The Goals of Antitrust: Welfare Trumps Choice
The Goals of Antitrust: Welfare Trumps Choice
Joshua D. Wright
Douglas H. Ginsburg
Recommended Citation Joshua D. Wright and Douglas H. Ginsburg, The Goals of Antitrust: Welfare Trumps Choice, 81 Fordham L. Rev. 2405 (2013). Available at: http://ir.lawnet.fordham.edu/flr/vol81/iss5/9
Joshua D. Wright* & Douglas H. Ginsburg**
The evolution of U.S. Supreme Court antitrust jurisprudence over the
past fifty years is well known. As one of us has written, “[f]orty years ago,
the U.S. Supreme Court simply did not know what it was doing in antitrust
cases.”1 The Court interpreted the Sherman2 and Clayton Acts3 to reflect a
hodgepodge of social and political goals, many with an explicitly
anticompetitive bent, such as protecting small traders from more efficient
rivals.4 The failure of antitrust law to promote competition and further
consumer welfare over this period is unsurprising and inevitable, for the
courts and agencies were operating without a coherent answer to the
question: “What are the goals of antitrust?”
The economic revolution in antitrust that took hold in the Supreme Court
in the late 1970s and the 1980s was brought on at least in part by Robert
Bork’s analysis of the original understanding of the Sherman Act.5 In
* Commissioner, Federal Trade Commission, and Professor (on leave), George Mason
University School of Law and Department of Economics. The views stated here are my own
and do not necessarily reflect the views of the Commission or other Commissioners.
** Senior Circuit Judge, United States Court of Appeals for the District of Columbia
Circuit, and Professor of Law, New York University. The authors thank Anna Aryankalayil
and Angela Diveley for research assistance.
1. Douglas H. Ginsburg, Originalism and Economic Analysis: Two Case Studies of
Consistency and Coherence in Supreme Court Decision Making, 33 HARV. J.L. & PUB.
POL’Y 217, 217 (2010).
2. 15 U.S.C. §§ 1–7 (2006).
3. 15 U.S.C. §§ 12–27; 29 U.S.C. § 52–53 (2006).
4. See Utah Pie Co. v. Cont’l Baking Co., 386 U.S. 685, 703 (1967) (condemning
rivals’ attempts to compete with Utah Pie by lowering prices because “each of the
respondents also bore responsibility for the downward pressure on the price structure” and
the “[Clayton] Act reaches . . . price discrimination that is intended to have immediate
destructive impact”); Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962) (“[W]e
cannot fail to recognize Congress’ desire to promote competition through the protection of
viable, small, locally owned businesses. 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.”); United States v.
Trans-Mo. Freight Ass’n, 166 U.S. 290, 323 (1897) (antitrust law exists to protect “small
dealers and worthy men”).
5. Robert H. Bork, Legislative Intent and the Policy of the Sherman Act, 9 J.L. & ECON.
7 (1966); see also Douglas H. Ginsburg, Judge Bork, Consumer Welfare, and Antitrust Law,
31 HARV. J.L. & PUB. POL’Y 449 (2008) (excerpted from Douglas H. Ginsburg, An
Introduction to Bork (1966), 2 COMPETITION POL’Y INT’L, Spring 2006, at 225).
Continental T.V., Inc. v. GTE Sylvania Inc.,6 the Court, shifting its focus
from this mix of economic, social, and political goals to the overall market
impact of an alleged restraint of trade, recognized the potential for vertical
nonprice restrictions to promote interbrand competition and declared
interbrand competition “the primary concern of antitrust law.”7 It is
difficult to overstate the importance of GTE Sylvania as the foundation of
the economic approach to antitrust analysis: antitrust would no longer serve
multiple masters; economic goals would be exclusive. Soon the Court
would determine more specifically that the “Congress designed the
Sherman Act as a ‘consumer welfare prescription,’”8 and that “[a] restraint
that has the effect of reducing the importance of consumer preference in
setting price and output is not consistent with this fundamental goal of
The promotion of economic welfare10 as the lodestar of antitrust laws—
to the exclusion of social, political, and protectionist goals—transformed
the state of the law and restored intellectual coherence to a body of law
Robert Bork had famously described as paradoxical.11 Indeed, there is now
widespread agreement that this evolution toward welfare and away from
noneconomic considerations has benefitted consumers and the economy
more broadly.12 Welfare-based standards have led to greater predictability
6. 433 U.S. 36 (1977).
7. Id. at 52–56.
8. Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979).
9. NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85, 107 (1984).
10. We put to the side issues of whether the appropriate standard is aggregate economic
efficiency, often referred to as the total welfare standard or “true” consumer welfare (in the
economic sense of a consumer surplus) standard. See generally Ken Heyer, Welfare
Standards and Merger Analysis: Why Not the Best?, 2 COMPETITION POL’Y INT’L, Autumn
2006, at 29; Steven C. Salop, Question: What Is the Real and Proper Antitrust Welfare
Standard? Answer: The True Consumer Welfare Standard, 22 LOY. CONSUMER L. REV. 336
(2010). Our focus is upon the desirability of welfare standards over alternative non-welfare
antitrust objectives, and more specifically, over the proposed “consumer choice” standard.
11. ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF 7
(1978) (demonstrating “[c]ertain of its doctrines preserve competition, while others suppress
it, resulting in a policy at war with itself”).
12. 1 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 110 (3d ed. 2006)
(“The biggest advantages conferred by the use of relatively traditional microeconomics as
the guiding principle for antitrust are two: coherence and welfare. . . . [P]opulist goals
should be given little or no independent weight in formulating antitrust rules and
presumptions. As far as antitrust is concerned, they are substantially served by a
procompetitive policy framed in economic terms. . . . [I]njection of populist goals, by
broadening the proscriptions of business conduct, would multiply legal uncertainties and
threaten inefficiencies not easily recognized or proved. . . . [Despite some inadequacies,]
economics gives a focus to antitrust interpretation and is critical to any formulation of
rational rules.”); William E. Kovacic, The Intellectual DNA of Modern U.S. Competition
Law for Dominant Firm Conduct: The Chicago/Harvard Double Helix, 2007 COLUM. BUS.
