Efficiencies in Antitrust Analysis

• DOI: 10.1177/0003603X15585982
• Date: 01 June 2015
• Author: Philip Nelson,David Smith
• Published date: 01 June 2015
• Subject Matter: Symposium: The Role of Efficiencies in Antitrust Law (Part I)

Article

Efficiencies in Antitrust Analysis:

A View from the Middle

of the Road

Philip Nelson

*

and David Smith

**

Abstract

While antitrust scholars continue to debate the goals of antitrust law, including the role of efficiencies

in antitrust analysis, these discussions typically recognize that antitrust law does and should consider

efficiencies, particularly efficiencies that lead to lower consumer prices. This paper provides a review

of the ‘‘efficiencies debate’’ and the economics literature that evaluates efficiencies to assess whether

the analysis of efficiencies in antitrust cases should be changed significantly. Our review finds that

current antitrust law does a reasonable job of balancing the potentially conflicting policy objectives of

promoting social efficiencies and protecting consumers from the adverse effects of anticompetitive

practices. As a result, we conclude that only modest change in current antitrust policy is appropriate.

Specifically, we recommend (as is consistent with some existing policies) that parties asserting an

efficiency rationale for their conduct should bear the burden of proof, that a rule of reason analysis

should be used, that all efficiencies (not just variable cost savings) should be recognized, and that

limited equity issues should be considered. We conclude that antitrust law is not well suited for

addressing tangential social policy problems.

Keywords

efficiencies, economies of scale, vertical integration

Introduction

Some antitrust scholars, such as Judge Robert Bork, have argued that ‘‘[t]he whole task of antitrust

can be summed up as the effort to improve allocative efficiency without impairing productive effi-

ciency so greatly as to produce either no gain or a net loss in consumer welfare,’’

1

where ‘‘consumer

*

Principal, Economists Incorporated, Washington, DC, USA

**

Vice President, Economists Incorporated, Washington, DC, USA

Corresponding Author:

Philip Nelson.

Email: nelson.p@east.ei.com

1. ROBERT BORK,THE ANTITRUST PARADOX 91 (1978). This means that he excludes a concern about the transfer from consumers to

monopolists because of higher prices. See also his discussion of the legislative history underlying the Sherman Act in which

he argues that Congress’ intent was for the Sherman Act to promote efficiency, rather than other social objectives. Robert

The Antitrust Bulletin

2015, Vol. 60(2) 128-149

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DOI: 10.1177/0003603X15585982

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welfare’’ is used by Bork to mean what economists usually call ‘‘social welfare’’ (consumer plus

producer surplus).

2

However, other scholars have reached very different conclusions. For example,

after an extensive review of the legislative history, Robert Lande concludes that ‘‘Congress passed

the antitrust laws to further economic objectives, but primarily objectives of a distributive rather

than an efficiency nature. In other words, Congress was concerned principally with preventing

‘unfair’ transfers of wealth from consumers to firms with market power.’’

3

In particular, Lande

points out that both his and Bork’s review of the legislative history found numerous references to

concerns about consumers paying monopolistic prices,

4

which Lande views as evidence of a Con-

gressional concern about the transfer of wealth between consumers and monopolists (and thus a con-

cern for ‘‘consumer welfare’’ that is defined more narrowly by excluding ‘‘producer surplus’’).

5

Nonetheless, Lande does recognize that the legislative history of the Sherman Act ‘‘does repeatedly

praise corporate productive efficiency and recognize[s] that free competition leads to efficient com-

petitors. The productive efficiency of free competition was especially encouraged when gains were

Bork, Legislative Intent and the Policy of the Sherman Act, 9 J.L. & ECON. 7 (1966). For related discussions, see PHILLIP

AREEDA &DONALD TURNER,ANTITRUST LAW:ANANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION 149 n. 2 (1980);

RICHARD POSNER,ANTITRUST LAW:ANECONOMIC PERSPECTIVE 11–18 (1976); CHARLES RULE,CONSUMER WELFARE,

EFFICIENCIES AND MERGERS:STATEMENT FOR HEARING OF THE ANTITRUST MODERNIZATION COMMISSION ‘‘ TREATMENT OF

EFFICIENCIES IN MERGER ENFORCEMENT’’ (November 17, 2005) 5–6, available at http://govinfo.library.unt.edu/amc/

commission_hearings/merger_enforcement.htm.

