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Category: Antitrust

Expensive Glasses: Monopol-eye?

Why are eyeglasses so expensive? Take a listen to this podcast. If you’re like me, you’ll learn a lot about how to save on your next pair. And there’s a lesson or two about the failures of contemporary antitrust law. Finally, it mentioned a company called WarbyParker.com, which apparently not only has reasonable prices, but also gives away a free pair to the needy for every pair it sells.

Health Reform and Accountable Care Organizations

Critics of the ACA have frequently complained that the legislation does not do enough to improve quality or to cut costs. However, the Act did create incentives for new alliances of hospitals and doctors, known as “Accountable Care Organizations.” Now provider lobbies are demanding some pretty dramatic changes to health care regulation in order to implement ACOs. In this post, I want to explain what ACOs are, and why they challenge traditional health care regulatory models.
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Future of the Internet Symposium: Preserving Open Space for User Innovation

First off, thanks to Concurring Opinions and Danielle Citron for hosting this online symposium on Jonathan Zittrain’s The Future of the Internet – and How to Stop it.  Before I launch into my own thoughts, I want to add my own version of the praise that the book has already won.  It is an immensely readable work that succeeds in showing us where we’ve been, how we got to where we are, and the steps to take to avoid going where we’d rather not be.

I have three brief points, involving a comparison with Japan, some thoughts about competition, consumer protection and innovation, and finally, a somewhat different take on the lessons of Wikipedia.

This symposium is incredibly timely, particularly given the concern in recent weeks about the Google/Verizon agreement.  In TFOTI, Zittrain highlights the risks that threaten the Internet’s future, and explains how the net neutrality debate is in some ways a mismatch for those risks.  For example, he points out that the migration from the Internet to, in his words, tethered appliances like the iPhone and TiVo, ultimately provide an end-run around net neutrality on the Internet (pp. 177-185).  Accordingly, he argues that preserving generativity is a better-tailored principle.

The lead in The Economist this week also takes on the Google/Verizon agreement, and critiques net neutrality from a different angle calling America’s “vitriolic net-neutrality debate” “a reflection of the lack of competition in broadband access.”  If you’re reading this symposium, you probably already know, possibly because you read this, that in many other industrialized countries incumbent telcos were forced years ago – and not just in a superficial way – to open up wholesale broadband to competitors.

I’m in Tokyo this academic year thanks to Temple’s long reach across the globe and to my gracious hosts at Keio University Law School.  I’ve been travelling to Japan repeatedly since the late 1980s, and one of the changes I’ve been  struck by is how a country that in the 1990s was generally held to be well behind the U.S. in telecommunications now seems ahead in broadband and mobile Internet.  Read More

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On the Colloquy: The Credit Crisis, Refusal-to-Deal, Procreation & the Constitution, and Open Records vs. Death-Related Privacy Rights

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This summer started off with a three part series from Professor Olufunmilayo B. Arewa looking at the credit crisis and possible changes that would focus on averting future market failures, rather than continuing to create regulations that only address past ones.  Part I of Prof. Arewa’s looks at the failure of risk management within the financial industry.  Part II analyzes the regulatory failures that contributed to the credit crisis as well as potential reforms.  Part III concludes by addressing recent legislation and whether it will actually help solve these very real problems.

Next, Professors Alan Devlin and Michael Jacobs take on an issue at the “heart of a highly divisive, international debate over the proper application of antitrust laws” – what should be done when a dominant firm refuses to share its intellectual property, even at monopoly prices.

Professor Carter Dillard then discussed the circumstances in which it may be morally permissible, and possibly even legally permissible, for a state to intervene and prohibit procreation.

Rounding out the summer was Professor Clay Calvert’s article looking at journalists’ use of open record laws and death-related privacy rights.  Calvert questions whether journalists have a responsibility beyond simply reporting dying words and graphic images.  He concludes that, at the very least, journalists should listen to the impact their reporting has on surviving family members.

Here Comes FinReg

Via Ezra Klein’s Wonkbook (definitely one of my favorite morning emails), a variety of takes on what’s in the financial reform bill:

1. From Deloitte’s 12-page summary:

Because the new U.S. law is complex, it can be helpful to remind ourselves that its underlying purpose is relatively simple and has two powerful strands: 1. ‘De-risk’ the financial system by constraining individual organizations’ risk-taking activities and capturing a broader set of organizations’, including the so-called “shadow” banking system, in the regulatory net 2. Enhance consumer protections. . . .For example, the need for “arm’s-length” swap desk affiliates combined with the move from over- the-counter to exchange trading for derivatives, tighter constraints on leverage and risk-taking, and higher liquidity requirements imply lower profit margins in future from those activities.

