Thursday, August 31, 2023

Multi-family apts priced 10%-15% too high relative to bonds

 Using logic straight out of Chapter 9, the NYTimes suggests apartments are mis-priced:

Owning commercial property is a bit like owning a corporate bond, only slightly riskier: You bet on the solvency of a tenant, with more uncertainty about the value of the capital you’ll get back. For at least the past 20 years, investors in U.S. real estate have required a return premium of 1.9 percentage points over the yield on investment-grade corporate debt, according to Green Street’s director of research, Cedrik Lachance.
Right now, real estate only offers a 1.3 percentage point premium. For the relationship to return to normal and make property attractive again, U.S. real-estate prices need to fall a further 10% to 15%.


  • All real estate is local and this refers to National data.  
  • If I really knew, I wouldn't be teaching school and I probably wouldn't tell you.  

Price Discrimination saves lives: Glaxo's AIDS drugs

Link to article:
Some 28 shipments [of low-priced AIDS drugs] were diverted from African countries to Paris and Brussels, then moved to Antwerp, where the customs officers noticed something was amiss. The drugs then moved into the normal wholesale chain and were sold at European prices - up to £3.80 a tablet instead of the 50p Glaxo charges in Africa.
If Glaxo cannot prevent this kind of arbitrage, they may move to a uniform price which would price much of Africa out of the market.

Economist gets this wrong

 Dear Editor:

Though I liked your article about negotiating drug prices, the sentence, “The system is packed with opaque middlemen such as pharmacy benefit managers, many of which are making big rents” is not only wrong but it tarnishes PBMs with the “middleman” slur.    


See our recent paper on the industry, in which we survey the evidence.  This is from our conclusion,


As a final reminder, we noted in the introduction that PBMs have derogatorily been called the “middlemen” of the pharmaceutical industry. As FedEx—a “middleman” between many retailers

and consumers—has reduced the overall costs of shipping, PBMs reduce the costs of offering pharmacy benefits. Not every plan sponsor needs to (nor can) negotiate with manufacturers, keep

up with clinical developments, contract with the nation’s 66,000 pharmacies, and build systems to adjudicate and process claims.


Happy to write an article for you on what PBM’s do, and how they negotiate lower drug prices, based on the paper.  I think it would clear up a lot of misconceptions.  


Loyal reader, 


Prof. Luke Froeb

Vanderbilt University



CV  Bio  Textbook   Blog   MBA-BS'er

“In twenty years [but don't wait!], it will

be seen as the standard way to teach 

economics.”  — Robert E. Litan,

Kauffman Foundation and the Council

on Foreign Relations


Formularies, Rebates, and the Economics of PBM Bargaining

Vanderbilt Owen Graduate School of Management Research Paper

60 Pages Posted: 9 May 2023

Luke M. Froeb

Vanderbilt University - Owen Graduate School of Management

Mikhael Shor

University of Connecticut Department of Economics

Date Written: May 8, 2023


For 181 million Americans not on Medicare or Medicaid but insured through their employer, labor union, or private insurance health plan, the primary restraints on pharmaceutical prices are pharmaceutical benefit managers (PBMs) who administer health plan drug benefits. PBMs use the aggregate demand of their constituent plan sponsor clients — employers, unions, government agencies, health insurers, and others — to negotiate lower prices.

Recently, the use of formularies and PBM-negotiated rebates have come under fire. Critics allege PBMs act to maximize rebates rather than reduce prices, and that rebates lack transparency, contribute to increasing prices, and are not passed on to the benefit of patients. Yet, sophisticated plan sponsors have choices in how to administer their prescription drug benefits and almost all choose to hire PBMs to manage their drug benefit rather than internalize drug procurement, negotiation, clinical evaluations, and benefit administration.

This report examines the role of formularies and rebates in the provision of prescription drugs. We respond to the criticisms of PBMs by discussing the often misunderstood principles of formulary management and rebates and how they are essential parts of the bargaining process between PBMs and pharmaceutical manufacturers. We demonstrate that economic logic and evidence, as well as multiple investigations by independent and government groups, find that PBM bargaining reduces drug prices.

