Dennis Carlton on Resale Price Maintenance

U of Chicago economist Dennis Carlton, who is now Deputy Assistant Attorney General for Economic Analysis, Antitrust Division of the US DOJ weigned in on the matter of whether RPM should be subject to a rule of reason or per se standard:

"The number of situations in which resale price maintenance can be used as a device to harm all consumers is rather limited—certainly it is understood that RPM can be used to facilitate a dealer or manufacturer cartel. But those situations do not describe the actual uses of RPM very well.

By and large, the evidence shows that resale price maintenance is typically used in ways that one would not characterize as anticompetitive. Therefore, RPM should be judged under a rule of reason standard.

The simple obersvation I make in my textbook is that we don't typically tell a manufacturer how to produce his product, so why should we tell him how to distribute it."

I agree. That's from an interview with professor Carlton, read it here. Professor Carlton's textbook, of course, is a classic and standard reference for all economists working in the field of industrial organization. You can get it here.

What I Have Been Reading

Fragile Superpower: How China's Internal Politics Could Derail Its Peaceful Rise by Susan Shirk at UC San Diego and she was former Deputy Assistant Secretary of State responsible for U.S. relations with China.

Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Capital Markets by Philip Hoffman at Caltech and his coauthors.

A biography on Michael Polanyi.

A book based on lectures of the late John Rawls.

And finally, I am almost done with Albom's third serving, For One More Day. It is certainly better than his second book, The Five People You Meet in Heaven. It is still way, way off compared with his first book Tuesday with Morris.

I still remember vividly the strong emotions that I had while reading Tuesday with Morris. I finished it on a flight from San Francisco back to Washington D.C. after a job interview.

No, I Don't Believe in Consumer Protection Law

Peter up at HK Competition Law asked:

"I'm know that at a macro level we can leave competitive markets to work things out over the longer term, but at the micro level (like you or me as a single consumer entering into a single transaction) is there a need for some protection against unscrupulous businesses? The theory is good, but the reality can be quite different. I know there are problems with law enforcement etc. But as a concept, do you think some consumer protection is a good thing (for instance, mandatory product labelling) or should we not bother?"

Read more of Pete's comments here, and my original post here.

My answer to Pete's question of whether I think there is a place for consumer protection law is NOPE. A lot of studies have been conducted aiming at evaluating the effectiveness of consumer protection regulations and most of them would tell us that the costs of having such law far outweigh the benefits they would bring.

Here is one example:

"Since the 1910s, the Federal Trade Commission has sought to promote truth in advertising. Specifically, it is responsible for preventing deceptive acts or practices in the sale of various products, with particular attention given to food, drugs, and alcohol. In accordance with its regulations that define deceptive practices, the FTC conducts investigations of alleged falseadvertising and can order firms to stop running particular ads.

Peltzman (1981) found that the investigations raised firms’ costs, but itwas unclear whether they enabled consumers to make more informe dchoices that enhanced their welfare."

The above quotation is from p.29 of the excellent book by Brookings scholar Clifford Winston. The title of the book is aptly named as Government Failure vs Market Failure. Read it for free here.

Since I expect readers of this post would read Winton's book themselves, so my response would be brief.

People expect government would do a better job than the market in protecting consumers because they assume:

1) While market imperfections (or what they would label as market failures) are widespread, government operates smoothly without a glitch. This is what Harold Demsetz, a professor of economcis at UCLA, called the nirvana approach to economics in his 1969 piece "Information and Efficiency: Another Viewpoint," Journal of Law and Economics.

2) Government officials are actually out there to serve US and not themselves. So a person who would be a greedy monster if he or she works in the private market would suddenly turn into a saint once he or she joins the government.

I think both of these assumptions are false.

So both theory and evidence reported in empricial studies convince me consumer protection laws have only a very small role to play, if there is any, in our economy.

Informal Finance in China, Less Important than You Think

I have always believed that informal finance serves a very important function in China's growth. Now a paper, an empirical one, forces me to think about it again.

