An Excerpt from Debunking the Purchaser Welfare Account of Section 2 of the Sherman Act

An excerpt from Professor Alan Meese’s article, Debunking the Purchaser Welfare Account of Section 2 of the Sherman Act: How Harvard Brought Us a Total Welfare Standard and Why We Should Keep It (NYU Law Review 2010).  For the full article, please click here.

The last several years have seen a vigorous debate among antitrust scholars and practitioners about the appropriate standard for evaluating the conduct of monopolists under section 2 of the Sherman Act. Many of these individuals have advocated a “no economic sense” test, under which courts ask whether the monopolist’s conduct would have been economically rational for the firm in question without regard to its exclusionary impact. Others have proposed a more intrusive “consumer welfare balancing test,” under which courts seek to determine the net impact of a monopolist’s conduct on purchasers in the relevant market. Under this approach, courts would ban any conduct that reduced the welfare of such purchasers, without regard to the conduct’s overall impact on the welfare of society.

Most of the debate about these and other possible standards has focused on their economic utility. In the lexicon of antitrust policy, debate has centered on the question of which test produces the optimal mix of false positives (instances in which courts condemn conduct they should not) and false negatives (cases in which courts fail to condemn conduct they should). This debate is largely empirical, with the outcome depending upon factors such as the competence of courts at interpreting complex economic data, the impact of various standards— including the availability of treble damages—upon primary conduct, and the extent to which economic forces—for example, the entry of new competitors—will undermine monopolies that courts mistakenly decline to condemn.

Lurking in the background, though, is a more fundamental question, the answer to which necessarily determines what counts as a false negative or a false positive: What is it that renders conduct properly subject to condemnation in the first place? There are several possible answers to this question. For some, the mere fact that a monopolist’s conduct injures a rival may suffice to establish unlawful monopolization. This “populist” or “producer welfare” standard would thus condemn a firm that, for instance, obtains a monopoly by realizing economies of scale that allow it to underprice its smaller rivals. Others would only condemn conduct that reduces the total wealth of society, regardless of its impact on rivals or purchasers in the relevant market. Under this “total welfare” approach, which is generally attributed to Robert Bork and the Chicago School of antitrust analysis, the same firm could underprice its rivals, drive them from the market, and increase prices above the preexisting level, so long as the productive efficiencies from economies of scale outweigh the so-called “deadweight loss” resulting from the misallocation of resources flowing from the resulting monopoly power. A third group would ban all conduct by a monopolist that reduces the welfare of purchasers in the market that the defendant has purportedly monopolized, even if such conduct increases society’s overall welfare. Under this middle-ground “purchaser welfare” standard, the acquisition of monopoly due to economies of scale would be unlawful whenever purchasers in the relevant market pay higher prices, even if the benefits of these economies far outweigh the deadweight loss associated with monopoly pricing. In any event, the choice among the standards is inescapably normative: Neither economic theory nor empirical inquiry can make this choice for courts or the rest of society.

Despite the pivotal nature of this choice between normative premises, scholars and others who advocate various tests for section 2 liability generally avoid meaningful examination of this question. Some argue that their preferred test should apply regardless of which normative framework one accepts. Others—including leading enforcement officials—casually assert that their proposed approach is consistent with the purported normative framework underlying a mere handful of Supreme Court and circuit court precedents or that the normative premise underlying section 2 should automatically replicate that applied under section 1,5 where courts at least purport to balance a restraint’s benefits against any harms imposed upon purchasers in that market. Still others proceed without any apparent recognition that the test for analyzing alleged monopolistic conduct could turn on the choice between competing normative frameworks. Another scholar claims that the case law is ambiguous on the issue of normative premises. Finally, some scholars make arguments that depend upon one framework or the other without expressly embracing or justifying their chosen premise.

This Article undertakes a somewhat different inquiry, one that fills a significant gap in the scholarly literature: What is the normative framework that courts actually have chosen when adjudicating section 2 cases? The Article concludes that, despite some twists and turns along the way, courts have not embraced purchaser welfare as the fundamental value underlying section 2. Indeed, the author is aware of no decision in which a court implementing section 2 has employed purchaser welfare as the operative standard. At the same time, courts have repeatedly adopted tests that effectively implement a total welfare approach to antitrust regulation.

Before offering to reform the law, one first needs to know what the law is. Several antitrust scholars and lawyers have recently argued that the case law under section 2 of the Sherman Act reflects a purchaser welfare approach to antitrust—that is, an effort to maximize the welfare of those individuals who happen to purchase in the market purportedly monopolized by the defendant. Some of these same scholars claim that support for the alternative total welfare account originated with the Chicago School of antitrust analysis and that only Chicagoans support such a standard.

The choice between these two competing normative premises is of significant practical import. Selection of a total welfare standard implies a safe harbor for competition on the merits and any other conduct that makes economic sense separate and apart from any expectation of acquiring or maintaining monopoly power. Conversely, embrace of a purchaser welfare standard would entail application of a consumer welfare balancing test. Under this test, courts would balance any benefits produced by a challenged practice against its harms, judged by the impact of the challenged practice upon the welfare of purchasers in the relevant market. Thus, a practice that enhanced the overall welfare of society would nonetheless be unlawful if it reduced the welfare of purchasers in the relevant market.