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Consumer welfare as antitrust goal. A note (di Michele Grillo, Professore ordinario di economia politica, Università Cattolica di Milano)


Over the last decades, a neoliberal approach to antitrust has stressed maximization of consumer surplus as the appropriate goal of antitrust, assuming the welfare of consumers as a measure of the efficiency of a market equilibrium. The “more economic approach” heralded by the so-called post-Chicago synthesis has induced a twist of the previous view of both antitrust structuralism and the Chicago School who were rather concerned with the connections between market competition and social division of labour. This note makes two points. First, it retraces the main successive steps in the history of antitrust to unveil the reasons behind the turn of consumer welfare from being a simple ancillary effect of the working of the competition to becoming the normative ground of antitrust. Second, it discusses three crucial challenges arising today from the neoliberal focus on consumer surplus as a direct way to assess the lawfulness of firms’ behaviour in imperfectly competitive markets.

Il consumer welfare come finalità antitrust. Una nota

L’approccio neoliberale della cosiddetta “sintesi post-Chicago” individua la finalità propria dell’antitrust nella massimizzazione del consumer welfare, in quanto proxy dell’effi­cienza del mercato. Ciò ha determinato un cambiamento significativo dell’approccio precedente, condiviso da strutturalismo e Scuola di Chicago, che si concentrava sulla relazione tra concorrenza e divisione sociale del lavoro, considerando il consumer welfare un semplice corollario dell’operare del meccanismo concorrenziale. L’obiettivo di questa nota è duplice. Innanzi tutto, si analizzano le principali fasi della storia antitrust per esplicitare le ragioni che spiegano la trasformazione del surplus del consumatore da semplice corollario a obiettivo. In secondo luogo, si mettono in luce tre conseguenze problematiche del­l’approccio neoliberale quando si ricorre al consumer welfare per valutare direttamente la liceità o l’illiceità dei comportamenti delle imprese nei mercati di concorrenza imperfetta.

Sommario:

Introduction. - Part I. The value of competition and the scope of antitrust law. – 1. The social value of competition. - 2. The passage from free-entry to perfect competition and the roots of antitrust. - Part II. Antitrust and the notion of consumer welfare. – 3. The surplus of consumer from analytical corollary to antitrust goal. - 3.1. Structuralism. - 3.2. The Chicago School. - 3.3. The post-Chicago synthesis. - 4. Challenges of Consumer Welfare as antitrust goal. - NOTE


Introduction.

Over the last decades, concern about the consumer welfare has been gaining wide acceptance as the single antitrust goal, substituting for a previous more vague structural approach that rested on the structure-conduct-performance (SCP) paradigm. The SCP paradigm held that market performance hinges on firms conduct, while conduct in turn hinges on market structure. Hence, structuralism in antitrust condemned market practices artificially reducing market thickness because they are objectively anticompetitive. We owe to Robert Bork the surge of the so-called consumer welfare standard. Bork harshly criticized structuralism for making antitrust a policy at war with itself [1]. The critical flaw of structuralism was lack of a consistent theory of competition when large-scale undertakings are the source of competitive efficiencies. Emphasizing that firm behaviour need have an adverse efficiency effect on market equilibrium in order to be illegitimate, Bork forcefully steered antitrust analysis towards a more economic approach. Bork’s criticism gave rise to a neo-liberal bent in antitrust claiming that maximization of the consumer welfare is the appropriate and accurate overall antitrust goal, because welfare of consumers provides the proper measure of the efficiency of a market equilibrium. While plausible, to establish a positive link between market efficiency and the welfare of consumers requires appropriate analytical foundations. We are in need of an intermediating variable, namely, organization of the underlying production process, in order to specify such foundations adequately. Due to the substantially indirect relationship between market efficiency and the welfare of consumers, we incur therefore serious risks of misconceiving the efficiency grounds of antitrust law when taking consumer welfare as the straightforward criterion to assess the lawfulness of firms’ competitive behaviour in imperfectly competitive markets. The purpose of this note is to analyse such risks by shedding light on a number of mistaken implications of the neoliberal approach in antitrust due to its direct focus on the notion of consumer welfare as the antitrust goal. The organization of this note is as follows. The first part discusses the social value of competition and the scope of antitrust law. More specifically, section 1 emphasizes the connections between competition and social division of labour, while section 2 argues that the economic roots of antitrust [...]


