The company behind EVE Online (which is far and away my favorite MMOG) recently hired Eyjólfur “Eyjo” Guðmundsson, a professional economist to analyze and advise on the in-game economy. In this /. interview, Guðmundsson talks about the macroeconomics of EVE and the evolution of cooperation in a low-trust environment.

Well, the whole macroeconomics of EVE are very interesting. Trying to figure out inflation, trying to figure out the monetary supply, trying to figure out the overall trade patterns … all of these macroeconomic trends are of interest and we’ll be working on those over the next few months. I also find it interesting to look at these resources, to think about how corporations and alliances are run. We can see how different corporate cultures have helped in obtaining different goods.

As to the supply and demand factors in the game:

PvP is essentially the way that resources are consumed in EVE. In order to operate a fleet, to outsmart your opponent, you need a lot of resources. In order to get these resources you get them in the most intelligent, efficient way possible. You need to get people to mine for you, you need people to make the right weapons for you, in as short a period of time in the right quantities. Specialization among the players is almost a requirement in order to get the best use out of time and resources in games. We have whole corporations in game that focus on mining and shipping, and there are individual traders who think they know what demand will be for in the near future; they do arbitrage trading all over Alliance space to the alliances and corporations.

Mining, of course, is for losers. PvP is where the action is

Technorati Tags: economics, EVE

For much of the 19th Century, legal formalism held sway both in the US and in Germany. The law was seen as a more or less autonomous, inward-looking, quasi-scientific endeavor. Normativity was ensured by a consistent internal point of view. The doctrinal ideal was coherence of each normative claim with all other parts of the system. To be sure, there were significant differences. US formalism never subscribed to quite the same rigor in its pursuit of internal non-contradiction, and it did not make (the received) Roman Law methodology the gold standard for proper syllogistic, analytical legal reasoning. Also, and maybe more importantly, the US legal elite comprised foremost of judges, whereas the German legal elite was firmly in the hand of professors. Lastly, the general philosophical climate was different. German legal philosophy was dominated by the teachings of Kant, Fichte, and Hegel, who despite their significant differences, can safely be described as non-consequentialists. (Kant, of course, made significant practical allowances for consequentialism. However, he rejected Glückseligkeitslehre as a foundation for moral theory. Similarly, consequentialist considerations play a role in Hegel’s philosophy of right. However, the source of normativity lies in a theory of recognition, not in a forward-looking balancing of benefits and burdens.) In contrast, the intellectual climate in the US was influenced much more significantly by Bentham’s and Mill’s utilitarianism.

Today, law & economics has become an indispensable part of legal scholarship in the US, whereas in Germany and other European countries (including the UK), law & economics is a rather specialized discipline situated outside the legal discourse proper. More broadly, legal scholarship in the US is dominated by an external or policy point of view, in which the law is the object of study, undertaken from an economic, sociological, psychological, etc. point of view. In contrast, most European scholarship — with the exception of legal history — proceeds from an internal point of view, that is, accepting of law’s normative constraints. E.g., in the US we would ask: “Is a strict liability rule efficient?” In Germany one would ask: “Given that we have strict liability rule for situation X, how can we explain a negligence standard for a related situation Y?” The assumption is that there must be an explanation within the legal system as it is. “Because folks exposed to Y had the better lobbyists,” is not an acceptable answer, it is irrelevant to the task of the lawyer and legal scholar. In the US, from an external point of view, that answer is perfectly fine (and more often than not correct).

Why have US and German legal scholarship (and, as a result, legal practice, as every antitrust lawyer who has dealt with both US and German courts and agencies will confirm) proceeded on such different tracks? In a recent, highly readable and thoroughly researched paper “The Transatlantic Divergence in Legal Thought: American Law and Economics vs. German Doctrinalism,” Kristoffel Grechenig and Martin Gelter argue that a pivotal moment in the history of legal thought came in the inter-war period, when legal realism destroyed the intellectual foundations of formalism in the US. Meanwhile in Germany and Austria, the Free Law School, whose program was similar to that of the early realists, never achieved the same level of success. Among the reasons for the demise of the Free Law School were:

• The thoroughly anti-consequentialist bent of German legal philosophy
• The concept of law as a pure, normative discipline (Kelsen)
• A legal elite comprised of professors (with much to lose), as opposed to judges
• Economic turmoil, hyper-inflation, and increasing political radicalism in Germany after WWI, culminating in the Machtergreifung of 1933. The Nazis immediately suspended many of the Free Law School luminaries (e.g., Hermann Kantorowicz).

