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Antitrust Policy and Inequality of Wealth by Prof. Herbert Hovenkamp – A quick glance

Prof. Herbert Hovenkamp, who many consider to be the ‘dean of American antitrust law,’ addresses the relationship between competition policy and inequality of wealth in his new article, published in Competition Policy International (CPI)’s Antitrust Chronicle.  His new publication is an educational piece explaining how antitrust norms enforced under the consumer welfare standard are already having a positive impact on wealth distribution and employment.  As such, Prof. Hovenkamp poses the question: “accepting that competitive markets are conducive to greater wealth equality, hasn’t antitrust already done all it can do?”

To address this question, Prof. Hovenkamp briefly examines the evolution of US antitrust norms, clarifies the reasons why consumer welfare is the appropriate standard, and illustrates how antitrust enforcement contributes to wealth distribution and employment by using Amazon as an example.

Prof. Hovenkamp acknowledges that “antitrust law unquestionably affects wealth distribution.”  Furthermore, Prof. Hovenkamp reminds us of the literature suggesting that competitive markets are conducive to more even wealth distribution. Assuming this literature is true, Prof. Hovenkamp argues that rigorous antitrust enforcement aimed at increasing market competition inevitably contributes to wealth distribution.  Similarly, antitrust contributes to job creation by promoting increased outputs that demand more labor forces without decreasing efficiency.

But what is rigorous antitrust enforcement? Is harm to consumers enough to invite antitrust restraints or should harm to other players, job creation, etc. be factored into the antitrust analysis? Coming to the more specific question as to what yardstick one should apply to assess if a particular conduct is anticompetitive, Prof. Hovenkamp argues in favor of the consumer welfare standard, and against the general welfare standard that calls for factoring in efficiency gains, benefits to other players, competitors, etc.

Prof. Hovenkamp suggests three reasons for choosing the consumer welfare standard as the right antitrust analytical framework:

  1. Legislative History: Prof. Hovenkamp reminds us that the legislative history of the antitrust laws was driven by two main concerns, namely (i) high prices and (ii) emergence of big businesses that threatened smaller competitors.  For example, the Robinson-Patman Act (the RPAct) was passed to protect small grocers from the rise of vertically integrated chains stores such as A&P.  However, as Prof. Hovenkamp notes, although the passage of the RPAct protected smaller grocery stores, consumers became the unintended victims of the law as they had to  pay higher prices. For obvious reasons the supporters of the RPAct did not articulate that their goal was to harm consumers.  Prof. Hovenkamp clarifies that their objective was to protect smaller players, not to penalize efficient firms that gain market shares on account of efficiencies.  
  2. Principles: Neoclassical economic models relating to efficiency analysis, or ‘welfare tradeoffs,’ used to advance the general welfare standard do not withstand legal scrutiny.  The efficiency models that analyze the efficiency of the overall economy without analyzing its effects on wealth distribution (such as the Pareto efficiency or Kaldor-Hicks efficiency model) are inapplicable to antitrust analysis or merger analysis where efficiency gains need to be verifiable.
  3. Administrative Concerns: The consumer welfare model is easier to administer. To quantify the amount of general welfare generated by a conduct, one has to quantify several variables, such as production efficiency gains and resultant consumer loss.  On the other hand, consumer welfare standard requires quantification of reduction in output or ascertaining a decline in product quality.  Simply put, the consumer welfare standard is easier of the two to apply.

Finally, from a pragmatic viewpoint, Prof. Hovenkamp recalls that the selection between total welfare and consumer welfare rarely makes a difference when enforcing the antitrust laws.  Further, the model of ‘welfare tradeoff’ — which compares the increase in general welfare or production efficiencies  with consumer losses — has rarely, if ever, found application in real life antitrust situations. In fact, despite the efficiency defense being raised ever so frequently before the courts, there are no instances of its application.

So, according to Prof. Hovenkamp, under the consumer welfare standard, Sections 1 and 2 of the Sherman Act and Sections 3 and 7 of the Clayton Act, in their current form, present a useful wealth distribution toolkit.  

But, with the rise of big businesses, such as Amazon, that compete fiercely on prices against smaller players, and the increasing concern from some policymakers towards the emergence of big companies, particularly on the internet, are there any instances that warrant antitrust intervention on distributive grounds, even if such intervention would harm consumers?  The short answer is no.

The author argues that lower prices, provided they are achieved without reducing total market output and gained through competitive practices, should not be subject to antitrust intervention. Prof. Hovenkamp argues that such intervention would: (i) harm the consumers by robbing them of lower prices; (ii) create a slippery slope of limitless over-regulation that would lead to the imposition of ‘hysterical costs on everyone’; and (iii) disincentivize market shifting innovations that result in dominant firms (Ford, Bell, IBM, Kodak, Microsoft, Google, Apple, etc).

Most importantly, Prof. Hovenkamp notes that adopting antitrust policies that penalize firms like Amazon that produce lower prices, or higher quality, than their rivals may or may not lead to equitable distribution of wealth. Counterproductively, it may inhibit competition or unfairly benefit the rivals, who may or may not be small fish (think Walmart).

Furthermore, Prof. Hovenkamp addresses claims that Amazon and other tech companies are job killers, and that this should become an antitrust concern.  When discussing the issue of job losses the author agrees that productive efficiency gains may, in the short run, lead to job losses. But as Prof. Hovenkamp notes, job creation or preservation is not an antitrust concern – just the way it would be ridiculous to use patent laws to deny patents because the technology in question may lead to job losses.

Prof. Hovenkamp, finally, counters the allegation that Amazon engages in predatory behavior and/or acts like a monopsony buyer, reminding us that such claims need to “be more than asserted as an abstract proposition.” On predatory behavior, the author points to the law that demands predatory pricing to be a plausible strategy, which is not the case for Amazon based on its market positions.  Amazon would not be able to charge monopoly prices without making such price increases unprofitable. Against the claims of Amazon acting as a monopsony buyer, Prof. Hovenkamp recalls that a key element to act as a monopsony is suppressing output.  The author argues there is no hard evidence to support such claim based on casual observation of Amazon’s business.

Prof. Hovenkamp’s conclusion is clear: current antitrust prescriptions under the consumer welfare standard that foster higher outputs by condemning anti-competitive restraints have a conspicuous wealth distribution impact.  The counterfactual, i.e. the adoption of antitrust policies that would punish efficient firms on distributional grounds, would harm consumers in the form of higher prices, with dangerous spillover effects such as job losses that generally take place in a lower output market.  


Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.