction costs created by information technology and reduced startup costs.  The whole thing is worth reading, but here is an excerpt:

Wired’s Chris Anderson drinks the New Economy Kool-Aid. It’s the same old argument — information technology reduces transaction costs, leading to a radical disaggregation of industry and society — still supported by little more than a few colorful anecdotes, not any kind of systematic analysis. The new twist is the financial crisis, described by Anderson as “not just the trough of a cycle but the end of an era.”

What we have discovered over the past nine months are growing diseconomies of scale. Bigger firms are harder to run on cash flow alone, so they need more debt (oops!). Bigger companies have to place bigger bets but have less and less control over distribution and competition in an increasingly diverse marketplace. . . . The result is that the next new economy, the one rising from the ashes of this latest meltdown, will favor the small.

Nonsense. The major banks, the Chrysler corporation, and whoever is next to fail have not become nimbler and smaller, but larger; they have become part of the Federal government. Fannie and Freddie have swollen and taken on additional responsibilities. The financial crisis, as argued repeatedly on these pages, was spawned by a credit bubble brought about by loose monetary policy and massive government subsidization of the home mortgage market. It has nothing to do with firms being too large or somehow failing to take advantage of the Next Big Thing in social networking or cloud computing.

Competition Policy International has announced its next Webinar, featuring Professors Bajari and Abrantes-Metz on the economic and legal analysis of collusion.  I’ve had a blast doing these lectures the last couple of weeks teaching Antitrust Economics 101, and will be finishing up the third lecture this week (after covering basic demand side and supply side issues in the first two weeks) with examples and applications.  It really is a nice set up and a fun way to teach and I hope to do some more of it in the near future with some more advanced topics, i.e. law and economics of vertical restraints, and perhaps one lecture sessions on patent holdup and loyalty rebates/ exclusive dealing.

Here’s the course announcement for the Collusion Webinar:

This course will provide a current and concise summary of collusion, using simple economic models, case studies, and an overview of enforcement activity. The course was primarily designed for lawyers and antitrust professionals; we will address ideas at the forefront of economics in such a way that the material is clear and accessible to non-economists. Familiarity with microeconomics at the level of an introductory college level course will be presumed.
This series will be presented over CPI’s Global Learning Platform which delivers lectures globally in real time. The only technology required is a computer with a flash player and a telephone.

To register: Visit our website at https://www.competitionpolicyinternational.com/course_main.html.

The fee for all three classes, with CLE credit, is $355; without CLE credit the cost is $129. Discounts for multiple users from the same organization and courtesy admissions for competition authorities are available.

This course is approved for CLE in PA, as CPI is an Approved Provider of Distance Learning Courses in PA. Under the approved jurisdiction policy, New York attorneys may apply Pennsylvania CLE credit toward fulfilling their New York CLE requirement. For complete information regarding discounts and the availability of CLE credit in other states, special registration needs, or for any other questions, contact us at LearningCenter@competitionpolicyinternational.com.  

The CPI Learning Center presents: An Economic and Legal Analysis of Collusion
 
Session 1: Economic and Legal Analysis of Collusion – Wednesday, June 3, 2009 at 12 pm E.D.T.

Topics include: empirical regularities that have been found in known cases of collusion; an economic model of how a cartel determines output; a summary of efficiency losses from collusion; and the behavior of international cartels.  

Session 2: Case Studies of Collusion – Wednesday, June 10, 2009 at 12 pm E.D.T.

Topics include: Collusion in the railroad industry in the 1880’s; Bidding Behavior in Spectrum auctions used by the FCC to privatize the airwaves, including the changes made by the FCC to make tacit collusion more difficult; and two cases of bid rigging in the New York City construction industry and the Ohio School milk markets.

Session 3: Antitrust Enforcement & Screening for Collusion – June, 17, 2009 at 12 pm E.D.T.

Topics include: The use of empirical screens to detect conspiracies; a discussion, including examples, of screen use by both competition authorities and private parties; and leniency programs.
About the Instructors:

Patrick Bajari is a Professor of Economics at the University of Minnesota where he completed his PhD in 1997.  Prior to his return to Minnesota, he taught in economics departments at Harvard, Stanford, Duke, and Michigan.  Professor Bajari has authored 40 academic papers, many of which were published in leading economics journals.  He has done research on the economics of collusion and bid rigging, the empirical analysis of auctions and public sector procurement, the economics of housing markets, and mortgage default and econometric methods for analyzing strategic interaction.  Professor Bajari has served on the editorial boards of a number of leading economics journals.  Currently, he is the managing editor of the International Journal of Industrial Organization and an associate editor for the Journal of Business and Economics Statistics and Quantitative Marketing and Economics.

