Categories
Antitrust Monopolization Regulation

Biden Antitrust Policy and the Fall of Kabul

The election of a longtime Washington insider to the presidency was, if anything, supposed to mark a return to competent, reality-based government. The astonishing failure of the administration to predict—or adequately plan for—the rapid collapse of the Afghan government this summer is hinting that the new administration is not all that much more competent than the last.

There are warning signs in Biden’s antitrust policy as well. His executive order on competition, for example, misleadingly cited as authority academic sources that either didn’t support the order, or suggested it would fail. And now we learn that the administration actually thinks it can use antitrust action to reduce inflation caused by pandemic-induced supply chain disruption. Oh my.

Antitrust won’t stop inflation caused by supply chain disruption because the profits that firms generate from supply chain disruptions are scarcity profits, not monopoly profits. They are the product of actual scarcity, not the artificial scarcity that antitrust can alleviate by promoting more competition. Only an administration that doesn’t know its Antitrust 101 would miss this.

Indeed, competent progressivism doesn’t make these kinds of mistakes. Take John Maynard Keynes. He was all for killing off the rentier—the earner of the kind of economic profits that supply-chain-induced inflation is dealing to many corporations these days—but he never thought antitrust would do the trick.

Because, like most progressives of his generation—and the competent progressives in ours—he understood that rent is a problem of competition, not monopoly.

The rentier doesn’t need to smash his competitors; he just lies on his fainting couch and watches the numbers tick up in his bank account because he happens to own a uniquely productive resource, one that competitors can’t beat, even if competitors are allowed to try their hardest.

Similarly, the big corporations charging high prices today don’t need to smash their competitors to charge those prices, because their competitors don’t have access to better sources of supply either. No matter how hard these firms compete with each other, there is just not enough production capacity in the supply chain to enable them to ramp up output and therefore no firm has an incentive to reduce prices and increase profits through increased market share.

That is not to say that these corporations are not earning rents, meaning profits in excess of what they need to be ready, willing, and able to produce and sell their wares on the market. They are. Rental car companies, for example, are charging multiples of what they used to charge for a car, while at the same time facing much lower costs than they ever did, because they are unable to expand their fleets. It follows that the price premia rental companies are charging are pure profits that the rental companies do not strictly need in order to remain in business.

But the profits are not a result of anticompetitive conduct. They are due, instead, to shortage. The rental car companies are not expanding their fleets, because a microchip shortage means there aren’t any cars available for them to buy. So, while they wait, the companies ration access to the cars that they do have by charging high prices for them, ensuring that those consumers with the largest pocketbooks get access to cars, and those with less means have to sit on the sidelines and wait for the shortage to end.

Unless it is reformed to adopt pricing remedies—and there is no indication the Biden Administration is seeking to do that—Antitrust has nothing to bring to this situation but trouble. To the extent that Biden’s antitrust initiatives translate into actual cases and the imposition of actual antitrust remedies, we can expect costs that will be passed on to consumers in every competitive market that the Administration mistakenly targets. The costs will be legal costs and also those associated with unnecessary remedies—the firm that actually worked better when it was whole hacked to peaces to please the angry antitrust god.

But the biggest danger posed by the use of antitrust to deal with supply chain disruption is that antitrust will be completely ineffective at actually getting prices down.

Smash three big rental car companies into twenty small ones, but you still won’t increase the number of available cars, and so you won’t, actually, increase competition, or bring prices down. Each of the smaller companies will know that it can raise prices without losing market share to the other nineteen, because the other nineteen don’t have any additional cars to rent out to customers either.

Failing to get prices down would be bad, however, because prices can and should be made to come down. For, as noted above, the fact that prices are currently high due to shortage does not imply that they must be high in order to induce firms to continue to compete and produce as best they can. The rental car companies could just as easily cover their costs by charging the rock bottom prices they charged last summer because the companies are, after all, still fielding the same fleets they fielded last summer. They are charging higher prices because the shortage (but not their own anticompetitive conduct) shields them from additional competition.

How, then to get prices down without antitrust? Keynes’s elegant solution was the euthanasia of the rentier. This was understood by Keynes to mean that the central bank could use monetary policy to drive down interest rates, thereby depriving the rentier of the ability to earn a fat return on his investments.

But the euthanasia of the rentier actually has a deeper meaning. For an actual rentier could always respond to low interest rates in financial markets by using his money to invest directly in actual businesses, especially businesses earning large rents due to shortages. What makes this impossible, and really does euthanize the rentier, is that the lower interest rates created by monetary policy induce large numbers of businesspeople to borrow money and invest it in new businesses, and this investment ultimately eliminates shortages across the economy, driving rents down and killing off the rentier.

But it takes time for money invested in new businesses to eliminate shortages and drive prices down. To get prices down now, before supply-chain disruptions can be eliminated, there are two other options.

The first is direct price regulation. Government could impose price controls in industries subject to pandemic-driven supply chain disruptions. President Biden could order rental car companies to revert to charging their low summer 2020 prices, for example. President Nixon imposed price controls in the 1970s; it can be done.

The second is taxation. Congress could vote a special corporate tax aimed at hoovering up the rents generated by firms enjoying pandemic-driven shortages. That would not bring respite directly to consumers, who would continue to pay high prices, but Congress could vote to redistribute the proceeds of the tax to deserving groups, or spend the money on projects like infrastructure that benefit everyone, rather than leaving it to firms to pay it out to wealthy shareholders to stimulate the market for yachts.

I am having trouble deciding whether the Biden Administration’s obsession with antitrust as cure-all is the legacy of President Biden’s long career as a centrist Democrat or a result of the meathead radicalism that the Trump Administration inspired in some progressives.

Either way, like relying on the Afghan government to defend Kabul, he can’t say no one warned him it wasn’t going to work.

Categories
Antitrust Monopolization Regulation

The Executive Order on Promoting Competition That Isn’t

President Biden’s Executive Order on Promoting Competition in the American Economy does a great job of targeting a range of business practices across the economy that harm workers and consumers.

But the order—and the fact sheet accompanying it—also highlight how much wishful thinking is currently going into the contemporary progressive romance with competition as an economic cure-all.

The fact sheet declares that economists have found a link between competition and inequality, even though whether a link exists remains the most important open question in antitrust economics today and the subject of much ongoing debate. And despite the competition rhetoric, most of the order is actually about consumer protection or price regulation by other means, not competition.

Wishful Thinking about Competition and Inequality

Anyone who has been following the unresolved debate over the existence of a link between competition and inequality is going to be surprised to learn from President Biden’s fact sheet that “[e]conomists find that as competition declines . . . income [and] wealth inequality widen.”

The surprised might include Thomas Piketty, the dean of the contemporary economic study of wealth inequality, who has observed that the fundamental cause of inequality “has nothing to do with market imperfections and will not disappear as markets become freer and more competitive.”

But it might also be news to the authors cited by the fact sheet itself.

Follow the first of the quoted links and you get to a paper that connects the decline in labor’s share of GDP (a proxy for inequality) to rising markups (firms charging higher prices relative to their costs), but not to a decline in competition.

The author is careful not to link rising markups to a decline in competition because increases in markups have two potential causes, not one: monopoly power and scarcity power—as I have highlighted in a recent paper.

That is, firms can obtain the power to jack up prices by excluding competitors and achieving monopoly power, or they can do it by making better products than everyone else (or the same products at lower cost), in which case even the price prevailing in a perfectly competitive market will represent a markup over cost.

The great open question of contemporary antitrust economics is whether the evidence of an increase in markups in recent years is evidence of monopoly markups or scarcity markups. As Amit Zac has pointed out to me, this is the essence of the disagreement between the work of De Loecker et al. (monopoly markups) on the one hand and the work of Autor et al. (scarcity markups) on the other.

