Four Misconceptions About the Consumer Welfare Standard

The consumer welfare standard has been the subject of a very effective contestation in modern antitrust law and policy literature. This contestation targets mostly United States law but, as we know, ideas travel fast. In spite of differences in law, policy, and institutions, contestations of consumer welfare frameworks have also emerged in slightly different terms in the European Union.

In this blog, we lay bare the fundamental flaws of the modern critique of the consumer welfare standard. We show that critics misrepresent the meaning of the consumer welfare standard, distort the US case law, and ignore important facts that do not align with their normative preferences. We conclude with the assertion that many criticisms of the consumer welfare standard among US antitrust scholars reflect a critique of the US judiciary’s attitude toward uncertainty and hard evidence rather than a critique of the consumer welfare standard itself.

The four common critiques of the consumer welfare standard

The stated ambition of the critics of the consumer welfare standard is either to supplement it with other goals or to ditch it entirely and replace it with something else, such as the protection of the competitive process. The critique is built on four assumptions about US antitrust law:

• First, that the adoption of consumer welfare as the goal of antitrust law implies that the exclusive test of liability consists in establishing that business conduct or transactions leads to an output reduction or a price increase.
• Second, that the usage of a consumer welfare standard always requires extensive, lengthy, and thorough factual and economic understanding that is often impractical and sets the bar too high for antitrust authorities (this logic also underpins arguments in favor of ex-ante regulation, like the EU’s Digital Markets Act).
• Third, that using the consumer welfare standard as the whole and sole test of antitrust liability violates canons of statutory interpretation. In particular, it de facto excludes consideration of non-economic harms from antitrust law, such as harm to the political process or other social objectives that the US Congress sought to pursue with the adoption of the Sherman Act in 1890.
• Fourth, that the consumer welfare goal, and its related price and output test, stem from a body of doctrine shaped by 1970s opinions influenced by the Chicago school’s favorable views towards industrial concentration, large corporations, and monopoly power. Thus, some critics argue that the excesses of the consumer welfare standard can be made whole by reverting back to the previous era of antitrust.

Proposition One: The consumer welfare standard requires direct evidence of lower prices or higher output

The first proposition, that is, that the adoption of consumer welfare as the goal of antitrust law implies that the exclusive test of liability consists in establishing that business conduct or transactions leads to an output reduction or a price increase,  confuses ends with means. It is not because a law aims at consumer welfare that it necessarily works by forbidding anything that undermines consumer welfare. A law’s end can be achieved by indirect and sometimes unintuitive means. This is often the case in antitrust law. As antitrust law comparatist René Joliet has written, the Sherman Act:

‘[E]mploys indirect means, aimed at securing and maintaining market conditions and behavior patterns which will lead otherwise unregulated enterprises to achieve, through competitive processes, a reasonably good performance.’

Put differently, antitrust law has an end, that is consumer welfare, and a means, that is protecting rivalry. But this is also the case for other bodies of law, like patent law, which aims at innovation but does not forbid anti-innovation conduct. Patent law has a goal—innovation—and a means, a legal entitlement, which can discourage additional innovation relating to that patented technology. Similarly, antitrust law does not mandate efficient conduct. 

But there is more to this. An antitrust law system that has adopted a consumer welfare goal can implement it through multiple means. A strict version of the standard requires an ‘actual’ or ‘short-term’ effect on price charged or output served to buyers in the relevant market. A soft version of the standard does not make consumer welfare a test of legality in the particular case, but rather a ‘guide’ in the formulation of legal rules of liability and procedure. And an even looser version relies on the consumer welfare standard as a priority-setting device.

Lastly, nothing in the idea of consumer welfare as either an end or a means indicates a necessary focus on output or price. In the 1999 US v Microsoft case, the district court condemned practices unrelated to price that threatened to raise entry barriers and thus reduce or delay innovation. The Federal Trade Commission’s decision to terminate in 2013 its investigation into how Google preferences its own services in its search results had nothing to do with a price-centric approach, but instead held that Google’s display of its own content could be seen as ‘an improvement in the overall quality of Google’s search product.’ 

In fact, in US antitrust law, lost consumer welfare can be proved directly by evidence of price increases or indirectly by showing conditions of monopoly control of output in a relevant market. The FTC v Heinz opinion of 2001, for example, finds that no court has ever held ‘that a reduction in competition for wholesale purchasers is not relevant unless the plaintiff can prove impact at the consumer level.’ The court of appeals added that under US law,  it is not, in any event, the agency’s ‘burden to prove such an impact with ‘certainty.’ Of course, in the case law, direct evidence understandably carries a greater weight for the outcome of an antitrust case compared to potential effects and indirect evidence. But this is also true of direct evidence of cost reductions that trump more speculative claims of efficiencies. The point, in short, is that the US courts’ preference for direct evidence over indirect evidence is a reflection of the search for certainty that is typical of a highly judicialized system.

