Antitrust

• “Doomsday Mergers: A Retrospective Study of False Alarms,” by Brian C. Albrecht, Dirk Auer, Eric Fruits, and Geoffrey A. Manne. SSRN Working Paper no. 4407779, April 2023.
• “ ‘Killer Acquisitions’ Reexamined: Economic Hyperbole in the Age of Populist Antitrust,” by Jonathan M. Barnett. SSRN Working Paper no. 4408546, May 2023.

Populist antitrust is back. Lina Khan chairs the Federal Trade Commission (FTC), Jonathan Kanter heads the U.S. Justice Department’s Antitrust Division, and Tim Wu was special assistant to President Joe Biden for technology and competition policy. But the intellectual attack on populist antitrust is also back. So, which view better fits the facts?

The first of these papers, by Brian C. Albrecht et al., revisits mergers from the recent past that were criticized by populist opponents but were allowed to go forward. They found:

• At the time of the Amazon–Whole Foods merger, Kahn criticized it as allowing “Amazon to leverage and amplify the extraordinary power it enjoys in online markets and delivery, making an even greater share of commerce part of its fief.” But Whole Foods’ market share hasn’t changed and consumers have enjoyed more convenience and lower prices.
• Over the last two decades, the beer industry has had many mergers that populists predicted would increase the price of beer and decimate craft beer producers. But prices did not increase on average and the craft‐​beer segment has continued to thrive.
• Critics argued that Bayer’s acquisition of Monsanto would increase the price of corn, soy, and cotton seeds. Seed prices have remained constant.
• When Google acquired Fitbit, opponents claimed the merger would augment Google’s advertising dominance, harm user privacy through the selling of their health data, and reduce competition in wearable devices. The evidence suggests the opposite has occurred: Google’s share of online‐​advertising has declined, Fitbit’s market share of wearable‐​devices has declined, and Google does not use data from Fitbit in its advertising platform.

Concludes Albrecht et al., “Popular and populist fears about corporate consolidation are often completely untethered from economic reality and wildly erroneous. The less these fears influence antitrust policy, the better.”

The second paper, by Jonathan M. Barnett, examines the acquisition of small startup firms by large, established companies like Amazon, Google, Facebook, Apple, and Microsoft. Critics like Sens. Tom Cotton (R–AR) and Amy Klobuchar (D–MN) introduced legislation in 2021 “to prevent big tech firms from making killer acquisitions that harm competition and eliminate consumer choice.”

Barnett argues such legislation would undermine the venture capital–based innovation system in the United States. The most common mechanism by which initial investors in startups monetize their investments is acquisition by a large firm rather than going public through an initial public offering (IPO) of stock. A study of the universe of non‐​biotech venture capital–backed, U.S.-based startups from 2002 through 2022 found that 61 percent failed or were acquired by larger firms at a loss to initial investors. Just 35 percent were acquired at a profit to initial investors, and only 4 percent had a successful IPO.

Why does innovation have these characteristics? Barnett notes that small firms can use “high‐​powered incentives” (that is, stock) rather than cash to support innovation, but large firms have an advantage in converting an innovation into a product that can be manufactured and distributed on a mass scale. The populist antitrust proposals thus would effectively eliminate the most‐​used monetization mechanism for technology startups.

Still not convinced? Barnett argues that if you really want to preserve the options of small firms to innovate and flourish independently without the necessity of acquisition, you should favor the existence and enforcement of patents, an argument he has presented in Regulation. (See “Weak IP’s Hidden Subsidy,” Spring 2021.) Small firms can license their enforced patents and avoid acquisition to monetize their innovations.

‘Predatory’ Loan Interest Rate Controls

• “Credit for Me but Not for Thee: The Effects of the Illinois Rate Cap,” by J. Brandon Bolen, Gregory Elliehausen, and Thomas W. Miller Jr. SSRN Working Paper no. 4315919, June 2023.

On March 23, 2021, Illinois enacted the Predatory Loan Prevention Act (PLPA). The PLPA sets a 36 percent “all‐​in APR” (including non‐​credit charges, making it more restrictive than the Truth in Lending rate) ceiling for loans below $40,000. Banks and credit unions are exempt from the Illinois rate ceiling.

