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Antitrust in 60 Seconds: Is the Consumer Welfare Standard Appropriate?

· November 17, 2017

The 60-Second Read:

Today’s debate over the need to reboot antitrust enforcement centers on the appropriateness of the consumer welfare standard that guides U.S. antitrust enforcement.  Although the modern U.S. Supreme Court consistently enforces the consumer welfare standard as the guiding principle for antitrust analysis, some observers do not necessarily see the consumer welfare standard as the solution for antitrust enforcement, and claim that other public interest considerations should factor into the antitrust analysis.A sound understanding of the evolution of the U.S. competition system reveals that it is hard to reconcile economic analysis with public interest considerations other than consumer welfare within the antitrust framework.  On the contrary, factoring other public interest concerns into the antitrust analysis could result in inconsistent application of competition norms and of political intervention in the decision-making process.

What is the consumer welfare standard?

The consumer welfare standard is the economic model for decision-making employed by antitrust enforcers to determine whether a business conduct deserves antitrust restraint or not.  It focuses solely on the surplus gains for consumers and disregards the efficiency gains for producers.  Thus, a competition system guided by the consumer welfare standard, has as a goal the maximization of consumers’ benefits.

With the adoption of the consumer welfare standard, other public interest considerations — such as unemployment, discrimination or protection of small businesses — do not factor into the antitrust analysis.

The benefits of enforcing antitrust norms under the consumer welfare standard are clear.  First, it enhances predictability and legal certainty since businesses have clear guidance about which test their practices will be subject to.  The chaotic interpretation of antitrust norms that would look into apples and oranges under a single test (i.e. racial discrimination vs. impact on prices) undermine due process rights.

Second, since the consumer welfare standard is an economic analysis-based test — i.e. non-economic considerations are not factored into this pro-consumer test — enforcement coherence is preserved.   The impossibility of weighing non-economic factors against economic considerations without risking discretionary results and injustice disposed the evolution towards adopting the consumer welfare standard.

And, finally, under the consumer welfare test, tradeoffs between various forms of competition and their effects are considered.  As such, the evolution of economic thinking has allowed the courts to decide antitrust cases with a very high degree of accuracy in order to avoid harming consumers.  Ultimately, the consumer welfare standard has enabled antitrust enforcement to put consumers first.

Does the U.S. Supreme Court recognize the Consumer Welfare Standard?

Yes and, in fact, to understand why this maximization of consumer welfare is the appropriate approach to antitrust enforcement, one must look at the evolution of the U.S. Supreme Court cases.

In 1890, the United States adopted its first antitrust laws that had three major goals: (i) break up trusts and conglomerates; (ii) preserve small firms; and (iii) foster economic efficiency in the form of lowering prices for consumers, i.e., consumer welfare.  An analysis of case law between 1890 and 1930 shows consistent pursuit of these goals, and especially in cases pertaining to vertical restraints and merger control.  Illustratively, the Supreme Court ruled in Doctor Miles that vertical price restraints imposing minimum prices were per se unlawful and in Alcoa that the size of the company was a per se antitrust concern.

It wasn’t until 1973 that the U.S. competition system began to increasingly accord primacy to consumer welfare.  That said, other goals, such as the protection of small and medium-sized enterprises (SMEs), continued to be concurrently pursued.  For example, in 1974, the merger between General Dynamics Corp. and Material Services Corp. was cleared largely because the Supreme Court concluded that the concentration brought about economic efficiencies.  In Sylvania, the U.S. Supreme Court overruled the Schwinn decision and ruled that non-price vertical restraints should be judged under the rule of reason.  The Supreme Court concluded that location clauses promoted interbrand competition by allowing the manufacturer to achieve certain efficiencies in the distribution of its products.

As the U.S. competition system evolved, consumer welfare became the primary goal of competition enforcement while other goals are addressed by other governmental authorities or divisions. The U.S. Supreme Court, inspired by Bork, recognized that  “Congress designed the Sherman Act as a consumer welfare prescription.”

Why leave out other public interest considerations?

In 2003 the OECD recognized that the inclusion of conflicting objectives, including public interest considerations beyond consumer welfare, would undermine the public good.  It stated that rooting antitrust in multiple competing policy rationales:

“increases the risks of conflicts and inconsistent application of competition policy.  The interests of different stakeholders may severely constrain the independence of competition policy authorities, lead to political intervention and in a relatively minor way, compromise and, adversely affect one of the major benefits of the competitive process namely, economic efficiency.”

In the United States, the increasing uncertainty created by antitrust enforcement actions and decisions empowered the voices in favor of limiting and eventually eliminating the political dimension to the enforcement of antitrust norms.  In fact, some argue that the exclusion of political factors from antitrust enforcement restored intellectual coherence to the antitrust framework.

What do other competition systems do?

In the rest of the world, including the European Union, most competition systems were put in place in the post-war periods.  As such, the pursuit of pluralistic goals guided by public interest concerns through the competition system was a method by which these toddling democracies sought to boost and defend their nascent democratic process.  That being said, competition systems have evolved, and mature ones have narrowed the antitrust analysis to focus on consumer welfare.
In this context, it is noteworthy that the UN and OECD have separately concluded that many competition systems pursue consumer welfare as the primary competition goal.  In 1995, UNCTAD concluded that “There has in fact been an increasing convergence in the provisions or the application of competition laws over the laws two decades.  Competition systems in many countries are now placing relatively greater emphasis upon the protection of competition, as well as upon efficiency and competitiveness criteria, rather than upon other public interest goals”.

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.