Is Amazon's takeover of Whole Foods anti-competitive? Probably not.

A few days ago, Amazon announced its plans to purchase the predominantly USA-based grocery retail chain Whole Foods for almost $14bn. Although both companies operate in many countries, the main competition issues (if any) are likely to arise in the US, were both companies have a non-negligible presence.

Indeed, this announcement has resulted in a number of people claiming that the proposed merger will be anti-competitive. Specifically, there are some claims that the merger would result in 1) bundling and foreclosure of rivals; and/or 2) predatory pricing. In short, the first theory of harm posits that Amazon would force customers that wanted to purchase its distribution (or other) services to also purchase from Whole Foods (or vice versa), while the second theory of harm suggests that the merged entity would price below cost in order to drive out rival grocery firms before increasing prices once those rivals exited.

Importantly, both of these theories of harm require that the merged entity have some form of "market power" (i.e. the ability to charge a price above the competitive level and to act independently of its rivals). Typically, this is most likely to occur when a firm has a share of sales in a particular market of over 40%. However, as a general point, these theories of harm gloss over the fact that Amazon and Whole Foods' shares in grocery sales are tiny - less than 5% combined in the US. As such, it is difficult to see how the combined entity can have any market power.  Clearly, the merged entity would not satisfy this for sales of groceries at the moment of the merger.

Bundling

However, others might argue that Amazon does have a sufficiently high share of sales of "online retail" to be classed as dominant. As such, they argue that Amazon could "leverage" its power in that area to grocery retail by bundling some of its services with those of its groceries. However, as the merged entity will be active at the retail level of groceries, it is not obvious exactly what other services offered by Amazon could be bundled with them - for the bundling strategy to work, consumers would still have to want at least one of the items in the bundle, and could continue to purchase them separately from Amazon or elsewhere anyway. Hence, there does not appear to be a viable mechanism through which this bundling theory of harm could occur.

Predatory Pricing

Moreover, for the predatory pricing theory of harm to be valid, there must be strong evidence that 1) the merged entity would price its groceries below some measure of cost that represents the extra cost that would be incurred by supplying one extra unit of output (usually measured as average variable cost of long-run average incremental cost); and 2) it would have an incentive to do so.

The first condition is notoriously difficult to prove - one first has to decide which costs should be included / excluded in the measure (which really isn't as easy as one would think - e.g. should advertising spend that applies to brand-related marketing, but isn't specifically related to groceries, be included), as well as deciding the relevant time-frame over which costs are assessed.

The second condition requires proving that the merged entity would become dominant (and therefore be able to recoup the losses it had made in pricing below cost) in the future. This is where the theory of harm becomes incredibly speculative - it assumes that sufficient sales would switch to the merged entity from rival grocery firms that the merged entity would be dominant. In other words, it assumes that pricing below cost would be sufficient in and of itself to persuade consumers to switch (regardless of e.g. quality of service provided) and that rival grocery firms would not respond in any way to the merged entity's actions. Clearly both of these assumptions are likely to be violated in practice and, as such, the predatory pricing theory of harm seems unlikely.

Summary

Given that the merged entity is unlikely to have the incentive or ability either to bundle its products together or recoup any losses made from pricing below costs, both of the theories of harm currently being bandied about are unlikely to be valid. As such, it is difficult to see how the cries that the proposed merger is anti-competitive are anything more than "a big firm is buying someone so they have to be stopped". That should not be a basis on which a merger can be prevented.

Government can't even give away free money

One for the Annals of Government Failure:

A damning report into a disastrous £178 million Scottish government IT project that has left farmers without vital grants has uncovered a series of errors which will now have to be fixed at even greater cost to the taxpayer.

One of us has direct business experience of building IT systems. This is not good news:

One of the main problems has been a lack of documentation showing how the system was put together.

The report said: “The level of documentation is poor and is a critical risk to future stability. In many cases design documents don’t exist, in many others the design document does not match what has been built”

In one passage on corners being cut, the experts said: “It is evident that quality has been compromised in many areas (including architecture, design, analysis, coding, testing, governance, quality assurance of design, coding and implementation) to expedite delivery.”

What has been built isn't what was planned and no one does know what has been built because there is no documentation. There're just bits of code which interact but, unfortunately, don't work. No one knows why either.

But this is worse than just yet another government IT system which doesn't work. There are only 18,500 Scottish farmers getting subsidies in the first place. The IT system cost here is thus near £10,000 per farmer. And note, that's the cost just of the system to work out who to give the free money to.

