Two Tales of Bundling

The economic literature on bundling has made many theoretical advances. However, several omissions reveal themselves. The advances have largely been on the theoretical side. These models contain restrictive assumptions regarding the existence of monopoly in some markets, and the nature of rivalry in others. The models generally ignore obvious and ubiquitous reasons firms may use bundled discounts. These models have not been subject to robustness checks, nor have their assumptions been tested empirically. As a result, the literature that shows the possibility of anticompetitive harm does not provide a reliable way to gauge whether the potential for harm would outweigh any demonstrable benefits from the practice. As a result of the underdeveloped nature of the literature, simple rules that result in extreme tradeoffs between type I and type II errors may dominate more complex tests that attempt to differentiate procompetitive from anticompetitive behavior. Such complex tests may work well within the confines of a theoretical model, but not when applied to firms in actual antitrust cases. Improving the reliability of more complex tests for anticompetitive behavior will require economists to expand their understanding of both the anticompetitive and procompetitive reasons firms engage in bundling. This will entail studying the reasons bundling is adopted by firms without market power, relaxing the assumption of monopoly in theoretical models, and generating testable hypothesis and the data to test them

The Economics of Loyalty Discounts and Antitrust Law in the United States

This paper examines the law and economics of loyalty discounts. While there have been recent advances in the economic analysis of loyalty discounts, this literature is still relatively recent and sparse. Though some of these papers provide tests that would serve to identify either deviations from short run profit maximization or, in the case of bundled discounts, a reduction in consumer welfare or the exclusion of a hypothetically equally efficient competitor, these tests have several shortcomings. As a result, the economic literature currently does not provide a reliable way to gauge whether the potential harm from the use of loyalty discounts would outweigh any demonstrable benefits from their use. A review of the major cases involving loyalty and other volume discounts suggests the following general observations. In the single product case, courts have consistently applied the “not easy to establish” two part test for predatory pricing set out by the Supreme Court in its Brooke Group decision. As a result, the courts have generally ruled that above-cost volume discounts, including those that use market share discounts and near exclusive thresholds, are lawful and do not violate the antitrust laws. In cases involving multimarket or bundled rebates, however, courts have not generally followed the Brooke Group Court’s presumption that above cost bundled discounts are presumptively legal. However, they have generally followed the Brooke Group Court’s focus on the actual facts or realities of the marketplace rather than on hypotheticals. Thus, while the lower courts have considered the theories and tests contained in the recent theoretical literature on loyalty discounts, they have generally refused to find liability absent sufficient proof that the conditions required by these tests apply, and that the underlying tests reflect market realities. This approach is consistent with the federal courts’ generally cautious approach to expanding Section 2 liability, and the recognition of the underdeveloped and untested state of the academic literature. Moreover, there are significant flaws in the two cases where courts have found use of bundled loyalty rebates to be unlawful. In SmithKline, the court did focus on data and concluded that an equally efficient competitor would have been excluded by the bundled discounts evaluated in the case. However, economic theory suggests that the court may have used a flawed standard, and should have instead focused on the fact that changes to the bundled rebate programs served to increase rather than decrease prices. And the court’s decision in LePage’s not only suggested use of the same flawed standard, it found liability without requiring sufficient proof that the standard even applied to the facts of the case

An Economic Analysis of the Private and Social Costs of the Provision of Cybersecurity and other Public Security Goods

This paper examines the incentives of private actors to invest in cybersecurity. Prior analyses have examined investments in security goods, such as locks or safes that have the characteristics of private goods. The analysis in this paper extends this analysis to examine expenditures on security goods, such as information, that have the characteristics of public goods. In contrast to the private goods case, where individual uncoordinated security expenditures can lead to an overproduction of security, the public goods case can result in the underproduction of security expenditures, and incentives to free ride. Thus, the formation of collective organizations may be necessary to facilitate the production of public security goods, and the protection of information produced by the collective organization should be a central feature of such organizations

The Law and Economics of Proportionality in Discovery

This paper analyzes the proportionality standard in discovery. Many believe the Advisory Committee\u27s renewed emphasis on this standard has the potential to infuse litigation practice with considerably more attention to questions related to the costs and benefits of discovery. We discuss the history and rationale of proportionality\u27s inclusion in Rule 26, adopting an analytical framework that focuses on how costs and benefits can diverge in litigation generally, and discovery in particular. Finally, we use this framework to understand the mechanics and challenges involved in deploying the six factors included in the proportionality standard. Throughout, we emphasize that the proportionality standard requires both difficult-to-answer positive questions and unavoidably normative judgments

