Posts tagged ‘ftc’

Anti-Trust Law and the Corporate State

Kevin Drum is uncomfortable that Google got off the hook on anti-trust charges merely because it was not harming consumers

Google made a number of arguments in its own defense, and consumer welfare was only one of them. Still, it was almost certainly the main reason they won, and it's still not clear to me that this is really what's best for consumers in the long run. Did Google users click on the products they highlighted? Sure. Did they buy some of the stuff? Sure. Were they happy with their purchases? Sure. Is that, ipso facto, evidence that there's no long-run harm from a single company dominating the entire search space? I doubt it. After all, John D. Rockefeller could have argued that consumers bought his oil and were pretty happy with it, so what was the harm in his controlling the entire market?

The tech industry moves fast enough that antitrust might genuinely not be a big issue there. In the end, it wasn't antitrust that hurt IBM and Microsoft. It was the fact that the industry moved rapidly toward smaller computers and then the internet, and neither company was really able to react fast enough to dominate these new spaces. Nonetheless, I'm skeptical of the tautology at the heart of the consumer welfare argument. If a company is successful, then by definition people must be buying its stuff. On this basis, bigness is simply unassailable anymore. That has broad societal implications that I suspect we're not taking seriously enough.

He seems to be arguing that we consider returning to a pure bigness standard without reference to consumer harm.  I am not sure that we ever followed such a standard, but certainly today the alternative to a consumer harm standard is not a bigness standard but a competitor harm standard.  Whether he knows it or now, this is essentially what Drum is advocating.  We see this in the article he quotes:

But while the F.T.C. said that Google’s actions might have hurt individual competitors, over all it found that the search engine helped consumers, as evidenced by Google users’ clicking on the products that Google highlighted and competing search engines’ adopting similar approaches.

I am not sure what Drum really wants, but the result of eliminating the consumer-harm standard would be an environment where every failed company can haul its more successful competitors in front of the government and then duke it out based on relative political pull rather than product quality.  It is pretty well understood out there that this anti-Google FTC claim was initiated and championed by Microsoft, certainly not among the powerless typically championed by progressives, and a company well known to have missed the boat on Internet search and which is apparently trying to do now through government fiat what it has not been able to do in the marketplace.  Microsoft learned this technique from Sun and Oracle, which took Microsoft to the FTC in the famous browser case where Microsoft faced years of anti-trust scrutiny for the crime of giving the public a free product.

Already, anti-trust law is an important tool of the corporate state, to allow politically powerful companies to squash competition from those who invested less money in their Washington office.  I am not a legal expert at all, but this consumer standard in anti-trust strikes me as a critical shield stopping a hell of a lot more abuse of anti-trust law.

By the way, there is a modern bigness problem with corporations that is very troubling -- we have made government tremendously powerful, giving it many tools to arbitrarily choose winners and losers without any reference to justice or rights.  As private entities get larger and richer, they are better able to access and wield this power in their own favor.  The libertarian solution is to reduce the government's power to pick winners and losers.  The progressive answer is to regulate business more with tools like anti-trust.

But the progressive solution has a built-in contradiction, which why Drum probably does not suggest a solution.  Because the very tools progressives suggest to regulate business typically become the tools with which politically connected corporations further tilt the game in their own favor.  Anti-trust is a great example.  We want to reduce the number of large companies with an eye to reducing corporatism and cronyism, but the very tool to do so -- anti-trust law -- has become one the corporate crony's best tools for stepping on competitors and insulating their own market positions.

And by the way, Rockefeller's Standard Oil did a HELL of a job for consumers.  It was nominally punished for what it might some day hypothetically do to consumers.

Here are the facts, via Reason

Standard Oil began in 1870, when kerosene cost 30 cents a gallon. By 1897, Rockefeller's scientists and managers had driven the price to under 6 cents per gallon, and many of his less-efficient competitors were out of business--including companies whose inferior grades of kerosene were prone to explosion and whose dangerous wares had depressed the demand for the product. Standard Oil did the same for petroleum: In a single decade, from 1880 to 1890, Rockefeller's consolidations helped drive petroleum prices down 61 percent while increasing output 393 percent.

