Over the past several decades, antitrust analysis has become tightly focused on the prices consumers pay as the sole, or at least the primary, measure of consumer welfare. The focus on prices to consumers has in turn led to too narrow a focus on efficiency as a proxy for consumer welfare because regulators assume that greater efficiency results in lower consumer prices.

This approach was described by William Kolasky, then Deputy Assistant Attorney General of the Antitrust Division, in a 2002 speech he delivered in Japan titled “The Role of Competition in Promoting Dynamic Markets and Economic Growth”:

In the United States, we believe that the sole objective of competition policy is consumer welfare. This means, to repeat one of my favorite sayings, that “efficiency is the goal, competition is the process.”

To oversimplify, the argument is essentially that companies in a competitive market seek to differentiate themselves from their competitors either by increasing the quality of their product without raising the price, or by lowering the price of their product without reducing the quality, in both cases increasing the ratio of quality to price in their product. A company facing competition must become more efficient in order to do either of those.

But efficiency is a proper proxy for lower prices, and thus consumer welfare, only if companies share with consumers the benefits of their increased efficiency.

Historically, competition has forced producers to share some of their increased efficiency with consumers in the form of lower prices, and lower prices have benefited consumers and the economy in general by enabling a given amount of disposable income to purchase a larger volume of products, just as antitrust theory would predict.

Historically, it also was true that labor unions forced producers to share some of their increased efficiency with employees in the form of higher wages, which benefited consumers and the economy in general by giving consumers more spending power–that is, putting more money into the hands of employees–the consumers most likely to spend it (rather than save it)–thus spurring growth in the economy.

But more recently, the increase in concentration across broad swaths of the economy has resulted in producers keeping more of their efficiency gains for themselves. We have seen more and more companies use their increased profits from efficiency gains not to lower prices, but to buy back stock and pay large bonuses to senior management. And of course, those two actions are linked: stock buybacks increase earnings per share–a main criterion of management compensation plans–not by increasing earnings but by decreasing the number of shares outstanding.

Similarly, the decrease in the number and role of labor unions and other collective bargaining mechanisms has resulted in producers keeping more of their efficiency gains for themselves rather than paying higher wages. This is captured in the statistics over the past decades showing that dramatic increases in production efficiency have not been accompanied by increases in wages. Interestingly, the experience in professional sports stands in sharp contrast, as players’ unions have been successful in forcing team owners to share profits through higher player salaries.

William Kolasky neatly summarized the view that efficiency was the most important value in antitrust analysis in the speech quoted above, saying: “We should never use the antitrust laws to restrain efficient conduct or transactions.”

The current coronavirus pandemic is shining a spotlight on how this overreliance on efficiency as the primary proxy of consumer welfare has had negative consequences in many segments of our economy, which, I suggest, would not have obtained if we as a society–and if the antitrust agencies–had taken a broader view of the benefits of competition, rather than focusing relentlessly, and primarily, on price, and more particularly on efficiency, as a proxy for consumer welfare.

Future blog posts will explore how this narrow focus on efficiency has played out in various ways, and how by “never restraining efficient conduct or transactions” we have allowed conduct and transactions that have produced outcomes that do not enhance the welfare of consumers or society.