L. REV. 1, 35 (“Both [the Chicago School and Harvard School] generally embrace an
economic efficiency orientation that emphasizes reliance on economic theory in the
formulation of antitrust rules. Although Chicago School and Harvard School scholars do not
define efficiency identically, the two schools discourage consideration of non-efficiency
objectives such as the dispersion of political power and the preservation of opportunities for
smaller enterprises to compete.”); Donald F. Turner, The Durability, Relevance, and Future
in judicial and agency decision making. They also rule out theories of
liability (e.g., a transaction will tend to reduce the number of small
businesses in a market) and defenses (e.g., the restraint upon trade is
necessary to save consumers from the consequences of competition) that
would significantly harm consumers. Further, the focus upon economic
welfare has led the Court to reject per se prohibitions of conduct once
thought anticompetitive but now, owing to advances in our economic
knowledge, understood to be efficient.13 Untethered from an economic
welfare standard, it is difficult to imagine a rationale for eliminating those
per se prohibitions.
The “consumer choice” standard is the latest challenge to the welfarist
understanding of antitrust.14 In a series of articles, Neil Averitt and Robert
Lande present the consumer choice standard as an alternative to efficiency
or welfare standards15—including not only the “consumer welfare” and
of American Antitrust Policy, 75 CALIF. L. REV. 797, 798 (1987) (“Antitrust law is a
procompetition policy. The economic goal of such a policy is to promote consumer welfare
through the efficient use and allocation of resources, the development of new and improved
products, and the introduction of new production, distribution, and organizational techniques
for putting economic resources to beneficial use. . . . The legislative history of the Sherman
Act and other antitrust laws also suggests ‘populist’ goals—social and political reasons for
limiting business size and preserving large numbers of small businesses and business
opportunities. However, economics-based antitrust law serves those goals to a substantial
extent by preventing agreements, mergers, and monopolizing conduct that tend to eliminate
or reduce competition without yielding economic benefits. . . . [T]here is no reasonable
basis for presuming that courts must give priority or even weight to populist goals where the
pursuit of such goals might injure consumer welfare by interfering with competitive pricing,
efficiency, or innovation. Indeed, even where there is no such apparent conflict, it is
questionable whether populist goals are appropriate factors to consider when formulating
antitrust rules. The pursuit of these goals would broaden antitrust’s proscriptions to cover
business conduct that has no significant anticompetitive effects, would increase vagueness in
the law, and would discourage conduct that promotes efficiencies not easily recognized or
13. See, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 907
(2007) (lifting per se prohibition of minimum resale price maintenance (RPM)); State Oil
Co. v. Khan, 522 U.S. 3, 19 (1997) (lifting per se prohibition of maximum RPM); Cont’l
T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 54 (1977) (lifting the per se prohibition against
vertical nonprice restraints).
14. Earlier such challenges include Robert H. Lande, Wealth Transfers As the Original
and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 50 HASTINGS
L.J. 871, 874 (1999) (the “Congress was concerned principally with preventing ‘unfair’
transfers of wealth from consumers to firms with market power.”); Robert Pitofsky, The
Political Content of Antitrust, 127 U. PA. L. REV. 1051, 1051 (1979) (“[I]f the free-market
sector of the economy is allowed to develop under antitrust rules that are blind to all but
economic concerns, the likely result will be an economy so dominated by a few corporate
giants that it will be impossible for the state not to play a more intrusive role in economic
affairs.”); Maurice E. Stucke, Reconsidering Antitrust’s Goals, 53 B.C. L. REV. 551, 624
(2012) (rejecting “[a]ntitrust’s current objectives of promoting consumer welfare and
efficiency” in favor of using antitrust to “secure political, economic, and individual
15. See Neil W. Averitt & Robert H. Lande, Consumer Choice: The Practical Reason
for Both Antitrust and Consumer Protection Law, 10 LOY. CONSUMER L. REV. 44 (1998)
[hereinafter Averitt & Lande, Consumer Choice]; Neil W. Averitt & Robert H. Lande,
Consumer Sovereignty: A Unified Theory of Antitrust and Consumer Protection Law, 65
“total welfare” standards16 but even the “consumer surplus” standard.17
Perhaps the clearest articulation of the consumer choice standard is that
“[a]n antitrust violation can . . . be understood as an activity that
unreasonably restricts the totality of price and nonprice choices that would
have otherwise been available.”18
Averitt and Lande occasionally use their alternative model to highlight
perceived weaknesses in the current approach to nonprice competition and
to call for a greater focus upon that dimension of the competitive process.19
That shift would be desirable to the extent it improves courts’ and agencies’
ability to understand the competitive consequences of some business
arrangements. Still, they clearly have something more ambitious, even
grandiose, in mind: “nothing less than a new paradigm of the antitrust
laws.”20 They also point to the consumer choice standard as the starting
point for understanding section 5 of the Federal Trade Commission (FTC)
Act;21 the gap between the European and the purportedly less well-targeted
U.S. law of monopolization;22 a unified theory of competition and
consumer protection law;23 and the role of behavioral economics in
Averitt and Lande correctly claim that adopting the central idea of the
consumer choice framework, viz. that the loss of a “choice” (however
defined) is a cognizable antitrust injury even when associated with a
reduction in price or an increase in output, would represent a revolution in
antitrust thinking. As we shall explain, that revolution would have
seriously detrimental consequences for consumers.
The fatal flaw in the consumer choice standard is that it simply, indeed
simplistically, rejects economic analysis of consumer preferences as the
fundamental guiding principle of antitrust analysis, including the
preferences consumers express in making unavoidable tradeoffs between
price and nonprice values. The consumer choice standard rejects even the
view that the role of antitrust is to protect the competitive process as one
that produces desirable outputs (i.e., consumer welfare) in favor of an
antitrust regime that analyzes nonprice competition as a standalone and
Part I of this Essay reviews the consumer choice standard as its
proponents present it. We demonstrate that the consumer choice standard is
necessarily a noneconomic approach to antitrust analysis; that is, it is
inconsistent with not only the economic welfare standard but also with
much of modern economic theory and practice, despite its authors
occasionally restating it in economic terms as a call for greater attention to
Part II demonstrates that the consumer choice standard, like other
noneconomic objectives of antitrust that have been rejected in the past,
would inevitably reduce both total and consumer welfare. Ironically, it
would also diminish what the authors most value: nonprice competition,
product variety, and innovation.
