Congress Hears Challenges to the Consumer Welfare Standard

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The purpose and goals of United States antitrust policy have not remained static over time.  Since 1979, the Supreme Court has focused on a “consumer welfare” theory of antitrust law.  See Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979) (The floor debates “suggest that Congress designed the Sherman Act as a ‘consumer welfare prescription.’” (citation omitted)).  Under the consumer welfare standard, an act is deemed anticompetitive “only when it harms both allocative efficiency and raises the prices of goods above competitive levels or diminishes their quality,” Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1433 (9th Cir. 1995); whether an action or policy is found to be anticompetitive depends ultimately on whether consumers pay higher prices.  The consumer welfare theory has the advantage of focusing on the impact to consumers through the application of economic theory, but doesn’t always have much to say about firms that occupy a dominant position in an industry while continuing to provide services to consumers cheaply (or without any fee at all)—a hallmark of many modern tech companies.

It wasn’t always this way.  Congress first passed the Sherman Act in 1890 in response to a growing number of corporate consolidations and public concern that these “trusts” threatened to impair the free market economy and undermine individual freedom.  Ohio Senator John Sherman – the bill’s sponsor – explained that “[i]f we will not endure a king as a political power we should not endure a king over the production, transportation, and sale of any of the necessaries of life.”  In the middle of the twentieth century, the courts seized upon this legislative history and held that the purpose of antitrust law is to prevent “the concentration of economic power in the hands of a few . . . by keeping a large number of small competitors in business.”  United States v. Von’s Grocery Co., 384 U.S. 270, 274-75 (1966).  This conception was based, in part, on the idea that antitrust law is intended to serve social and democratic, as opposed to mere economic goals.  See United States v. Aluminum Co. of America, 148 F.2d 416, 427 (2d Cir. 1945) (Hand, J.) (“[I]t was not necessarily actuated by economic motives alone.  It is possible, because of its indirect social or moral effect, to prefer a system of small producers, each dependent for his success upon his own skill and character, to one in which the great mass of those engaged must accept the direction of a few.  These considerations . . . we think the decisions prove to have been in fact its purposes.”).  In earlier eras, courts would often look to market share and concentration, in addition to consumer prices, when ruling on allegedly anticompetitive behavior.  See Von’s Grocery Co., 384 U.S. at 277-278 (noting that a merger would “certainly” violate antitrust law where “it takes place in a market characterized by a long and continuous trend toward fewer and fewer owner-competitors which is exactly the sort of trend which Congress, with power to do so, declared must be arrested”). 

On March 5, 2019, the Senate Judiciary Committee reopened this debate, and the door to whether the United States should return to this earlier era of antitrust enforcement.  The Committee solicited testimony from experts regarding whether the consumer welfare standard was outdated in an era driven by rapid technology growth, new data privacy concerns, and dominant technology firms that do not necessarily charge consumers directly for their products.  Several experts urged that the standard should focus more on market dominance, apart from actual price impacts.

Robert Reich, former Secretary of Labor under Bill Clinton, urged a return to the days of the Sherman Act’s early history.  Reich argued that antirust should be “about more than welfare economics”; rather, “[a]ntitrust is about protecting and fostering civil society . . . and freedom from intimidation, whether from a giant government or giant corporations that know everything there is to know about them.”  According to Reich, the need to “revive” antitrust is particularly acute in the era of Big Tech, where consolidation by technology companies implicates not only concerns about competition, but also political power, data privacy, and free speech. 

John Kwoka, a professor of economics at Northeastern University, likewise stated that “concentration has been steadily rising and competition declining in a great many sectors of the economy,” and that the dominant technology companies, in particular, had “engaged in binge-buying.”  He pointed to under-enforcement of antitrust laws against mergers “that have harmed competition and consumers,” and recommended strengthening enforcement standards and, in certain circumstances, shifting the burden of proof to the parties.  Kwoka urged enforcement of concentration and share thresholds, and argued that the burden of proof should shift to the parties in cases involving mergers of large share firms in concentrated markets or where a company employed mergers to eliminate potential competitors and stifle competition.  Kwoka further suggested that for “major tech companies where network effects can create irreversible marketplace advantages, it is worth considering a broad presumption against any such acquisitions.”

But Douglas Melamed, a professor at Stanford Law School, suggested that while antitrust law could be improved, it is “sound in principle” and “should be adjusted, if at all, only after careful study and only at the margins.”  According to Melamed, “antitrust is not ultimately about dispersing power[;] [i]t is about economic welfare.”  He did, however, suggest rethinking the notion that “false positives – mistaken determinations that conduct or transaction in question was anticompetitive – are more serious than false negatives – mistaken determinations that the conduct or transaction was not anticompetitive.”  Melamed opined that “[h]orizontal mergers,” in particular, might be a sound area to consider “adjusting the legal standards for merger enforcement[.]” 

Joshua Wright, a law school professor at George Mason University, raised the most ardent defense of the consumer welfare standard.  Wright characterized the anti-consolidation approach of early antitrust law as “incoherent,” with various goals often in conflict with one another.  By contrast, Wright stated that the consumer welfare standard afforded federal enforcement agencies the necessary “flexibility to expand and contract enforcement in response to sound empirical evidence.”  Wright urged policymakers to shy away from per se rules based on market structure and concentration, and argued that lawmakers should instead take “an objective, evidence-based approach[.]”  Wright argued that two types of data must be collected “in order to evaluate the effectiveness of merger policy”:  (1) “data on the relevant market pre- and post-merger,” and (2) “ex-ante information concerning the Agency’s predictions of the merger.”  According to Wright, “[b]y structuring merger retrospectives to square the estimated merger effects of econometric studies with the details of the relevant agency’s assessment process, we can begin to identify whether Agencies’ decision-making is consistently biased in a way that harms consumers.”

It seems unlikely that, at present, Congress will attempt to modify the consumer welfare standard (and if so, how).  But the fact that the hearing took place suggests that concerns over how the consumer welfare standard can suitably address antitrust issues in the Information Age may find an increasingly receptive audience.  We’ll continue to monitor future developments in this area.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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