Rosa Abrantes-Metz is an Adjunct Associate Professor at Leonard N. Stern School of Business, New York University, and a principal with LECG’s antitrust and securities practices based in New York City. Prior to consulting, she was a staff economist at the Federal Trade Commission and has also taught at the University of Chicago and at Universidade Catolica Portuguesa in Lisbon, Portugal. She has published in both peer-reviewed journals as well as trade publications. Both at the FTC and as a consultant, Rosa has worked on a variety of cases including alleged conspiracies and manipulations including bid rigging and price fixing cartels, commodities and stock prices manipulations and revenues management, among others, and has co-developed several empirical screens to detect such anti-competitive behaviors. She is also a co-author of one of the most popular econometric models used by pharmaceutical industry analysts to value the R&D pipeline. Rosa received her Ph.D. in Economics from the University of Chicago in 2002.

About the CPI Learning Center:

The CPI Learning Center brings together leading global scholars in the fields of competition law and economics with agency officials, practitioners, judges, and corporate counsels. The Learning Center offers a convenient and user-friendly way to acquire the latest thinking on world-wide competition policy and provides access to experts who are at the cutting edge of the field. Lectures are presented by leading professors, scholars, and practitioners of competition policy from around the world, including scholars from Harvard University, University of Chicago, University College London, Singapore University, Hong Kong Polytechnic University and the Chinese Academy of Social Science.

Lectures are presented over CPI’s Global Learning Platform which relies on state-of-the art web technology to deliver lectures globally both in real time as well as and on-demand. CPI is an Approved Provider of Distance Learning Courses in PA. CLE credit also is available to New York attorneys for completion of CPI’s programs.  Under the approved jurisdiction policy, New York attorneys may apply Pennsylvania CLE credit toward fulfilling their New York CLE requirement. CPI Learning Center also applies for CLE credit in additional states; please contact us for further information.

I’ll be testifying tomorrow at the Federal Trade Commission hearings on Resale Price Maintenance.   My panel will focus on rule of reason analysis of RPM Post-Leegin.  There is a bit of awkwardness testifying about different modes of rule of reason analysis with legislation that would restore the Dr. Miles per se rule pending, but it strikes me as a valuable exercise nonetheless.  The early afternoon panel looks very interesting and focuses on the legal and business history of RPM.   I do not have a written statement for my prepared remarks, but you can see my slides here.

UPDATE: In response to Thom’s query in the comments, I thought the panel went pretty well.  It was fun, anyway.  The panel split time discussion the merits of the pending legislation that would restore the per se rule and whether some “inherently suspect” truncated liability approach placing the burden on defendants to justify their use of minimum RPM was appropriate.  Five of the eight panelists were in favor of the per se rule with three dissenting for various reasons, including my own view that economic learning in the form of theoretical and empirical knowledge about vertical restraints and RPM more specifically simply did not satisfy the standard that the restraint always or almost always reduces output or harms competition.  Much of the discussion of the underlying economics, in my view, revealed a general suspicion not just of RPM but of the promotional services it is designed to induce.  In other words, a few panelists argued that even if RPM did facilitate the supply of promotional services by resolving incentive conflicts (I’m not sure how well the proponents of the per se rule understand the Klein & Murphy model), we should be skeptical of any sort of promotion that manufacturers have to pay for.  Taken seriously, that view would be fairly dangerous and easily expanded to per se rules for exclusive territories, advertising, slotting contracts, and other forms of promotion.  All in all, it was a fun panel and a lively discussion.  I largely stuck to the same mantra: the theory and evidence does not support application of the per se rule, and to the extent that one believes that we know even less than the literature suggests or does not trust the results in the literature, that is not an argument in favor of per se treatment.

Available here.  Here’s an excerpt:

It turns out that it is a very difficult business to identify the few cases when low prices and aggressive competition might perversely end up harming consumers in the long run rather than simply making them better off. And the cost of erroneous antitrust enforcement, such as mistakenly condemning Intel’s discounting practices on the view that they “might” harm competition in the future, can have important negative consequences throughout the economy as other firms learn that aggressive competition might get them a phone call from the Justice Department or the FTC–or a dawn raid from the European Commission.

In announcing a new direction for the administration’s antitrust agenda, Varney was refreshingly explicit in her rationale and made clear that in the new DOJ the existence of possible harm alone would be enough–and that she and her staff will recognize anti-competitive conduct when they see it, without inadvertently deterring beneficial conduct.  One hundred years of legal and economic thinking in antitrust suggests that this task will be much more difficult than Varney and the new Antitrust Division are expecting. Unfortunately, the political harm from deterring what might have been valuable business behavior is negligible, as un-attempted innovation and unrealized efficiencies rarely show up on the political balance sheet.

