The consumer welfare standard is used in modern antitrust enforcement to assess a merger between two companies. However, its original definition was corrupted in the 1970s and led to insufficient antitrust enforcement.
Bush and Glick’s ProMarket paper on the consumer welfare antitrust principle leads to a question: how could an enforcement theory explicitly embracing consumer welfare become a “concerted and unified push” for protect high producer profits? The answer lies in history and the changing meaning of “consumer welfare”. This term was already used in the progressive era to reflect the increasingly important role of consumers in the economic theory of distribution. John Kenneth Galbraith later used it in a 1954 article on countervailing power and his popular book with this title. He defined it as “any type of economic behavior that lowers the prices of products to the consumer” without reducing the quality.
In the 1960s, even Robert Bork equated consumer welfare with high production, associating it with the antitrust rule of reason in 1966 (“impact on production” as the “primary criterion”) and price maintenance of resale in 1968 (the goal is “the maximum attainable output”). In 1973 Ralph Nader and Mark Green also spoke of conduct that maximizes the output of goods and services as “optimizing the welfare consumers”. In his dissent in 1972 topco In that case, Chief Justice Burger complained that adopting a new per se rule would harm “consumer welfare”. In the 1976 Sylvania decision, which the Supreme Court upheld, the Court of Appeals described the legislative history of the antitrust laws as reflecting an exclusive concern for the welfare of consumers, requiring it to “discourage the restriction of production without impeding the ‘efficiency “.
Prior to Bork’s publication of The Antitrust Paradox in 1978, a thin but consistent line of thought associated antitrust concern for consumer welfare with high commercial output, low prices, and competitive profits. Then Bork read Oliver E. Williamson’s 1968 essay on antitrust and efficiency and changed his mind. The effect has been to decouple the concept of “consumer welfare” from high output and low prices.
Williamson’s model hypothesized a merger or other practice that simultaneously increased a firm’s market power, but also produced “cost savings”. He called his model “naive”. Costs were simply a horizontal line that made no distinction between fixed, variable, or incremental costs. The practice in question produced a triangle of monopolistic “deadweight” losses that harmed consumers, as well as an expanded rectangle of producer profits that reflected cost reductions. Williamson did not specify the source of these cost reductions, although he repeatedly referred to them as “economies of scale”. He concluded that the fusion was effective if the rectangle was larger than the triangle. Moreover, a small gain in efficiency would be enough to compensate for a large increase in prices. Indeed, Williamson concluded that, under common assumptions, a 4% efficiency gain would be sufficient to offset a 20% price increase.
Thus was born the idea that a merger or other practice resulting in a real reduction in production and a significant increase in profits could be legal if it resulted in even modest cost savings. Williamson noted that this was consistent with “general welfare” economic theory, which viewed wealth transfers as a “matter of indifference” and therefore to be ignored. A dollar for a producer was as good as a dollar for the consumer.
Bork adopted this model in The Antitrust Paradox (Chapter 5), but with some differences. Williamson had correctly named the model “wellness trade-off”, reflecting what he was actually doing. Bork called it the “consumer welfare” model. In Bork’s illustration (Paradox, p. 107) company[s] in question reduced production by about half and increased prices by about a third, but also saved money. The actual decrease in production and the increase in prices could be larger or smaller, depending on the market power created or the magnitude of the efficiency gains. Disagreeing with Williamson, Bork argued that efficiencies are “unprovable.” Accordingly, in most cases, the defendants should not have the burden of showing them. It was Bork’s way of approaching a problem with general theories of well-being that require balancing cardinal values – the insurmountable costs of measurement.
Bork’s book was timely, just at the start of the Reagan-era neoliberal revolution in economic policy. The use of “consumer welfare” in antitrust discussions has exploded. During the period 1960-1980, the term appeared in 11 cases and 54 law review articles. During the period 1980-2000 he appeared in 218 cases and 1853 law reviews. It was not a conspiracy, but rather a revolution. Bork’s view allowed dissenters on the Supreme Court to proclaim a “consumer welfare” principle even as they endorsed a horrific increase in drug prices resulting from late generic entry. The majority cited her in support of a practice that caused credit card prices to rise every time it was used.
Most users of the term fail to recognize the distinction between genuine consumer welfare and Bork’s corruption of it. Anecdotally, much of the current opposition to consumer welfare as an antitrust principle seems to come from people who equate it with Bork’s idea and who may not even be aware of the alternatives .
However, not everyone followed suit. Some authors have defended a “true consumer welfare” approach by rejecting Bork’s position. The most notable dissent is that of the 2010 Horizontal Merger Guidelines, §10, which only allows an efficiency claim if there is no reduction in output – i.e. that there is no compromise.
And what about the Williamson/Bork version of the “consumer welfare” principle itself? This was not just naive, but misguided in almost every way. First, the model assumed a market that was competitive before a practice and monopolized afterwards. But most antitrust practices do not create monopolies. For example, a merger of a 30% company and a 10% company is often contestable even if the resulting market share is 40%. To the extent that this merger facilitates collusion, the higher prices appear throughout the market, but any efficiency gains only benefit the merging firms’ 40% of production. As a result, the model underestimates the social cost of monopoly by two and a half times.
Second, the costs of the Williamson/Bork model were a black box. It simply assumed that all inputs were competitive. Any restriction that halves the production of products reduces the demand for labor in proportion, and if this results from a change in an antitrust rule, it could affect the entire economy. If there is market power over labour, this leads to an additional welfare loss that the Williamson/Bork model did not take into account. In any case, the result of the work was completely in line with the neoliberal position, which included the elimination of work as one of its objectives.
A particularly serious flaw in the Williamson/Bork model was its assumption of significant efficiencies that occur even when a practice significantly reduces a firm’s output. When does this happen in the real world? Ronald Coase called this “blackboard economics”, or the idea that if you can draw a picture of something, it must represent economic reality. The most common source of efficiency gains is economies of scale, but these typically accrue at higher output rather than lower output. And what about fixed costs? Because a fixed cost does not change with production, it increases as production decreases. A merger that would halve the production of the parties would result in much higher unit fixed costs. The fixed costs in Bork’s example must have been insignificant. But then what is the source of the monopoly? This does not mean that a merger with such a reduction in production and a simultaneous reduction in unit costs is impossible, but it would be exceptional.
This criticism of Bork’s corruption of the consumer welfare principle does not justify overreacting and thinking that efficiencies are irrelevant. They absolutely are, and the health of the economy depends on competition to achieve them. Here, the best approach to efficiencies is that of the Merger Guidelines, with some modifications for breaches of the rule of reason in general: Firstthe efficiencies must be rigorously proven, at the expense of whoever claims them. Secondit must be shown that they are reasonably necessary to facilitate the impugned restraint. Third, they must be sufficient so that no trade-off in welfare is necessary; that is, they must leave consumers unscathed. If we do that, then we can start calling it a consumer welfare principle.
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