We typically advocate that competition is good, except when it is not, for example in the case of large production fix costs. Such natural monopolies then need to be regulated. Part of the debate on health care in the United States is also about competition: if health insurance is provided by a single entity, it got to be less efficient. Well, there is data that can verify this, by looking at employers that offer a choice of providers and those that do not.
Ilya Rahkovsky does this and comes to the stunning conclusion that insurance providers that have a exclusivity contract with an employer charge about 40% for the same "insurance quality units." How could this be? Exclusive providers tend to provide better quality insurance because they can subsidize it with the premiums of low quality policies. That would not be possible if they were to compete with other providers.
That said, insurance providers must have been in competition in order to obtain the exclusivity contract, so it is not quite true to state that the monopoly is welfare improving. But from the employees' perspective, it looks like a regulated monopoly in the sense that the employer can keep a leash on the insurance company by threatening to change providers, and that keeps the monopolist from exploiting all rents, it even encourages it to show goodwill to keep the contract. With multiple providers, everyone goes for the quick buck and offers lowly policies.
Showing posts with label monopoly. Show all posts
Showing posts with label monopoly. Show all posts
Tuesday, February 8, 2011
Thursday, November 18, 2010
Privatization-nationalization cycles
The past two decades have seen an impressive wave of privatizations all around the world, especially in utilities and resources. This trend has recently been reversed though, with several large nationalization waves, in particular Latin America. This kind of cycle is not new, as especially the gas industry has gone through several waves each way during the last century. Why all this back and forth?
Roberto Chang, Constantino Hevia and Norman Loayza observe that nationalizations typically happen when the price of the output of reference is high and inequality of wages is also high. The opposite is the case for privatizations. They can explain this with a model of a benevolent government that maximizes a social welfare function represented by the average utility of workers. Under nationalization, all workers are paid the same and exert little effort. Under privatization, firms can discriminate workers, who then put more heart at work, creating wage differentials. When prices for the commodity increase, this generates larger rents for the most productive, and inequality increases.
The story is then of a inequality-efficiency trade-off for the government. In the naturalized state, inequality is low, but so is efficiency. If prices are low, it is more important to increase efficiency, and the firm is privatized. But as it becomes more efficient and discriminates its workers, inequality becomes more important, and the firm is nationalized back. And the cycle continues, with an average of 12 years of privatization and 25 years for nationalization. While this is a very stylized story, after all the model assume an economy with a single sector that has no impact on world prices, it is still a compelling story.
Roberto Chang, Constantino Hevia and Norman Loayza observe that nationalizations typically happen when the price of the output of reference is high and inequality of wages is also high. The opposite is the case for privatizations. They can explain this with a model of a benevolent government that maximizes a social welfare function represented by the average utility of workers. Under nationalization, all workers are paid the same and exert little effort. Under privatization, firms can discriminate workers, who then put more heart at work, creating wage differentials. When prices for the commodity increase, this generates larger rents for the most productive, and inequality increases.
The story is then of a inequality-efficiency trade-off for the government. In the naturalized state, inequality is low, but so is efficiency. If prices are low, it is more important to increase efficiency, and the firm is privatized. But as it becomes more efficient and discriminates its workers, inequality becomes more important, and the firm is nationalized back. And the cycle continues, with an average of 12 years of privatization and 25 years for nationalization. While this is a very stylized story, after all the model assume an economy with a single sector that has no impact on world prices, it is still a compelling story.
Wednesday, October 20, 2010
Copyright and the lack of competition in academic publishing
The official story is that copyright encourages creators by giving them temporary monopoly rights. The unofficial story is that copyright prevents the diffusion of art and knowledge, and nowhere is it as frustrating as with academic publishing. Commercial publishers sell the research others paid for, and can extract substantial rents because researchers have to publish in established outlets for reputation, tenure and promotion.
Giovanni Ramello remarks that there is another unfortunate consequence of copyright in academic publishing: having been granted some market power, the monopolist will seek to extend this market power through acquisitions and thereby obtain even more dominance. The obvious example is Elsevier, which has reached now a market share that should trigger anti-trust investigations along with profit margin in the order of 30%. The situation is quite bad in Economics, as scholarly societies have done little to prevent Elsevier taking hold of the major field journals, thereby making it essential to any tenure file. And given this, research libraries have no choice but subscribe to those journals, falling in the trap of the monopolist.
