Relevant and even prescient commentary on news, politics and the economy.

Copyrights and free market pricing

The New York Times points us to one anomaly in the idea of “free markets”. Dean Baker (and many others) of course has championed taking a more critical look at this set of issues for years.  But most readers know that “free market” is an election slogan and a metaphorical  apocryphal story line rather than  something real for guiding either private companies or governments policies and rules.  On the other hand, that is the language used and something I hear from people in a non-critical way.

Copyright and patent rights need strong government to enforce the rules, and distort “pricing” mechanisms.   Yet it does not seem to be enough to cajole people into making a list of possible exceptions and then applying the rule of  “free”…if open to exception, where does it stop?  Often the question puts people to sleep, but is part of the bread and butter of real multinational companies.  And then enforcement falls to whom?  Who votes based on such details?  Trade policy hasn’t had traction for years.  

…can sell their copyrighted works abroad at prices different from what they charge in the American market and rely on copyright law to help maintain the separate pricing without having importers profit from the difference. The justices should rule that the Copyright Act and a revision to it that Congress made in 1976 prohibit such resales…..

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A federal trial court ordered Mr. Kirtsaeng to pay $600,000 in damages for infringing on the Wiley copyright by reselling more than 600 copies of eight different books that he bought in Thailand. Mr. Kirtsaeng contends that the law allows him to resell the textbooks because he, family members and friends bought them legally and a principle called the first-sale doctrine, announced by the Supreme Court in a 1908 ruling and codified into law by Congress, says copyright owners cannot control the distribution and pricing of works, like books, after the initial sale.

But the Copyright Act prohibits anyone from importing into the United States copyrighted works without the copyright holder’s approval. That provision would be seriously limited if copies of a work made abroad could be resold by importers in this country without constraint.

This case requires a difficult interpretation of the Copyright Act, but that is made easier by understanding the intent of Congress when it revised the law in 1976. It did so to broaden protection against unauthorized imports of copyrighted works by so-called gray-market sellers, and to make easier the kind of market segmentation by geography and price that Mr. Kirtsaeng’s resales subverted. With segmentation, book publishers can offer cheaper editions of their works in less-developed countries, without concern that those copies will be resold in the United States and unfairly undercut sales here.

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Free market mechanics and healthcare…

by Michael Halasey

Free market mechanics and healthcare…

Now, I hear something all the time in my work in the health policy realm, and that is that the “free market” could lower prices.

I even recently had someone approach me after I mentioned that the PPACA had resulted in an extra million people aged 18-25 having health coverage this year. His statement? “That’s exactly the wrong direction, we need to have less people, far less people with health insurance.” I asked him his reasoning…of course, already knowing what his response would be. He reasoned that it would force people to compare prices, shop around, and would dramatically lower prices through the mythical, magical “free market”….

Of course, this ignores some rather real problems with this line of thinking. For starters, healthcare does not behave like normal commodities for a variety of reasons.

To start with, healthcare does not lend itself to price comparisons, and comparison shopping. The high costs are often related to trauma and emergency care/hospitalizations. It is simply not practical to ask which hospital in the area offers the best rates on cardiac catheterizations while you are being rushed to the hospital in the midst of an MI.

This impracticality also lends itself to probably the biggest problem. That is irrational behavior. Any of us who have taken even undergraduate economics remember the discussions of rational actors, and how prices were sensitive to rational behavior. Much of health care involves emotionally charged, heated, and oftentimes difficult decisions. Most patients and families can hardly be expected to act in a rational fashion about receiving the news of a terrible diagnosis such as cancer. Real world experience reveals this to be true. I wish I could count how many times I have presented various treatment options to patients, only to hear “Do whatever it takes”.

Hayek once wrote that spontaneous order was a result of market economies, and that it was “a more efficient allocation of societal resources than any design could achieve.” This of course, assumes rational behavior, and assumes that a market can be symmetric.

Because of this behavior, and because people view healthcare not as optional, but as a necessity, price elasticity scores generally trend around 0 or -1. This indicates an inelastic market.

Of course, the next time I have a 21 year old kid who comes in after a farm accident without insurance, and is badly injured, I’ll make sure to tell him that perhaps he should have shopped around.

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Markets and Merchants’ Guilds: Which is the Chicken? Which the Egg?