By the way, Greenpeace should have a picture of John D. Rockefeller on the wall of every office.  Rockefeller, by driving down the cost of kerosene as an illuminant, did more than any other person in the history to save the whales.  By making kerosene cheap, people were willing to give up whale oil, dealing a mortal blow to the whaling industry (perhaps just in time for the Sperm Whale).

So Rockefeller grew because he had the lowest cost position in the industry, and was able to offer the lowest prices, and the country was hurt, how?  Sure, he drove competitors out of business at times through harsh tactics, but most of these folks were big boys who knew the rules and engaged in most of the same practices.  In fact, Rockefeller seldom ran competitors entirely out of business but rather put pressure on them until they sold out, usually on very fair terms.

From "Money, Greed, and Risk," author Charles Morris

An extraordinary combination of piratical entrepreneur and steady-handed corporate administrator, he achieved dominance primarily by being more farsighted, more technologically advanced, more ruthlessly focused on costs and efficiency than anyone else. When Rockefeller was consolidating the refining industry in the 1870s, for example, he simply invited competitors to his office and showed them his books. One refiner - who quickly sold out on favorable terms - was 'astounded' that Rockefeller could profitably sell kerosene at a price far below his own cost of production.

Update on the EPA's Electric Vehicle Mileage Fraud

I have written several articles (here and here) outlining why the EPA's method of giving electric cars an equivalent or eMPG is outright fraudulent.  I calculated for the average driver, for example, that the Nissan Leaf's 99 eMPG was actually closer to 36.  Why?  Well, in the EPA's methodology, the science-based Obama administration pretends the 2nd law of thermodynamics does not exist.  Specifically, they assume perfect conversion of the chemical potential energy in fossil fuels to electricity.  They also assume zero transmission losses.  To rework the calculation, I actually used a Clinton-era Department of Energy methodology called well to wheels.

So here is something I thought I would never write:  It turns out the Union of Concerned Scientists agrees with me.  Apparently they have used a similar methodology to rework electric vehicle MPGs based on the fuel mix of the power in different cities, rather than an average national fuel mix as I did it.  I am not sure how they did the analysis - did they use average fuel mix or the marginal fuel, and if the marginal fuel did they assume the marginal fuel at night or during the day?   For example, certain California cities look good with solar use but that does not do anything for typical night time car charging.

Anyway, the problem is hard and I could quibble with how they did it.  But the results are telling - everywhere they looked, even in the hydro-powered Pacific Northwest, the eMPG they got was lower than that of the EPA's.  And in many cases much lower.

If corporations were using the EPA's eMPG methodology, they would be busted by the FTC for false advertising.  It's time to fix this calculation so Fisker Karma drivers can't continue to fool themselves into thinking they are doing something positive for the environment.

Putting Crosshairs on the Succesful

Google is starting to discover that all its smug leftish do-gooder aura is not going to stop the government from trying to take it down merely for being successful.

Sens. Herb Kohl (D-Wis.) and Mike Lee (R-Utah), the top lawmakers on the Judiciary Committee's antitrust subpanel, are urging Federal Trade Commission (FTC) Chairman Jon Leibowitz to take a hard look at whether Google is engaging in anticompetitive business practices....

"Given the scope of Google's market share in general Internet search, a key question is whether Google is using its market power to steer users to its own web products or secondary services and discriminating against other websites with which it competes," the lawmakers wrote in a letter sent Monday.

Two quick thoughts

  1. Further proof that, long ago, anti-trust actions dropped any hint of being about the consumer and have become completely about protecting competitors with connections in Washington from getting their butts kicks by a stronger company.  Look at some of the last suits - Microsoft, now maybe Google - both are actually about stopping companies from offering consumers free stuff.
  2. Isn't Google being accused of doing exactly what, say, NBC does all the time?  NBC loses money on the Superbowl and the Olympics, but uses the huge audience to cross sell its other shows and offerings.

Ex Post Facto Law

Ex Post Facto law, meaning law retroactively criminalizing past practices, is explicitly banned in the Constitution.  But big government folks have found a way around this prohibition through the massive government regulatory bureaucracies that have been created over the last half-century.