In other sciences, I hear the situation is not much better. And I have reported previously about horror stories that still seem to have little impact (1, 2).
In any case, journals are dead to me, for reasons cited above and also because the publishing process is broken, starting with refereeing.
Giovanni Ramello remarks that there is another unfortunate consequence of copyright in academic publishing: having been granted some market power, the monopolist will seek to extend this market power through acquisitions and thereby obtain even more dominance. The obvious example is Elsevier, which has reached now a market share that should trigger anti-trust investigations along with profit margin in the order of 30%. The situation is quite bad in Economics, as scholarly societies have done little to prevent Elsevier taking hold of the major field journals, thereby making it essential to any tenure file. And given this, research libraries have no choice but subscribe to those journals, falling in the trap of the monopolist.
In other sciences, I hear the situation is not much better. And I have reported previously about horror stories that still seem to have little impact (1, 2).
In any case, journals are dead to me, for reasons cited above and also because the publishing process is broken, starting with refereeing.
Tuesday, September 21, 2010
Pennsylvania liquor stores are welfare maximizing
In many countries, and in particular North America, the state holds a monopoly on the sale of alcoholic products. And in those areas, everybody complains how inconvenient the purchase of alcohol is. Of course, this inconvenience is part of the purpose of these state monopolies, along with keeping prices high and keeping the margin for government coffers. But discouraging the consumption of alcohol does not need to be done this way, simply taxing it would achieve the same goals.
Katja Seim and Joel Waldfogel claim that at least in the case of Pennsylvania, the state monopoly is beneficial. Indeed, the layout of the network of stores, and the number of stores is much closer to maximize welfare than maximize profits. Now, of course, we need to define welfare. They measure it à la Hotelling: consumer surplus is based on the price of liquor and the distance between stores and customers, the producer surplus is based on profits, and there is a fix cost of operating a store. In other words, Seim and Waldfogel treat this problem like it would apply to any good. But we are taking about liquor here. And there is a reason we want to regulate it: it generates negative externalities.
Thus, if they find that in Pennsylvania the outcome is close to welfare maximizing according to their criterion, it tells me that there are too many stores if that social welfare measure included the negative externality of alcohol.
Katja Seim and Joel Waldfogel claim that at least in the case of Pennsylvania, the state monopoly is beneficial. Indeed, the layout of the network of stores, and the number of stores is much closer to maximize welfare than maximize profits. Now, of course, we need to define welfare. They measure it à la Hotelling: consumer surplus is based on the price of liquor and the distance between stores and customers, the producer surplus is based on profits, and there is a fix cost of operating a store. In other words, Seim and Waldfogel treat this problem like it would apply to any good. But we are taking about liquor here. And there is a reason we want to regulate it: it generates negative externalities.
Thus, if they find that in Pennsylvania the outcome is close to welfare maximizing according to their criterion, it tells me that there are too many stores if that social welfare measure included the negative externality of alcohol.
Tuesday, September 7, 2010
The iPhone must have an exclusive carrier
Aren't you angry that the particular mobile phone you prefer has an exclusive contract with a carrier? This limitation of carrier choice seems anti-competitive, if not frustrating. US anti-trust authorities seem to be getting interested in these arrangements and may intervene. It turns out that maybe they should not.
Robert Hahn and Hal Singer say exclusivity contracts are in fact the best thing that could happen for consumer welfare. Indeed, they spur competition through innovation, and the fact that the smart phone industry is innovative is hardly an understatement. Indeed, the exclusive contracts allow manufacturers to share the risk with the carrier, they make sure that both want the success of the new phone, and thus insure better reception and coverage. All this taken together induces manufacturers to take more risk and go for even faster and bolder innovations, which ultimately benefits the consumer.
Robert Hahn and Hal Singer say exclusivity contracts are in fact the best thing that could happen for consumer welfare. Indeed, they spur competition through innovation, and the fact that the smart phone industry is innovative is hardly an understatement. Indeed, the exclusive contracts allow manufacturers to share the risk with the carrier, they make sure that both want the success of the new phone, and thus insure better reception and coverage. All this taken together induces manufacturers to take more risk and go for even faster and bolder innovations, which ultimately benefits the consumer.
Thursday, September 2, 2010
Why so few drug innovations?