The irony of the new approach is that it puts the new administration on a collision course with the law. The previous DOJ, whatever its shortcomings, reflected an honest effort to adopt an enforcement strategy that was likely to find success given the existing monopolization law developed independently by the courts. The new strategy, so far as one can tell, seeks to pressure the courts to change the law in order to meet the desires of the new administration. In the end, either the Antitrust Division will fail, or the courts will bend in a way that unsettles the law. But either way, this week’s events in Europe and the U.S. portend a tough road ahead for the world’s most successful companies.

Keith N. Hylton is the Honorable Paul J. Liacos Professor of Law, Boston University. Geoffrey A. Manne is executive director of the International Center for Law and Economics and Lecturer in Law at Lewis and Clark Law School. Joshua D. Wright is co-director of the Antitrust Research Center at the International Center for Law and Economics and assistant professor of law at George Mason University School of Law.

My colleague Todd Zywicki has a must read op-ed in the WSJ.  Here’s an excerpt:

The Obama administration’s behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors — entitled to first priority payment under the “absolute priority rule” — have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar.

The absolute priority rule is a linchpin of bankruptcy law. By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead.

Violating absolute priority undermines this commitment by introducing questions of redistribution into the process. It enables the rights of senior creditors to be plundered in order to benefit the rights of junior creditors.

Go read the whole thing.

Reacting to the EU fines imposed on Intel, Geoff raises a nice point about the difficulty of constructing the but-for world in antitrust cases generally, but particularly in cases where prices are falling.   This discussion reminded me of Thom’s excellent post responding to the NYT editorial and an AAI working paper and putting theoretical anticompetitive concerns to an empirical test and discussing evidence of falling prices for both Intel and AMD products and increased operating margins for AMD.  So how are we to sensibly evaluate the EU decision?

To make some progress here, let’s all agree for the sake of discussion that there are logically valid anticompetitive theories of loyalty discounts, exclusive dealing contracts, and conditional rebates generally and that there are valid and sensible pro-competitive justifications for these types of distribution contracts as well.  And lets also assume for the sake of analysis that it makes analytical sense to consider the possibility that the loyalty rebates operate like exclusive dealing contracts and that therefore the competitive concern is that the contracts will deprive AMD of the opportunity to compete for distribution sufficent to achieve minimum efficient scale — thus creating the possibility of future harm from a theoretical perspective.  And finally, without making any contentious statements about the empirical literature, lets assume that it is a fair characterization (and I think this is mild) to say that there is evidence both that there is evidence both that firms without market power frequenty use exclusive dealing contracts and or similar loyalty rebate schemes and that evidence of anticompetitive exclusive dealing is scarce.

Given all of the above, lets look at the loyalty rebate problem through the error cost lens.  The Intel case is a perfect example for application of this approach because even the most interventionist antitrust thinkers do not debate the proposition that lower prices have some redeeming competitive qualities and generate consumer benefits.  So it makes sense to think about the tradeoffs here between what we expect to gain from a decision like the EU’s (or here in the US) versus what we expect to lose.  The error cost framework allows us to assess these tradeoffs objectively, relying on existing theory and evidence to inform our estimates.  Here is what I wrote in my post during the Section 2 Symposium on this exact issue:

The situation antitrust enforcers find themselves in with respect to exclusive dealing is not unfamiliar.  On the one hand, there are a set of possibility theorems which indicate that exclusive dealing and de facto exclusives can lead to anticompetitive outcomes under some specified conditions, including substantial economies of scale or scope.  On the other, there are a set of sensible and economically rigorous pro-competitive justifications for the practice.  On top of that is the casual empiricism that we observe exclusive dealing contracts in competitive markets and adopted by firms without significant market power.  As David Evans noted on the first day of our symposium, quite a bit can be learned about the relative probabilities of anticompetitive and pro-competitive uses of certain types of business behavior by understanding the incidence of use by competitive firms.  Exclusive dealing is no different.

The same analysis applies to loyalty rebates:

The key points here from an evidence-based perpsective are both that we have little empirical evidence that loyalty discounts lead to anticompetitive outcomes, but we do know that the discounts are passed on to consumers and increase welfare.  Like exclusive dealing, this state of knowledge ought to lead to a liability rule that places a strong burden on the plaintiff to demonstrate actual competitive harm, and safe harbors based on sound theory and evidence where they can be crafted reasonably.  In this case, since the anticompetitive theories all require foreclosure of a significant share of distribution and substantial economies of scale, it is quite sensible in the case of loyalty discounts to allow defendant’s a safe harbor that would make per se legal loyalty discount programs that foreclose less than a pre-specified share of the retail/distribution market.  I believe the right starting point for such a safe harbor comes from the cases, and could be set at 40 percent.  But building on the DOJ’s analysis, the argument  can and should be made that the exclusive dealing safe harbor logically can and should apply to loyalty discounts as well.

