Though coined by academic economists, the term “consumer welfare standard” has been captured and changed by the economic school of thought known as the Chicago School and the courts to mean a defendant-friendly antitrust standard that dismisses the benefit of quality and innovation. This standard, justifiably criticized by New Brandeisians and the media, bears little connection to the “consumer welfare” concept that academic economists across the policy spectrum have employed for decades.  

The “Consumer Welfare Standard” (CWS) is a term that has been central to the modern antitrust regime since Robert Bork’s epochal 1978 book The Antitrust Paradox. In recent years, the term itself has become the target of vocal criticism in light of mounting evidence that recent enforcement—and what many call the “consumer welfare standard era” of antitrust enforcement—has been a failure. 

Neo-Brandeisian antitrust theorists have strongly advocated for replacing the CWS with a new legal standard that would better reflect the social and political purposes of the antitrust statutes. At the same time, academic economists are generally in favor of the CWS, and many are not aware of the controversy which has begun to surround the term. Policymakers may wonder: are economists who embrace the consumer welfare standard in favor of lax enforcement and corporate profit? And was the consumer welfare standard, in fact, the cornerstone of this era of underenforcement?

The problem with the debate on these issues is that parties on both sides are talking past each other, each side using a different definition of the term “consumer welfare.” Academic economists—unless they are already deep in the weeds of this debate—don’t understand the confusion because the concept of “consumer welfare” appears in every introductory microeconomics textbook. But policymakers and judges today do not use the textbook definition, nor does the media. As we will show, the definition used in legal settings is quite different.

To academic economists, consumer welfare is the area under the demand curve and above the price paid. This basic concept was popularized by Alfred Marshall in his seminal book Principles of Economics, published in 1890. Anything that factors into demand creates consumer welfare: those factors can include price, quality, innovation, privacy, etc. Importantly, this definition of consumer welfare is used by economists across the policy spectrum in trade, public finance, competition, and other areas of microeconomics, including by those who consider current antitrust enforcement to be too lax.

The Chicago School Intervention

The genius of the Chicago School movement of the 1970s was to assert that it was applying economics to inform antitrust enforcement—introducing supposedly objective, value-neutral metrics that judges could use to decide antitrust cases. However, the Chicago School was not interested in economics as a tool per se. Its animating principle was to achieve less government involvement in markets. To justify this anti-enforcement stance, Chicago School adherents asserted that markets are overwhelmingly self-correcting, an ideological claim founded on neither empirical evidence nor economic theory. 

Robert Bork introduced the economic concept of the “consumer welfare standard” into the law. However, Bork and others effectively redefined CWS to suit their ideological purposes while giving them a veneer of economic rigor. 

Bork’s claim, now resoundingly refuted by antitrust historians, was that the Congresses which adopted the Sherman and Clayton Acts in the late 19th and early 20th centuries were motivated by neoclassical efficiency goals, and thus intended the laws to reach only a narrow definition of conduct which was “in restraint of trade,” or which would “substantially lessen competition or tend to create a monopoly.”  

Though Bork used the term “consumer welfare,” he defined consumer welfare as “merely another term for the wealth of the nation.” His model of “consumer welfare,” unlike that found in standard economics textbooks, included not just the consumer surplus but also the producer surplus—the area above the supply curve and under the price. That area represents producer profits, or how much the producer earns above its cost of production. In conventional economics, the combined producer and consumer surplus is called “total welfare,” not “consumer welfare.” 

Scholars both right and left of Bork believe that he meant to promote a total welfare standard. Using total welfare as a metric in antitrust cases would affirmatively put weight on the benefits to the corporation from its own anticompetitive conduct. Counting producer profits would fly in the face of what most antitrust scholars and practitioners believe antitrust law is supposed to protect against—when firms use anticompetitive strategies to erode consumer welfare, they are illegally transferring wealth and well-being away from their counterparties.

“Academic economists don’t understand the confusion because the concept of ‘consumer welfare’ appears in every introductory microeconomics textbook. But policymakers and judges today do not use the textbook definition, nor does the media.”

Application by the Courts

American courts did not formally take up Bork’s disguised total welfare idea, though some scholars continue to argue that they should. While many scholars believe he intended to promote total welfare as the correct benchmark, he referred to his concept as “consumer welfare,” and the name stuck. Ever since, Bork has been credited with the belief that antitrust should measure consumer surplus and exclude producer surplus, as the textbooks show. 

Nonetheless, the Chicago School of antitrust successfully advocated for a version of CWS that was as defendant-friendly as possible. Consistent with their goal of non-interference with corporate behavior, Bork and others sold the courts a laissez-faire philosophy, significantly limiting what could be “counted” in the “consumer welfare” concept. By using heuristics that overestimated the benefits of anticompetitive conduct while systematically underestimating the likelihood and magnitude of harm, courts allowed corporate defendants inappropriate latitude to consolidate and leverage their market power.