Part I. The value of competition and the scope of antitrust law. – 1. The social value of competition.

Due to the inherent interdisciplinary character of antitrust, an explicit premise of value is in order. In economic analysis, consumer surplus is the area lying under the demand curve for a given commodity and above the price paid by consumers for the commodity. The area measures the share accruing to consumers of the surplus arising from all market exchanges of a given commodity, while the remaining surplus accrues to producers. Yet, we should not infer from such distributional feature that assuming maximization of the consumer surplus as the antitrust goal means that antitrust law aims at protecting consumers, let alone in contrast with producers, interest. To see the point, we need delve into the analytical grounds for attributing social value to competition. As the last question has received assorted answers in the history of economic thought, a brief retracing of the evolution of the notion of competition is also helpful to the purpose. In the second half of the 18th century, classical political economists identified the source of the wealth of nations in social division of labour. Within this framework, they understood and appreciated competition as the best non-authoritative way to realize the optimal division of labour in society. More specifically, classical economists defended market competition on a twofold argument. First, competition pushes the price of any commodity to its minimum production cost, annihilating thereby all excess profits accruing to commodity producers. Second, when every production process is ruled by competition, the overall vanishing of excess profits allows only social subjects able to produce the commodity at its minimum cost – namely, only those enjoying a comparative advantage in producing the commodity – to actively participate in the market as producers. In other words, the distributional properties of the competitive equilibrium deserve attention only due to their implications for efficiency. They do not matter per se. The essential point is that, as a result of the zero-profit condition to which every competitive market equilibrium converges, division of labour urges any social subject to perform the task for which he is better endowed with respect to all his social fellows. The classical theory of market competition has two straightforward implications. First, we need acknowledge as a tautology that, for every profile of consumers’ reservation prices, whenever the price of any commodity equals [...]


2. The passage from free-entry to perfect competition and the roots of antitrust.

To catch the roots of antitrust law, we need call into play the crucial advance marked by 19th century neoclassical theory of perfect competition with respect to 18th century classical theory of competition as free entry. In agreement with classical economists, neoclassical economists identified as well the social value of (well-functioning) competitive markets in their being conducive to efficient division of labour. However, they disagreed with their predecessors as to the conditions under which we are entitled to assume that competition actually operates in such a way as to be socially valuable. More specifically, neoclassical economists were unhappy with an unqualified assessment that unfettered market free-entry is enough for giving rise to socially efficient division of labour. In contrast, they were concerned with the hurdles to competition arising from market power enjoyed by competing agents whenever the latter are able to behave in such a way as to modify the market equilibrium price of the commodity. Neoclassical economists emphasized that whenever economic agents have market power – namely, have the power to affect market equilibrium prices – society faces a market external effect, or a market externality. Being the source of an inherent conflict, between the behaviour of the individual agent and the interests of society as a whole, market power hinders the emergence of an efficient market equilibrium. In fact, it prevents the market price of the commodity from converging to its minimum production cost. Thus, in contrast with the classical view, neoclassical economists came to the much less optimistic conclusion that in order to rely on market competition as a vehicle for efficient division of labour in society we are in need of a far more severe assumption, namely lack of market power forcing agents to act as price-takers in perfectly competitive markets. The neoclassical notion of perfect competition has a surprising property. Under perfectly competitive ideal conditions, lack of market externalities associated with individual behaviour accommodates also economic freedom within the realm of J.S. Mill’s principle of individual liberty [2]. The principle claims that no interference with individual free agency, let it come from the State as well as from any other social institution, can be ethically justified if the consequences of individual action only concern the agent’s own well-being, while leaving any other [...]


Part II. Antitrust and the notion of consumer welfare. – 3. The surplus of consumer from analytical corollary to antitrust goal.

