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The Consumer Welfare Standard Debated at the Senate: Consensus, After All?

· December 14, 2017

Yesterday was an interesting day in the history of U.S. antitrust.  

Five expert witnesses – Prof. Carl Shapiro, Dr. Diana Moss, Prof. Joshua D. Wright, Prof. Tad Lipsky & Barry Lynn – representing the entire political spectrum testified at the Senate regarding the consumer welfare standard. And, it seems that the majority of the witnesses (left and right) with a single exception agreed upon the fact that the consumer welfare standard is the right antitrust analytical standard.

The takeaway of yesterday’s hearing?

Alternatives to the consumer welfare standard are difficult to reconcile with sound antitrust enforcement free of political interference and corporate capture. Hence, because the consumer welfare standard is widely approved, we can move beyond this discussion. As rightly put by Ranking Member Klobuchar, “we don’t need to move away from the framework of the consumer welfare standard.”

Below we summarize the testimony of the five witnesses.

Prof. Carl Shapiro: He opines that the proper goal of antitrust law should be to promote competition; and to this end guard against cartels, regulate mergers and check exclusionary conduct by dominant firms. He goes to bat for the consumer welfare standard and suggests that no workable alternative has been found yet. In order to address the antitrust concerns of the day, he advocates for: (i) a more robust merger control regime which is based on sound legal rules and economic analysis; (ii) close scrutiny of the big firms of the day to check any unilateral conduct that harms customers or affects the competitive process; and (iii) employment of appropriate non-antitrust policy tools to address political concerns such as growing political clout of large corporations or campaign finance issues, etc.

Dr. Diana Moss: While recognizing the different economic and social problems facing us today, she argues that the pure consumer welfare model with its emphasis on lower prices is by itself distributive in nature and that flipping the standard to a more public service oriented standard will present significant administrative and technical issues, which cannot be in any manner understated. She advocates invoking other policy tools such as labor laws, tax laws, etc. to address the non-antitrust public policy concerns. While recognizing that there has been a decline in antitrust enforcement, in her testimony, she establishes empirically that the pure consumer welfare standard still is the best available tool for assessing harm.

Prof. Joshua D. Wright: He advocates for retaining the consumer welfare standard as a key tool in the antitrust armory on account of the following reasons: (i) Given that the consumer welfare standard involves number crunching and economic analysis, it brings discipline, clarity and precision to an area of law that can easily become subjective and therefore unwieldy; thus strengthening rule of law. It also gives room to accommodate newer market players and models within its framework. (ii) No other model or standard has been proven to be superior to the consumer welfare standard in the econometric sense. Other contending models rely on theoretical gains and other benefits to stack up against the concrete gains demonstrated by the consumer welfare model. (iii) Setting aside the consumer welfare model would imply increasing the discretion at the hand of government authorities, which is not a desirable outcome given economic and political realities of the day. (iv) The consumer welfare standard is a well-established, well-functioning model, overhaul of which would entail significant costs and unwarranted disruption and maybe followed, in most likelihood, by an unworthy heir.

Prof. Tad Lipsky: He endorses the consumer welfare standard “maximizing the long-run economic welfare of our society” and focuses on preserving the competitive process. Standard as the ultimate policy objective as distinct from the objective of consumer welfare maximization. He relies on the text of Sherman Act that demands “preservation of the competitive process”. He suggests that matters relating to new technologies should be assessed on the touchstone of the long term effect on overall productivity. He dismisses the criticism of the consumer welfare standard that it is concerned only with short-term price effects. Separately, he also cautions against attempting to mix antitrust objectives with political objectives such as full employment, redistribution of wealth, or preferences for particular regions, sectors or other interest groups, as a counterproductive and ill-advised move.

Barry Lynn: He traces the development of antitrust law from the founding days of America to where it is at today. He notes that the American antitrust regime, in its origins, treated the networks industry, manufacturing and remaining sectors of the economy differently. Given the tendency of network industries to concentrate towards the core, or towards becoming a natural monopoly, in other words, it was thought appropriate to advocate for their public holding and subject them to anti-monopoly rules. The early antitrust narrative was imbued with democratic ideals for the first few decades. Fast forward to today and he alleges high concentration across industries and conspicuous wealth inequality. He highlights that America has a monopoly problem that is aggravated by the tech behemoths of the day. He argues for abandoning the consumer welfare standard as it was a politically motivated tool geared towards exclusion of small businesses and the will of American people to regulate monopolies. He instead advocates in favor of making markets competitive that will automatically solve for other market issues and calls for the end of promoting monopolies under the garb of promoting efficiencies/consumer welfare.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.