The point is: this is an unresolved question. Economists haven’t “found” a connection between declining competition and contemporary increases in inequality. They haven’t even found a connection between declining competition and contemporary increases in markups. They’re still looking.

But you wouldn’t know that from the fact sheet.

Follow the second of those links and the support is equally weak. The title of the cited article, “Inequality: A Hidden Cost of Market Power,” would no doubt appeal to a fact sheet writer fishing Google for quick cites. But the paper itself could not be more timid about its conclusions, telling readers that it does no more than to “illustrate[] a mechanism by which market power can contribute to unequal economic outcomes” and warning that “[a]lternative models and assumptions may yield different results.”

The authors have good reason to be timid, because the paper’s attempt to distinguish between monopoly markups and scarcity markups extends no further than this: “we attempt to compare actual mark-ups with the lowest sector specific mark-ups observed across countries, in order to estimate an unexplained or excess mark-up.”

So: find the lowest markups in an industry, assume they are scarcity markups, and attribute any markups you find that exceed them to monopoly.

Not exactly convincing, as the authors themselves seem to telegraph—which is why the character of the higher markups we are observing today very much remains an open question.

Highlighting Antimonopolism’s Intellectual Deficit

The last revolution in antitrust policy happened in the 1970s, and however one might feel about the path it beat toward less antitrust enforcement, there is one thing one must grant: it carried the day as an intellectual matter.

You can’t read the book of papers produced by the epochal Airlie House conference and not get the impression that the Chicago Schoolers really got the best of the old antitrust establishment on the plane of ideas. I once asked Mike Scherer, who carried the banner for the old pro-enforcement establishment more than anyone at that conference, why he comes across as so timid in the dialogues reproduced in that book.

His answer: Chicago had convinced him, too.

The current inflection point in antitrust has not been built on anything like that level of intellectual consensus. I have argued elsewhere that this is because the current movement didn’t need to win the academy to achieve liftoff, as Chicago did. The current movement got its thrust instead from a highly sympathetic press, which has a competitive interest in unleashing a reinvigorated antitrust on its nemeses, the Tech Giants.

It is a symptom of contemporary antimonopolism’s intellectual deficit that our new, self-consciously reality-based administration can go to war against monopoly only by passing off economic conjecture as economic fact.

Did Golden-Age Antitrust Save Consumers “Billions”?

Before moving on from the order’s wishful thinking, I can’t help but also mention the fact sheet’s claim that mid-20th-century antitrust “saved consumers billions in today’s dollars and helped unleash decades of sustained, inclusive economic growth.”

Was mid-20th-century antitrust enforcer Thurman Arnold responsible for America’s 2% annual growth rate from the 1950s to the 1970s?

The press release doesn’t cite any economic study taking that position—because there is none. But there are plenty that think those twenty years of 2% growth had something to do with the nation’s return to the peacetime production possibilities frontier after nearly two decades of depression and war.

And did mid-20th century antitrust really save consumers “billions?” You might be forgiven for thinking that link leads to a recent economic study. Instead, it is to a set of figures, released by Thurman Arnold himself, that are cited by legal historian Spencer Weber Waller as possible exaggerations. For example, Waller: “[Arnold’s] case against the milk industry in Chicago supposedly produced $10,000,000 a year in consumer savings” (emphasis mine).

All the figures cited by Waller do probably add up to billions in today’s dollars. But Waller cited them as evidence that Arnold knew how to use hyperbole to win political support for his antitrust campaigns.

Not that the Biden Administration would be doing the same thing.

Competition as Price Regulation by Other Means

But what about the order itself? Here’s where things really get interesting. For despite the rhetoric little of it is actually about competition: it is, amazingly, largely about price regulation and consumer protection instead.

Why? Because the competition business and the inequality business are two very different things; and no matter how hard you tell yourself you are doing competition policy, if you’re trying to equalize wealth, you’re going to end up doing something else.

To see why the order is mostly about price regulation, consider that competition really has two virtues, one more important than the other. The smaller virtue is that competition can reduce prices. The greater virtue is that competition promotes innovation, which is the principal driver of economic growth and benefits to workers and consumers alike.

The reason competition’s effect on prices is a lesser virtue is that competition is wasteful. It means duplication of management and often diseconomies of scale. As I have argued at length elsewhere, if you want to get price down it’s far less expensive simply to order lower prices than to try to jerryrig markets into producing them through unregulated competition.

Antitrust gets this, and so it does not actually prohibit the charging of high prices. Antitrust is much more interested in prohibiting conduct aimed at excluding competitors from markets, because this keeps out the sort of innovative challengers that are responsible for the link between competition and innovation.

The striking thing about Biden’s order is that it is mostly aimed at promoting the first kind of competition—competition meant to lower prices—rather than the second.

Which makes it price regulation by other means. Let’s consider some of the initiatives contained in the order.

Canadian Drugs

The order calls for lowering prescription drug prices by importing drugs from Canada. The thing is: the drugs imported from Canada will be the same as drugs sold in America, only cheaper, which means that the only competition this will create will be between the same products sold at different prices on different sides of the border.

Promoting competition between iterations of the same product produced by a single producer isn’t going to promote innovation. It’s just price regulation by other means.

And wasteful means at that. There’s a reason why Canada has lower drug prices than the U.S., and it’s not because there’s more competition in Canada—a lot of Canadian drugs come from America in the first place. It’s because Canada regulates drug prices directly.

So why can’t we just do that, too, instead of sending American drugs north to be price regulated so that we can bring them back down south at lower prices?

Because, I guess, that wouldn’t sound like a competition policy solution, and progressives today are convinced that competition cures all.

Generic Drugs

The order also simultaneously calls for more antitrust enforcement against “pay-for-delay” drug patent settlements and “more support for generic and biosimilar drugs.”

As in the case of drugs from Canada, competition from generic drugs doesn’t promote innovation. Generics are, by definition, copies of preexisting drugs; generic drug companies don’t invent new drugs, they just strive to bring old ones to market at low prices. So generic competition is just price regulation by other means, and particularly futile and inefficient means at that.

For branded drug companies use pay-for-delay settlements to undermine generic competition, and enforcers have wasted untold hours litigating to stop them, to only modest effect. Plus, forty years after Congress embraced generic competition with the Hatch-Waxman Act, we still have a drug price problem.

That makes an order telling the agencies to stop pay-for-delay and to promote generic competition at the same time more than a little odd. It is like telling a fireman to pump harder and stop more leaks. It might be time to find a different hose.

If Congress wants to get drug prices down, the easiest way to do it would be to follow the Canadians and, you know, order drug prices down, rather than trying to manage the Herculean task of creating and maintaining a competitive generic drug market. The Biden Administration should call for that.

But competition cures all.

The Right to Repair

The order also calls for protecting the right of buyers to repair a host of items from cell phones to tractors.

Now, one can imagine that competition between repair shops might lead to innovation. But it will be innovation in repairs, which is not going to do much to raise living standards. The innovation that matters is not in repairs but in the design of the products being repaired.

Opening products up to third-party repairs isn’t really about competition at all, therefore, but about price regulation by other means.

And not regulation of the price of repairs, but rather of the price of the product to be repaired. The Biden Administration probably believes that making products reparable will drive down the all-in price that buyers pay for the products, because buyers will be able to avoid paying high repair fees to manufacturers, or will be able to go for a longer period before having to replace the item with a new one.

But if manufacturers are able to extract extra revenues from their buyers by charging them for repairs today, what’s to stop them from simply raising their up-front prices to compensate for lower revenues on repairs tomorrow?

