For the past eight years the antitrust division of the Department of Justice (DOJ) has been in hiding. Virtually no antitrust claims occurred during the Bush administration. But in only the few months Obama has been in office, antitrust claims have abounded. There are currently claims on large pharmaceutical companies, Google, telecom providers, and various airlines.
With this rebound of antitrust law, it is important that the DOJ remembers the matter in which they are defending; consumer welfare. Too often, especially in the past, the DOJ has brought to trial cases in which consumer welfare was actually increased by a so-called anticompetitive agreement.
Up until the 1980’s, lawmakers had a vague and broad idea of what competition was, which turned out to be thoroughly wrong. They viewed firm competition akin to competition seen in sports: the more players, the more competition (i.e. rivalry). So for over half a century antitrust law was mistakenly used to simply increase the number of firms in a given market. This turns out to actually decrease market efficiency and consumer welfare.
The new, and correct, definition of firm competition is whatever means create the highest consumer welfare.
Example: An industry contains 3 firms, all with equal market share. Another industry contains 20 firms, 1 firm with 90% of the market and the remaining 19 firms share the last 10% of the market. Clearly there is more “rivalry” in the latter example but the former example is more competitive.When looking at competition, we must take into consideration market share - the larger the market share of a firm relative to other firms, the more monopoly tendencies that firm will exhibit. The former industry will create higher consumer welfare and therefore is deemed more competitive by modern standards.
Question: Is bigger always badder?
Answer: No. If a firm is able to increase market power and size by increasing efficiency while still making high quality products, then this is not bad. What’s more, this is actually better for consumers.
Example: Costco. Costco is able to offer high quality products at lower prices than competitors because they have been able to increase efficiency by selling items in bulk in warehouse-like retail stores. They save money by eliminating flashy displays and store decorations and then pass those savings on to consumers.So the next time you snub Wal-Mart, relish the increases in consumer surplus they allow consumers to enjoy!
I just came back from Costco. I was looking at the vitamin/shampoo section and there was a woman telling her husband that the prices on Listerine were cheaper here (Costco) than at Wal-Mart. Indeed, the per unit costs of goods from Costco are lower than Wal-Mart (and other retail stores) but you have to purchase goods in bulk. So, in the end, the consumer surplus comes in the form of extra quantity of goods purchased than in the form of income saved. I suppose it is the trade off/consumer choice that will ultimately lead the consumer to reach a higher utility curve. Thanks for the food for thought!
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