Here is the abstract:

China is often mentioned as a counterexample to the findings in the finance and growth literature since, despite the weaknesses in its banking system, it is one of the fastest growing economies in the world. The fast growth of Chinese private sector firms is taken as evidence that it is alternative financing and governance mechanisms that support China’s growth.

This paper takes a closer look at firm financing patterns and growth using a database of 2400 Chinese firms. We find that a relatively small percentage of firms in our sample utilize formal bank finance with a much greater reliance on informal sources. However, our results suggest that despite its weaknesses, financing from the formal financial system is associated with faster firm growth, whereas fund raising from alternative channels is not. Using a selection model, we find no evidence that these results arise because of the selection of firms that have access to the formal financial system.

While firms report bank corruption, we do not find evidence that it significantly affects the allocation of credit or the performance of firms that receive the credit. We find that an important determinant of access to bank loans is the ability to post collateral, which is in turn a function of firm size, level of fixed assets and firm location.

Our findings suggest that the role of reputation and relationship based financing and governance mechanisms in financing the fastest growing firms in China is likely to be overestimated.

Read the paper here.

Firms Compete at Multiple Margins

In response to my earlier post on consumer protection law, Peter asked:

"Could the issue be one of the availability and reliability of information in consumer transactions? "

Producers, of course, have more info regarding characteristics of their products compared with consumers. Sellers would be compelled by competition to try the best they could to lure customers. One way to do so, of course, is to compete against in each other in doing the best they could to inform customers about their products.

In other words, competition is multi-dimensional. It entails not only price, quantity and quality, it would include after-sales services like warranties to address the information asymmetry problem as well in producers' bid to draw customers.

Peter also asked:

"Take a law against misleading or deceptive conduct, for instance. We already have such a law in the form of section 7M of the Telecommunications Ordinance, but it only applies to telecommunications licensees. What's your view on the need for/effectiveness of this prohibition in what is a very competitive industry (there are a number of decided cases on the OFTA website www.ofta.gov.hk)? Could it be of greater utility in other industries? "

I would caution against attributing the well-functioning character of the telecom market to that section 7M. One has to bear in mind that once HK starts liberalizing its telecom market, competitive forces are unleashed, and my argument is that these competitive forces would ensure that the information aysmmetry problem would be adequately addressed.

Hence, one should be careful about the reverse causality problem here. That is, the well-functioning of the telecom market as a result of the intense competition introduced after liberalization creates the false impression that the causality runs the other way (ie the smooth working of the market is a consequence of the existence of section 7M in the Telecom Ordinance).

Protection of Consumer Interests, why?

There is a discussion going on up at Hong Kong Competition Law about how HK consumers are not being protected by their government compared with governments elsewhere where consumers protection laws are in place.

Why consumers need protection? Is it not the case that standard economics tells us that a market with sufficient competition will ensure that consumers get what they want at the lowest possible prices?

OK, you respond, sometimes markets might fail because of monopoly and other anti-competitive practices. Hence, leave them alone, markets might be unable to provide consumers with what they want at the lowest possible prices.

Let's assume for a moment that indeed that were the case. So you introduce a competition law, a law supposedly would ensure that markets stay competitive. And let's check how we are doing here. With the markets functioning properly with the help of a competition law, aren't consumers' interests get well taken of already. If so, why we would need another law which supposedly would perform the same function as competition law? That is why need to have another consumer protection law on top of a competition law?

The only argument I can think of for a consumer protection law separate from a competition law is to assume that consumers DO NOT KNOW WHAT WANT. Putting it in another way: While competition can offer them what they want at the best prices and quality, those wants might not be serving their best interests.

I just don't think that is the case. Do you believe that some government lawyers would know better than you do where your real interests lie?

The First Female to Win the J B Clark Award

The American Economic Association announced Friday that Susan Athey, a 36-year-old professor at Harvard University with professional interests ranging from deepest economic theory to Canadian timber auctions, had won the prestigious John Bates Clark medal, awarded every two years to the nation's most promising economist under the age of 40. No woman had won the medal in its 60-year history.

