While the purpose of their picture is to illustrate the ecological footprint (”tacoshed”) of their favorite tacos, the image illustrates just how complex is the nature of the food supply system.  It also illustrates why agribusiness firms (and other suppliers to the food system) have comprised a larger share of the average food dollar over the past several decades (relative to the farm level), as supply chains have lengthened to various corners of the globe.

In light of the DOJ/USDA antitrust workshops that begin later this week in Ankeny, IA, this picture illustrates what many participants in the program will likely ignore: the US food system is intricately intertwined with international markets and linked together by the same (large) agribusinesses that are under attack by populist farmer groups. While that is not a defense against competition concerns, it does suggest the nature of competition is much more complex (and hence more complicated to understand) than the simple “big is bad” finger pointing promised by the composition of the DOJ’s “discussion” panels.

And then there’s a recent paper I had to read on executive compensation, whose author should remain nameless. The author found a statistically significant result that he didn’t like. So he threw it under the bus by claiming that his regressions were flawed. Accordingly, he turned to panel data analyses that gave him a result he liked. All the while, another paper on the same topic had found the same results as our author’s regressions. Who was it that said statistics don’t lie?

On top of which, of course, there’s the problem that the number crunchers can only tell you something when they’ve got numbers to crunch. Suppose there was a change in the law in 2000. A before and after comparison might be instructive. But companies weren’t required to disclose the relevant information until 2005. You don’t have anything to measure.

I’m tempted to ask how many legal theory debates have been resolved convincingly by a single paper?  But instead I’ll try to do something more constructive.  At least I hope so. Larry Ribstein chimes in to make the well taken starting point that theory itself is not useful without data.  That is obviously right.  And I think if one were too ask whether the legal literature was suffering from too many theories of too much empirical knowledge — I’d opt for the latter.  But, I’ve got a few different bones to pick.

The first is that even holding regressions and sophisticated quantitative analysis aside for the moment — we’ll come back to it — is that the data should constrain the theory.  In fields that I am familiar with, there is a great deal of legal scholarship that simply ignores the few stylized facts or empirical regularities established by the empirical literature but builds theories and rattles off policy implications.  Of course, the theory of legal theorists rejecting an empirical methodology that restricts their ability  to generate theory willy nilly is not one that can be casually rejected.  I mean, unconstrained theory does sound like more fun doesn’t it?

Second, I read Bainbridge’s post as revealing a common tendency in the legal academy to dismiss empirical evidence if it, alone, is not sufficient to resolve some policy debate.  Empirical evidence is hard to collect and a body of empirical knowledge builds over time.   My sense is that the intuitive gut instinct of law professors is that the role of empirical scholarship is to “prove” assertion X in the way that one might establish the proper interpretation of a contract or statute.  Fads in legal scholarship are another example of this high discount rate in the academy.  For example, I’ve complained before about what I think is the over-use of behavioral law and economics, lack of rigor in drawing out policy implications from the evidence and models, and insufficient attention to empirical data.   There is a premium in the legal literature on striking while the topic is hot, and on over-claiming (and of course, having a catchy paper title) as well, and without expert peer review of claims concerning the relevant empirical literature, perhaps the latter is to be expected.  In any event, the point is that to the extent that “law and social science” disciplines like law and economics want to be taken seriously, and claim the advantages of the ancillary discipline, they cannot simultaneously reject the methodological commitments that come with it — even if those come with the price of things moving a bit slower than the law review (or news) cycle.

Third, paragraphs like Bainbridge’s first make me wonder whether this attitude (not his specifically) about empirical work are informed judgments or just reflexive tendencies to question sophisticated models that are outside our own strike zone?  Knowing nothing about the paper that the Professor is talking about in his example, one can in the abstract think of lots of reasons an empiricist might run a plain vanilla OLS specification as a baseline, report the results, go on to suggest that OLS in this setting as various problems, and move on to some more sophisticated panel approach, and compare the more robust results to contrasting ones in the literature.  Of course, the sort of specification search that Steve hints at could also be going on too.  I’ve got no horse in that race.  But the more general point is that often the critiques of various econometric models by non-econometricians sometimes betray a thinly veiled anti-empirical bias that I think is often dressed up in the language of “omitted variable” bias.  I can vouch for having given dozens of workshops at law schools where no discussion of panel data techniques and description of what exactly fixed effects control for is sufficient to respond to the “but did you control for X, Y and Z” question.

In sum, there is a lot of empirical work out there that is worthy of suspicion.  There is work that it methodologically unsound, suffers from poor and unreliable data or from authors that overclaim.  But there is a lot of really good stuff out there too!  Data is getting cheaper and methods more sophisticated.  Of course, the reduced cost can lead to the types of problems that Steve raises.  But quality problems can and do also occur in doctrinal scholarship pplying other, non-quantitative methodologies to interpret statutes, synthesize cases, make historical claims, or construct theoretical models.  The devil in these arguments is typically in the details no matter what the methodological toolkit.  And rigorous academic discourse is often about identifying and exposing those details to evaluate claims and hopefully, answer questions that can move the literature forward.   I understand that lawyers are going to be suspicious of foreign toolkits, like econometric analysis.  But in my view, the reflexive rejection of empirical work because “its hard to control for everything” is about as persuasive as reflexive rejection of claims that there is some coherent theory of statutory interpretation because “the judge just makes it up anyway, doesn’t he?”  Both might be true on a case by case basis, but I think the bar that legal scholars face in each case is to take seriously the work of others and describe exactly what the problems are and what implications they have for the results.  Let me be absolutely clear that I do not view Professor Bainbridge’s post as committing that error — it IS a blog post after all  — but it did get me thinking about this issue of empirical work and its reception in the broader legal community more generally.

The article’s abstract summarizes the heart of the paper:

Out of 200 randomly selected firms, we found only one waiver over 4 years disclosed pursuant to Section 406. However, by exploiting an overlap in disclosure regulations [between SOX 406 and Item 404 of Regulation S-K requiring disclosure of related-party transactions in year-end proxy statements], we were able to cross check our sample companies’ waiver disclosure. We find 30 instances where companies appear to be violating the law, and another 74 where companies evade illegality by watering down their codes to an arguably impermissible degree – their codes of ethics do not forbid the same Enron-style conflicts of interest that led to the adoption of Section 406 in the first place. Finally we study all waivers filed by all public companies with the SEC in the four years following SOX’s passage – and find only 36 total. Event studies reveal that the market generally does not react to these transactions, suggesting that companies only use waivers to disclose innocuous, immaterial information.

There’s a lot of interesting stuff here, including the conclusions that 15% of the sample firms are apparently violating the law and that the waivers that are disclosed are viewed by the market as irrelevant.  It is also interesting that 37% of the sample “evade illegality by watering down their codes to an arguably impermissible degree.”  It is this latter claim on which I want to focus.

