A Consumer Surplus Defense in Merger Control

• Pages: 287-302
• Published date: 01 April 2007
• DOI: https://doi.org/10.1016/S0573-8555(06)82011-0
• Date: 01 April 2007
• Author: Sven-Olof Fridolfsson

CHAPTER 11

A Consumer Surplus Defense in Merger

Control

Sven-Olof Fridolfsson

Research Institute of Industrial Economics, Stockholm, Sweden

E-mail address: sof@industrialeconomics.se

Abstract

A government wanting to promote an efficient allocation of resources as mea-

sured by the total surplus, should strategically delegate to its competition author-

ity a welfare standard with a bias in favor of consumers. A consumer bias means

that some welfare increasing mergers will be blocked. This is optimal, if the

relevant alternative to the merger is another change in market structure that will

even further increase the total surplus. Furthermore, a consumer bias is shown

to enhance welfare even though it blocks some welfare increasing mergers when

the relevant alternative is the status quo.

Keywords: merger control, competition policy, consumer surplus

JEL classifications: L11, L13, L41

11.1. Introduction

The main task of Merger Control is to evaluate mergers in light of their wel-

fare effects on different interest groups and to take a decision based on this

evaluation. This task requires that the Merger Control system specifies the in-

terest groups—consumers, shareholders, workers, competitors, suppliers and so

on—to be included in the evaluation. In case of conflicting interests, the Merger

Control system must also trade-off the different groups’ interests against each

other. The purpose of so-called welfare standards is to clarify how these trade-

offs are made by explicitly stating which interests groups ought to be included

in the evaluation and by assigning specific weights to each group.

The actual welfare standards used in different jurisdictions are characterized

by two particularly striking regularities. First, many welfare standards tend to

be strongly biased in favor of the consumers’ interests. In the US, a merger that

increases market concentration might be challenged unless it is expected to de-

liver such cost-savings that it is also beneficial to consumers (US Horizontal

Merger Guidelines, 1997). In the EU, the EC Merger Regulation (2004) stipu-

lates that concentrations are allowed unless they significantly impede effective

CONTRIBUTIONS TO ECONOMIC ANALYSIS © 2007 ELSEVIER B.V.

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DOI: 10.1016/S0573-8555(06)82011-0

288 S.-O. Fridolfsson

competition. Furthermore, competition is significantly impeded if the concentra-

tion harms consumers’ interests. Thus the world’s two largest economies apply

a pure consumer welfare standard (henceforth referred to as a consumer surplus

standard). Second, if a jurisdiction does not apply a consumer surplus standard,

the producers (i.e. the merging firms and competitors) tend to be the additional

interest group represented in the welfare standards. In Canada, for example, Sec-

tion 96 of the Competition Act directs the Tribunal not to issue an order ...if

it finds that the merger ...is likely to bring about efficiency gains that will be

greater than, and will offset, the effects of any preventionor lessening of compe-

tition .... The 1991 Canadian Merger Enforcement Guidelines interprets these

wordings as a welfare standard giving the same weight to consumers andproduc-

ers (henceforth referred to as a total surplus standard). However, in Hillsdown

this interpretation was questioned by the court; a reasonable reinterpretation of

the court’s decision suggests a standard, which in effect gives a larger weight to

consumers than to producers (see McFetridge, 1998).

The two above regularities raises at least twoquestions. What is the motive be-

hind the strong focus on consumers’ interests and why are the interests of some

groups, for example workers, so unlikely to be taken into account? When faced

with policy objectives in favor of a specific interest group, a natural reaction is

to look after an explanation based on distributional considerations. A tempting

answer to the first question is therefore that the focus on consumers’ interests is

driven by a concern for the distribution of wealth, combined with a belief that

consumers are, on average, less wealthy than firm owners. This view, however,

has been criticized on at least two grounds (see, e.g., Williamson, 1968). First,

it has been questioned whether consumers are poor; for sure, many luxurious

goods are primarily purchased by rich consumers. Second, even if the focus on

consumers’ interests has some distributional effects, there are other instruments

such as taxes and transfers that seem more appropriate for affecting distribu-

tion. On these grounds, many economists argue that competition policy ought to

promote allocative efficiency only (see, e.g., Crampton, 1994;Jenny, 1994).

Any reasonable answer to the second question seems even more unlikely to

incorporate a distributional dimension. Indeed, among all the interest groups

affected by mergers, the one group that may perhaps motivate a distributional

concern, namely workers,1is excluded from most welfare standards2or at least

is not given a large weight. Note also that because workers probably wouldmerit

a larger weight than consumers if welfare standards were primarily designed for

the purpose of affecting distribution, the actual focus on consumers’ interests is

all the more puzzling.

1If merger induced rationalizations primarily take place through a process of skill biased techno-

logical change, one may at least hypothesize that mergers tend to hurt low skilled workers with low

wages.

2Interestingly, in Sweden, a country which is widely perceived as one of the most pro-egalitarian

ones in the world, it is explicitly stated that the workers’ interests should not be taken into account

(see Röller et al., 2001).