Kim Them Do
The beneficial nature of competition for society is self-evident: in particular, consumers have more choice at lower prices and higher quality. Without competition pressure larger producers have no incentive to improve their product or to keep their prices down. The consumer welfare promotion objective is so significant that policymakers follow this commonsense approach in formulating the goals of their competition law and policy, as US antitrust law discourse illustrates.
One of the leading thinkers in consumer welfare is Robert Bork, who avocates a consumer welfare approach in various publications with the aim of protecting small and medium sized enterprises (SMEs).[1]
He claims that neither logic nor experience of the law are beneficial for consumers and that bad economics and weak jurisprudence make them worse off.[2] The way forward, he suggests, is using consumer welfare as a only legitimate goal of antitrust law, and this law should be interpreted and applied only in the way of consumer welfare protection objective: this is the simplest method of serving the goal of the law effectively.[3]
Bork provide two arguments for this:
First, it is easier to pursue a single than a multiple goal approach to antitrust law.
Second, a court is unlikely to assess all the harmful effects of given conduct on the consumer harm when balancing all of the kind of tests needed. A consumer welfare test would therefore be an easy tool for use by the courts.
In his argument for the goal of the US antitrust law, Bork points out that the Congress adopted the Sherman Act as a ’consumer welfare prescription‘[4] and that ’competition must be understood as a term of art signifying any state of affairs in which consumer welfare cannot be increased by judicial decree.’[5]
By contrast, the welfare economics scholarship has long invoked the role of consumer welfare, but contrary to Bork’s argument tells us that consumer welfare is an economic, not a legal term; its semantic ambiguity is truly problematic among scholars.
Their dispute is deeply and essentially substantive; their convincing arguments rests on the idea that this economic concept is not by itself a normative theory and cannot be used as a normative foundation, and it especially should not be seen as the only and ultimate goal of antitrust law. Perhaps most importantly, its interpretation and application may harm consumers and reduce total social welfare.[6]
What scholars are more concerned about is that Bork oversimplifies this complex terminology. It is deceptively simple, as Bork highlights just one aspect of its semantic variation in terms and fails to contribute further insights to convince them. For analytical purposes it is helpful to recall the concepts of economic efficiency and welfare optimization in order to understand Bork’s arguments. Two basic concepts are discussed below.[7]
First, there are four forms of economic efficiency: static, productive, allocative and dynamic. Efficiency is static if the set of products, production factors and prefences are assumed as given and constant and competition will cause no considerable effects in the particular market. Besides the static efficiency there are two other forms: productive and allocative efficiency.
The former is not only the ulitization of resources but also the maximization in the process of production. Firms focus solely on the amount of inputs or factors of production with minimal costs to reach productive efficiency. In doing so, they maximize their allocative efficiency. However, consumers think only of their willingness to pay and are happy to pay only the production cost.
Of course, static efficiency cannot statisfactorily explain the problem of inefficient allocation as techonological progress and consumer preferences change over time. The dynamic dimension of innovation in the production process and buyers’ tastes cannot be excluded from the analysis. Innovation is positive if it can better serve consumer preference. The dynamic efficiency test would therefore be a necessary tool for the further examination of market development.
Second, welfare means the performance of industry, and economic welfare is a standard concept that needs to be clarified. Most economists suggest using two tests: total surplus and consumer surplus. Total surplus (total welfare) is the sum of consumer surplus and producer surplus. Economic welfare is reached only if total surplus can be reached.
In contrast, consumer welfare (consumer surplus) is the aggregate measure of the surplus of all consumers. Producers’ profits are excluded from the analysis. Economists favor the total surplus standard and ignore the balancing test between producer and consumer welfare.
The reason for this is twofold: First, the consumer surplus calculation makes basic sense in welfare planning, but considering the increase in firms’ profits makes more sense when viewing industry performance and societal development.[8]
Second, the effects of distributive justice between producer and consumer welfare should not be an issue for their further examination; this is a philosophical rather than an economic research project and calls for entirely different methods from those that economists use daily. They cannot describe and justify it appropriately, but lawyers and philosophers can help policymakers reconsider the tax system and the law of succesion to solve the equality problem.[9]
These concepts illustrated above, are not synonymous: most notably, they offer more insight to assess what Bork advocated. Four typical misconceptions by Bork are discussed below.