This post was provoked by a moment of frustrated pique, another in a series of ‘shakes cane at clouds’ moments as this classic New Deal Liberal is driven to craziness by otherwise sensible social liberals who still fetishize markets. And yes I am pointing fingers right at Erza K, Matt Y and Kevin D. But in this case directly at Kevin and his piece today that should raise hackles at the very sight of its title: A Conservative Medicare Plan Liberals Could Love Here is the core proposal:

What to do? Via Reihan Salam, Yuval Levin proposes a revised version of Ryan’s plan that’s based on a genuine conviction that market forces can work. Each year, Medicare would define a minimum benefit level, and then providers in each Medicare region (there are four) would bid for business:

The level of the premium-support payment in each region for that year would be set at, for instance, the level of the second-lowest of the bids. Seniors would then be able to apply that amount toward the purchase of any of the plans on offer in their area. Thus, in each region, there would be at least one option that would cost less than the Medicare benefit, and seniors choosing that option would get the difference back as cash in their pockets; there would be at least one plan that cost the same as the benefit, so that seniors could obtain it with only the same out-of-pocket costs they have today; and there would be other plans that cost more (perhaps because they offered more, or because they failed to find ways to drive greater efficiency in their networks of doctors and hospitals) and for which seniors would pay an additional premium if they chose.

….In such a system, the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula…. If market forces did drive costs down, as conservative health care experts expect, the reform would save the government an enormous amount of money….If market forces did not drive costs down, then we would have to find another way to address our entitlement costs. We would be back where we started, which is where Democrats want to end up anyway. Whether the reform succeeded or failed, seniors would have a guaranteed benefit and essentially no added financial risk.

Generally speaking, there’s no reason this idea should offend liberals.

Well as I said over there maybe just one tiny reason. I call it “the whole effing history of market relations” reason. Rant continues below.

My question is inherent in the post title. Historically did free markets precede artificial market barriers and price fixing? And in the European context the answer is clearly no. As the historical record dawns in the West long range trade is firmly in the hand of the Phoenicians and their colony in North Africa Carthage. Firmly because enforced by swords and fighting ships. Which in turn means harnessing state military power to enforce market barriers. And this model never changed over the three plus millennia to follow. Whether you take the Athenian Confederacy, the Roman Empire, medieval merchants guilds, the English Staple, the Hanseatic League, the East India Company in each case you have a cartel backed by or buying off state power to control entry to markets. And with enforced market barriers you have price fixing in more or less rigid form, competition on price always bounded.

Which doesn’t mean no competition at all, there will almost always be some level of internal price variation as well as external competition from smugglers and itinerent travelling merchants but the former were often treated as simple criminals to be punished by state power while the latter mostly relegated to openly marginalized groups, in Europe historically the Jews, the Roma/Gypsies, the Irish Travellers alternately grudgingly tolerated for specialized skils like tinkering or money lending or brutally suppressed, but never or very rarely simply accepted within the literal or figurative walls that protected major commodity markets.

Real economic historians please chime in with counter-examples, clarification, or simple vilification, AB is a blog, we exist to start conversations. But in the case highlighted by Drum the gaping flaw is obvious. All it takes to game this system is for the cartel of health insurers to decide who is going to be the number two in any given market, who is tasked to undercut him marginally and so be the ‘low-cost’ provider, while anyone else is free to adopt or try to leverage off the price level set by no 2. Which price doesn’t have to have any particular relation to cost of providing services or marginal productivity or any of the other fetishes of free-market absolutists. Instead any time you have a commodity based production commodity whether that be rice, wool, or simple labor supply, where withholding that commodity is not an option in real terms, not when the producers are at or near subsistence levels, the price of wholesale and retail is set by the market controllers. Because in the case of these basic commodities neither supply nor demand is infinitely or even partially elastic, the farmer needs to sell his crop, the village or urban worker needs to eat, and in between is the merchant’s guild backed by state power as necessary. And certainly health care for seniors falls into this must have category, and doubly so if the actual funding is mostly external to the end consumer.

It has always been such since Egyptian faience glass was exchanged for Baltic amber or either for tin from the Pretannic Isles (the Greek name for Britain). Historically there have always been middle men and in all cases in which I am familiar those middlemen had some sort of internal coordination on both pricing and in keeping competing cartels out of their market by all means necessary.

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