To that list I would add:

• Judicial review of legislation by the Supreme Court, transforming what would otherwise have been a “great debate” in the legislature into a legal dispute between the executive and the legislative branch, e.g., during Roosevelt’s first term.
• A culture of signed, judicial opinions and dissents, which made the influence of personality on decision-making (and thus the indeterminacy of the law) immediately visible. Taft, Holmes, Brandeis, Cardozo, McReynolds, etc. were household names not only in the legal but also in the political and public discourse. Newspapers wrote op-eds about the “Four Horsemen” and the “Three Musketeers.” In contrast German opinions are issued as consensus decisions, that is, “decisions of the court,” not of individual judges. As a rhetorical device, this aggregation stresses the institutional aspect and permitted the illusion of legal determinacy to survive.

Grechenig’s and Gelter’s paper provides a detailed and convincing, comparative history of legal realism and law & economics as its foremost modern-day heir. Anyone interested in what really lies behind much of the transatlantic divide can hardly do better than download Grechning’s and Gelter’s paper, along with Brian Leiter’s account of American Legal Realism. My own views regarding a contemporary version of formalism are here.

Technorati Tags: antitrust, germany, comparative law

Jeremy Frandsen and Andrew Lock from the Renegade eBay Sellers Podcast explain how to dominate an industry through product differentiation and bundling. Beware, the sellers in this example wield crushing market power!

Technorati Tags: antitrust

Geoff Manne kicked off an interesting discussion about Radiohead’s experiment in variable (and voluntary) pricing for its new album OK Computer. The “give stuff away for free to sell the same and other stuff later” has certainly worked for other artists such as Bruce Sterling, Cory Doctorow, Peter Watts, and Ronald Jenkees to name a few, for whom, as Tim O’Reilly put it, “obscurity is a far greater threat … than piracy.” It seems that novelists have a bit of an edge in this game, because online texts, even nicely formatted ones, are incomplete substitutes for books. That can’t be said for Radioheads full-quality mp3s, which makes their experiment all the more interesting.

Technorati Tags: economics

I’ve been waiting for this for quite some time. Use restrictions (in the form of digital restraints management aka DRM, technological crippling of devices, restrictive architectures or contractual terms, etc.) diminish the value and thus raise the net price for a device. Here, Nokia is aggressively advertising the openness of its phones as a feature. “Open to anything.” I like it! (HT: BB).

Technorati Tags: antitrust, nokia

It is, I think, possible to be both a good economist and a conservative, a liberal, perhaps even, for some senses of the term, a socialist. But it is impossible, or at least very difficult, to be a good economist and an orthodox conservative, liberal, or socialist. There are simply too many political positions incorporated in each ideology that depend for their force on bad economics.

Well said.

The NYT has an interesting article about the most recent effort. It is quite amazing how walled off supposedly public legal information is, including statutes and cases, as evidenced by the subscription prices that both Westlaw and Lexis/Nexis are able to command. Their services are in fact indispensable. There is no decent free search engine for statutes. For case law, thanks to FindLaw, the situation is somewhat better, however, since none of the free collections can be trusted to be comprehensive, they are only good for linking, not for research. Creating a comprehensive repository of the entire legal code of a nation sure seems like a small but tremendously valuable public service that the government should undertake. What’s required? A server hosting the materials, a simple citation convention (e.g., new page after x words or y characters), and a standard API. Next thing you see is a thriving legal search engine market, network theory applied to cases, graphical links and backlinks, etc. Legal information is almost ideally suited for computerized searches, because of the highly developed citation and linking conventions. I can only imagine how cool Google Law would be. No more “ALLFEDS” and “JLR”. The NYT article quotes Tim Wu:

I’m a legal academic and I woke up one day and thought, “Why can’t I get cases the same way I get stuff on Google?” People should be able to get cases easily. This is a big exception to the way information has opened up over the past decade.

That said, the current incarnation of the public.resource.org project is, well, somewhat underwhelming, unless you happen to look for a case from the 1880s and have a microfiche reader at hand.

Technorati Tags: law

Here is a fascinating visualization of the products exported by various countries, which may help explain why some nations are rich and others are poor.

