Yet another major airline merger appears to be in the works: United and Delta. This calls for some antitrust analysis. A few months ago, Thom did a thorough job analyzing the antitrust aspects of AirTran’s proposed takeover of Midwest. The key point in Thom’s analysis was that assessment of an airline merger’s economic effects properly centers not on the merging parties’ overall market shares but rather on the extent to which the two firms compete head-to-head.

United and Delta are large carriers, the second and third largest in the industry. If one uses overall industry market shares to calculate HHI in the merger analysis, the transaction would seem presumptively unlawful. But if one looks at the actual routes on which the two airlines compete and the level of competition currently present on those routes from other carriers, the picture may look very different. If it is the case that the two firms now compete head-to-head only (or largely) on routes that are are served by a large number of carriers, then the firms’ high overall market shares may not matter very much.

That said, a note of caution. In a major airline asset acquisition some years ago, American/TWA, the firms argued that the transaction should be permitted on the ground that TWA (then in bankruptcy) was a “failing firm” and that therefore the transaction’s effect on HHI was not dispositive. The enforcement authorities (wrongly) bought into this argument and permitted the transaction, even though TWA’s airplanes would not have “left the industry” (the relevant standard under a failing firm theory) if they had been sold to the second highest bidder rather than to American. Commercial airplanes are a long term, durable capital good that can’t easily be converted into other uses. Sure TWA’s creditors wanted to maximize the value of TWA’s assets. But that’s not a reason to relax the requirements of antitrust law any more than it would be to permit a bankruptcy debtor to violate the Clean Water Act.

As with TWA, neither United’s nor Delta’s planes will disappear from the market if the deal is blocked, nothwithstanding the firms’ recent bankruptcies and the financial woes that chronically plague the industry. The United/Delta deal should be assessed solely on the basis of its competitive effects. The failing firm argument has no place here, and the parties should not assume that the enforcement authorities will treat them as generously as they treated American and TWA.

My colleague Todd Zywicki offers an empirical rebuttal to the Warren-Tyagi “Two Income Trap” hypothesis which asserts that families with two incomes end up more leveraged than families with single incomes and more susceptible to negative economic shocks than otherwise for a number of reasons, including, e.g. counterproductive bidding for housing, child care expenses, etc. The hypothesis is designed, in part, to explain the increase in bankruptcy filings in the US during the 1980s and 90s. After a bit of number crunching, Zywicki concludes that the largest difference between the typical family in 1970 and 2000 is the tax burden not the mortgage expenses:

expenses for health insurance, mortgage, and automobile, have actually declined as a percentage of the household budget. Child care is a new expense. But even this new expenditure is about a quarter less than the increase in taxes. Moreover, unlike new taxes and the child care expenses incurred to pay them, increases in the cost of housing and automobiles are offset by increases in the value of real and personal property as household assets that are acquired in exchange.

Overall, the typical family in the 2000s pays substantially more in taxes than in their mortgage, automobile expenses, and health insurance costs combined. And the growth in the tax obligation between the two periods is substantially greater the growth in mortgage, automobile expenses, and health insurance costs combined.

Interesting stuff.

My GMU colleague Todd Zywicki and Gail Heriot (USD) have an op-ed in the Washington Times exposing Harvard Professors David Himmelstein and Elizabeth Warren’s study on medical debt and bankruptcy, presented to Congress earlier this week, as “one of the most misleading pieces of research ever placed before Congress — no small dishonor.” 

The punchline of the study is that over 50% of bankruptcies have a medical cause, a conclusion that Zywicki and Heriot say is reached only because the researchers have a fairly odd definition of “medical cause” which includes uncontrolled gambling, drug or alcohol addiction, the birth or adoption of a child, or $1,000 or more in out-of-pocket medical expenses over the two years prior to bankruptcy.  The study has been criticized extensively elsewhere (see, e.g. here). 

