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On the Choice of Welfare Standards in Competition Law

21 Pages Posted: 27 Jun 2011 Last revised: 2 Jul 2011

Louis Kaplow

Harvard Law School; National Bureau of Economic Research (NBER)

Date Written: May 1, 2011

Abstract

This article addresses two issues relating to the choice between a consumer welfare and total welfare standard for competition law. First, it considers whether distributive considerations may favor a consumer welfare standard, or at least some underweighting of producer surplus in a total welfare assessment. The argument that focusing on consumer welfare is poorly targeted to general redistributive objectives is correct but not decisive since the distributive incidences of consumer and producer surplus differ significantly. By contrast, the argument that it is more efficient to rely exclusively on the tax and transfer system to achieve general distributive objectives is normatively powerful. Second, the relevance of the preexisting level of price elevation (relative to a competitive, marginal cost benchmark) is found to be quite different under the two standards. For a given additional price increase caused by anticompetitive activity, the marginal sacrifice of consumer welfare is greatest when there is no preexisting elevation and gradually falls as the initial elevation grows. By contrast, the marginal sacrifice of total welfare (deadweight loss) is negligible when there is no preexisting elevation and rises as the initial elevation grows. This difference has implications for competition policy, most directly for that toward horizontal mergers and price-fixing, along with practices that facilitate coordinated price elevation.

JEL Classification: D40, D63, H23, K21, L40

Suggested Citation

Kaplow, Louis, On the Choice of Welfare Standards in Competition Law (May 1, 2011). Harvard Law and Economics Discussion Paper No. 693. Available at SSRN: https://ssrn.com/abstract=1873432 or http://dx.doi.org/10.2139/ssrn.1873432

Louis Kaplow (Contact Author)

Harvard Law School ( email )

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National Bureau of Economic Research (NBER)

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