First, his concept of allocative efficiency is most questionable. Instead of bringing more clarity to these conceptual confusions, Bork mixes allocative efficiency with productive efficiency without justifying his argument. Bork states that ‘the whole task of antitrust can be summed up as an effort to improve allocative efficiency without impairing productive efficiency so greatly as to produce either no gain ar a net loss in consumer welfare.’ [10]
Second, in developing his thesis Bork speaks of consumer welfare, which he understands as allocative efficiency in his argument: ‘Consumer welfare is maximization of wealth or consumer want satisfaction’.[11] In fact the wealth of the nation can conceivably be employed as social welfare; efficiency and consumer welfare are two closely interrelated concepts in the economic literature, and they may – but do not necessarily – align.
Third, based on price model theory, Bork advances his thesis. He contends that the best way to assess consumer welfare is to check the output restriction or price increase. Consequently cost saving and social loss are excluded from the analysis, but these factors are entirely relevant to further examination of the welfare economy.
Fourth, what Bork calls the consumer welfare standard is not clear enough, as he deals with the effects of the total welfare standard. He insists that ‘all consumers are also of business, and hence they must benefit from monopolisitic price increases, so efficiency with price increase would not hurt the average consumer.’ If the consumer welfare test is intended to appreciate the effects of given conduct on final consumers, producer welfare should be excluded from the analysis. [12]
All these counterarguments together indicate that Bork’s concept should not be convincing to academics. Not surprisingly, no courts refer to his concept directly, although most judicial decisions illustrate that the objective of antitrust is to improve consumer welfare. There is no evidence to suggest that the court adhered to Bork s analysis as a starting point for its judicial review. Some leading court decisions demonstrate this, as shown below.
In National Colegiate Athlethic Association v. Board of Regents of University of Oklahoma,[13] the court stated that the Congress enacted the Sherman Act as a ’consumer welfare prescription’, as Bork explains, but did not rely exclusively on price theory to test consumer welfare as Bork suggests. The court stated that the fundamental goal of antitrust law cannot be based only on the setting of price or output because that is not fully consistent with the consumer welfare protection objective.
In Brooke Groupe Ltd v. Brown & Williamson Tobacco Group[14] and Weyerhaeuser Co. v. Ross Simmons Hardwood Lumber Co.[15] the court made a distinction between consumer welfare and total welfare, stating that the former has always prevailed but the that court did not refer to economic efficiency.
Historically, most antitrust enforcement has been directed at anticompetitive behavior by sellers rather than buyers. In Telecor Communications v. Sw. Bell Tel. Co.[16], the court points out that suppliers should be protected by antitrust law as much as consumers, even when the anti-competitive practice does not harm the end users. The court argues that buying power can bring down prices across the market. The welfare efffect is in the interest not only of the final consumer but also the input suppliers.
Finally, the court held that effects on the competitive process are worth considering in testing the net welfare effect. In the Microsoft case,[17] the court states that the firm’s anticompetitive practice must be condemned if it harms the competitive process and thereby harms consumers.
Although the consumer welfare standard is a well-etablished concept in US competition law discourse, Bork’s concept has not been entirely accepted by the scholarship or the court.
[1] Bork, 1967, 57 Am. Econ. Rev. 242 (1967); Bork, Fortune, Aug. 1967; Bork, 1968 77 Yale L.R. 950 (1968); Bork The Antitrust Paradox, 1978; Bork, 1966, 9 J.L. & Econ 7.
[2] Bork (footnote 34) 1967 p. 242.
[3] Bork (footnote 34) 1967 p. 244.
[4] Bork (footnote 34) 1978 at 66.
[5] Bork (footnote 34) 1978 at 51.
[6] Orbach, Journal of Competition Law & Economics 2010 7 (1) 133-164.
[7] Kerber ‚Should competition law promote efficiency? Some reflections of an economist on the normative foundations of competition law in Drexl (footnote 3), 93-100.
[8] Orbach (footnote 39) at 141.
[9] For the classical economists, economics war part of moral philosophy. The principle of benevolence and self- restraint in The Theory of Moral Sentiments and the principle of the invisible hand and the self-interest in The Wealth of Nations of Adam Smith go hand in hand. Modern economists become versed in philosophy and argue that the redistributive justice through tax code or minimum wages is a costly affair, but the equality is determinant in promoting efficiency and sustaining growth, see Berg and Ostry ‘Equality and Efficiency’ 2011 Finance and Development 48 (3) 1-5.
[10] Bork (footnote 34) 1978 p. 91.
[11] Bork (footnote 34) 1966 p. 7.
[12] Orbach (footnote 39) at 140-142.
[13] 468 U.S. at 85.
[14] 509 U.S. 209 (1993).
[15] 549 U.S. 312 (2007).
[16] 305 F.3d 1124 (10th Cir. 2002).
[17] 253 F.3d 34 (D.C. Cir. 2001
