Refuting the “Laws” of Economics . . . One at a Time

            The Covid-supply chain debacle, and the short-term thinking that has created shortages of nearly everything, except for exculpatory excuses.  This “perfect storm” offers daily reminders that knucklehead behavior does not trigger punishment, despite the laws regularly treated as irrefutable in the economics courses I took.  Here are a few laws rendered inoperative just now.

Ridiculous, Knucklehead Decisions Generate Measurable Harm to Company Profit and Employee Career Trajectory

            Simply put, I cannot catch a break in this economy.  I live near State College, Pennsylvania “centrally located in the middle of nowhere.”  Under the best conditions, the supply chain to edge towns sometimes breaks down.  But with Covid as an excuse, empty shelves have increased and car rental companies cannot honor their “reservations.”  No one gets punished in the marketplace, or suffers from a poor performance evaluation.  In many instances, the lowest priced options have evaporated, but a higher priced, possibly higher margin alternative is available.  Better pick up two or more, just like the mindset of consumers in the former Soviet Union.

Right Now is a Great Time to Make Shoplifting Harder Even if It Adds 20 Minutes for Customers to Checkout          

            The local Walmart recently reduced by about 50% the number of self-checkout terminals.  The installation of three large television screens makes me think some genius senior manager thought greater surveillance by cameras and employees will cut product shrinkage.  I am sure the manager expects to receive a bonus for saving the company millions.

            Maybe not.  The time it took me to check out and pay increased by 20 minutes and the thought crossed my mind that I should abandon my cart and leave.  Walmart loses a sale and an over worked employee has to restock the shelves with my now abandoned products.  Additionally, the possibility exists that significant numbers of Walmart customers will vote with their feet and shop somewhere else, like the Aldi that just opened nearby.

            The economic rules, that consumer behavior and revenue streams matter, seem to have evaporated.  There is a great likelihood that no one at Walmart will detect the problem, or remedy it if identified.  The shoplifting obsessed executive will not suffer for having been “pennywise and pound foolish.” 

What impact would any group of boycotting consumers have against Walmart, or for that matter any of the legacy or low cost airlines that make every effort to goose revenues by reducing the value proposition of service?  Is Southwest Airlines going to suffer in the marketplace by failing to calibrate employee availability vis a vis upside incentives to restore service schedules to their pre-pandemic levels?  Will Enterprise stop overbooking reservations, because a significant number of bookings cannot be honored?

The customer may not always be right, but are we as expendable as it seems right now?

Greed by Algorithm

            The adage about the stock market applies to both human and machine greediness: Bulls make money and bears make money, but pigs get slaughtered.  I am not suggesting that corporations—or academic entrepreneurs—forego profit maximization, or charging what the market will bear.  But consider the following instances where algorithms overreach and in the process tick people off big time.

            In researching hotel accommodation for my daughter’s “White Coat” ceremony marking the start of her 4 year vet school adventure at Virginia Tech, I quickly identified peak demand conditions for Blacksburg and a 50 mile radius. OK I get this: high, inelastic demand equals high prices even for 2 star motels that usually fetch $50 off peak.  But does Marriott do anything but generate ill will with an algorithm triggering a $968-1069 nightly rate for a Residence Inn?

            Countless so-called behavioral economic experiments prove that we humans do not operate as utility maximizing, cost minimizing, rational actors.  We often forego gains so that cheaters do not share or exceed what rule compliant actors get.  I suspect that many people seeing this kind of price quote from Marriott think less of the company perhaps to the point of avoiding its offerings even when quoted rates are fair and competitive. 

            Way to go Marriott algorithm writers!

            Of course, Marriott does not have a monopoly on foolish algorithmic outcomes.  Amazon has an algorithm that occasionally prices an easily procured book at prices no one would pay.  See Amazon Algorithm Price War Leads to $23.6-Million-Dollar Book Listing, https://www.pcmag.com/article2/0,2817,2384102,00.asp.

            Most times, well-written algorithms manage to squeeze out every last dollar of consumer surplus in a transaction.  So-called surge pricing taught a student of mine how elasticity-based rates work far better than I ever could.  During Spring Break in Florida, an Uber ride to Miami Beach cost a quite reasonable $17.  At 2 a.m. the same ride was quoted in excess of $400       .  The student gutted it out until the rate dropped to $147.

Legacy Antitrust Models Have Legs in the Internet Ecosystem: AT&T’s Acquisition of Time Warner

            A day after the FCC’s termination of network neutrality rules, District Court Judge Richard J. Leon will announce the verdict in the Justice Department’s suit against AT&T’s acquisition of Time Warner.  See https://www.nytimes.com/2018/06/10/technology/att-time-warner-ruling.html.  I’m betting the Judge will apply “old school” competition policy analysis finding no significant harm in this $85 billion deal that he will frame as vertical integration among non-competitors.  This ruling will lead to even more industry consolidation always framed as necessary to achieve scale, efficient operations and effective competition. We have not heard much about how these acquisitions offer consumer benefits, apparently because advocates do not have to bother telling us.