OK, it's not really free money as we've all paid the taxes to the EU which then comes back as farm subsidies. But viewed in isolation it is.

It's not even that the system is complicated. Most of it is area payments, we know the size of the farms. If one clerk processed one farmer per day then a hand wavey estimate of the running cost of the system, purely on paper, would be £4 million a year.

This is an excellent example of why we want to have minimal government. Simply because government's not a good way of doing things. Really, we ask you, spending the thick end of £200 million to fail to give free money to under 20,000 people. This isn't a system we want to use for very much, is it?

The EU's got it all wrong on Google

By fining Google £2.1bn for giving special prominence to Google Shopping in shopping-related searches, European regulators have made exactly the same mistake that they and US regulators did when they fined Microsoft for bundling its Internet Explorer with Windows in the 1990s (a decision that even Lawrence Lessig, who led the first case, now says was wrong).

The basic error is to assume that Google or Microsoft’s dominant position in the market is unchallengeable – that they are akin to ‘natural monopolies’ like, say, water or electricity companies, and can use their position to exploit consumers – and that instead of competition between platforms being able to take place, they must brute-force competition within those platforms. But Microsoft’s market dominance was much more vulnerable than it seemed, and normal pressures of competition and innovation were what did for Windows in the end, no regulators needed. Windows is now only the operating system for 14% of devices shipped, and Android is the most-used operating system for browsing the internet.

An analogy is mobile phones: if you assume people are locked into using some kind of Android phone, then the preeminence that Google gives to its own products looks like a big problem. But when you realise that there are alternatives to Android, like iPhones, competition within the platform begins to look less important than competition across platforms. 

And forcing within-platform competition might make the product worse – look at how vertically integrated iPhones are, which allows things like frequent software updates (something Android badly lacks), and how Google products (like the Pixel) have been moving towards that sort of model too. It also deprives the company of a revenue stream that makes investment in the free product, like search or Android, possible.

Finally, bundling or integrating price comparison tools might be good for users who are less tech-savvy and would normally go for a 'trusted' but more expensive retailer. If you don't realise that SkyScanner exists and would normally just go with BA every time, it could be very useful to get Google Flights right up top, showing that Ryanair does what you're looking for much more cheaply.

So it’s not even clear that prioritising Google Shopping results is bad for consumers – it may lead them to be more price-conscious and to shop around between merchants more. Even if it is – because it’s worse than some alternative price comparison site, for example – there is still no case for punishing Google for giving it special prominence. If Google Shopping is worse for consumers then it must be acting as a revenue raiser for Google, and a de facto way of charging for use of Google search (and other free Google products). 

If people can switch between platforms it doesn’t matter that much if, within a platform, there isn’t that much competition. Prioritising a particular shopping search engine is not akin to gouging water users with higher prices because there are alternatives to Google that users can switch to easily. If the overall user experience is made worse by Google Shopping being prioritised, then users will have the option of moving to a search engine like Bing which is perhaps less good as at search but better overall because it does not prioritise a bad shopping tool. Indeed Bing has specifically targeted Google Shopping, which they say is worse than their own tool, to get users to switch. And there is an incentive created for entrepreneurs and large existing rivals of Google like Facebook to create their own, rival platform.

Along with this broad point there are some specifics about this case that make it even weaker. It doesn’t take account of how people do online shopping: as well as search engines they also use things like Amazon and eBay, and they get advice about things from social sites like Facebook and Instagram. And bundling clearly doesn’t work that well for Google if the product isn’t that good – Google Flights gets special prominence if you search for flight information, and rivals like SkyScanner and Kayak are doing fine.

But the core issue here is whether we need to force competition within software platforms if competition exists between them. Just as Windows users moved to other operating systems (both on mobile with Android and iOS and desktop with Linux and Apple’s OS X), Google users have plenty of alternatives they can switch to if they think that Google’s bundling worsens the platform’s quality enough. Bundling has benefits as well as costs, because it pays for the free things Google does and allows for more streamlined use of software. Trying to stamp it out will end up hurting users in a misguided quest to help them.

So why is it that we don't include the effects of the NHS in our inequality calculations?

As we all know we face a veritable plague of inequality at present. The various numbers are up to Victorian levels of top hats consuming everything and the orphan waifs starving in the streets. Except, of course, we have a remarkable absence of both the starving waifs and the plutocrats exploding from the volume of their own consumption. So, there must be something wrong with the manner in which we are measuring that inequality.