Keywords: drug pricing, pharmacy benefit managers, PBMs, rebates, formulary design, prescription drug market

JEL Classification: C70, D4, I11, I13, I18, L1, L42

Suggested Citation:

Froeb, Luke M. and Shor, Mikhael, Formularies, Rebates, and the Economics of PBM Bargaining (May 8, 2023). Vanderbilt Owen Graduate School of Management Research Paper, Available at SSRN: or




Tuesday, August 29, 2023

Regulations deter the movement of assets to higher valued uses: Germany

 Two examples from WSJ: Germany is losing its mojo:

German privacy laws made it impossible to run key studies for cancer cures, BioNTech’s co-founder Ugur Sahin said recently. German approvals processes for new treatments, which were accelerated during the pandemic, have reverted to their sluggish pace, he said.
Germany ought to be among the nations winning from advances in medical science, said Hans Georg Näder, chairman of Ottobock, a leading maker of high-tech artificial limbs. Instead, operating in Germany is getting evermore difficult thanks to new regulations, he said.
One recent law required all German manufacturers to vouch for the environment, legal and ethical credentials of every component’s supplier, requiring even smaller companies to perform due diligence on many foreign firms, often based overseas, such as in China. 
Näder said his company must now scrutinize thousands of business partners, from software developers to makers of tiny metal screws, to comply with regulation. Ottobock decided to open its latest factory in Bulgaria instead of Germany.


Sunday, August 27, 2023

Why shale-oil drilling in the US, but not in Europe?

If you give people secure property rights, they have the incentive to move the property to its highest valued use:
'Whoever owns the soil, it's theirs up to Heaven and down to Hell." So goes the ancient common-law principle. Today, however, almost no major country recognizes full subsurface private property rights, except for the United States.

Wednesday, August 23, 2023

US is getting richer faster

From the Economist:
America’s outperformance has translated into wealth for its people. Income per person in America was 24% higher than in western Europe in 1990 in ppp terms; today it is about 30% higher. It was 17% higher than in Japan in 1990; today it is 54% higher.

Monday, August 21, 2023

Saturday, August 19, 2023

On estimating elasticity from a change in price

Elasticity of demand is defined at a given Price and Quantity by taking an infinitesimal change. But in real life you cannot measure the effects of a small change, so we are presented with discrete changes. If the elasticity is not constant (most demand curves get more elastic as you raise price as consumers find more substitutes) then the elasticity after the price change may be different from the elasticity before the change. Using the percentage change from the midpoint, is a way of dealing with this: Instead of elas=((Q1-Q0)/Q0)/((P1-P0)/P0) we use elas=((Q1-Q0)/midpointQ)/((P1-P0)/midpointP); where midpointP=(P1+P2)/2, and midpointQ=(Q1+Q2)/2, and you get the formula in our favorite textbook.

Thursday, August 17, 2023

Benefit-cost analysis without the benefits or the analysis: How not to write Merger Guidelines


The wealth-creating engine of capitalism is the movement of assets to higher-valued uses. Our biggest and most valuable assets, and those with the greatest wealth-creating potential are corporations. Antitrust law and practice work to facilitate this movement, while deterring the types of mergers which substantially lessen competition. 

Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for doing so.   By describing agency practice, guidelines facilitate compliance, ensure consistent and reasonable enforcement, which encourages good mergers and deters bad ones.  

As long as the methodology can distinguish the good from the bad mergers, this process works pretty well.  

Beginning in 1982 (Reagan/Baxter) the methodology relied heavily on economics.  At that time, the simple "big is bad" structural models focused on changes in market concentration. But by the early 1990's, Agency economists had begun using more realistic game theoretic models to both characterize observed pre-merger competition (calibration) and to predict the loss in competition following merger (simulation).  

By providing a transparent mapping from evidence to prediction, the models showed which evidence mattered, why it mattered, and how much it mattered (Werden et al., 2004).  Economic models gave credibility to antitrust conclusions because they were falsifiable.  All one party had to do was show that the inputs were wrong, e.g., "demand is much more elastic than you think" (Werden and Froeb, 1994), or that the model was wrong, e.g., "if we ignore advertising, you will understate the loss in competition among super-premium ice cream manufacturers" (Tenn et al., 2010).  