The costs of making loans do not vary that much with loan size, so costs are a higher percentage of small loans and thus interest rates on smaller loans must be higher. One estimate in the literature concludes that a 36 percent interest rate cap would preclude loans of less than $2,900 from breaking even. Thus, Illinois’ 36 percent all‐​in APR is likely binding on small‐​dollar unsecured installment loans from finance companies.

This paper examines credit bureau data from Illinois and Missouri (which had no interest rate controls) over four consecutive quarters, from the fourth quarter of 2020 to the third quarter of 2021, roughly two six‐​month periods before and after the PLPA.

The rate cap decreased the number of unsecured installment loans in Illinois by 6 percent and increased the average size of unsecured installment loans in Illinois by 23 percent. The number of subprime loans in Illinois decreased by 38 percent, but the average subprime loan size increased 35 percent. This increase in average loan size is consistent with the notion that a larger loan is needed to make small loans profitable at a maximum rate of 36 percent. Despite being explicitly exempt from the new law, banks and credit unions in Illinois did not increase their supply of these loans after the interest‐​rate cap was enacted.

Minimum Wages and Poverty

• “Minimum Wages and Poverty: New Evidence from Dynamic Difference‐​in‐​Differences Estimates,” by Richard V. Burkhauser, Drew McNichols, and Joseph J. Sabia. NBER Working Paper no. 31182, April 2023.

The consensus of economists has long been that minimum wage increases did little to reduce poverty because most minimum wage labor is not supplied by individuals living in poor families and many people in poor families do not work. A 2019 paper by Arindrajit Dube, “Minimum Wages and the Distribution of Family Incomes” (American Economic Journal: Applied Economics 11(4): 268–304), challenged that consensus, finding that increases in the minimum wage decreased poverty. The Congressional Budget Office cited Dube to conclude that 900,000 individuals would be lifted out of poverty from an increase in the federal minimum wage from $7.25 per hour to $15 per hour.

Subsequent papers have challenged Dube’s work.

Most disputes regarding empirical work in economics are about the failure to include variables in regressions that are statistically related to the outcome (in this case, aggregate poverty rates) as well as the causal variable of interest (the minimum wage). The addition of those variables reduces the apparent effect of the variable of interest (in this case, the minimum wage).

This paper criticizes Dube for the opposite problem: including controls for state unemployment rate and per‐​capita state gross domestic product. The authors argue these controls are inappropriate because the minimum wage affects poverty through those variables: its negative effect on employment and hours. Burkhauser et al. use the state house‐​price index and the unemployment and average wage rate among more highly educated individuals to control for state macroeconomic conditions that are less likely to capture pathways through which minimum wages affect the labor market and poverty. The result is no effect of minimum wage increases on the poverty rate.

The authors also recalculate the effect of a $15 minimum wage on poor families with descriptive statistics. Fewer than 10 percent of those whose hourly wage rate would be affected by a $15 minimum wage live in poor families. Approximately two‐​thirds live in families with incomes over two times the poverty line and nearly half live in families with incomes over three times the poverty line.

Educational Expenditures and Outcomes

• “Pricing Neighborhoods,” by Sadegh Eshaghnia, James J. Heckman, and Goya Razavi. SSRN Working Paper no. 4477536, June 2023.

Educational inequality is often attributed to expenditure differences across school districts. And public‐​school funding equalization is an explicit goal of many educational reform advocates as well as state‐​level constitutional litigation.

In Denmark, per‐​pupil expenditures and teacher salaries are mandated to be equal across public schools except for students with special needs and for cost‐​of‐​living adjustments. Despite the equalization, high‐​quality teachers are attracted to schools with high‐​quality students and parents.

Controlling for housing and neighborhood characteristics, households are willing to pay 2–3.5 percent more for housing ($6,700) with average characteristics. Households are paying for their children to attend schools with better student peers and teachers, and with better adult peers. Educational inequality occurs even when expenditures are equalized.