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The Politics of Price Making: Why LPE Needs to Engage with Market Design


William Boyd is Professor of Law at UCLA School of Law and Professor at UCLA’s Institute of the Environment and Sustainability.

The following draws on a recent article: Ways of Price Making and the Challenge of Market Governance in U.S. Energy Law, 105 Minn. L. Rev. 739 (2020). It is also, retroactively, part of our Methods of LPE symposium.

Last October, the 2020 Nobel Prize in Economics was awarded to Robert Wilson and Paul Milgrom “for improvements to auction theory and inventions of new auction formats.” As pioneers in the field of “mechanism design”, Milgrom and Wilson have been at the forefront of a fundamental shift in economics over the last three decades to a more self-conscious form of intervention dedicated to the design of new markets and new ways of price making.

Drawing on Hayek’s epistemic conception of the price system, mechanism design seeks to develop new “market architectures” that format competition and allow stable markets to emerge.  Together with parallel work in experimental economics, the insights generated from this work have obliterated the idea of a single, natural market format with an undefined price mechanism operating at its center and showed that the behavioralist turn in economics over the last several decades is, as Philip Mirowski and Edward Nik-Khah argue, a sideshow to the far more central work of designing rules and institutions that can cultivate and channel behavior in ways that “promote competition” and allow the Hayekian process of “learning” and “discovery” to proceed.

By now, the list of designer markets that testify to the success of this approach is long and growing. From spectrum to medical residencies to electricity, economists and others have used insights from auction theory to design new markets (or, more accurately, new market-like entities) that, as Alvin Roth notes, “solve problems that existing marketplaces haven’t been able to solve naturally.”

As foot soldiers of neoliberalism, these economist-engineers have been down in the trenches providing performance enhancements for markets in order to solve coordination problems previously committed to bureaucratic decision-making. In doing so, they have opened up whole new worlds of possibilities, providing a powerful set of tools to give effect to the broader goals of deregulation. By seeking to uncover “the mysterious process through which markets find price,” as Charles Plott once put it, such work purports to design and engineer “a system of institutions” that will “mirror” the behavioral features of competitive markets.

But is it really this easy?  Do we really understand what it takes to build a competitive market and should we trust these economists when they tell us how it all works? 

One reason for skepticism is that many of these pioneers have developed lucrative consulting practices in advising governments and large companies on the pros and cons of different market formats. For his part, Wilson was intimately involved in the design of new wholesale electricity markets and, together with Paul Milgrom, played a key role in designing the FCC auctions for spectrum. And both Wilson and Milgrom have continued to advise governments on the design of new markets and big corporations on bidding strategies in these markets, all for an ample fee.

If you believe that newly constructed markets can be kept pure—encased in a set of rules and institutions that would keep politics at bay—then there is nothing suspicious here. A properly designed auction does not reward manipulation or strategy or incumbents: it simply allocates goods to the bidders that most value them. But if you believe that price making is never neutral, that markets cannot be designed to optimize some pre-political set of criteria, Wilson’s and Milgrom’s business model begins to look more suspicious.

Put another way, once we recognize (yet again) that price making cannot be understood in neutral, functionalist terms, efforts to design new markets become impossible to separate from politics and political economy. Viewed in this way, prices are not simply signals or pieces of information that emerge from markets, but also objects of struggle—an insight that one can find in Max Weber’s understanding of markets and prices, in Joan Robinson’s vigorous mid-century critique of mainstream economics, as well as in the work of institutional economists and legal realists, such as John Commons and Robert Lee Hale who viewed prices and price relationships in the context of a broader economy of mutual coercion structured by shifting sets of background entitlements.  As Hale put it, “prices and price relationships are decisive factors in modern economic life.”  They “account directly for the economic inequalities which we observe between different classes in modern society.” 

What united these alternative approaches to prices and price making was the recognition that politics and institutions determine the ways in which markets take shape and prices emerge. As articulated by Walton Hamilton, the goal was to develop an understanding of “the economic order” that would explain “why some of us are better off than others.”  “Such an explanation,” he continued, “cannot properly be answered in formulas explaining the processes through which prices emerge in a market…. It cannot stop short of a study of the conventions, customs, habits of thinking, and modes of doing which make up the scheme of arrangements which we call ‘the economic order’.”

One thing that is different in today’s economy is that a large part of the action with respect to price making has shifted from firms’ internal strategies to the specific instruments and practices that make prices within newly designed markets. While e-commerce and other platforms operated by large firms tend to blur these boundaries, the move from pricing strategies to the techniques of price making marks an important underlying shift that merits renewed attention from legal scholars interested in a more critical investigation of prices and price making.

To be sure, the role of rules, devices, and techniques in constituting markets as well as the applied work of economists in building markets have not gone unnoticed by a new generation of social scientists focused on the institutional and technical infrastructures of price making in particular markets. Rather than viewing prices as facts that emerge out of the unconditioned interaction of supply and demand, these scholars seek to investigate the specific rules, techniques, and practices that make prices and in turn shape and format the ways in which supply and demand are allowed to interact. By shaping the “space of tradability,” they argue, different market designs, employing different pricing technologies, allow for different interactions between buyers and sellers.

Competition, in this view, is not some underlying force waiting to be unleashed, much less an end-state reflected in market structure, but a process that can be shaped and channeled in specific ways by different market formats and different ways of price making. Seen from this perspective, the problem of price formation cannot be reduced to a technical problem of ensuring that the structure of any particular market is sufficiently “competitive” or that the conduct of market participants stays within the bounds of acceptable behavior. It is also a problem that requires close attention to the infrastructure and instrumentalities of price making and the various rules and institutions that determine how they work.

To say this is not simply to recognize (again) that our standard conception of markets is incomplete and overly abstract. Nor is it just another way of repackaging the legal realist insight that all markets are in fact legal entities—that there is no such thing as a “free market.”  Recent work traveling under the label of law and political economy, the resurgence of interest in Brandeis, and growing concerns about economic concentration in the platform economy have all brought the question of markets back into a broader conversation among legal scholars. All of this is a welcome and important development, but we make a mistake if we allow that conversation to operate at the same level of abstraction and generality that has framed the debate about regulation and markets for much of the last half century. When we talk about “the market” or “the price system,” as we all do, we need to be careful to recognize how much discursive work these concepts do and how they often obscure the actual concrete practices, techniques, and devices that constitute markets. Focusing on these concrete ways of price making, together with the question of who gets to influence and control how they are designed and deployed, shows how questions of market power and anti-competitive conduct are intimately connected with the microstructures of price formation.

One normative implication is especially obvious: by determining the manner in which competition will proceed, the different ways of price making operating at the heart of various markets and platforms across the economy—from natural gas and electricity to Uber and Amazon—are, to use the old words, “clothed with a public interest.” All of which, of course, raises the question of who gets to determine the public interest and what sorts of regulatory responses are appropriate— questions that cannot be answered without getting into matters of politics and institutional competence and questions that cannot be resolved solely by focusing on the break-up of dominant firms. But these are the questions that have animated economic regulation since its inception, and it is a mistake to view the move to markets as somehow dispensing with them. In seeking to answer them, there is no alternative to getting down in the trenches with the economist-engineers who are designing new markets and, in the process, deeply influencing our current economic order.