If the Biden Administration thinks cell phones and tractors are too expensive, a better way to actually reduce the amount people pay for these products would be to order manufacturers to charge lower all-in prices for them.

But competition cures all.

Small Business Procurement

The fact sheet says that the order will “[i]ncrease opportunities for small businesses by directing all federal agencies to promote greater competition through their procurement and spending decisions.”

But “competition” here means the opposite of what we normally mean. It means that the firm offering the best products at the lowest prices shouldn’t get the contract; the smallest firm should get it instead, even if it offers shoddy products at high prices.

This is regulation of the price paid by government for goods and services by other, deeply inefficient means.

Here’s a better way to redistribute wealth from taxpayers to small businesses that can’t make it in the market: just write their owners checks to stay home. That way the (presumably) poor get their money without the federal government having buy anything but the best.

But competition—or its semblance—cures all.

Protecting Third-Party Sellers on Amazon

The order also directs the FTC to create rules for “internet marketplaces” and the fact sheet suggests that the rules should prevent Amazon from copying the products of third-party sellers.

As the use of generic competition to tame drug prices suggests, the sort of competition that comes from copying is primarily about getting prices down, rather than innovation. If Amazon wanted to beat its third-party sellers by innovating, it wouldn’t create close matches of their products, but rather something new. By selling an identical product, Amazon instead places all the competitive pressure on price.

So we can understand rules preventing Amazon from copying as attempts to drive the price of goods sold on Amazon’s ecommerce platform up, presumably to redistribute wealth from consumers to third-party sellers. Such rules are, in other words, price regulation by other means.

Because the rules would drive prices up, they are the least consumer-friendly initiative described in the fact sheet (unless one expects Amazon to respond by competing more with its third-party sellers based on innovation).

But precisely because the rules seek to drive prices up rather than down—to squelch duplicative and wasteful competition between Amazon and third-party sellers rather than to promote it—they are also the order’s least inefficient example of price regulation by other means.

But they represent price regulation by other means all the same.

Non-Competes

According to the fact sheet, the order “encourages the FTC to ban or limit non-compete agreements.”

Non-compete agreements in high-skilled jobs are associated with higher wages, suggesting that at the high end they help firms invest in their employees, and that investment, in leading to new skills and abilities, counts as a kind of innovation in human resources.

But the fact sheet is interested in the application of non-competes at the low end: to “tens of millions of [presumably ordinary] Americans—including those working in construction and retail . . . .” Here, the evidence suggests that non-competes don’t induce firms to invest more in their employees; they just prevent employees from using outside options to bid up their pay.

A ban on non-competes for ordinary Americans would therefore not have any effect on innovation in worker training, but it would raise wages, making it price regulation by other means.

If we really want to get wages up, of course, the way to do it is to order them up, through initiatives like an increase in the minimum wage. And I get that the Biden Administration indeed also wants to raise the minimum wage.

But that doesn’t make banning non-competes any less price regulation by other means.

Direct Price Regulation

To President Biden’s credit, the order also calls for plenty of direct, and therefore more efficient, price regulation. The remarkable thing is that he does this in a competition order.

The Federal Maritime Commission is to protect American exporters from “exhorbitant” shipping charges. Railroads are to “treat . . . freight companies fairly,” which means charging them lower prices for access to track. The USDA is to “stop[] chicken processors from . . . underpaying chicken farmers.” The FCC is to “limit excessive early termination fees” for internet service. And airlines are to refund fees for wifi or inflight entertainment when the systems are broken—a regulation of the all-in price of a flight.

(Ok, the reason the order doesn’t do more direct price regulation might be that the requisite statutory authority to act in other areas is lacking. But I’m not aware of any Administration calls for Congress to pass new price regulatory legislation, apart from raising the minimum wage and adopting reference pricing in drugs, which latter would apply only to Medicare.)

Consumer Protection

The amount of price regulation—of both the wasteful, competition-mediated sort and of the direct sort—in this order is rivaled only by the amount of consumer protection.

Hospital price transparency is to be fostered, surprise billing condemned. Airline baggage and cancellation fees are to be clearly disclosed. The options in the National Health Insurance Marketplace are to be standardized to facilitate comparison shopping. So too broadband prices.

The common thread to all of these initiatives is that they correct cognitive limitations of consumers that make it difficult for them to find the best, lowest price options on the market, and so leave them poorer. That’s why I class them as consumer protection initiatives, and why they are a good thing.

Consumer protection is competition-adjacent policy—competition does work better, and firms may be more likely to innovate, when consumers have good information about the products offered by competing firms. But the main focus of these initiatives is on empowering consumers to avoid paying out more cash than necessary for goods and services.

Like the price regulation initiatives, it’s directed, ultimately, at the distribution of wealth, not competition. Which is why it is surprising to find so much consumer protection in a competition order.

Unions and Occupational Licensing

The focus on price regulation and consumer protection are a welcome surprise. But the dangers for progressives of confusing these things with competition policy are also on display, for competition is just as likely to be the enemy of equality as it is to be its friend, and it is very easy to lose sight of this when pursuing an equality agenda in competition terms.

Thus in a press release that is already pretty deaf to irony, this takes the cake: “the President encourages the FTC to ban unnecessary occupational licensing restrictions [and] call[s] for Congress to . . . ensure workers have a free and fair choice to join a union . . . .”

Here’s a secret about those “unnecessary licensing restrictions”: they’re state-created unions. The only difference between them and actual unions is that they operate by restricting labor supply, and thereby driving up wages, whereas unions operate by driving wages up, and thereby restricting labor demand. If you’re against occupational licensing because it makes it hard to get a job, you should be against unions, and if you’re in favor of unions because they drive up wages, then you should be in favor of occupational licensing.

The way to minimize mistakes in fighting inequality is to focus on fighting inequality.

Indeed, one cannot help but feel that this order, despite being well-intentioned and expansive, is a sideshow to the real work of fighting inequality that the Administration has undertaken on the tax side. Given the breadth of applicability of the corporate tax—all industries are swept in at once—and the power of the corporate tax to target the proceeds of excessive pricing directly, last week’s agreement of 130 nations to a global minimum corporate tax will likely do far more to divest firms of their markups than anything in today’s order—even were it all implemented as direct price regulation.

Categories
Antitrust Monopolization

Using Intellectual Property Rights in Social Media Innovations to Diagnose Kill Zones

The most important charge against the Tech Giants is that they are creating kill zones: no one wants to create new online functionality that Google or Facebook in particular might easily copy. Whether kill zones exist remains a subject of debate, but that hasn’t stopped antimonopolists from wanting to respond anyway by breaking up the Tech Giants.

But there’s a treatment that is more likely to cure the disease without killing the patient—one which has the added benefit of helping us determine whether there actually is a disease to begin with.

But first, let’s consider why kill zones would be a problem if they really do exist.

If kill zones exist, then startups won’t introduce innovative social media functionality into the market because they will know that if Google or Facebook copy it, consumers will prefer the Google or Facebook versions—because those versions will be integrated seamlessly into the rest of the functionality those companies offer—and so the startups will lose out in the market. But because the startups won’t introduce the new functionality, Google and Facebook will feel no need to introduce it either, and so the functionality never makes it into our online lives.

The saga of Vine, Twitter’s erstwhile video sharing service, provides a nice illustration of the kill zone argument. Vine pioneered the video sharing format, but just as it looked poised to take off, Facebook introduced essentially the same functionality in Instagram, and because Instagram was already much bigger, social media users found it easier to embrace the format in Instagram than by migrating over to Vine. The lesson of that episode for someone with a bright idea for the next big thing in social media is: don’t waste your time. So long as it’s something that the Tech Giants can copy, they will, and they’ll win.

