Category Archives: Law

Antitrust Basics: The Relevant Market Fallacy

This is the second entry in the “Antitrust Basics” series. See below for previous posts.

If a firm is charged with having market power, the question naturally arises: in which market? Does Facebook have a monopoly over social networking, especially now that it owns additional networks such as Instagram and WhatsApp? Or does Facebook compete with other uses of leisure time such as movies, television, books, sports, concerts, and countless other ways people can spend their time? Which is the more relevant market? The answer is subjective—a significant problem for a legal case with multi-billion dollar stakes.

Antitrust regulators often try to make their case appear stronger by using an unrealistically narrow definition of a company’s relevant market. I call this tactic the relevant market fallacy. The relevant market fallacy is one of the easiest mistakes to make in all of antitrust analysis. It is also one of the easiest to avoid. Thinking along the different parts of a spectrum illustrates why.

At one end of the spectrum, every individual product can be seen as its own relevant market. A sandwich at one restaurant is different from a similar sandwich sold at another restaurant next door, even if they are the same price. One restaurant might offer better service, better ambience, or some other nonprice characteristic that differentiates it from its competitor. In that sense, there are two different products operating in different markets appealing to different sets of consumer preferences.

At the other end of the spectrum, the only relevant market is as big as the entire global economy. That sandwich also competes against all other types of food in a global supply chain—and any non-food item a person might spend their money on instead. Whichever point on the spectrum an analyst decides is right for a given case is an arbitrary decision. It is largely a matter of semantics, and often analytically useless in determining consumer benefits.

As with most things in the real world, most relevant markets fall somewhere in between these two extremes. Amazon controls roughly half of online retail, but a much smaller fraction of total retail. Which is the proper relevant market? Amazon’s success with online retail has also caused traditional retailers such as Walmart and Target to massively change their business strategies to match consumer desires. The relevant market is not only debatable in size and scope, but it is constantly changing shape. And that change is happening far faster than the speed of litigation.

When satellite radio companies Sirius and XM merged, critics argued that the combined firm would have a monopoly on satellite radio, and the merger should have been blocked. Once again, they defined the relevant market too small. Satellite radio competes with terrestrial radio, streaming radio, on-demand music streaming, podcasts, audio books, and more.

As political candidates, pundits, and activists tout statistics for this or that company’s market dominance, keep in mind they are often committing the relevant market fallacy. It doesn’t take long to check, and it’s well worth the small effort.

For more, see Wayne Crews’ and my study, “The Case against Antitrust Law: Ten Areas Where Antitrust Policy Can Move on from the Smokestack Era.” Further resources are at antitrust.cei.org.

Previous posts in Ryan Young’s “Antitrust Basics” series:

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Herbert A. Simon – Administrative Behavior, 4th Edition: A Study of Decision-Making Processes in Administrative Organisations

Herbert A. Simon – Administrative Behavior, 4th Edition: A Study of Decision-Making Processes in Administrative Organisations

Realistic, subjective, and humble—probably a reflection of Simon’s time at the University of Chicago. Rather than the typical snake-oil management guru who pretends to know everything, Simon that there is no perfect structure for an organization. Every possibility has at least some drawbacks. Simon instead emphasizes the need to treat organizational structure as an ongoing process, rather than a finished product. Often personnel will dictate what structures work best, and personnel change over time. Technology has its own impacts, and Simon even in 1947 saw that computers would have significant effects on the workplace. Part of trial is error, and wise managers will accept this as part of the process. The trick is being humble enough to admit mistakes and being flexible enough to try different approaches with more promise.

Peter Wallison – Judicial Fortitude: The Last Chance to Rein In the Administrative State

Peter Wallison – Judicial Fortitude: The Last Chance to Rein In the Administrative State

The main insight I took from this book is probably not the one Wallison intended, though it is one he makes several times. America’s founders did not foresee the rise of political parties, and this was their biggest mistake. They set up the federal government with checks and balances so that the different branches would compete against each other, not different parties. Having distinct federal and state levels of government provided an additional level of non-party competition.

