New Merger Guidelines Should Keep the Consumer Welfare Standard

Economists Mark Israel, Jonathan Orszag, and Jeremy Sandford authored an article for the November edition of the CPI Antitrust Chronicle discussing recent statements made by heads of the Federal Trade Commission and Department of Justice that suggest new merger guidelines may replace the tried-and-tested consumer welfare standard with alternate goals.

Our experts express concern that shifting away from the consumer welfare standard will necessarily harm consumers, resulting in higher prices and lower output.

Abstract
Recent statements by the heads of the Federal Trade Commission and Department of Justice suggest that new merger guidelines may replace the tried-and-tested consumer welfare standard with a series of alternate goals. Proponents of such a shift see a need to promote goals other than consumer welfare and believe the consumer welfare standard is inadequate to enforce against mergers resulting in certain types of harms. We disagree. Shifting away from the consumer welfare standard will necessarily harm consumers, resulting in higher prices and lower output. In contrast, sticking with the consumer welfare standard is not biased toward or against enforcement, is consistent with enforcement against a variety of types of harm (as reflected in the agencies’ recent enforcement decisions), and provides ample room for greater enforcement if that is what the agencies desire. Shifting away from the consumer welfare standard would also replace a clear standard with a series of vague standards, undermining the agencies’ credibility, which would also harm consumers.

Introduction
The Federal Trade Commission (“FTC”) and Department of Justice (“DOJ”) are preparing to revise the 2010 Horizontal Merger Guidelines (“HMG”) and the 2020 Vertical Merger Guidelines (“VMG”). To the extent the revisions incorporate new scholarship and accumulated enforcement experience, we applaud efforts to update the public on such matters. However, we are concerned about some of the directions suggested in the agencies’ Request for Information (“RFI”) and about recent statements of the heads of both agencies. In particular, it appears that new guidelines may explicitly or implicitly move away from the consumer welfare standard (“CWS”). From an economic perspective, such a policy step would be a significant mistake.

The apparent hostility toward the CWS from some appears to derive from two premises: first, that the CWS ignores broad classes of harm, and second, that the CWS has directly led to systematic underenforcement. As we will explain in more detail, both of these premises are false.

The CWS defines the goal of merger enforcement as preventing mergers that harm consumers through a reduction in competition. We argue that this definition is consistent with the agencies’ actual enforcement records, including cases alleging nonprice harms, long-run harms, and harms to sellers. Critically, from an economic perspective, the CWS makes merger enforcement credible: It separates efficient mergers, which create benefits for consumers (even if they harm rivals and sellers), from mergers that do not benefit consumers. A CWS replacement would (necessarily) lack this feature, to the detriment of the very people that the Neo-Brandeisians seek to help.

Moreover, the CWS is not biased for or against enforcement. If the agencies desire to bring more merger challenges, they have ample tools to do so within the CWS. Replacing the CWS may appear to offer a shortcut to greater enforcement, but such a shortcut would trade credibility for expediency. In the long run, this tradeoff would damage the agencies’ ability to block harmful mergers. More immediately, shifting to an alternative standard would necessarily lower consumer welfare through higher prices and lower output. Such an outcome is an inevitable consequence of shifting focus away from consumer welfare and towards other goals.

This article was originally published by the CPI Antitrust Chronicle here. The views expressed are those of the authors only and do not necessarily represent the views of Compass Lexecon, its management, its subsidiaries, its affiliates, its employees, or clients.