I. THE CONSUMER CHOICE STANDARD
The consumer choice standard was born out of a concern that the
traditional welfare approach ignores the benefits that nonprice competition
generates for consumers. Averitt and Lande occasionally promote a milder
form of the choice standard, one based upon welfare but, they say, “fully
attentive to empirical evidence on purchasers’ nonprice, as well as price,
preferences.”25 They point to supposed failures of the standard approach,
which, owing to conceptual and technological shortcomings, they claim
ignores or insufficiently takes account of nonprice competition.26
The primary flaw in the traditional welfare approach, according to
Averitt and Lande, is economists’ purported inability to quantify and
incorporate qualitative considerations into the price dimension, with which
they are more familiar, and their consequent failure to account fully for
consumer welfare gains and losses associated with changes in nonprice
competition.27 For example, Averitt and Lande assert that “[o]nly rarely do
economists make serious attempts” to evaluate the welfare consequences of
innovations and, even when economists do so, Averitt and Lande are
skeptical of the process by which they “somehow” generate
25. Averitt & Lande, Using Consumer Choice, supra note 15, at 184.
26. Id. at 184–86.
28. Id. at 178 n.7, 186 n.29.
This critique is at the least an overstatement. Quality-adjusted prices
have been part of the industrial organization toolkit since the early 1900s.29
The Bureau of Labor Statistics has used this tool for nearly a century.30
Furthermore, quality-adjusted prices are frequently used in industrial
organization economics31 and in antitrust analysis.32
If the consumer choice standard were no more than an evidence-based
approach to incorporating nonprice competition into the traditional welfare
standard, it would be unobjectionable. Averitt and Lande, however, clearly
contemplate a departure from the welfare standard in favor of a strong
presumption of illegality for any business conduct that reduces the number
of choices available to consumers.33 The flaw in this approach is that both
economic theory and empirical evidence are replete with examples of
business conduct that simultaneously reduces choice and increases welfare
in the form of lower prices, increased innovation, or higher quality products
and services. Nonetheless, Averitt and Lande propose to define an antitrust
violation as “an activity that unreasonably restricts the totality of price and
nonprice choices that would otherwise have been available,”34 or
alternatively, as business conduct “that harmfully and significantly limits
the range of choices that the free market, absent the restraints being
challenged, would have provided.”35
Understanding the business arrangements that restrict the number of price
and nonprice choices facing consumers and would therefore violate the
consumer choice standard, requires an economic model of the number of
choices that would be available to consumers in the counterfactual scenario
without the restraint. The types of conduct that would be illegal under the
consumer choice standard, and the implications of that standard, are best
illustrated with a series of examples drawn from Averitt and Lande’s
analyses. We present one example for each of the three major concerns of
antitrust law: cartels, mergers, and monopolization.
We begin with the least controversial of business arrangements under the
antitrust laws: naked price-fixing arrangements are per se illegal under the
current welfare standard and also would be under the choice standard.
Averitt and Lande, however, object to more than just the allocative
inefficiency of price-fixing. “Under the choice approach,” they say,
“[cartels] are undesirable” because “[p]rices fixed at an artificial level rob
consumers of the competing price options to which they are entitled.”36
There is no debating that cartels restrict output and increase price; they
also reduce the variance of prices within a market.37 Averitt and Lande
recognized the impact of business conduct upon quality-adjusted prices. See, e.g., Roland
Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 395 (7th Cir. 1984) (“If, as [Defendant]
argues, exclusive dealing leads dealers to promote each manufacturer’s brand more
vigorously than would be the case under nonexclusive dealing, the quality-adjusted price to
the consumer (where quality includes the information and other services that dealers render
to their customers) may be lower with exclusive dealing than without, even though a
collateral effect of exclusive dealing is to slow the pace at which new brands . . . are
33. Averitt & Lande, Using Consumer Choice, supra note 15, at 184.
34. Id. at 182.
35. Id. at 184.
36. Id. at 187 n.35.
37. See, e.g., Rosa M. Abrantes-Metz et al., A Variance Screen for Collusion, 24 INT’L J.
INDUS. ORG. 467, 473 (2006) (case study showed price-rigging “conspiracy not only
increased the price level but reduced its variance as well.”); John M. Connor, Collusion and
make clear that under the choice standard, pricing arrangements that restrict
the availability of price options would be unlawful even if they do not
increase average prices.38 Such a rule would amount to harmless error in
the case of naked price-fixing cartels, but it exposes some troublesome
implications of the consumer choice approach in the area of horizontal
restraints that involve prices as well as pricing practices more generally.
Consider Broadcast Music, Inc. v. Columbia Broad. Sys., Inc.,39 which
involved the American Society of Composers, Authors, and Publishers
(ASCAP) and Broadcast Music, Inc. (BMI), joint ventures by which
thousands of owners of copyrighted music established blanket licensing
agreements for use of their music on network television programs.40 The
Supreme Court analyzed the restraint and concluded it was unlikely to
reduce welfare.41 In fact, the Court found the restraint necessary to the
distribution of the music, which would not otherwise have been practical
because it would have required thousands of individual transactions
between composers and consumers (here represented by broadcasters).42
All the same, the blanket license was the product of an agreement among
competitors to reduce dramatically the number of pricing options that might
have been available to consumers but for the restraint.43 This
welfareincreasing arrangement necessarily violates the consumer choice standard.
The economic logic of the choice framework is also problematic for the
many business practices that involve price discrimination. Price
discrimination is generally efficient and welfare increasing.44 For
simplicity, imagine a monopolist able to engage in perfect price
discrimination (i.e., charging each individual the maximum price that
consumer is willing to pay instead of offering a single, uniform price to all).
(This is what colleges and universities with market power are doing when
they set a high price and then give scholarships based upon “ability to
pay.”) Price discrimination reduces the availability of pricing options in the
marketplace because the pricing arrangement deprives some consumers of
Price Dispersion, 12 APPLIED ECON. LETTERS 335, 336 (2005) (“[C]artelization suggest[s] a
reduction in price variance.”).
38. Averitt & Lande, Using Consumer Choice, supra note 15, at 187 n.35.
39. 441 U.S. 1 (1979).