Here is story in WSJ. Here is Susan's webpage at Harvard.

Here is an interesting blogpost on Susan's background, the most interesting bit is certainly the following on her work habits:

"To end, I am going to recount one story about Susan’s work habits. Last year, she was expecting her second child. I got a call which must have been late at night her time. It was Susan and she was trying to complete a few minor things on a project she and I were involved in on timber auctions in Victoria. After a few minutes I asked. “So you must be due soon, how is it going?” Well, apparently, it was going slowly. She was calling me from the delivery room! Most people are content to take that time off. Susan was clearing her to do list! Susan had time to spare and we chatted for a while and for the next hour emails continued to come in. The baby was born soon after."

Must Read for Democracy Advocates in HK

Bryan Caplan's excellent book, which demolishes the myth of the rational voter, is out. Go get it, now! Here is the introduction, here is the book's page, and here is Bryan's homepage at George Mason University. And yes, Bryan is a blogger too.

Once you are done with Bryan's book, you should also read Don Wittman's The Myth of Democratic Failure (which pushes the rational voter model to its logical extreme).

Here is an exchange between Don and Bryan over at Econ Journal Watch back in 2005.

Tax All Those Tall People!

Greg Mankiw wrote:

"Should the income tax system include a tax credit for short taxpayers and a tax surcharge for tall ones? This paper shows that the standard utilitarian framework for tax policy analysis answers this question in the affirmative."

Read more here.

Arnold Kling at Econlog questioned Greg's use of Instrumental Variable in the latter's paper. And BTW, do read BOTH of his comments, (another, more recent one could be found here) they are some of the best, intuitive explanations that I have encounterd on the concept of Instrumental Variable.

China Further Liberalizes its Banking Sector

A story in a weekend edition of the SCMP reports:

"The mainland's banking regulator will allow the country's 114 city commercial banks to expand their businesses nationwide, a move that will strengthen their competitiveness and boost their attractiveness to investors."

Read more here.

In other words, from now on the city banks would be free to build their branches nationwide and diversify their businesses as well as risks. Needless to say this policy is a boon to these city commercial banks.

This policy certainly is not what the dominant players like Bank of China and ICBC would like to see though. Because the new policy would inevitably intensify the competition between the city banks and the dominant players. And it is not hard to imagine that the dominant players would try very hard in lobbying the government to prevent this policy from implemented in the first place.

The question is then why these dominant players would let this happen, why now?

I guess this might have something to do with the fact that foreign banks now could, on paper at least, compete head on with the Mainland's dominant players on a level playing field starting this year as part of China's fulfilment of its WTO commitments. Read more here.

Afterall, if you would have to compete with the likes of Citibank and HSBC, you wouldn't mind letting the city banks jump into the fray, would you? Hence, the timing of the policy.

Wisdom of the Day

"How does one then asses the efforts of Treasury Secretary Paulson to ask for financial sector reforms in China?

Frankly, while such reforms are likely to be good for China itself, I do not see our pressures for them as anything other than using our confrontations with China to open the Chinese market more rapidly and deeply to our financial firms on Wall Street: this is good for Wall Street but it is not clear how it will benefit the US in any other Chinese-macroeconomics-related benefit spillovers."

Read more here.

Shockingly High Costs of Exchange Control

This is from one of the latest NBER papers:

"This paper investigates the negative effects of exchange controls on trade. To minimize evasion of controls, countries often intensify inspections at the border and increase documentation requirements. Thus, the cost of conducting trade rises.

The paper finds that a one standard-deviation increase in the controls on trade payment has the same negative effect on trade as an increase in tariff by about 14 percentage points. A one standard-deviation increase in the controls on FX transactions reduces trade by the same amount as a rise in tariff by 11 percentage points."

Read more here.

Think about the jobs that would have created if not for the FX control, think about the economic growth that would have gained as a result of higher export if not for the FX control, think about the additional political heat that would have created in the US if not for the FX control...

Mind boggling indeed.

It's Your Money Too!