I talked a bit about this issue in my Hydraulic Theory of Disclosure article.  In the article I said this about the waiver disclosure requirement:

The implicit assumption is that disclosure to shareholders will deter inappropriate waivers, inducing better compliance with the underlying code of ethics.  But that assumption must be animated by a further assumption that some conduct will be relatively static—that codes of ethics will not themselves be re-written and relaxed in response to the rule. In fact, however, the more likely outcome is that codes of ethics will be (and have been) re-written in order to minimize the need for waivers, in the event actually stemming rather than improving the flow of information . . . .  In other words, disclosed waivers are (privately) costly, and it may be less (privately) costly to amend codes of ethics than to seek and publicize waivers. Underlying behavior of the sort requiring waivers may not change, or it may even deteriorate. And either way less of it will be disclosed.

Rodrigues’ and Stegemoller’s (R&S’s) concluision seems to be 1) that immediate disclosure of related-party transactions would be a good thing, 2) that SOX 406 intended this but was poorly-executed to achieve the result, and 3) that companies’ failure to disclose waivers of their codes of ethics for related-party transactions is a violation of SOX 406, even where the code does not explicitly prohibit such transactions.

While the abstract quoted above is somewhat circumspect about the illegality of these “in spirit” violations of SOX 406, the article itself is a bit more hard-nosed:

It may be that, by omitting related-party transactions from their codes of ethics, companies are in violation of Section 406(c)(1), because prohibiting related-party transactions is “reasonably necessary” to promote “ethical handling of actual or apparent conflicts of interest between personal and professional relationships.” At the very least, these codes violate the intention, or “spirit” of Section 406’s disclosure requirements. As discussed in Part III, Section 406’s waiver provision was specifically enacted to address Enron’s related-party transactions with its CFO, Andy Fastow. Yet the majority of our sample companies do not forbid related-party transactions in their codes.

Instead, companies tend to have generic “conflicts of interest” provisions. And even when the provisions address related-party transactions, they use “weasel wording” that makes it hard to find an actual violation.

As R&S note, most ethics codes do not prohibit related-party transactions outright, so neither waivers of these codes, nor, therefore, disclosure of waivers, is required.  While seemingly proving my prediction that the effect of SOX 406 would be watered-down codes of ethics and, thus, less disclosure of information (assuming the watering down came in response to SOX 406), R&S focus instead on the illegality point, with which I have some trouble.

Basically, R&S argue that ethics codes that do not prohibit related party transactions are, in fact, impermissible under SOX, but I find their reasoning to be a stretch, and certainly there is no case law or SEC ruling (that I know of or that they cite) supporting the claim.  The R&S argument goes, in essence: a) a firm has an ethics code, waivers of which must be disclosed immediately; b) the code “should” prohibit related-party transactions but it does not on its face; c) there is a related-party transaction; d) there is no disclosure of a waiver; e) 406 is violated because the code of ethics “should” have prohibited this transaction, thus it “should” have required a waiver, and thus the absence of disclosure of a waiver is a violation of 406.  This seems like a pretty big stretch to me.  It might be that firms are interpreting 406 liberally, but it’s a long way from that to saying they are breaking the law.  Rather, I would say that failure to disclose waivers in this case is not an example of a firm flouting its obligation under SOX, it is instead an example of the predictable (and predicted) hydraulic effect of imperfect regulation.

This would still count as a failure of SOX 406, in my book (whether that’s a bad thing or not is another matter), but not because of non-enforcement, as R&S suggest, but rather because of the perverse incentive created by SOX 406 that induces firms to enact less-restrictive ethics codes.

In the end, I see the article as a vindication of my prediction.  My point was to suggest that SOX 406 would have the opposite effect of the one it intended–less internal prohibition (or policing) by firms of “unethical” conduct and less disclosure of such conduct.  I hasten to note that this study doesn’t say anything about whether SOX had anything to do with the watered-down ethics codes; for all I know they were already watered down (and thus the accuracy of my prediction is unconfirmed by the article).  But that would have been the thing to look at, it seems to me:  The role of SOX in inducing firms to engage in disfavored conduct to avoid new disclosure obligations that they would not otherwise have engaged in.

Despite this critique, I think the article is the best sort of empirical legal scholarship.  My conclusion might diverge from R&S’s (I would not suggest, as they do, a rule simply requiring disclosure of all related-party transactions over a certain size), but the evidence they uncover is important and their presentation of it is straightforward, well-written and informative.

Josh, Scott Kieff and I have posted a short comment based on our submission to the DOJ/USDA Workshops on Agricultural Competition, co-authored by us and Mike. The comment should be available for download from the DOJ webpage when the public comments are posted (someday . . . ).  A copy is also available here (www.laweconcenter.org), and comments are most welcome at gmanne@laweconcenter.org Please leave comments on this post over at the A&CP Blog.

Regarding firm size and integration, it must be kept in mind that the agriculture industry in the U.S. has, for good reasons, moved beyond the historic, pastoral image of small family farms operating in quiet isolation, devoid of big business and modern technologies. The genetic traits that give modern seeds their value—traits that confer resistance to herbicide and high yields, for example—are often developed through processes that are technologically-advanced, time- and money-intensive, risky investments, and subject to various layers of regulation. It doesn’t take expertise in industrial organization to imagine why at least for some participants in this market these processes are likely to be more efficiently and effectively conducted within large agribusiness companies having enormous research and development budgets and significant expertise in managing complex business and legal operations, than they are by the somber couple depicted in the famous 1930 Grant Wood painting, “American Gothic.” Nor is such expertise required to imagine why complex contracting across firms, of any size, is likely to be of significant help in supporting the specialization and division of labor that is useful in allowing some businesses (even a small family farm is a business) to be good at planting and harvesting while others are good at inventing, investing, managing, developing, testing, manufacturing, marketing, and distributing the next wave of innovative crop technologies. This requires on the one hand that the government give reliable enforcement to contracts and property rights whether tangible or intangible (extremely important in this industry are patents, trade secrets, and even trademarks), while on the other hand it allows firms wide flexibility to decide for themselves which of these contracts and property rights they would like to enter into or obtain pursuant to the applicable bodies of contract and property law.

When courts and regulatory agencies like the DOJ Antitrust Division adopt special approaches to the body of antitrust law to address concerns that may arise from these property rights and contracts, they run the risk of crafting doctrines that inappropriately override well-established bodies of law that are informed by longstanding judicial and scholarly thought and consideration of each area, and creating the potential to reduce innovation and economic growth. A central countervailing concern is that the putative antitrust injuries that might arise are rooted in stylized economic models that are heavily dependent on a narrow set of assumptions, leaving significant room for erroneous antitrust enforcement. A modest but fundamental safeguard to protect against this concern of “false positives,” is an approach to antitrust that requires a strong demonstration of actual anticompetitive effect as a precondition for a monopolization violation.

Not only are patents not presumptive proof of market power in any static sense, but patents can also meaningfully improve both competition and access to patented technologies over time, in the dynamic sense. From the public record it appears that the driver of much of today’s antitrust enforcement in the agricultural industry boils down to intervention into business disputes between large and sophisticated parties. The inherent uncertainty regarding the economic consequences of specific conduct, coupled with competitors’ poor incentives and the huge costs of error, counsel strongly against antitrust intervention without strong empirical evidence that the conduct has reduced competition and harmed consumers in the form of higher prices, lower quality, or reduced innovation.