Albeit for reasons largely independent of protecting a specific class of agents in the economic arena, it has always been common in antitrust to look at welfare of consumers as a benchmark when assessing how to delimit the autonomy of economic agents in imperfectly competitive markets. Yet, the role played by the notion of consumer welfare has undergone a significant change in the last decades. More specifically, concern with the systemic drawbacks of imperfect competition on social division of labour has been normally associated in antitrust with focusing on consumer welfare as a simple presumptive measure of the imperfection of competition in the specific market. In contrast, in recent years, a prevailing neo-liberal approach has been stressing the need to check every single case in the light of the specific efficiency properties of the equilibrium resulting from market behaviour under assessment. Accordingly, firm specific behaviour is always legitimate as long as no “efficiency harm”, i.e., no loss of efficiency, hinges on it. This view has led to the claim that maximization of consumer welfare is the sole goal of antitrust. In what follows, I will discuss the emergence of the neo-liberal approach by briefly retracing three main phases of the history of antitrust along the XX century, namely: (i) structuralism; (ii) the Chicago School; (iii) the so-called post-Chicago synthesis. As I will argue in detail below, the neo-liberal approach receives large support from post-Chicago advocacy of a “more economic” approach in antitrust.


3.1. Structuralism.

Economic analysis first entered antitrust through structuralism. Since the beginning, economists saw their contribution as a systematic attempt at sorting out a unifying picture of the normative grounds of antitrust, from among a plurality of public goals that, in early days, interpreters usually reconstructed from parliamentary debate – such as, for instance, dispersion of economic power, satisfaction of consumers, or protection of the competitive process. Structuralism in antitrust rested on a general result of the then prevailing economic theory of imperfect competition. The theory established that, in imperfectly competitive markets, a positive relationship exists in equilibrium between the degree of industry concentration and the excess profits accruing to firms. A measure of the latter is industry mark-up, i.e. . As the numerator increases with the excess of the commodity price over the minimum production cost of the commodity, mark-up varies inversely with the overall amount of consumer surplus. Thus, the mark-up also assesses the degree in which imperfect competition due to industry concentration threatens the attainment of inefficient division of labour. Along several decades, the theory has given support to an overall interpretation of antitrust law censoring firm strategies artificially reducing the dispersion of industry structure as illegal market behaviour. A main strength of structuralism was that to provide a framework whereby consumer surplus plays a crucial role as a benchmark for market competition, not only with regard to the economic issue of market efficiency, but also with regard to the political issue of economic freedom. In fact, antitrust structuralism is concerned with market liberty as well as with market efficiency. With respect to the former, any reduction in industry dispersion reduces the scope of economic liberty because it enlarges the conflict between spheres of agents’ autonomous behaviour by increasing the extent of market externalities. With respect to the latter, any enlargement of the gap between the price and the minimum production cost of the commodity resulting from a reduction in industry dispersion reduces efficiency in social division of labour.


3.2. The Chicago School.

Efficient organization of social division of labour is the concern of Chicago School as well. At the very roots of the Chicago School was the highly theoretical research – undertaken in the Thirties of the 20th century by the young Londoner socialist, as well as economist, Donald Coase – about the causes of the extent of decentralized, vis-à-vis authoritative, organization of production in capitalist economies [4]. Coase suggested that the prevailing institutional organization hinges on a comparative analysis of the respective transaction costs, namely on the efficiency comparison of the costs that owners of production factors have to bear by governing transactions through the market, vis-à-vis the costs of running a firm as a hierarchy. More specifically, the firm supersedes market decentralization whenever the costs of authoritatively managing arrangements among owners of production factors within the firm are lower than the bargaining costs the same owners of production factors have to bear when dealing with analogous arrangements through market transactions. The modern theory of the firm largely expands on Coase result. Today economic theory describes the firm as the result of an agreement among owners of production factors who delegate to a single subject – in most prevailing circumstances the one conferring the capital factor – the residual rights of control, namely the right to take residual decisions under non-contractible circumstances [5]. Elaborating on the theory above, the Chicago School of Law & Economics has heralded a general anti-structural reading of vertical relations among firms in competitive markets. On the one hand, the Chicago School concedes that, by intrinsically reducing the thickness of markets for the exchange of production factors, hierarchical relations resulting from vertical agreements also reduce the degree of market competition, as envisaged by standard antitrust structuralism. However, Chicago scholars underline that the general goal of vertical agreements is to explicitly substituting an (efficient) hierarchical relation for a (less efficient) market transaction, precisely in pursuit of the efficient organization of production, hence of social division of labour. Therefore, it would be thoroughly inconsistent to assess vertical agreements through the lenses of the working of competition in the market. Antitrust law need appreciate vertical relations among firms per [...]