To be sure, TikTok shows us that innovation is still commercially viable in social media, the Tech Giants notwithstanding. But the key to TikTok’s success is the algorithms it uses to target videos to users, and those are not easy for the Tech Giants to copy. That means that major, irreproducible innovation is still possible in this space.

But not all good ideas that make our lives better are necessarily major, irreproducible technological steps. If there hadn’t been a Vine, video sharing might have taken a lot longer to invade social media, and that would have been a loss to users, many of whom love the format.

So what to do about kill zones?

I am often struck in reading Nick Lane’s excellent books on biochemistry (Power, Sex, Suicide, and The Vital Question are my favorites) by how much more careful biochemists seem to be in diagnosing problems and sussing out solutions than we are in antitrust. All the more struck, in fact, because biochemistry is a more mechanistic, indeed, easy, field than is antitrust.

In biochemistry, the basic repertoire of behaviors of the smallest units of analysis—molecules—is known with absolute certainty, thanks to the laws of chemistry and quantum physics. If molecule A hits molecule B, we know exactly what will happen. And hypotheses in biochemistry are often testable: you can find a thousand or ten thousand living human bodies in which to observe the biochemical behaviors that interest you.

By contrast, in antitrust, the basic repertoire of behaviors of the smallest units of analysis—human beings—is almost infinite and the subject of perennial debate. We like to assume rational, profit maximizing behavior, but we know, thanks to decades of behavioral economics, that actual behavior is much, much more complex and varied. And hypotheses in antitrust are almost impossible to test on the scales required to produce real knowledge: where do you find ten thousand similar markets to deconcentrate in order to determine whether breakup actually works?

You would expect, then, that antitrusters would be even more careful in diagnosing problems and sussing out solutions than are biochemists. But instead the sheer complexity of the problem seems to impel us in the other direction. It tempts us to boil away the complexity and then find clarity in a residue that bears little resemblance to actual markets. (For the record, I am as guilty of doing this as the next antitrust scholar.)

We should take a page from biochemistry and recognize that while kill zones sound plausible, plausibility is not reality, and so any solution to the kill zone problem must include, as a precondition, some attempt to determine whether there really is a problem. We need to diagnose.

Simply breaking up the Tech Giants doesn’t do that. It’s a bit like the antioxidant craze Nick Lane critiques in his books. It was certainly plausible that free radicals, which do destroy cells, might be the cause of disease, and so molecules that neutralize the free radicals—antioxidants—would be conducive to health. But when biochemists looked closer, they discovered—at least according to Lane—that free radicals are an integral part of the process by which cells regulate the amount of energy that they generate. They’re not all bad, in other words, and so mitigating the harm they do is not as simple as just getting rid of them through the use of antioxidants.

Similarly, a closer look at Google and Facebook’s behavior might reveal something more complex at work than the mere crushing of competitors, and smashing these big companies might, then, not be the solution.

One way to try to determine whether kill zones really are a problem, and, as an added bonus, potentially to treat any problem that does exist at the same time, would be to provide something like intellectual property protection for social media innovations.

Let’s look first at how this works as treatment. By giving startups the right to charge Google and Facebook for any new social media functionality that Google and Facebook appropriate from them, an intellectual property regime would restore the incentive for startups to enter and innovate, regardless whether Google and Facebook use their technology or not. If the new technology is successful, either the startup profits by succeeding independently in the market or by generating licensing income from Google and Facebook if those companies choose to license the technology. The heart of the kill zone fear is that Google and Facebook can take ideas, and the markets that go with them, without paying compensation: this solves that problem.

To return to our example, if Vine had had a right to demand compensation for Instagram’s embrace of video sharing, then Vine might not have become a business failure after all, and the lesson of Vine for social media entrepreneurs today would be that innovation does pay after all, the power of the Tech Giants notwithstanding.

Indeed, intellectual property rights in social media methods would not only encourage innovation, but would also likely lead to the incorporation into Google and Facebook of any successful new social media technologies, guaranteeing that the economies of scale that only these companies can bring to social media technologies would be realized. Google and Facebook would be forced to license any new social media innovations that meet with success in order to prevent their own platforms from sinking into irrelevance, so they would both pay a reward to innovators and incorporate the new innovations, giving them the greatest possible reach. You would get the benefits of size without the costs to innovation.

That would be a big improvement over breakup, which would lead to smaller and hence, for users, less valuable, social media platforms, at least until a new dominant platform could emerge, as one surely would given the value of size to any social network. But with the return of a dominant platform, the kill zone would presumably reappear and the rate of innovation would fall again. Thus in a breakup scenario, unlike in an intellectual property scenario, one cannot both have economies of scale and innovation at the same time.

Of course, any intellectual property rights regime comes with its own bureaucratic costs: someone must decide what really is a protectable social media innovation. And there is the possibility of holdup. There is never a guarantee that any two parties bargaining over a license fee will actually reach agreement, and if they don’t then the technology will not propagate. But holdup, at least, can be solved by a regime of compulsory licensing at regulated rates. (If it seems like a lot to ask a regulator to decide on a license fee, shouldn’t it seem like quite a bit more to ask a regulator to decide precisely how Facebook or Google should be broken up?)

But the really nice thing about an intellectual-property-based approach to kill zones is that it is also a diagnostic tool that can be applied in advance of taking any difficulty-to-reverse actions. We would be able to diagnose the existence of kill zones if, in response to the creation of intellectual property rights, startups were to appear and Google or Facebook were to license the startups’ technology. The fact that Google and Facebook would choose to license the technology would tell us that these big companies view the technology as a competitive threat, and that would in turn tell us that in the absence of the intellectual property rights they would have simply copied the functionality and run the startups out of business. If, on the other hand, startups do not appear or Google and Facebook do not license their technologies, we could conclude that there are no kill zones and phase out the intellectual property rights.

By contrast, under the breakup approach, there would be no way to know whether there was kill zone until after breakup, because only then could we see whether innovation had increased in response. And if there were no increase in innovation, suggesting that there had not actually been kill zones, we would need to wait for the smashed bits of the Tech Giants to knit themselves back together before we could reacquire the benefits of large networks that we currently enjoy.

Indeed, even those who remain committed to the breakup remedy ought to support the imposition of some sort of intellectual property rights regime first, purely as a diagnostic tool. Introducing intellectual property rights and seeing what happens would tell us more about whether there really is a kill zone than any economic study to which an antimonopolist might appeal for diagnostic support today, because any economic study is necessarily counterfactual: the economist can only draw on data about the industry as it is now, or about other industries, to decide whether there would be more innovation in the event that Google and Facebook were to change their behavior.

By contrast, introducing intellectual property rights has the character of an experiment designed to elicit a response (licensing of new startup innovations) that can exist only if the underlying kill zone disease is present.

Would Google and Facebook try to game the diagnosis, by avoiding licensing any technology under a temporary, diagnostic intellectual property regime in order to avoid sending the signal that there is a kill zone? I think not, because doing that would be their loss. If Google and Facebook don’t license successful new technologies, competitors will grow at Google and Facebook’s expense, and they won’t enjoy a dominant position anymore—in which case we would end up with more long-term competition in the market, which is what antimonopolists hope for anyway.

Of course, such a diagnostic experiment would hardly be the sort of large-scale, controlled undertaking one needs for scientific certainty. But it would be a start, and perhaps inch antitrust in the direction of the level of respect for the complexity of its subject that is characteristic of a science.

Categories
Miscellany Monopolization Uncategorized

Don’t Cancel Student Debt; Redistribute It

A culture that does not understand, let alone value the innerness of things is going to have an ambivalent relationship with learning, especially elite learning. For such a culture—our culture—the question what is it for? will forever trouble the educator’s sleep, or, more to the point, the sleep of government officials who are asked to allocate funding for higher education and the voters who are asked to vote for those government officials.