One of the things, not the only one but significant, is that we're not measuring the inequality reducing effects of government spending. That all gain access to health care is just fine by us even if we're not greatly enamoured of the details of the current NHS. But everyone having access to health care is quite obviously a reduction in inequality, isn't it? For if we all have equal access then we're all equal, right, in at least this manner? 

But a new paper, via, tells us that there's more to it than this:

Second, there is a mostly negative correlation between patient income and medical spending within all countries, except Japan and Taiwan for the over-65s and Taiwan and the US for the under-25s.

More is spent on the health care of the poor than the rich.

The (mostly) negative correlation between income and medical spending within all countries suggests that medical systems typically act to redistribute resources from the rich to the poor.

No one is really going to argue that the rich shouldn't pay more of the cost of the society than the poor do, even Adam Smith plumped for more than in proportion. But if the consumption of the state supplied goods is also pro-poor then we're again less unequal than the normal numbers suggest.

Or as we've been saying for some time now, inequality just isn't as high as the usual numbers suggest. For none of them ever do include the effects of a major thing we do to reduce inequality, the welfare state.

The allure of socialism

The urge to improve the world is a powerful one.  We see suffering and deprivation and stunted lives, and we want a world in which as many as possible can live decently and aspire to live fulfilled lives instead.  We think like this because we are human and share what Adam Smith called 'sympathy' with our fellow human beings.  Today we would call that 'empathy,' and it is what drives us to improve the lot of others if we can.

Some people yearn to replace this imperfect world with a better one conceived in the imagination, and in their mind they echo the lines of Fitzgerald's Rubaiyat of Omar Khayyam:

"Ah Love! could thou and I with Fate conspire

To grasp this sorry Scheme of Things entire,

Would not we shatter it to bits -- and then

Re-mould it nearer to the Heart's Desire!"

F A Hayek called it "The Fatal Conceit" to suppose that we can, with our limited mental resources, think up a better world than the one created by the input of countless people over aeons of time.  It is part of the allure of Socialism, which in theory proposes a world in which we are all more equal, and in which we do things collectively for the common good.  Socialism in practice has always been different, involving oppression, deprivation, blighted, limited lives, and often torture and mass murder.  Its practical record has barely diminished the enthusiasm its acolytes accord its theory.  Many of them become apologists for the atrocities committed when it is applied in practice.

The spontaneous order produced when people are allowed to interact freely with others contains more knowledge than any individual mind can hold.  It is faster to react to changes that could affect it adversely, and it does not involve forcing people to conform to the lifestyles that others would have them live.  It gives men and women space to improve their lives by pursuing their own aspirations rather than any goals that others would have them follow.

If it is folly to suppose that this world can be replaced by one dreamed up in the imagination, it is certainly not folly to suppose that it can be improved.  We can address its perceived shortcomings, experimenting with ways to overcome them, and persisting with those that achieved the desired results in practice.  The last 250 years have seen spectacular improvements in the human condition, and the last 25 years have seen many of those improvements rolled out on a global scale.  Advances have been made by virtually every measure of the human condition.  People live longer, no longer prone to diseases that ravaged their predecessors.  Fewer women die in childbirth, fewer children die in infancy.  Fewer starve or are malnourished.  More are literate, more educated.  It is a record of achievement unparalleled in the history of our species.

Karl Popper referred to a process of "piecemeal social engineering" by which we seek to improve the world by judicious inputs targeted at its failings, a process of evolution rather than the revolution that Marx sought and which his latterday followers still seek.  It is an empirical process that concentrates on practical improvements.

It may be true that young people are less patient, and more inclined to embrace idealistic schemes of total change than are older people, some of whom have lived through the catastrophes brought about when ideologies have been imposed upon the real world.  It seems paradoxical that many young people, the ones who cope more readily with a world of flux and change, should embrace an ideology whose goal is a settled world.  It seems equally paradoxical that many older people, who are supposedly ill at ease with churn and change, should embrace the system of markets and trade that is characterized by constant innovation.  It might be experience of reality that explains this apparent paradox.

Many advocates of socialism suggest that the tyranny introduced by socialist regimes in practice is an add-on that distorts and perverts ‘true’ socialism, but it seems more likely that compulsion is an evil lurking at the very heart of socialism.  It requires people to behave in ways which, given a choice, they would not freely choose.  Therefore they must be constrained to behave as all good citizens of the new utopia must…

Will we ever stop banging on about minimum wages

The link between the minimum wage and unemployment is a touchstone with many of us who broadly believe in free markets, because if we're wrong about this, then we might be wrong about a lot of things.