3.3. The post-Chicago synthesis.

The postulate that competition always eventually prevails allows Chicago not to depart from the classical defence of competition as the source of efficient division of labour in society. It took only to the so-called post-Chicago synthesis to lay the ground for turning the notion of consumer surplus from being an analytical corollary of the working of competition into becoming the overall goal of antitrust law. The label “post-Chicago” identifies today a systematic critical assessment of most Chicago views about antitrust, based on attentively reviewing them in the light of the game-theoretical advances in Industrial Organization in the Seventies and the Eighties of the 20th century [6]. The post-Chicago synthesis differs from the standard Chicago approach in an essential aspect. Chicago was in search of a sort of ontological criterion of lawfulness or unlawfulness of market behaviour. The criterion essentially rests on the argument that the rational pursuit of efficiency in the organization of the social division of labour always makes firms’ behaviour legitimate. Yet, game-theoretical advances in Industrial Organization have made things much more complicated. In imperfectly competitive markets, antitrust offences typically contemplated under the general classes of vertical agreements and abuses of market power normally involve strategic behaviour by firms simultaneously having both efficiency and market power effects. The latter effects are the typical concern of antitrust structuralism. Enlightening the former effects is the typical contribution of the Chicago School. The crucial message of the post-Chicago synthesis is that both consumers and producers benefit from both effects in intricate and different ways. Market-power increasing strategies, because they raise consumers’ reservations prices, or reduce the production costs, of the commodity, at the same time often enlarge the benefit for consumers, through a better quality of the commodity or a lower market price. Even lower prices not hinging on lower production costs may benefit consumers. In other words, the antitrust assessment always faces an essential ambiguity, about whether efficiency (thus, competitive) or market power (thus, anticompetitive) effects prevail overall. As both effects reverberate on the consumer surplus with opposite sign, the Consumer Welfare Approach comes to the conclusion to make consumers the ultimate arbitrator, thus pinpointing [...]


4. Challenges of Consumer Welfare as antitrust goal.

Turning an ancillary effect of the working of competition into the goal of antitrust law is fraught with consequences, not least because in several regards it changes our perspective on the task of competition in market societies. In the following, I dwell on three specific, albeit challenging, points. My first point concerns a considerable alteration in the received attitude to view competition as an overall mechanism interconnecting behaviour of all social subjects participating in division of labour. For both classical and neoclassical economists competition is a non-coercive system of inducing every individual to perform the task most appropriate to his own comparative advantage. When competing in a well-ordered market system, any individual may confidently expect to contribute to the society to which he belongs by enhancing his own best talents. Hence, following the received view, society need appreciate the market as a fully inclusive and cooperative system of efficiently managing all economic activities. Structuralism and Chicago School share both the view of the competition as a system, thus locating the ultimate goal of antitrust in preventing its imperfections from hindering efficient division of labour. In contrast, the consumer welfare approach heralded by the post-Chicago synthesis forgoes the prospect of competition as an inclusive and cooperative social system, in favour of a parcelled analysis of each single element of the whole set of market relations. Thus, post-Chicago scholars restrict each time analysis to the arrangement of the single transaction, simply interpreting the competitive interaction as a specific application of a sort of Darwinian process of natural selection [8]. My second point concerns the conceptual link between competition as a mechanism to select the winner against a whole army of losers in the specific transaction and the backward-looking, short period, assessment of lawfulness or unlawfulness of competitive behaviour invoked by the consumer welfare standard. According to post-Chicago scholars, behaviour is lawful as long as it induces short-period changes of the equilibrium price and quantity implying an enlargement of the consumer surplus. A most conspicuous evidence of the backward-looking approach is the test for abusive exclusionary strategies according to which exclusion of an as-efficient competitor is a necessary condition for abusive behaviour. Declaring that antitrust law should never punish a firm [...]


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