As I mentioned in my last piece on Bitcoin, I have a new paper out with Yale Law PhD Student Luke Herrine: “Competition Law as Collective Bargaining Law”. This paper will appear as a book chapter in the Cambridge Handbook on Labour in Competition Law, published by Cambridge University Press. Readers can find a copy of our paper here.
In Notes on the Crises I have focused deeply on monetary policy and fiscal policy, as these were the policy tools that I saw as most relevant to the Coronavirus Depression. So if you only know my work from this website, it might seem strange that I’m putting out a paper on competition law (known as “antitrust” in the United States). The on-going crisis this newsletter focuses on changed the trajectory of my career, which had previously been focused more prominently on what are conventionally thought of as “microeconomic” issues. I focused and published quite extensively on alternative ways of approaching microeconomics across 2017 to 2019. However, I have touched on some of the themes of this “microeconomic” work in Notes, including this piece on “public governance” during crises.
For those of you new to legal citation, a large part of this paper is made up of footnotes. While that can seem confusing (and even unwieldy) to those who don’t usually read this type of writing, I actually think that it is a more accessible form of writing for non-academics. The main text is focused on unfolding the argument the author is making as clearly as possible, while the footnotes provide relevant academic works. Footnotes also tackle side arguments and preemptive answers to questions and counterarguments that readers might have (especially back-and-forths familiar to those in the field). Other forms of academic writing reference a bevy of other academic thinkers, and include asides which are only relevant to subject matter experts in the main text.
Style aside, onto the paper itself. The central question this paper tackles are: what institutional mechanisms coordinate between different market actors to produce market prices and how does law, particularly competition law, shape these institutional mechanisms? This issue is surprisingly neglected because of the intuition built up by textbook microeconomics that market actors will coordinate markets without explicit governance institutions. Supposedly, they’re to do this automatically: simply acting in their own narrow self-interest.
In the beginning of the paper we tackle this myth head on by tackling the markets which are often claimed as “real world approximations” of textbook “perfect competition” markets: chartered exchange markets. While these markets have many buyers and sellers, in most other ways they diverge wildly from textbook market behavior. The vast majority of those buyers and sellers are not producers or consumers of the product — if there is a currently produced product at all — but market specialists (e.g. brokers and dealers) who’s explicit purpose is to smooth out market volatility.
The chartered exchanges themselves (e.g. the Chicago Mercantile Exchange, London Metals Exchange, New York Stock Exchange etc.) have various rules that manage how trading takes place. Many of these exchanges even have what are called “circuit breakers” —. automatic processes which will shut down trading if prices are falling too rapidly. Meanwhile traders themselves manage their effects on markets by submitting limit orders. These are orders that will not be executed below or above certain prices. Meanwhile, simply because there are many traders doesn’t mean there isn’t market concentration. In other words, a market for a specific exchange-traded commodity may be dominated by four or five large producers or buyers — even if there are many traders in the middle!
Recognizing these markets as jointly governed by chartered exchanges and financial firms helps us realise that governance architecture reliably manages all types of markets. The main type of price market focused on our paper are prices which are administered by business enterprises i.e. “administered prices”. I hope to write about administered prices in the context of inflation in the future. But for now what is important about these types of prices is that they are set by business enterprises and held for a period of time and a series of transactions.
While we take business enterprises for granted, there are peculiarities about them that we should focus on. Activities that happen “within” businesses are often illegal when conducted outside of businesses. It may seem obvious that a firm can set the price on the product it sells. But don’t forget the same conduct, conducted by the same individuals, using the same tools would be illegal if shared. (That is: if some of the work was done by one firm, and some of the work was done by another firm, but they still got together to set a shared price.) This is known in competition law as the “per se rule” against “price fixing”. Professor Sanjukta Paul calls this differential treatment between firms and non-firms — or larger firms and smaller firms — the firm exemption.
This differential treatment is worsened by the fact that current competition law gives a relatively free hand to large businesses dictating terms to their suppliers or customers. These are known as “vertical restraints”. As an aside, in “industrial organization”, businesses which you interact with but don’t undertake the same activities are referred to as “vertical” because they are either “behind” you, or in “front” of you. Meanwhile your direct competitors are “horizontal” to you — because you are in the same business. Ergo coordinating with your direct competitors is referred to as “horizontal coordination”.
This finally brings us to the core idea — and contribution — of the paper. Not all markets are vertically governed. Meanwhile the vast, vast majority of markets are not completely owned by one firm. Thus, vertical restraints and the firm exemption cannot explain all market governance in contemporary markets. And if it can’t, we are still left with a missing explanation for how markets are governed horizontally when explicit horizontal coordination is illegal. Posed in these terms, the answer is obvious. Horizontal implicit coordination between direct competitors is legal.
This type of market governance, known popularly as “price leadership”, requires sufficiently concentrated firms to make coordinating implicitly viable. Or at least make the appearance of implicit coordination plausible. Because only firms can be price leaders, and a number of relatively concentrated price followers are likely required to maintain market order, this form of market governance is an extension of the firm exemption — and built on top of it. Most obviously, a cartel of the same size and market share could not be a price leader in the world of the firm exemption.
As a result, we have christened this the “price leadership exemption”.
This is a really important point to emphasize. Price leadership by concentrated, hierarchical business enterprises is the most common form of market governance. That’s because competition law is designed in such a way that no other form of market governance can be conducted legally. At the same time, the price leadership exemption facilitates explicit price coordination among large concentrated firms, since they are presumed to be engaging in price leadership. Meanwhile drivers for Uber would be prosecuted for price fixing if they coordinated in attempts to have Uber pay more.
If we want less unequal and more democratic workplaces and economies, it’s worth considering what competition laws would discourage price leadership and encourage other forms of market governance. At the same time, we are hoping this paper gets people thinking about the value of price stability at the individual firm and market level. Monetary policy, and to a certain extent fiscal policy, is obsessed with price stability. But only the type of price stability that appears in aggregate price indices. Our competition laws don’t value price stability, instead focusing on the nebulous idea of “consumer welfare”. Some might respond to this paper by arguing that cracking down on price leadership will finally produce “competitive prices” and “true competition”. I don’t think that is the case. I think that is simply a recipe for more price instability and uncertainty, without very many benefits.
Even if you don’t agree with the values and conclusions I draw from the analysis of the paper, I still think that many readers could benefit from the point of view it puts forward, and the facts it marshals. For example, there is an extensive section on historical forms of market governance. I’m sure I will be drawing on insights from this paper for future writing I do, including on the topic of Bitcoin — which of course sees its price managed by formal exchanges. Anyway, enjoy the paper and have a good weekend!
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