Research and development has an inherent tendency to have a decreasing growth rate. As the pool of things to discover continuously shrinks, it becomes harder to innovate. But we a groundbreaking discovery is made, this opens a lot of new opportunities and one should see a lot of new innovation. But with molecular biology and genomics, the pharmaceutical industry should have seen a burst of innovation, and in particular a jump in innovation productivity. Yet the contrary happened. One argument could be similar to the one that has been made about the productivity slowdown of the seventies, that an groundbreaking innovation like information technology needs time and resources to be understood.
Fabio Pammolli, Massimo Riccaboni and Laura Magazzini claim that this effect is very important. They observe that all the low hanging fruit have been picked in pharmacology and that first have shifted their investment portfolio towards more difficult problems. They suggest that one particular reason to do so is that improving current drugs is not profitable as generics are close substitutes and little rents can be extracted. Thus new classes of molecules are sought.
I would add another development in the field of R&D in general. It has become increasingly difficult and costly to file patents, as the field is littered with "predators" who file vague patents to prevent other from innovating, or to claim royalties. Not only does this increase the cost of innovating, it also increases its uncertainty, as any discovery can be subject to litigation even if it was a genuine discovery. This also encourages laboratories to find new molecules that are much different from existing ones.
Fabio Pammolli, Massimo Riccaboni and Laura Magazzini claim that this effect is very important. They observe that all the low hanging fruit have been picked in pharmacology and that first have shifted their investment portfolio towards more difficult problems. They suggest that one particular reason to do so is that improving current drugs is not profitable as generics are close substitutes and little rents can be extracted. Thus new classes of molecules are sought.
I would add another development in the field of R&D in general. It has become increasingly difficult and costly to file patents, as the field is littered with "predators" who file vague patents to prevent other from innovating, or to claim royalties. Not only does this increase the cost of innovating, it also increases its uncertainty, as any discovery can be subject to litigation even if it was a genuine discovery. This also encourages laboratories to find new molecules that are much different from existing ones.
Wednesday, May 19, 2010
Less competition is good for insurance
Competition is best, economists often claim. Except when it is not, for example in the case of natural monopolies, where the duplication of infrastructure is wasteful. THe case can also be made that competition is not as good as one would think in the insurance industry
Giuseppe de Feo and Jean Hindriks explain that adverse selection has worse consequences under competition. Indeed, in a monopoly, the insurance company can make profits on some products which allows to cross-subsidize others. With competition. profits are driven to a minimum, and cross-subsidization is minimal. This is important because cross-subsidies allows to relax the incentive constraint. This provides better coverage for high risks, but lowers participation among low risks.
One aspect that was not mentioned in the paper is that monopolistic insurers, because they have a larger market share, are better able to diversify the individual risk of the insureds. Observationally, this makes them closer to risk-neutral, and thus allows them to offer lower premiums, every else being equal. Of course, they could use their monopoly power to raise premiums, but with smart regulation or threats to entry, this can be prevented and the full social benefit can be obtained.
Giuseppe de Feo and Jean Hindriks explain that adverse selection has worse consequences under competition. Indeed, in a monopoly, the insurance company can make profits on some products which allows to cross-subsidize others. With competition. profits are driven to a minimum, and cross-subsidization is minimal. This is important because cross-subsidies allows to relax the incentive constraint. This provides better coverage for high risks, but lowers participation among low risks.
One aspect that was not mentioned in the paper is that monopolistic insurers, because they have a larger market share, are better able to diversify the individual risk of the insureds. Observationally, this makes them closer to risk-neutral, and thus allows them to offer lower premiums, every else being equal. Of course, they could use their monopoly power to raise premiums, but with smart regulation or threats to entry, this can be prevented and the full social benefit can be obtained.
Monday, April 19, 2010
Optimizing patent law design is hard, why not drop it
Patents are supposed to rewards those successful at developing new technologies by granting them a temporary monopoly on their innovation. We know monopolies are bad for social welfare, in this case because it leads to underprovision of the innovation, and thus the length of the monopoly protection needs to be determined according to all sorts of factors. But patent law provides a uniform length for patents. Is this really bad?
