Politics

Exploring the Atlantic Divide in Antitrust: Consumer Welfare v. Abuse of Dominance

Introduction

The US antitrust standard has long been dictated by common law derived from the court system’s interpretation of “monopoly” behavior prescribed by Section 2 of the Sherman Act. From this jurisprudence, the US has upheld the consumer welfare standard of antitrust, placing a premium on innovation and efficiency that benefits consumers. Across the Atlantic, however, the EU enforces an antitrust standard that focuses more heavily on competitor welfare. The European approach employs an “abuse of dominance” standard that focuses more on a per se application regarding size and market share, which functions to shield competitors from companies far less dominant than monopoly.

In the United States, there are some indications attitudes regarding the appropriate principles of antitrust enforcement have begun to shift due to concerns about alleged increasing concentration in certain industries. As politicians on both sides of the aisle sound the alarm over what they perceive to be lax antitrust enforcement, the consumer welfare standard is facing its biggest test in recent memory. But is adopting the abuse of dominance standard the right solution or can the consumer welfare standard still ensure a beneficial outcome? To properly understand the two standards, an analysis of the nexus between competition, innovation, and efficiency is essential.

Consumer Welfare

For much of the 20th century, antitrust adjudication was dominated by a “big is bad” standard, with no real economic analysis evaluating effects on competition. This led to a contradictory and inconsistent common law that was confusing for businesses and consumers alike. Reformers, led by Robert Bork and the Chicago School, influenced judges to take a consumer welfare approach to antitrust law, highlighting the need for market objectivity as opposed to a judge’s subjective assessment of market inequality. In 1979, the US Supreme Court officially adopted the consumer welfare approach in Reiter v. Sonotone Corp.

The consumer welfare standard asks whether consumers have been made better or worse off by alleged anticompetitive practices. This standard created a clear, predictable methodology for judges to use in evaluating antitrust claims. The standard allows judges to consider not only price, but other factors such as product quality, innovation, and product variety when evaluating whether an antitrust violation has occurred.

The consumer welfare standard has even gone as far as defending monopoly pricing at times when it is a result of business acumen. The US is much more willing to tolerate highly concentrated markets that are the result of innovation or efficiency than the EU, citing a desire to avoid possible false positives that could result from a standard that punishes conduct that is actually neutral or pro-competitive. With that said, there are still business practices that are per se illegal in the US, including efforts to fix prices, divide markets or rig bids.

Abuse of Dominance

Abuse of dominance jurisdictions such as the EU aim to promote rivalry by propping up competitors, hoping that a less concentrated market will ultimately benefit consumers. In the EU, exploitative abuses that prejudice consumers are similar to consumer welfare abuses in the United States. However, the EU also prohibits exclusionary actions, in which firms create unfair trading positions, apply dissimilar trading conditions to equivalent transactions or enforce contracts with supplementary obligations, among other things. To avoid antitrust enforcement in the EU, firms must prove that there is an objective justification for an alleged abuse of dominance.

Unlike the US, the EU places a special responsibility on firms not to distort competition, even if the distortion is achieved by displacing less innovative or efficient competitors. Additionally, the threshold to find dominant power in the EU can be less than 40% of market share as long as a competitor can be found to act independently of the rest of the market. The burden of proof is extremely heavy on firms found to have dominant positions in the EU, making antitrust enforcement difficult to evade should a firm secure any sort of competitive advantage in the marketplace. As American tech companies continue to grow internationally, the EU has not shied away from acting; in the past 6 years, Europe has opened investigations into Amazon, Apple, Facebook, and Google, including a combined $9.5 billion in fines aimed at Google since 2017 alone.

Shifting Antitrust Sentiment

American officials frustrated with a lack of antitrust enforcement against perceived monopolists are now rethinking the consumer welfare standard. This past legislative session, the New York State Senate passed an antitrust bill that more closely resembles the European abuse of dominance standard. Meanwhile, following a 16-month investigation, the House Judiciary Committee passed a package of six antitrust bills that would drastically alter how Big Tech is adjudicated. On the Senate side, rare bipartisan rebukes of concentrated market power have resulted in antitrust bills introduced by Sens. Amy Klobuchar, Josh Hawley, Mike Lee, and Chuck Grassley.

The sentiment has even shifted to the agency tasked largely with enforcing antitrust violations. FTC Chairwoman Lina Khan recently introduced changes to the agency’s antitrust procedure that could weaken the consumer welfare approach. Likewise, President Biden in an Executive Order called on the independent agency to use its power to reign in companies exhibiting monopolistic behavior.

The Impact of a New Standard

The abuse of dominance standard could limit innovation, prop up inefficient competitors and burden consumers. A 2019 McKinsey report found that “superstar firms,” which are firms in the top 10% of companies with revenues over $1 billion annually, “exhibit relatively higher levels of digitization, greater input of skilled labor and a higher innovation intensity, more intangible assets, and deeper integration into global flows of trade, finance, and services than their peers.” In the last 20 years, the number of superstar firms in the United States has remained consistent at 60 whereas Europe’s has fallen by 50%, from 32 to 16. The consumer welfare standard seems to have increased the amount of money being spent on research and development and ultimately innovation, an indicator of competitive pressure and a benefit for consumers.

Reverting back to a pre-1970’s jurisprudence will upend 40 years of judicial consistency and clarification. Businesses and consumers will have to adjust to rules that are not necessarily bound by economic analysis and that could contradict each other at times. Additionally, without an economic metric, there is room for the politicization of antitrust enforcement, a result that undermines credibility in our judicial institutions.

Critiques of the Consumer Welfare Standard

Critics of the consumer welfare standard have argued that the test is outdated and cannot adapt to the emerging power of Big Tech companies and other innovative industry giants, especially in a consumer-oriented environment that now includes free services such as social media and search. This, however, is not supported by the standard itself. The consumer welfare standard applies to consumers of the market that is being monopolized, so a proper market definition will always allow for antitrust enforcement. The standard includes buyers in business-to-business transactions and sellers who are disadvantaged by powerful buyers themselves.

As mentioned earlier, the consumer welfare standard is not hinged entirely on price. It allows for an evaluation of impacts on innovation, a clear sign of healthy competition in a marketplace. Historically, harm to innovation analysis has been included in merger denials and other antitrust proceedings at the FTC. The standard also ensures that product quality and product variety is not impacted by a conglomeration of market power, which ultimately effects the consumer as well.

The consumer welfare standard is also silent regarding the amount of antitrust enforcement that is necessary to achieve intended goals. The standard can still be employed alongside increased antitrust enforcement, which may well be the solution to many of the problems posited by critics of the standard itself. Perhaps intensified scrutiny toward how often antitrust is enforced is a better route than tearing down the framework that has allowed for some of the most innovative and consumer-friendly technological advancements in modern history.

Finally, antitrust and the standard utilized to enforce it should be focused on the sole purpose for its implementation: promoting and preserving competition for the benefit of the consumer. Other social ills that are not properly defined by antitrust law such as data privacy concerns and worker welfare are better addressed at the state or federal level through legislation specifically designed to remedy those issues.

Conclusion

The consumer welfare standard is an important tool in antitrust law that has guided our understanding of enforcement for 40 years. It is flexible enough to adapt to a rapidly changing environment and respond to emerging markets efficiently. There is discussion to be had about whether the law is being applied often enough to ensure that consumers are benefited as a result of vigorous competition, however, moving towards an abuse of dominance standard will not achieve the same results as the consumer welfare standard. Competition and innovation will be chilled, and businesses will be left in the dark again as to how the law will be applied moving forward.

What do you think?

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s