Bargaining with Longshoremen

How much bargaining power did the two sides have in the recent dock workers' strike? 

For shippers, what is the cost of a one day delay in coming to terms? The port of New York handled 6.6 million Twenty-foot Equivalent Unit (TEU) containers in 2022, but the East cost and Gulf coast ports for which data are available handled ~21 million. The average value of a TEU is $54.500. Assume firms have a 20% annual discount rate for a little back-of-the-envelope calculation.

	Port of New York	All Affected Ports	Units
Volume Handled 2022	6.6	20.8	Million TEU
Value of TEU 2020	$54.5	$54.5	$Thousands
Annual Value	$359.7	$1,133.6	$Billion/Year
Daily Value	$985.5	$3,105.8	$Million/Day
Daily Carrying Cost	$540.0	$1,701.8	$Thousand/Day

The carrying cost alone is over $1.7 million per day, perhaps more in 2024 due to inflation and increases in trade volume. This is also a lower-bound since there will also be production disruptions & spoilage of goods. The cost to shippers might come to $3-5million per day.

What is labor's cost of a one day delay in coming to terms? The earnings of the 45,000 affected dock workers could be anywhere from $39/hour to $200,000/year. Suppose half of these would have worked on any day and that a typical day is eight hours of work, the 45,000*0.5*$39/hour*8hours = ~$7million per day. This is an upper-bound since opportunity cost of workers time is not $0. The cost to workers might be $3-5million per day.

You can adjust any of these assumptions as you deem appropriate, but it seems that the two parties were pretty evenly matched.

Colocating Complements

 

Providers of complementary services can increase demand by reducing the search costs of shared customers. Perhaps colocation will suffice but the next step would be vertical integration.

New interactive games to teach supply, demand, and pollution, a "negative externality"

From MarginalRevolution.com:

MRU videos are free for anyone’s use anytime, anywhere and don’t forget there are also two new econ-practice games on negative externalities and positive externalities and a fun choose your own adventure story on Unintended Consequences (most textbooks just teach when regulation works. We are more balanced.)

HIGHLY RECOMMENDED: These are GREAT exercises for teaching students about Demand, Supply, and shifts in Demand and Supply!

Frank Zappa on Project Selection

 

Why vertical merger challenges are hard to win

In 2016, the Antitrust Division of the US Dept of Justice (DOJ) challenged the vertical merger of Time Warner (movies) and ATT which owned DirectTV, a cable provider.  It was the first litigated vertical merger case in 40 years.

The DOJ used a "foreclosure" theory, arguing that the vertically integrated firm (movies + distribution) would give ATT the incentive and ability, via increased bargaining leverage, to raise the price of Time Warner movies to rival distributors, like Comcast. As a result, Comcast would raise its subscription price and some Comcast customer would shift from Comcast to ATT's DirectTV. 

The government argued that these anticompetitive costs outweighed the well-documented procompetitive benefits of vertical integration (Cooper et al., 2005), namely the better incentive alignment of Time Warner and ATT, e.g., that post-merger markups on TimeWarner movies shown by ATT, would fall. 

The Antitrust Division lost its case in court because they couldn't prove all the assertions of the theory, that: (i) ATT would raise the price of Time Warner content to rival distributors, (ii) Comcast would raise its subscription price, (iii) that Comcast customers would switch to ATT, and (iv) these anticompetitive costs outweighed the merger's procompetive benefits. 

After DOJ lost the case, the merger was consummated.  But ATT just sold its remaining stake in DirecTV, undoing the merger the DOJ fought so hard to challenge. 

The expert witness for the parties, Dennis Carlton et. al. (2022), weighed in on the failure of the merger:

That the previous integration did not work out as AT&T hoped represents a firm's decision regarding what risks to take in the market, not an indication that the government's alleged harms came to pass. Indeed, the disintegration is evidence that the alleged harms, such as supracompetitive pricing or other exercises of market power, did not occur. The reasoning is straightforward: if the mergers had created significant market power as the government alleged, AT&T would have been incentivized to retain ownership, which would make the subsequent spinoffs less likely (see, for example, Hazlett 2021).