This system does not work so well when powerful political parties exist. If one party controls both Congress and the presidency, those two branches do not compete with each other, they collude.

The first-past-the-post electoral system the founders established is also naturally conducive to a two-party system—and the two parties which usually oppose each other will cooperate to prevent rule changes that would allow additional competing parties.

This probably doesn’t matter so much; Europe’s experience with proportional representation has shown that most people coalesce around two polar ideologies, and most political parties represent various points on the spectrum between those two poles—meaning proportional representation doesn’t differ much from the U.S. system in terms of policy outcomes, muting its appeal. It merely has higher transaction costs for building coalitions, a separate issue well outside of Wallison’s subject matter. In the U.S. case, the dominant parties oppose proportional systems for their own organizations’ sake, rather than to promote conservative or progressive values.

The primary point Wallison does make is also compelling—judicial restraint and judicial activism are both ineffective safeguards against a regulatory state that lacks transparency and democratic accountability. A passive judiciary lets Congress and the executive make and enforce all sorts of crazy laws and regulations. This is a rather obvious problem. Legislation from the bench is also a problem; besides offending democratic sensibilities, repeal of judicial policy mistakes is extremely difficult.

Wallison instead prefers a judiciary with the fortitude to tell Congress what’s what when it passes unconstitutional legislation. More importantly, executive branch agencies issue thousands of regulations, guidance documents, and other regulatory “dark matter” outside of required legal processes. These policies lack transparency, democratic accountability, and in many cases are unconstitutional. The judiciary needs to gain the fortitude to strike such policies down when cases present the opportunity. Wallison also draws heavily on my colleague Wayne Crews’ research in developing this argument, which is a plus.

Addressing the Gender Pay Gap: Culture, Not Legislation

A recent Washington Times article quotes me on Democratic presidential candidate Sen. Kamala Harris’s plan to address the gender pay gap. I could have given better quotes, frankly, but it’s difficult to treat a complicated issue with nuance in a couple of short sentences. Conservatives and progressives both make some good points, but ultimately fall short of addressing the issue constructively:

  1. Conservatives often downplay gender discrimination or deny that it is a problem. This is wrong.
  2. Progressives are right that discrimination is a problem, but with the pay gap, they are prioritizing the wrong facet of the problem.
  3. There is a culture gap, far more than a pay gap. Most politicians put the pay gap at 77 or 79 cents on the dollar. One ideologically motivated study puts it at 49 cents. These figures do not account for the fact that women are more likely than men to work part time or not at all for extended periods to provide child care or other family needs. Men who do the same thing are subject to a similar wage lag. In another comparison, Bureau of Labor Statistics data show a wage gap of six cents for women who have never married—which says more about cultural gender norms than about different pay for equal work. Men and women also often cluster in different occupations, which have different pay. Occupations such as kindergarten teachers and construction have heavy gender disparities, as well as different pay—often in men’s favor. Again, the causes for this are often cultural, not due to different pay for equal work. The pay gap is almost certainly not a myth, but it is almost certainly a smaller problem than many people believe.
  4. Focusing so intently on the pay gap has an opportunity cost: More important gender discrimination issues are being crowded out from popular attention. In the workplace, these issues are as serious as rape and sexual harassment. They also include cultural pressures against women making their own life choices. Different people have different preferences on working vs. staying home. Many people on both sides of the culture wars still don’t respect that. Gender discrimination also includes everyday rudeness, such as men being more likely to interrupt women in conversation, taking their ideas less seriously, or judging them on appearance and demeanor rather than merit. The list is long, and the combined effects are large.
  5. One reason for the undue attention to the pay gap is that wages are easy to measure, while “soft” discrimination is often difficult or impossible to measure. It’s an example of what economist Jerry Z. Muller calls The Tyranny of Metrics. People tend to focus on what they can measure, and ignore what they can’t.
  6. Not only is attention being focused on the wrong issue, but many progressives are only offering one tool, poorly chosen: legislation.
  7. Pay gap legislation is prone to unintended consequences, such as businesses hiring fewer women. This is not what anyone intends. But it would be the easiest way for a company to avoid compliance headaches, potential lawsuits, or as in Sen. Harris’s proposal, a tax increase. This easily predictable effect works against everyone’s shared goal.
  8. Addressing gender discrimination requires cultural change from the bottom up, not top-down legislation. Politicians’ limited vocabulary is hurting progress on a real problem.
  9. Convincing millions of  individuals over time to be more thoughtful to others is a slow, uneven process. It will also likely never end; civilization is not humankind’s natural state.
  10. The cultural change argument is aesthetically unsatisfying. It can’t be planned, controlled, or quantified, even when possible improvements are clear as day, as with gender discrimination. It is a long-term process, not a short-term result. Advocating for cultural progress just looks flat compared to more immediate offerings such as taxes, fines, or quotas.
  11. Emotionally, it is much more fulfilling to hear a fast, simple, and concrete solution at a candidate’s press conference. It gives people something tangible with a face and a name they can rally around. This is in tune with how the human brain works. It gives us an in-group to affirm and an out-group to vilify. A story with a hero and a villain makes for a more interesting story than personal reflection.
  12. In addition to the endorphin rush it provides, signaling support of a bill is far less work than a lifelong effort to treat people well.
  13. The measurement problem, the cultural change argument’s lack of charisma compared to magic bullet legislation, the abstract nature of culture, the difficulty for ongoing individual effort, our own brain chemistry, and the long-term nature of change all contribute to why people’s everyday cultural values aren’t discussed as much as they could be.
  14. Astute readers might notice that economic historian Deirdre McCloskey says similar things about cultural change and the origins of modern mass prosperity, which extends beyond one’s bank account to include the arts, life expectancy, political inclusion, technology, travel, family life, and more. Caring about gender discrimination and fighting against it is another important aspect of the larger classical liberal project.
  15. Gender discrimination is a complex problem with a complex solution. But then, Rome wasn’t built in a day.

David Friedman, Peter Leeson, and David Skarbek – Legal Systems Very Different from Ours

David Friedman, Peter Leeson, and David Skarbek – Legal Systems Very Different from Ours

Many years ago at a Mont Pelerin Society conference in Reykjavik, I saw Friedman give a talk on Icelandic law during the Free State period, when the island had no central government. This book greatly expands on his earlier work on governance without government. Friedman looks at legal systems in Iceland, Somalia, Gypsy/Roma society, ancient China, Medieval Ireland, the Amish, Comanche, and more. He finds endless ingenuity and creativity among people trying to solve social problems, sometimes in very harsh conditions. Many legal institutions evolve as ways to reduce transaction costs, to reinforce group identity, and to enhance respect for social customs, whatever they may be in a given society. Leeson, a former professor of mine, and David Skarbek contribute chapters on laws among pirates and prisoners, respectively.

Edward H. Levi – An Introduction to Legal Reasoning, Second Edition

Edward H. Levi – An Introduction to Legal Reasoning, Second Edition

A depressing read, but not on purpose. Basically, Levi argues that much legal reasoning is ad hoc, rather than stemming from general principles or logic. Basically, people just make it up as they go along. There is a long history of common law analysis that ties in with spontaneous order and social evolution. This book is not necessarily part of that tradition. As Levi shows, while case law can adapt to changing social mores or work around ineffective or counterproductive statutes, the process is slow, mistakes are common, people are wrongly punished, and even then bad laws aren’t necessarily reformed. The confusing mix of statute and case law makes for a confusing thicket that is extremely reform-resistant. As the name of this blog says, inertia always wins. Levi sheds some insight into why. Levi wrote this book in the 1940s while teaching law at the University of Chicago; he would later serve as President Greald Ford’s attorney general.

Interview on the Case against Antitrust Law

Here is an interview I recently did on Wayne Crews’ and my paper on antitrust law. My segment starts at about the 57-minute mark.

The paper is here.