The supply and demand model is one of economics's most enduring, intuitive, tractable, and predictive frameworks. Yes, there are always going to be many examples it doesn't apply to. Some things are too complex to be framed in that way, or beset with market failures. But basic market transactions should work the way it says. Slapping a blunt price floor on something as basic as labour should have very perverse effects.

And broadly, this is what the literature says. I know this because I've read nearly every minimum wage paper ever written. But it's not what all of the literature says. Everyone now agrees that in most cases minimum wage hikes do not lead to immediate appreciable drops in employment considered over the whole population.

The debate is mostly over which control groups and other methodological techniques we should use. Two new papers illustrate that minimum wage defenders should not see the work of Card & Krueger and Dube as the last and only word. There is more coming out all the time.

The first (pdf) is of Danes. When Danes turn 18 they face a sharply higher minimum wage, and a lot of them get fired on their birthday or soon after. But total wage payments are about the same—many get fired, but some get more per hour.

On average, the hourly wage rate jumps up by 40 percent when individuals turn eighteen years old. Employment (extensive margin) falls by 33 percent and total labor input (extensive and intensive margin) decreases by around 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old. We estimate that the relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is about -0.8.

In this methodology the actual rules stayed the same for the whole study, but eligibility changed over the lifespan. By contrast, a new NBER paper looks at the imposition of a considerably higher minimum wage in Seattle on the low-wage sector: those who might be affected. Seattle rapidly hiked its minimum wage from $9.47 to $11, in 2015, and then to $13, in 2016.

Their results were in some ways starker than the Danish findings, since the higher wage per hour was far more than outweighed by the lower total hours.

Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.

Is it too soon to predict that eventually we'll all agree that the supply & demand model broadly works, even in the case of low wage labour?

This is really most odd from Shelter, most odd

Apparently the poor will all be taking advantage of that liberty also available to the rich, sleeping under bridges:

More than a million households living in private rented accommodation are at risk of becoming homeless by 2020 because of rising rents, benefit freezes and a lack of social housing, according to a devastating new report into the UK’s escalating housing crisis.

The study by the homelessness charity Shelter shows that rising numbers of families on low incomes are not only unable to afford to buy their own home but are also struggling to pay even the lowest available rents in the private sector, leading to ever higher levels of eviction and homelessness.

Clearly not desirable but is it actually true? ONS keeps an index of rents.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to May 2017; this is unchanged from April 2017.

But note that this is nominal. Inflation more generally for that 12 months was 2.9% wasn't it? It's true that we are seeing real wages falling as they seem to be running at about 2.5% nominal. But if rents are rising more slowly than general inflation, more slowly than nominal wage rises  then that must mean that rents are falling in real terms.

Falling rents and rising rents are not compatible findings of evidence, are they? And as ONS says about London the reasons why rents are falling are:

Growth in private rental prices in London continues to slow, increasing by 1.3% in the 12 months to May 2017, down from 1.4% in April 2017. New build constructions, buy to let investors and accidental landlords have led to high levels of stock available to rent in the capital according to Savills. This view is supported by Countrywide, who report that rental stock was growing at a faster rate than demand in London, pushing down rents.

We would not claim that this is something that is solved. But at least some of the things that need to be done to solve it seem to have been done. There's more housing stock on the market and given that markets do actually work this is reducing prices in real terms. But it does appear that at least some of the things needed to solve the problem have been done because the numbers are moving in the right direction to solve the problem.

Far from the imminent disaster predicted by Shelter we seem to be retreating from said disaster.

This rule of law thing is such a pain, isn't it?

There's more than a whiff of a certain totalitarianism here:

If you had told people in the City at the height of the financial crash in 2008 that it would take almost nine years for the first top bankers to face prosecution, few would have believed you. If you had then said that this first prosecution would relate to suspected fraud over one bank’s supposed attempt to avoid nationalisation – rather than the crash itself – the bankers involved in the crisis would have laughed in disbelief: surely, they aren’t going to let us get away with that?

But they did: the bankers who played a central role in the worst crash of the postwar era walked away with their fortunes and freedom intact. Even worse, the fundamentals of the system that made it possible were retained intact.

Jailing all the bankers would not doubt be terribly cathartic. But there is this little thing called the rule of law which we do rather strain mightily to observe. One part of this being that you only get jugged when you have been tried, and found guilty, of doing something which was a crime at the time you did it.

We're starting the process with those Barclay's folks right now. We've done that with people who manipulated Libor. But the bankers in general? What actually is the crime they should be charged with?

