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What Does the Supreme Court Have to Say About Consumer Welfare? A Reply to Professor Hovenkamp

There is a tension in the discourse as to the purpose of antitrust policy. In one camp, consumer welfare still reigns supreme. In another, there is greater acceptance that the consumer welfare standard is flawed, or at least controversial. Disciples of the first camp argue that antitrust policy should focus exclusively on increasing output as a proxy for consumer welfare.

Looking backwards, some have argued that the SCOTUS antitrust decisions focus almost entirely on output and price, consistent with consumer welfare. But is that how we should appraise what the Court was doing?

This short missive argues that SCOTUS does not articulate that it is applying consumer welfare. Even if it did, it does not tether that policy to notions of Congressional intent behind the antitrust laws. Indeed, where SCOTUS has said it is embracing Congressional intent, its opinion directly contradicts the notions of consumer welfare.

In a recent paper posted to SSRN titled “Antitrust’s Goals in the Federal Courts,” Herb Hovenkamp argues that to understand antitrust’s objective, we should focus on the words of SCOTUS and the federal courts: “Nearly all of this paper consists of statements from the Supreme Court and lower federal courts and concerns how they define and identify the goals of the antitrust laws.” It bears noting that Hovenkamp has been a strong advocate for consumer welfare theory, which would put him in the first camp. As Hovenkamp pointed out in a previous paper, “In sum, courts almost invariably apply a consumer welfare test.” And as Hovenkamp stated in yet another paper, there is good reason for the courts to do so: “it is a reasonable supposition that consumer welfare is maximized by offering consumers the best quality at the lowest price.”  

While others have attempted to insert other policies into consumer welfare—or at least claim it is possible that other policies fit nicely within consumer welfare—the lodestar has always been output. As Hovenkamp professed: “[T]he country is best served by a more-or-less neoclassical antitrust policy with consumer welfare, or output maximization, as its guiding principle.”

Hovenkamp is correct that the courts have used the term consumer welfare. But the push for consumer welfare was not started in the Supreme Court, and the term has not been applied consistently in the way antitrust advocates of the consumer welfare standard might think.

Reading the tea leaves

The first mention of the words “consumer welfare” comes from U.S. v. Dotterweich, a case that sought to interpret the Federal Food, Drug and Cosmetics Act of 1938. The act sought to protect “against abuses of consumer welfare growing out of inadequacies in the Food and Drugs Act of June 30, 1906.”

It is not until 1976, in the Ninth Circuit’s case GTE Sylvania v. Cont’l T.V. Inc., that a court adopted the view that the purpose of antitrust was to protect consumer welfare. “Since the legislative intent underlying the Sherman Act had as its goal the promotion of consumer welfare, we decline blindly to condemn a business practice as illegal per se because it imposes a partial, though perhaps reasonable, limitation on intrabrand competition, when there is a significant possibility that its overall effect is to promote competition between brands.” The Court’s footnote 39 cites to Robert Bork’s 1966 piece. The notion of consumer welfare stayed in the Ninth Circuit for a few years, with Boddicker v. Arizona State Dental Ass’n and Moore v. James H. Matthews & Co.

In 1979, Chief Justice Burger wrote the Supreme Court’s decision in Sonotone. In that case, it appears Burger adopts Bork’s consumer welfare approach. But a careful reading of the full paragraph in which Burger cites Bork leaves that prescription uncertain:

Nothing in the legislative history of § 4 conflicts with our holding today. Many courts and commentators have observed that the respective legislative histories of § 4 of the Clayton Act and § 7 of the Sherman Act, its predecessor, shed no light on Congress’ original understanding of the terms “business or property.”4 Nowhere in the legislative record is specific reference made to the intended scope of those terms. Respondents engage in speculation in arguing that the substitution of the terms “business or property” for the broader language originally proposed by Senator Sherman5 was clearly intended to exclude pecuniary injuries suffered by those who purchase goods and services at retail for personal use. None of the subsequent floor debates reflect any such intent. On the contrary, they suggest that Congress designed the Sherman Act as a “consumer welfare prescription.” R. Bork, The Antitrust Paradox 66 (1978). Certainly, the leading proponents of the legislation perceived the treble-damages remedy of what is now § 4 as a means of protecting consumers from overcharges resulting from price fixing. E.g., 21 Cong.Rec. 2457, 2460, 2558 (1890). [emphasis added]

From there, the lower courts either cited Sonotone, Bork, the Merger Guidelines, or, in one case, Broadcast Music, which did not mention consumer welfare at all.

It was not until Jefferson Parish that the Court again mentions consumer welfare, but only in a concurrence by Justice O’Conner (again citing Broadcast Music). Justice O’Conner wrote: “Dr. Hyde, who competes with the Roux anesthesiologists, and other hospitals in the area, who compete with East Jefferson, may have grounds to complain that the exclusive contract stifles horizontal competition and therefore has an adverse, albeit indirect, impact on consumer welfare even if it is not a tie.” And in the same year, the Court in NCAA v. Board of Oklahoma again quoted Sonotone.

The words appear again in Atl. Richfield Co. v. USA Petroleum Co. in a dissent by Justice Stevens. But here the words are used in contradiction to notions of efficiency. Justice Stevens writes: “The Court, in its haste to excuse illegal behavior in the name of efficiency, has cast aside a century of understanding that our antitrust laws are designed to safeguard more than efficiency and consumer welfare, and that private actions not only compensate the injured, but also deter wrongdoers.” (emphasis added) The line suggests that the purpose of antitrust laws goes beyond short-run welfare maximization.

In his dissent in Eastman Kodak, Justice Scalia accuses the majority of ignoring consumer welfare in application of a per se rule against tying. Similarly, Justice O’Conner, citing consumer welfare, accuses the majority in Edenfield v. Zane of “taking a wrong turn” in areas of speech.

