Conceptual Foundations of Antitrust Law
In a previous post, I tried to outline the core concepts of antitrust law as it is practiced today. This post attempts to reconstruct some of the foundations on which the concepts of antitrust law discussed in that post are built.
Consumer welfare, or simply wealth, is primarily determined by the price, quantity, and the variety of goods available to the consumer, and by the rate of technological progress. Note that goods include services, and that services include many of the intangibles that economists are often accused of ignoring, e.g., education, entertainment, and leisure. (There are few leisure activities today that aren’t connected in some way to leisure services.) Promoting consumer welfare is thus one of the most important public policy goals. The primary means of promoting consumer welfare is a free market. That, of course, is a policy decision, a normative commitment with a breathtaking range of moral and economic implications. There are few decisions that a society can make with similarly dramatic impact on matters of justice than the choice of the mechanism by which decisions are made as to what goods gets made, how they get made, and who gets them. Competition is a necessary element of a free market, which is precisely why the antitrust laws protect competition, as a means of promoting the ultimate goal of consumer welfare.
The antitrust laws protect competition by prohibiting anticompetitive conduct. Anticompetitive conduct decreases consumer welfare. Consequently, we can propose the following working definition:
Conduct is anticompetitive if it causes higher prices, lower output, less variety, and less innovation compared to a state in which the conduct didn’t occur.Should the antitrust laws prohibit all anticompetitive conduct? Most certainly not, because enforcing prohibitions is costly both in terms of cash costs and opportunity costs. Our present antitrust laws can rationally be reconstructed as an attempt to prohibit anticompetitive conduct above a certain threshold of significance, so that the cost of enforcement is outweighed by the welfare gains from more competitive markets.
Note that in the previous post which I mentioned above, I identified consumer welfare, market power and anticompetitive conduct as the core concepts of antitrust law. Of those, market power is the only one not mentioned here. Why not? Because from an economic point of view, market power doesn’t add much to the concept of anticompetitive conduct, as the former is a necessary condition of the latter. (If you don’t have the power to profitably raise prices, then you can’t do it. If you managed to profitably raise prices then it’s a safe bet that you had the power to do so.) In contrast, from a legal point of view, market power is central for effective enforcement, because it is often easier to detect and prove market power than it is to detect and prove anticompetitive conduct or to causally connect a certain conduct to anticompetitive effects, in particular in situations where the courts and the agencies have to predict the likelihood of future anticompetitive effects from proposed conduct. Of course, any antitrust violation can be proven by direct evidence of the effects of anticompetitive conduct: higher prices, reduced quantity, etc. But in the vast majority of real-world cases, plaintiffs rely on indirect evidence in the form of proof of market power, either by direct inference (e.g., demand elasticity) or indirect inference (e.g., high market shares). Similarly, defendants rely on indirect evidence of market power to rebut a claim of anticompetitive conduct. If defendants can prove that they don’t have market power, then any claim of anticompetitive conduct must be false.
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February 27th, 2006 at 3:05 pm
[…] Following up on my previous posts about the conceptual foundations of antitrust law (here and here), the chart below illustrates the relationship between the ultimate goal of economic policy (consumer welfare), the primary means of achieving it (free markets, competition), and the mission of the antitrust laws (prohibiting conduct having significant anticompetitive effects) as a policy tool for promoting competition and therefore consumer welfare. Moreover, the chart depicts the two most important proxies for anticompetitive conduct, market power (the ability and the incentive to raise prices) and market concentration (e.g., HHI measures), as well as the evidence typically introduced to prove anticompetitive effects directly or circumstantially by establishing the factual predicates for one of the two proxies. Against this backdrop, it is apparent that much of the traditional merger analysis involves the least direct evidence of anticompetitive effects. Delineating markets, identifying market participants, and computing market shares all contribute to establishing a market concentration measure. That measure, in turn, permits the inference of market power (Step 1). Market power permits the inference of anticompetitive effects (Step 2). The diminution of competition, finally, permits the inference of a consumer welfare loss (Step 3).Technorati Tags: antitrust, inference, competitive effects, consumer welfare, economic policy You can also bookmark this on del.icio.us or check the cosmos […]
February 28th, 2006 at 11:46 am
Are you using the phrase “consumer welfare” in the Borkian sense, i.e. “total welfare”, or are you claiming that the purpose of antitrust is to maximize consumer surplus?
In addition, your overview of antitrust policy is understandably focused on monopoly, but what about monopsony? If a monopsonist has no power in the output market (perhaps because of very close substitutes), is there an antitrust problem at all, even assuming there are substantial wealth transfers from producer to monopsonist? If this is not an antitrust problem, are cases like Todd v. Exxon Corp. wrongly decided?
March 3rd, 2006 at 2:06 pm
[…] The goal of the antitrust laws is to protect competition as a necessary condition of free markets, the currently best available means of continuously increasing consumer welfare. (To be sure, free markets don’t succeed on that score in all instances, but by and large they do a better job at it than any other arrangement has done so far.) We thus want a prohibition only for those kinds of price discrimination that are detrimental to consumer welfare. Against that backdrop, how can we tell good discrimination from bad discrimination? If we could measure the welfare effects directly, that wouldn’t be a problem. But more often than not we can’t, and so we have to rely on inferences and proxies, unless we want to forego regulation altogether. […]
March 10th, 2006 at 6:22 pm
Consumer welfare as I understand the term is utility derived from the enjoyment of goods and services by the consumer. The level of utility depends on the price, quantity, and variety of the goods and services. (I explained my position regarding the use of the term consumer welfare in a previous post.) The monopsony point, of course, is well taken. The consumer welfare effects of monoposony are much less clear cut than those of monopoly. (i) A firm with market power on the buy and sell side will likely contract input quantity below competitive levels and then sell “less for more” to its customers. In contrast, (ii) a firm with buyer power that sells in competitive markets won’t be able to directly harm consumers. Capturing the effects (ii) would require us to consider total welfare losses, which the law has been trying to do to some extent (you mentioned Todd v. Exxon, where the effect was on input prices, i.e., labor costs; one could also think of instances of predatory overbuying).