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1. The Horizontal Merger Efficiency Fallacy

Author:
Mark Glick, Gabriel A. Lozada, Pavitra Govindan, and Darren Bush
Publication Date:
08-2023
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The Department of Justice and Federal Trade Commission Merger Guidelines (the “Merger Guidelines”), including the much improved latest revision in 2023 (the “New Merger Guidelines”), have continued to perpetrate what we call in this paper the horizontal merger efficiency fallacy. The fallacy arises because in the Guidelines the term “efficiencies” has become unmoored from its foundations in economic theory and has been reduced to the business school construct of cost savings. We show that cost savings can only be considered universally socially beneficial by acceptance of what is termed “the Consumer Welfare Standard” (antitrust) or “the surplus theory of welfare” (economics), a theory that has been discredited and abandoned by welfare economists. In economic theory, efficiency means Pareto Efficiency. We explore the various attempts to tether the cost savings definition of efficiency to Pareto Efficiency and explain why these attempts have failed. We conclude that there is no sound way to theoretically reconcile cost savings with the economic meaning of efficiencies. We then move beyond the efficiency fallacy and show how modern welfare economics can be used to integrate Congressional antitrust goals into the New Merger Guidelines. This requires abandoning the unsupported “standard deduction” for efficiencies and replacing it with an evidence-based assessment of how a specific merger under review potentially impacts Congressional antitrust goals. This change renders the present efficiency rebuttal section of the New Merger Guidelines superfluous, and we provide specific reasons why this section as currently drafted is flawed and should be jettisoned.
Topic:
Economics, Government, Markets, Business, and Efficiency
Political Geography:
Global Focus

2. An Economic Defense of Multiple Antitrust Goals: Reversing Income Inequality and Promoting Political Democracy

Author:
Mark Glick
Publication Date:
03-2022
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Two recent papers by prominent antitrust scholars argue that a revived antitrust movement can help reverse the dramatic rise in economic inequality and the erosion of political democracy in the United States. Both papers rely on the legislative history of the key antitrust statutes to support their case. Not surprisingly, their recommendations have been met with alarm in some quarters and with skepticism in others. Such proposals by antitrust reformers are often contrasted with the Consumer Welfare Standard that pervades antitrust policy today. The Consumer Welfare Standard suffers from several defects: (1) It employs a narrow, unworkable measure of welfare; (2) It excludes important sources of welfare based on the assumption that antitrust seeks only to maximize wealth; (3) It assumes a constant and equal individual marginal utility of money; and (4) It is often combined with extraneous ideological goals. Even with these defects, however, if applied consistent with its theoretical underpinnings, the consideration of the transfer of labor rents resulting from a merger or dominant firm conduct is supported by the Consumer Welfare Standard. Moreover, even when only consumers (and not producers) are deemed relevant, the welfare of labor still should consistently be considered part of consumer welfare. In contrast, fostering political democracy—a prominent traditional antitrust goal that was jettisoned by the Chicago School—falls outside the Consumer Welfare Standard in any of its constructs. To undergird such important broader goals requires that the Consumer Welfare Standard be replaced with the General Welfare Standard. The General Welfare Standard consists of modern welfare economics modified to accommodate objective analyses of human welfare and purged of inconsistencies.
Topic:
Economics, Democracy, Income Inequality, and Antitrust Law
Political Geography:
Global Focus

3. The Erroneous Foundations of Law and Economics

Author:
Mark Glick and Gabriel A. Lozada
Publication Date:
02-2021
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The fundamental originating principle of law and economics (L&E) is that legal decisions should be (and are) based on maximizing efficiency. But L&E proponents do not define “efficiency” in the way agreed to by most economists, as Pareto Efficiency. A Pareto optimal condition is obtained when no one can be made better off without making someone worse off. Pareto Improvements are win-win changes where no losers exist. In the judicial system, however, there are always winners and losers, because under Article III § 2 of the Constitution a legal case does not exist unless there is a justiciable “case or controversy” in need of resolution. Unable to use Pareto Efficiency, L&E scholars have been forced to adopt alternative definitions of efficiency. Most L&E scholars claim to define “efficiency” based on the work of Kaldor and Hicks, but (perhaps unwittingly) instead use a definition of “efficiency” derived from the 19th century idea of consumer surplus, which encompasses L&E notions such as “wealth maximization,” and “consumer welfare” in antitrust. Neither of these alternative definitions is viable, however. Outside of L&E, the Kaldor-Hicks approach has long been recognized to be riddled with logical inconsistencies and ethical failures, and the surplus approach is even more deficient. Remarkably, virtually none of the numerous L&E textbooks even hint at such problems. Critically, all definitions of efficiency improvements in economics are biased in favor of wealthy individuals or firms, either because they are dependent on the status quo ante distribution of assets, or because they bestow large advantages on parties with political influence or who can afford to bring lawsuits quickly. Many L&E practitioners treat efficiency improvements instead as being objectively good, an error revealing that L&E is primarily motivated by its neoliberal policy agenda.
Topic:
Economics, Law, Neoliberalism, and Efficiency
Political Geography:
Global Focus

4. Big Tech Acquisitions and the Potential Competition Doctrine: The Case of Facebook

Author:
Catherine Ruetschli and Mark Glick
Publication Date:
10-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The Big Tech companies, including Google, Facebook, Amazon, Microsoft and Apple, have individually and collectively engaged in an unprecedented number of acquisitions.When a dominant firm purchases a start-up that could be a future entrant and thereby increase competitive rivalry, it raises a potential competition issue. Unfortunately, the antitrust law of potential competition mergers is ill-equipped to address tech mergers. We contend that the Chicago School’s assumptions and policy prescriptions hobbled antitrust law and policy on potential competition mergers. We illustrate this problem with the example of Facebook. Facebook has engaged in 90 completed acquisitions in its short history (documented in the Appendix to this paper). Many antitrust commentators have focused on the Instagram and WhatsApp acquisitions as cases of mergers that have reduced potential competition. We show the impotence of the potential competition doctrine applied to these two acquisitions. We suggest that the remedy for Chicago School damage to the potential competition doctrine is a return to an empirically tractable structural approach to potential competition mergers.
Topic:
Economics, Science and Technology, Communications, Law, Digital Economy, Macroeconomics, Monopoly, and Antitrust Law
Political Geography:
United States

5. American Gothic: How Chicago Economics Distorts “Consumer Welfare” in Antitrust

Author:
Mark Glick
Publication Date:
07-2019
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Since the publication of Robert Bork’s The Antitrust Paradox, lawyers, judges, and many economists have defended “Consumer welfare” (CW) as a standard for decisions about antitrust goals and enforcement priorities. This paper argues that the CW is actually an empty concept and is an inappropriate goal for antitrust. Welfare economists concede that there is no credible measurable link between price and output and human well-being. This means that the concept of CW does not legitimate limited antitrust enforcement, nor does it justify the exclusion of other antitrust goals that require more active enforcement practices. This paper contends that antitrust policy is not welfare based at all, and that if it were, antitrust policy and enforcement would differ significantly from the Chicago School vision. Without the fiction that economists can establish that in the short run lower price and higher output measurably increases welfare more than other goals, recent defenses of the CW standard resolve down to arguments based on unsupported assumptions.
Topic:
Economics, Law, Legal Theory, Economic Theory, Macroeconomics, Antitrust Law, and Microeconomics
Political Geography:
United States