Some estimates I’ve seen have estimated the profit margins might be around 15% lower.

2. Simon Johnson on the Kanjorski Amendment as a “new kind of antitrust:”

Effective size caps on banks were imposed by the banking reforms of the 1930’s, and there was an effort to maintain such restrictions in the Riegle-Neal Act of 1994. But all of these limitations fell by the wayside during the wholesale deregulation of the past 15 years. Now, however, a new form of antitrust arrives – in the form of the Kanjorski Amendment, whose language was embedded in the Dodd-Frank bill. Once the bill becomes law, federal regulators will have the right and the responsibility to limit the scope of big banks and, as necessary, break them up when they pose a “grave risk” to financial stability.

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Breaking Up Behemoth Banks

Thanks to banking industry mistakes and government’s orchestration of its rescue, the country now has ten banks that together command some $10 trillion in assets, roughly equal to nearly 70% of the country’s gross domestic product. Pending legislation would break those up into a total of about 36, each still commanding about $285 billion in assets apiece—larger than the next largest bank is now.

That break up would eliminate the continuing threat to the US economic and political system posed by banks deemed so big that government lavishes trillions in aid to avoid letting them fail—at enormous cost to ordinary citizens and the real economy. It is by far the cleanest and most reliable solution to the manifest havoc massive banks wreak, not addressable by any pending technocratic tinkering like better regulation or capital requirements.

The break-up idea is not as radical as it is controversial, due to foes of ex ante legal constraints on private power.  All passage of the legislation would mean is substantially a return to the scale and distribution of the US banking system as of the mid-1990s, when no bank commanded assets exceeding more than a few percent of GDP. In important part, as the lists below suggest, the conglomerate mergers of the past two decades that caused this massive concentration of economic and political power would be reversed. Read More

Banks, Bankers, and the New Political Economy

As post-mortems of the financial crisis proliferate, it’s helpful to keep an eye on some foundational causes. Michael Lewis recently commented that “the people who squandered the most money paid themselves the most”—and continue to do so. We’ve all heard about agency problems, but rarely are they as crisply illustrated as in this post by James Kwak:

[The hedge fund] Magnetar made the Wall Street banks look like chumps. [In] one deal . . . Magnetar put up $10 million in equity and then shorted $1 billion of AAA-rated bonds issued by the CDO. It turned out that in this deal, JPMorgan Chase, the investment bank, actually held onto those AAA-rated bonds and eventually took a loss of $880 million. This was in exchange for about $20 million in up-front fees it earned.

But who’s the chump? Sure, JPMorgan Chase the bank lost $880 million. But of that $20 million in fees, about $10 million was paid out in compensation (investment banks pay out about half of their net revenues as compensation), much of it to the bankers who did the deal. JPMorgan’s bankers did just fine, despite having placed a ticking time bomb on their own bank’s balance sheet. Here’s the second lesson: the idea that bankers’ pay is based on their performance is also hogwash. (The idea that their pay is based on their net contribution to society is even more absurd.)

I was recently at a conference on “Too Big to Fail” banks organized by Zephyr Teachout, and several experts explained how the tail of massive compensation was wagging the dog of societal capital allocation. William K. Black‘s theory of “control fraud” is one of many efforts to illuminate the persistent conflicts of interest between banks, bankers, and investors, but one needn’t designate any of these conflicts “fraudulent” in order to see how socially destructive they have become. Rather, pulling back to see the big picture—from the lens of political economy—illuminates the key drivers of the crisis. As Kwak notes, “the crisis was no accident: it was the result of the financial sector’s ability to use its political power to engineer a favorable regulatory environment for itself.” Thinkers across the political spectrum—from Kling to Kuttner—can recognize the critical role of political connectedness in driving bankers’ compensation.
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Me, Justice Stevens, and the Dublin Marathon

Here is a sentence I never expected to write. So there I was on Monday in the middle of running the Dublin Marathon when I decided to listen on my Ipod to a C-Span podcast interview with Justice Stevens. I had traveled to Dublin to run the actual Dublin marathon and to co-host Antitrust Marathon IV: Marathon with Authority, a round table discussion co-hosted with the British Institute of International and Comparative Law and the Irish Competition Authority.

Around Mile 11, I was hurting and turned from a combination of Irish rock and random songs to some pod casts. After some short New York Times and NPR pod casts, I remembered that I had downloaded a series of C-Span interviews with the current Justices and Sandra Day O’Connor.

