A Brief History Of The Consumer Welfare Standard
The consumer welfare standard is often cited in antitrust discussions, but what is it, where did it come from, and why is it important? Antitrust law originated with the passage of the Sherman Antitrust Act of 1890, there was a period where politics and judicial activism got out of hand, until in the 1970s everyone came to a consensus and restored antitrust to its first principles. Since then, antitrust has become more consumer-focused
— In the early days of antitrust, enforcement often lacked objectivity and consistency, creating uncertainty for businesses.
— In the 1970’s, scholars and regulators fine-tuned the purpose of antitrust to focus on consumer welfare and objective analysis, which unleashed a torrent of unprecedented innovation.
— Consumer welfare has held up as the standard precisely because it is clear and pro-consumer.
In the early days of antitrust, enforcement often lacked objectivity and consistency, creating uncertainty for businesses.
Ryan Young, Fellow at CEI: Without a unified theory to rely on, pre-CWS judges could only rely on their personal discretion to decide antitrust cases. Outcomes therefore differed substantially depending on the judge and the time period. “This feeling that size itself should be a prosecutable offense ebbed and flowed over the decades, giving antitrust enforcement a distinct uncertainty and lack of clarity during the rule of reason era. In fact, during the New Deal, President Franklin Roosevelt reversed course almost completely, and wanted the government to actively encourage business cartels. After World War II, the old rule of reason standard resumed.”
Joe Kennedy, Senior Fellow of ITIF: The pre-empirical antitrust era was characterized by “great uncertainty” for businesses. “[A]ntitrust morphed into an attack on bigness per se with the government seeking to prevent mergers that would give companies any sort of market power, breaking up large companies into smaller units, and forcing firms to share intellectual property with competitors. The attack on bigness often resulted in great uncertainty as companies wondered how big was too big and the potential consequences of gaining too much market share—even if it was the result of offering consumers better products at lower prices.”
In the pre-consumer welfare era, Brandeisian antitrust advocated excessive enforcement, even against competitors with small market shares, write former FTC Commissioner Josh Wright and antitrust scholar Aurelien Portuese. “Justice Brandeis ambitioned using antitrust enforcement in courts as instruments of economic planning models of the mid-30s following the Great Depression. From the mid-1930’s until the 1970’s, ‘antitrust’s pendulum had swung dramatically away from the permissiveness of the 1920’s and early 1930’s’ in favor of a prima facie antitrust illegality of any increase of concentration, where efficiency claims were rebutted and market shares as low as 4.5 percent were considered at risk for antitrust enforcement.”
In the 1970’s, scholars and regulators fine-tuned the purpose of antitrust to focus on consumer welfare and objective analysis, which unleashed a torrent of unprecedented innovation.
Consumer welfare became the predominant factor in antitrust enforcement during the economic slowdown of the 1970’s as the Carter Administration began to rethink competition law and Robert Bork argued a consumer welfare based framework in his 1978 book, “The Antitrust Paradox.” “Perhaps the most important was the recognition in the 1970s—with the slowdown of the U.S. economy and the growth of global competition—that past regulatory structures, including antitrust, needed to be rethought. Under the guidance of economist Alfred Kahn, the Carter administration launched a major regulatory reform initiative designed to spur consumer welfare, bringing competition to industries such as railroads, airlines, and trucking. Another factor was Robert Bork’s 1978 book The Antitrust Paradox: A Policy at War with Itself, which laid out a clear critique of antitrust policy and provided a consistent alternative.”
FTC Commissioner Christine Wilson: Bork reasoned that a focus on consumer welfare would return antitrust law to its initial purpose—protecting consumers. “Robert Bork examined and provided an interpretation of the Sherman Act’s legislative history that concluded that Congress intended mainly to protect consumers from the harm done by cartels without undermining efficiency. He argued that Congress valued only consumer welfare and concluded that ‘[t]he Sherman Act was clearly presented and debated as a consumer welfare prescription.'”
New economic research at this time found “benign” and pro-competitive explanations for market concentration, Wilson continues. “At about the same time economic research found benign explanations for highly concentrated markets, which broke from prior work that was suspicious of concentration. For example, economists concluded that some firms were winning competitive battles and achieving large shares not for pernicious reasons but because they were more efficient than other firms, and that other firms with significant shares benefited from economies of scale. In addition, new theoretical and empirical economic learning provided procompetitive explanations for certain business practices like vertical restraints.”
Consumer welfare has held up as the standard precisely because it is clear and pro-consumer.
The consumer welfare standard gives antitrust enforcers a clear mission, write Wright and Portuese. “The adoption of the consumer welfare standard gave antitrust enforcers a coherent mission: protect the benefits of the competitive process by preventing activities likely to raise market prices, lower market output, or otherwise harm competition. When antitrust focuses upon socio-political goals, it detracts from this mission, likely slowing economic growth and depriving consumers of goods and services.”
The empirical nature of the consumer welfare standard allows antitrust enforcement to be coherent, says CCIA’s Marianela Lopez-Galdos. “[S]ince the consumer welfare standard is an economic analysis-based test — i.e. non-economic considerations are not factored into this pro-consumer test — enforcement coherence is preserved. The impossibility of weighing non-economic factors against economic considerations without risking discretionary results and injustice disposed the evolution towards adopting the consumer welfare standard.”
Neo-Brandeisian claims that consumers are better off with higher prices and more competitors are not grounded in evidence, says Hovenkamp. “To date, the strongest and most central claim of the neo-Brandeis movement remains untested; that is its assumption that individuals in our society would really be better off in a world characterized by higher prices but smaller firms. Everyone in society is a consumer and consumers vote mainly with their purchasing choices. The neo-Brandeisians still face the formidable task of providing evidence that most citizens believe they would be better off in a world of higher cost smaller firms selling at higher prices, their market behavior notwithstanding.”
For more on the evolution of the consumer welfare standard, read our summary of Herbert Hovenkamp’s recent article in Revue Concurrentialiste.