2. ‘‘Consumer welfare is greatest when society’s economic resources are allocated so that consumers are able to satisfy their

wants as fully as technological constraints permit. Consumer welfare, in this sense, is merely another term for the wealth

of the nation. Antitrust thus has a built-in preference for material prosperity, but it has nothing to say about the ways

prosperity is distributed or used. Consumer welfare, as the term is used in antitrust, has no sumptuary or ethical

component.’’ BORK,supra note 1, at 90.

3. Robert Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged,

34 HASTINGS L.J. 65, 68 (1982) [hereinafter Lande, Wealth Transfers]. For a more recent treatment that reaches the same

conclusion, but includes both a review of the legislative history and a textual analysis of antitrust statutes, see Robert

Lande, A Traditional and Textualist Analysis of the Goals of Antitrust: Efficiency, Preventing Theft from Consumers, and

Consumer Choice, 81 FORDHAM L. REV. 2349 (2013) (‘‘Both approaches demonstrate that the overriding purpose of the

antitrust statutes is to prevent firms from stealing from consumers by charging them supracompetitive prices.’’). For

another review of the legislative history that disagrees with Bork’s position, see Thomas W. Hazlett, The Legislative

History of the Sherman Act Re-examined, 30 ECON.INQUIRY 263, 2351 (1992).

4. Lande, Wealth Transfers, supra note 3, at 87. (‘‘Judge Bork’s review of the Sherman Act’s legislative history conclusively

demonstrates that Congress was preoccupied with the higher prices facing consumers as a result of monopolistic pricing.’’)

Lande also points out that there was fairly explicit concern about transfers from consumers to monopolists: ‘‘As Senator

Sherman pointed out in qualification of his praise for efficiency, ‘It is sometimes said of these combinations that they

reduce prices to the consumer by better methods of production, but all experience shows that this saving of cost goes to

the pockets of the producer.’’’ (Lande, Wealth Transfers, supra note 3, at 91) See also John Kirkwood & Robert Lande,

The Fundamental Goal of Antitrust: Protecting Consumers, Not Increasing Efficiency, 84 NOTRE DAME L. REV. 191, 201

(2008) (pointing out that ‘‘Judge Bork summarized this portion of the debates eloquently: ‘The touchstone of illegality is

raising prices to consumers. There are no exceptions.’’’).

5. Lande, Wealth Transfers, supra note 3, at 87–89, 142–46. See also Kirkwood & Lande, supra note 4; Frank Easterbrook,

Workable Antitrust Policy, 84 MICHIGAN L. REV. 1696, 1702–03 (1986). Lande criticizes Bork’s view that the Sherman

Act was focused on the promotion of total social welfare/reduction of allocative inefficiencies by pointing out that this

argument ignores the fact that the allocative inefficiencies associated with monopoly (today captured in the famous

‘‘dead weight loss triangle’’) became well-known to economists only well after the passage of the Sherman Act. (Lande,

Wealth Transfers, supra note 3, at 88–89). This led Lande to conclude that ‘‘the Sherman Act reveals a total lack of

concern for allocative efficiency’’ (Id. at 83). While it is correct the allocative inefficiency due to the ‘‘dead weight loss’’

associated with monopolization was not well known at the time the Sherman Act was passed, one must also recognize (as

Lande points out) that Congress ‘‘condemned trusts for raising prices and restricting output’’ (Id. at 88, 93) and that it is

the restriction/reduction in output that causes the ‘‘dead weight loss’’ in simple economic models of monopoly. As a

result, it may be somewhat strong to claim that there was a ‘‘total lack of concern with allocative efficiency.’’

Nelson and Smith 129