Learn from history, don’t repeat it.

Antitrust laws originated in Midwest states like Missouri in the late 1880s when small farmers banded together in the face of falling agricultural commodity prices to stand against the competitive pressures of larger, more efficient farming operations. Over a century later, it is, as Yogi Berra said, “déjà vu all over again.”

Of the almost 2.2 million farms in the USDA’s 2008 Agricultural Resource Management Survey, the 1.8 million smallest farms lost money on their farming operations (on average) even after accounting for government program payments. These farms represent only 10% of the value of agricultural production in the US, yet received roughly 28% of government payments.

In addition, these small-scale farmers are less likely than their larger competitors to shop beyond the nearest town for key inputs, to shop for the best price from suppliers, to negotiate price discounts, or to lock in prices for inputs. Small-scale farmers are also much less likely to market their products using contracts or to use market-based risk management tools. In short, small-scale farmers fail to (or are simply unable to) take advantage of market opportunities that larger, more efficient farms do. That large farms do engage in these activities suggest a very competitive agricultural economy.

Although antitrust has long been used as an anticompetitive club by economically inefficient competitors, such applications do more harm than good. The agriculture sector would be better served by eliminating the subsidies that sustain marginal producers than by using antitrust to penalize more efficient, better managed farming operations and other firms along the rest of the food value chain. DOJ’s antitrust inquiry will, at best, simply perpetuate the inefficient industry fringe or, more likely, inhibit the kinds of technological and market innovations that have provided US consumers and the world with a safe, reliable food supply.

Amazon is an interesting hybrid, sometimes acting as a platform, sometimes acting as a direct merchant.  In its capacity as a platform, Amazon facilitates sales of goods from other merchants to Amazon’s customers through its website.  Amazon itself doesn’t actually sell these goods (because it never actually owns them), although it operates the system that enables these sales and takes a cut.  In its capacity as a merchant, Amazon purchases goods from suppliers and sells them directly to its customers.

The Kindle makes the merchant/platform distinction even more muddled for Amazon, and the distinction is at the core of the issue.

Basically, the difference between a merchant and a platform, as suggested above, is in the degree of control an intermediary exerts over pricing and other terms of sale, and the extent to which it bears risk.  The more control, the more merchant-like; the less control, the more platform-like (Thus the Gap is a merchant; eBay is a platform).  Background economic conditions determine which model (or where on the continuum between them) is more efficient for a given intermediary or market.  As these conditions change, the optimal degree of control may change, as well.  At the same time, suppliers or intermediaries may choose to assert or deny control in response to changing economic conditions–and this choice may not be optimal.  To my thinking, this is what is going on in the book/e-book market.

Steven Pearlstein in the WaPo hints at the issue:

While markets have their flaws, over the long run they are good at executing these technological transformations. My guess is that in the not-so-distant future, best-selling authors such as John Grisham and Malcolm Gladwell — along with unknown authors peddling their first books — will publish their own works, contracting with independent editors and marketers and selling directly to consumers as much as possible. Other authors will turn to smaller, more specialized publishing houses that will offer smaller advances but bigger royalties and will be built, as they once were, around great editors. Publishers will sell their books through competing online distributors and traditional hard-copy bookstores, the latter of which will continue to exist not only as places to browse and socialize, but also as places to have printed on demand. Backlists will be infinite, pricing will be dynamic, and more copies of more books will be read and sold.

From Amazon’s point of view, this possible future is probably a quite likely one (in part because it can help to hasten its arrival), and one which does not necessarily bode well for its merchant-like business model (on which see, e.g., Charlie Martin).  But this future is a goldmine for its platform model, particularly to the extent that Amazon’s Kindle offers a widespread and attractive platform to readers and authors alike.

When it comes to selling physical books directly, Amazon has, and is used to, full control over the terms of sale.  When it comes to selling e-books, however, Amazon is not really a merchant–but it’s not (yet) exactly a platform, either.  Most obviously, there is no physical inventory for Amazon to purchase with e-books, and whether it actually purchases e-books at the time of sale to resell in each transaction (even at a predetermined price) or simply facilitates a transaction between publisher and purchaser at the time of sale, Amazon bears the same extent of inventory risk: zero. Very platform-like.  But the terms of contracts with publishers complicate matters.  Under the Amazon-negotiated pricing scheme, Amazon does, indeed, buy the e-book and re-sell it.  Although this entails no inventory risk, it does mean that Amazon bears “pricing risk” (if that’s a term) just as a merchant does, and it is stuck with the price it negotiated with publishers, no matter the price at which it actually sells its e-books.

There are other nuances.  Important among these, use of e-books purchased through Amazon requires that buyers own a Kindle (just as use of Xbox video games generally requires owners to have purchased an Xbox).  If not enough buyers own Kindles, there is little value (and some cost) to publishers in participating in the e-book market through Amazon; likewise, if not enough publishers sell e-books through Amazon, there is little value to consumers in buying a Kindle.  Again, very platform-like.  But books will be written, published and marketed regardless (or maybe almost regardless) of the number of Kindle owners, and book buyers will buy the same books (or maybe almost the same books) whether they own Kindles or not–and some Kindle owners will buy physical books even though they own Kindles.  The point is that the indirect network effects (or economies of scale–a debate for another day) that one expects in platform markets and that one sees in, say, the video game market (the more Xbox owners, the more Xbox game developers there will be and thus the more Xbox owners there will be) are severely attenuated in the e-book market currently because of the overwhelming demand for physical versions of the same books.

Now, both of these points are discussed in different ways by many of the commentators I pointed to on this issue.  Obviously the nature of the contracts between Amazon and publishers is central to the story (in fact, it is the story), and everyone has discussed the issue.  Several folks have also pointed out that e-books compete with physical books, usually to mention that publishers are interested in price discrimination (on which Kiesling and Postrel are particularly good).

But I think viewed in the light of the choice of business model it is clear that the issue is control.  The question is the extent to which Amazon should act more like a platform or more like a merchant, and this distinction is determined by the amount of control it has.  As a merchant, Amazon expects–and everyone benefits from it having–a lot of control, with both its attendant costs and benefits, over the terms of sale of its products.  As a platform, Amazon is willing to cede control over the terms of sale and just manage the platform.

When publishers assert that they want more control over e-book prices they are pushing Amazon toward a platform model for e-books.  The problem is that because book publishers do not internalize the benefits conferred on other publishers from a wider use of Amazon’s platform, their pricing incentives may be inefficient.  As others have noted, publishers probably want to engage in pricing and price discrimination that will maximize their revenue.  But this control may not be optimal for the platform at this nascent stage.