The most common models used by Agency economists, and the consultants that appear before them, are online at  

Attorneys are critical to this process, as they have to pitch the economists' work to the Agencies in a way that is credible, but also favors their client.  When these goals conflict, attorneys earn their hourly fees.  Also, by pushing back against economists, attorneys make the presentations better so that by the time they get to the Agencies, arguments are clear and persuasive.  

But the 2023 Draft Merger Guidelines seem to be trying to go back to the days before economics played such a large role.  Not only do the Draft Guidelines put economic analysis in the appendices, they don't say how it should guide the legal analysis.  Untethered from economics, the Agency heads are now freer to claim that what they do is consistent with the Guidelines.  In other words, the Draft Guidelines don't provide as much Guidance.  

What worries us most is their potential effect on innovation. In the late 1950s, Nobel Laureate Robert Solow attributed about seven-eighths of the growth in U.S. GDP to technical progress, and stressed the importance of policies to encourage growth— “Adding a couple of tenths of a percentage point to the growth rate is an achievement that eventually dwarfs in welfare significance any of the standard goals of economic policy,” which includes antitrust.

For example, the Draft Guidelines take particular aim at acquisitions made by US Tech Firms.  However, this kind of enforcement can discourage innovation by reducing the rewards from innovating.  In particular, acquisitions of tech firms often create the incentives that induce firms to innovate in the first place:
  • acquisitions of technology companies are critical in creating the incentives to innovate—for technology ventures, exits via acquisitions are about five times more likely than IPOs. These exits create an ex-ante incentive to innovate. 
  • In addition, investors evaluate regulatory risks as part of their due diligence when considering an investment; excessive regulatory risks, like those posed by uncertain antitrust enforcement, can deter investors from investing, particularly in the early and growth stages of ventures.
BOTTOM LINE:  Without a coherent merger analysis that embraces both benefits and costs and a way to weigh one against the other, the Draft Guidelines will likely deter mergers, regardless of whether they are anticompetitive.


Cost-Benefit Analysis Without the Benefits or the Analysis: How Not to Draft Merger Guidelines

7 Pages Posted: 14 Aug 2023

Luke M. Froeb

Vanderbilt University - Owen Graduate School of Management

D. Daniel Sokol

USC Gould School of Law; USC Marshall School of Business

Liad Wagman

Illinois Institute of Technology - Stuart School of Business, IIT

Date Written: August 10, 2023


Previous iterations of the DOJ/FTC Merger Guidelines have articulated a clear, rigorous, and transparent methodology for balancing the pro-competitive benefits of mergers against their anticompetitive costs. By describing agency practice, guidelines facilitate compliance, ensure consistent and reasonable enforcement, increase public understanding and confidence, and promote international cooperation.

But the 2023 Draft Merger Guidelines do not. They go to great lengths to articulate the potential anticompetitive costs of mergers but with no way to gauge “substantiality.” Most significantly, they ignore potential benefits, which eliminates the need for balancing. In other words, the Draft Guidelines provide very little guidance about current practice which adds risk, which deters mergers, which seems to be the point. We offer specific recommendations for Horizontal, Vertical, and Tech Mergers that do a better job differentiating procompetitive mergers from anticompetitive ones.

Keywords: Antitrust, Merger Enforcement, Horizontal Mergers, Vertical Mergers, Technology Mergers

JEL Classification: L40, K21

Froeb, Luke M. and Sokol, D. Daniel and Wagman, Liad, Cost-Benefit Analysis Without the Benefits or the Analysis: How Not to Draft Merger Guidelines (August 10, 2023). Southern California Law Review, Forthcoming, Available at SSRN:

Tuesday, August 15, 2023

White House lowers US govt discount rate from 3% to 1.7%

VOX Reports:  This means that more projects with big current costs and small future benefits will pass the NPV (Net Present Value) test.  For example, the investment below returns more than its assumed cost of capital after 12 periods under the Biden Administration's 1.7%, but not under the Trump Administration's 3%. 