Nevada and the Market for Corporate Law

Berle and Means’s view that managers rather than shareholders control our largest corporations finds important expression in William Cary’s famous article arguing that managers have led shareholders on a “race to the bottom” whose finish line is Delaware. These views, in turn, support supplanting state corporation law with federal regulation of corporate governance. Concerns about a race to the bottom lately focus on Nevada, which seeks to be Delaware’s first real competitor for out-of-state firms in the national incorporation market. Evidence suggests that Nevada’s strategy is to raise tax revenues by offering a significantly laxer corporate law than Delaware. We examine Nevada’s strategy and incorporation history to show that there is an alternative explanation for Nevada law that does not raise concerns about a race to the bottom. Specifically, we argue Nevada corporation law may actually reduce some firms’ total agency costs by reducing the costs of judicial monitoring. This analysis has implications as to the need for federal regulation of corporate governance

Nevada and the Market for Corporate Law

Berle and Means’s view that managers rather than shareholders control our largest corporations finds important expression in William Cary’s famous article arguing that managers have led shareholders on a “race to the bottom” whose finish line is Delaware. These views, in turn, support supplanting state corporation law with federal regulation of corporate governance. Concerns about a race to the bottom lately focus on Nevada, which seeks to be Delaware’s first real competitor for out-of-state firms in the national incorporation market. Evidence suggests that Nevada’s strategy is to raise tax revenues by offering a significantly laxer corporate law than Delaware. We examine Nevada’s strategy and incorporation history to show that there is an alternative explanation for Nevada law that does not raise concerns about a race to the bottom. Specifically, we argue Nevada corporation law may actually reduce some firms’ total agency costs by reducing the costs of judicial monitoring. This analysis has implications as to the need for federal regulation of corporate governance

Unreasonable: A Strict Liability Solution to the FTC’s Data Security Problem

For over two decades, the FTC creatively employed its capacious statute to police against shoddy data practices. Although the FTC’s actions were arguably needed at the time to fill a gap in enforcement, there are reasons to believe that its current approach has outlived its usefulness and is in serious need of updating. In particular, our analysis shows that the FTC’s current approach to data security is unlikely to instill anything close to optimal incentives for data holders. These shortcomings cannot be fixed through changes to the FTC enforcement approach, as they are largely generated by a mismatch between the tools that Congress gave it over a century ago and what it needs to foster firms’ incentives to mimic socially optimal levels of care for the data they hold. Not only does the current framework likely suffer from informational deficiencies attendant to its focus on “reasonable” security that render liability standards uncertain, it also lacks the ability to obtain the type of relief that will force firms to internalize the costs of their data security decisions. We examine the problem of data security enforcement through the lens of the economics of optimal precautions and identify several reasons why a strict liability regime administered by the FTC, under which firms pay for the expected harm from breaches they cause, is likely to be superior to the current framework that revolves around the concept of reasonableness. The benefits of strict liability flow from the likelihood that firms do not fully internalize the costs and benefits of their data security decisions and the relatively large informational burdens associated with measuring actual and optimal care under a negligence regime. We also show why in this informational environment, strict liability is better than negligence for developing a vibrant cyber insurance market, allowing for data security regulation to be de facto outsourced to insurers who will contract with firms for optimal levels of care. Because these private contracts will harness private information on costs and benefits from precautions, they are likely to incentivize more efficient behavior

Reverberation Measurements of the Inner Radius of the Dust Torus in Nearby Seyfert 1 Galaxies

The most intense monitoring observations yet made in the optical (UBV) and near-infrared (JHK) wave bands were carried out for nearby Seyfert1 galaxies of NGC 5548, NGC 4051, NGC 3227, and NGC 7469. Over three years of observations with MAGNUM telescope since early 2001, clear time-delayed response of the K-band flux variations to the V-band flux variations was detected for all of these galaxies. Their H-K color temperature was estimated to be 1500-1800 K from the observed flux variation gradients, which supports a view that the bulk of the K flux should originate in the thermal radiation of hot dust that surrounds the central engine. Cross-correlation analysis was performed to quantify the lag time corresponding to the light-travel distance of the hot dust region from the central engine. The measured lag time is 47-53 days for NGC 5548, 11-18 days for NGC 4051, about 20 days for NGC 3227, and 65-87 days for NGC 7469. We found that the lag time is tightly correlated with the optical luminosity as expected from dust reverberation ($\Delta t \propto L^{0.5}$), while only weakly with the central virial mass, which suggests that an inner radius of the dust torus around the active nucleus has a one-to-one correspondence to central luminosity. In the lag time versus central luminosity diagram, the K-band lag times place an upper boundary on the similar lag times of broad-emission lines in the literature. This not only supports the unified scheme of AGNs, but also implies a physical transition from the BLR out to the dust torus that encircles the BLR. Furthermore, our V-band flux variations of NGC 5548 on timescales of up to 10 days are found to correlate with X-ray variations and delay behind them by one or two days, indicating the thermal reprocessing of X-ray emission by the central accretion flow.Comment: ApJ, March 2006, v639 issue, 24 pages, 33 figures, 10 table