The BCS Is Under Bipartisan Busybody Attack

Every year a slew of unhappy fans claim that their favorite college football team was unfairly excluded from BCS college football national champion game.  Politicians feeding into that discontent, either from a ghoulish desire to ride populist discontent or an earnest desire to serve disgruntled constituents, propose government action to reform the BCS.  The latest effort is described by an AP writer for SI.com ("Justice Dept.: Obama administration may take action on BCS," Jan 29, 2010).

WASHINGTON (AP) -- The Obama administration is considering several steps that would review the legality of the controversial Bowl Championship Series, the Justice Department said in a letter Friday to a senator who had asked for an antitrust review.

In the letter to Sen. Orrin Hatch, obtained by The Associated Press, Assistant Attorney General Ronald Weich wrote that the Justice Department is reviewing Hatch's request and other materials to determine whether to open an investigation into whether the BCS violates antitrust laws.

"Importantly, and in addition, the administration also is exploring other options that might be available to address concerns with the college football postseason," Weich wrote, including asking the Federal Trade Commission to review the legality of the BCS under consumer protection laws.

Several lawmakers and many critics want the BCS to switch to a playoff system, rather than the ratings system it uses to determine the teams that play in the championship game.

"The administration shares your belief that the current lack of a college football national championship playoff with respect to the highest division of college football ... raises important questions affecting millions of fans, colleges and universities, players and other interested parties," Weich wrote.

I oppose the busybody, partisan attack for at least four reasons.  First, a playoff system may not do a better job at selecting a national champion as James Hamilton explains here.  The BCS is adaptive and has repeatedly demonstrated that they are a profit maximizing organization.  If there is additional profit to be had in a playoff structure, it will make its way to college football.  Third, President Obama, Senator Hatch, and the staff at Justice have better things to do than fix a nonproblem.  Isn't a War on Terror fought on two fronts, trials of terrorists, 10% unemployment enough?  And most important, it is not the government's role to attempt to fix every problem, some should be beneath their notice.  Let individuals and private organizations solve their own problems; their track record is better than yours.  If the BCS has violated antitrust or consumer protection law, it is the law that should change, not the BCS system.  
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Intel, Antitrust and Stock Price Volatility

The Federal Trade Commission (FTC) under the Obama administration is stepping up antitrust activities.  In the past, aggressive antitrust actions have been associated with declining stock values, suggesting that current efforts are ill timed.  Justin Bloom of Bloomberg describes the action against Intel in, "Intel Case May Signal Increased Antitrust Enforcement (Update2)."

Dec. 17 (Bloomberg) -- The government’s case against Intel Corp., accusing the world’s largest computer-chip maker of using monopoly power to stifle competition, may signal that antitrust enforcers under the Obama administration will be more aggressive than their predecessors, lawyers said.

The Federal Trade Commission, led by Jon Leibowitz, who was elevated to serve as the panel’s chairman by President Barack Obama, yesterday filed an administrative complaint saying Intel tried to block “superior” products by rivals and hurt consumer choice.

This is a bipartisan action having roots in the Bush administration.

Commissioners are nominated by the president, serve seven- year terms, and no more than three people on the five-member panel can be of the same political party.

The Justice Department, which isn’t involved in the Intel case, in May revoked a Bush administration antitrust policy that it called an impediment to the government’s ability to fight anticompetitive conduct by dominant companies.

Christine Varney, who heads the department’s antitrust division, said in a May speech that the Obama administration “will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers.”

Varney’s remarks, the Intel case and comments by Leibowitz suggest more enforcement, said Bernard A. Nigro Jr., a lawyer with Fried, Frank, Harris, Shriver & Jacobson LLP in Washington. He previously served as deputy director for the competition bureau of the FTC.

Intel interprets events differently.

Intel said that it has competed “fairly and lawfully” and that its actions have benefited consumers. The microprocessor industry is competitive and prices have declined at a faster rate than in any other industry, the company said in a statement. In settlement talks with Intel, the government asked for “unprecedented remedies” that would make it “impossible for Intel to conduct business,” general counsel Doug Melamed said.

It is hard to envision an industry that has innovated as rapidly or seen such consistent price declines. 

George Bittlingmayer describes the impact of antitrust enforcement in the 1920's and 1930's in, "The 1920'S Boom, The Great Crash and After."  The stock market crash began on October 23, 1929 with a 6% decline, while Warner Brothers and Paramount awaited merger approval from the FTC.  It is likely that the participants knew that the deal would not be approved by the Attorney General on October 23.  One week later, the stock market had declined by 30%.  Bittlingmayer finds hat stock price movements are strongly and negatively correlated with antitrust activity. 

Attorney General Mitchell sent a clearer signal on Friday, October 25 in a dinner speech to the American Bar Association. He promised to enforce the antitrust laws as they were written; he characterized "the machinery of some trade associations [as] dangerously near pricefixing;" he revealed that the Department had not approved a single merger since the new administration took office in March, which implied a clear break with Coolidge-era practice; and he reserved the right to file suit against any merger not explicitly approved.3

Lawsuits followed. Mitchell filed two cases against publicly traded movie producers on November 27. One involved Fox's acquisition of a controlling share of Loew's, the other Warner Brother's acquisition of a controlling interest in First National Picture. The merger attacked in the second case was itself a response to antitrust objections...