And that’s really the twist.  Amazon is not ready to be a platform in this business.  The economic conditions are not yet right and it is clearly making a lot of money selling physical books directly to its users.  The Kindle is not ubiquitous and demand for electronic versions of books is not very significant–and thus Amazon does not want to take on the full platform development and distribution risk.  Where seller control over price usually entails a distribution of inventory risk away from suppliers and toward sellers, supplier control over price correspondingly distributes platform development risk toward sellers.  Under the old system Amazon was able to encourage the distribution of the platform (the Kindle) through loss-leader pricing on e-books, ensuring that publishers shared somewhat in the costs of platform distribution (from selling correspondingly fewer physical books) and allowing Amazon to subsidize Kindle sales in a way that helped to encourage consumer familiarity with e-books.  Under the new system it does not have that ability and can only subsidize Kindle use by reducing the price of Kindles–which impedes Amazon from engaging in effective price discrimination for the Kindle, does not tie the subsidy to increased use, and will make widespread distribution of the device more expensive and more risky for Amazon.

Many of the commentators (see especially Scalzi and Kiesling) are angered by Amazon’s conduct in the affair, and see in it reason to shift their loyalty from Amazon to its competitors (or at least they did before Amazon capitulated).  I see it quite differently.  To me the affair was a dispute over control rights allocated by contract.  Amazon is willing to pay more for control–to act, in other words, like a merchant re-selling publishers’ books.  It wants this control because it wants to sell e-books at a lower price than publishers want in an effort to sell more Kindles and encourage e-book use (and, incidentally, sell fewer physical books).  At this stage in this market what is needed is not more incentive for publishers to develop more inventory, but more incentive for Amazon to develop its platform.  To the extent that Amazon must now bear more of the risk and cost associated with the transition to e-books, the transition will likely occur more slowly.  Amazon’s effort to maintain pricing control by playing hardball with Macmillan in the physical book market was appropriate and gutsy.  And we would have been better off if it had succeeded.

I don’t think there’s anything to be “done” about the state of affairs other than for Amazon and publishers including Macmillan to continue negotiating.  But I will note one thing (seconding Joshua Gans):  It is almost certainly the case that Amazon capitulated in its dispute with Macmillan because of fear of drawing antitrust litigation.  If so, I think this would be most unfortunate, and it would represent antitrust enforcement placing an inefficient thumb on the bargaining power scale.  Perhaps we shouldn’t be so quick to reject the idea of false positives . . . .

Important Hat Tip.  When I started writing this post I hadn’t yet seen this article by Andrei Hagiu (Hagiu, Andrei (2007) “Merchant or Two-Sided Platform?,” Review of Network Economics: Vol. 6: Iss. 2, Article 3) (embarrassingly enough, as it was published in 2007).  But my thinking here maps significantly onto Andrei’s and I re-wrote some of the post, particularly reflecting some of his terminology, once I did read it in the middle of drafting the post.  It strikes me as an extremely important article in the two-sided markets literature, and I highly recommend it to everyone interested in the topic.  To the extent that I say what he says, he says it better; and to the extent that we diverge, he is probably correct and I am probably wrong.

A recent opinion from Judge Posner cites our very own Josh Wright (Joshua D. Wright & Todd J. Zywicki, “Three Problematic Truths About the Consumer Financial Protection Agency Act of 2009,” Lombard Street, Sept. 14, 2009, available here) (by the way, the essay has drawn a few comments, my favorite of which is definitely the one titled, “are you stupid or scumbags[?]“).

The opinion is vaguely interesting touching as it does on the propriety of short-term, high-interest loans, but the holding rests on an analysis of the commerce clause so is pretty well beyond my ken.

At issue is an Indiana statute that purports to apply Indiana’s restrictive usury laws to consumer contracts executed outside the state, but with creditors that have advertised or solicited sales within Indiana.  The Indiana usury statute at issue constrains consumer loan interest to terms under which “the ceiling is the lower of 21 percent of the entire unpaid balance, or 36 percent on the first $300 of unpaid principal, 21 percent on the next $700, and 15 percent on the remainder,” with an exception for payday loans.  Such terms would preclude payday loans if they weren’t excepted under the statute and does preclude car title loans of the sort at issue in the case.  The court rules that the restriction on out-of-state transactions is impermissible under the constitution and strikes down the Indiana law.

The interesting part (to me) of the case, and the part where Josh (and Todd) are cited, is where Posner discusses the law and economics and related scholarship of car title and payday loans.  He doesn’t really come down on one side or another in this debate except to aver that Indiana has a colorable interest in protecting its citizens from “predatory lending,” if it so chooses.  It seems to me that he gives too much credit to the behavioral-economics-based arguments on the “predatory lending is, well, predatory” side of the debate, but he really doesn’t wade into the debate.  Nevertheless, Josh and Todd get their mention (Todd actually gets a couple of mentions) in this section, and kudos to them (and to FinReg21, where their essay appears) for drawing Posner’s attention.

The courts have pared back plaintiffs’ rights in antitrust cases. They’re concerned about what they believe to be the toxic combination of class actions, treble damages and a very aggressive plaintiffs’ bar. The problem for us as an agency is we come under those restrictions, [too]. So how do we do what we’re supposed to do, which is stopping anticompetitive behavior? One tool in our arsenal is using what’s known as our Section 5 authority to stop unfair methods of competition.

Leibowitz further justifies his approach to Section 5 with an appeal to what he claims to be an important intrinsic limit of Section 5:

The other advantage of this authority is, because it’s not an antitrust statute, it’s going to limit follow-on, private treble-damages law suits. I think in the end, if we use this statute effectively to stop anticompetitive behavior, the business community is going to end up supporting it very, very strongly. Because what they’re most concerned about is follow-on, private, treble-damages litigation. They’re not so much concerned about cease-and-desist [orders], which is the kind of thing we’re often looking at when we use our Section 5 authority. I don’t think big business should be worried. I think they should embrace this trend.

Yes, I’m sure business will eagerly embrace the FTC’s use of this statute, particularly as the agency defends it precisely on the ground that its use is relatively unconstrained by courts and their pesky rule of law.

Leibowitz has been making these claims for some time (see, e.g., these remarks from October 2008 and the N-Data Statement).

But admittedly, if it were true that the FTC’s use of Section 5 did not lead inexorably to costly follow-on litigation, and if it were not the case that the statute were a recipe for unprincipled, uneconomic antitrust enforcement, no doubt there would be some support for it.  But unfortunately for Leibowitz, the claim is NOT true–it is not the case that Section 5 removes the specter of costly private litigation from the equation.

The reality is that many states have “Baby FTC Acts,” modeled on the federal FTC Act and taking enforcement cues–by law–from FTC interpretation of the Act.  And these statutes do provide for private rights of action and treble damages.  So although it is technically true that there is no private right of action under the federal FTC Act, this hardly shields antitrust defendants from follow-on liability.  And even if such actions have been rare up until now (as Leibowitz claims in the remarks linked above), that may well change as the FTC’s precedent-setting enforcement decisions shift toward using the statute as an antitrust enforcement tool and as the Act is used more and more for otherwise-unwinnable Sherman Act cases.

