WITHER THE CONSUMER WELFARE STANDARD?

• Author: Ginsburg, Douglas H.

INTRODUCTION

President Biden issued Executive Order 14036 (1) to widespread media acclaim (2) in July of last year. The order sweeps broadly and suggests the administration will make antitrust a major priority. (3) In particular, the President's Executive Order highlights greater enforcement of antitrust laws against technology platforms, in labor markets, in transportation markets such as air travel, and in health care. (4) What the order does not say is what previous administrations were missing in their enforcement agendas that overlooked competition problems in such varied industries.

The President's choice of advisers and leadership for the antitrust agencies fills in much of that gap. (5) President Biden selected leaders who have consistently taken aim at the economic foundations of modern antitrust and sought to replace those foundations with political goals in order to accomplish through antitrust law what they have thus far not been able to accomplish through legislation. (6) Whether their efforts will prove successful at reshaping antitrust law remains to be seen. (7)

In my limited time here today, I want to take up an issue that was being discussed when I came to the Antitrust Division in 1983--indeed, even when I had started teaching antitrust law in the late 1970s. (8) After a long hiatus, it is being discussed again. (9) I am referring to the idea that antitrust enforcement should have as its goal something other than, or in addition to, consumer welfare--meaning efficient markets that deliver lower prices and better products to consumers.

1. THE RISE OF THE CONSUMER WELFARE STANDARD

   Getting consumer welfare accepted as the sole purpose of the antitrust laws was a hard-won victory for economic rationality and for the rule of law. (10) Before then, courts viewed antitrust as serving various, conflicting societal goals. (11) The intellectual foundation for the consumer-welfare approach was laid in the 1960s by some of the people whose work everyone here knows--or should know--economists Aaron Director and Harold Demsetz, and law professors Richard Posner, Robert Bork, William Baxter, and Phil Areeda. (12) It was in 1979, after only about a dozen years of intensive academic work on this subject, when the Supreme Court adopted the consumer welfare standard, saying simply, "Congress designed the Sherman Act as a 'consumer welfare prescription.'" (13) The Court has adhered to that insight ever since, even though it meant overruling about half a dozen of its own precedents over the years. (14) These included all the precedents that made vertical restraints per se unlawful. (15) One after another, territorial restraints, maximum price restraints, and eventually minimum resale price restraints were all re-examined and made subject to the rule of reason, requiring a case-by-case assessment of the potential anticompetitive effects of the relevant business conduct. (16)

   All of this was done through economic analysis. (17) Per se condemnations were seen often to be contrary to the welfare of consumers and to prevent efficient arrangements in the chain of distribution. (18) Likewise, the application of economics and the consumer welfare standard altered the Supreme Court's understanding and application of Section 2 of the Sherman Act with respect to monopolization and attempted monopolization, particularly when considering intellectual property rights. (19)

   When Bill Baxter came to the Division in 1981, he discarded the so-called "Nine No-Nos," the Division's list of nine practices previously thought to be anticompetitive in the licensing of intellectual property rights. (20) It was a good deal later before we saw the Supreme Court making the basic point that the possession of an intellectual property right does not ordinarily entail a monopoly or even meaningful market power. (21) I have a lawful monopoly over my backyard, but that does not give me any market power. It is rare, indeed, that the possession of a lawfully acquired patent provides market power that should be viewed with concern, instead of being viewed as a reward for investment in innovation. (22)

2. ANTITRUST AND CORPORATE POLITICAL INFLUENCE

   All of that came into question and was starting to be debated, as I said, before I came to the Division in 1983. (23) The debate had been originated by FTC Chairman Robert Pitofsky. (24) He was concerned with the political influence that a large firm might acquire by virtue of its size, and could use to advantage itself or to disadvantage its rivals via the political branches of government. (25)

   Corporate political influence, which is usually used for "rent-seeking," (26) is a legitimate cause for concern. The result is too often a crony capitalism that distorts resource allocation, unjustly rewards some and harms others, and is antithetical to the market competition that benefits consumers and the economy. (27)

   The Brandeisians may overstate the issue, however, as they often confuse lobbying dollars spent with political capital acquired. (28) Although the quantity of lobbying effort is an input in the congressional budget process, simply totaling the number of dollars spent without considering offsetting expenditures from opposing lobbying groups overstates the role lobbying plays in directing congressional priorities. In some cases, lobbying may be a zero-sum game, with each group's expenditures merely offsetting those of an opposing group. (29)

   In any event, it does not necessarily follow that antitrust enforcement is an appropriate preventative measure for corporate political influence. If not the only, certainly the primary tool with which an antitrust agency can inhibit corporate political influence by large firms is merger control, that is, by blocking mergers not because they are thought to be anticompetitive but solely in order to prevent the merged firm from obtaining a size that is thought to be conducive to political influence.

   There are a number of problems with using merger control to that end. First, and most obviously, it precludes realizing whatever efficiencies are motivating the merger, to the detriment of consumers. (30) Second, size is a rather poor proxy for political influence. Many small firms and, particularly, associations of small firms, have substantial political clout, often besting large firms on the other side of an issue. Consider insurance agents versus insurance companies; (31) automobile dealers versus automobile manufacturers; (32) and gasoline retailers versus petroleum companies. (33) These "small dealers and worthy men," as Justice Peckham called them in 1897, (34) prevail consistently, both in the state and the federal legislatures.

   Finally, some firms attain size--and perhaps also political influence--simply because they are successful in satisfying consumers. (35) A merger control program aimed at preventing firms from becoming large would leave those firms unaffected. It would essentially be an arbitrary and haphazard application of the antitrust laws.

   Even the more "targeted" reform efforts in the proposed American Innovation and Choice Online Act, which would apply only to firms that had an estimated market valuation in excess of $550 billion over the previous year, (36) would have arbitrary results. For example, Meta would have qualified as a "covered platform"--and therefore been subject to special rules about which firms it could refuse to deal with--in 2020 and 2021, but not after its stock price declined in 2022. (37) With this regime in place, it is not hard to imagine a firm saving bad news to release whenever the specter of antitrust enforcement appears.

   The same problems attend a fixed limit on firm size; indeed, that would be so arbitrary that it has not been proposed by any thoughtful proponent of curbing corporate political influence. (38) This is not to deny it was proposed by Senator Edward Kennedy in 1979 and endorsed by Zephyr Teachout as recently as 2014. (39)

3. ALTERNATIVE GOALS FOR ANTITRUST

   More recently, other voices have championed different goals for antitrust. All are arguably worthy goals, but ask yourself whether they are best, or even reasonably, achieved by reforming antitrust law or enforcement policy. They include the preservation of jobs that would be rendered redundant...