Implications of the Fact that Losses Count More than Gains for Antitrust

• Author: Richard O. Zerbe
• DOI: 10.1177/0003603X15585985
• Date: 01 June 2015
• Published date: 01 June 2015
• Subject Matter: Symposium: The Role of Efficiencies in Antitrust Law (Part I)

Article

Implications of the Fact

that Losses Count More

than Gains for Antitrust

Richard O. Zerbe

*,**

Abstract

It is now well established that losses to individuals count more (absolute value) in valuation than

equivalent gains. This suggests that a price standard or a consumer surplus standard is superior to a

total surplus standard in antitrust and helps to explain some current law.

Keywords

antitrust, efficiency, surplus, law, the gain-loss disparity, the total efficiency standard, the price

standard, the consumer surplus standard

Introduction

In mainstream antitrust law, the nature of economic efficiency has not been investigated in great depth.

Such an investigation will have important implications for antitrust law and economics. Among these

are the following: (1) Behavioral economics shows that consumer surplus measures of losses underesti-

mate consumer damages, often considerably, while producersurplus measures generally do not. (2) This

means that an efficiency-based approach to antitrust should weigh consumer losses much more heavily

than producer gains. (3) Losses to corporations qua corporations should not receive extra weight. Such

conclusions have profound effects on many areas of antitrust, including every area that involves both

market power and efficiency effects. The areas that would be affected include mergers, monopolization,

andevery Section 1 rule ofreason case: these effectsrely on the realizationthat consumersurplus measures

of lossesunderestimate consumerdamages, often considerably,while producer surplus(profits) measures

generally do not. This is because economic efficiency requires that losses be weighed more than gains.

This result suggests that the optimal antitrust penalty as suggested by William Landes and Richard

Posner is an underestimate. Landes correctly notes that theoptimal fine to the firm should be equal to the

harm imposed on others.

1

The point here is that the harm to othersis more than Landes suggests.

*Evans School of Public Affairs, Seattle, WA, USA

**University of Washington, Seattle, WA, USA

Corresponding Author:

Richard O. Zerbe, 939 21st Ave. East, Seattle, WA 98112, USA.

Email: zerbe@uw.edu

1. William Landes, Optimal Sanctions for Antitrust Violations,50U.CHICAGO L. REV. 652 (1986).

The Antitrust Bulletin

2015, Vol. 60(2) 150-167

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Besides the gain-loss disparity,losses are also underestimated since consumerand producer surpluses

only approximate the true measureof gains and losses asdetermined by economic efficiency, whichis the

compensating variation or CV.

2

Thus, I demonstrate that a proper understanding yieldsa novel and eco-

nomically correct calculation ofconsumer harm and damages that is larger than traditionally given.

I show further that the concept of economic efficiency or benefit-cost analysis furnishes a justifi-

cation for a focus on consumer protection as the correct role for antitrust law. This justification is

related to the underestimates of consumer losses. The gain-loss disparity suggests a rationale in anti-

trust law for the emphasis on consumer protection rather than using a total surplus standard, as such a

focus will, in fact, better reflect total welfare effects. Thus, consumer protection is compatible with

economic efficiency, contrary to some mainstream literature.

3

There are two primary measures of con-

sumer protection, a price standard and a consumer surplus standard. Generally, these give the same

policy conclusions. However, for quality changes, the price standard for antitrust may be misleading

and may appear to differ from a consumer surplus standard. This discrepancy is, however, more appar-

ent than real. Finally, I show that even as the goal of antitrust, as embodied in antitrust statues, has been

found to be consumer protection,

4

so also does consumer protection explain the decisions of the courts.

The Definition of Economic Efficiency

Economic efficiency is generally held by economists and other social scientists to be, in effect, benefit-

cost analysis (BCA) or, what is generally taken to be an identical term, cost-benefit analysis (CBA).

5

The related concept of wealth maximization (WM) that Richard Posner introduced into law

6

is only

confusingly distinguished from BCA, if at all.

7

The BCA concept is important in policy and

2. Another measure is the equivalent variation. For a derivation of both the compensating and equivalent variation, see

RICHARD ZERBE &DWIGHT DIVELY,BENEFIT-COST ANALYSIS IN THEORY AND PRACTICE (1994).

3. For example, ROBERT H. BORK,THE ANTITRUST PARADOX:APOLICY AT WAR WITH ITSELF (1978).

4. See Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation

Challenged,34HASTINGS L.J. 65 (1982); John B. Kirkwood & Robert H. Lande, The Fundamental Goal of Antitrust:

Protecting Consumers, Not Increasing Efficiency,84N

OTRE DAME L. REV. 191 (2008).

5. Because of the incursion of economics and particularly the concept of efficiency into law, there has been widespread

examination and criticism of the role of efficiency. Perhaps the main issues have been four: (1) the role of moral

sentiments in BCA; (2) whether or not consumer harm should be the value measure used particularly in antitrust,

omitting losses to producers; and (3) whether or not the Scitovsky paradox renders BCA unusable. In addition to these

three issues, a current issue generic to all BCA is (4) what the discount rate should be. For a fuller consideration of

these issues, see Richard O. Zerbe, The Legal Foundation of Cost-Benefit Analysis,2C

HARLESTON L. REV. 93 (2007);

Richard Just, Andrew Schmitz & Richard Zerbe, Scitovsky Reversals in Benefit-Cost Analysis with Normal Goods,4J.

BENEFIT-COST ANALYSIS 411 (2013); David Burgess & Richard O. Zerbe, Appropriate Discounting for Benefit-Cost

Analysis,2J.B

ENEFIT-COST ANALYSIS 1 (2011).

6. Richard Posner, Utilitarianism, Economics, and Legal Theory,8J.L

EGAL STUD. 103 (1979).

7. The definition in Posner’s textbook is ‘‘Efficiency means exploiting economic resources in such a waythat value—human

satisfactionas measured by aggregate willingnessto pay for goods and services—is maximized.’’ RICHARDPOSNER,ECONOMIC

ANALYSIS OF LAW 10 (2d ed. 1977). This is a sort of national income definition and, as such, cannot claim the virtues of a

more refined measure,as Harberger notes. See Arnold C. Harberger,Three Basic Postulates for AppliedWelfare Economics:

An InterpretativeEssay, 9J.E

CON.LITERATURE 785 (1971). WM does not take into accountthe willingness to accept (WTA)

so that the greater value of lossesis not maximized. Value in WM then is, by default, determined by auction—that is, the

highest willingness to pay (WTP). One interpretation of wealth maximization is that its goal to simply promote material

wealth. This definitionshould be dismissed as having no moral basis, no salience, and it is an unsatisfactorybasis for legal

analysis. Posnerat last has rejected it. Richard A. Posner, WealthMaximization Revisited,2N

OTRE DAME J.L. ETHICS &PUB.

POL’Y85 (1985). Forit leads quite easily to importantly wrong decisions. Richard Zerbe, Economic Welfare Applied to Law

with Costly Markets,in EFFICIENCY IN LAW AND ECONOMICS xix Richard Zerbe ed., Efficiency in Law and Economics

(Northampton, MA: Edward Elgar Publishing Inc., 2014) (Richard Posner and Francesco Parisi, series eds.). Yet, if this is

not the definition, how does WM differ from economic efficiency, that is, from BCA? Robert Cooter notes that (the more

primitive definitionof) WM leads to sacrificing libertyfor production. Robert D. Cooter,Liberty, Efficiency, and Law,50L.

Zerbe 151