The underlying paper, The Product Space Conditions the Development of Nations, by C. A. Hidalgo. R. B. Klinger, A.-L. Barabasi, and R. Hausmann, Science 317, 482-487 (2007), is discussed in an article by Tim Harford:

“The … map shows each economy in this network of products, by highlighting the products each country exported. Over time, economies move across the product map as their export mix changes. Rich countries have larger, more diversified economies, and so produce lots of products–especially products close to the densely connected heart of the network. East Asian economies look very different, with a big cluster around textiles and another around electronics manufacturing, and–contrary to the hype–not much activity in the products produced by rich countries. African countries tend to produce a few products with no great similarity to any others.” That could be a big problem. The network maps show that economies tend to develop through closely related products. A country such as Colombia makes products that are well connected on the network, and so there are plenty of opportunities for private firms to move in to, provided other parts of the business climate allow it. But many of South Africa’s current exports–diamonds, for example–are not very similar to anything. If the country is to develop new products, it will mean making a big leap. The data show that such leaps are unusual.

(HT: Marginal Revolution).

Technorati Tags: ecoonomics

In Hobbes’ state of nature, self-interested robots descend into mutual warfare, because they cannot resolve their resource conflicts by non-violent means. If every robot is programmed to maximize its own welfare, if all goods are rivalrous, and if there is no powerful central authority to change the cost/benefit calculus, then a state of mutual warfare is inevitable. Hobbes’ solution to the problem of coordination is to introduce the Leviathan, a social construct whose purpose is to impose massive costs on non-cooperators. Hobbes’ solution is ingenious, not in the least because he does not rely on re-programming his robots. Rather, he changes their environment (their incentives) so that the prisoner’s dilemma conditions are neutralized and coordinated behavior emerges. One can fault Hobbes for having underestimated the possibility of social organization emerging as a result of mutual trade. His natural state is a zero sum game, which is an assumption of questionable value. But at the end of the day, Hobbes’ asocial robots became the type-case from which modern economics with its undersocialized rational actors emerged.

Against that backdrop, it seems that the persistence of the equilibrium model of perfect competition is at least in part the result of its ability to provide a formal answer to Hobbes’ challenge of how social order can be achieved and maintained. Hobbes’ answer was: change the incentives of the rational actors through a central authority. The economist replaces (i) the zero sum game assumption with a theory of mutual gains from trade; and (ii) the central authority of the Leviathan with the disciplining force of a perfectly competitive market. Under conditions of perfect competition, no individual actor can afford to use violence or deceit to maximize their profits, because the other market participants will simply contract around the “difficult” participant. Since no single actor can influence the market clearing price, the “difficult” market participant disproportionately harms him or herself. The impersonal punishment meted out by the market is structurally similar to the costs imposed on the non-cooperator by the Leviathan. Both, the market and the Leviathan are impersonal institutional arrangements that change the actors’ incentives so as to make cooperative behavior more profitable than violence or deceit.

Technorati Tags: hobbes, economics, philosophy

In response to my previous post, a reader brought this article by Scott Sher to my attention. Sher is critical of ex post post-closing merger review, and cautions as follows:

In the rare instances where post-consummation review is appropriate to make its case under Section 7, the government must demonstrate that the merger itself is the competitive problem, not the changing nature of the market dynamic. Thus, the government must demonstrate through evidence of the market structure — not simply evidence of post-close behavior — that a transaction represents a true competitive concern.

The problem harkens back to U.S. v. DuPont, where the government challenged a partial acquisition of GM by DuPont after 23 years (!), and the Supreme Court found that the point in time for analyzing the elements of a Section 7 claim is the time of the lawsuit, not the time of the acquisition. That, in my view, is the correct result. In ex post cases, the Section 1 and Section 7 standards, in substance, have converged. However, proving causation for diminished post-acquisition market performance may not always be an easy task for the plaintiff, for the reasons that Sher cites above. That said, from an epistemological point of view, proving past effects is less of a problem than extrapolating potential future effects. In a forward-looking Section 7 case, we compare two extrapolated states of affairs, the world as it would be without the merger (”A/B”, i.e., A and B remain separate) and the world as it would be with the merger (”A+B”). In a backward-looking Section 7 (or Section 1) case, we compare the world as it is (”A+B” in the NW corner) with one extrapolation, the “but for” world (”A/B” in the SE corner). Obviously, the latter is fraught with less uncertainty.

