The Consumer Welfare Standard Is an Outdated Holdover from a Discredited Economic Theory

December 11, 2017

This week, the Senate Judiciary Committee is holding a hearing about the consumer welfare standard to determine whether it is outdated or remains the worthwhile core principle of antitrust enforcement. The hearing comes amid widespread questioning about antitrust’s effectiveness in recent decades. As the debate over the AT&T-Time Warner merger rages, this hearing is particularly timely. But there is no doubt that the consumer welfare standard, even if upheld through reinvigorated antitrust enforcement, is insufficient to ensure that the economy is fully competitive.

The consumer welfare standard, as put into practice by existing policy, means exactly what it says: that only outcomes facing consumers “count” when it comes to assessing anti-competitive harm, and in practice, those outcomes are restricted to short-term price effects. For example, when evaluating mega-mergers, federal antitrust agencies may consider a range of competitive effects and seek input from the merging firms’ rivals, suppliers, and customers. Unfortunately, history shows that, in practice, these agencies are only likely to bring a challenge if they can show the merger will likely raise prices for consumers. The 2010 horizontal merger guidelines state: “A merger enhances market power if it is likely to encourage one or more firms to raise price, reduce output, diminish innovation, or otherwise harm customers as a result of diminished competitive constraints or incentives.” This statement of purpose notably leaves out foreclosure or other discrimination along vertical supply chains and monopsony power, both of which are crucial to understanding the rise in corporate profits and in anti-competitive behavior seen to date throughout the economy.

(Horizontal mergers are mergers between business rivals in the same market(s); vertical mergers are when a firm buys its supplier or customer.)

Although one section of the horizontal merger guidelines does address monopsony—market power on the part of buyers as opposed to sellers—mergers are rarely challenged on that basis. As a recent letter sent by Senator Cory Booker (D-NJ) to the antitrust agencies documents, there is no record of a merger challenge premised on monopsony power in the labor market, and scant few conduct cases exist that address it—and only when the collusion is multilateral and documented in some sort of written agreement. Meanwhile, evidence of monopsony power throughout the economy proliferates, including through unilateral conduct.

The proposed AT&T-Time Warner merger highlights the problems with the consumer welfare standard in merger enforcement, particularly for vertical mergers. The key competitive threat arising from the merger is foreclosure: AT&T will discriminate in favor of Time Warner content in marketing to its subscribers (both wireless and broadband), and it will withhold that content from rival internet service providers. It is already doing that for some content by “zero-rating” in its wireless plans, and if the FCC succeeds in removing Title II classification for broadband (the “Open Internet rules,” as ultimately enacted), the discrimination will get worse. In response, there is likely to be a cascade of vertical integration in telecoms, resulting in a series of walled gardens. A recent paper by Professor Steven Salop highlights this history of inadequate vertical merger enforcement premised on discounting the threat of foreclosure, and the flurry of recent news stories about possible structural conditions placed on the merger by the DOJ Antitrust Division indicates it is attuned to this past policy failure. Crucially, under-enforcement against vertical mergers and conduct is inevitable if the only outcomes that matter are the ones facing consumers—it’s very hard to prove that consumers are harmed by foreclosure if they don’t directly face less choice of providers, and yet, we’ve seen what an anti-competitive mess the telecoms sector has become through lax antitrust enforcement.

Finally, the flaws in the consumer welfare standard are especially evident when it comes to tech platforms. As Lina Khan documented in her now-famous article, Amazon is a prime example of how trusts can run rampant in the modern era of lax antitrust enforcement under the consumer welfare standard: The tech giant charges low prices to consumers, and so it is able to consolidate power throughout its supply chain, favor its vertical affiliates, spy on its rivals using its domination of cloud computing, and use its control of one market to leapfrog into others—as the recent Whole Foods merger shows. Likewise, Google and Facebook are actually free and purportedly serve as shining exemplars of consumer welfare, as traditionally defined—except that they also let foreign powers sway our electionsforce independent journalistic outlets to surrender their content for free or vastly reduced subscription and ad revenue, shut off whole app ecosystems on a whim should they decide they want those markets for themselves, suck in data unbeknownst to their users, and impose discriminatory “tying” conditions on hardware manufacturers who want to license an operating system. All of these are exercises in market power, and all of them are ignored by the consumer welfare standard.

Even as they outwardly espouse the view that the consumer welfare standard is sufficient to enforce the antitrust laws, the federal agencies have in effect abandoned that view in a number of cases. They challenged the merger of AT&T and T-Mobile and of Time Warner Cable with Comcast on the grounds that each merged entity would have the ability to block access to the market for upstream suppliers. If they do seek structural conditions in AT&T-Time Warner, they will have done so again. And they should go further. It was misguided to wave through Amazon-Whole Foods, it was misguided to close the investigation into Google’s discriminatory practices prematurely in 2013, and it would be a mistake for the authorities to further ignore the concerns raised by Senator Booker. Any of those things is a tacit admission that the consumer welfare standard is indeed out of date, and I hope Wednesday’s hearing makes that quite clear.