A Critique of Antitrust Econometrics: Aggregation, the Representative Consumer, and the Broader Concerns of the New Brandeis School

• Published date: 01 March 2022
• DOI: 10.1177/0003603X211067829
• Date: 01 March 2022

https://doi.org/10.1177/0003603X211067829

The Antitrust Bulletin

2022, Vol. 67(1) 69 –99

© The Author(s) 2022

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DOI: 10.1177/0003603X211067829

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Article

A Critique of Antitrust Econometrics:

Aggregation, the Representative

Consumer, and the Broader Concerns

of the New Brandeis School

Gabriel A. Lozada*

Abstract

Some economists argue antitrust policy should be based on empirical methods used by the Industrial

Organization subdiscipline of economics, but those methods contain assumptions that noneconomists

should recognize. Those assumptions underlie econometric “identification,” and underlie treating

aggregate demand as if it were generated by a representative consumer (Muellbauer’s “generalized

linear” preferences). We explain aggregation bias in Almost Ideal Demand System models, then show

that data limitations make it even harder to justify economists’ restricting aggregate demands as one

would the demand of one individual. Such problems notwithstanding, the main problem with antitrust

econometrics may be that there is not enough of it. Whether firms maximize profit is understudied

empirically; many may maximize return on assets instead, leading to firms with assets and employees

below their profit-maximizing level. There is insufficient empirical study of this and many other topics

of concern to New Brandeisians.

Keywords

antitrust econometrics, Almost Ideal Demand System (AIDS), myth of shareholder value, financialization

of management, New Brandeis School

In a recent Antitrust magazine article, Carl Shapiro1 makes the case for what he calls the “modern”

approach to the future of antitrust. He stakes out his position in opposition to the “consumer welfare”

camp and the “populist” camp—by the latter he means the New Brandeis School. Under Shapiro’s

“modern” approach, antitrust is reduced to an “effects” analysis based on modern Industrial

Organization. At the apex of this approach is empirical Industrial Organization, where econometrics is

employed to quantify anticompetitive effects (negative welfare effects) and efficiencies (positive

*Department of Economics, The University of Utah, Salt Lake City, UT, USA

Corresponding Author:

Gabriel A. Lozada, Department of Economics, The University of Utah, Salt Lake City, UT 84112, USA.

Email: lozada@economics.utah.edu

1067829ABXXXX10.1177/0003603X211067829The Antitrust BulletinLozada

research-article2022

1. Carl Shapiro, Antitrust: What Went Wrong and How to Fix It, 35/3 antitrust. 33 (2021) at 33–34.

70 The Antitrust Bulletin 67(1)

welfare effects). This exercise usually involves Industrial Organization economists on both sides of the

case. Because of the technical nature of the practice, the economists take center stage. However, many

economists on both sides have been trained to accept certain assumptions, as well as to limit the scope

of their inquiries in important ways.

In Baker and Rubinfeld’s2 survey article, while problems with “identification”3 and “functional

forms”4 are discussed (and will be revisited and explained by us in Section I), no mention is made of

the strong assumptions needed to justify economists’ common practice of applying restrictions from

economic theory to the estimation of aggregate demand systems. Sections II through V of this paper are

devoted to explaining what those assumptions are, including new results along those lines. An addi-

tional assumption underlying most (though not all) econometric approaches is that income but not

wealth determines consumption. That makes little sense outside of a purely theoretical static frame-

work, but abandoning that assumption would require economists to have data not only on household

income but also on household wealth, and the latter is often not available. Once all the assumptions

needed to justify the econometrics are understood, they need not be accepted, raising questions about

how accurate the econometric analyses really are.

Section VI discusses problems using consumer surplus as a measure of consumer welfare, problems

which turn out to be of a similar form to those involved in working with demand systems.

Moving to less mathematical topics, Section VII questions whether firms maximize profit, which

is the assumption underlying almost all neoclassical analysis of firm behavior, and calls for more

econometric analysis of this question. This section reviews the arguments that in the immediate

post–World War II period there were important firms which willingly sacrificed short-term profit to

benefit society as a whole, and that some such firms still exist. If true, that behavior should be taken

into account before allowing such firms to be subject to a hostile takeover. This section also points

out that Wall Street and, accordingly, many large U.S. firms take as firm goals not profit but rather

various financial ratios, especially return on assets. Such a perverted goal can be an immediate

cause of firms wishing to have as few employees and assets as possible. A merger instigated by

managers with such goals can result in merged companies soon having fewer, not more, assets and

employees than the former companies which merged. This decrease in “size” (measured in assets

and employees, rather than in market share or revenues) will falsely be characterized by the pro-

merger parties as “efficiencies” when, in fact, it is probably a welfare-reducing, even profit-reduc-

ing, aspect of the merger. More empirical analysis of firm motives is needed to help enforcement

agencies more carefully distinguish between true merger-specific efficiencies and predatory behav-

ior motivated by short-run financial interests.

The last section of the paper, Section VIII, presses further along the lines of critiquing not what

econometricians have done but what they have not done. These errors of omission may in the final

analysis be a more serious problem than the Industrial Organization econometricians’ errors of com-

mission. The problem with elevating modern Industrial Organization to the center of antitrust policy is

that if important policy goals do not appear in the Industrial Organization literature, they are dismissed

as not relevant to true competition concerns. For example, the effects of practices such as mergers on

workers, small business, the income distribution, and the environment are ignored. Econometrics in

antitrust should be expanded to include analysis from labor economics, environmental economics,

urban and regional economics, and other economics subdisciplines, without which the econometrics

paints only a misleadingly partial picture.

2. Jonathan B. Baker & Daniel L. Rubinfeld, Empirical Methods in Antitrust Litigation: Review and Critique, 1/1 am. Law

Econ. rEv. 386 (1999).

3. Id. at 408.

4. Id. at 413.