Category Archives: Fundamentals of Competition Law

Adam Smith, the Competitive Process, and the Flawed Consumer Welfare Standard

On consumer welfare v. aggregate welfare, Warren Grimes writes:

‘Scottish economist Adam Smith wrote in 1776 that the collective buying and selling of individuals would result in the preferred allocation of society’s resources. That insight has endured and is the basis for the competition law goal of fostering and protecting the competitive process. That goal, with venerable roots on both sides of the Atlantic, has been sidetracked by emergence of the consumer welfare standard, which is now preeminent in competition law analysis. The narrow focus of the consumer welfare standard has led to confusion and misdirected decisions that do not adequately protect the competitive process. I point to confusion about who is the buyer and who is the seller in many transactions, and describe why that classification should, in any event, be irrelevant in applying competition law. When competition is distorted, the central goal of protecting the process and ensuring a preferred allocation of resources is undermined, regardless of the impact on the consumer.

The proper welfare standard is unconcerned with where the harm occurs. The standard focuses on anticompetitive conduct at any level of the distribution chain and regardless of whether the anticompetitive effects are directed upstream at sellers or downstream at buyers. The symmetric standard is rooted in competition law decisions on both sides of the Atlantic; it is sound in theory and, compared to the consumer welfare standard, is easier to explain and apply. It more comfortably honors the broader goals of competition, including promoting entry, innovation, and choices for both entrepreneurs and consumers. I assess how this symmetric welfare standard would apply to mergers and classic predatory or exclusionary conduct. The standard offers hope of simplifying analysis and better serving ancillary goals of competition. Fostering and preserving efficiency, enhancing output, and maintaining low consumer prices are among the highly valued benefits of the competitive process, but they are not determinative. The focus must remain on the central goal of preserving the competitive process.’

Source: Adam Smith, the Competitive Process, and the Flawed Consumer Welfare Standard

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Alternatives to market concentration as a measure of competition

Measuring Competition

By Chris Dillow

“[C]ompetition economists have known for some time – that you cannot necessarily measure competition by the number of firms in an industry: the Herfindahl index, for example, can be a bad measure.

. . .

But if you cannot measure competition by the number of firms, how can you?

One alternative, proposed (pdf) by Jan Boone, is profits elasticity. The idea here is that if profits fall sharply in response to a rise in marginal costs then the industry is competitive but if they don’t then it isn’t. A competitive market is one which punishes inefficiency.”

More at Stumbling and Mumbling

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