From my reading of the latest paper by Angus Chu, yes. While it seems quite obvious that optimal patent length should depend on the level of competition in a sector, or that latter's market size, what really matters is how much patent length differ, and what a uniform patent length implies in terms of welfare losses. Chu performs in this regard an interesting numerical exercise. In a two-sector model, welfare costs of uniform patent length can reach 34% of consumption if the arrival rate of innovation is five times higher in one sector, and both sectors have the same market share. One could reasonably ask whether it is even worth have patent protection, considering all the other problems they generate (1, 2, 3).
From my reading of the latest paper by Angus Chu, yes. While it seems quite obvious that optimal patent length should depend on the level of competition in a sector, or that latter's market size, what really matters is how much patent length differ, and what a uniform patent length implies in terms of welfare losses. Chu performs in this regard an interesting numerical exercise. In a two-sector model, welfare costs of uniform patent length can reach 34% of consumption if the arrival rate of innovation is five times higher in one sector, and both sectors have the same market share. One could reasonably ask whether it is even worth have patent protection, considering all the other problems they generate (1, 2, 3).
Tuesday, April 6, 2010
Further evidence on the profit motive of churches
The Catholic Church is facing quite a lot of heat lately, to a large extend because it put the welfare of the organization far ahead of the welfare of its constituents. The Church denies this, of course. It is of interest here whether its other actions corroborate its social welfare motives.
Carla Marchese and Giovanni Ramello find an intriguing fact: since 2005, the teachings of the Pope are copyrighted. Copyright is like a monopoly in that it reduces quantity and maximizes private profits. Why would the Church adopt this model if it were trying to save as many souls as possible? The authors are gentle here and claim that the Church just wants to tax other media outlets that would make money by diffusing the Pope's message. I would not be that lenient. Indeed, this motivation only works if there is imperfect competition across media outlets, and then only under specific conditions. It is true that proceeds can be used to subsidize the Church's own publications, but seeing the profit margin of the Vatican's publisher (16%), it does not look likely.
Carla Marchese and Giovanni Ramello find an intriguing fact: since 2005, the teachings of the Pope are copyrighted. Copyright is like a monopoly in that it reduces quantity and maximizes private profits. Why would the Church adopt this model if it were trying to save as many souls as possible? The authors are gentle here and claim that the Church just wants to tax other media outlets that would make money by diffusing the Pope's message. I would not be that lenient. Indeed, this motivation only works if there is imperfect competition across media outlets, and then only under specific conditions. It is true that proceeds can be used to subsidize the Church's own publications, but seeing the profit margin of the Vatican's publisher (16%), it does not look likely.
Monday, March 29, 2010
Static innovation
Technical innovation is good. Monopoly is bad. What about technical innovation by a monopolist? Apparently, the literature on this uses partial equilibrium models, which is silly because general equilibrium effects can be quite important. In particular, it is not necessarily the case that whatever resources the monopolist requires after innovation are a net loss for the rest of the economy. Aggregate capital accumulation may be different, for example.
Shuntian Yao and Lydia Gan thus address the question with a model of R&D where production requires capital, there is a monopolist and a competitive sector, all this in general equilibrium, But the model is static. That is right, the process of innovation is static, innovation just happens spontaneously, and costlessly, I should add. The same applies to capital which drops from the sky when required.
Now, isn't there a literature that has general equilibrium in a dynamic setting? Yes there is: endogenous growth theory, born in the 1980's, which is right after when the literature review of Yao and Gan stops. Even undergraduates know about that.
Shuntian Yao and Lydia Gan thus address the question with a model of R&D where production requires capital, there is a monopolist and a competitive sector, all this in general equilibrium, But the model is static. That is right, the process of innovation is static, innovation just happens spontaneously, and costlessly, I should add. The same applies to capital which drops from the sky when required.
Now, isn't there a literature that has general equilibrium in a dynamic setting? Yes there is: endogenous growth theory, born in the 1980's, which is right after when the literature review of Yao and Gan stops. Even undergraduates know about that.
Monday, February 8, 2010
Open platforms versus cartels in professional sports leagues
What makes a sports league more competitive? More interesting? And more profitable? We have two basic models out there. The European model, with open entry, promotion and relegation on mostly athletic grounds, and the American model, a cartel with regulated entry and no exit except on economic grounds. Basic economics should tell us that an American league should be more profitable but of lesser athletic quality, while the European one should be providing more value, both in terms of quantity and the quality of the good (say, athleticism and entertainment).