This point isn’t new, and Commissioner Kovacic made this same point in his dissent from the N-Data settlement:

The Commission overlooks how the proposed settlement could affect the application of state statutes that are modeled on the FTC Act and prohibit unfair methods of competition (“UMC”) or unfair acts or practices (“UAP”). The federal and state UMC and UAP systems do not operate in watertight compartments. As commentators have documented, the federal and state regimes are interdependent. [Citations omitted].  By statute or judicial decision, courts in many states interpret the state UMC and UDP laws in light of FTC decisions, including orders. As a consequence, such states might incorporate the theories of liability in the settlement and order proposed here into their own UMC or UAP jurisprudence. A number of states that employ this incorporation principle have authorized private parties to enforce their UMC and UAP statutes in suits that permit the court to impose treble damages for infringements.

If the Commission desires to deny the reasoning of its approach to private treble damage litigants, the proposed settlement does not necessarily do so. If the Commission’s assumption of no spillover effects is important to its decision, a rethink of the proposed settlement and order seems unavoidable.

As far as I can tell, however, Leibowitz and other defenders of this rationale for expanded Section 5 enforcement have not addressed this point, and they continue to rely, disingenuously, in my opinion, on claims that Section 5 enforcement will not lead to follow-on, private actions.

At the same time, as I pointed out here, Leibowitz’ continued claim that courts have reined in Sherman Act jurisprudence only out of concern with the incentives and procedures of private enforcement, and not out of a concern with a more substantive balancing of error costs–errors from which the FTC is not, unfortunately immune–seems ridiculous to me.  To be sure (as I said before), the procedural background matters as do the incentives to bring cases that may prove to be inefficient.

But take, for example, Twombly, mentioned by Leibowitz as one of the cases that has recently reined in Sherman Act enforcement in order to constrain over-zealous private enforcement (and thus not in a way that should apply to government enforcement).  Yes, of course, Twombly was concerned with the private incentives for bringing antitrust strike suits and the costs of such suits.  (And I note in passing that, while the specific monetary incentive at issue in the case might not apply to the government, the government, too, certainly has incentives to bring cases that may be weak–I hardly think the analysis is completely inapposite.  Meanwhile the costs of protracted litigation are just as high if the plaintiff is the government as if it is a private party.)

But the over-zealousness of private plaintiffs is not all it was about, as the Court made clear:

The inadequacy of showing parallel conduct or interdependence, without more, mirrors the ambiguity of the behavior: consistent with conspiracy, but just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market.  Accordingly, we have previously hedged against false inferences from identical behavior at a number of points in the trial sequence.

* * *

Hence, when allegations of parallel conduct are set out in order to make a §1 claim, they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action. [Citations omitted].

The Court was appropriately concerned with the ability of decision-makers to separate pro-competitive from anticompetitive conduct.  Even when the FTC brings cases, it and the court deciding the case must make these determinations.  And, while the FTC may bring fewer strike suits, it isn’t limited to challenging conduct that is simple to identify as anticompetitive.  Quite the opposite, in fact–the government has incentives to develop and bring suits proposing novel theories of anticompeitive conduct and of enforcement (as it is doing in the Intel case, for example).

I recognize that Leibowitz may believe that he is not susceptible to mistakes of this sort, or that (as Dan Crane might say), the FTC has a comparative institutional advantage over courts in making these sorts of determinations.  I disagree, but if that is the claim then Leibowitz should make it explicitly rather than suggesting that current Sherman Act jurisprudence is all about treble damages and strike suits.  I’m quite certain, however, that an explicit claim by the FTC that it never gets it wrong and thus shouldn’t be constrained by meddling courts wouldn’t be viewed very favorably by the business community.

Meanwhile, Assistant Attorney General Varney’s comments are available on the interwebs.  Overall her remarks seem uncontroversial, especially following on the heels of the agency’s (surprising?) clearance of the Live Nation/Ticketmaster merger with conditions (but see the agency’s challenge of the consummated Dean Foods/Foremost Farms merger, about which I will have more to say in a subsequent post).  But I did find one section quite a bit troubling.  Acknowledging that agency practice did not hew slavishly to the Guidelines’ “five-step analytical process” for assessing markets and market share, Varney noted that:

Implicit in deemphasizing the sequential nature of the Guidelines inquiry is a recognition that defining markets and measuring market shares may not always be the most effective starting point for many types of merger reviews. Remember, the purpose of defining a market and assessing shares is to assess potential harm. When it is clear, for instance, that either certain vulnerable customers are likely to be harmed by a merger, or that certain customers have in fact been harmed by a consummated merger, the need to define a market to assess likely competitive effects is diminished. For instance, the consumer harm that followed from the consummated Evanston hospital transaction lessened the importance of the Commission’s market definition and market share analyses in that matter. Our panelists have largely confirmed the view that market definition should not be an end-all exercise. Rather, it is something to be incorporated in a more integrated, fact-driven analysis directed at competitive effects.

I am among the many commenters who have criticized the Guidelines’ approach to market definition and market share–my submission to the workshops is here.  There has also been a strong movement recently to do away with market definition in some unilateral effects analysis and to replace it with the UPP analysis promoted most recently in the Farrel & Shapiro article (pdf).  Interestingly, while Varney is previously  on record opposing this movement, elsewhere in this speech she seems to endorse it:

There is a growing body of evidence that measures of upward pricing pressure, which focus on diversion ratios, and price-cost margins, can be highly informative in assessing the likelihood of unilateral pricing effects.

But this is in a different section of the speech, UPP remains an analytical approach (as opposed to the class of cases Varney is concerned with here where harm to certain consumers is simply “clear”), and it does not seem to be what she’s talking about in the quote above.  Here she seems to mean something else–and I fear it is something troubling.

Taken literally, what Varney is saying is that an ad hoc (ok, fine–an “integrated, fact-driven”) determination that some customers (”vulnerable” ones, whatever that means) may be made worse off by a merger lessens the need for a more comprehensive assessment of overall competitive dynamics within a relevant market.  But I don’t know what this means, frankly.  In the first place, how is the agency supposed to know that some customers are likely to be harmed if it hasn’t assessed the availability of substitutes and the extent of diversion?  One can certainly criticize the method by which this assessment is made, but a conclusion of harm absent this assessment seems absurd.  Moreover, if Varney really means that all that is required to condemn a merger is that any customers may be harmed, no matter how many are also benefited, at a minimum it sounds like she’s writing the efficiencies defense out of the Guidelines, but she may even be justifying condemnation of any and all mergers–after all, how many actions in the marketplace impose a cost on literally no one?  If, as seems likely, it is inframarginal consumers who are “likely” “vulnerable” to price increases (where “vulnerable” may be a synonym for “having inelastic demand”), then this test is a repudiation of the entire economic edifice of modern merger analysis (parallel to my discussion of the DC Circuit’s Whole Foods decision here).

And Varney’s reference to the FTC’s Evanston Northwestern case is a bit of a sleight of hand.  That was indeed a consummated transaction, where the requisite harm was shown by direct pricing evidence following the merger.  That’s quite a bit different than tossing out the Merger Guidelines in a non-consummated merger case because it is “clear” that “vulnerable” consumers are “likely” to be harmed.  And even the Evanston Northwestern case is not without controversy, precisely because forsaking the Guidelines’ analytical framework also forsook clarity in the analysis (see, for example, the strong criticism of the case here).

