ICYMI: What Is Consumer Welfare? The “Dean Of Antitrust” Explains
The consumer welfare standard is the bedrock of antitrust law. But what is the consumer welfare standard, and why is it important? In a recent blog post for Revue Concurrentialiste, “Dean of Antitrust” Herbert Hovenkamp explains the history of the consumer welfare principle since the term was popularized by Robert Bork, and why we should remember the fact that the definition of “consumer welfare” has changed over time. In particular, Hovenkamp writes:
— There is a high degree of ambiguity over the definition of “consumer welfare,” since that definition has changed substantially since Bork’s time.
— However, “consumer welfare” today refers to the “aggregate welfare of consumers as consumers” with a focus on maximizing output rather than minimizing price.
— The consumer welfare standard, as currently defined, maximizes economic benefits to consumers and the economy as a whole.
There is a high degree of ambiguity over the definition of “consumer welfare,” since that definition has changed substantially since Bork’s time.
The definition of consumer welfare Bork used, and the definition we use for antitrust enforcement today, differ substantially. “Part of the ambiguity about the meaning of consumer welfare lies with the model of perfect competition that was Bork’s starting point. Under perfect competition, both general welfare and consumer welfare are maximized, so there is no difference between them. Under perfect competition, consumer prices are minimized and output is maximized but returns are limited to the competitive level. However, antitrust policy is concerned with states of the economy that are imperfect. Otherwise, there would be no need for antitrust. As soon as we assume the existence of imperfections, or of some monopoly in the economy, Bork’s definition and the definition of consumer welfare that we use today can mean very different things.”
Bork coined “consumer welfare” to mean “total welfare” that includes both consumer and producer welfare. “Bork, however, used the term ‘consumer welfare’ to describe something that most economists refer to as ‘general welfare’ or ‘total welfare.’ At least for those who are not familiar with this debate, the rhetoric of consumer welfare in antitrust has suffered from a critical ambiguity ever since. For example, even today some Progressive critics deride the ‘consumer welfare’ standard by equating it with Robert Bork, apparently not realizing that what consumer welfare means today is entirely different from Bork’s understanding.”
However, “consumer welfare” today refers to the “aggregate welfare of consumers as consumers” with a focus on maximizing output rather than minimizing price.
Looking at price alone is an insufficient marker of consumer welfare. “Most of the literature on the antitrust consumer welfare standard assumes that the variable of interest is price: other things being equal, an increase in consumer welfare occurs if the price falls, and a decrease in consumer welfare occurs if the price rises. This creates a certain amount of awkwardness when we look at things such as monopsony, or monopoly power exercised on the buying side. For example, wage suppression might be thought of as producing lower prices, but does that give antitrust policy a goal of keeping wages down? The answer, of course, is no. Wages should be competitive just as consumer prices should be.”
The consumer welfare standard as used today focuses on maximizing output. “A better way to think of the consumer welfare principle is as concerned with maximizing output rather than minimizing price: Namely, the consumer welfare principle in antitrust should seek out that state of affairs in which output is maximized, consistent with sustainable competition.”
The consumer welfare standard, as currently defined, maximizes economic benefits to consumers and the economy as a whole.
The output-focused interpretation of the consumer welfare standard protects consumer, supplier, and labor interests. “Viewing the consumer welfare principle as output maximization has the effects of (1) protecting the consumer interest in low prices; (2) protecting intermediaries all the way down the distribution chain because high output tends to benefit all of them; (3) protecting competitive labor and other supplier markets, because these are also best off when output is maximized and wages are unrestrained.”
The consumer welfare standard can also enhance macroeconomic health. “In the process, one might add an additional value, which is that maximum output is also consistent with most definitions of economic productivity or measures of economic growth. To be sure, antitrust analysis is not generally concerned with macroeconomics. However, a healthy economy depends on the health of its individual markets, and it is far better for antitrust to contribute to that goal rather than detract from it.”