According to Wu’s piece above, the “fundamental and important difference between” the consumer welfare paradigm and the “protection of competition” standard is that the former “seeks to maximize some value” while the latter “is designed to protect a process.” Melamed and Petit argue that this distinction is not correct in this piece which can be found here.
There is, to be sure, abundant rhetoric in antitrust literature about maximizing consumer welfare, but that is not how antitrust law and the consumer welfare paradigm actually work. Instead, antitrust law prohibits the creation or increase of market power by conduct that is not competition on the merits. There are two elements to an antitrust violation: bad conduct, and more market power than there would be absent that conduct. Bad conduct is, to oversimplify, conduct that does not reduce costs or price or increase output or product quality (including innovation). Such conduct can create or increase market power only by either coordinating the conduct of rivals and thus reducing competition among them, such as by a price fixing cartel; or by weakening competitors and thus decreasing market rivalry, such as by tying arrangements or exclusive dealing.
In other words, in practice antitrust law deems a conduct ‘bad’ because it undermines the competitive process. Antitrust law does not prohibit conduct just because there might be more efficient alternatives or because the court or enforcer determines that the conduct failed to maximize consumer welfare. Nor does antitrust law prohibit the creation of market power by competition on the merits. Both elements of the antitrust offense are about “protect[ing] a process” under the consumer welfare paradigm.
Instead, the consumer welfare paradigm serves two very different but nonetheless important functions. First, it cabins antitrust enforcement to economic matters rather than a hodgepodge of political and social objectives. Second, it provides a criterion to guide the formulation and case-by-case application of the specific rules of antitrust law.
Wu makes two specific criticisms of the consumer welfare paradigm:
A first criticism is that the consumer welfare standard biases antitrust law toward a focus on short term price increases and causes it to overlook non-price and “dynamic harms” like anticompetitive exclusion, reduced innovation, loss of quality competition and industry stagnation.
However, there is nothing about the consumer welfare paradigm that inherently confines the antitrust inquiry to static analysis or a focus on prices. To the contrary, since the early 20th Century, economists have used “consumer welfare” to encompass various hedonic properties of competitive markets: “utility”, “pleasure”, “satisfaction”, “benefit” or “gratification”, “surplus”, “wealth”, “wants”, etc. Consumer welfare does not strictly mean price valuation. Across the world – including the US – consumer welfare-spirited antitrust regimes have thus focused on entry barriers, incipient exclusion, dynamic competition, innovation, quality and choice. The problem Wu identifies is not a consequence of a conceptual bias by the consumer welfare standard towards prices: it is practical. As all decision-makers, antitrust agencies and courts are understandably constrained in their ability to discover facts that are imperfectly observable (e.g., successful entry deterrence), measurable (e.g., product quality) or predictable (e.g., innovation and technological progress). Prices, on the other hand, are easily observable and measurable.
Antitrust law can deal with this practical challenge in a number of ways without jettisoning the consumer welfare paradigm. First, it can err on the side of humility and accept that practical constraints limit ability to reach ideal decisional outcomes or even case selection. Second, it can stimulate efforts to find new ways to prove previously hard-to-prove propositions. Third, antitrust law can replace rules that require detailed factual assessment of individual cases with simpler rules, such as the per se prohibition of price fixing. While antitrust law moved away from such types of shorthand in recent years, there is nothing about the consumer welfare paradigm that would preclude a movement of the pendulum in the opposite direction.
More generally, Wu alleges, the consumer welfare paradigm is “too restrictive” in the sense that antitrust law prohibit less that it is designed to. It is hard to win an antitrust case. That is because antitrust precedent has been heavily influenced by (i) beliefs that false positives are more costly than false negatives and (ii) a concern about the predictability of legal rules with which companies are expected to comply. The consumer welfare paradigm does not require any of this. Consider, for example, the courts’ greater concern about false positive than about false negatives: that rests on empirical beliefs, specifically the premise that “errors on the side of excusing questionable practices are preferable” because markets almost always end-up self-correcting.
A second criticism that Wu makes against the consumer welfare standard is that it drives enforcement based on “economic criteria” characterised by “indeterminacy” and “abstraction”. As a result, antitrust practice became reserved to an elite class of experts, often economists, leading to a “democratic deficit”.
Wu’s complaint here is that technocrats living in their own, self-referential world have captured antitrust law. However, the normative choices – including the foundational decisions that antitrust law should be about bad conduct and market power – have been made by generalist judges, as is the case with vast amounts of US law. The economists’ special role has been, and remains to this day, confined to what in a legal context are significant yet factual issues: establishing market power, measuring efficiencies, estimating damages, etc. There is nothing wrong or undemocratic about relying on fancy tools and experts to help solve tough factual issues (like forensic analysis in criminal cases).Many areas of law involve arcane rules, often require expert input, and are not accessible to the general public. These include bankruptcy law, health law, tax law, environmental law, mass tort law, labour law, and countless others.
Most importantly, the indeterminacy problem is vastly overstated. The primary function of antitrust law is to deter anticompetitive conduct without discouraging procompetitive conduct. For the most part, the law is not indeterminate. Every sentient businessperson knows that she should not enter into price fixing agreements, allocate customers with competitors or engage in conduct that benefits her firm only by harming rivals. Of the millions of decisions that business people make every day, only a miniscule portion require the guidance of lawyers and economists, and an even smaller number become the subject of costly and uncertain litigation.
In addition to Wu’s criticisms of the consumer welfare paradigm not being able to survive scrutiny, it is not clear how “protection of competition” or the “competitive process” differs from the consumer welfare paradigm.
Wu identifies a number of questions that “the enforcer should ask” and that Wu believes would “capture far more of the dynamics of the competitive process than does existing analysis”. Most of them – who is the complainant, who is the alleged lawbreaker, what is the complained of conduct, is there evidence of anticompetitive effects – are the bread and butter of everyday antitrust law.
As you may have gathered, I am broadly sympathetic to this paper, with one (important) caveat: it displays a completely different understanding of the concept of ‘consumer welfare’ than Wu, without acknowledging this. Here, consumer welfare is merely a guiding principle for legal design and enforcement that covers a variety of theories of ‘utility’; from Wu’s perspective, it is an actual decisional benchmark requiring effects on prices and output and which is applied in individual cases.
The reason why the authors are able to engage in such an argumentative strategy is the vagueness (I prefer ‘openness’) of the ‘consumer welfare’ concept. This is not only a problem here: many of the discussions on the goals of antitrust are actually about the lack of adequate enforcement, particularly in the US. Many of these papers could be easily reconceptualised – say, in court – into arguments about what the consumer welfare standard does and does not entail for competition law. This is also a reason why systems where individual cases with reach different outcomes are able to all claim that they apply a ‘consumer welfare’ standard.
A secondary, but related point is that Wu’s reading of the consumer welfare standard could be said to have just been endorsed by the US Supreme Court – which, in its American Express decision, seemed to imply at p. 17 that only conduct that can restrict output would be anticompetitive. I do not want to read too much into this decision or its dicta, but it is not an easy fit with a ‘process oriented’ approach to US law. Furthermore, it is often pointed out that one important distinction between European and US law is that the former can focus on protecting the competitive process even absent directly measurable effects, while this is not done (because it is not empirical) in the US. Again, I am not saying that this is correct – but it goes to my point that consumer welfare is an elastic enough concept to be misunderstood by intelligent people in sophisticated ways.