Indeed, antitrust economics has developed significantly since courts first adopted the consumer welfare standard, providing an increasingly insightful basis for decisions. The populist antitrust movement argues vociferously for abandoning the well-established consumer welfare standard. To many within this movement, the consumer welfare standard is an impediment to successful antitrust enforcement and to the achievement of socio-political goals such a regime may foster. As such, they argue, the consumer welfare standard should not be allowed to persist.
This line of argument views with the rosiest of glasses the well-trod history, described above, of antitrust enforcement pre-consumer welfare standard—which experts, scholars, Nobel Laureates, judges and Supreme Court Justices across the political spectrum have recognized to be a disaster that undermined fundamental principles of our democracy, including the rule of law. Nonetheless, populist antitrust proponents advocate returning to this pre-consumer welfare standard world.
Some of the many benefits of the consumer welfare standard—and the commensurate costs of abandoning this standard—are described above. This section explores the empirical evidence upon which populists rely when arguing to abandon the consumer welfare standard. The move to reject a standard that has been uniformly embraced by the Supreme Court and the lower courts for decades should be supported by clear economic consensus that the standard is doing more harm than good.
Thus far, however, the populist antitrust movement has not demonstrated such a sound economic basis. The evidence upon which it relies is mixed, at best.
At most, it calls into question the level of enforcement under the consumer welfare standard, not the utility of the standard itself. As an initial matter, then, rejecting the consumer welfare standard today would risk all the observed benefits of the standard without compelling evidence of an actual problem—and with no persuasive reason to believe the proffered solutions would enhance outcomes. Populist antitrust supporters make numerous assertions and policy proposals.
Some of the most frequently articulated include: 1 concentration is increasing, competition has weakened, and weak antitrust enforcement is to blame; 2 lax antitrust enforcement has allowed prices to increase and output to decrease; and 3 increased antitrust activity would reduce economic inequality. This section addresses each claim in turn.
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To begin, however, there is, in fact, no rigorous economic support for claims that high concentration levels are a strong indicator of harm to competition or that they should trigger a presumption of such harm in antitrust analysis. Instead, such assertions are based on a simple inference of competitive effects from market structures, and the unsupported assumption that an increase in concentration can mean only a reduction in competition.
Properly considered, a superficial increase in concentration is just as consistent with an increase in competition as with a decrease; the contrary claim — that there is a clear causal link between increased concentration and reduced competition — simply disregards the weight of economic evidence. The fact is that economists know very little about the relationships among market structure, firm size, competition, profits, prices, entrepreneurship, and innovation. In particular, in markets in which competition occurs significantly through innovation, the effect of increased concentration on competitiveness is ambivalent, at best.
Excessive reliance on obsolete, market-share-based analysis to evaluate antitrust practices is tantamount to a rejection of modern antitrust principles and the economic learning that undergirds them. Moreover, such an analysis is likely to lead to decisions that reduce rather than promote consumer welfare and the public interest. As evidence of the purported increase in concentration underpinning these alleged defects, promoters of populist antitrust frequently cite studies that examine high-level industry designations often based upon NAICS codes and find, for instance, the 50 largest firms in a broad industry sector increased in revenue share over a recent ten-year period.
This logic has several critical flaws. One is that the ability to measure the 50 largest firms in a sector itself demonstrates there are at least 50 competitive firms, which would seem, in the abstract, to be a not-insignificant number of firms. Another, related, logical flaw is that the industry-level designations upon which these studies rely have little to no utility for antitrust purposes.
They are far too broad to offer insight into actual market power.
Authors of the concentration studies themselves, leading economists across the political spectrum, and the Antitrust Agencies all acknowledge this basic point. It also covers an expansive breadth of businesses, such as new and used car dealers, boat dealers, furniture stores, floor covering stores, household appliance stores, electronics stores, supermarkets and other grocery but not convenience stores, fish and seafood markets, various clothing stores, jewelry stores, sporting goods stores, musical instrument and supplies stores, florists, art dealers, tobacco stores, and more!
So, identifying that concentration across these vastly different retail segments, in the aggregate, increased cannot illuminate our understanding of actual market power.
These carefully delineated antitrust markets underscore the limited utility of citing to industry-level designations within antitrust debates. Another threshold flaw in the populist logic is that it assumes concentration is per se bad and something that antitrust law should always condemn. As discussed above, economic theory and empirical work has debunked this notion—and for good reason. Again, simply counting the number of firms in existence fails to shed any real light on the underlying competitive dynamics of a given industry.
Consider an Olympic example. While it might have been the case that competition in this field was lower over the last 16 years maybe competitors were just slower than average, making it easier to win gold , it might very well have been that competition was just as strong—if not stronger—than ever.
To understand the competitiveness of the field, we would have to examine several additional facts. As it happens, the clear consensus is that Phelps faced an incredibly competitive field—he broke several world and Olympic records including some of his own!
The same basic idea holds in economic competition. An increase in concentration might be correlated with a decrease in competition, but it might also be the natural result of a healthy competitive process and consistent with constant or increasing competition.
In other words, identifying an increase in concentration—particularly an increase in industry-level concentration rather than in antitrust-market concentration—is not the same as identifying a failure of antitrust enforcement. A corollary is that altering antitrust rules to respond to concentration, alone, threatens to undermine competitive and anticompetitive outcomes alike. It would punish the victorious firm for winning and successfully growing larger—which both economic learning and the courts tell us is a poor outcome.