Add into the mix the fact that the politics of the academy are not broadly shared by the electorate at large, and I see in fully-government-funded higher education nothing but: danger. The danger that America’s great system of higher education will starve and wither.

Fortunately, and no doubt because of our cultural ambivalence to education, the funding system we currently have in place provides some protection. The student loan system taxes those who have actually worshipped at the altar of education to pay for its survival. It is, in a sense, a regime of forced alumni giving, with schools asking students to borrow against the future cash flows that become student loan payments so that schools can take this giving up front in lump sums.

The effect is to tell those who wonder what is it for?: we don’t need you. We will pay for this system ourselves.

To be sure, it is not really the students who are saying this, at least not entirely. It is the schools that have been able to decide, within certain limits, just how much funding they receive, because schools have a great deal of market power with respect to students.

Part of that power (this part not, technically, market power, but rather scarcity power) is due to students’ fairly inelastic demand for education: they rightly place great value on education, and are willing to pay a lot for it. But lots of the schools’ power is also due to students’ lack of understanding of the meaning of the large amounts of debt they take on, allowing schools to raise tuition levels without fear of alienating their clients. And more power still comes from schools’ reputations, which are so strong that many schools can raise tuition levels without losing even those students who understand the meaning of long-term indebtedness.

Insidious, perhaps.

But it is thanks to this power of schools to choose their own funding levels that America has the greatest, wealthiest system of higher education in the world. I do not think that an America in which student debt were cancelled, and the student loan funding system for higher education replaced by one of full government funding for higher education, would be anywhere near so wealthy, or so excellent.

It is easy for a graduate pushing for debt cancellation to forget that 60% of Americans do not have a college degree. And many more Americans who do are still troubled by the question what for? Why should they be expected to vote the levels of funding that schools have been able to arrogate to themselves through the current student loan system? The answer is, they won’t.

True, other developed countries that have a public funding model still manage to funnel a lot of cash to schools. But America is different. Remember: each and every developed country in Europe and Asia has a concept of culture.

We have no such thing here in the United States.

Each of those European and Asian countries descends from kingdoms and empires that claimed power by divine right, which is to say, claimed to have a direct connection to the innerness of things. Though many have mellowed and democratized, or at least acknowledged the moral superiority of democracy, they all retain the notion that the state has inner meaning. The expression of the state’s inner meaning is culture, and culture is realized through elite education. The notion that the state should pay for education is not, therefore, subject to question in those countries in the way that it is here, where the state’s only meaning is out-in-the-world practical: to make us happy.

All this is not to say that the student loan system doesn’t need reform. It does. If we correctly understand the system to be a tax on the educated, then we should reasonably ask that it be progressive: that the rich should subsidize the poor.

The current system does that, but only very little. At present, borrowers can sign up for income-based repayment, which uses the federal government’s general tax revenues to reduce the student debt burden of poor students who end up earning less after graduation. To the extent that federal taxation is mildly progressive, income-based repayment is itself mildly progressive.

But real progressivity in the student loan system would mean something different entirely. What we should demand is that rich students—or those who go on to become rich—subsidize poor students and those who go on to be poor. Thus the redistribution associated with progressivity should remain “in the family” of the educated, and be much more extreme than it is today.

Today, those from rich families pay the sticker price for tuition up front and then are free of any further payment obligations to schools, no matter what heights their incomes happen to reach. By contrast, poor students fund themselves through loans, and unless they do well enough after graduation to pay off their loans in full, they go on income-based repayment and their repayment burden varies with income. If they make more, their payments go up, if less, they go down. Thus today, the student-loan system is progressive only with respect to poor students who don’t do well after graduation! The rich, by contrast, pay the equivalent of a flat tax. That’s not progressive.

Instead, we need all students, including the rich, to make payments to fund education over their entire working lives, and those payments need to be adjusted based on income, to the end of redistributing wealth from the most successful to the least.

One way to do that would be vastly to increase tuition bills, so that even rich students must take out loans to fund their education. Then all students would go on income-based repayment after graduation, and the income-based repayment schedules could be used massively to redistribute from the most successful of the educated to the least. The poorest, least successful graduates would end up with very low monthly payments, or immediate debt forgiveness, and the richest and most successful would end up with very high monthly payments—right into the millions of dollars per month, if necessary. Think of it, again, as forced alumni giving, in which those who can give more, do.

The introduction of increasingly generous income-based repayment terms over the past couple of decades signals that the student loan system is already moving slowly in this direction.

Instead of calling for student debt cancellation, and placing politically-vulnerable, inescapably elitist institutions at the mercy of democratic majorities that are not sure they want them, let’s keep education in the family—but make sure that anyone who wants to join, can join, and that the richest graduates pay their way.

[Note: Given that the New York Times doesn’t have to disclose its interest in smashing Google or Facebook whenever it writes about the antitrust cases against them, maybe I don’t need to disclose my own competitive interests when I write about them. But I am an educator.]

Categories
Antitrust Civilization Monopolization

Nietzsche on Competition and Monopoly

When the traveler Pausanias visited the Helicon on his travels through Greece, an ancient copy of the Greeks’ first didactic poem, Hesiod’s Works and Days, was shown to him, inscribed on lead plates and badly damaged by time and weather. [I]t . . . began straight with the assertion: ‘there are two Eris-goddesses on earth’. This is one of the most remarkable of Hellenic ideas and deserves to be impressed upon newcomers right at the gate of entry to Hellenic ethics. ‘One should praise the one Eris as much as blame the other, if one has any sense; because the two goddesses have quite separate dispositions. One promotes wicked war and feuding, the cruel thing! No mortal likes her, but the yoke of necessity forces man to honor the heavy burden of this Eris according to the decrees of the Immortals. Black Night gave birth to this one as the older of the two; but Zeus, who reigned on high, placed the other on the roots of the earth and amongst men as a much better one. She drives even the unskilled man to work; and if someone who asked property see someone else who is rich, he likewise hurries off to sow and plant and set his house in order; neighbor competes with neighbor for prosperity. This Eris is good for men. Even potters harbor grudges against potters, carpenters against carpenters, beggars envy beggars and minstrels envy minstrels.’

Hesiod . . . first portrays one Eris as wicked, in fact the one who leads men in hostile struggle-to-the-death, and then praises the other Eris as good who, as jealousy, grudge and envy, goads men to action, not, however, the action of a struggle-to-the-death but the action of competition. The Greek is envious and does not experience this characteristic as a blemish, but as the effect of a benevolent deity . . . . Because he is envious, he feels the envious eye of a God resting on him whenever he has an excessive amount of honor, wealth, fame and fortune, and he fears this envy; in this case, the God warns him of the transitoriness of the human lot, he dreads his good fortune and, sacrificing the best part of it, he prostrates himself before divine envy.

If we want to see that feeling revealed in its naïve form, the feeling that competition is vital, if the well-being of the state is to continue, we should think about the original meaning of ostracism: as, for example, expressed by the Ephesians at the banning of Hermodor. ‘Amongst us, nobody should be the best; but if somebody is, let him be somewhere else, with other people.’ For why should nobody be the best? Because with that, competition would dry up and the permanent basis of life in the Hellenic state would be endangered. . . . The original function of this strange institution is . . . not as a safety valve but as a stimulant: the pre-eminent individual is removed so that a new contest of powers can be awakened: a thought which is hostile to the ‘exclusivity’ of genius in the modern sense, but which assumes that there are always several geniuses to incite each other to action, just as they keep each other within certain limits, to. That is the kernel of the Hellenic idea of competition: it loathes a monopoly of predominance and fears the dangers of this, it desires, as protective measure against genius—a second genius.

