Publications

Commodities markets date to the trading of livestock and the use of rare, standardized items such seashells as commodity money by the ancient Sumerians.  Since the markets' very origins, traders have sought to standardize wares in order to increase market liquidity.  However, investing in commodities has proved challenging to the average investor.  Physical commodities often require costly storage, and most investors cannot manage inventories.

The futures market appears to assuage these problems, but suffers from limitations of its own. Indeed, every futures contract eventually expires, and an investor who fails to sell his in time must take delivery of the physical commodity.  Buying futures with far-out expirations appears to be a solution, but the markets get progressively more illiquid as one wanders further from the near expiration months.  Thus, one way or the other, one faces either illiquidity costs  or rollover costs such as time spent trading, commissions, and bid/ask spreads.  In addition,  investing in futures differs significantly from investing in physical commodities, and complications may arise from many directions.

Faced with a clear investor demand for easy access to commodities exposure and so many difficulties with the pre-existing system, 21st century innovators started seeking solutions.  Financial instiutions have created Exchange Traded Funds (ETFs) for many commodities. But how have these financial instruments fared?

Elhauge (2009)1 provides a wide-ranging article that is impressive both in its clarity and its holistic attack on the practice of bundling and tying. In this commentary, I will focus my attention on one aspect of his presentation, namely the effect of price discrimination via metering and tying on consumer welfare and total welfare. Elhauge makes the claim that we should not suppose that the total welfare effects of price discrimination are positive. Even if they are, he suggests that this perspective is too narrow; a price-discriminating monopolist will make more money and so may incur greater ex ante costs to secure its market position. And if total welfare still rises after taking these costs into account, Elhauge makes the further argument that antitrust is and should be focused on consumer welfare, not total welfare. In that domain, the presumption should be that price discrimina- tion lowers consumer welfare. The first claim that (what Elhuage calls ex post) total welfare goes down may be surprising since it runs counter to the intuition that comes from first-degree or perfect price discrimination. Perfect price discrimination is typically thought to achieve the efficient outcome and therefore it raises total welfare. As I discuss below, I think that perspective is too simplistic, as it ignores the real costs asso- ciated with implementing a price discrimination system. But, putting that issue aside, it is easy to see why there is a presumption that imperfect price discrimina- tion moves total welfare in the same direction as perfect price discrimination. Elhauge argues that this intuition is unfounded.