Here is a great example.  In short, an online site accepted advertising from a company that the FTC later went after for deceptive advertising.  Note, the online site was not involved, they just ran the add, just as your web site may be running ads or Google adwords right now.  The FTC actually settled the case with the company accused of wrongdoing for $0.  So obviously, they were not that worked up about the ad.  But in order to establish a new legal principal that sites that run advertising can be liable for the entire liability for a deceptive ad, they went after the web site for $6 million!

Forget for a moment what bad policy this is -- can you imagine being fully liable for any fraud involved with any company that runs an add on your site?   But beyond that, the basic approach -- of legislating from the administrative branch, abuse of power to cow small companies and individuals through threat of bankrupting legal costs, and ex post facto rule-making -- is just staggeringly scary.

This is why I cringe every single day whenever the phone rings in my small business.

My suspicions were confirmed when I looked up the law the FTC said I had violated, a law that was vague and didn't seem to have much to do with what the FTC was accusing me of. And it certainly did not say that the FTC was entitled to the amount of money it wanted. My lawyers explained that the amount the FTC was suing for was based not on laws that Congress had passed but seemed to be based on what judges had awarded in previous cases over the years.

Moreover, in our case, the FTC was now trying to go beyond what previous judges had awarded. What lay behind their actions seemed to be this: they were trying out a new legal theory. They wanted to establish a new principle "“ that a person who was in any way connected to the advertising at issue, no matter how trivial their involvement, was liable for the entire amount of all purchases of the product by consumers. I felt as if I had been struck by lightning. I was the sacrificial lamb. I had the rotten luck to be chosen, of all people, to be the test of their novel legal theory. [...]

I'm all for getting tough on deceptive advertising, including Internet fraudsters. But what seems terribly wrong is the FTC playing Goliath where they just outspend everyone they go after, regardless of whether there was any wrongdoing. Unfortunately, that appears to be the direction in which they're going. David Vladeck, the new head of the Bureau of Consumer Protection (the person I met with), advocates pursuing test cases "even if the legal theory has not been accepted by the court prior to that time." (see http://www.abanet.org/antitrust/at-source/10/04/Apr10-VladeckIntrvw4-14f.pdf) In other words, you may be violating a law that doesn't exist yet. That is downright scary. The only thing the FTC is going to "prove" by "winning" these cases is that they can establish their new principles by bankrupting anybody but the very wealthiest Americans "“ the only people who could afford to take them on.

Homesteaders Beware

I already wrote on the egregious FTC proposals to begin the government takeover of journalism.  But I missed this part, via South Bend Seven, which caught my eye in their post:

Tax on broadcast spectrum. They argue "commercial radio and television broadcasters are given monopoly rights to extremely lucrative spectrum at no charge," and this is a massive public subsidy. They therefore suggest the revenues generated by that spectrum be taxed at a rate of 7 percent, which should result in a fund of between $3 and $6 billion. In exchange, commercial broadcasters would be relieved of any obligations to engage in "public-interest programming," which the broadcasters claim costs them $10 billion annually.

Much of the TV and radio spectrum was indeed "given away," in exactly the same process that the Homestead Act (and I believe the Northwest Ordinance before that) "gave away" land to Americans who were willing to develop it.  These acts gave land away to pioneers who were willing to take the risk and effort to develop what was essentially value-less land into a productive asset  (the land had potential value, but until someone tilled it and put up structures and built rail and road to it, it was worthless).  When TV and Radio broadcasters first started using the spectrum, it was worthless -- and we were even less confident in its potential value than we were of the land in the Homestead Act.  The spectrum did not have value until private broadcasters demonstrated it had value through their investment, development, and experimentation.

So is Congress next going to tell everyone who lives on homesteaded land that they received a massive public subsidy and that their land is now going to be taxed?  The current landowner would likely argue that they didn't get the land for free - they bought it for a substantial price from the previous owners, who bought if from someone else, who bought it from the original homesteader.  But the situation is no different in the broadcast spectrum.  Clear Channel did not get the spectrum for free -- it did not even exist for decades after the spectrum was homesteaded -- it paid a full market price for the spectrum it controls.

