The definition of the Consumer Welfare Standard (“CWS”) as a measure to judge the effects of market consolidation or firm competitive practices is under review. The CWS used by both the Federal Trade Commission (“FTC”) and Department of Justice (“DOJ”) analyzes the effect on the final price to consumers with some consideration of non-price factors such as innovation, quality, and efficiencies. The price-based CWS has been a fairly objective and consistent standard based on economic theory and market facts. This price-based CWS is now under scrutiny, because recent studies suggest there is an ongoing economy-wide increase in concentration. Additionally, a purely price-based CWS may not be adequate for analyzing markets where consumers pay a zero price, and it also may not capture the effect on consumers and market efficiency when “big data” allows some sellers to perfectly price discriminate among buyers. However, there is no consensus among economists on how, or even whether, to broaden the CWS to address these issues or whether to add measures that consider the effects on other participants in a market.
The FTC’s recent public hearings on “Competition and Consumer Protection in the 21st Century” included comments on broadening the CWS to include non-price measures of consumer welfare and measures of effects on other market participants. Chairman Simons stated in his opening remarks, “…some are debating the very nature of antitrust itself, calling for antitrust enforcers to take account of policy goals beyond consumer welfare. Inequality, labor issues, excessive political power are perhaps the main examples.” The central issue is whether antitrust enforcement is properly focused on protecting consumers from price increases or if enforcement should be broadened to protect competition in order to ensure additional benefits to society.
Economists and practitioners in favor of including non-price effects on consumers and effects on other market participants argue that empirical studies over the last twenty-five years show increases in market concentration, decreases in share of costs accruing to labor, and a slowdown in innovation and productivity growth. They attribute these changes to the fact that some industries have only one firm, or a small handful of firms, dominating the industry. They argue that merger review using the current price-based CWS may allow these larger and more dominant firms to acquire small competitors and potential competitors. Some studies suggest that dominant firms may not have incentives to ensure data privacy, may wield significant political power, and may lead to increased income inequality, decreased wages, and higher unemployment. For example, in some technology markets, individual firms that pioneered an industry and have a large market share may be able to raise significant barriers to entry, either through network effects, proprietary control of consumer-generated content, or exercising political power. Thus, these economists and practitioners argue that a welfare measure that includes effects on income distribution, labor cost share, privacy protection, and innovation may be better suited for analyzing some markets.
Broadening the CWS to include these types of additional measures is not simple and raises other potential concerns. A broadened CWS may create a new “multi-goal” framework, and which goals should be considered, and the relative importance of each goal, may vary from case to case. This variation can create confusion for practitioners and the courts, which can result in firms forgoing efficiency-enhancing actions and inefficient enforcement. Practitioners and courts are familiar with the price-based CWS, and there is a long litigation history of using a “small but significant price increase” as the measure of consumer welfare. Proponents of a broadened standard have not articulated how different benefits to consumers (such as price, quality, variety, and privacy) should be traded off against benefits to employees, ownership, and society in general. In addition, other societal problems, such as wage rates and income distribution, may be better addressed through regulation, tax policy, and other legislative functions.
Moreover, the studies showing increased concentration, cited by proponents of broadening the CWS, have mixed findings. Additional studies find that the increase in concentration is not across all industries or marketplaces, but tends to occur in industries with technological innovation, where successful firms may have a first-mover advantage, or in declining industries which are experiencing exit by participants. Thus, stating that a single “big” firm dominates a market is not sufficient for determining whether competition has been harmed. It must be determined whether a firm’s actions are part of the competitive process or disruptive of the competitive process. Broadening the CWS will complicate such an analysis.
Another concern is that broadening the CWS may lead to a Total Welfare Standard (TWS). A TWS values firm efficiencies, whether or not passed through as lower prices to consumers, and increased participant profits as part of the determination of whether a merger or competitive action is likely to harm competition. A review using a TWS may approve mergers or competitive actions that raise consumer prices in the short run, because there are benefits to firms, employees, and the overall economy.
The current price-based CWS, while facing criticism, has resulted in fairly objective and consistent enforcement. Additionally, the Horizontal Merger Guidelines allow for the evaluation of non-price factors, such as quality and innovation, and merger efficiencies, as well as any potential monopsony concerns. While the goal of a broadened CWS is to better protect consumers and promote other societal benefits, a broadened CWS also may have significant drawbacks – including how to measure benefits, how to balance tradeoffs, and consistent and efficient enforcement.