Why the Consumer Welfare Standard Must Remain the Bedrock of U.S. Antitrust Law

Antitrust rarely dominates political discourse. Yet, it has recently become an issue that holds bipartisan support and has entered mainstream political conversations after a series of federal suits against Facebook, Google, and Visa. Additional antitrust suits are expected in 2021 as pressure ramps up on politicians and federal agencies to prosecute big tech for alleged violations of antitrust statutes. When prosecuting antitrust cases, the federal government and antitrust enforcers must not succumb to a reflexive ideological hostility towards big companies. Instead, they should continue to embrace the consumer welfare standard, a standard that justifies an antitrust remedy if market conduct results in a decrease in consumer benefits.

Despite a growing hostility toward big tech, the consolidation of the airlines between 2000 and 2010 serves as a clear example of why the consumer welfare standard should remain the basis for U.S. antitrust law.

Before 1974, U.S. antitrust law was governed by the Sherman Act (1890) and the Clayton Act (1917). The Sherman Act outlawed “monopolization, attempted monopolization, or conspiracy or combination to monopolize.” Most significantly, the Act also gave the federal government the power to break up large monopolies. The Clayton Act expanded the Sherman Act, creating the Federal Trade Commission and prohibiting anti-competitive acquisitions. Unifying both was a presumption that big companies are anticompetitive and intrinsically antithetical to consumer welfare.

The 1970s saw a significant change in how the federal government approached antitrust enforcement with the creation of the consumer welfare standard. In 1974, the Supreme Court ruled, “Statistics concerning market share and concentration, while of great significance, are not conclusive indicators of anticompetitive effects.” In essence, the Supreme Court told antitrust enforcers that they could not ban mergers because it would create a monopoly. Instead, they should consider if the proposed merger harms or benefits consumers. In essence, proponents of the consumer welfare standard believed”antitrust law should serve consumer interests and that it should protect competition rather than individual competitors.”

Since 1974, the consumer welfare standard has allowed mergers that would have been prohibited under the Sherman and Clayton Acts. Despite creating larger companies, the result has only enhanced consumer welfare.

Between 2000 and 2010, a number of mergers took place following the dual crisis of September 11, 2001 and the 2008 financial crisis. Both events severely reduced demand for air travel, leading to industry losses of around $35 billion and a need to restructure the industry to remain solvent. Over that same decade, 30% of U.S. airlines filed for bankruptcy protection. The period 2001-2010 was so damaging to airlines that it was routinely referred to as the industry’s lost decade.

In response to the lost decade, airlines merged and consolidated into fewer but larger companies.  Most notably, Trans World Airlines was acquired by American Airlines for $1.5 bn in 2001, America West was bought by U.S. Airways in 2005 for $1.5 bn, and Delta acquired Northwest Airlines in 2008 for $2.6bn. Under the traditional approach to antitrust, these mergers would have been prohibited under the theory they lessened competition, would raise prices, and lower service standards.

Despite these mergers creating large, increased concentration was allowed to occur because the Department of Justice employed the consumer welfare standard, not a reflexive hostility to large companies. An advanced quantitative study by the DoJ’s Antitrust Division found that these mergers could “produce substantial and credible efficiencies that will benefit U.S. consumers and are not likely to substantially lessen competition.”

In particular, the DoJ noted that airline mergers “will result in efficiencies such as cost savings in airport operations, information technology, supply chain economics, and fleet optimization that will benefit consumers. Consumers are also likely to benefit from improved service made possible by combining under single ownership the complementary aspects of the airlines’ networks.”

When defending the mergers to Congress, airline executives pointed out that they would not be able to maintain services to rural communities unless they could merge and return to profitability. In his testimony to the U.S. Senate in 2007, Gerald Grinstein, former Chief Executive Officer at Delta, warned that unless mergers were allowed to occur, there would be “a loss of service to small communities” and higher airfares for consumers.

As a result of these mergers, consumer welfare was enhanced. Not only were carriers able to continue service to small communities that would otherwise be unprofitable, but prices fell significantly. The result of this was more Americans flying between 2010 and 2019.

When considering the example of the airline mergers between 2000 and 2010, it becomes clear that the creation of large companies does not necessarily harm consumers. The example of airline mergers should also serve as a reminder to legislatures seeking to change how federal agencies approach antitrust cases that large companies can substantially enhance consumer welfare. Returning to a ‘big is bad’ mentality to antitrust risks denying consumers benefits they would otherwise derive from large companies’ existence.

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