Of course, the EU approach does not make room for such safe harbors.  Not even close.  To describe the EU approach to Intel’s loyalty rebates as either remotely “effects-based” or “evidence-based” would strip both those terms of any useful meaning.  But that’s not an incredibly interesting point.  It does not appear that the EU approach is going to change any time soon.  Nor does it appear that there will be any pressure placed on the Europeans from domestic agencies (in fact, the pressure appears to moving in the opposite direction to “do something”).  By the way, for all the criticism that Tom Barnett at DOJ took for criticizing the EU Microsoft decision a few years back, at least that approach had the benefit of informing US companies that they would not adopt the European approach, and that US law was importantly different because it required a more rigorous form of economic analysis and more substantial evidence of consumer harm rather than speculative possiblity theorems coupled with harm to competitors.  That is a message that I’m quite sure the business community in the United States would be interested in hearing today from the US agencies.  And rightly so.  Thom is right that these developments give antitrust academics a lot to do!  Its a very exciting time for antitrust.

But that’s generally a bad sign for companies in high tech markets with significant market shares who are facing some pretty scary times.  On the one hand, the EU has sent the signal that competitors who can’t quite cut it in product market competition and innovation can get a second bite at the apple by running to the friendliest regulator around for help in tying a competitor’s hand behind its back.  I imagine that another concern is that the messages sent collectively by the FTC and “new” DOJ in repudiating the Section 2 Report and that error costs are hereby assumed out of existence raise the possibility that there will be a competitive dynamic between the EU and US to see who will be the global monopolization policeman — and also between the FTC and DOJ.

But what is more interesting to me is to watch how this will play out in th United States.   Long before the Section 2 Report scuffle I predicted that we might be headed toward a sort of convergence where rather than the EU moving to a more US-based approach, the US went the other way.  That looks like a much more likely possibility today than it did a few weeks ago.  So what’s going to happen in the US?

Nellie Kroes recently made the statement that Intel, after the recent fines, is now “the sponsor of the European taxpayer.”  Cute.  But given the fears that the EU is using antitrust law as a protectionist weapon, this statement was not well advised and I hope catches the attention of the new antitrust regimes in the U.S. (including new AAG Christine Varney, who could have had something like the Intel decision in mind when she described the European approach to monopolization as “much more extreme than I would ever be“).  Bottom line: I wouldn’t quite celebrate the new sponsorship if I were a European taxpayer (nor as an American one) who was planning on buying products with microprocessors any time in the near future.  The most likely consequence of the EU’s action is going to be higher prices.

Take a look at these pictures, which I suspect matter a great deal more in the US than the EU in terms of the antitrust analysis.  Given the complexities of predicting the speculative welfare gains from the EU’s enforcement action against the more certain gains from lower prices, would Kroes really bet against intervention ultimately increasing prices to consumers?  I think the pictures below tell a story that begs the following question of Kroes, and the folks at the AAI who issued a press release prematurely celebrating the EU fines as a victory for consumers and calling for the FTC to get in the action:

(1) How confident are enforcers that the but for world would result in an increase in consumer welfare?  For example, what probability would they assign to the prediction that EU intervention will result in lower prices for consumers?

(2) On what basis is that belief formed? are they consistent with the existing empirical evidence?

(3) What probability to the enforcers assign to the likelihood that the contracts actually are pro-competitive and so the enforcement action will create some consumer losses?

[Ed - Sorry the pictures are fuzzy --- I'll get better ones up.  But suffice it to say for now that the steeply declining yellow line is Intel microprocessor prices and the four lines in the second picture (also declining fairly quickly) are Intel and AMD prices.  Source data from pricescan.com]

This leads me to my last point about what happens now in the US.  I’m quoted in the WSJ as saying that I believe it is much more likely that the US gets involved in the Intel litigation than was the case two weeks ago.  Its hard to avoid that conclusion after reading the combination of statements from the FTC on the repudiation of the Section 2 Report, the new life of Section 5, as well as the competitive pressures placed on that agency from the DOJ’s new agenda and the EU fines.

The problem is that the content of the Section 2 Report was not just policy statements from the Bush administration political appointees about what the Section 2 should be.  It was a serious project with engagement from DOJ and FTC appointees, staffers, the academic community, and business representatives to summarize the existing law and existing evidence as well as generate some guidance on best practices where available.  Turns out that with two years to work on the project and that breadth of resources and diversity of viewpoints, the Section 2 Report really does accurately state the law with respect to exclusive dealing, predatory pricing, loyalty rebates, and such.  And that law isn’t going anywhere.  Perhaps the mission of the new DOJ and FTC will be to change the law?  Or perhaps the FTC will avoid the unfavorable Section 2 law by substituting Section 5 for cases like Intel where they are unlikely to win under a Section 2 theory.  But the Supreme Court and the federal case law under Section 2 remain substantial obstacles to convergence that extends beyond the hallways of the agencies.