Market Power, Not Consumer Welfare: A Return to the Foundations of Merger Law

37 Pages Posted: 24 Feb 2023 Last revised: 30 May 2023

See all articles by Eric A. Posner

Eric A. Posner

University of Chicago - Law School

Date Written: February 18, 2023

Abstract

Section 7 of the Clayton Act prohibits mergers and acquisitions where “the effect may be substantially to lessen competition, or to tend to create a monopoly.” Starting in the 1960s, academics reinterpreted the law as a cost-benefit test under which a merger should be blocked if it reduces total surplus. Over the ensuing decades, the DOJ and FTC adopted a modified version of this standard that approximately prohibited mergers that increase price (or reduce consumer surplus rather than total surplus). While the courts have not fully adopted this new standard, they are on their way. Yet the cost-benefit standard and the price test have no basis in law, and neglect many of the social costs of consolidation. The modern standard, often called the consumer welfare standard, should be abandoned and replaced with a standard that prohibits mergers that increase market power rather than price. The market power standard can be made precise and rigorous in the form of a “margin test.” The margin test is more faithful to the statute and would better reflect the broader social costs of corporate consolidation that motivated the statute than the price test does. An earlier version of this paper was circulated under the title,The Invention of Efficiency as the Standard for Evaluating Mergers under Section 7 of the Clayton Act.

Keywords: mergers

JEL Classification: K21

Suggested Citation

Posner, Eric A., Market Power, Not Consumer Welfare: A Return to the Foundations of Merger Law (February 18, 2023). Available at SSRN: https://ssrn.com/abstract=4364084 or http://dx.doi.org/10.2139/ssrn.4364084

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