40. Id. at 4–5.
41. See id. at 20–21.
42. Id. at 21.
43. Id. at 32–33 (Stevens, J., dissenting).
44. This is true in the static economic welfare case. The welfare case in favor of price
discrimination becomes stronger when one considers the role of price discrimination in
intensifying upstream competition and dynamic efficiencies such as the incentive to
innovate. See James C. Cooper et al., Does Price Discrimination Intensify Competition?
Implications for Antitrust, 72 ANTITRUST L.J. 327 (2005); Benjamin Klein & John Shepard
Wiley, Jr., Competitive Price Discrimination As an Antitrust Justification for Intellectual
Property Refusals To Deal, 70 ANTITRUST L.J. 599 (2003). This economic logic highlights a
relationship entirely ignored in the choice analysis between business arrangements restricting
choice and simultaneously increasing incentives to innovate or to improve quality, thus
increasing choice. The choice model provides no method, in the absence of welfare analysis,
of analyzing these tradeoffs.
their preferred option—namely, the option to pay a uniform and lower
price—that would be available in the absence of discriminatory pricing.
Although each consumer is still offered a single price, and thus, the number
of pricing options available to each consumer remains unchanged, it is clear
that the choice standard would condemn this practice.45 Recall that for
Averitt and Lande, price-fixing is condemned not because it reduces the
total number of prices available in the market—and it need not do so, for
example, when a single competitive price is replaced by a single cartel
price—but because consumers are deprived of pricing options. Price
discrimination necessarily results in higher prices for some consumers than
they would otherwise be offered. Price discrimination in the case of our
example of a perfectly price-discriminating monopolist is efficient; but
price discrimination is also a common feature of competitive markets. The
ubiquity of price discrimination in the modern economy renders
troublesome the implication that the choice model would condemn it.
Averitt and Lande also posit a merger between two firms—call them A
and B—in a market with five firms (also including C, D, and E).46 We are
asked to assume that A, B, and C have the capacity to compete by
innovating; that “three firms are enough to have effective price competition
in this industry; and that three firms are also enough for effective choice or
innovation competition.”47 They conclude that such a merger would likely
be lawful under a welfare approach because enough firms remain for the
market to be competitive but unlawful under their choice analysis because it
would reduce the number of independent sources of choice or of innovation
to less than the optimal number.48
Ignoring for a moment that we are very unlikely ever to know the optimal
number of firms for innovation in a given market,49 and certainly cannot do
so with the current set of economic tools,50 the merger example sheds
additional light upon problems with the choice model. The critical point is
that the choice model assumes a strong relationship between market
structure and innovation, the latter under the rubric of choice: in short,
fewer firms generate less innovation and therefore fewer choices. That
strong presumption simply is not warranted by the evidence. Not
surprisingly, therefore, it is also inconsistent with modern merger analysis,
which has retreated from structural presumptions because they are not
probative of likely competitive effects, including competitive effects
associated with nonprice dimensions of competition.51
The merger example highlights another problem with application of the
choice standard. The authors’ example, in which it is known how many
firms are “sufficient” for nonprice and price competition, not only assumes
knowledge of facts that are not ordinarily known and in most cases are
unknowable, it also obfuscates the key economic tradeoff at issue in
analyzing a horizontal merger. A and B might be merging to achieve
economies of scale or other efficiencies that would reduce costs and put
downward pressure on prices, and might increase innovation. The key
question is whether that downward pricing pressure yields welfare gains
(under a consumer welfare standard rather than a total welfare standard)
sufficient to offset potential consumer welfare losses insofar as the merger
reduces price or nonprice competition. The welfare approach immediately
highlights the right question and provides a framework for the answer. The
choice standard avoids the relevant economic questions—how does the
merger change the incentives to compete, and what implications do those
changed incentives, if any, have for welfare?—and instead presumes a loss
to consumers based upon market structure. In this way, the choice standard
imposes a presumption that operates much like the now discredited
presumptions of pre-modern merger analysis reflected in the 1968
Horizontal Merger Guidelines.52
One further example underscores the tendency of the choice standard to
distract from the key economic questions and to avoid analysis of the
relevant tradeoffs. Most exclusive dealing arrangements reduce choice in
the sense relevant to the choice standard. An exclusive dealing arrangement
between a manufacturer and retailer or set of retailers necessarily reduces
the choices available to the consumer at the retailer’s store(s). For the sake
of simplicity, assume the manufacturer’s exclusive dealing arrangements
with its retailers and distributors also generate a net reduction in consumer
choice, expressed as a loss of product variety in the marketplace. Under the
choice standard, nearly all exclusive dealing contracts will be deemed
unlawful because they restrict the number of nonprice choices (e.g., other
brands) available to consumers compared to the number that would be
available but for the exclusive dealing contracts.
51. See U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, HORIZONTAL MERGER
GUIDELINES § 4 (2010) (“The measurement of market shares and market concentration is not
an end in itself, but is useful to the extent it illuminates the merger’s likely competitive
effects.”); see also Carl Shapiro, The 2010 Horizontal Merger Guidelines: From Hedgehog
to Fox in Forty Years, 77 ANTITRUST L.J. 701, 707–08 (2010) (“Many observers have noted
specifically that the 2010 Guidelines place less weight on market shares and market
concentration than did predecessors. . . . The revised Guidelines emphasize that merger
analysis ultimately is about competitive effects.”); Joshua D. Wright, Abandoning Antitrust’s
Chicago Obsession: The Case for Evidence-Based Antitrust, 78 ANTITRUST L.J. 241 (2012).
