Focus Areas:    Antitrust | Consumer Welfare Standard | FTC | FTC Reform

ICLE Comments, the Consumer Welfare Standard and the Role of Presumptions

Introduction

In this comment we address the continued viability of the consumer welfare standard (“CWS”), its flexibility to include presumptions, as well as the relative weakness of proffered alternatives to the CWS.

The CWS has been the subject of much discussion lately, largely driven by a seeming uptick in criticism of the standard. This criticism falls generally into two camps. On the one hand, the CWS is understood to be the broadly correct, if imperfect, touchstone for antitrust enforcement. Proponents of this view support the consumer- focused approach to antitrust but nevertheless often recognize the inherent shortcomings of the CWS (endemic to any general legal principle applied in complex and evolving economic circumstances), and particular areas where its operationalization can and should be improved (e.g. accounting for innovation harms or properly defining who counts as a “consumer”).

On the other hand, the CWS is objected to per se as an improper or incurably deficient guiding principle for antitrust enforcement. Proponents of this view see the CWS as inconsistent with the proper goals of antitrust, which should, they contend, focus on control of threats to the “process of competition” (as opposed to the welfare of consumers). Many of the adherents to this perspective also contend that antitrust should address private-sector economic threats to the democratic process more

broadly. In both cases a key component of the antipathy to the CWS is that it has allowed for the sustained presence of large corporations in the polity — a presence that is alleged to threaten, simply by its existence, both competitive and democratic welfare.

The first set of criticisms is part of a healthy dialog that seeks to continually update and improve the antitrust enforcement process. The second set of criticisms is less salutary, however (except perhaps to the extent that it has impelled the more constructive debate). The fundamental defect of the view that would undermine the CWS as the foundational principle of modern antitrust is its effort to shift antitrust enforcement away from a common-law-driven and economically grounded legal process toward a largely discretionary and expansive regulatory regime.

While the former is a constrained process for discovering and promoting the welfare of consumers, the latter is a process for allowing regulators to impose on consumers their predetermined (and often varying) notions of what is best for them — in other words: antitrust as a tool for the promotion of consumer welfare versus antitrust as a tool for the “protection” of consumers:

Ultimately, from Louis Brandeis to Elizabeth Warren, those who cloak their approach to market regulation in the cloth of “consumer protection” instead of “consumer welfare” start from the premise that consumers need protection—from both the market and from themselves—and that learned regulators are best situated to offer this protection. A consumer protection standard is inherently ambiguous, affording regulators the power to structure markets in whatever manner they deem best for consumers. The consumer welfare standard, on the other hand, restricts the conduct of firms and regulators alike, ensuring that both operate in the objective best interest of consumers.

There is an ironic elitism in the self-avowedly populist efforts to impose particular “ideal” market structures on the economy. Those who espouse this position implicitly or otherwise profess to know the ideal patterns into which markets should fall and what consumer preferences should be, and call for intervention to upset the actual patterns that emerge from the free association of individuals and firms in the economy and substitute their own preferences instead.

Regulation designed in accord with this vision of society is disconnected from the preferences of the millions of individuals and firms freely interacting in the economy. The CWS, for all its flaws, largely evades this critical problem with the structuralist view of antitrust by seeking out appropriate proxies for discovering the preferences of consumers. This is to say that allowing the competitive process to operate relatively freely will tend to surface the features of the market that are most salient and beneficial to consumers and firms. Under this goal, the task of enforcers is to ensure that mutually advantageous transactions in line with consumer preferences can take place without undue hindrance.

Contrary to the assertions of the modern populist critics of the CWS, this is not a revolutionary new paradigm foisted upon an unsuspecting public four decades or so ago. Instead, the experience of lawyers, economists, and government officials over the course of more than a century have progressively built up (and continue to build) an understanding of more and less efficient ways to intervene in a large, dynamic economy. Most importantly — and in contrast to the static, top-down vision of the anti-CWS approach — antitrust law under the CWS has substantially developed an inherent restraint that tends to permit new and untested economic interactions and business models to develop and evolve. As Harold Demsetz eloquently put it:

I have stated elsewhere what I believe to be the basic problem facing public and private policy: the design of institutional arrangements that provide incentives to encourage experimentation (including the development of new products, new knowledge, new reputations, and new ways of organizing activities) without overly insulating these experiments from the ultimate test of survival.

The work of economists such as Demsetz and Friedrich Hayek — whose crucial work developed the understanding of competition as a discovery process — teaches that policymakers should tend to operate under the assumptions that (i) a market outcome should only be acted upon if intervention improves upon the current state of affairs (and not if the market merely departs from some idealized state), and (ii) even when this is the case, intervention in complex systems should always be accompanied by an appropriate measure of restraint because it entails numerous unforeseeable effects; there is no guarantee that regulators will obtain what they set out to achieve.

Antitrust intervention entails more harm than good when enforcement moves away from the promotion of economic efficiency (through the proxy of consumer welfare). While the CWS is not perfect, of course, a standard aimed at political or social objectives inherently increases the politicization of the process and provides opportunity and incentive for firms to engage in conduct that reduces competition, such as colluding with competitors (in the name of social betterment, of course) and lobbying for regulations that limit entry (rent-seeking). Antitrust law unmoored from a consumer welfare goal may also be used to prop up failing firms in less obvious ways. Using the proxy of market structure to determine the “right” number of firms to achieve the welfare of some (favored) producers, democratic “health,” or some other non-CWS metric is, at best, a messy inquiry and will likely lead authorities to protect economically inefficient conduct.

Bork’s work and that of his intellectual forebears represented a movement toward more accurately assessing the welfare effects of various approaches to antitrust enforcement. The virtue of the CWS, as we have previously noted to the Commission, is that it provides a relatively clear set of metrics for assessing the conduct of firms without needing to evaluate the motivation of firms: are consumers better off or worse off as a result of a certain set of observable behaviors?

Here it is crucial to also note what the CWS is and what it is not. The CWS is not a single tool; it is not even, in itself, a tool at all. Rather, it is a methodology by which to arrange the legal and economic tools that guide antitrust enforcement and adjudication and to evaluate their efficacy. This inquiry’s focus on the role of presumptions provides an excellent lens through which to view the CWS in this regard.

As we detail below, presumptions are neither good nor bad per se, but are merely a tool, the utility of which depends upon the method of use. When applied within the CWS framework, presumptions can serve procompetitive ends. By contrast, when employed to satisfy the ends of advocates who wish to impose hypothetical “ideal” structures on the economy, presumptions can be — and often are — destructive.

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