23 Pages Posted: 28 Jun 2011 Last revised: 29 Dec 2013
Date Written: August 3, 2011
The dominant view of antitrust policy in the United States is that it is intended to promote some version of economic welfare. More specifically, 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.
The distribution concern that has dominated debates over United States antitrust policy over the last several decades is whether antitrust should adopt a “consumer welfare” principle rather than a more general neoclassical “total welfare” principle. In The Antitrust Paradox Robert Bork famously argued that antitrust law should adopt what he termed a “consumer welfare” standard for illegality, but then equated this standard with general welfare. “Total welfare” refers to the aggregate value that an economy produces, without regard for way that gains or losses are distributed.
The consumer welfare test is not a balancing test, in the sense that one must attempt to measure efficiency gains and losses and net them out. Under the test, if consumers are harmed (either by reduced output or product quality, or by higher prices resulting from the exercise of market power), then this fact trumps any offsetting gains to producers and, presumably, to others. Theoretically, even a minor injury to consumers outweighs significant efficiency gains. In this sense the consumer welfare test can be easier to administer on a case by case basis than general welfare tests. Even the consumer welfare test can be difficult to administer, however, when a practice impacts different groups of consumers differently. Practices that involve price discrimination, such as variable proportion ties or patent field of use restrictions, typically have this result.
The volume and complexity of the academic debate on the antitrust welfare definition creates an impression of policy significance that is completely belied by the case law, and largely by government enforcement policy. 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, although the schools entertain different assumptions about the robustness of markets and the merits of intervention. Harvard School antitrust economists began to look at total welfare consequences at least as early as the 1930s. The Chicago School has likewise consistently followed a total welfare approach, ignoring distributional concerns and focusing on the extent to which practices are likely to impose welfare losses in the neoclassical sense.
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, I have not been able 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.
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By Mark Lemley
By Mark Lemley