52. U.S. DEP’T OF JUSTICE, 1968 MERGER GUIDELINES (1968), available at
Though exclusive dealing arrangements can and do pose competitive
risks, they are generally efficient.53 There are a number of well-known
efficiency justifications for exclusive dealing. For example, some exclusive
arrangements involve intensifying competition for scarce shelf space or
distribution and therefore result in lower prices for consumers.54 The
various efficiency justifications for exclusives pose the same types of
problems discussed above in the merger example, because the choice
framework applies a presumption of illegality to conduct that is likely to
improve consumer welfare, accounting for both the gains to consumers in
the form of lower prices and any losses attributable to some consumers
substituting a less- for a more-preferred brand.55 The exclusive dealing
example also exposes a more serious problem with the internal consistency
of the choice paradigm. Many exclusive dealing arrangements do not just
increase price competition; they are intended to align the incentives of
manufacturers with those of distributors to supply nonprice, promotional
services56 or to induce asset specific investments that might facilitate
innovation.57 These nonprice efficiencies may simultaneously reduce
present choices but increase future choices by providing incentives to invest
and to innovate. The choice standard provides no analytical framework
with which to assess these tradeoffs. Indeed, while Averitt and Lande pay
lip service to the importance of taking seriously the tradeoffs between
various forms of competition—including price, nonprice, innovation,
quality, and others—the examples betray a structural presumption of
illegality to be imposed upon a broad range of business conduct that is
generally thought to be efficient under conventional welfare analysis,
including welfare analysis incorporating nonprice effects.58
53. See generally Alden F. Abbott & Joshua D. Wright, Antitrust Analysis of Tying
Arrangements and Exclusive Dealing, in ANTITRUST LAW AND ECONOMICS 183 (Keith N.
Hylton ed., 2010).
54. See, e.g., Cooper et al., supra note 44, at 342–43; Benjamin Klein & Kevin M.
Murphy, Exclusive Dealing Intensifies Competition for Distribution, 75 ANTITRUST L.J. 433,
55. Klein & Murphy, supra note 54, at 436.
56. See Benjamin Klein & Joshua D. Wright, The Economics of Slotting Contracts, 50
J.L. & ECON. 421, 432–33 (2007); see also Benjamin Klein & Andres V. Lerner, The
Expanded Economics of Free-Riding: How Exclusive Dealing Prevents Free-Riding and
Creates Undivided Loyalty, 74 ANTITRUST L.J. 473, 489–90 (2007); Benjamin Klein &
Kevin M. Murphy, Vertical Restraints As Contract Enforcement Mechanisms, 31 J.L. &
ECON. 265, 266 (1988).
57. Klein & Murphy, supra note 54, at 443–44 (describing the role of exclusive dealing
in facilitating asset-specific investments); Benjamin Klein et al., Vertical Integration,
Appropriable Rents, and the Competitive Contracting Process, 21 J.L. & ECON. 297, 302–07
(1978) (discussing contractual solutions to opportunistic firm behavior).
58. Federal Trade Commissioner Rosch has endorsed the choice standard. It is unclear
whether the endorsement is anything more than a call for greater attention to nonprice
competition in the application of welfare standards. Commissioner Rosch agrees the goal of
antitrust should be to promote consumer welfare, but he first endorsed the consumer choice
approach as consistent with that goal because it focuses upon harms that result when a
“firm’s conduct impairs the choices that free competition brings to the marketplace.”
J. Thomas Rosch, Comm’r, FTC, Rewriting History: Antitrust Not As We Know It . . . Yet,
II. WELFARE TRUMPS CHOICE
The shift from myriad social, political, and protectionist goals to welfare
has produced significant benefits for consumers and brought coherence to
antitrust law. Put simply, the welfare approach has served antitrust well;
Averitt and Lande acknowledge as much.59 They are not alone. The
Antitrust Modernization Commission observed that “[f]or the last few
decades courts, agencies, and antitrust practitioners have recognized
consumer welfare as the unifying goal of antitrust law.”60
The choice standard, as noted in Part I, is not designed to sharpen the
welfare paradigm but to replace it with “nothing less than a new paradigm
of the antitrust laws.”61 Averitt and Lande take pains to comfort readers
that the choice approach is “not a return to the ‘social and political values’
paradigm of the 1960s and 1970s, which proved standardless and unduly
hostile to business.”62 As we have demonstrated, however, the defect with
the choice standard is that it is inconsistent with the modern economic
approach to antitrust analysis that focuses courts and agencies not just upon
the right outcomes (i.e., prices, quantities, innovation, quality), but also
upon understanding the relationship between the restraint at issue and those
outcomes and the tradeoffs between different and sometimes inversely
related dimensions of competition.
Without the discipline economic analysis provides by reducing the range
of plausible outcomes in a given case and, thus, limiting the discretion of
agencies and courts, it is unclear why Averitt and Lande think their new
paradigm will not allow the same or other political and social values to
trump welfare in the name of choice.63 Further, the choice standard will
certainly reduce welfare. To the extent the choice standard does indirectly
focus upon economic welfare, Averitt and Lande’s examples suggest their
model embraces an effects-based analysis rooted in simple structural
presumptions relating the number of firms or brands in a market to
consumer welfare. These presumptions have no basis in modern economic
Remarks at the ABA Antitrust Section 2010 Spring Meeting (Apr. 23, 2010), available
at http://www.ftc.gov/speeches/rosch/100423rewritinghistory.pdf. As discussed above,
however, the consumer choice standard is in significant tension with the consumer welfare
standard. More recently Rosch has suggested a welfarist approach to consumer choice,
which he observed may best be viewed as “a strand of consumer welfare that is promoted
whenever we enforce the antitrust laws against unreasonable restraints on output.” J. Thomas
Rosch, supra note 22, at 13.
59. Averitt & Lande, Using Consumer Choice, supra note 15, at 175 (describing the
welfare goals of antitrust as “an immense improvement over their predecessors, and they
have served the field competently for a generation, producing reasonably accurate results in