Postscript: However, I am happy to see even the leftish Obama Administration admit that public-interest programming is a questionable requirement.  Because broadcasters only make money if they broadcast things people want to see or hear, everything they do is "public-interest."  What is meant in practice by the term "public-interest" should actually be called "political-interest" programming, because this programming tends to be uninteresting to the great majority of the public (have you ever listened to the garbage at 5am on Sunday morning on radio?) but is supported by small niche groups that have disproportionate political influence.  Let's remove these requirements as stupid without holding up broadcasters for more taxes in exchange.

Creating the American Pravda

It is a beautiful day here, so I really don't have the time or desire right now to summarize the absolute mess that is the FTC discussion draft for the "reinvention of journalism," reinvention being a synonym apparently for government takeover.  Almost every proposal is fraught with unintended (or perhaps intended but hidden) consequences, faulty economics, and unprecedented attacks of the first amendment.  If you don't have the time to read it, I will try to summarize it next week, but just open it and scroll the bold headers with the proposals.  Its really outrageous.  Here are just some quick highlights:

  • Substantial narrowing of fair use, with particular focus on how search engines and other online sites (e.g. blogs) use and/or have to pay for access to news sites
  • Expansion of news copyrights on breaking news - ie certain papers will own the copyrights to certain news events if they are the first mover on it
  • Increased government funding of news organizations along multiple vectors, from subsidies to guaranteed loans to income tax checkoffs to lower postal rates to Americorps programs for for journalists.
  • Simultaneously reduce private funding of journalism through taxes, including a tax on advertisers
  • Shift the organizational model of journalism from profit corporations (which rely on satisfying individuals to get their revenue) to non-profit organizations dependent on the government for funding
  • New taxes on and licensing of the Internet.   New taxes on broadcast spectrum to subsidize print media (shifting money from media that are more hostile to the administration to print media and non-profits that are more sympathetic to the administration).

Here is the intro that was missing from the report:  "The New York Times and Newsweek can't figure out a profitable business model in the Internet age.  We propose the government step in with all means at its disposal to limit competition to these print media companies and create new government subsidies for their business.  Once their companies' profitability is absolutely dependent on these government mandates and subsidies, the Federal government will have a powerful source of leverage to protect itself from criticism in these outlets.  Once we have this situation in place, we will have a strong inventive to quash more independent outlets and maximize the market share of media companies beholden to the government.  In a large sense, our recommendations build off the success of the tobacco settlement experiment, where a few large companies agreed to pay the government large percentages of their future profits, and then the government worked diligently to quash new tobacco competitors to maximize the market share of those companies paying it settlement money."

Update: South Bend Seven makes an interesting comparison to campus newspapers.

Walter Olson on the FTC vs. Bloggers

Olson has a series of posts on the new FTC rules.  They are here and here.

The scariest part for me is not just the rules, but the frank admission that they will be enforced unequally as the FTC says it will apply discretion as to who to prosecute for picayune violations and who they won't.  As I often say to folks, even if you trust this administration   (e.g. "your guys") to not abuse this power, what about the next administration (ie "the other guys")?

Olson has a priceless picture a medical blogger snapped at a recent trade show showing that there is reason to fear that rules aimed at ridiculously small conflicts of interest will be enforced even when they are dumb:

FreebieDocsDontEat1

Anyone who has been involved in NCAA recruiting can tell you the absurd results that flow from defining even tiny freebies as violations.  For example, when I interview high school students for Princeton, I have to be careful not to buy them lunch or coffee on the off-chance they turn out to be athletes where such a purchase could trigger a recruiting violation.

Great Suggestion

Brad Warbiany has a great suggestion in response to new FTC rules requiring that

Under the revised Guides, advertisements that feature a consumer and convey his or her experience with a product or service as typical when that is not the case will be required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides "“ which allowed advertisers to describe unusual results in a testimonial as long as they included a disclaimer such as "results not typical" "“ the revised Guides no longer contain this safe harbor.

Brad has suggested this disclosure is in order:

Barack Obama, Sept 12, 2008
And I can make a firm pledge: under my plan, no family making less than $250,000 will see their taxes increase* "“ not your income taxes, not your payroll taxes, not your capital gains taxes, not any of your taxes.