One of the means by which courts limited antitrust liability was to minimize harms by assuming they were implausible or speculative; another was to minimize harms that were more difficult to quantify with the tools available in 1975, e.g., quality dimensions such as privacy or innovation. When an effect on privacy or innovation was difficult to quantify, defendants argued for an implicit assumption that in the absence of a clear numerical estimate of harm, that harm is zero. Many of these difficult-to-measure harms are hugely important to consumers. Society has measurably benefited from pharmaceutical companies competing to create better cancer treatments, and digital firms competing to introduce better computer chips and smartphone apps. The path of that innovation is uncertain, but its impact on our quality of life can be enormous. 

Meanwhile, courts were generous in accepting claims of efficiencies. Though CWS, as adopted, did not allow producer profits to be counted per se, the courts allowed producers to argue that otherwise anticompetitive conduct and anticompetitive mergers would lead to efficiencies (e.g., decreases in their costs of production) that would in theory be passed along to consumers in the form of lower prices or improved products. After litigation ended, there was insufficient attention to whether or not prices actually fell, or quality increased. Ultimately, a forgiving standard for counting cognizable efficiencies became a backdoor way of using a total welfare standard rather than a consumer welfare standard.

While claiming to “use economics,” the Chicago theorists actually depended on a few simplistic economic assumptions and applied economic analysis selectively to purportedly show that no enforcement was needed. As a result, whole arenas of antitrust that grew out of improving economic theory and evidence, like strategic behavior among firms, behavioral choices by consumers, and labor market monopsony, were underdeveloped in the law.

Economics of Consumer Welfare

This strategy of non-enforcement has harmed markets and consumers. Today we see the evidence of this under-enforcement in a range of macroeconomic measures, studies of markups, as well as in merger post-mortems and studies of anticompetitive behavior that agencies have not pursued. Non-economist observers– journalists, advocates, and lawyers – who have noticed the lack of enforcement and the pernicious results have learned to blame “economics” and the CWS. They are correct that using CWS, as defined and warped by Chicago-era jurists and economists, has been a failure. That kind of enforcement—namely, insufficient enforcement—does not protect competition. But we argue that the “economics” at fault are the corporate-sponsored Chicago School assumptions, which are at best outdated, generally unjustified, and usually incorrect.  

While the Chicago School caused the “consumer welfare standard” to become associated with an anti-enforcement philosophy in the legal community, it has never changed its meaning among PhD-trained economists.

To an economist, consumer welfare is a well-defined concept. Price, quality, and innovation are all part of the demand curve and all form the basis for the standard academic definition of consumer welfare. CW is the area under the demand curve and above the quality-adjusted price paid. “Quality-adjusted” is a central and too-often ignored part of the formulation: a dollar price is meaningless unless you account for what is being purchased. Quality-adjusted price represents all the value consumers get from the product less the price they paid, and therefore encapsulates the role of quality of any kind, innovation, and price on the welfare of the consumer. 

It has taken a long time for the Chicago School strategy of redefining consumer welfare to be noticed and combatted by mainstream economists, though progressives involved in the antitrust debate have been calling it out for decades. This may be because the weakening of the conventional meaning of CWS occurred in courts and in legal literature, and not in venues where economists normally read and publish. 

The divergence between competition economics and antitrust enforcement escaped attention from much of the economics profession—even as it was gaining traction. On public panels, contemporary Chicago School economists often agree that consumer welfare includes long-run harms, innovation, and quality. However, promoting a misleading definition in a purely legal environment may evade the scrutiny of the economics profession and be adopted by a court. And once the degraded standard was baked into case law, it became very hard to dislodge.

President Reagan meeting with Judge Robert Bork in the Oval Office, 1987. [Public domain]

Unlike the judiciary, most academic economists never embraced the simple and highly unrealistic price theory models that characterized the height of Chicago School thought and have moved even farther away in the subsequent forty years of research. Applied microeconomics has made huge strides in empirical methods, advanced theory, and psychological realism. Economists are able to measure firm and consumer behavior in the real world as never before. Indeed, the field of economics is premised on the idea that the willingness to pay for a new handset, health treatment, or electric car is a proxy measure for utility, or individual well-being—because it’s difficult, if not impossible, to measure individual happiness. 

As we have noted above, economists do not believe that policymakers should ignore factors that are likely to be important but are not yet measurable with current tools. For example, economists don’t yet know how to quantify the patience level of oligopolists who are trying to tacitly collude or quash competition through predatory pricing; nor can they yet measure willingness to pay for future innovative products, pinpointing what attribute of a product makes it “cool” or forecast what transformative product will be invented next year. But the inability to predict the future with specificity—and the need to invent more and better economic methods—in no way implies that consumers do not gain from future innovation and the competition that drives it. 