Friedrich Nietzsche, Homer on Competition, in On the Genealogy of Morality 187, 189-92 (Keith Ansell-Pearson ed., Carol Diethe trans., 1995).

Three observations. First, Nietzsche’s remark that “[e]ven potters harbor grudges against potters” reminds us that McCloskey ought to have included envy (the second Eris) among the bourgeois virtues, though she did not. In fact, one often senses that the only really human feeling left in the modern world—the only one for which any individual really is capable of killing or dying—is that of envy. Caged, to be sure, hidden, so rarely acknowledged that one would call it subconscious if one did not so often see that knowing look in the eyes of those it is consuming. I suppose in modern guise envy is what Nietzsche elsewhere calls resentment. Which leads to the second observation.

Second, Hellenic potters may have envied Hellenic potters, but what is distinctly un-bourgeois about the Hellenic world, as described by Nietzsche, is this: “[b]ecause he is envious, [the Greek] feels the envious eye of a God resting on him whenever he has an excessive amount of honor, wealth, fame and fortune, and he fears this envy[.]” The modern does not fear God; he believes, instead, that he deserves his wealth, even when he doesn’t have it, which is why envy spoils into resentment in him. Only the successful Greek would ever mistake himself for a God; but even the unsuccessful modern does that.

Third, Nietzsche is a Chicagoan through and through, not an antimonopolist in the contemporary mold. Yes, Nietzsche does ask : “[W]hy should nobody be the best?” And he does answer: “Because [if someone were the best], competition would dry up and the permanent basis of life in the Hellenic state would be endangered[.]” But the reason for which the best must be smashed is not to promote fairness. It is not to make equal.

On the contrary, it is to achieve even greater heights of inequality. As Nietzsche says: “[t]he original function of this strange institution [of smashing the best] is . . . not as a safety valve but as a stimulant: the pre-eminent individual is removed so that a new contest of powers can be awakened[.]” So far from making equal, the purpose of competition is to create “—a second genius.” Thus, in the language of today’s antitrust, Nietzsche’s antimonopolism is dynamic and Schumpeterian. He would smash the best only where the best stand so high above everyone else that they inhibit the process of overcoming and surpassing associated with dynamic competition. The notion that markets should be fair, in the sense that the best should be placed on an equal footing with the rest, plays no role in this calculus.

Are we there yet with the Tech Giants? Is Google already an Alexander—“that grotesquely enlarged reflection of the Hellene,” as Nietzsche calls him in the same essay—raging unchecked across the earth? I suppose that the “kill zone” narrative comes closest to making a genuinely Nietzschean case for breakup: no one will innovate in Google’s markets because Google will win.

But only to the extent that the harm of the kill zone is thought to be the toll it takes on excellence.

Categories
Antitrust Monopolization

Self-Preferencing and the Level Playing Field

I, too, have been enamored of sports metaphors in antitrust. How can the level playing field not convince?

Two wrestlers meet on the floor. If it is uphill for one and downhill for the other, neither will excel. One will find it too easy to win, and so train little. The other will find it too hard to win, and so train little. So, too, in business. If Amazon stands at the top of the hill, because Amazon owns the floor and has chosen to put itself there, then it will do little to improve itself, for it can too easily win against the third-party sellers that it has placed at the bottom of the hill.

But the level playing field is but the pretense of fairness. A way, only, of highlighting a much greater unfairness that we in fact revere. For when the athletes meet, one wins, and not, we like to think, by chance, but because one is better. And why is that one better? Forsooth, because that one does not compete on a level playing field at all. His muscles are better developed. He has better stamina. He is a quicker thinker. He has the focus of mind required to train more. His intuition is better. He has a better spatial sense. And so on. That is, he has an advantage that he does not share with his opponent.

Let us say it is his muscles. In muscle space the field is not level; he stands at the top. And he self-preferences, for he does not, say, starve himself for a week before the bout in order to waste his muscles a bit and thereby level the playing field in muscle space. No! He seizes his advantage. He uses it to win—inevitably to win—and despite this inevitability he feels that he deserves this win, that it is an expression of who he is and not of the tilt of a field.

Why should he feel that his victory is about him given that it was not earned on a truly level playing field? Because it is not a complete leveling that we really seek in any contest. What we seek is to reveal the character of a field that we value. Once we have isolated that field, we glory in whatever tilt we find to it.

If what interests us is who is the strongest, then we want to level the irrelevant fields, and then watch which way the parties slide on the field of strength. If it is the strength of wrestlers, then we level the floor, so that we can better perceive the tilt in their relative strengths.

We can therefore only really object to self-preferencing if the particular instance of self-preferencing at issue relates to a field that we do not think important. We cannot oppose self-preferencing itself, for to do that is to oppose all tilts of field, which is to say, to oppose excellence. It is to insist that no one win the match, or equivalently, that it only ever be determined by a flip of the coin.

(You ask me why the strong massacre the weak in war and want to celebrate it. What challenge is there in that, you say? I say: what challenge was there in your successes, dear reader, any of them, apart from the anxiety you may have felt over whether you would succeed, an anxiety born of your ignorance regarding where your strengths lay? Do you not massacre your opponents too, and call it achievement?)

We can oppose Amazon’s self-preferencing only if it lies in a space that we think irrelevant. If, instead, it reflects a superiority that we desire—if, in the commercial context, it is a superiority in product space, meaning that the self-preferencing delivers better products to consumers—then we must celebrate Amazon’s blood-letting.

We might legitimately say that in giving priority to ads for its own products, Amazon is tilting a field about which we do not care much—the field of marketing—and that prevents the tilt of a different field, that of product quality, from determining the outcome of the game, as we would want it to do.

But we might also conclude that on an ecommerce platform rife with unregulated and unsafe products, the field of information about products should be tilted in favor of Amazon, because then, at least, it is easier for consumers to find the products that Amazon actually stands behind: its own, for which Amazon can be sued if the products turn out to be defective.

So I do not see how the sports metaphor ultimately adds anything to antitrust analysis. It certainly does not teach that the heart of antitrust is fairness, the rules of the game. It merely takes us back to the question that is the heart of all antitrust analysis: does the slaying of competitors improve the product entire, including our ability to find it?

Categories
Miscellany Monopolization Philoeconomica

Was Personalized Pricing the Epstein Grift?

The Times reports that pedophile Jeffrey Epstein earned more than $100 million from private equity magnate Leon Black in exchange for providing some “idea-generator”-type tax advice on a handful of Black’s family trusts, advice that Black still had to pay his own tax lawyers to implement.

Does that mean that Epstein, who was a college dropout, was a self-taught tax genius? Not likely.

But it does suggest that Epstein knew the value of personalized pricing. Here’s the key passage from the article:

Jack Blum, a Washington lawyer who has led corruption investigations for several Senate committees, said he was surprised by the size of the fees Mr. Epstein’s work commanded. “You could be the best lawyer in Manhattan working on the most complicated trusts and estates and it would never come anywhere close to that kind of money,” he said.

Matthew Goldstein & Steve Eder, What Jeffrey Epstein Did to Earn $158 Million From Leon Black, N.Y. Times (Jan. 26, 2021).

So what gives?

The answer is that tax lawyers price for the marginal consumer: the marginal client using their services. They not only serve magnates like Leon Black, but also the merely rich, like an executive mentioned in the Times article whom Epstein initially refused to take on as a client for being insufficiently wealthy.

The merely rich can’t afford $100 million, so, to get their business, tax lawyers must charge them lower fees. When the truly rich, like Leon Black, go looking for tax advice, they knock on these lawyers’ doors, and the lawyers charge them about the same price they charge everyone else.