ChatGPT on why Vertical merger cases are hard to win:

• Pro-competitive Justifications: Companies often argue that vertical mergers can create efficiencies, such as reducing costs, improving supply chain coordination, and enhancing product quality. These claims can be compelling in court, making it harder for the government to prove that the merger would harm competition. 
• Better incentive alignment between ATT and TimeWarner, e.g., on price, called "the elimination of double marginalization."
•  Lack of Established Precedent: There is less legal precedent and fewer clear guidelines regarding vertical mergers compared to horizontal mergers (where firms in the same market merge). Courts and regulators may have less confidence in assessing potential competitive harms in vertical mergers. 
• Market Definition Difficulties: Defining the relevant markets can be complex in vertical mergers. Regulators must consider not only the direct competitors in the market but also how the merger affects suppliers and distributors, which often involves nuanced economic analysis. 
• Is the market defined at the upstream content level or the downstream distribution level or at both?
• Indirect Effects: The potential anti-competitive effects of vertical mergers are often indirect, making it harder to demonstrate harm. For instance, a merger may not lead directly to higher prices but might reduce competition over time or create barriers for new entrants, which can be more difficult to quantify.
• Dynamic Nature of Markets: Many industries are dynamic, and the competitive landscape can change rapidly. Regulators and courts must consider not only the current state of competition but also future market developments, which adds uncertainty. 
• The advent of streaming. 
• Economic Theories: There are differing economic theories about how vertical mergers can affect competition.  Some economists argue that these mergers are typically beneficial, while others highlight potential risks. This divergence in expert opinion can complicate litigation. These factors contribute to the difficulty in successfully challenging vertical mergers in legal and regulatory contexts.
•  For example, see Boshoff et al (2021), who show that how and over what parties bargain, namely one- or two-part prices, determine whether a merger will raise price. 

REFERENCES

• Boshoff, Willem H. and Froeb, Luke M. and Minnie, Roan and Tschantz, Steven T., Bargaining Competition and Vertical Mergers (March 31, 2021). SSRN
• Dennis W. Carlton , Georgi V. Giozov, Mark A. Israel and Allan L. Shampine, 'A Retrospective Analysis of the AT&T/Time Warner Merger' (2022) 65 JLE S461
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Antitrust Policy as Problem of Inference, International Journal of Industrial Organization, 23 (2005) 639–664. SSRN 
• i) Comment by John Comanor, Frederick Scherer, and Robert Steiner 
• ii) Reply by John Comanor, Frederick Scherer, and Robert Steiner 
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, A Comparative Study of United States and European Union Approaches to Vertical Policy, George Mason Law Review, 13:2 (Winter, 2005) 289-308. SSRN 
• Cooper, James, Luke Froeb, Daniel O'Brien, and Michael Vita, Vertical Restraints and Antitrust Policy: What about the Evidence? Competition Policy International, 1:2 (Autumn, 2005) 45-64. SSRN 
• i) Comment by Frederick Scherer (2005) 
• ii) Comment by Ralph Winter (2005) 
• iii) Reply by authors (2006) 
• iv) Rejoinder by Ralph Winter (2006)
• Thomas Hazlett, “Antitrust Activists Want to Go Full Throttle. Here's a Lesson. They Should Consider First.” Barron's, July 29, 2021,.

 

Who Works From Home?

Work From Home (WFH) opportunities were dramatically broadened during, and after, the COVID-19 pandemic, but they existed pre-pandemic. Emanuel and Harrington (and ungated here) take advantage of when WFH went to voluntary to mandatory due to the pandemic to investigate which call center workers had selected WFH. Workers switching to WFH due to office closures during the pandemic were not as productive as before but those switching to remote work pre-pandemic were even less productive. The authors infer that those choosing WFH were adversely selected. Not only did they complete fewer calls, but they had higher customer hold times and more customer call-backs indicating that call quality suffered.