Technorati Tags: antitrust

The history of the modern administrative state illustrates the increasingly prominent role that future states of affairs play in present deliberations. During the 1960s, Congress tasked a number of federal agencies (e.g., EPA, OSHA) with preventive policy making.

Instead of regulating technologies that were known to be harmful, agencies now were charged with identifying and controlling hazards that could, if unchecked, pose serious threats to health, safety, and the environment. Risk (that is, the possibility of harm), rather than harm itself, became the phenomenon that Congress asked the agencies to guard against. (Sheila Jasanoff, Science At the Bar: Law, Science, and Technology in America (Harvard University Press, 1997)).

The history of the antitrust treatment of mergers provides a vivid illustration of how the law shifted its focus from the ex post regulation of harm to the ex ante prevention of risk. With the Celler-Kefauver amendments to §7 of the Clayton Act, Congress tasked the agencies and the courts with preventing increased market concentration in its incipiency. The subsequent passage of the Hart-Scott-Rodino Act in 1976 transformed merger practice from ex post litigation into a forward-looking regulatory discipline. That latter shift was so momentous, that the Supreme Court has not decided a merger case since 1975. The change from ex post regulation of harm to ex ante prevention of risk also contributed significantly to the rapid assimilation of economics into antitrust jurisprudence. Faced with the task of having to make predictions about post-merger prices, antitrust courts and agencies turned to economic science for help. The structural presumption is a direct outgrowth of that attempt to deal with highly contingent future events (post-merger prices) on the basis of presently observable facts (number of competitors in the pre-merger market). The legal inference that few competitors will engage in oligopolistic behavior, which in turn will lead to higher prices was underwritten by then state of the art economic science (“structure-conduct-performance paradigm”).

Technorati Tags: antitrust

Kai Raustiala (UCLA) and Chris Sprigman (UVA) posted a brief summary of their excellent Virginia Law Review Article The Piracy Paradox: Innovation and Intellectual Property in fashion Design on the “negative space” of IP law. The question is: Why is there rapid innovation in the fashion industry even though no IP protection exists (or is exercised in practice?).

We argue that the fashion industry counter-intuitively operates within a low-IP equilibrium in which copying does not deter innovation and may actually promote it. We call this the piracy paradox. Our article offers a model explaining how the fashion industry’s piracy paradox works, and how copying functions as an important element of, and perhaps even a necessary predicate to, the industry’s swift cycle of innovation. In so doing, we aim to shed light on the creative dynamics of the apparel industry. But we also hope to spark further exploration of a fundamental question of IP policy: to what degree are IP rights necessary to induce innovation in particular industries? Are stable low-IP equilibria imaginable outside of the fashion industry? … We advance an explanation for fashion’s piracy paradox that rests on two features: induced obsolescence and anchoring. Both reflect the status-conferring power of fashion, and both suggest that copying, rather than impeding innovation and investment, promotes them.

The question of why there is innovation in the absence of (legal and/or de facto) IP protection, of course, is not limited to the fashion industry. Why was there an explosion of innovation and creativity during the Wild-West decade of the Internet boom from 1985-1995, where IP rights were largely ignored? Why does the the US database industry (with no IP protection for collections of facts) lead the world whereas Europe is lagging behind (with databases being copyrightable)? Why is the audio industry (still) teeming with innovation, at least compared to what’s happening (or not) to video content? Those are critically important empirical questions to which sound policy needs factual answers. We need more research and case studies such as this one! Download it while it’s hot!

Technorati Tags: antitrust, intellectual property, fashion

• Both Truth on the Market and the Antitrust & Competition Policy Blog report on a conference co-sponsored by George Mason Law School and Microsoft on the law and economics of innovation. As it is a short metro (subway) ride from my office, I hope to attend (and perhaps even live blog the conference).

• The Patent Baristas discuss reverse payment settlements in Hatch-Waxman litigaiton.

• One of my old law professors, David Cole, has an op-ed in the Washington Post suggesting that laptops with wireless internet access may not help classroom learning. I agree.

• The Sports Law Blog, a long-time Antitrust Review favorite, discusses the fascinating issue of ensuring competition among NBA teams (ensuring competitive games, not ensuring competition for the first pick in the draft by tanking games) (the comments also deal with some antitrust (non)issues).

