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Wednesday, June 29, 2011

Debunking the Purchaser Welfare Account of Section 2 of the Sherman Act: How Harvard Brought Us a Total Welfare Standard and Why We Should Keep It

Posted by D. Daniel Sokol

Alan Meese (William & Mary Law) has posted Debunking the Purchaser Welfare Account of Section 2 of the Sherman Act: How Harvard Brought Us a Total Welfare Standard and Why We Should Keep It.

ABSTRACT: This article demonstrates that courts, particularly the Supreme Court, have embraced a total welfare approach when articulating and applying Section 2 doctrine. During antitrust’s formative era, courts created a safe harbor for so-called “normal” or “ordinary” conduct, regardless whether such conduct led to higher prices for purchasers. More recently, decisions such as Eastman Kodak v. Image Technical Services, Brooke Group v. Brown and Williamson Tobacco, and Aspen Skiing v. Aspen Highlands all announce and apply tests that immunize practices producing significant economic benefits, without regard to the impact such practices might have on purchaser prices. This doctrinal result, also endorsed by various lower courts, is most consistent with a total welfare standard, given the prediction by the partial equilibrium tradeoff model that non-trivial efficiencies resulting from a monopolist’s conduct will usually outweigh the deadweight loss caused by monopoly pricing and output reduction. While some opinions, notably the now-discredited Alcoa decision, rejected a total welfare approach, none embraced a “purchaser welfare” account of Section 2. In fact, courts have never made Section 2 liability turn on whether a monopolist’s conduct results in higher prices.

The modern commitment to total welfare is not a recent phenomenon associated with Robert Bork and the Chicago School. Instead, the Harvard School of antitrust policy, led by Edward Mason, Donald Turner, and Carl Kaysen embraced a total welfare approach to Section 2 doctrine in the decade before Bork advocated this standard. In particular, the Harvard School argued that so-called “competition on the merits,” including the realization of economies of scale, above-cost pricing and product innovation, should be lawful per se, without regard to whether such conduct excludes rivals and results in higher purchaser prices. The desire to protect competition on the merits and practices that further such competition reflected a more general Harvard School “total welfare” approach to the antitrust problems, an approach exemplified by Turner and Kaysen’s argument that mergers necessary to achieve significant efficiencies should be lawful, again without regard to price effects. The Supreme Court expressly endorsed the Harvard School’s definition of unlawful exclusionary conduct in Aspen Skiing, simultaneously embracing the definition articulated by Robert Bork.

To be sure, the Harvard and Chicago Schools sometimes disagree about the appropriate content of antitrust doctrine in the Section 2 context. However, such disagreement, when it occurs, reflects disparate evaluations of the economic impact of monopolists’ conduct, evaluations unrelated to the two schools’ common normative commitment to a total welfare standard. Those who advocate repudiation of this longstanding scholarly and judicial normative consensus bear a heavy burden of explaining why courts should suddenly reverse themselves and adopt the completely novel purchaser welfare standard, twelve decades after Congress passed the Sherman Act.

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