60. ANTITRUST MODERNIZATION COMM’N, REPORT AND RECOMMENDATIONS 35 (2007).
61. Averitt & Lande, Using Consumer Choice, supra note 15, at 178.
62. Id. at 177.
63. For one application of the choice framework to justify increased regulation of media
mergers on social and political grounds, see Maurice E. Stucke & Allen P. Grunes, Toward a
Better Competition Policy for the Media: The Challenge of Developing Antitrust Policies
That Support the Media Sector’s Unique Role in Our Democracy, 42 CONN. L. REV. 101
theory, are not supported by empirical evidence, and are likely to provide
misleading answers to the very questions concerning nonprice competition
and innovation that the choice standard was designed to address.64
Before we discuss resale price maintenance (RPM)—an example of the
advantages of welfare analysis over the choice model––consider this basic
but underappreciated point concerning the economic theory of consumer
choice as it relates to antitrust welfare standards: nothing in the
microeconomic theory of consumer choice and the associated concept of
revealed preference65 requires antitrust analysis to ignore or underweigh
nonprice dimensions of competition. Economists consult consumers’
revealed preferences, as expressed in their actual choices, in order to
recover information about their welfare. The standard microeconomic
framework requires the assumption that consumer preferences are relatively
stable, but those preferences can and do incorporate various nonprice
values. Within the standard model, consumers economize on tradeoffs by
evaluating different bundles of goods and services with different price and
nonprice attributes and make purchasing decisions subject to a budget
constraint. Therefore, to incorporate nonprice elements into the standard
model, as a conceptual matter, no revolution is required. Moreover, as a
practical matter, nearly all merger simulation models, a variety of other
applications in industrial organization, and antitrust analysis specifically
contemplate consumers making decisions among products differentiated in
both price and quality.66
We focus here upon two primary advantages of the welfare standard over
the choice standard in cases involving nonprice competition and innovation.
First, the welfare approach highlights tradeoffs between various forms of
competition and their effects. This is critical because, contra Averitt and
Lande, a marginal increase in the number of choices available in a market
could increase, decrease, or have no effect upon nonprice competition.
Second, the welfare approach highlights, rather than obfuscates, the relevant
economic forces at work. Again, this advantage is critical to coherent and
predictable antitrust analysis under the rule of reason67 because economic
64. For critiques of the behavioral economics antitrust program, see Douglas H.
Ginsburg & Derek Moore, The Future of Behavioral Economics in Antitrust Jurisprudence,
6 COMPETITION POL’Y INT’L 89 (2010); Joshua D. Wright & Judd E. Stone II, Misbehavioral
Economics: The Case Against Behavioral Antitrust, 33 CARDOZO L. REV. 1517 (2012).
65. HAL R. VARIAN, INTERMEDIATE MICROECONOMICS: A MODERN APPROACH 121 (8th
ed. 2010) (describing revealed preference with the statement: “If a bundle X is chosen over a
bundle Y, then X must be preferred to Y.” (internal quotation marks omitted)).
66. See supra notes 31–32 and accompanying text. We are more sympathetic to the
view that neither the theoretical relationship between competition and innovation nor the
available empirical evidence provides sufficient economic knowledge for reliable predictions
required for antitrust analysis. See Ginsburg & Wright, supra note 50, at 1. However,
Averitt and Lande appear to endorse these presumptions and “innovation market” analysis.
Averitt & Lande, Using Consumer Choice, supra note 15, at 187.
67. Obviously, per se rules and de facto per se rules are quite predictable even if they are
welfare decreasing and anticompetitive, as Justice Potter Stewart famously noted in his
dissent in United States v. Von’s Grocery Co., 384 U.S. 270, 301 (1966) (Stewart, J.,
analysis illuminates how a business arrangement affects the incentives of
firms and of consumers and which tradeoffs matter in any particular case,
and can give a sense of the magnitudes of the competitive effects at issue.
We explore these advantages with an example showing how welfare
analysis focuses upon the right questions and avoids the errors the choice
framework would bring to such cases.
In Leegin Creative Leather Products, Inc. v. PSKS, Inc.,68 the Supreme
Court held minimum resale price maintenance would be analyzed under the
rule of reason.69 The Court deemed the previously longstanding per se rule
against RPM inappropriate because, although RPM could be
anticompetitive, the economic theory and evidence simply did not
demonstrate that the practice “always or almost always tend[s] to restrict
competition and decrease output.”70
The fundamental economic question concerning RPM—both minimum
and maximum—especially in a competitive retail market with no free
riding,71 is whether retailers lack a sufficient incentive to promote the
manufacturer’s product adequately. In other words, why isn’t competition
at the retail level a sufficient incentive to provide the efficient level of
promotional services? It is a question that has stumped many, including
Justice Breyer, who dissented in Leegin.72 Interestingly, the opinion of the
Court provides an answer, citing Klein and Murphy’s seminal article on the
economics of vertical restraints, which analyzed this question more than
twenty years ago.73
dissenting) (criticizing the majority’s analysis while observing “[t]he sole consistency that I
can find is that in litigation under § 7, the Government always wins”).
68. 551 U.S. 877 (2007).
69. The Court had overruled the per se rule against maximum RPM ten years earlier in
State Oil Co. v. Khan, 522 U.S. 3 (1997). See Benjamin Klein, Distribution Restrictions
Operate by Creating Dealer Profits: Explaining the Use of Maximum Resale Price
Maintenance in State Oil v. Kahn, 7 SUP. CT. ECON. REV. 1 (1999).
70. Leegin, 551 U.S. at 894 (quoting Business Elecs. Corp. v. Sharp Elecs. Corp., 485
U.S. 717, 723 (1988)); see Brief of Amici Curiae Economists in Support of Petitioner at 16,
Leegin, 551 U.S. 877 (No. 06-480), 2007 WL 173681 (“In the theoretical literature, it is
essentially undisputed that minimum RPM can have procompetitive effects and that under a
variety of market conditions it is unlikely to have anticompetitive effects”). The best
estimate of the prevalence of collusion in RPM cases is no greater than 15 percent. See
Pauline M. Ippolito, Resale Price Maintenance: Empirical Evidence from Litigation, 34 J.L.
& ECON. 263, 270 (1991).
71. For an efficiency explanation of RPM in the presence of interdealer free riding on
promotional services, see Lester G. Telser, Why Should Manufacturers Want Fair Trade?,
3 J.L. & ECON. 86, 91–93 (1960).
72. 551 U.S. at 921 (Breyer, J., dissenting) (“I do not understand how, in the absence of
free riding (and assuming competitiveness), an established producer would need resale price
maintenance. Why, on these assumptions, would a dealer not ‘expand’ its ‘market share’ as
best that dealer sees fit, obtaining appropriate payment from consumers in the process?
There may be an answer to this question. But I have not seen it.”).
73. See id. at 892 (majority opinion) (citing Klein & Murphy, supra note 56). For a
recent restatement and extension of Klein & Murphy’s analysis, see Benjamin Klein,
Competitive Resale Price Maintenance in the Absence of Free Riding, 76 ANTITRUST L.J.
