Antitrust Law Should Focus on Consumer Welfare

Google CEO Sundar Pichai testifies before the House Judiciary Subcommittee on Antitrust, Commercial and Administrative Law on “Online Platforms and Market Power” on Capitol Hill in Washington, D.C., July 29, 2020. (Mandel Ngan/Pool via Reuters)

Antitrust attacks aimed at ‘cutting monopoly platforms down to size’ harm consumers.

Politicians and policy analysts have expressed concern about the growing size and impact of large digital-platform companies such as Google, Facebook, Amazon, and Apple. Some are advocating more aggressive antitrust enforcement or major changes to the law. Although competition policy can be improved, promoting consumer welfare should continue to guide antitrust enforcement in the United States.

Critics claim that antitrust law, which is intended to condemn business practices that undermine competition or maintain monopolies, is being neglected as competition weakens across the economy. They claim that the failure to enforce antitrust law allows unchecked abuses — not just by digital platforms, but by powerful firms in other market segments as well.

Critics also attribute this monopoly-abuse problem to antitrust law’s emphasis on the goal of promoting consumer welfare. They argue that the consumer-welfare standard should be ditched in favor of broader policy goals in order to “revitalize” antitrust as a powerful interventionist tool.

Before the 1970s, Supreme Court antitrust decisions generally reflected a “big is bad” philosophy. Those opinions often viewed antitrust as a means of protecting smaller companies. Many poorly understood business practices were condemned with no inquiry into their actual economic effects. Mergers fared particularly badly in court. As Supreme Court Justice Potter Stewart lamented in 1966, the only consistency in government merger challenges was that “the Government always wins.”

In the late 1970s, we started to see the rise of the consumer welfare standard as courts changed their approach to antitrust in response to economic and legal scholarship revealing that large business size and market share often manifested wealth-creating efficiency, rather than poor economic performance. While continuing to summarily condemn hard-core cartel activity, courts began to apply case-specific economic analysis. This involved weighing the potential benefits resulting from a firm’s conduct against its harmful effects.

In 1979 the Supreme Court underscored the new approach in its Reiter v. Sonotone opinion, stating that “Congress designed the Sherman Act as a ‘consumer welfare prescription.’” Subsequent judicial decisions enunciated legal standards that seek to preserve incentives for business conduct that benefits consumers. These decisions have also granted dominant firms greater leeway to engage in aggressive competition to better satisfy consumers.

In parallel with judicial developments by the mid-1990s, Democratic and Republican enforcers adopted a bipartisan approach to federal antitrust enforcement that emphasized consumer-welfare promotion.

Over the past few years, however, the consumer-welfare standard has come under siege. Critics of current antitrust policy cite the growing size and market share of dominant firms as signs of ineffective antitrust enforcement. These concerns were highlighted in 2020 studies by the House Subcommittee on Antitrust, Commercial, and Administrative Law and by the Washington Center for Equitable Growth. They endorse digital platform regulation, new Federal Trade Commission rulemaking, and legislation to tighten antitrust laws, with a greater emphasis on condemning dominant firm behavior out of hand, without regard for consumer welfare. They would also pursue a broader range of objectives, such as promoting fairness, protecting labor rights, and limiting monopoly as measured by firm size and market share.

In February 2021, Senator Amy Klobuchar (D., Minn.) introduced legislation that would toughen the standard for evaluating mergers (preventing many out of hand, based on the size of the acquiring firm). Her proposal would also lower the bar for convicting a firm of illegal monopolization. Other expansive antitrust-reform proposals, including possible regulation or structural breakups of big platforms, may be considered in Congress. Recent antitrust-reform hearings in both the Senate and House have featured condemnations of the consumer-welfare standard.

Yet these critiques of consumer welfare miss the mark. Abandoning this approach in favor of broad-based interventionist antitrust policies would prove harmful.

Proposed reforms such as breaking up dominant firms or prohibiting most mergers and acquisitions are likely to make consumers worse off, sacrificing the cost reductions that result from one firm producing a growing share of output and integrating many complementary services.

Considering a broader range of conduct to be in violation of antitrust law would likely increase uncertainty for firms as they endeavor to compete to attract additional customers. Moreover, having to assign weights to ill-defined objectives of labor rights and fairness (among other new goals) would create confusion. The resulting decisions could be arbitrary and inconsistent with the rule of law.

Furthermore, oft-cited studies claiming that competition is weakening are based on questionable evidence. The 2020 Economic Report of the President showed that those studies rely on overbroad market definitions that tell us nothing about competition in specific markets, let alone across the entire economy.

What’s more, while leading digital platforms often have large market shares, they still face competitive pressure from existing firms and startups to develop innovative new products and services. Indeed, market-leading platforms that fail to innovate can be displaced — just ask Yahoo and MySpace.

Finally, the benefits that consumers derive from participating in some digital platforms will grow as the platforms expand their membership. Antitrust attacks aimed at “cutting monopoly platforms down to size” could undermine these benefits, harming consumers.

The antitrust consumer-welfare standard has served consumers well. Competitive forces have yielded a bounty of highly affordable and greatly enhanced digital products and services. The pace of innovation has been breathtaking. The last thing we should do is quickly impose new and amorphous antitrust restrictions that threaten this success story.

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