  • more government spending ("investment") under a Biden Administration; and
  • less government spending in a Trump one.
NOTE:  Vanderbilt uses a 12% Discount rate to evaluate potential projects.  

Monday, August 14, 2023

Why is the Russian rouble falling?

 From the Economist:  

Russia’s rouble slumped to a 16-month low of 100 against the dollar, having lost around 25% of its value this year. Deteriorating foreign trade conditions and an escalation in military spending have accelerated its fall in recent weeks. The currency was already suffering from western sanctions and European countries’ diversification away from Russian energy supplies.
The exchange rate is the "price" of the rouble which is set in a "market" where quantity demanded = quantity supplied. If the price falls it must be because 
  • Demand has fallen (Europeans who sell € (euros) to buy ₽ (roubles) to buy Russian Goods or invest in Russia).   In this case, European sanctions has reduced EU demand for Rusian Gas.  
  • Supply has increased (Russians who sell ₽ to buy € to buy EU goods or invest in EU).  The article mentions increased military spending which could represent and increase in demand for €.  More likely, though the article doesn't say this, Russians could be trying to invest in the EU or US to get their money out of Russia because they anticipate a depreciation in the ₽
Note that the Economist talks about depreciation against the $, but we are using € instead of $ because the EU is a bigger trading partner with Russia than is the US.  The depreciation against the € would track the depreciation against the $ if the exchange rate between the EU and US is stable.

UPDATE:  Russia Hikes Rates To 12% In Emergency Move To Halt Rouble's Collapse

By hiking rates, Russia hopes to make investing in Russia more profitable, so that investors will sell € to buy ₽ to invest in Russia, which makes the ₽ appreciate

Tuesday, August 8, 2023

Assumed rates of return for public pensions vs. interest rates


As a result, Public Penions are 30% under-funded. To figure out why we aren't saving enough for our public pensions, ask three questions

  • Who is making the bad decision?
    • We the People
  • Do We have enuf info to make a good decision?
    • No, We the People don't know how to compound, much less discount.
  • And the incentive to do so?
    • No, We the People over-weight the present, called "hyperbolic discounting," and act as if our discount rates are really big, which means we don't save enough.  

Is your corporate DEI program legal?

 From The WSJ:

  • Comcast settled a case accusing it of illegally favoring minority-owned small-business customers with grants and marketing advice. 
    • Comcast opened the program to all small businesses. 
  • Amazon has been sued in Texas over a program offering an extra $10,000 to Black- or Latino-owned delivery-service contractors. 
  • Starbucks directors and executives are being sued by a shareholder arguing they violated their duty to investors by supporting diversity policies. ...
“Anything a company’s doing that is treating someone differently because of their race, even if it’s a small part of the decision-making process, is going to be scrutinized,” said Dan Lennington, a former Wisconsin deputy solicitor general and deputy counsel for Wisconsin Institute for Law and Liberty, the legal group behind the Comcast lawsuit. ...
Companies have long relied on rationales similar to those buttressing affirmative action at universities—that there are benefits to diversity. By dismissing that rationale, the high court weakened the justification for other programs that promote it. 

The Hidden Costs of Property Taxes: A Tale of Two Houses

From Art Laffer:  

Since the housing bubble peak of 2006-2008: 
  •  2.8% Ohio property tax rate: owners of Dr. Art Laffer's childhood home have paid approximately $125,000 in property taxes while their home appreciated by $75,000. 
  •  0.6% Nashville property tax rate: paid $250,000 in property taxes while his current house appreciated in value by $2 million. 
The causality is hard to disentangle from the correlation: 
  • it could be that unattractive states adopt high taxes, and/or
  • that high taxes make states unattractive, and/or 
  • that high taxes are correlated with some other factor (Democratic control?) that causes states to become unattractive. 
BOTTOM LINE: before buying a house, especially one in a high tax state, look ahead and reason back.

Why is rent control failing in Scotland?

 From the Financial Times:

...levelling up secretary Michael Gove said in Edinburgh: “The history of rent controls and rent freezes is that they lead to a reduction in supply overall and they end up hurting the poorest most.”  

In other words, if you impose price ceilings below the equilibrium price, you get shortages.

HT:  Justin K.