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Consumer Surplus as the Appropriate Standard for Antitrust Enforcement

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  • Russell Pittman

    (Economic Analysis Group, Antitrust Division, Department of Justice)

Abstract

In antitrust enforcement as in cost-benefit analysis, neoclassical economics may be interpreted as arguing for the use of a “total welfare” standard whose implementation treats transfers as welfare-neutral. Several recent papers call for antitrust agencies to move in the direction of this version of a total welfare standard for enforcement. However, as Williamson (1968) noted, horizontal mergers typically result in transfers that may greatly exceed in magnitude any deadweight loss or efficiency gain, so that a decision to ignore transfers may be quite important. I argue that such transfers are likely overall to be quite regressive, and thus that a consumer surplus standard rather than a total welfare standard may be appropriate for antitrust. Two common arguments against this standard – that most mergers are in markets for intermediate goods, and that a consumer welfare standard implies a tolerance for monopsony – are examined and found wanting. I argue in addition that, even if a total welfare standard is used, both the finance literature on merger outcomes and the structure of the U.S. enforcement agencies suggest that the use of a consumer surplus standard by the agencies is more likely to achieve that goal.

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Bibliographic Info

Paper provided by Department of Justice, Antitrust Division in its series EAG Discussions Papers with number 200709.

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Length: 19 pages
Date of creation: Jun 2007
Date of revision:
Handle: RePEc:doj:eagpap:200709

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Postal: Department of Justice Antitrust Division 450 Fifth Street NW Washington, DC 20530
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Web page: http://www.justice.gov/atr/
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  1. Vijay Gondhalekar & R. Raymond Sant & Stephen Ferris, 2004. "The price of corporate acquisition: determinants of cash takeover premia," Applied Economics Letters, Taylor & Francis Journals, vol. 11(12), pages 735-739.
  2. Coate, Malcolm B & Higgins, Richard S & McChesney, Fred S, 1990. "Bureaucracy and Politics in FTC Merger Challenges," Journal of Law and Economics, University of Chicago Press, vol. 33(2), pages 463-82, October.
  3. Bargeron, Leonce L. & Schlingemann, Frederik P. & Stulz, René M. & Zutter, Chad J., 2008. "Why do private acquirers pay so little compared to public acquirers?," Journal of Financial Economics, Elsevier, vol. 89(3), pages 375-390, September.
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  5. Damien J. NEVEN & Lars-Hendrik RÖLLER, 2000. "Consumer Surplus vs. Welfare Standard in a Political Economy Model of Merger Control," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 00.24, Université de Lausanne, Faculté des HEC, DEEP.
  6. Farrell, Joseph & Katz, Michael L, 2006. "The Economics of Welfare Standards in Antitrust," Competition Policy Center, Working Paper Series qt1tw2d426, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
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  8. Dennis W. Carlton, 2007. "Does Antitrust Need to be Modernized?," EAG Discussions Papers 200703, Department of Justice, Antitrust Division.
  9. Baker, Jonathan B & Shapiro, Carl, 2007. "Reinvigorating Horizontal Merger Enforcement," Competition Policy Center, Working Paper Series qt4x44j66x, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
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  15. Amihud, Yakov & Lev, Baruch & Travlos, Nickolaos G, 1990. " Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions," Journal of Finance, American Finance Association, vol. 45(2), pages 603-16, June.
  16. Mandelker, Gershon, 1974. "Risk and return: The case of merging firms," Journal of Financial Economics, Elsevier, vol. 1(4), pages 303-335, December.
  17. Röller, Lars-Hendrik & Stennek, Johan & Verboven, Frank, 2000. "Efficiency Gains from Mergers," Working Paper Series 543, Research Institute of Industrial Economics.
  18. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-97, September.
  19. Kenneth Heyer, 2006. "Welfare Standards and Merger Analysis: Why not the Best?," EAG Discussions Papers 200608, Department of Justice, Antitrust Division.
  20. Besanko, David & Spulber, Daniel F, 1993. "Contested Mergers and Equilibrium Antitrust Policy," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(1), pages 1-29, April.
  21. Raghavendra Rau, P. & Vermaelen, Theo, 1998. "Glamour, value and the post-acquisition performance of acquiring firms," Journal of Financial Economics, Elsevier, vol. 49(2), pages 223-253, August.
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Cited by:
  1. Jarig Sinderen & Ron Kemp, 2008. "The Economic Effect Of Competition Law Enforcement: The Case Of The Netherlands," De Economist, Springer, vol. 156(4), pages 365-385, December.
  2. Esteves, Rosa Branca & Vasconcelos, Helder, 2010. "Price Discrimination under Customer Recognition and Mergers," CEPR Discussion Papers 7683, C.E.P.R. Discussion Papers.
  3. Pingping Shan & Guofu Tan & Simon Wilkie & Michael Williams, 2012. "China’s Anti-Monopoly Law: What is the Welfare Standard?," Review of Industrial Organization, Springer, vol. 41(1), pages 31-52, August.
  4. Emilie Dargaud & Andrea Mantovani & Carlo Reggiani, 2013. "The fight against cartels: a transatlantic perspective," Working Papers 2013/31, Institut d'Economia de Barcelona (IEB).
  5. Thomas Jeitschko & Nanyun Zhang, 2011. "Patent Pools and Product Development," Working Papers 2011-02, Towson University, Department of Economics, revised Feb 2011.
  6. Timothy J. Brennan, 2009. "Energy Efficiency: Efficiency or Monopsony?," UMBC Economics Department Working Papers 09-110, UMBC Department of Economics, revised 01 May 2009.
  7. Dennis W. Carlton & Ken Heyer, 2008. "Appropriate Antitrust Policy Towards Single-Firm Conduct," EAG Discussions Papers 200802, Department of Justice, Antitrust Division.
  8. Marc Fusaro & Richard Ericson, 2010. "The Welfare Economics of “Bounce Protection” Programs," Journal of Consumer Policy, Springer, vol. 33(1), pages 55-73, March.
  9. Brennan, Timothy J., 2011. "Energy efficiency and renewables policies: Promoting efficiency or facilitating monopsony?," Energy Policy, Elsevier, vol. 39(7), pages 3954-3965, July.
  10. Brennan, Timothy J., 2009. "Energy Efficiency: Efficiency or Monopsony?," Discussion Papers dp-09-20, Resources For the Future.

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