The government finally has offered some details on its plan of giving out freebies to film makers. The plan was first mentioned in this year's budget.

A story in today's SCMP reported:

"Films costing less than HK$12 million could qualify for grants of up to 30 per cent, according to a government discussion paper submitted to the Legislative Council yesterday..."

Why limit it to HK$ 12 million? Is that any analysis to support that? (May be, I have not read the government report submitted to the legislature yet).

It gets better.

"At least half of the main cast and film crew would have to be local permanent residents."

Does the government think that the reason for the decline of HK's movie industry is caused by the industry's past hiring patterns, ie too many non-residents are employed. If so, why the industry itself couldn't figure it out and shifting its employment pattern?

It gets even better.

"To be eligible, films must be commercially viable, with third-party financing of at least half of the production budget."

If so, ie. the movie is known to somebody to be commercially viable, you wouldn't need the government dole in the first place, wouldn't it?

Finally, giving government handouts to some "qualified" movie makers but not others based on some necessarily arbitrary criteria mean that all movie makers are not competing on an equal footing. How would this square with the government's calling for the urgency of a competition law when it serves as one source of the problem itself?

Best Idea I have Read Today

Auction the right to hire temporary workers among employers.

This is from an oped in WSJ by Gordon Hansen, an econ professor at UC San Diego. Read it here. The oped, in turn, is distilled from a longer study done for Council for Foreign Relations.

Holiday Picks

I visited a couple of the local bookstores during the Easter Holidays, here are the treasures I have found:

1) While Amazon still lists Black Swan as unavailable, I actually got it at a Pageone yesterday at HK$ 241.

2) Tom McCraw's Biography on J. Schumpeter is also sold at TST's Commercial Bookstore. The price is HK$ 333. Here is a review by David Warsh.

3) More Than You Know: Finding Financial Wisdom in Unconventional Places published by Columbia University Press. I saw the book at Causewaybay's Commercial Bookstore for about HK$ 250.

4) A paperback version of Origin of Wealth at around HK$ 150 at Causewaybay's Pageone, the print is small though.

And What's Wrong with That? or I Could Have Filed it Under the Why HK does not Have Better Reporters Category

SCMP has a story last Sunday on competition between convenient stores, supermarket chains, and mom-and-pop stores.

This is the beginning of the story:

"Stacking cans of Coca-Cola Zero in his Tsuen Wan grocery shop, Lai Wai-kwong has been wondering whether the new cold drink will boost sales at his small business.

Things do not look promising. He sells three cans for HK$10, or HK$3.33 per can, which yields a 10 per cent profit margin. But supermarkets are selling eight cans for HK$20.90, or HK$2.61 per can. What's more, shoppers receive a free bottle of lemon tea with their buy."

Please tell me reporter, what's wrong with customers getting the better end of the deal? Would you prefer to see these giant supermarkets leave the scene and see the price for Coke Zero to cost HK $ 5.00 a can. Is that fair? And to whom? Sure it is fair to Lai, the owner of the mom-and-pop store, but have you considered the benefits of the customers whose welfare would definitely decline if that were to happen when you penned that article of yours?

Unfair practices are involved the reporter might respond, whose story continued:

"Supermarket chains have more bargaining power with suppliers than mom-and-pop shops like Mr Lai's. Small shops pay 10 to 20 per cent more for soft drinks from wholesalers than the chains. The chains also enjoy exclusive distribution of some products, which Mr Lai is barred from selling."

Read more here.

I would leave the counter-argument in support of the supermarket chains' bargainning power as an exercise to the reader (hint: if not for that power vis-a-vis the suppliers, do you think you could get such a cheap price for Coke Zero at HK $ 2.61 per can mentioned above?). I would pose the answer later on.

As far as exclusive distribution is concerned, do you think at least the reporter should make a case for why such practices might make business sense and how that practice might actually help customers in the first place? Instead the tone of the story makes it seems like the reporter has made a guilty verdict without a trial.

Why couldn't we have better reporters? Again one explanation is that there exists liberal bias in the media, as my fellow classmate back in graduate school reported here.