I have a special fondness for Justice Stevens. We are both Chicagoans, Cub Fans, and Northwestern Law grads. More improbably, we even had the same antitrust professor (James Rahl) at Northwestern, albeit about 35 years apart. That plus the fact he was primarily an antitrust litigator before going on the bench was enough to get me to devote the next 30 some minutes, and about 3 miles, to the Stevens interview.

A lot of it was a fluffy discussion of his chambers and personal history. But mixed among the fluff and the questions for non-lawyers (What is certiorari?), there were a handful of interesting tidbits. Justice Stevens talked about the reasons and impact of not participating in the cert pool, the importance of writing his own first drafts, and his interest in having the court hear a few more cases than its current docket. There are no smoking guns or shocking revelations, but Justice Stevens does mention the need for Justices from diverse legal backgrounds, such as veterans and litigators, as an important mix for the Court to have on the bench. Justice Stevens is of course both and as far as I know the only current Justice to actually have made his living as a litigator.

The main thing I came away with was the genuine niceness of the good Justice which was my impression from the only time I ever met him. In 1993, I taught in a summer program in Innsbruck, Austria where Justice Stevens was lecturing. Instead of staying for the three days as promised, he stayed and lectured the entire week and interacted warmly with the students and the rest of the faculty. At one point, a student asked him to sign the packet of course materials which he did after class. Because he did not want to play favorites, he then stayed and patiently signed for more than a hundred students.

In the pod cast interview, Stevens demurred on picking a most important or favorite case. But when asked about a most memorable experience, he didn’t hesitate and proudly mentioned throwing out the first pitch at Wrigley Field before a Cubs game at the age of 85.

With that, I grinned, quickened my pace a bit, and headed up the next of an endless series of hills on my way around Dublin on a surprisingly warm and sunny late October day.

I have not listened to the rest of the interviews. But if anyone else has, please post if there are particularly revealing or interesting moments.

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Antitrust in Obamaland

Antitrust enforcement was one area where most observers expected significant changes from the Bush years, particularly at the Antitrust Division of the Justice Department. For the past eight years, the Antitrust Division had vigorously prosecuted cartels, but had not been active in monopolization or merger enforcement. In addition to bringing relatively few cases in these areas, the Division had filed a number of amicus briefs in support of defendants, opposed a petition for certiorari sought by its sister agency the Federal Trade Commission, and issued a number of reports and policy recommendations that restricted the reach of the antitrust laws or imposed significant burdens on private plaintiffs. During this same period, the FTC proved to be more active in the competition area, particularly in the health care and intellectual property fields which suggests that the FTC will have a greater continuity in the competition area despite key changes at the Commissioner and staff levels.

The key officials in the Obama administration came into the antitrust agencies promising change. Christine Varney, the new head of the Antitrust Division, gave a speech in her early days promising more vigorous enforcement and hearkening back to the days of Thurman Arnold during the latter half of the New Deal. At the same time, she repudiated a highly restrictive report on monopoly power issued during the waning days of the prior administration issued by the Justice Department alone because a majority of the FTC had refused to endorse. In addition, the Division has reversed policy and filed an amicus brief in support of plaintiffs in a key Supreme Court case involving the pharmaceutical industry. Most recently, the Justice Department and the FTC jointly announced a new initiative to revisit the Merger Guidelines of the 1990s used by both agencies to decide which mergers and acquisitions to challenge on competition grounds. Read More

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The Informant!

It’s not often that I hear about a new Hollywood movie based on the facts of a case that I first encountered while clerking, but The Informant!, directed by Steven Soderbergh and starring Matt Damon, is just such a film. It tells the story of Mark Whitacre, a central actor in a case decided while I was clerking for my judge on the Seventh Circuit. Whitacre served as the key informant in a successful FBI investigation into price-fixing charges against Archer Daniels Midland Co. that sent top executives to prison. As my co-clerk Kevin Metz observed, the case featured the type of direct evidence of an agreement to fix prices that antitrust professors explain is almost never available in antitrust prosecution. Whitacre secretly recorded many hours of conversations with co-conspirators in the lysine industry over three years, all while bragging carelessly to others about his role as an FBI informant and embezzling millions from ADM under the FBI’s nose. During my clerkship year, we worked on a number of memorable cases, but United States v. Andreas probably featured the most colorful facts. Whitacre was a very odd and unpredictable personality who suffered from bipolar disorder, which Matt Damon plays up for comic effect in the movie.