According to the Guidelines themselves,

The unifying theme of the Guidelines is that mergers should not be permitted to create or enhance market power or to facilitate its exercise. Market power to a seller is the ability profitably to maintain prices above competitive levels for a significant period of time.

The presence of some harm (how much, by the way?) to some consumers does not necessarily equate to market power, unless the definition is simply tautological.  Under the Guidelines approach, this would require a market definition so narrow (defined to include only the harmed customers) that it would be economically meaningless (the classic “red-haired, bearded, one-eyed, man-with-a-limp classification” condemned by Justice Fortas in his Grinnell dissent).  Sidestepping the Guideline’s analytical framework by equating the exercise of market power with a theoretical price increase that wouldn’t be cognizable under the Guidelines (and wouldn’t exist in the real world) is not merely an analytical shortcut, it is a subversion of the whole analysis.  Again, see the fundamental errors of the Whole Foods case.

Now, in the end, all she may be saying is that sometimes there is direct evidence of harm, properly-statistically attributable to the merger, many years after a transaction has been consummated.  Or that the risk of harm is so self-evident that a formal analysis isn’t required–say, when there are simply no other competitors in a relevant geographic area, no timely entry is possible (for some reason . . . ) and a significant number of customers is affected.  I suppose this could happen.  I would expect in such circumstances that the parties wouldn’t even bother attempting the merger, but maybe once in a while the situation could arise.  But I just can’t fathom that this could be a significant enough possibility that it would rise to the level of an important policy speech on the Merger Guidelines by the AAG.

So what is Varney saying?  Anyone?

As you may not know, Monsanto and Pioneer (a DuPont subsidiary) have been engaged in a heated contract and patent dispute rooted in Monsanto’s claim that Pioneer breached a patent license it obtained from Monsanto by stacking (that is, combining in one seed product) Monsanto’s Roundup Ready trait (which makes plants resistant to glyphosate herbicides like Monsanto’s Roundup) with its own glyphosate-tolerant trait in some of its genetically-modified soybean and corn seeds.  Pioneer has counterclaimed, including with a number of antitrust claims.  Arguably the major impetus for the antitrust accusations swirling around Monsanto in this area is Pioneer’s fomenting of such claims, and Pioneer seems to have been “cooperating with” the DOJ in its ongoing investigation.

Although we have been most interested in the antitrust aspects of the case, Monsanto won an important victory in the underlying licensing case last week.  Article here; the court’s (Eastern District of Missouri) decision is available in pdf here.

The basic summary of the case is this (from the decision):

This matter comes before the Court on Plaintiffs’ Motion for Partial Judgment on the Pleadings and Defendants’ Motion to Dismiss Count II of Plaintiffs’ Complaint.

* * *

Monsanto brought the present action for breach of contract, patent infringement, inducement to infringe, and unjust enrichment, alleging that Pioneer violated Monsanto’s contractual and patent rights by producing [] stacked seed products.  Pioneer counterclaims for a declaratory judgment that the license agreements permit it to stack [].  Pioneer also asserts a number of antitrust counterclaims, alleging that Monsanto has abused its patent monopolies, has inserted anticompetitive restrictions into its license agreements with seed producers, and is attempting to employ an anticompetitive “switching strategy” by using new licensing agreements to shift independent seed companies from the current RR trait seed lines to Roundup Ready 2 Yield®, in order to prevent generic entry into the market and extend Monsanto’ patent protection through 2020.

* * *

Monsanto moves for partial judgment on the pleadings that: (1) the license agreements do not permit stacking of any non-RR glyphosate-tolerant traits with Monsanto’s [RR] traits; (2) Pioneer breached those agreements by [so] stacking; and (3) it is entitled to judgment in its favor on Pioneer’s counterclaim for a declaratory judgment that the license agreements permit this type of stacking. . . . Pioneer argues that the license agreements do permit [such] stacking.

We can dispense with Pioneer’s last counterclaim off the bat:  Monsanto announced toward the end of last year that it would not force (and, it claims, never planned to force) seed companies to switch to its new Roundup Ready seeds in anticipation of the expiration of the current Roundup Ready patent in 2014:

But in its letters this week, Monsanto said it would now extend all contracts for Roundup Ready 1 until the patent’s expiration date. It also said it would not enforce language in some contracts that would have required seed companies to destroy or return Roundup Ready seed when the patent expired.

Last week’s ruling explicitly did not reach Pioneer’s antitrust claims which are still alive.

But the ruling did support Monsanto in its basic case which centers around the field-of-use restriction described above.  And on this issue the court found in Monsanto’s favor, holding that the license did indeed contain a valid restriction against stacking of glyphosate-tolerant traits and that Monsanto may seek a remedy for violation of the restriction (if the agreements and patents are deemed enforceable, an issue not reached by the court’s decision) in contract.

The ruling is narrow in scope, but it’s an important victory for Monsanto in what is, at its core, a patent infringement/breach of contract case–not an antitrust case.  It is difficult to escape the conclusion, laid out on Monsanto’s web page here, that Pioneer resorted to stacking in an effort not to improve through synergy the overall glyphosate tolerance of its seeds but rather to patch over the relative  ineffectiveness of its own traits.  Monsanto has licensed its technology widely for use in products where its trait is combined with different traits from other companies (including, notably, competitors like Pioneer).  But for very good reasons (mainly protection of its brand), Monsanto imposes field of use restrictions on the coupling of its Roundup Ready trait with other companies’ traits that purport to perform the same function.  The court’s decision paves the way for Monsanto to thus enforce its property rights.  That this sensible restriction also forms the basis of Pioneer’s and others’ allegations of anticompetitive conduct is regrettable, and I hope the court and the DOJ are mindful of the error cost risks inherent in this kind of claim.

At the same time the ruling makes the underlying case harder for Pioneer and thus makes Pioneer’s antitrust counterlcaims more important to its ability to prevail.  I guess that means more fomenting of antitrust animosity against Monsanto is probably in the cards.

The FTC should be ashamed

Seriously.  What interpretation of events is there other than that the FTC knew it could not prevail in a Section 2 case and decided to go in search of a back-up?  Commissioners Rosch and Leibowitz have been making noise about Section 5 for some time, and this seemed like the perfect opportunity to put it to the test—to make some new law that would favor the Commission in cases like this one where it “knows” there is injury but the Section 2 case law makes prevailing difficult nonetheless.  They have “found” their case, and Intel, its shareholders, consumers and competition generally will suffer mightily for their hubris.

Chairman Leibowitz’ defense of the use of Section 5 is, quite frankly, astonishingly disingenuous.  First is the implicit defense I mention above—“hey, we can’t win under settled law [I guess repudiating the Section 2 Report just wasn’t enough. Bummer.-ed.] so let’s make some new law.  We are doing good after all, and if the law stands in our way, we should find a way around.”  Commissioner Rosch has made similar noises in the past.  I find this degree of hubris to be appalling and dangerous.