Proposition Two: Consumer welfare standard sets an impossible bar

The second proposition, which concerns itself with the weak administrability of an economics-driven consumer welfare approach, displays an ignorance of doctrine. The adoption of a consumer welfare standard can just as easily lead US courts to require less economic evidence. Take, for example, the 1992 Eastman Kodak case. The existence of obvious ‘actual effects’ on consumers left no doubt to the Supreme Court that a test of monopoly power in primary goods markets—and by implication a requirement of market definition—was unnecessary in aftermarket cases. Conversely, application of a consumer welfare standard to the Swiss Watch case would have saved the European Commission important resources to dismiss the complaints on de minimis grounds, instead of laboring to cook an implausibly wide market definition.

Proposition Three: The narrow and ahistorical goals of the consumer welfare standard

The third proposition about the political ambition of the Sherman Act is a modern originalist fantasy comparable to Robert Bork’s claim that Congress’ single focus was to protect the ‘wealth of the nation.’ As historian Alan Brinkley has said, ‘there was no single antitrust idea in the United States in the late nineteenth and early twentieth centuries; there was a cluster of related ideas.’ Some supporters of rigorous antitrust enforcement certainly had in mind political goals, such as a fear that large corporations endangered the democratic process, but these goals were not carried into the text of the Sherman Act itself.

Most of what lawmakers write in statute is imprecise. Aggregating diverse electoral preferences is hard. Drafters of statutes thus tend to cast the law in broad, abstract, and ambiguous terms. It then falls on the courts to interpret the law in a consistent and reasonable manner. Since the early 20th century, the US courts have explicitly construed the Sherman Act as an instrument of economic policy. The Supreme Court’s opinion in Northern Securities in 1903 states early and clearly that the Sherman Act addresses an ‘economic question,’ that is, how to optimize ‘public convenience’ and ‘general welfare.’

Interpretation of the Sherman Act has resisted Supreme Court swings in judicial or political attitudes towards more or less enforcement. Compare, for example, the conservative 2004 Trinko decision, which states that Section 2 of the Sherman Act protects against ‘extraordinary agglomerations of economic power’ with the progressive 1963 opinion in Philadelphia Nat’l Bank, where the Supreme Court held that the assessment of social and economic trade-offs, like contribution of banking mergers to local economic development, involved ‘value choice…beyond the ordinary limits of judicial competence.’ Both represent an economic conception of the law.

Proposition Four: The Chicago origins of the consumer welfare standard

The fourth claim, that the consumer welfare standard is attributable to a neoliberal Chicago school ideological influence, tells an incomplete story. Again, a review of US Supreme Court decisions in the ‘pre-ideological’ era of the late-19th century up to 1921 demonstrates that the DNA of a consumer-oriented antitrust was already there. Decisions like Central Lumber v South Dakota in 1912, Chicago Board of Trade in 1918, or US Steel in 1920 talk of ‘consumers interest,’ ‘power over price,’ and ‘raising prices to consumers.’ In Chicago Board of Trade, Justice Louis Brandeis himself viewed antitrust law as permitting a rule that allowed country dealers to give higher payments to farmers, conditional on an absence of any price increase to consumers. While it may thus be true that the Chicago school greatly influenced US antitrust law, its contribution lay in consolidating pre-existing ideas—not fabricating them. Courts wisely accepted this approach, thereby rationalizing a system that was otherwise bound to collapse under the weight of its own incoherence. 

Conclusion

The bottom line is that modern critiques overstate the argument against the consumer welfare standard, while downplaying any considerations that run counter to their desired conclusion; namely, that the consumer welfare standard is obsolete, unfit for purpose, and needs to be dislodged as the lodestar of antitrust law. Granted, some US courts might, at times, make too literal a reading of the consumer welfare standard. But comparative study shows that the choice of a consumer welfare standard is not determinant of enforcement outcomes. EU competition law, for example, embodies more consumer welfare language than its American counterpart. And yet, it has allowed much more findings of liability under the antitrust rules. Why? Because the institutional, cultural, and historical properties of both competition law systems beyond just the consumer welfare standard are conducive to different attitudes towards uncertainty. US doctrine requires the resolution of more factual uncertainty, or more hard empiricism, as a condition for antitrust liability than EU doctrine. 

Nicolas Petit is the Joint Chair in Competition Law at the Department of Law and the Robert Schuman Centre for Advanced Studies, European University Institute.

Lazar Radic is a senior scholar for competition policy at the International Center for Law & Economics, and an adjunct professor of law at IE University.

This post was first published on the ProMarket blog of the University of Chicago Booth School of Business (here).