Implementing Antitrust's Welfare Goals
Herbert J. Hovenkamp
University of Iowa - College of Law
January 2, 2013
U Iowa Legal Studies Research Paper No. 12-39
United States antitrust policy is said to promote some version of economic welfare. Antitrust promotes allocative efficiency by ensuring that markets are as competitive as they can practicably be, and that firms do not face unreasonable roadblocks to attaining productive efficiency, which refers to both cost minimization and innovation. One important welfare debate is whether antitrust should adopt a “consumer welfare” principle rather than a more general “total welfare” principle.
The simple version of the consumer welfare test is not a balancing test. If consumers are harmed by reduced output or higher prices resulting from the exercise of market power, then this fact trumps any offsetting gains to producers. In this sense the consumer welfare test is easier to administer on a case by case basis than general welfare tests that may have to trade consumer losses and producer gains against each other.
The volume and complexity of the academic debate on the general welfare vs. consumer welfare question creates an impression of policy significance that is completely belied by the case law. Few if any decisions have turned on the difference. In fact, antitrust policy generally applies both tests in the following sense. First, the economic analysis from the dominant Harvard and Chicago schools of antitrust is consistently concerned with general welfare. Second, however, if the evidence in a particular case indicates that a challenged practice facilitates the exercise of market power, resulting in output that is actually lower and prices that are actually higher, then tribunals uniformly condemn the restraint without regard to offsetting efficiencies. Indeed, one is hard pressed to find a single appellate decision that made a fact finding that a challenged practice resulted in lower market wide output and higher prices, but that also went on to approve the restraint because proven efficiencies exceeded consumer losses. In sum, courts invariably apply a consumer welfare test.
In the paradigm cases that are commonly used as illustrations in this debate, all consumers either gain or lose from a practice. Often things are not that simple. Many practices affect different consumers in different ways, making the computation of net effects very difficult. Among such practices are (1) variable proportion ties; (2) ties that result in interproduct price discrimination; (3) tying and bundled discounts of imperfect complements; (4) vertical restraints and other practices used to facilitate third degree price discrimination; and (5) resale price maintenance which causes nominally higher prices but produces services that are more valuable to some customers than to others.
When a practice causes both consumer harm and consumer benefit but net effects are unknown, producer gains may become more relevant, particularly if they result from significant production efficiencies.
Number of Pages in PDF File: 28
Keywords: antitrust, monopoly, consumer welfare, tying, resale price maintenance, vertical restraints, market power, efficiency
Date posted: September 30, 2012 ; Last revised: January 19, 2014
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