Why Economists Should Support Populist Antitrust Goals

Abstract

Antitrust policy can be a powerful tool to tackle important social and economic problems. For decades antitrust enforcement has been shackled by the so-called Consumer Welfare Standard (“CWS”) that has limited the goals considered to be “legitimate.” The CWS limits antitrust goals to those that impact demand in markets, and primarily in output markets. Recently, new voices have come forward to suggest that antitrust policy should address several other important social objectives. Such goals include the traditional antitrust goals that motivated passage of the antitrust statutes, and which were discussed in Pre-Rehnquist Court opinions, including dispersion of economic and political power, and protection of small business. Additionally, it has been suggested that antitrust law should contribute to alleviating inequality, protecting labor when mergers occur or in the presence of monopsony, protect macroeconomic growth and stability when financial entities merge, and possibly contribute to efforts to advance sustainability. While some argue that the CWS is flexible enough to support some or all of these objectives, we disagree.

There are at least five reasons why the CWS is severely limited or defective, preventing it from being an appropriate standard for modern antitrust. First (Section III below), it is a “material welfare” approach derived from Alfred Marshall, meaning an approach that cannot incorporate important issues that affect welfare such as political democracy and sustainability. This is made clear in the writings of Marshall and Pigou, the originators of the theory imported into antitrust by Judge Bork. Second (Section IV), the CWS assumes that the marginal utility of money (or the marginal social welfare with respect to a change in anyone’s surplus) is constant and equal among individuals impacted by anticompetitive practices. As a consequence, the CWS treats as inconsequential transfers of income between groups resulting from alleged restraints or mergers. Third (Section V), CWS is biased in favor of the wealthy, despite Section IV’s findings that CWS is neutral with respect to marginal transfers. Fourth (Section VI), CWS uses an indefensible measure of efficiency. Fifth (Section VII), CWS ignores the input market when analyzing restraints in the output market.

We suggest that there are three questions that must be addressed when considering an antitrust criterion. First: is there credible social science research showing that the policy goals embodied in the criterion result in material increases in human well-being (the basis of economic welfare)? Second: can competition policy substantially advance the criterion? Finally, does the criterion provide a method for dealing with tradeoffs between the goals it embodies, if such tradeoffs are present? The CWS is so seriously limited that it does not even allow consideration of the first requirement. A more general welfare approach certainly can address the first two questions and may hold promise for satisfying the third.

Keywords: antitrust, industrial organization, competition policy, law and economics

JEL Classification: L4, L40, K21