Helmut Dietl and Tobias Duschl confirm this conjecture. Indeed, the six top revenue generating teams are European, but some of them are still not profitable, and as in the case of Manchester United, despite significant athletic success. Dietl and Duschl use platform organization, a form of two-sided market theory, to get some better understanding of sports league organizations. In this regard, European leagues can be compared to open source like Linux, open and performing, while American leagues are like Windows, underperforming but most profitable.
Table 2 from the paper summarizes well the differences between the leagues. In European ones, most clubs are members' associations that try to maximize wins. Leagues are open (promotion/relegation), there is full market coverage, hardly any relocations (I cannot think of one), and no salary caps. As a consequence, value (as defined by athleticism or entertainment) is maximized. Contrast this with American leagues, where clubs are privately owned and maximize profits. League are closed, there is rationing, frequent relocation and a salary cap. Thus, American leagues maximize value appropriation.
Helmut Dietl and Tobias Duschl confirm this conjecture. Indeed, the six top revenue generating teams are European, but some of them are still not profitable, and as in the case of Manchester United, despite significant athletic success. Dietl and Duschl use platform organization, a form of two-sided market theory, to get some better understanding of sports league organizations. In this regard, European leagues can be compared to open source like Linux, open and performing, while American leagues are like Windows, underperforming but most profitable.
Table 2 from the paper summarizes well the differences between the leagues. In European ones, most clubs are members' associations that try to maximize wins. Leagues are open (promotion/relegation), there is full market coverage, hardly any relocations (I cannot think of one), and no salary caps. As a consequence, value (as defined by athleticism or entertainment) is maximized. Contrast this with American leagues, where clubs are privately owned and maximize profits. League are closed, there is rationing, frequent relocation and a salary cap. Thus, American leagues maximize value appropriation.
Tuesday, June 2, 2009
Microsoft, still the evil monopoly
Let me rant about another evil monopoly, Microsoft. Unfortunately, this is not the first time. The problem with monopolies is that they manage to get away with actions that would never be tolerated in a competitive marketplace. Here are some recent examples regarding Microsoft.
Microsoft automatic updates recently installed updates for the .NET suite that included a Firefox plug-in. Now why would Microsoft bother installing plug-ins for competing products? In this particular case, the plug-in allows websites to install software without the user's knowledge, that is, it creates for Firefox the vulnerabilities that plague Internet Explorer. Users are never prompted about this. Worse even, it does not appear to be possible to remove this plug-in without much trouble (such as downloading additional material from Microsoft). Details.
In view of Vista getting much traction, Windows has been encouraging users to download Windows 7 (release candidate version) for testing (and getting used to). It will stop functioning in June 2010. This will then force users to purchase Windows 7. The installation of any operating system, including a purchased copy of Windows 7 or a return to the previous one, will require wiping clean the hard drive. Thanks. Details (see IMPORTANT).
Microsoft continues to push Windows on manufacturers, making it difficult to buy computers with alternative operating systems, or none. Why would manufacturers go along? Windows is so bloated (along with the ever growing virus software) that it requires to upgrade hardware. And Windows installs typically have a Microsoft Office teaser install, prompting you to buy it after 60 days, while there are free products out there that do the same job (if not better), such as Open Office.
And my previous rants about forced and unnecessary upgrades, abusing patents
Microsoft automatic updates recently installed updates for the .NET suite that included a Firefox plug-in. Now why would Microsoft bother installing plug-ins for competing products? In this particular case, the plug-in allows websites to install software without the user's knowledge, that is, it creates for Firefox the vulnerabilities that plague Internet Explorer. Users are never prompted about this. Worse even, it does not appear to be possible to remove this plug-in without much trouble (such as downloading additional material from Microsoft). Details.
In view of Vista getting much traction, Windows has been encouraging users to download Windows 7 (release candidate version) for testing (and getting used to). It will stop functioning in June 2010. This will then force users to purchase Windows 7. The installation of any operating system, including a purchased copy of Windows 7 or a return to the previous one, will require wiping clean the hard drive. Thanks. Details (see IMPORTANT).
Microsoft continues to push Windows on manufacturers, making it difficult to buy computers with alternative operating systems, or none. Why would manufacturers go along? Windows is so bloated (along with the ever growing virus software) that it requires to upgrade hardware. And Windows installs typically have a Microsoft Office teaser install, prompting you to buy it after 60 days, while there are free products out there that do the same job (if not better), such as Open Office.
