Luis Braido builds on Eric Posner and Carl Shapiro’s debate about the role of economics in merger review by further exploring the tension between efficiency and consumer welfare. He argues that efficiency merits endorsement as it boosts productivity, wealth, and social welfare. Nevertheless, he acknowledges that the law favors competition and consumer welfare over efficiency. From his perspective, enlarging the range of remedies available in merger review is central for protecting productivity gains while preserving competition and compensating consumers for adverse impacts.

ProMarket recently published two insightful articles, one authored by Eric Posner and the other by Carl Shapiro, exploring the role of economics in merger review. In a brief summary, Posner highlights that Section 7 of the Clayton Act does not explicitly mention efficiency, despite its longstanding recognition as a central welfare criterion in economics. He argues that the United States justice system tends to resist approving mergers that generate substantial cost-saving technical efficiencies but potentially harm consumers. According to him, this leads to a clash between the legal interpretations taken by courts and the economic views of the antitrust enforcement agencies and academics. In courts, consumer surplus takes precedence, even if this results in a smaller total surplus.

Shapiro, on his turn, stresses that the Clayton Act prohibits mergers whose effects may substantially lessen competition or create a monopoly. He highlights a distinguishing characteristic of antitrust legislation worldwide: the actions allowed and prohibited are usually not predetermined but depend on their potential effects on the economy. As a consequence, economic analysis becomes indispensable for anticipating these possible effects. He argues that the antitrust law is not directly concerned with political power, income inequality, or the prevalence of domestic firms over foreign ones. He stresses that the Clayton Act solely supports competition and that the consumer welfare standard is just a slogan. Nevertheless, he embraces the view that lessening competition should be interpreted as reducing rivalry, thereby resulting in price increases or decreases in innovation, product variety, quality, and working conditions.

Among many interesting considerations discussed in these articles, the potential conflict between efficiency and consumer welfare particularly caught my attention. This is a complex issue and deserves further analysis. This is the primary objective of this text.


According to Vilfredo Pareto’s definition from the 19th century, an allocation of resources is efficient if no possible reallocation could make some agent better off without making someone else worse off. This welfare criterion is minimalist and widely accepted among economists.

Typically, there are multiple efficient policy alternatives, each associated with a different distribution of welfare across agents. Economists refer to this as the Pareto frontier. In principle, policies should achieve this frontier, but the choice of which point to adopt falls within moral and political spheres.

For this reason, the Pareto criterion is useful to rule out policies that are inefficient, but it is not sufficient to precisely select among multiple efficient policies. In any case, since ruling out bad policies is already something significant, it is worthwhile to describe the main properties derived from Pareto efficiency.

First, to achieve efficiency, the total output must be produced at the minimal possible cost, a property known as technical efficiency. In other words, producers cannot waste resources nor use a more expensive input, such as labor, when a cheaper alternative, like artificial intelligence, is available.

Second, the marginal rates of substitution must be equalized across all consumers and producers, a principle known as allocative efficiency. This implies that firms must continue expanding the output as long as the consumer’s willingness to pay exceeds the cost of producing an extra unit. In other words, all consumers willing to pay for the marginal production cost should be served.

As a result of these two properties, in partial equilibrium theory, where each market is examined in isolation, efficiency requires maximal total surplus, defined as the sum of consumer and producer surpluses. However, contrary to intuition, policies that increase total surplus do not necessarily generate Pareto improvements, in the sense of benefiting at least one agent without adversely affecting any other.

This distinction is important. If instruments were available to transfer welfare across agents, then maximizing total surplus would be justified as a first step toward achieving a Pareto improvement. Policies with higher total surplus, combined with wealth transfers from winners to losers, could implement a Pareto improvement. However, transferring welfare is not a simple task in practical terms. For instance, antitrust policy can impose remedies on mergers, but it cannot implement transfers from firms to consumers.

Merger review

Mergers and acquisitions usually present two main private motivations: the gains in technical efficiency resulting from integrating production processes and the strengthening of market power for the merged firm.

The technical efficiency gains are frequently associated with the existence of increasing returns to scale or scope, the elimination of specific fixed costs, and other cost-saving integrations. These gains should be unequivocally supported as they improve both consumer and producer surpluses.

In contrast, market power raises producer surplus by weakening competition, curbing production, and elevating prices. This leads to deadweight loss and diminishes consumer welfare, ultimately resulting in a decrease in the total surplus for society as a whole, despite the growth in firms’ profits.

But how should merger review balance these two opposing forces?