They don’t try to charge higher fees to their wealthiest clients because tax law is a reasonably competitive industry. You need to be smart to work at the high end of the field, but tax is not a field in which “the best are easily ten times better than the average.”

And for the many who do have what it takes, the cost of entry into the market is relative low; all you need is a JD and an LLM, which cost a few hundred thousand dollars to obtain, about the amount needed to open a cleaners or a pizzeria (okay, there’s also the opportunity cost of time spent in school, but we are still probably only talking about the high six figures).

So if you start raising your fees above what the marginal client is willing to pay, your super-rich inframarginal clients will take their business to another tax lawyer who is still pricing for the marginal client. So you, too, continue to price for the marginal client.

But what if you could find a way to charge your richest clients prices personalized to them, and not have them jump ship to your competitor?

It looks like Epstein’s grift was figuring out how to do that.

The answer, as in so many other lines of business, was to make tax advice into a luxury product: to make the product exclusive.

The Times tells us that Epstein sold himself to clients as a genius who would only give tax advice to the richest of the rich. He cultivated the image of being, not some pathetic, overworked, upwardly-mobile professional, but one of them, a fellow member of the super-rich who was willing to cut other members in on secrets that only they could access because of who they were.

Exclusivity creates brand loyalty, and brand loyalty means that you stop shopping around; you are willing to pay a price determined by what you can afford, rather then what competitors are offering. You are willing to pay, in other words, a personalized price.

Graphically, the tax market may have looked like this:

Gerrit De Geest observes in Rents: How Marketing Causes Inequality, that in today’s economy, it’s not those who make who earn all the profits, or those who distribute who earn all the profits; it’s those who do the marketing. That’s where all the rents live. Competition drives profits to zero for all save those who beguile.

It seems somehow fitting that this economy would spawn a figure like Epstein, who sold tax advice but didn’t even bother to do his legal work in house. He didn’t really sell tax advice; he marketed it.

As the Times recounts, Epstein referred one acquaintance to outside tax lawyers, whom the acquaintance then paid for tax advice, and then Epstein, having never mentioned a fee to this acquaintance, sent him a bill for 10% of the purported tax savings that the lawyers, and not Epstein, had created.

That 10% was the price of enchantment, nothing more.

But you still have to wonder how a private equity guy like Black, whose business revolves around deals hammered out by armies of lawyers and shaped by tax considerations, could have thought he was getting something special from Epstein.

Did he really think tax was like music, and it was worth paying his Mozart to dream up a tune, even if Black still had to pay someone else to write all the notes down for him?

Maybe he didn’t, and there’s more left to tell in this story.

Or maybe we need a new razor: Never attribute to conspiracy what can otherwise be attributed to marketing.

Categories
Monopolization World

Unlearning Trade

First we thought the inherent superiority of our political system would defeat the Chinese Communist Party. Now that we’re coming to terms with the fact that it didn’t, we seem to think that the inherent superiority of free markets will defeat China instead.

Clearly, we’re not taking learning in account.

But I don’t mean that we haven’t learned from our mistaken view that China would become more democratic as it became wealthier.

I mean that in assuming that China’s embrace of a new closed door policy will cause its technological competitiveness to wither, we are literally failing to take the relationship between learning and output into account.

The Wall Street Journal argues that by picking fights with the West, and getting itself banned from engaging in semiconductor trade with the US as a result, China has put itself in the deeply wasteful position of having to recreate a native semiconductor industry from scratch. If the moonshot fails, Chinese high tech firms will lag, and the country’s race to global dominance will be lost.

It would have been much better, argues the Journal, for China to have continued to make nice with the West and enjoy the benefits of trade, not least of which is the ability to leverage what others do best—like making semiconductors—to enable China to do what it does best—like making smartphones and 5G infrastructure.

The Achilles heel of this and all free trade arguments is that they don’t take innovation into account, and specifically that most valuable of all forms of innovation: learning by doing.

The fact that China is not an efficient producer of semiconductors today, and would be better off trading with those who are, does not mean that China cannot learn to be an efficient producer of semiconductors tomorrow.

And if China is able to learn, then the money it pours into starting more or less from scratch now won’t be wasted.

Instead, it will be the most important investment China has ever made, because it will buy not only a valuable skill, but something more valuable still: independence and a shot at world domination. The future belongs to high tech, the hardest thing to do in high tech is chips, and so if you’ve got the best chips, you will win eventually.

The key to learning is doing: the more you make, the better you get at making, which is why semiconductors have a downward sloping learning curve. As production volumes increase, cost falls and falls and falls.

That in turn means that if you want to produce the difficult-to-make things that render countries rich and powerful, the opposite of free trade dogma is required: you must shut out foreign competition, freeing up domestic demand for your native industries, so that those industries can ramp up supply and start marching down the learning curve.

If you don’t do that, then your domestic market will buy from foreign producers, helping them learn, not you.

Of course, too much protection can also be a problem. If your domestic industries are not subject to competitive pressures, they won’t have an incentive to learn. That can particularly vex small countries whose internal demand can only support one or two firms in a given market. But for a country the size of China, that’s not a problem. (Indeed, it’s no accident that free trade ideology has roots in Western Europe, home to lots of small- and medium-sized countries.)

So by picking fights with the West at a moment in its development when it has plenty of domestic demand for semiconductors (think Huawei) China is really just binding itself to the mast: committing its domestic market to its native semiconductor operations. It is forcing itself to learn.

And China does know how to learn. America installed the first solar panel in 1956, on the Vanguard I satellite. But at that time a single panel cost the equivalent of $500,000 today, meaning that we weren’t very good at applying the technology. As we made more solar panels, however, we got much better, as the solar learning curve below shows. But by the early 2000s learning had stagnated at around $5 per module.

Then China, which is energy poor but for coal—a mature technology that promises few gains from innovation—embraced solar, installing panels across its vast peripheral deserts.

By doing, China learned to do better, driving price south of 50 cents per module by 2019, making solar power the cheapest in the world today, more so even than coal or gas, and coming to dominate the global solar industry.

Will China walk just as quickly down the semiconductor learning curve? You can bet on it. And the country’s leadership in the new technology of quantum computing—the future of chips—means that it is not starting all that far behind its global competitors.

So when the Wall Street Journal says things like this:

Beijing is essentially now engaged in a massive, long-shot attempt to build from the ground up an advanced semiconductor manufacturing capability that doesn’t depend on foreign suppliers—churning through gargantuan amounts of the Chinese people’s money in the process. Rather than trying to reinvent the wheel, a better economic strategy would be to mend its relations with the West and reform China’s dysfunctional credit system—then import chips and let Chinese markets and Chinese companies decide what China is really good at.

Nathaniel Taplin, China’s State Capitalism Collides With Its Technological Ambitions, Wall St. J. (Jan. 2, 2021).

I have to wonder at its lack of learning.

And as I have pointed out elsewhere, the really funny thing about this mode of thought—the notion that a country is better off not trying to do the things that it is not right now good at doing—is that those who love it most also tend to be those who, when they turn their gaze to domestic markets, talk most about innovation and learning, and the need to protect firms from too much competition in order to promote them.

They argue in favor of monopoly and against regulation at home on the ground that shelter from competition is a necessary reward for innovation, that though big firms may destroy “static competition”—competition over price by firms with fixed levels of technical skill—doing so actually enables “dynamic competition”—competition to learn and innovate that eventually leads to far greater benefits for society.

So they ought to know better than to assume that a new Chinese closed door policy will save America from China.

Indeed, the Journal’s faith in free trade reminds me a bit of Ah Q, the eponymous antihero of The True Story of Ah Q, by the great early 20th century Chinese writer Lu Xun.