And my previous rants about forced and unnecessary upgrades, abusing patents
Monday, June 1, 2009
The worst bailout of all
Bailouts are difficult to justify in general, because of the adverse effect they have on anticipations and thus the moral hazard they induce. They can only be justified if this moral hazard risk can be outweighed by a strong positive welfare effect. Say, in the case of the bailout of the Big Three car manufacturers, that there is the threat that a new Great Depression would ensue, like Edward Lazear thought when he advocated intervention last September. We can discuss this assessment, and also whether it is a good idea to bail out the financial industry, the airline industry or whoever else is going to line up. But I have just been made aware of the least justifiable bailout of all: Belgium sinking a billion euros into the diamond industry.
Why? Because the diamond industry is a fraudulent operation to begin with. The world market for diamonds is overwhelmingly dominated by the De Beers diamond cartel that forces everyone to sell through it. This allows the cartel to dictate the price, essentially setting it at a multiple of what it would be under normal competition. This cartel was put in place in the late 1800s to preserve prices after major discoveries in South Africa that suddenly increased a lot the diamond supply. When the cartel found it difficult to hold prices in the 1930s, it created the diamond engagement ring, the most successful marketing campaign ever as it created a must have for every fiancée. The latest marketing scam is that "diamonds are forever." Well, actually this is true, as it is extremely difficult to resell a diamond at a price remotely close to its supposed value as diamond sellers have to comply with the cartel. So you are stuck with your diamond forever.
Diamonds, the worst investment ever, now supported by the Belgian government.
Why? Because the diamond industry is a fraudulent operation to begin with. The world market for diamonds is overwhelmingly dominated by the De Beers diamond cartel that forces everyone to sell through it. This allows the cartel to dictate the price, essentially setting it at a multiple of what it would be under normal competition. This cartel was put in place in the late 1800s to preserve prices after major discoveries in South Africa that suddenly increased a lot the diamond supply. When the cartel found it difficult to hold prices in the 1930s, it created the diamond engagement ring, the most successful marketing campaign ever as it created a must have for every fiancée. The latest marketing scam is that "diamonds are forever." Well, actually this is true, as it is extremely difficult to resell a diamond at a price remotely close to its supposed value as diamond sellers have to comply with the cartel. So you are stuck with your diamond forever.
Diamonds, the worst investment ever, now supported by the Belgian government.
Thursday, April 2, 2009
Credit rating inflation and naive investors
Imagine that employers determine the quality of job applicants by looking at their GPA (grade point average). Then obviously, colleges would want to give good grades to their students to give them better chances on the job market. To attract tuition paying students, colleges promise good grades. This scheme will work as look as there are some naive employers that do not see that they are getting fooled by grade inflation.
Patrick Bolton, Xavier Freixas and Joel Shapiro argue that this is exactly what happened with the credit rating agencies, which are financed by the very institutions they are rating. And the latter shop around for the better ratings. As long as there are naive investors willing to believe whatever the credit rating agencies say, the rating inflation will continue. The authors show with a model that the optimal policy response is to force disclosure of all ratings. One would not have needed a formal model to realize that. More interesting is that they show that a monopoly can in fact lead to better outcomes, for once, because it does not lead to rating inflation. Monopolies bring other inefficiencies, however, and we are already advocating the public provision of ratings...
Patrick Bolton, Xavier Freixas and Joel Shapiro argue that this is exactly what happened with the credit rating agencies, which are financed by the very institutions they are rating. And the latter shop around for the better ratings. As long as there are naive investors willing to believe whatever the credit rating agencies say, the rating inflation will continue. The authors show with a model that the optimal policy response is to force disclosure of all ratings. One would not have needed a formal model to realize that. More interesting is that they show that a monopoly can in fact lead to better outcomes, for once, because it does not lead to rating inflation. Monopolies bring other inefficiencies, however, and we are already advocating the public provision of ratings...
Monday, March 2, 2009
Do new drugs reduce medical costs?
There is good evidence, foremost by Eric (corrected: Frank) Lichtenberg, that the introduction of new drugs improves health outcomes. But at the same time, there is a perception that new drugs increase health care costs, and maybe so more than it improves lives.