Second is the remarkable claim that Section 2 is a problem only because courts have taken its teeth away only because of abusive private litigation process—and the FTC is not susceptible to those process problems, so an emasculated Section 2 should not constrain the FTC.  There is so much wrong with this.  Section 2 jurisprudence and a concern for error costs is about substantive error as well as procedural imbalance; I’d even say it is more about the former.  Read any Section 2 case and the entirety of the decision (Microsoft, for example) is about how, as a matter of substance, we can be sure we’re getting it right in assessing speculative harms.  Of course there is a background procedural element that tips or rights the scales, but the claim that this is entirely what Section 2 jurisprudence is about is ridiculous on its face.  For the FTC to claim that it should not be bound by the substantive, economically-sensible limits of antitrust that courts have developed in their jurisprudence is for the FTC to claim that it is simply above the law—and the economics.  And I would be interested in seeing any case-law precedent for the claim that Section 2 jurisprudence is all about reining in private litigation and not about getting the economics right.

We’ve seen this kind of hubris before—when antitrust enforcers have pursued tenuous and costly cases despite massive uncertainty and copious conflicting evidence:  IBM and Microsoft come to mind.  I still relish Larry Lessig’s admission that he “blew it on Microsoft” because he couldn’t anticipate the future—a future that Microsoft told him and the court was inevitable and coming quickly.  Now we have Commissioner Rosch’s essentially-unmoored reading of Section 5 to support another speculative case—this time one almost certain otherwise to fail under the current law.  It is a disaster in the making not only for Intel but for the economy generally if the Rosch/Leibowitz reading of and approach to Section 5 takes off.

___

My comment on Dan Crane’s post responds to his claim that there is, in fact, a role for Section 5 “independence” rooted in the FTC’s institutional comparative advantage in certain areas over that of private litigants.  Dan writes:

In my forthcoming white paper, I articulate principles–based in the Commission’s comparative institutional advantages–for when it should and should not declare Section 5 independence. To give just one example here, much of the case law on Section 5 suggests that the Commission may have prophylactic powers in cases of incipient conduct.

Perhaps this is because the Commission is better than the courts at predicting likely effects of emerging market forces. But such a justification cannot possibly serve in Intel, since the conduct at issue has been in play for over a decade.

In short, while I strongly support separating Section 5 from the Sherman Act, great care has to be taken to pick the right cases for making the arguments. Intel–a high-profile case with punitive and drastic proposed remedies entailing conduct paradigmatically covered by the Sherman Act–is the wrong case.

My response:

Dan:  I’m torn. I agree with your criticisms of Leibowitz’s and Rosch’s lame justifications for use of Section 5 in this case, but I disagree that there is really any strong justification for the public/private separation you advocate (I’ll await your article for more extensive comment . . . ). But you mention the possibility (for other cases, not here) that the FTC could be better than the courts at predicting emerging market forces. In the first place, I’m curious why you think that or what evidence you have to support the claim. But more important, even if true, why isn’t it perfectly applicable here? Who cares that the conduct has been going on for a decade? Today there are “emerging market forces” that may or may not have existed the last 10 years. By your own claim, the FTC may be better at anticipating these. Just because the conduct has been going on for 10 years does not mean that the market conditions have remained the same, and today is a new day with new emerging market forces. Thus, it seems to me, if you want to claim that the FTC’s alleged better ability to predict emerging market forces justifies use of Section 5, you are providing justification for this use of Section 5.

There is no annual fee for shopping at Wal-Mart, but there is an annual fee for shopping at Sam’s Club. Is there a consumer protection problem here?

Some people think that credit card issuers are acting badly by not charging annual fees, thus luring consumers into services that involve back end costs. By this logic, should retail stores like Wal-Mart be condemned for NOT charging annual membership fees, luring customers in, and making profit at check out lines? In fact, some stores probably charge a “negative” fee.  High-end retailers (Whole Foods, Neiman Marcus) provide a pleasant shopping experience and free samples. Low-end retailers distribute discount cards. They all charge these negative “membership fees” because they surely make up for it at the cashier. Should these retail techniques be regulated to protect consumers?

I find it puzzling why some retailers and service providers charge annual membership fees and others don’t. Why, for example, do wholesale clubs like Costco and Sam’s Club charge memberships while retail department stores do not? I am sure there is much to be learned from finding the answer to this puzzle, but I don’t think it has anything to do with consumer protection. Consumers are doing quite well in either format, and if there are problems of deception they are independent of the annual fee dimension.

Todd is right that consumers are happy to see annual fees go away, but the disappearance of annual fees wasn’t a freebie for consumers.  It came about as part of a shift in the credit card business model whereby upfront fees were replaced with backend fees that have lesser salience to consumers when the consumers decide which cards to carry and use.  This was a move that was made to increase revenue for card issuers (or put another way, to siphon off more consumer surplus); it was not a charitable act.  The disappearance of annual fees is an important innovation, but I think it is a stretch to call it a pro-consumer innovation, when it is viewed contextually.

The disappearance of annual fees was a step in the democratization of credit (or put another way, the decline in underwriting standards).  Whether this was a good thing is unclear.  It certainly increased consumer’s borrowing ability and choices, and might have led to a substitution from secured installment credit to unsecured revolving credit.  But greater ability to borrow and more borrowing choices are not necessarily good.  They are only good to the extent that a consumer is capable of repaying the increased credit line and making informed choices among credit options.  Both of those are questionable for many consumers.

Adam’s incessant claims that consumers are idiots, fooled time and again by rapacious capitalists, is tiresome.  The behavioral econ/behavioral law and econ literature just doesn’t support these strong claims.  Yes, there are some interesting theories.  No, there is no empirical proof, and there are plenty of counter-explanations.  There are some experiments that support these claims.  And they have been called in to question (sorry I can’t take the time to link right now, but we’ve discussed the behavioral literature quite a bit on this blog).  Todd’s competition story is the Occam’s Razor argument here and unsupported claims to the contrary should be scoffed at.

The “contextual” reality is that the “backend” fees that have replaced annual fees are born by a small fraction of cardholders and are avoidable, as opposed to unavoidable annual fees born by all cardholders.  These backend fees have likewise been falling in magnitude and incidence over recent years.  And meanwhile, they act to make borrowing more expensive for the helpless people Adam and other self-appointed consumer advocates claim to want to protect from themselves and less expensive for those who don’t “need” Adam’s protection (scare quotes because I’d say no one “needs” Adam’s help).  On Adam’s own terms this should be a feature, not a bug, and it is arguably more efficient, lowering consumer credit costs for everyone.

Adam’s view that these backend fees make credit seem cheap to profligate spenders in a way that annual fees do not is absurd.  Maybe the first time, but I’d have to say that fees imposed directly when repayment is not forthcoming, for example, and showing up on a statement at the very moment they are incurred should have much more “salience” than annual fees imposed once a year with no relationship in time or magnitude to any behavior on the part of consumers.  Meanwhile, there is a whole industry of protectors warning consumers of the dangers of over-extending, and very few daytime talk shows warning of the perils of annual fees.  I’d wager the behavioral fee is much more “salient” than the annual fee.

