Against Consumer Choice as an Antitrust Standard (Some Preliminary Thoughts)

Josh Wright —  27 December 2010

The “consumer choice” approach to antitrust is increasingly discussed in a variety of settings, and endorsed by regulators and in scholarship, especially but not exclusively in the Section 5 context.  The fundamental idea is that the “conventional” efficiency approach embedded in the total and/or consumer welfare standards is too cramped and does not measure the “right” things. The consumer choice is a standard focusing on the options available to consumers and is proposed as an alternative to efficiency-based standards.  Preliminary, I do not think the approach as I understand it is an improvement for modern antitrust methods, nor do I think that its adoption would be a good development for the coherence of antitrust jurisprudence or consumers.

Averitt & Lande describe the consumer choice antitrust standard as follows:

It suggests that the role of antitrust should be broadly conceived to protect all the types of options that are significantly important to consumers. An antitrust violation can, therefore, be understood as an activity that unreasonably restricts the totality of price and nonprice choices that would otherwise have been available.

The “consumer choice” framework tells us, Averitt  & Lande assert, that from an antitrust perspective “more  consumer choice is probably good.” The central idea is that the efficiency perspective is hampered by “only” looking at things like prices and output (including quality-adjusted prices), and occasionally innovation.  The fundamental observation of the “consumer choice” framework is that a reduction of “choice” (however defined, but lets come back to that), even if coupled with a reduction in price or increase in output, is a cognizable antitrust injury.

The approach is getting some traction.

For example, in a speech, Commissioner Rosch asserts that the appropriate antitrust standard is “is to look at consumer welfare from the buyers’ perspective, or what Robert Lande has termed a “consumer choice” perspective, which occurs when a firm’s conduct impairs the choices that free competition brings to the marketplace.”   Indeed, Commissioner Rosch apparently argues that the consumer choice standard not only should be the law, but that it is the law after Leegin, asserting that after the Supreme Court’s decision: “injury to consumer choice (as well as an increase in price) is now recognized as injury to consumer welfare in the United States.”  This, I think, is a controversial and questionable interpretation of Leegin.  But holding that aside for the moment,  I want to focus on some skeptical observations concerning the utility of such a framework for antitrust analysis, and more importantly, for consumers.

In no particular order:

  1. The biggest shift in antitrust over the past 25 years has been away from indirect and unreliable proxies of consumer harm and toward a more direct effects-based analysis.  For example, this is the tale of the antitrust analysis of mergers from Vons Grocery to FTC v. Staples, which Judge Posner describes as the economic “coming of age” or merger analysis.  The movement has been away from the structural presumption and away from reliance on market concentration to predict price effects.  Instead, the intellectual movement within the Horizontal Merger Guidelines has been to deemphasize market definition and the market definition exercise in favor of direct analysis of competitive effects wherever possible.  The argument is that the indirect methods are just means to an end of predicting competitive effects.  While I have some qualms about avoiding market definition altogether, the movement away from naked concentration-based presumptions and more sophisticated economic analysis has been good economics and good for consumers.Like the misguided focus on market concentration in the structure-conduct-performance framework at the core of “old” merger analysis, the “consumer choice” framework appears to substitute another indirect proxy for consumer welfare (and if you don’t like that term, consumer outcomes).  Why not go straight to effects?
  2. The economic point is that a reduction in the number of consumer choices may or may not be good for consumers.   Consider the standard exclusive dealing contract with a retail outlet.  It, by definition, reduces product variety.  But it is well known within the economics literature that exclusive dealing can lower prices, increase output, and enhance competition for distribution.  By focusing on the number of choices, the analysis shifts attention to the wrong question from a consumer perspective.
  3. Points (1) and (2) raise an interesting tension that I had not thought of before with respect to the tension here between merger analysis and the consumer choice standard.  Surely, those who support the direct, “effects-based” approach embodied in the 2010 Horizontal Merger Guidelines on the grounds that the market definition exercise is unnecessary (from an economic perspective, not a legal one) must not be in favor of injecting into all antitrust cases such an indirect proxy for consumer outcomes.
  4. I’ve assumed in the discussion above that what the “consumer choicers” have in mind is the classic tradeoff between price and product variety (or other non-price factors), e.g. my exclusive dealing example above.  Coca-Cola might compete for exclusives in various distribution channels, offering rebates to retail outlets and other terms that the retail wants.  Retailers consider these tradeoffs, standing in as the agent for the ultimate consumers, and make a choice.  We know that if we have competition between retailers, those than make the wrong decision will suffer in equilibrium.But one propose that consumer choice means something like “the number of options available to consumers,” including all possible dimensions of competition (price, variety, innovation, other amenities).

    From an economic perspective, this seems wrong to me for a number of reasons.  Let me focus on one.  One very good reason why sellers focus on a combination of product attributes is because consumers want them.  Imitation is an important form of competition.  Of course, innovation can break up the equilibrium from time to time and that is important too.  But we certainly do not know, for example, because many of the firms in a consumer goods industry employ minimum resale price maintenance and use exclusive territories, or that they have similar prices, or similar quality characteristics, that consumers are suffering.  In fact, absent evidence of collusion, the homogeneity of options might tell us that the current arrangement is quite beneficial for consumers.

  5. The retailer standing in as the “agent” for consumer preferences raises another important issue.  Who is the consumer in the consumer choice framework?  Do consumer choicers need a story for why there is market failure at the retail level?   Why would supermarkets get the optimal price-variety-quality tradeoffs wrong?  If we don’t have reason to suspect market failure or collusion at the retail level, is the correct presumption from a consumer-oriented perspective to trust the choices made by the agent?
  6. We know that empirical evidence tells us that exclusives and partial exclusives not only can be pro-competitive, but are generally pro-competitive.  It would be odd to overlay an antitrust standard that was presumptively suspicious of these arrangements or, from an economic perspective, adopted the presumption that the price-variety-choice tradeoffs faced by retailers uniformly favored more choice and higher prices.
  7. The fundamental question from an antitrust perspective is whether consumer choice a better predictor of consumer outcomes than current tools allow.   There doesn’t appear to be anything in economic theory that suggests that it would be.  Indeed, the focus on “choice” as a standalone measure of harm parces out individual dimensions of competition rather than focusing on antitrust as a method of governing the competitive process.   I do not believe the consumer choice offers better predictive power for consumer outcomes.  Further, it appears to be susceptible to interpretations that would sacrifice consumer outcomes or outcomes produced by highly competitive markets on economically unsound grounds.
  8. The consumer and/ or welfare standards as applied in modern economics are certainly imperfect — but I believe the path forward is nudging rule of reason tests towards the minimization of Type 1 and Type 2 error costs + administrative costs based on the best available economic theory and evidence.  A consumer choice standard doesn’t move the ball forward on any of those margins.