Why Antitrust Law Should Protect Consumers First

The “dean of American antitrust law” weighs in on building better policy and the fallacy of targeting big business in defense of the little guy.

Herbert Hovenkamp

 

Herbert Hovenkamp is a Wharton professor of legal studies and business ethics with a joint appointment at the Penn Law School as well as the James G. Dinan W81 University Professor. More simply, he’s a prolific scholar in the area of antitrust law, earning the nickname “dean of American antitrust law” from the New York Times. Hovencamp spoke with Knowledge@ Wharton about his latest research, which builds a compelling defense for antitrust policies that advocate protecting consumers over businesses. An edited transcript of the conversation follows.

 

Knowledge@Wharton: You’ve recently completed two papers on antitrust policy. The first focuses on what you call progressive antitrust policy. “Progressive” is a word used in the news quite a bit these days, especially in the realm of politics. Can you talk about what it means for antitrust policy?

Herbert Hovenkamp: Progressives in general have tried to make antitrust policy more aggressive. That is, they don’t think markets work as well, and there ought to be more intervention on the part of the government against anti-competitive practices. The original progressive movement in the early 20th century had that motive, and the result was very significant expansion of the antitrust laws. More recently, the Democratic Party has espoused what they consider to be a progressive approach that would use the antitrust laws more aggressively, particularly against big businesses in highly concentrated industries, which are industries that have only a small number of firms.

 

K@W: You find a disconnect between progressive views about the role of regulation and what you would call optimal antitrust policy. You say in the paper that progressives tend to have outsized expectations about what antitrust could accomplish.

Hovenkamp: Yes. Antitrust is only as good as the fact-finding powers of courts and our knowledge about economic theory, and there are a lot of situations where we just don’t know as much as we need to in order to make the economic world a better place by means of an antitrust decree. I’ve always taken the position that antitrust needs to be a little bit more conservative or a little bit more cautious about proceeding against practices that it doesn’t understand very well. I’m concerned about overreaching on the part of this new wave of antitrust interventionism.

 

K@W: What should lawmakers keep in mind when crafting an optimal progressive antitrust policy?

Hovenkamp: I don’t think antitrust policy should have as its goal keeping small businesses in the market. I think its goal should be to maximize the welfare of consumers. And consumers are usually best off when output is highest. High output translates into low costs and high quality, and that benefits consumers. The fact is that sometimes it takes a pretty big business to benefit consumers. Small businesses frequently can’t compete with that, because they have higher costs. Frequently, they can’t produce products that are as good in quality. When that happens, an antitrust policy has to choose sides, which is either protection of small businesses or protection of consumers.

 

“Antitrust should give up on its quest for improving general welfare and instead focus solely on the welfare of consumers.”

 

K@W: Let’s talk about your second paper, which looks at antitrust policies and inequality of wealth. What are some reasons why people try to use antitrust policies to redistribute wealth?

Hovenkamp: I think the main reason is because Congress, or in some cases state legislatures, isn’t doing it by means that everybody agrees would be better. For example, the best way to redistribute wealth would be through a tax system or a welfare system. Those systems may not be particularly popular right now. Antitrust has the advantage for redistributional purposes that it uses very general, open-ended language that is capable of a wide variety of interpretations. It simply speaks of monopolization without really telling us what that term means, or competition without really defining that term. The thinking is that if we can’t get this from the legislature through explicit legislative action, maybe we can get it from the judges and the guys who are interpreting the antitrust laws.

 

K@W: You mention that antitrust law should focus on consumer welfare, but there’s another school of thought that you write about in the paper that talks about general welfare. What is the difference?

Hovenkamp: General welfare is the total welfare of all participants in the market—producers, consumers, and third parties that might be affected. By contrast, consumer welfare is concerned only with the welfare of consumers. Importantly, consumer welfare is much easier to measure in the context of antitrust litigation than is general welfare. General welfare always requires these very complicated balancing tests between harm to consumers on the one hand and benefits to producers on the other. In terms of measurement, consumer welfare has a huge measurement advantage. One of the things I advocate is that antitrust should give up on its quest for improving general welfare and instead focus solely on the welfare of consumers. That translates into preferring practices that produce higher outputs, and higher output generally makes the economy more efficient with benefits. It’s more attractive distributionally, because there’s a fair amount of evidence that says competitive high-output markets are better for more egalitarian wealth distribution than monopolized markets.

 

K@W: You also note how that approach may be applied to the Googles or the Amazons of today.

Hovenkamp: The Federal Trade Commission looked at the Whole Foods merger with Amazon but decided not to challenge it. I believe that was the right decision. The arguments against those large firms are based largely on the impact they have on smaller businesses. In the case of Amazon, it’s firms that make things and either compete with Amazon or supply Amazon. In the case of Google search, it’s based on complaints from firms that operate competing search engines and things like that. What both sets of arguments lack is any serious concern about the welfare of consumers. Very few of the complaints against either Google or Amazon come from consumers. Consumers, by and large, are happy with all the free stuff they get from Google. They’re also happy with Amazon’s low prices. If Amazon should switch to charging monopoly prices, it would lose most of its business. The same thing would almost certainly happen in the case of Google. What I find very disturbing about the arguments against both Amazon and Google is the lack of any serious attention to the impact on consumers.

 

K@W: It seems that often, other businesses are arguing about this in the guise of protecting consumers when they really want to protect themselves.

Hovenkamp: Sure. In the case of Google, it’s companies like Microsoft, which has a competing search engine, or Yelp, which has a competing specialty search engine. In the case of Amazon, one of the largest complainants has been Walmart, which is owned by probably the richest family in the United States. However, Walmart has been primarily dedicated to very traditional brick-and-mortar retail sales. Greater and greater portions of the retail economy have switched to online buying, which has hurt Walmart a lot and has benefited Amazon. A great deal of this complaining is nothing more than kind of a call to reverse a technological revolution in favor of firms that are committed to older ways of doing business that may have worked very well for them in the past but are not working so well today.

 

K@W: That’s pretty far away from the goals of antitrust law, correct?

Hovenkamp: There’s never been any viable theory that has articulated small-business protectionism at the expense of consumers as a viable antitrust goal.

 

K@W: By using the consumer welfare consideration, you can protect small businesses and consumers as long as the policy does both of those things?

Hovenkamp: Yes. We’re not really so much protecting small businesses as giving them a chance to compete. It may require that they change their technologies. It may require that they enter into new areas that they’re uncomfortable with. Increasing numbers of grocery stores have gotten into home delivery. These are fundamentally good things, because they benefit consumers, but they do put pressure on small businesses that have to make these technological or distributional changes.

 

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Published as “Building a Better Antitrust Policy” in the Spring/Summer 2018 issue of Wharton Magazine.

 

 

 

 

 

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