Getting it wrong? There but for the grace of God go near all of us. It's not even true that greed, high wages nor incompetence are crimes.

That is, the reason our jails are not packed with bankers is that bankers did not, in general, break the law.

So, the short answer as to why no top banker lost his (they are always men) fortune when their banks went bust and required bailouts or nationalisation? It’s politics. There was too little political capital and almost no political will among mainstream parties to break up the banks and make them small and simple again – let alone to take on the “top” bankers and at least take away the bonuses paid out to reward profits that in 2008 proved illusory.

Most bonuses were paid in stock, stock which plummeted in value. One report has Dick Fulds of Lehman losing $960 million in that manner. Hey, maybe that's not taking away enough money but it's most certainly taking away some, isn't it? 

Further, banks have indeed become smaller and safer, capital requirements are very much higher and so on. And the problem wasn't caused by the complexity of the system either. Northern Rock was a very uncomplicated mortgage lender, Lehman a pure investment bank, HBOS sank on the rock of mortgages again and so on.

It's not even true that small and simple saves banks - America's Depression experience shows that, as does the S&L problems of the 80s.

We have no problem at all with the idea that the system might usefully be reformed. But we do insist that we've got to analyse the problems properly first. The GFC was, properly, a wholesale bank run, an inherent weakness of fractional reserve banking, not something brought about by widespread criminality. Only if we grasp that can we possibly devise solutions.

Two little economic lessons for Dawn Foster

Ms. Foster needs to have a little bit of remedial economics:

Social housing pays for itself

No, it doesn't, quite clearly and quite obviously. It charges less than market rent therefore it must make a loss. To ignore this is to miss one of the two things about economics that even a Guardian writer should manage to get, incentives matter and there are always opportunity costs.

It is the second which is in play here. If social housing were let at full market rent then some amount of money would be rolling in. As it is let at less than market rent less is - the amount not rolling is the loss from the activity.

Note that this is nothing at all to do with whether housing for the poor should be subsidised by the rest of us or not, nor whether social housing is the correct way to do this. We have argued here that all rentals should be market rent and housing benefit used to pay for those who cannot afford it. Precisely upon the grounds that this makes visible the opportunity costs. And when that bill is seen to be the size it is then perhaps we'll all go off and actually solve the problem by blowing up the Town and Country Planning Acts.

But that there are opportunity costs from below market rents is indisputable, it's simply fact. Social housing does not therefore pay for itself.

Further:

The problem is not tower blocks, but safety and how willing companies are to risk lives to save money: most buildings won’t have similar fires, but any with similar renovations could.

This is not a feature of companies, this is a feature of our universe. Human desires and wants are unlimited, resources to meet them are scarce. Everything, but everything, is therefore a trade off. We can make cars rather safer by making them tanks that move at 3 mph. That would perhaps not be a good trade off. We could undoubtedly make tower blocks safer at some cost. But that's not the question which needs to be answered. The one that does is how much safer at what cost?

For example, perhaps fire accelerating cladding at the cost of saving on the heating bills isn't all that good an idea? 

This is, of course, just opportunity costs all over again. The price of greater safety is whatever we cannot do as we've used our resources on greater safety.

Please do note that even we don't think that the balance is correct here at present. But we do absolutely insist that we've got to ask the right question before we can have any hope of gaining the right answer. What are we prepared to give up to make those tower blocks how much safer?

The OECD seems to be arguing for more indoctrination

Or at least people are using the OECD report on early years childcare to argue for more indoctrination.

“Give me a child for his first seven years and I will give you the man,” said the Jesuits, though recent developmental work suggests that they would have done better to have got their hooks into him before he was five. Our children are not only most adorable when they are tiny, they are also at their most malleable. They are most sensitive learning about emotional control at one, language and social skills at two, numbers at three. That’s why policymakers, like the Jesuits, long to get at people when they are tiny. That is when governments have their best chance of shaping the country’s future.

And the correct name for that is indeed indoctrination. Get at the little ones and mold them into what the State desires the citizenry be. All very much smacking of New Soviet Man to our ears, where given that state socialism doesn't work with human beings let's try to change the people into something which allows state socialism to work.

It's thus a basic approach which we reject. The aim of the State, whoever runs it and how, is to us to aid and allow us to be ourselves. It is not we who should change to fit the plans, the plans should be devised for us as we are.

That we provide plasticine for 3 year olds to play with while Mummy is at work is just fine. But indoctrination while they do so isn't.