Competition law has no place raising prices some say are ‘too low’

Antitrust law is becoming very popular, but like many things that enter the world of media frenzy — the debate can often go off the mark.

Leaders on both sides agree that we need tougher competition cops, but how they should enforce the law is a matter of dispute. There are many proposed solutions — from better funding our enforcers and encouraging them to be more aggressive, to legislation introduced by Sen. Amy Klobuchar (D-Minn.) that would shift the burden in large mergers to the companies to show that the merger would not diminish competition.

{mosads}But one proposed solution stands far apart from the rest — scrapping the consumer welfare standard and replacing it with something else. You see, for decades Congress and the courts have properly looked to consumers to determine how to enforce the antitrust laws. We want the antitrust cops to act only if consumers will be better off. As Supreme Court Justice Stephen Breyer once said, “the Congress that enacted the Sherman Act saw it as a way of protecting consumers against prices that were too high, not too low.” Antitrust enforcement that would require consumers to pay more, or reduce innovation or efficiency in the name of another policy goal would simply stand the law on its head.

The consumer welfare standard has been a grounding principle in our antitrust laws for decades. It is not complicated on its face, it basically just says that there has to be something that you can point to and say that consumers are worse off due to the activity we are challenging. It is an attempt at objectivity, a call on enforcers to show their work and a check to make sure enforcement resources are directed at the important competitive problems.

Tossing out the consumer welfare standard would be like a ship captain throwing his compass into the sea. President William Taft as a judge warned that loose antitrust standards would have us “set sail on a sea of doubt.” It makes very little sense. It would also leave us unprepared to tackle the important problems we face in new high tech economies. But these “new antitrust” theorists would have us do just that.

A common theme among new antitrust folks is that we need to rethink predatory pricing to extend beyond simply a consumer welfare concern. The predatory pricing doctrine is meant to protect against a specific problem that occurs when a company with deep pockets drops its prices so low that it forces all of its competitors out of business, only to raise prices once consumers are stuck with only one company. This assumes a market in which it is extraordinarily hard to enter, which is why successful predatory pricing, especially in high tech markets, is sort of a unicorn— often imagined but never found.

Tech companies often price low, use loss leader strategies or provide certain services for free. Video game companies will lose money on the sale of consoles so that they can later make money on software sales. Many companies provide free search or email services so that they can make money on advertising. These companies have no intention of ever raising prices, and consumers benefit from these practices as long as they understand what is being exchanged.

Take Amazon, a company known for competitive pricing and providing the much loved prime service. New antitrust folks aren’t swayed by the fact that consumers are doing well with Amazon’s high efficiency and low prices. Instead, these folks are concerned the Amazon might be too efficient and their prices too low. This, they would argue, harms competition because no one else has yet figured out how to compete with that. These new antitrust folks would prefer to see competition judged based on the number of competitors in the market, not how consumers are doing.

Another example is found in the German auto industry. Following the Volkswagen scandal, where the company ultimately admitted to manipulating emission tests that measured how much pollution a diesel vehicle emits in order to meet certain environmental laws, the fallout has since pulled the entire German auto industry under a strict microscope. Volkswagen paid the U.S. government more than $15 billion in fines and settlements, but now the entire industry is being accused of cartel violations, simply because the automakers participated in industry “working groups.”

The fact is that while the initial cheating scandal did harm the environment, it’s hard to see the case where it harmed consumers — meaning antitrust is probably not the best suited to correct any problems.

Just because antitrust is not the right tool does not mean that companies should be given a free pass. But there are other policies and regulations at work in markets. The consumer welfare standard prevents mission creep that would ultimately leave antitrust policy worse off.

It is not proper to catalogue a list of perceived problems with markets and leave them at the door of antitrust policy to solve. This would force antitrust law to tackle policy issues it is not prepared for, and would also neglect the other tools in the policy toolbox.

Calls to toss out the consumer welfare standard seem to be an attempt to shoehorn greater policy concerns into antitrust law out of a belief that we can’t make good policy anymore. This defeatist attitude is unhelpful to those of us who want to see an economy led by predictable, consistent and fair policies.

David Balto is an antitrust attorney based in Washington, D.C.. He previously served as policy director at the Federal Trade Commission and as an attorney in the Justice Department’s Antitrust Division. He is an expert in antitrust, consumer protection, financial services, intellectual property and health care competition.