Another assertion populist antitrust supporters regularly make is that prices have increased and output has decreased. Again, the evidence here is mixed at best. One study by De Loecker and Eeckhout, for instance, purports to demonstrate an increase in markups since , which they argue indicates market power has increased over this period. While this study purports to demonstrate an increase in markups and, therefore, an increase in market power, there are several problems with this methodology and reasoning.
Fundamentally, industrial organization economics literature has clearly established that profit margins, alone, are not reliable evidence of market power. To understand whether higher markups translated to higher prices, we would need to understand additional factors, such as whether marginal costs have changed.
Moreover, a trend toward higher markups does not necessarily indicate firm profits are likewise trending higher, as De Loecker and Eeckhout acknowledge. As they explain, a technological change that reduces variable, but increases, fixed costs might result in increased markups but not increased profits. In addition, higher markups might simply reflect a shift in the composition of firms within the economy. Consider, for instance, a software company that spends a tremendous amount developing an innovative new software that consumers download on their personal devices.
While the marginal cost of selling each new unit of software would be miniscule, the company—to stay in business—would need to charge a price that helped it recoup the costs incurred to create its innovative product. The more firms within the economy employing this business model, the more we would expect to see higher markups, and so the less we could assume, based upon the existence of higher markups, alone, that those markups derive from increased market power. Aside from the methodological issues with these studies, there is the added complication that other work finds conflicting results.
Robert E. Traina argues that SGA is an increasingly significant share of variable costs for firms in the U. Similarly, Ganapati examines data from , and finds concentration issues do not lead to higher prices, but in fact correspond with increased output.
Other studies upon which populist antitrust proponents rely purport to identify higher prices using different metrics. The evidence upon which populist antitrust supporters rely in asserting that prices have increased is, accordingly, mixed at best. The studies they cite often attempt to examine very important—but also difficult to measure—questions. The limits of these studies must be acknowledged in any serious debate regarding the state of antitrust enforcement today.
While many of these studies offer good initial insights, they mostly identify areas for further research.
And in no case do they clearly identify systemic shortcomings in current antitrust enforcement efforts. In addition to questionable empirical premises, the argument that we must abandon the consumer welfare standard because prices are higher and output is lower under this standard is in serious tension with remedies the populist antitrust movement proposes. Each of the proposed remedies would, as described above, diminish consumer welfare.
If, for instance, we adopted a public interest standard, prices and output might be one concern—but employment, democracy, the environment, and inequality might be competing concerns. And lower prices, higher output, and product improvements would not have the trump card in the analysis they do today. Similarly, if we decided to ban vertical mergers or prohibit any transactions over a certain size, we would be preventing at least some transactions that would lower prices and increase output. This would appear to be particularly likely in the case of banning vertical mergers, a move which empirical evidence indicates has anticompetitive outcomes—i.
Accordingly, even if prices and output have, in fact, trended in directions harmful to consumers, the better question to be asking is whether this is because enforcement under the consumer welfare standard is not at the optimal level. The consumer welfare standard focuses on just such factors—along with innovation, quality, and other consumer concerns. If the goal is to lower prices and increase output, it is difficult to see what better standard could be adopted than one that makes these consumer concerns its sole focus. Populist antitrust supporters further note that income inequality in the United States has increased dramatically in recent decades, and proffer that lax antitrust enforcement is to varying degrees to blame.
Shareholders are, by and large, in the top percentage of wealth and income distribution, so these increasing returns increase the wealth of the wealthiest and, thus, inequality. Imbedded in this theory are a couple key assumptions, both of which can be empirically tested. First, that inequality is increasing. The evidence here suggests inequality is likely increasing, though the magnitude of this increase is probably overstated. Second, that increasing antitrust enforcement would reverse this trend.
On the proffered causal link between antitrust enforcement and inequality, there is, so far, a notable dearth of empirical support or development. First , consider the evidence on inequality trends. Populist claims regarding increasing inequality largely rely upon analysis of the Gini coefficient for US incomes over the last 50 years, which appears to show a steep increase in inequality.
Examining the ratio of the share of US income among the 5th quintile of income-earning households to the share among the 1st quintile of households likewise seems to show increasing inequality. While these data points offer interesting insights, it is again important to understand their limitations.
As Robert Kaestner and Darren Lubotsky emphasize, for example, failing to account for government transfers and employee benefits—that presumably substitute, in part, for cash income—can meaningfully affect these kinds of inequality measures. As healthcare costs have rapidly increased in recent years, omitting a measure of health insurance benefits provided by employers or by the government could significantly affect ultimate inequality findings. Kaestner and Lubotsky, in fact, analyze inequality measures accounting for this omission, and find that including health insurance benefits substantially lessens the difference between high-end and low-end incomes.
Andrew George marked it as to-read Apr 05, Should the firm have waited until a rival cut a price before it initiated its own cut? These are offered in the spirit of challenging us to model and test the intentions of real world business people. Technological tying; Substitutability and the Relevant Market: Cellophane p. VI Exclusive Dealing.
Examining household consumption trends tells a similar story.