* Results not typical. Families making less than $250,000 can expect to see rises in cigarette taxes, increased energy costs through cap and trade and/or gasoline taxes, soda taxes, and mandates to buy costly insurance plans they can't afford. They can expect to pay all the taxes levied on "corporations", as well as the cost of new regulations, who will pass those on in the cost of goods. Families can expect taxation through the form of inflation, eating away at the buying power of their paychecks. Firm pledges have not taken Viagra and should not be expected to last more than 4 hours.

Update: From Ann Althouse, couldn't have said it better myself:

The most absurd part of it is the way the FTC is trying to make it okay by assuring us that they will be selective in deciding which writers on the internet to pursue. That is, they've deliberately made a grotesquely overbroad rule, enough to sweep so many of us into technical violations, but we're supposed to feel soothed by the knowledge that government agents will decide who among us gets fined. No, no, no. Overbreath itself is a problem. And so is selective enforcement.

ADM's Mistake (Mostly Corrected)

Alex Tabarrok discusses the new movie about Mark Whitacre and price fixing at Archer Daniels Midland.  ADM apparently was caught holding meetings with competitors to fix prices of certain chemical commodities, specifically Lysine.

Here was ADM's mistake, and it is one they have clearly learned from:  in the modern American corporate state, there is no reason to engage in illegal private price fixing or cartel arrangements when corporations can achieve similar ends legally and openly through the government.  If ADM was concerned about difficult competition depressing pricing, they could have emulated any of these examples:

  • Run to Congress to beg for strong tariff's on foreign sources of their commodity product (as do the sugar and ethanol industries)
  • Run to Congress and have them institute minimum pricing or buy up excess supply (as do many agricultural producers)
  • Run to Congress to seek supply restrictions (as does the taxi business)
  • Run to Congress and have them restrict new competition and sources of supply through licensure (as do a variety of industries, from real estate to funeral homes to medicine)
  • Run to Congress to have them pass onerous legislation that makes it difficult for new capacity to be added in the business (as does the waste disposal industry)
  • Run to Congress to seek subsidies for their product in the name of some public good - it doesn't even have to be true (as does, well, ADM with ethanol)
  • Run to Congress to seek regulations that favor your particular production and product technologies while hamstringing your competition (as does GE with light bulbs)
  • Run to Congress and have them enforce an industry price-fixing arrangement -- its legal when Congress does it (as do the Milk producers)
  • Run to the FTC to bring anti-trust actions against your competition (as did Netscape and Sun against Microsoft)  This is an interesting article on this, which says in part, "Most [antitrust] cases are not brought by public representatives, whether elected or self-appointed, but by private companies, often rivals of the defendant who are being driven out of business. Businessmen believe that competition is good if they win but bad if the other guy wins."

Of course, all of this takes a little care.  The competitive relief must be couched in something like "consumer protection" or "saving jobs" or "going green" or "fairness," but there are plenty of good examples of consumers getting the shaft in the name of consumer protection that it shouldn't be too hard to come up with something.  Developing a high profile in an early Presidential primary state like Iowa doesn't hurt either.

As I said in the title, ADM has certainly figured this out, if their approach to the ethanol business is any guide.  In ethanol, they have resorted to any number of these tactics simultaneously.

More Anti-Trust Fun and Games

Regulators can always declare a merger to be monopolistic -- they just have to define the market narrow enough.  For example, if the FCC and FTC are considering calling satellite radio a separate market from terrestrial radio as an excuse to stop the Sirius-XM merger.  The NAB, the trade group fro terrestrial radio, has been going ape trying to block the merger, knowing that the two together will cause its stations to bleed listeners to satellite even faster than in the past.  Hilariously, though, the NAB is having to twist itself into pretzels as it goes to Defcon 1 trying to stop the merger by ... arguing that satellite radio is a separate market from terrestrial radio and thus the merger is monopolistic.  Begging the question, then, why they are working so hard to block it, particularly after the FCC has allowed huge consolidation and merger activity among NAB members.

Now, history is repeating itself yet again, as the FTC threatens to block the Whole Foods - Wild Oats merger because... it claims organic food grocery stores are a separate market from other grocery stores.  Uh, right.  Extra points, as in satellite radio, for claiming consumers will be irreparably harmed by a merger in a "market" that did not even exist 2 decades ago.