In defence of the consumer welfare standard

E VER SINCE its first antitrust law passed in 1890, America has argued over what trustbusting is for. One school, named after Louis Brandeis, a judge, holds that big companies must be tamed because they corrupt politics and damage customers, competitors and staff. The other says the goal of antitrust is to protect the welfare of consumers, which can be enhanced by big, efficient firms. For decades the consumer approach has been ascendant, but now the consensus has frayed and trustbusters are heading in a Brandeisian direction. This is a mistake. Competition policy needs reforms, to correct past failings and to adapt to the digital economy. Yet it should continue to be based on the principle that consumers are what count.

A shift towards more politicised and expansive antitrust is taking place across the rich world. President Joe Biden has appointed trustbusters, such as Lina Khan (pictured) at the Federal Trade Commission, who are exploring new responsibilities like protecting small firms or workers. Since the 1990s the EU has tended to put consumers' interests first, but now its commissioner wants to apply a "broader notion" of harm. Lawmakers everywhere are redrafting rules to constrain technology firms, even when their products are popular and free. On January 20th America's Senate Judiciary Committee approved, with bipartisan support, a bill that would ban tech giants from using their platforms to favour their own services.

The change is happening because competition policy has fallen short. In America the consumer welfare standard is associated with rulings that make it difficult for trustbusters to win in court unless they can meet abstruse legal tests proving that a firm has raised or will raise prices. Competition authorities have lost cases they should have won, such as when Sprint and T -Mobile merged, taking the number of mobile networks down to three. The authorities became gun-shy about bringing cases. Between the 1990s and 2010s the average number of mergers investigated per year by the Department of Justice fell from 180 to 70, despite frantic industry consolidation. Sleepy trustbusters missed the rise of big tech.

The new expansive and strident approach is tempting, but it did not work well in the past. Standing up for consumers, who are diffuse, does not come naturally to politicians who tend to indulge vocal and concentrated interests, such as incumbent firms, lobbyists and unions. Before the consumer welfare standard emerged in legal judgments in the 1970s and 1980s, America's trustbusting was capricious. In 1949 the government won a case against a grocery chain, A & P , whose low prices led a government lawyer to accuse it of being "a gigantic blood sucker, taking its toll from all levels of the food industry". In 1967 the Supreme Court ruled that firms that started a price war by shipping cheap pies into Utah had acted illegally. Europe shows how trustbusters can be clueless. What purpose was served in 2005, when the EU forced Microsoft to release a version of the Windows operating system without a media player—even though it barely sold any copies?

Instead of aiming to protect everyone, opening the door to clumsy interventions, trustbusters should reform the consumer standard. Regulators and governments, especially in Europe, must be realistic about their ability to anticipate consumers' needs and should not pursue firms purely because they have grown big by being useful. The large and fluid tech ecosystems offered by Alphabet, Amazon, Apple and others show the complexity of the task: they are in an innovative phase with new services being created that are highly popular and they increasingly compete with each other. It would be easy to erode the quality of their products with ill-judged rules.

A key step is to identify market power using indicators that go beyond price. Abusive dominant firms typically exhibit persistently high returns on capital, high market shares and face a lack of credible new entrants. In tech this points to particular services such as search and smartphone app stores, rather than an entire industry. For example, Amazon's e-commerce business is big but has mediocre returns and faces new competitors.

America has many conventional industries that flash red, including credit cards, airlines, telecoms and health care. Once dominant firms have been spotted, they should find it harder to win approval for mergers. They could, for instance, be obliged to show that acquisitions will promote consumer welfare. And defendants should have the benefit of the doubt less often in American antitrust cases of all kinds. The remedy for the failures of competition policy is not to abandon the consumer welfare standard but to bring it up to date. ■

This article appeared in the Leaders section of the print edition under the headline “All-consuming”