If approving or rejecting an operation were the only possibilities, one would have to choose between taking advantage of the technical gains and blocking the escalation in market power. Decisions centered on preserving competition or enhancing consumer welfare would lead to rejecting many mergers, lowering the economy’s productivity and the national product. Alternatively, decisions focused on maximizing total surplus would approve operations whose technical gains outweigh the allocative losses, making the country more productive and richer but harming consumers.

Fortunately, the antitrust authorities can do more than simply approve or reject a merger. They can negotiate or impose remedies and restrictions aimed at preserving the technical efficiency gains and mitigating the allocative efficiency losses of the operation.

Antitrust remedies

Antitrust authorities must start by questioning whether the merger is really indispensable for achieving the technical gains of the operation. In numerous instances, providing immunity to partnerships among competing firms is sufficient to safeguard those gains. Take, for instance, the advantages of avoiding infrastructure duplication. Sharing agreements are commonplace in the telecom industry, allowing the joint utilization of towers, cables, radio access networks, and backhaul networks among multiple companies. Similarly, code sharing among airline companies and warehouse sharing among logistics companies are other examples of private agreements that eliminate fixed costs without requiring the merger of competing firms.

Cost-saving partnerships, however, must maintain the incentives for each firm to independently expand its production; avoid the exchange of sensitive information about prices, costs, and production levels; and avoid foreclosure by allowing entrant firms to also access the benefits of the common infrastructure. Achieving these goals is not straightforward and, in many cases, is not feasible.

When the merger is essential for implementing technical gains and the increase in market power is likely to affect consumers, the structural restrictions and behavioral remedies should focus on improving contestability. Structural remedies are very effective in restricting market power, especially when they support the entrance of a new competitor. However, they may sometimes sacrifice part of the technical gains, especially those related to returns to scale.

Behavioral remedies should focus on reducing barriers to entry and increasing rivalry. In cases where infrastructure is important, a common remedy involves ensuring accessibility to other firms, especially entrants. Describing a recent case from Brazil is useful to illustrate this point.

A Case from Brazil

Covered by the Amazon rainforest and intersected by numerous rivers, the northern region of Brazil heavily depends on waterway transport. One of its largest cities, Manaus, is home to the region’s only crude oil processing facility, the Isaac Sabbá Refinery. Originally held by the state-owned oil company Petrobras, the refinery was divested in the end of 2022 as part of an agreement with the Brazilian antitrust authority aimed at diminishing Petrobras’ monopoly power over the oil supply chain.

The buyer was a major local fuels distributor. Other large companies also distribute fuels from Manaus. Since the region is close to Venezuela and the Gulf of Mexico, it was economically possible to import fuels from other countries or to bring them from refineries in other regions of Brazil. In principle, this should suffice to discipline prices and quantities in the Northern region. However, the primary oil terminal in the area was owned by the refinery and operated privately for the mooring of tanker ships and the storage of crude oil and refined fuels.

In this way, the integration between the refinery and the oil terminal was important for the technical efficiency of the operation. In contrast, ensuring the utilization of the terminal by third parties was crucial for promoting competition.

The acquisition was approved with remedies. In summary, the buyer agreed to maintain separate legal entities and management teams for the refinery, the oil terminal, and the distribution company. Additionally, the merger control agreement enabled public access to the oil terminal by allocating a portion of its tankage for third-party use, permitting new pipeline connections, and placing the terminal under the oversight of the port regulatory agency. Lastly, the agreement mandated the resolution of commercial disputes by an independent arbitral tribunal.

These remedies appeared to be the best way of implementing a policy aimed at reducing Petrobras’ market dominance while fostering external competition and preserving the technical efficiencies inherent to an integrated port-refinery operation.

When remedies are not enough

As discussed in Posner’s and Shapiro’s articles, the Clayton Act prohibits mergers whose effects may substantially lessen competition. It is worth mentioning that the European Union Merger Regulation considers efficiency in the decision process, but it does not authorize merges that significantly impede effective competition as a result of the creation or strengthening of a dominant position. Similarly, the Brazilian law explicitly states that improvements in efficiency, productivity, technology, and quality of products can justify authorizing a merger, but it also mandates that a relevant part of these gains must be transferred to consumers.

These statutes clearly favor competition and consumer welfare over efficiency. Within this regulatory framework, expanding the set of available remedies emerges as the only alternative for preserving mergers that would increase total surplus but reduce competition and consumer welfare if approved without restrictions.

Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.