Klein and Murphy demonstrate that retailers will undersupply
promotional services because manufacturers do not take into account the
incremental profit margin the manufacturer earns on promotional sales
when some, but not all, consumers value the promotional service.
Manufacturers and retailers have divergent interests with respect to the
retailers supplying presale promotional effort. The conflict derives from
two economic factors common in markets where RPM is observed. First, a
manufacturer’s profit margin (the difference between the wholesale price
and the marginal cost of production) on an incremental sale induced by
retailer promotion is generally larger than the retailer’s profit margin (the
difference between the retail and wholesale prices).74 Second, the
manufacturer’s incremental sales owing to the retailer’s brand-specific
efforts are often greater than the retailer’s incremental sales. When a
retailer provides services to promote a specific manufacturer’s product, the
increase in total retail sales is not generally sufficient to offset the lower
retail profit margin. In fact, when a multiproduct retailer promotes a
particular brand, for example Coca-Cola, the primary effect is to shift
demand among brands, not to increase the aggregate quantity demanded for
When these conditions obtain, we expect to observe manufacturers
compensate retailers for providing promotional services. One such method
of compensation involves RPM; others involve per-unit time payments,
such as slotting contracts, cooperating marketing arrangements, or a
reduction in the wholesale price. The fundamental objective of all such
payments is to provide a premium stream of revenue to retailers as an
inducement to provide promotional services. These promotional services
are valuable to some consumers but not others; their provision is efficient,
however, in the sense that they increase output. Indeed, despite claims to
the contrary,76 understanding RPM as facilitating the supply of nonprice
74. This is highly likely to be the case where manufacturers produce branded,
differentiated goods and face substantially less elastic demand than do retailers. Because
retailers do not take into account the additional profit margin the manufacturer earns on
promotional sales, their incentive to provide promotion will be insufficient from the
manufacturer’s point of view. For a more complete analysis of the incentive conflict-based
interretailer demand effects, see Klein & Wright, supra note 56; Ralph A. Winter, Vertical
Control and Price Versus Nonprice Competition, 108 Q.J. ECON. 61 (1993).
75. In other words, promotion-induced sales of Coca-Cola are likely to be at least
partially offset by a decrease in the sales of other soda products.
76. Critics of RPM claim that RPM either cannot or does not prevent some retailers from
free riding on the promotional services provided by other retailers and therefore infer an
anticompetitive effect from any increase in retail prices. See Warren S. Grimes, The Path
Forward After Leegin: Seeking Consensus Reform of the Antitrust Law of Vertical
Restraints, 75 ANTITRUST L.J. 467 (2008); Marina Lao, Free Riding: An Overstated, and
Unconvincing, Explanation for Resale Price Maintenance, in HOW THE CHICAGO SCHOOL
OVERSHOT THE MARK: THE EFFECT OF CONSERVATIVE ECONOMIC ANALYSIS ON U.S.
ANTITRUST 196 (Robert Pitofsky ed., 2008).
promotional services implies that RPM can both increase output and reduce
The welfare approach not only accounts for the nonprice amenities
associated with RPM; it also answers the fundamental question why firms
adopt RPM arrangements. We are therefore equipped with a better
understanding of the competitive effects of RPM on both price and nonprice
dimensions. An important implication is that antitrust agencies and courts
should evaluate RPM by its effects not upon price but upon output. The
welfare approach thus illuminates the correct questions, deepens our
understanding of the business practice, and can identify for courts and
agencies what types of evidence are useful in determining its actual impact
and role in the competitive process.
The choice framework, on the other hand, approaches RPM without
regard to its welfare effects. Averitt and Lande briefly mention RPM as
potentially harmful because it tends to decrease the number of price options
available in the marketplace.78 RPM restricts the pricing freedom of
retailers and, thus, inevitably restricts the pricing options available to
consumers; it is therefore presumably suspect under the choice framework.
Commissioner Rosch agrees and claims that, after Leegin, evidence of a
reduction in consumer choice is sufficient to make out a prima facie case
that a defendant’s RPM arrangement violates section 1 of the Sherman
Act.79 Rosch argues this is the law because Leegin permits consumers to
choose between buying from a “no frills” discounter and buying at a higher
price from a reseller offering pre- or postsale services along with the
product.80 “Or, to put it in economic terms, a higher resale price may be
justified by evidence that, despite the higher price, there has been an
increase in output.”81
77. Those who claim RPM always increases the retail price contemplate a manufacturer
increasing the retailer’s margin by holding the wholesale price constant, increasing the retail
price above competitive levels, and imposing RPM to ensure that price competition does not
dissipate the additional profit margin. A manufacturer can achieve the same effect by
reducing both the wholesale price by an amount greater than it reduces the retail price—
thus, still increasing the retailer’s profit margin and inducing provision of the presale
services. Consequently, RPM does not necessarily result in higher retail prices as a matter of
economic theory. Rather, one should think of the provision of presale services as reducing
the “effective price” paid by the consumers who value those services; that is, a reduction in
price to marginal consumers moving the manufacturer along the demand curve. Similarly,
this well-accepted analysis of RPM implies that evaluating only the price effects of RPM is
an error. Because retail prices might increase under both the anticompetitive cartel
explanation of RPM as well under the efficiency explanation, a better test is to evaluate the
effects of the restraint upon output.
78. Averitt & Lande, Using Consumer Choice, supra note 15, at 189.
79. J. Thomas Rosch, Comm’r, FTC, Convergence and Comity: Still Improbable?,
Remarks Before the Friends of Europe Roundtable on New Transatlantic Trends in
Competition Policy 7 (June 10, 2010), available at http://www.ftc.gov/speeches/rosch/1007
10transatlanticremarks.pdf (“[A]fter the Supreme Court’s Leegin decision, injury to
consumer choice (as well as an increase in price) is now recognized as injury to consumer
welfare in the United States.”).