In FCC v. Beach Comm’n Inc., the Court wrestled with an FCC franchising requirement. In explaining its understanding of the purpose of antitrust laws, the Court mentions consumer welfare in a way potentially inconsistent with Bork’s treatment: “Furthermore, small size is only one plausible ownership-related factor contributing to consumer welfare. Subscriber influence is another.” These are not necessarily output- or price-related goals.

In the 1990s, there are two cases in which SCOTUS mentions consumer welfare. In Brooke Group v. Brown & Williamson Tobacco, the Court talks of its precedent, Utah Pie, in terms of how the case has “been criticized on the grounds that such low standards of competitive injury are at odds with the antitrust laws’ traditional concern for consumer welfare and price competition.” It does not, however, explain the meaning of consumer welfare. It merely quotes the usual Chicago School authors as to the point and moves on.

In the 2000s, consumer welfare became more prevalent in SCOTUS discussion, but again without explaining its meaning. Justice Stevens dissents in Granholm v. Heald against the removal of state wine restrictions because of Constitutional concerns. The Court in Weyerhauser notes that without recoupment, predatory pricing improves consumer welfare. Leegin, for all of its careful consideration of overturning Dr. Miles, mentions consumer welfare only three times, once quoting an Amicus brief. In Kirtsaeng, it quotes Hovenkamp in passing for that proposition. In Alston, the Court cautions that judges in implementing a remedy may affect outcomes worse than the market. In a maritime tort case, the dissent warned that overwarning regarding contaminants would injure consumer welfare. In Ohio v. American Express, the Court favorably cites to Leegin for the notion of consumer welfare, but only in passing. In Actavis, too, the dissent points to consumer welfare.

That is the extent of the Supreme Court’s wisdom on consumer welfare. For nearly 100 years, the phrase “consumer welfare” did not appear anywhere in antitrust lore. It did appear elsewhere, a point with which we must contend if the Court knew of term’s existence. Moreover, the Court has inconsistently used the term (within and beyond the antitrust laws), which suggests more haphazard citation than deliberate calculation. Or, perhaps more insidiously, an attempt to alter precedent via seemingly innocent citation leads to its increased usage in antitrust.

Put one shoe on before the other

In contrast to the obscure tea leaves from the aforementioned cases, the Court made a very precise pronouncement as to the purpose of antitrust in 1962. In Brown Shoe v. United States, the Court details the legislative history of the antitrust laws. The Court makes clear it is interpreting legislative history and the will of Congress, not creating its own policy:

In the light of this extensive legislative attention to the measure, and the broad, general language finally selected by Congress for the expression of its will, we think it appropriate to review the history of the amended Act in determining whether the judgment of the court below was consistent with the intent of the legislature.

That legislative history does not detail consumer welfare, and indeed it could not given the passage of the Sherman Act in 1890 and Alfred Marshall’s book, Principles of Economics, published in the same year. Looking backwards—from current understanding and implicitly thrusting that understanding on courts of yesteryear—is a problematic bias of this approach.

The Supreme Court goes on to note other aims of antitrust. It notes a focus on the rising tide of economic concentration. It even mentions some potential defenses, such as two small firms merging or a failing firm:

[A]t the same time that it sought to create an effective tool for preventing all mergers having demonstrable anti-competitive effects, Congress recognized the stimulation to competition that might flow from particular mergers. When concern as to the Act’s breadth was expressed, supporters of the amendments indicated that it would not impede, for example, a merger between two small companies to enable the combination to compete more effectively with larger corporations dominating the relevant market, nor a merger between a corporation which is financially healthy and a failing one which no longer can be a vital competitive factor in the market.

But it fails to mention other goals, including consumer welfare. And it explicitly rejects an efficiencies defense. Indeed, SCOTUS recognized that the goals of antitrust law may contradict expansions of output:

It is competition, not competitors, which the Act protects. But we cannot fail to recognize Congress’ desire to promote competition through the protection of viable, small, locally owned business. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets. It resolved these competing considerations in favor of decentralization. We must give effect to that decision.

In other words, prices might be higher and output lower when markets are less concentrated, but that is a price we are willing to pay in exchange for greater democracy and greater freedom from economic tyranny.

Looking backwards yields more heat than light

What all of this suggests is a strong movement and perhaps some misunderstandings by the Court about what consumer welfare means. Hovenkamp is right to be skeptical given, as he points out, SCOTUS does not often use the term. But it’s worse than that.

Where the trouble comes in is when Hovenkamp starts looking for output and price discussions as a proxy for consumer welfare. Here, he finds slightly more support in the tea leaves. But my critique of those considerations, beyond the points that overlap here, will have to wait for another blog post. At the very least, suffice it to say: If we’re using output as a measure of welfare, output holds the same problems as have been repeatedly stated as to consumer welfare. And if output is a not a proxy for consumer welfare, then why are we measuring it again?

Using the lens of our current understanding to assess older cases leads to biases that are more inclined to find the Court’s understanding is consistent with ours. Thorstein Veblen said it best:  For the economist, “[a] gang of Aleutian Islanders slushing about in the wrack and surf with rakes and magical incantation for the capture of shell-fish are held, in point of taxonomic reality, to be engaged in a feat of hedonistic equilibr[ium] …. And that is all there is to it. Indeed, for economic theory of this kind, that is all there is to any economic situation.” 

What we see looking backwards is not necessarily what the Court saw in the moment. And the only time the Court gave explicit meaning to antitrust’s purpose, it recognized that deconcentrating the economy might lead to higher prices and reduced output. More importantly, it recognized other antitrust goals apart those espoused by consumer welfare advocates.

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