            Using the perspective of Chicago School economists, vertical mergers and acquisitions trigger limited concern about harm to competition and consumers while horizontal deals eliminate a competitor and further concentrate a market.  The prevailing wisdom assumes vertical integration can achieve benefits for the merging parties without offsetting harms to consumers largely because judges assume the two merger-aspiring ventures do not compete in the same market segments.

            In the Information, Communications and Entertainment (“ICE”) markets, deep-pocketed ventures operate throughout the marketplace with extensive vertical and horizontal integration.  It makes no sense to assume any ICE venture involving major incumbents, such as AT&T and Time Warner, operate in mutually exclusive market segments.  Decision makers do not seem willing, or able to understand that the Internet ecosystem seamlessly combines conduit and content and the ICE marketplace has fully integrated converging markets and technologies.

            Consider the conditionally approved acquisition of NBC-Universal by Comcast in 2011.  Even then, Comcast operated extensively in both content creation and content delivery.  It made no sense to consider the deal as solely occurring in a vertical “food chain” with Comcast a downstream distributor of content created mostly by unaffiliated ventures such as NBC.  In 2011, Comcast had 100% ownership interests in content networks including E!, Golf Channel Versus, G4, and dozens of regional sports networks, with minority interests in dozens of other networks.  See https://apps.fcc.gov/edocs_public/attachmatch/FCC-11-4A1.pdf at p. 177.

            It seems that competition policy models do not easily lose traction after having made the transition from academic theory, to preferred model by stakeholders, to conventional wisdom. For example, the Chicago School and now case precedent hold that no venture would ever deliberately underprice a good or service for any period of time beyond a blockbuster sale, e.g., the day after Thanksgiving (“Black Friday”).  The prevailing wisdom concludes that the underpricing company would have no good likelihood for recouping its losses, particularly in competitive markets that would foreclose gouging.  How then can judges and academics—including Chicago School economists—make sense of the ongoing business plan of Amazon and other Internet “unicorns” to forgo profits for years in the pursuit of market share and expanding “shelf-space” for products and services?

            Day by day consumer safeguards evaporate in the ICE marketplace.  I am not endorsing ex ante remedies that anticipate problems, but may well create their own through inflexibility.  But in this current environment, even ex post responses to legitimate complaints do not appear necessary. Who needs a largely impartial and qualified referee when economic doctrine assumes the market can solve or prevent all ills?

            

            

More Doctrinal and Partisan Economic Analysis at the FCC

            According to FCC Chairman Amit Pai and the partially dissenting judge in a key case, the FCC desperately needs more economists and their work product. See https://www.youtube.com/watch?v=-JL7Wrwj9dg; and https://www.cadc.uscourts.gov/internet/opinions.nsf/3F95E49183E6F8AF85257FD200505A3A/%24file/15-1063-1619173.pdf.  If only these disciplined and intellectually honest non-lawyers were on the case, the FCC would better serve the public interest. See, e.g., Gerald R. Faulhaber, Hal J. Singer and Augustus H. Urschel, The Curious Absence of Economic Analysis at the Federal Communications Commission: An Agency in Search of a Mission, 11 INTERNATIONAL JOURNAL OF COMMUNICATION, 1214–1233 (2017); available at: http://ijoc.org/index.php/ijoc/article/view/6102/1967.

            I don’t buy it one bit.

            The FCC has far more lawyers than economists, because much of the agency’s job requires statutory interpretation and implementation.  The Commission has an established body of case precedent from which it has a legal obligation to consult and apply absent changed circumstances, particularly in the frequent adjudications it performs.  Of course economists should participate in the FCC’s policy making process to assess whether and how circumstances have changed.  Additionally, laws occasionally do specifically require the FCC to conduct economic analysis such as assessing whether a market operates with “sufficient competition.”

            D.C. Circuit Court Judge Williams endorsed a statement attributed to former Chief Economist Professor Tim Brennan criticizing the FCC for ignoring economic analysis.  See Williams Partial Dissent at 41, citing http://www.wsj.com/articles/economics-free-obamanet-1454282427.

            Professor Brennan is no shrinking violet who somehow found himself ignored, if not shunned at the FCC.  What is sought by Chairman Pai, Judge Williams, incumbents and the legions of sponsored economists already participating in FCC proceedings is something quite different from legitimacy and a seat at the table.  They want doctrinal superiority.

            Doctrinal superiority means that the FCC should unconditionally accept the work product of specific economists and their particular views. Chairman Pai does not appear to want more robust and open economic analysis.  He appears to want a specific strain of economic doctrine to apply.  Unsurprisingly that doctrine supports a deregulary wish list of incumbent ventures so they can accrue more market power, profits and insulation from competition. 