• Although waaaaay off-topic, since Hanno is a big Battlestar Galatica fan, the best quote I have seen from an actor in years is from Katee Sackhoff, who plays Kara “Starbuck” Thrace on Battlestar Galactica. From the LA Times: “In the first minute of this interview, Sackhoff admitted that she was hung over, because, she said, ‘I don’t want you to think I’m stupid. I’d rather you think I’m, you know, a drunk.’”

Technorati Tags: antitrust, Battlestar Galatica, NBA

The standard justification for copyright protection is the “incentive to create” theory. For obvious reasons, that theory has no application to after the fact extensions of the copyright term. If John Steinbeck felt sufficiently incentivized to write East of Eden in 1952, extending the copyright term in 1998 — absent time travel or extraordinary foresight on his part — would not have given us a better book. Extended protection for works already in existence is therefore justified by an “incentives to disseminate” theory. Paul Heald devised an ingenious experiment to test the hypothesis “that copyright law is presently necessary to prevent the under-exploitation of creative works.” He compared two sets of best sellers, one published from 1913-1922, which fell into the public domain from 1988-1997 and another set of best sellers published from 1923-1932 that remain under copyright protection presumably forever (at least until 2018). Heald finds no evidence of under-exploitation due to the public domain status of a work. To the contrary:

• In 2006 in-print status of the public domain set reached 98%, compared to 74% of the copyrighted set.
• Those copyrighted books in print were significantly more expensive than the public domain works, suggesting that the extended copyright term had no social benefits. It merely imposed a deadweight loss.

One “argument” for after the fact copyright term extensions (other than, of course, rent seeking) invokes congestion externalities. Cultural resources, or so the story goes, might suffer from over-exploitation. A book or a song might “wear out” if dozens of advertisers quote it or use it to market their products. That is plainly absurd. The tragedy of the commons requires rivalrous and exhaustible goods. Books and music and other cultural goods, however, that are commonly protected by copyrights are both non-rivalrous and inexhaustible. Here is Heald’s summary of his article:

The data presented herein clearly suggest that the public domain status of popular books does not result in under-exploitation. Although the public domain books in the data set are on the average ten years older than the copyrighted books, they are in print at a higher rate and have more editions available by more different publishers. If one considers only the sub-set of the most valuable books, then a significant difference in price can be measured, confirming economists’ suspicions about deadweight losses associated with the extension of copyright protection. The only arguable benefit to offset these losses would be the reduction of possible congestion externalities. In the context of books (unlike trademarks and perhaps celebrity personae) where the public is never forced to overconsume the product, it seems highly unlikely that the multiplicity of editions shown in the data demonstrate any such externalities. In general, the data show a highly competitive and robust market for the production of public domain books. Markets for other products, such as movies, music and software, where technology has made the cost of reproduction extremely low, are likely to behave in much the same way. Although market failure is possible, the burden should be on the party arguing in favor of central control of the production of a good in an apparently competitive market. Taking up Landes and Posner’s (2003b) call to explore analogies between intellectual property and tangible property, we should conclude with a simple point. If we trust the market to produce the optimal amount of tangible goods like string, bubble gum, and diet soda without entrusting central control of those products to a single authority, why should we treat intangible public goods like My Antonia, the color yellow, or the word “coffee” any differently? Of course, we need a property right of sufficient duration to assure that public goods get created in the first place, but extending the property right beyond that point demands affirmative proof that the market is incapable of responding efficiently to on-going consumer demand for those creative products.

Download it while it’s hot!

Technorati Tags: copyright, competition, economics

Head over to Truth on the Market and give Josh Wright’s post a read, in which he reacts to Anthony D’Amato’s latest wholesale attack on the usefulness of economics. I’m somewhat dismayed by this debate, partly because I very much like some of D’Amato’s work in international law, which — unlike his rants about economics — is subtle and well reasoned. He is one of the few non-continental thinkers who is familiar with the debate about the autopoiesis of law. I suspect that certain incorrect conclusions about the operational closure of social systems are responsible for D’Amato’s hostility towards economics. I, too, insist that economics can’t “overcome” or “replace” law in a naive (straw-man) realist’s sense but rather that the legal system decides autonomously and on the basis of legal criteria whether to assimilate and (in its own terms) re-render insights that the economic discourse provides. But that does not imply that economics is useless as such, which now seems to be D’Amato’s claim.

Technorati Tags: economics