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Efficiency and Inefficiency in
Antitrust Law: Theory and Practice
Economic Efficiency is Benefit-Cost Analysis
Richard O. Zerbe
Date: June 19
Location: National Press Club, Washington D. C.
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conomic Efficiency
A full expression of economic efficiency applied to law would run as
ollows:
A change in legal rule or any economic-legal action is efficient if
BENEFITS of the change as measured by the WTP is greater than
of its COSTS as measured by the WTA starting from a status q
position, including all goods for which there is a willingness to pay
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osses Have More Impact than Gains
For normal goods the WTA payment is greater than the WTP
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Consumer and Producer Surplus
Gains and losses are normally measured by consumer and producer
urplus
But these measures are APPROXIMATIONS of the true measures which
re known as compensating variations.
But producer surplus measures are normally a true measure where the
ood is a commercial good to the buyer.
The value for a commercial good is just the PV of its earnings.
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roducer Surplus
Thus changes in producer surplus are simply changes in profits.
These are generally reasonably measured by producer surplus
measures.
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Consumer Surplus
The story is different for goods purchased by consumers.
Consumer Surplus is the amount one would pay over and above
he amount one actually paid.
But Consumer surplus is not in most cases an accurate
measure of loss.
The losses are more exactly measured by the Compensating (or
and Equivalent Variation) which use Hicksian demand curves
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Consumer Surplus and WTP & WTA Measures
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How Large are Losses?
Estimates show that on average the WTA’s are about 7 times
he WTP though the differences can vary greatly
This means that the underestimate of antitrust losses can be
severe where consumer harm is an element
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ART II: The Frequency of Legal Terms of Efficiency
Economies
373
Economic efficiency
293
Cost-benefit analysis or
127
Benefit-cost analysis
Consumer harm
93
Potential compensation
17
Kaldor-Hicks
3
Total Cases in File
1,548
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fficiency as Consumer Protection
These cases show that the major guiding principle in antitrust is
onsumer protection.
n American antitrust the term “competition” means “consumer
rotection”.
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Welfare Standards
andard
nsumer Standard
a) The price standard
b) The consumer surplus standard
Definition
a)  An antitrust action is likely to be illegal if it will
raise prices
b)  An antitrust action is likely to be illegal if it
reduces consumer surplus.
al Welfare Standard
An action is to be measured by its total net benef
This is the BCA standard
ighted Standard
The loss of consumer surplus is given extra weig
but producer surplus is also counted
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he Consumer Welfare Standard
S1
P1
+ CS
P2
+ CS
S2
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Decrease in Costs with a Gain in Monopoly Power
B
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Total Welfare Standard
At least for merger cases Canada, Australia and Brazil tend to
ollow this standard
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omparison of Consumer Standard and
otal Welfare Standard
he adoption of a consumer standard by the United States should not be surprising. We can
easonably image that this right is granted in response to WTA measures of values on the p
f the general population.
Once consumers are given a right to in lower prices, the measure of total efficiency for a pric
ncrease must include consumers WTA not just their WTP.
n almost all cases the CS and the TW standard will give the same results.
ven in the case in which the total surplus and the consumer surplus standards give differe
esults, when CS is adjusted to account for the WTA effect the standards ten to give the sam
esult.
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Hypothetical :
Suppose: Defendant Argues Antitrust Action Should be Dismissed on
Efficiencies Basis Folllowing basis:
Change in Welfare Millions of Dollars Per
Year (US dollars) Deadweight Loss -CS -3.0 Wealth Transfer (-CS+ PS) 40.5 Efficiency Gain (+PS) 29.2 Price Increase 8% Consumer Standard -14.3 Total Surplus Standard 26.2 BE & ASSOCIATES, LLC
uggested Plaintiff Attack in this Case
First objection: Action fails consumer protection standard.
Second Objection: consumer loss is calculated using consumer surplus a
ctual consumer harm should be measured by the WTA and is significan
arger than shown. In fact if the actual consumer loss is only 1.65 times t
ain in the commercial producer surplus to the companies, the total welfa
tandard would no longer be positive.
Third Objection: Assumes that customers harmed are relatively poor: The
ublic may be harmed to the extent they are WTP to avoid harm to relatively
oor..
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essons for the Plaintiff Bar
Consumer protection is clearly the main goal. If price goes dow
or is expected to go down there is probably not a case.
There are other but minor considerations as well
Pointing out that the use of the WTA is the correct measure for
losses and for damages could be a way to amend the calculatio
of damages