            Chair Pai does not appear to embrace peer reviewed, disciplined economic analysis unfettered by specific, desired outcomes.  Instead, he seems to welcome economics that create unimpeachable rules that he endorses.  Lawyers surely can interpret law and parse its meaning, but economists do not even have to start with an underlying predicate. They can make it up as they go along.

            Free of having to start from case precedent and specific statutes, economists can state unequivocally that mergers and acquisitions “promote competition.”  Other Big Truths from sponsored telecommunications economists include the conclusion that:

●          markets only need 3 competitors to operate efficiently;

●          deregulation should start if a market might become competitive in the future;

●          vertical integration always helps a venture achieve scale and efficiency; and

●          incumbent common carriers should receive the same or greater compensation for having to                 lease capacity to a competitor than what would accrue if the carrier provided service to an end             user.

            Most economists I know have solutions to all of society’s ills.  Many have great confidence bordering on smugness, no doubt enhanced by their command of complex math.  Most have a particular agenda that colors their research converting it into advocacy that would not pass must with peer review.  The allure of easy and lucrative financial sponsorship from stakeholders converts most economic analysis submitted to the FCC into predictable, biased, partisan and doctrinal work product.  The FCC already receives tons of this kind of material in the proceedings for which it solicits public comments.

            I have little confidence that having more unsponsored, but likely partisan and doctrinal economists at the FCC will miraculously enhance the work product of the Commission.

            I’ll conclude with a lame joke about an economist who suddenly finds herself in a pit.  How does she get out of this dilemma?  She assumes a ladder.

Maybe We All Should Be Economists

I recently had the opportunity to attend the 17th biannual conference of the International Telecommunications Society; see http://www.itsworld.org/Montreal2008/. The conference attracts academics, practitioners and consultants, with economists predominating.
Attending a conference of this sort showcases the strengths and weaknesses of economists. I marvel at their confidence. Perhaps that comes from their mastery of math, statistics and the Greek alphabet. Or maybe it stems from the fact that many of the ITS attendees get paid handsome hourly rates to offer expert opinions.

I admit I am envious. These folks get to assume anything. You might know the lame joke about how economists can make their way out of a deep hole: they assume a ladder! So stakeholders in telecommunications policy contests employ economists to issue opinions based on most favorable assumptions. On the other hand lawyers have to work around case precedent and therefore cannot work with a blank slate.

My economist friends show extreme impatience when I challenge their assumptions. At the conference most of the economists dismissed the network neutrality debate as simple and misguided opposition to carrier efforts to secure some of the rents, i.e., profits, accruing to content providers. The economists at ITS seemed primarily to work with carriers, so there was little concern about the impact of such extraction on startup content providers, civil society and democracy. The economists at ITS assumed that a two-sided market should exist in the Internet with two payments: 1) downstream from content providers and 2) upstream from end users. No one seemed to recognize or acknowledge that peering substitutes for monetary transfers upstream.

In another conversation I had with a top flight economist, I was the one who became impatient when I explained that the concept of common carriage confers both rights and responsibilities and that carriers seemed to emphasize the responsibilities as “confiscatory” and an unlawful “taking.” This economists could not equate unbundling with such monetary benefits accruing from common carriage as below market or free access to property (for rights of way, ducts and tower sites) through eminent domain and by law (the Telecommunications Act of 1996).

Lastly I marvel how economists can create new Rules that some would consider as powerful case precedent. Now that’s something worth $600 an hour.

Bulls, Bears and Greed

As a regular telecommunications conference attendee I marvel at the ability of the hospitality industry to calibrate prices right to the brink of “what the market will bear.” Economists, such as Ramsey, have come up with supporting rationale for linking price with elasticity of demand, so of course what occurs couldn’t be deemed gouging. Or could it?
I wonder how my economist friends would react, when a “just say no” consumer revolt occurs. Outlandish greed on the part of the Geneva, Switzerland hospitality industry resulted in a one time relocation of the International Telecommunication Union’s major trade show and policy conference that occurs once every four years. An apparent miscalculated attempt to extract (extort?) more sponsorship and meeting fees for the Global Traffic Meeting by Intelsat has triggered major attendees, such as AT&T, British Telecom, Tata Group and Deutsche Telekom, to support a separate event scheduled for the same time at a hotel conveniently located two kilometers from the GTM conference hotel.
Conference attendance triggers a difficult cost/benefit analysis, because of high and increasing costs—regardless of the greed factor—with benefits sometimes not easily quantifiable. Some conference stimulate interest simply because a firm might be “conspicuous in its absence” suggesting all sorts of questions about financial or creative wellbeing.
On the other hand conference organizers need to find ways to extract income from hosting a must attend forum, particularly from attendees who find ways to exploit access to existing and prospective customers and partners without registering for the conference. For example, the annual conference of the Pacific Telecommunications Council, which occurs in January, attracts far more “free riders” than conference attendees. But if PTC were to overplay its hand—as Intelsat apparently has—thousands of visitors to Honolulu would change their travel plans perhaps irrevocably.