CPI TALKS ON

THE CONSUMER WELFARE STANDARD

An Interview with Diana Moss (American Antitrust Institute)

by Jon Baker (American University)

Ahead of the inaugural conference on Challenges to Antitrust in a Changing Economy, at Harvard Law School on November 9th, CPI reached out to Jon Baker (Professor, American University) and Diana Moss (President, American Antitrust Institute). They will participate in "The Consumer Welfare Standard” panel, together with Rob Atkinson (President, Information Technology and Innovation Foundation), Renata Hesse (Partner, Sullivan & Cromwell), and Einer Elhauge (Professor, Harvard Law School).

In this exclusive interview, Diana Moss has responded to three questions asked by Professor Baker on the consumer welfare standard and its current application in US antitrust law.

This conference is co-organized by CPI and CCIA. To see the full program and register free, please click here.

Some progressives say that antitrust rules pay insufficient attention to harms to suppliers, including workers; harms along competitive dimensions other than price and output, such as quality or innovation; and the ways that the exercise of market power may undermine non-economic values, as by creating anti-democratic political pressures or limiting the opportunity of small businesses to compete. To what extent are these concerns justified?

Today’s debate over the role of antitrust has generated a lot of blue sky thinking about the state of U.S. antitrust. I think of this debate as a very different process from that of crafting constructive reform proposals. Actual reform requires knowledge of how the laws and standard have been and can be applied by enforcers and the courts. For example, we know that the consumer welfare standard can address the price and non-price dimensions (e.g., quality and innovation) of competition. The standard also reaches to the harms resulting from the exercise of market power anywhere along the supply chain (e.g., consumers and workers). The control of economic power serves to limit barriers to entry and exclusionary conduct that targets smaller innovative rivals and in stemming the growth of political power.

In sum, if enforcers and courts used the full scope of the law and standard, antitrust would today be more effective in defending and promoting our markets. The reality has been different, namely, a narrow interpretation of the consumer welfare standard under the conservative ideology has held sway for decades. In response to this, some proposals advocate for wholesale reforms that would essentially do away with any standard. This risks reforms that divert the antitrust laws to purposes for which they are not designed and could exacerbate the current state of under-enforcement.

As a progressive (as I will articulate more in my panel remarks), I think of constructive reform as including a more nuanced approach through a package of complementary proposals. These include: (1) legislative clarification of the full scope of the law and increased appropriations for the agencies for enforcement; (2) guidance from the agencies that articulates a “dynamic and symmetric” consumer welfare standard (describes in #2 below) and requirements for implementing it; and (3) efforts to strengthen or introduce presumptions of illegality in mergers and some forms of conduct.

Some antitrust progressives argue for tough restrictions on vertical integration and vertical restraints. At the same time, some antitrust conservatives argue that vertical conduct should be presumed pro-competitive. Does the economic evidence favor either of these positions, or some third alternative?

The problem of a misreading of the consumer welfare standard is most evident in the area of vertical merger control. Conservatives have long-promoted the short and longer-term (i.e., dynamic) efficiencies of combining assets in complementary markets. These include eliminating double margins, economies of coordination, and reduced transactions costs. On the other side of the ledger, however, conservatives focus almost exclusively on short-term price effects. This asymmetric approach to implementing the standard almost guarantees deciding a merger in favor of merging companies. Considering the effects of a merger on total welfare, not consumer welfare, further stacks the deck against consumers.

It is important to note that many of the efficiencies claimed in vertical mergers never materialize. Analysis indicates that most of the synergies claimed by merging parties are never realized. Managers struggle with integrating large and diverse organizations so that any economies of coordination can remain unrealized. Other analysis shows that the costs of integrating diverse assets (e.g. airline mergers), often takes years and generate higher integration costs than what were originally projected.

What does this mean for enforcement? As a progressive, for me, it means that un-stacking the deck against consumers should be a high priority. For example, merger control should employ a dynamic and symmetric consumer welfare standard, or assessing the potential effects of a merger on both sides of the ledger in the same way. On the competitive effects side, enforcers and courts should consider both price and non-price effects, including the potential harms to competition and consumers from short and longer-term dynamic effects. This would realign the current asymmetry I mentioned above. Enforcers and courts should more rigorously assess efficiencies claims, basing their assessment not only on the cognizability and merger-specific nature of such claims, but also on whether previous mergers proved up claimed efficiencies. And enforcers and courts should insist on proof of passing such efficiencies through to consumers.

Finally, in the case of vertical mergers, recent experience with mergers such as AT&T-Time Warner and CVS-Aetna indicates that highly concentrated markets are strong indicators that the merged firm will have the incentive to foreclose its rivals from access to inputs and distribution. I believe that it is time to craft vertical merger equivalents to the structural presumption we have for horizontal mergers. In other words, vertical mergers in highly concentrated upstream and/or downstream markets can be presumed to enhance the incentive to foreclose rivals. As such, they should be presumptively illegal under the antitrust laws.

Some antitrust conservatives recommend that antitrust rules be crafted to minimize the harm to aggregate surplus from conduct harming competition, rather than the harm to consumer surplus, and that courts and enforcers should freely allow harms in one market to be justified by benefits in another, contrary to legal precedents that prohibit cross-market tradeoffs. Do you agree?

I do not agree. Such proposals would codify conservative ideology that has arguably been responsible for under-enforcement of the antitrust laws for decades and that has contributed to the state of declining competition in the U.S. In the unlikely event such proposals were to gain traction, they would be a definitive “no” vote for consumers and workers, innovation, and the importance of protecting our market-based system. Such a proposal invites defendants to pursue even more expansive and amorphous arguments about potential benefits of anticompetitive mergers and abusive conduct. Moreover, persuading enforcers and courts to accept harms in one market on the promise of benefits in another opens a Pandora’s box of economic, legal, and institutional reforms that would further stymie enforcement.

CPI Talks on the Consumer Welfare Standard - Interview with Diana Moss by Jon Baker