Maybe Congress isn’t interested in discovering the “true” causal relationship between medical debt and bankruptcy and is simply looking for a study that is consistent with its priors.  I don’t know.  But I don’t expect much more from a Congress that is apparently willing to pass price gouging legislation in the face of all theory and empirical evidence suggesting that this is a horrible idea.  One potential solution to preventing junk social science from influencing policy decisions is to allow for an adversial process in presenting the data so that spurious correlations can be brought to the surface.  Apparently, this solution was undone by some political manuevering.  From Gail Heriot’s post at the Right Coast:

The agenda as originally prepared called for Donna Smith, who was featured in Michael Moore’s Sicko, to testify first, followed by the experts witnesses on both sides, so that the witnesses invited by the minority would have a chance to respond to the study co-authors.  Minutes before the hearing began, the order of witnesses was re-arranged, so that Zywicki & and Clifford J. White III, Director of the Executive Office of United States Trustees, the other witness invited by the minority, would directly follow Ms. Smith’s emotional testimony.  The co-authors of the study, who were invited by the majority would both go later and thus be unrebutted. 

For TOTM readers interesting in seeing the primary sources themselves: Professor Warren’s testimony is available here, the study is available here, and Professor Zywicki’s testimony is available here.

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

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

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

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

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

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

(more…)

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

Why are Small Business Bankruptcies so Rare?;

Propensity Score Matching; and More on Propensity Score Matching;

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

and How Inefficient is Tort Law?

When teaching antitrust as I am this fall, a time always comes during the semester when I need to give my students an example of a merger whose implications for competition are so obviously adverse that the antitrust authorities would surely seek an injunction against the merger under Section 7 of the Clayton Act. My favorite example of this type of transaction has always been a completely unrealistic and therefore highly instructive hypothetical merger between the two leading U.S. automakers, Ford and GM.

With today’s reports that each of the two firms is discussing a potential collaboration with Nissan and Renault and that a three-way alliance is also being considered, I’ll now have to rethink my hypo.

Analysts have been quick to emphasize that a full-blown merger between GM and Ford is not in the cards and that the only thing being considered is some type of joint venture whose antitrust implications are being analyzed carefully. But why not think about a straightforward merger?

Sure, each firm has a substantial (if declining) share of the U.S. market (GM has about 25% and Ford has about 18%) such that a merger between the two firms would result in a more than sufficiently large increase in the industry HHI to create a presumption of illegality under the U.S. Merger Guidelines. But perhaps the firms could realistically offer a number of arguments to rebut that presumption.

First, GM’s many difficulties in the past year could plausibly justify treating GM as a “failing firm” for purposes of applying the Merger Guidelines, which subject the acquisition of such firms to less scrutiny than the same transaction would receive in better times. If there’s anything to the claim that analysts have been making over past year that GM is facing serious insolvency risks, then the failing firm strategy might really be worth a try.

An additional way to cast the merger in a more favorable light would be to argue that the relevant geographic market for cars in this day and age is not the U.S. or even North America but rather the world. Other products such as computer software are thought of in this way. And while cars (and car parts for local assembly) are more costly than software to transport intercontinentally, the principle is the same: firms in both industries compete with each other all over the world. GM and Ford have much lower shares of the world market than of the U.S. and North American markets. So if the world market were considered the relevant one, the merger would seem less threatening to competition.

A final point perhaps worth emphasizing is industry trends. It matters more for competition where market shares are likely to be in the future than where they are today. And both firms’ market shares have been in steady, long-term decline over the last few decades (albeit with an occasional uptick every now and then). The popular cars of even the near-term future are likely to be those that are hybrid or that do not rely on gasoline at all. And in these markets, Ford and GM are not major players–both take a back seat to Toyota and Honda. That being the case, Ford and GM might argue from a dynamic perspective that a merger between them, while no doubt resulting in some consolidation in old technology markets, would nevertheless enhance rather than harm competition in hybrid and electric cars — the innovation markets of the future. Current market share data thus may not express accurately the true underlying competitive reality.

It should be noted that all of these arguments could also potentially be made in support of a more limited proposed joint venture between the two firms. And of course, depending on how the venture proposal is structured, additional arguments might also be available.

All of this analysis is really beginning to make me worry about the future utility of that old GM/Ford hypo. Who knows? Perhaps I had better switch to Coke and Pepsi!

A few weeks ago, I predicted here that Anna Nicole Smith would win her case in the Supreme Court. That prediction has now come true. Justice Ginsberg’s opinion for a unanimous court holds that state probate law cannot divest federal bankruptcy courts of jurisdiction over the claims of a bankruptcy estate against a probate estate beneficiary.

It will be interesting to see how this result will be spun by the lawyers and legal commentators who earlier suggested that this was a close case (see here).