The Real Antitrust Debate

Because the consumer welfare standard that is actually used by courts is so limited in its reach, there is a cottage industry of theorizing potential replacements. There are advocates for broadening the standard to include a “rich set of democratic antimonopoly goals” like those that animated some antitrust legislators, enforcers, and jurists in the pre-Chicago era—values like local control, diffuse political power, environmental protection, labor rights, etc. This definition is more expansive and qualitatively different than the one in the economics textbook. Indeed, it expands the law out of the realm of economics while introducing an almost unlimited number of potential parties and conflicting considerations into any antitrust action.

The challenge of this approach to defining antitrust harm is devising legal rules to guide a federal judge on exactly how he or she should trade off economic benefits, and to whom, when they conflict with social goals such as local control or smaller firms. 

In the face of these difficulties, the more common proposals fall back on a desire for simple “bright lines” in antitrust enforcement, such as prohibitions on mergers above a certain size. If Congress bans wide swaths of conduct, bright lines spare courts from needing to carry out complex balancing exercises across a variety of social goals. Bright-line rules are readily administrable by generalist judges and have lower transaction costs for antitrust enforcers—but can also throttle new competition and actually protect incumbents in industries that don’t fit the mold. Where one falls in that debate largely depends on how much faith one puts in the federal judiciary, the discretion of enforcement agencies, and the self-correcting market.

A second issue is whether the consumer welfare standard should include all trading parties to the firm, including suppliers. A more expansive definition would cover monopsony power over workers, for example, and other input suppliers like chicken farmers, app designers, authors, and so forth. Anticompetitive harms to input suppliers have not been prosecuted much in recent decades, attracting attention neither from the Chicago school nor from economists who use a textbook definition of consumer welfare—despite the fact that the standard economic textbook includes monopsony power and shows that its harm is symmetric to monopoly. Recent research suggests that this neglect has been costly. Scholars are now finding significant market power in many of these input markets, particularly labor markets. When input (or output) suppliers do not earn competitive returns, they do not invest in quality and quantity sufficient to maximize social surplus; therefore, from an economic perspective, antitrust liability should be symmetric whether the conduct lessens competition on the sell-side or the buy-side of the market. On the buyer side, the “consumer welfare” analog might be termed “trading party welfare” or “counterparty welfare.”


The Debate We Are Having

This divergence in terminology means that participants in a debate about CWS are often talking about fundamentally different things. At some point, despite the best efforts of many economists at many antitrust conferences, this barrier to effective communication has become insurmountable. For reasons that are entirely understandable, Neo-Brandeisians have won the terminology debate in policy discourse and the media. Clear communication isn’t possible among Neo-Brandesians, Borkians, and academic economists when they use different definitions of the same term. Making things worse, any quotation from jurisprudence or analysis of past decades reflects the definition of its time.

Economists face a huge problem with the label they use for the textbook consumer welfare concept if they want to be understood by a larger society that uses the now-common restrictive definition. To foster understanding, economists should be happy to rebrand what they used to call “consumer welfare.” In his presentation to the FTC in 2018, Carl Shapiro suggested a “Protecting Competition” standard (cheekily subtitled “The Consumer Welfare Standard Done Right With Better Name”). It would have almost the same textbook economic meaning as consumer welfare, but the legal meaning would be explicitly framed as broader than the “consumer welfare standard” that is so railed against in the press and employed by courts. 

A  “protecting competition standard” would include the short- and long-run effects on price, every kind of quality, and innovation. The real change in the standard would be to explicitly cover the welfare on all “sides” of the market and of all trading parties, meaning both consumers and input suppliers are included in the new standard. 

Shapiro’s proposal is economic in that it does not include other social concerns like political power. It does, however, repair and improve the economic definition to be consistent with the best knowledge in the discipline. And some policy progressives are supportive of an antitrust standard based on economics that includes price, quality, innovation, and harm to input suppliers. Indeed, the current Chair of the Federal Trade Commission, Lina Khan, though she has overtly criticized the CWS as being too limited, has identified the goals of antitrust as targeting “monopsony or innovation or quality harms.” In addition to effects on price, that definition is identical to the “protecting competition standard” definition above. Despite these large areas of consensus, it will be difficult for everyone in the antitrust conversation to communicate accurately with one another until some rebranding occurs.

In short, if you have been confused by the current debate, you were justifiably confused. “Consumer welfare” is a term that was invented by academic economists; the “consumer welfare standard” was captured and changed by the Chicago School; justly criticized by the Neo-Brandeisians; and cemented into the popular lexicon by the media. To the listener, CWS now often means a defendant-friendly antitrust standard that dismisses the benefit of quality and innovation, rounds uncertain harms down to zero, ignores input suppliers, and is unduly deferential to claims of efficiencies. Modern textbook economics rejects this weakened standard, and in this way is aligned with the Neo-Brandeisians. 

Our advice to academic economists is that they should avoid using the “consumer welfare standard” as a term when they write or teach in antitrust settings. It causes confusion among those who learned different definitions of the term and impedes productive discourse. “Price, quality, and innovation,” along with “harm to trading partners,” is a more accurate and useful way to describe economic benefits to consumers until the antitrust enforcement agencies revise the merger guidelines and give us a new name for this useful concept.

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