Rexford Santerre dismisses this idea showing that new drugs even reduce medical costs, primarily by making medical procedures less necessary. The empirical analysis is performed using aggregate data by health category, by regressing the change in expenditures on the previous year's change, the change in income and the number of new drugs. I find it heroic to make claims on causation based on such a "model". All you have is a correlation after controlling for income. If you want to say anything about causation, write down a proper model with testable hypotheses, and test those, not some random equation.
Another point where I think this paper misses the mark is in the presumption that drug price controls would be bad. The pharmaceutical industry enjoys some of the highest returns thanks to the protection given by patents. These firms need to be regulated for that very reason. In fact, it would be better to drop the patenting system in the first place: this would increase the competition to be ahead of competitors, instead of hampering progress with strategic patenting. Also, drug prices would be much lower.
Rexford Santerre dismisses this idea showing that new drugs even reduce medical costs, primarily by making medical procedures less necessary. The empirical analysis is performed using aggregate data by health category, by regressing the change in expenditures on the previous year's change, the change in income and the number of new drugs. I find it heroic to make claims on causation based on such a "model". All you have is a correlation after controlling for income. If you want to say anything about causation, write down a proper model with testable hypotheses, and test those, not some random equation.
Another point where I think this paper misses the mark is in the presumption that drug price controls would be bad. The pharmaceutical industry enjoys some of the highest returns thanks to the protection given by patents. These firms need to be regulated for that very reason. In fact, it would be better to drop the patenting system in the first place: this would increase the competition to be ahead of competitors, instead of hampering progress with strategic patenting. Also, drug prices would be much lower.
Tuesday, February 10, 2009
Patents and copyrights are an abomination
Over the past few days, I finally came around reading Michele Boldrin and David Levine's Against Intellectual Monopoly. I had read bits and pieces from the on-line version (still available) and followed their blog (see my blogroll in the sidebar), but reading it from cover to cover makes their case more convincing.
Essentially, the book challenges the conventional view that temporary monopolies like patents and copyrights are necessary for innovation. This is the mantra you hear everywhere: if there weren't patents on drugs, the pharmaceutical companies would never be able to recoup their investment in research, their stratospheric returns on investment notwithstanding. Or that without copyright, artists cannot make a living.
Boldrin and Levine show plenty of examples that demonstrate that it is possible to make an absolutely decent living without monopoly protection. For example, the early US book industry did not have copyright protection, yet publishers and authors were make more profits than in Britain, where protection pushed prices up and print runs down. US printers, however, flooded the market with cheap books and thus contributed to the increase in literacy.
This brings me to the fact that monopoly is rarely good for social welfare. The book goes through numerous instances where patents actually inhibit progress by preventing innovations based on a current patent. Also, they have been many example where an industry expanded greatly while it was free from patents, but once some big players started feeling threatened by new innovators, they pushed Congress to extend the coverage of patent laws, and innovation and expansion comes to a standstill.
This is a great book. I bought a copy, but you did not need to, as it is not copyrighted and available for free download. But I guess I contributed to demonstrate that you can make a buck without copyright, and the authors deserve to be rewarded.
Essentially, the book challenges the conventional view that temporary monopolies like patents and copyrights are necessary for innovation. This is the mantra you hear everywhere: if there weren't patents on drugs, the pharmaceutical companies would never be able to recoup their investment in research, their stratospheric returns on investment notwithstanding. Or that without copyright, artists cannot make a living.
Boldrin and Levine show plenty of examples that demonstrate that it is possible to make an absolutely decent living without monopoly protection. For example, the early US book industry did not have copyright protection, yet publishers and authors were make more profits than in Britain, where protection pushed prices up and print runs down. US printers, however, flooded the market with cheap books and thus contributed to the increase in literacy.
This brings me to the fact that monopoly is rarely good for social welfare. The book goes through numerous instances where patents actually inhibit progress by preventing innovations based on a current patent. Also, they have been many example where an industry expanded greatly while it was free from patents, but once some big players started feeling threatened by new innovators, they pushed Congress to extend the coverage of patent laws, and innovation and expansion comes to a standstill.
This is a great book. I bought a copy, but you did not need to, as it is not copyrighted and available for free download. But I guess I contributed to demonstrate that you can make a buck without copyright, and the authors deserve to be rewarded.
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