This is the problem with the behavioral literature on which Adam relies: It is a set of non-rigorous, just-so stories that can be tortured to support any a priori policy view. The bottom line is that credit card markets have seen falling fees, increasing benefits (rental car insurance, airline miles, purchase protection, etc., etc.) and structural changes that respond to consumer preferences.  The just-so story that would turn this into a story of corporations preying on ignorant consumers is insulting and unsupported.

Here’s the description:

As the founder of the Center for Law and Economics at George Mason University and dean emeritus of the George Mason School of Law, Henry G. Manne is one of the founding scholars of law and economics as a discipline. This three-volume collection includes articles, reviews, and books from more than four decades, featuring Wall Street in Transition, which redefined the commonly held view of the corporate firm.

Volume 1, The Economics of Corporations and Corporate Law, includes Manne’s seminal writings on corporate law and his landmark blend of economics and law that is today accepted as a standard discipline, showing how Manne developed a comprehensive theory of the modern corporation that has provided a framework for legal, economic, and financial analysis of the corporate firm.

Volume 2, Insider Trading, uses Manne’s ground-breaking Insider Trading and the Stock Market as a framework for many of Manne’s innovative contributions to the field, as well as a fresh context for understanding the complex world of corporate law and securities regulation.

Volume 3, Liberty and Freedom in the Economic Ordering of Society, includes selections exploring Manne’s thoughts on corporate social responsibility, on the regulation of capital markets and securities offerings, especially as examined in Wall Street in Transition, on the role of the modern university, and on the relationship among law, regulation, and the free market.

Manne’s most auspicious work in corporate law began with the two pieces from the Columbia Law Review that appear in volume 1, says general editor Fred S. McChesney. Editor Henry Butler adds: “Henry Manne was an innovator challenging the very foundations of the current learning.” “The ‘Higher Criticism’ of the Modern Corporation” was Manne’s first attempt at refuting the all too common notion that corporations were merely devices that allowed managers to plunder shareholders. Manne saw that such a view of corporations was inconsistent with the basic economic assumption that individuals either understand or soon will understand the costs and benefits of their own situations and that they respond according to rational self-interest.

My dad tells me the sample copies have arrived at his house, and I expect my review copy any day now.  But I can already tell you that the content is excellent.  Now-under-cited-but-essential-nonetheless corporate law classics like Some Theoretical Aspects of Share Voting and Our Two Corporation Systems: Law and Economics (two of his best, IMHO) should get some new life.  Among his non-corporations works, the classic and fun Parable of the Parking Lots (showing a humorous side of Henry that unfortunately rarely comes through in the innumerable joke emails he passes along to those of us lucky enough to be on “the list”) and the truly-excellent The Political Economy of Modern Universities (an updating of which forms a large part of a long-unfinished manuscript by my dad and me) are standouts.  And the content in the third volume from Wall Street in Transition has particular relevance today, and we would all do well to re-learn the lessons of those important contributions.

The full table of contents is below the fold.  Get it while it’s hot!

Table of Contents

VOLUME 1 – The Economics of Corporations and Corporate Law

General Introduction by Fred S. McChesney vii

Biography of Henry G. Manne by Jonathan R. Macey xix

Introduction by Henry N. Butler xxix

Review of Corporation Giving in a Free Society 3

Review of The American Stockholder 13

Current Views on the “Modern Corporation” 22

The “Higher Criticism” of the Modern Corporation;
with a Reply by Professor Adolf A. Berle, Jr., Modern
Functions of the Corporate System 59

Corporate Responsibility, Business Motivation,
and Reality 125

Review of The Calculus of Consent 139

Review of The American Economic Republic 149

Some Theoretical Aspects of Share Voting:
An Essay in Honor of Adolf A. Berle 157

Mergers and the Market for Corporate Control 182

Panel Discussion: The Emergence of “Federal Corporation
Law” and Federal Control of Inside Information 199

Our Two Corporation Systems: Law and Economics 214

Cash Tender Offers for Shares: A Reply to
Chairman Cohen 242

Shareholder Social Proposals Viewed by an Opponent 267

The Social Responsibility of Regulated Utilities:
An Essay Dedicated to Wilber G. Katz 302

The Limits and Rationale of Corporate Altruism:
An Individualistic Model 320

Controlling the Giant Corporation: Myths and Realities 337

Testimony of Dr. Henry G. Manne before the Senate
Commerce Committee Considering Federal Chartering
of Large Corporations 351

Index 365

VOLUME 2 - Insider Trading

Introduction, by Stephen M. Bainbridge vii

INSIDER TRADING AND THE STOCK MARKET

Preface 3

1  Background 9

2  The Traditional Legal Context 26

3  Developments Under SEC Rule 10b-5 44

4  The Market for Valuable Information: An Introduction 59

5  Mechanisms for Marketing Inside Information 69

6  Market Effects of Different Trading Rules 88

7  Effects of Different Legal rules on Non-inside Traders 103

8  The Entrepreneur in the Large Corporation 121

9  Inside Information: The Entrepreneur’s Compensation 141

10 Objections to Information as Compensation 157

11 The Problems of Public and Private Policing 169

12 A Postscript on Government 181

List of Cases 200

Appendix: Selected Cases 202

ARTICLES AND ESSAYS

In Defense of Insider Trading 235

Insider Trading and the Administrative Process 256

Insider Trading and the Law Professors 309

A Rejoinder to Mr. Ferber 359

Definition of “Insider Trading” 364

Bring Back the Hostile Takeover 374

Options? Nah, Try Insider Trading 377

The Case for Insider Trading 380

Citizen Donaldson 384

What Mutual-Fund Scandal? 388

Regulation “In Terrorem” 392

Insider Trading: Hayek, Virtual Markets, and the Dog That Did Not Bark 396

Index 425

VOLUME 3 – Liberty and Freedom in the Economic Ordering of Society

Introduction, by Jonathan R. Macey vii

First Lecture 3

Economic Aspects of Required Disclosure under Federal Securities Laws 28

Reach vs. Grasp: A Legal Authority Analyzes a New Book on Securities Fraud 77

What Price Blue-Sky? State Securities Laws Work against Private and Public Interest Alike (with James S. Mofsky) 84

Prohibition on Wall Street? Congress Should Rewrite the Securities Exchange Act of 1934 94

Accounting and Administrative Law Aspects of Gerstle v. Gamble-Skogmo, Inc. 104

Law by Proxy? In Gerstle v. Gamble-Skogmo, the SEC Has Changed the Rules 136

Unconvincing Case: Mutual Fund “Reforms” Would Do More Harm than Good 143

Corporate Militants: Their Lawsuit Makes a Case for Sounder Securities Regulation 151

The Parable of the Parking Lots 158

The Political Economy of Modern Universities 165

Sins of Commission: A New Study Challenges SEC Disclosure Policies 189

Fighting Back against Controls 196

Preface to The Economics of Legal Relationships 204

The Publicly Held Corporation as a Market Creation 209

A New Perspective for Public Interest Law Firms 215

The Judiciary and Free Markets 239

A Free Market Model of a Large Corporation System 267

How Law and Economics Was Marketed in a Hostile World: A Very Personal History 291

Liberty Fund Conferences Attended by Henry Manne 315

Index 319

Cumulative Index 335