Stock market volatility also lowers consumption. 

The ups and downs of antitrust tell a simple and unified story for the twenties boom, the Great Crash and some of the volatility that followed. The identification of a possible cause of stock market volatility also enriches Christina Romer's (1990) finding that greater stock market volatility lowers consumer purchases, thus explaining the 1930 slump. Other potentially fertile ground remains untilled. The unstable antitrust politics at the end of World War I, Supreme Court decisions of the twenties and thirties, the changing fortunes of the FTC at the hands of Congress and the courts, the 1933 National Industrial Recovery Act, and the monopoly policies and investigations of the late 1930's should provide additional insight into the effects of antitrust on financial markets.

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Big Brother on the Gridiron

Senator Orrin Hatch of Utah urged the Justice Department to investigate college football’s Bowl Championship Series (BCS) for violations of antitrust laws.  The BCS grants automatic bids and higher revenues to traditionally strong conferences (Frederic Frommer, "Hatch calls for Justice Department  investigation into BCS," rivals.com, July 7, 2009).  I don't like the BCS, but not liking something does not imply government oversight is required or even desirable. 

Hatch is accusing the NCAA of violating antitrust laws.  He is not concerned with the low wages college athletes are paid given their contributions to a valuable product (see "A Union I Could Support").  He is concerned that a team from Utah was treated unfairly but this does not justify a Senate subcommittee hearing.  Business leaders should be free of a senatorial hissy fit.  It is an indication that our elected officials have too much power.  Is the NCAA concerned about government intervention?  Frommer provides a quote from Harvey Perlman, chancellor of the University of Nebraska-Lincoln and the new chairman of the BCS Presidential Oversight Committee.

“We are university presidents, and we are sensitive to what Congress thinks, and sensitive about what the president thinks,” Perlman added, referring to President Barack Obama’s stated preference for a playoff system. “But our primary responsibility is to manage our institutions in ways that protect student athletes, that acknowledges their academic pursuits as well as their athletic pursuits.”

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Priest on Obama Administration's Antitrust Policy

Christine Varney, the Assistant Attorney General for Antitrust in the Obama administration recently outlined plans for greater enforcement of antitrust laws.  George Priest who teaches antitrust law at Yale University, dissented from her conclusions in a Wall Street Journal opinion article titled, "The Justice Department's Antitrust Bomb." dated June 2, 2009.  As always, the entire article is well worth reading.  I have selected a few quotes that I believe illustrate Priest's reasoning.

Assistant Attorney General for Antitrust Christine Varney claims that the Justice Department can aid economic recovery by prosecuting businesses that have been successful in gaining large market shares. In her announcement last month she argued that "many observers agree" that our current recession reflects "a failure of antitrust" and "inadequate antitrust oversight."

This is news to most economists. The cause of the recession is not easy money by the Fed, or the bursting of the housing bubble, or excessive risk-taking through complicated financial instruments? It's insufficient antitrust prosecution? The claim is hardly plausible. Prosecuting successful businesses will help the recovery? Again, hard to believe.......Her basic proposal is to transform American antitrust law to more closely resemble that of Europe. She states that American antitrust policies have "diverged too frequently" from those of the Europe, and that "[w]e will focus our efforts on working through our previously divergent policies regarding single-firm conduct and pursuing vigorous enforcement on the [monopolization] front."

This is a huge mistake. The principal reasons American and European approaches to antitrust diverge are that the operative legal standards are different and that the Europeans have not adopted a tradition of rigorous economic analysis.

U.S. antitrust laws condemn practices that are "in restraint of trade," which has been interpreted to mean harm to competition. The European Union, in contrast, condemns practices that constitute "abuse of a dominant position."

The European emphasis on "dominance" has consistently led to confusion. A good example is the way the proposed GE-Honeywell merger was treated in 2001. It was uncontested both in the U.S. and in Europe that the proposed merger would create economic efficiencies, lowering product costs to the benefit of consumers. In the U.S. this was reason to approve -- if not applaud -- the merger. But in Europe the expected cost savings would make the merged firms even more dominant. The EU blocked the merger, to the harm of U.S. and European consumers.

Another example is the recent $1.45 billion fine levied by the EU against Intel. Although the EU has not released its full report documenting what violations it found, it appears that the principal concern was Intel's practice of giving "loyalty discounts" to repeat customers, presumably increasing Intel's dominance in the microprocessor business...

[T]he fact that it has been able to maintain roughly an 80% market share for decades provides strong evidence that it is producing a valuable product. The antitrust questions with regard to dominant firms should be: What is the source of dominance and how has it survived over time?

The EU complaint claims that Intel has practiced a variation of predatory pricing. As is well-established in U.S. law, predatory pricing claims are highly questionable in the intellectual property field. Although the EU competition unit has added economists to its staff since GE-Honeywell, its antitrust theories are roughly 30 years behind those in the U.S.

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