Interestingly, the voluntary nature of both pre- and post-pandemic WFH choices may limit its appeal.

Our model suggests that call-center firms were trapped in a prisoner’s dilemma with a low provision of remote work before the pandemic. All call-center firms would have been better off offering remote work jobs at similar wages as on-site ones — since the costs of remote work’s negative treatment effect would be offset by savings in office real-estate costs. Yet an individual firm hesitates to offer remote and on-site jobs at similar wages, due to concerns about attracting less productive workers into remote jobs.

Finally, the reduced worker productivity could be worth it due to offsetting reduced real estate costs. However,once you factor in the adverse selection, it may no longer make economic sense.

Fabulous essay on the history of trying to regulate technology

Grumpy Economist via MarginalRevolution: AI, Society, and Democracy

Highly recommended, but loved the spread of "misinformation" by Gutenberg

...Gutenberg’s moveable type arguably led to the Protestant Reformation. Luther was the social influencer of his age, writing pamphlet after pamphlet of what the Catholic Church certainly regarded as “misinformation.” The church “regulated” with widespread censorship where it could. Would more censorship, or “regulating” the development of printing, have been good? The political and social consequences of the Reformation were profound, not least a century of disastrous warfare. But nobody at the time saw what they would be. They were more concerned with salvation. And moveable type also made the scientific journal and the Enlightenment possible, spreading a lot of good information along with “misinformation.” The printing press arguably was a crucial ingredient for democracy, by allowing the spread of those then-heretical ideas. The founding generation of the U.S. had libraries full of classical and enlightenment books that they would not have had without printing.

What would be the effects of VP Harris' housing plan?

Here is the plan:

•  expand rental assistance for veterans and other low-income renters, 
•  increase housing supply for people experiencing homelessness, 
•  enforce fair housing laws, 
•  hold corporate landlords accountable [for charging high prices?]. 
•  provide up to $25,000 in down payment assistance for first-time homebuyers 
•  First-generation homeowners – those whose parents did not own homes – would receive more generous assistance.

WSJ Analysis:

• The law of supply and demand dictates that an increase in demand without a commensurate increase in supply will result in higher prices.
• As of August, the overall supply of homes for sale was 3.7 months’ worth. For houses in lower price tiers, that number drops to 2.4 months. Sellers’ markets create upward price pressure on home prices, which grows more powerful when demand is further stimulated. Ms. Harris’s policy would do just that, boosting demand by giving buyers more spending money.

My take is that the real barrier to increasing housing supply is not money but rather the restrictive zoning (see Nice Summary of the Affordable Housing Crisis) but, politically, restrictive zoning is very popular.  

The WSJ is right to point out that increasing demand will exacerbate the very problem VP Harris says she wants to address.  She can begin by listening to her economists, if she has any.  

Removing rent control ==> more supply ==> lower rents!

WSJ:

The Argentine capital is undergoing a rental-market boom. Landlords are rushing to put their properties back on the market, with Buenos Aires rental supplies increasing by over 170%. While rents are still up in nominal terms, many renters are getting better deals than ever, with a 40% decline in the real price of rental properties when adjusted for inflation

Milei’s move to undo rent-control regulations has resulted in one of the clearest-cut victories for what he calls “economic shock therapy.” He is methodically taking apart a system of price controls, closing government agencies and lifting trade restrictions built up over eight decades of socialist and military rule in an effort that has upended the lives of many Argentines.

Nepotism makes it hard for China's middle class to get ahead

 Economist:

...people in China once accepted glaring inequality, remaining optimistic that with hard work and ability they could still succeed. But now they are more likely to say that connections and growing up in a rich family are the keys to success, ...

IRONY: the "peoples' republic" has less income/social/class mobility than the US.