Leegin neither holds nor says that. The Court abandoned the per se rule
against minimum RPM and, in so doing, gave manufacturers the legal
ability, by contract, to prevent retailers from discounting the price of their
product. Although the Court acknowledged that RPM might result in a
greater diversity of price and quality options for consumers,82 nowhere did
the Court suggest that merely demonstrating a reduction in choice is
sufficient to shift to the defendant the burden of justifying its RPM policy
with evidence of increased output. On the contrary, the Court rejected
arguments that isolate a single dimension of competition, including price, to
demonstrate that RPM is likely to have had an anticompetitive effect in a
particular case precisely because an increase in price is not inconsistent
with RPM having increased consumer welfare when nonprice benefits are
taken into account.83 The Court is not as easily moved off the welfarist
foundation of modern antitrust law as Commissioner Rosch seems to think
or to wish.
There are, to be sure, modern antitrust decisions in which the Court
generally discusses choice or product variety as they relate to competitive
effects, which Averitt and Lande cite in support of their argument that the
choice standard is consistent with prevailing law.84 That there are such
cases is not surprising, however: holding price, output, and quality
constant, eliminating a choice valued by at least some consumers does
reduce welfare. That does not make choice rather than welfare a goal of
antitrust law, much less an adequate guide to antitrust decision making.
The very point of analyzing the economics of business arrangements, and a
point that has not escaped the Court, is that those arrangements arise not
randomly but rather because of their effects upon prices, output, quality,
and innovation. Economic analysis allows a better understanding of how
business arrangements affect incentives to compete along different margins,
how to assess those tradeoffs in theory and in practice, and how to analyze
the ultimate effect of those restraints upon welfare.
RPM also provides an excellent example of the benefits of a welfare
standard informed by the empirical evidence that has been accumulated
over the last thirty years. A few recent surveys summarize the existing
empirical literature on vertical restraints generally and on RPM in
particular. The first, by a group of economists at the Federal Trade
Commission and the Antitrust Division, reviewed twenty-four empirical
82. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 890 (2007)
(“Resale price maintenance also has the potential to give consumers more options so that
they can choose among low-price, low-service brands; high-price, high-service brands; and
brands that fall in between.”).
83. Id. at 895 (“Respondent is mistaken in relying on pricing effects absent a further
showing of anticompetitive conduct.”).
84. Averitt & Lande, Using Consumer Choice, supra note 15, at 189–91. For example,
Averitt and Lande point to United States v. Dentsply International, Inc., 399 F.3d 181, 194
(3d Cir. 2005), where the Third Circuit observed “[a]n additional anti-competitive effect is
seen in the exclusionary practice here that limits the choices of products open to dental
laboratories.” Id. at 194.
papers published between 1984 and 2005, focusing upon the effects of
vertical restraints and vertical integration (which substitutes managerial for
contractual imposition of vertical restraints). They concluded, “[e]mpirical
analyses of vertical integration and control have failed to find compelling
evidence that these practices have harmed competition, and numerous
studies find otherwise.”85
The second study reviewed a similar and overlapping set of papers and
reached similar conclusions.86 A more recent analysis of the theoretical and
empirical literature on vertical restraints, including RPM, by an economist
at the Federal Trade Commission, concluded that “[w]ith few exceptions,
the literature does not support the view that these practices are used for
anticompetitive reasons,” and that the evidence “supports a fairly strong
prior belief that these practices are unlikely to be anti-competitive in most
The RPM example not only illustrates the advantages of the welfare
standard in cases involving nonprice elements, it also shows that the errors
induced by Averitt and Lande’s choice standard are not harmless but are
likely to be harmful to consumers on both price and nonprice dimensions.
The choice standard, if adopted, would inevitably reduce consumer and
total welfare by shifting the focus of antitrust analysis from efficiency to
more easily observed but misleading proxies for consumer welfare, to wit,
the number of firms on offer in a market. While incorporating product
variety, quality, and innovation into the standard welfare analysis is
desirable when done correctly, no “new paradigm of the antitrust laws” is
required to do that; modern antitrust analysis quite comfortably incorporates
the tradeoffs between price and quality that consumers face. The flaw of
the choice standard is that it altogether rejects the economic approach to
dealing with these tradeoffs and instead imposes a structural presumption
that the number of firms or brands in competition is directly correlated with
consumer welfare. This involves two major errors: by rejecting the
economic approach, the choice standard forgoes illumination as to why
certain restraints arise in a particular market and, by imposing a structural
presumption, it implicitly depends upon conclusions about welfare that are
not justified either by theory or by evidence. In sum, the choice standard
would produce antitrust decisions uninformed by the contributions of
modern industrial organization economics.
The ultimate question is whether the consumer choice standard offers any
offsetting benefit in exchange for the loss of welfare it entails. If not, as we
think we have shown, then shifting to defendants the burden of justifying
any reduction in consumer choice would be merely a revival of the long ago
repudiated inhospitality tradition in antitrust88 that should and likely will be
rejected by the enforcement agencies and the courts.
45. The choice standard would also condemn a variety of other discriminatory pricing arrangements, not limited to perfect price discrimination, for the reasons described in the text .
46. Averitt & Lande, Using Consumer Choice, supra note 15 , at 246.
47. Id .
48. Id .
49. See , e.g., Michael L. Katz & Howard A. Shelanski , Mergers and Innovation, 74 ANTITRUST L.J. 1 , 22 ( 2007 ) (“The literature addressing how market structure affects innovation (and vice versa) in the end reveals an ambiguous relationship in which factors unrelated to competition play an important role .”).
50. See Douglas H. Ginsburg & Joshua D. Wright , Dynamic Analysis and the Limits of Antitrust Institutions , 78 ANTITRUST L.J. 1 , 12 ( 2012 ).
85. James C. Cooper et al., Vertical Antitrust Policy As a Problem of Inference, 23 INT'L J. INDUS . ORG. 639 , 658 ( 2005 ).
86. Francine Lafontaine & Margaret Slade, Exclusive Contracts and Vertical Restraints: Empirical Evidence and Public Policy, in HANDBOOK OF ANTITRUST ECONOMICS , supra note 32, at 391.
87. Daniel P. O'Brien , The Antitrust Treatment of Vertical Restraints: Beyond the Possibility Theorems , in REPORT: THE PROS AND CONS OF VERTICAL RESTRAINTS 40 , 76 ( 2008 ), available at http://www.konkurrensverket.se/upload/Filer/Trycksaker/Rapporter/ Pros&Cons/rap_pros_and_cons_vertical_restraints.pdf.