Ah Q’s talent, you see, was convincing himself he was the winner whenever he lost a fight.

To be sure, Ah Q was a metaphor for the much-oppressed China of a century ago, whereas America is still on top today.

But mentality is fate.


Categories
Antitrust Monopolization

The Assault on the Printed Page

When the New York Journal cabled Mark Twain in London on June 2, 1897 to inquire whether he was gravely ill, Twain famously replied that the reports of his death were greatly exaggerated.

William Randolph Hearst, the Journal’s publisher, could have saved his scoop by having Twain shot on the spot. Fortunately, he didn’t, and we got another 13 years and “Captain Stormfield’s Visit to Heaven” out of the great humorist.

Publishers of university textbooks wouldn’t have been so patient.

Reports of the demise of the printed page, popular since the dawn of the Internet, have turned out to be greatly exaggerated: sales of print books are surging.

So textbook publishers have decided to kill the printed page themselves.

According to a recent antitrust class action brought by university students, all the big names in textbook publishing have been working together to funnel cash to universities in exchange for commitments to assign online-only textbooks to students instead of print books.

It’s working: more than 1,000 universities have agreed to assign publishers’ online-only editions, millions of students have already been forced to purchase them, and publishers are preparing to phase out print textbooks entirely.

Studies show that students, like most readers, prefer the printed page, and textbook companies have seemingly had no problem jacking prices up to astronomical levels in recent years, with the average price of textbook in a core undergraduate course like statistics retailing for more than $300 dollars. So what do publishers have to gain from their assault on the printed page?

A lot, it turns out.

The Rise and Fall of the Internet Used Textbook Market

Eliminating print allows publishers to wipe out competitors that have depressed sales for years.

Before the Internet, textbook publishers had little to fear from the used book market, apart from an occasional copy with a yellow “Used” sticker on the spine that would make its way onto the shelf of a university bookstore.

The Internet changed that, by creating a national–indeed, international–market for used textbooks. Sales volumes of new textbooks plummeted, as students could now pass books along to each other from semester to semester through the medium of online booksellers.

For years, publishers more than offset their losses by jacking up new book prices, but it turns out that there is a limit even to what students with no-questions-asked access to loans are willing to spend for a new textbook.

Indeed, just as excessive tax increases can reduce tax revenues, excessive textbook price increases reduce profits as students start locating bootleg copies on the Internet or shaming their professors into distributing textbook pdfs in violation of copyright rules.

Publishers tried to stem the tide by accelerating the rate at which they put out new textbook editions, even–and rather humorously–in such timeless subjects as basic physics, in order to drive used books to obsolescence and force students to come back to the market for new books.

It didn’t work, which is not to say that it put the major textbook publishers in jeopardy of closing up shop. Textbooks remain the most profitable books in publishing. But publishers preferred to go back to minting money at the old rate. And that’s where online-only books come in.

The Supreme Court has held as recently as 2013 that publishers cannot prohibit students from reselling their textbooks. But it is a staple of Internet law that online publishers can prohibit users from reselling access codes for online material. By killing the printed page, publishers kill the used book market.

The Antitrust Case against the Publishers

There was just one wrinkle that publishers couldn’t iron out on their own: getting universities to assign online-only books. To achieve that, publishers had to buy off the universities, and violate the antitrust laws.

Paying someone to deny your competitors an essential input is called “exclusive dealing” in antitrust lingo, and it’s illegal if the perpetrators have market power and the denial does not help them improve their own products.

But that’s just what publishers do when they pay universities to assign online-only books.

A university’s textbook choices are an essential input into the used book business. If schools don’t assign print books, used book sellers have no textbooks to resell in competition with publishers’ new books.

With used book sellers frozen out of the market, publishers end up with 100% of the textbook market, far in excess of the market shares generally required by the courts to establish market power.

And students end up blinking into the glare of an inferior product.

So this should be an easy antitrust case. But before an increasingly pro-business judiciary, it is anyone’s guess whether the courts will actually get this one right.

From Bad to Worse in the Information Age

The rise of the Internet used book market twenty years ago was itself a disaster for those who love books.

Back in the 1990s, biblioagnostics–those who were indifferent to studying off a new book or a used book–subsidized the bibliophiles who much preferred new books, because the ‘agnostics had to buy new books they didn’t want for lack of a robust used book market. Sales to ‘agnostics kept prices down, enabling bibliophiles to buy new books they could not otherwise afford.

In freeing ‘agnostics to save their money and buy used books instead, the Internet put an end to that subsidy, forcing bibliophiles who could not afford $300 for a new edition to put up with tattered, highlighter-marred tomes.

But if publishers now succeed at killing the printed page, everyone will suffer, not just bibliophiles. For the other thing publishers have to gain from the move to online is the demise of the university itself.

The Assault on the Printed Page Is an Assault on the University

Publishers sell more than just online textbooks. They sell everything a school needs for online learning, offering tests, quizzes, lecture notes, and PowerPoint slides to go along with the textbooks they peddle. And they hire university faculty members to teach instructors how to teach their materials.

When universities accept cash from the publishers in exchange for moving books online, and allow their faculties to indulge in the teaching aids that publishers offer as a perk to make the switch, schools effectively outsource instruction to publishers.

It is not hard to imagine publishers one day cutting out the middleman by offering courses and degrees directly to students. That would wipe out virtually all academic scholarship, save for the sponsored research common in the hard sciences.

Tuition covers about half the cost of instruction at universities, with the difference coming from subsidies. But faculty spend up to half of their putative instructional time producing scholarship, which means that student tuition dollars mostly pay for research, not teaching.

The publishers, however, won’t get any subsidies if they take over the instructional function, so the fees they will charge students will go entirely to instruction. But unless universities are able to make a strong case for conducting scholarship without teaching, which seems unlikely, the subsidies will dry up, and so there will be no money, either tuition or subsidies, left for scholarship.

Universities have been able to force students to pay for scholarship because university education is an oligopoly: brand loyalty–universities call it reputation–makes entry into the market by startups almost impossible, allowing schools to choose their prices without fear of competition.

But it is a virtuous oligopoly that subsidizes a public service, much the way the local advertising monopolies enjoyed by newspapers for most of the 20th century subsidized investigative reporting that was not strictly necessary to attract readers (tabloid headlines suffice for that).

The Internet has already come for newspapers, which lack the extreme brand loyalty enjoyed by universities, but one day it will come for universities too.

If their complicity in the assault on the printed page is any indication, they won’t know what hit them.

(I thank Chris Bradley for comments on a draft of this post.)

Categories
Miscellany Monopolization

Dynamic Pricing Meets Music Licensing?

Just when you thought the most toxic of information age innovations had already spread as widely as possible:

The big publishers — which are all divisions of the major record conglomerates — own far too much material to exploit it all properly, he says. Sony/ATV, for example, has nearly five million songs in its portfolio. . . . In its place, he posits a bold but somewhat vague plan called “song management,” in which leaner companies look after smaller collections of high-value hits, and each track is held to a profit-and-loss analysis to ensure its value is maximized.

Ben Sisario, This Man Is Betting $1.7 Billion on the Rights to Your Favorite Songs, N.Y. Times (Dec. 18, 2020).

The big publishers block-license their songs, which means that they don’t adjust the prices of individual songs based on shifts in the willingness of licensees to pay for them. It sounds like Mercuriadis wants to capture additional profits by pricing songs dynamically–jacking prices up during periods when buyers are willing to pay more–which is why he can afford to pay more for song rights himself. “Song management” is the tell: In hospitality, which pioneered the practice in the context of hotel rooms and airline tickets, they call it revenue management.