University of Baltimore Law ScholarWorks@University of Baltimore School of Law All Faculty Scholarship Faculty Scholarship 2007 Using the "Consumer Choice" Approach to Antitrust Law Neil W. Averitt Bureau of Competition, Federal Trade Commission Robert H. Lande University of Baltimore School of Law, [email protected] Follow this and additional works at: http://scholarworks.law.ubalt.edu/all_fac Part of the Antitrust and Trade Regulation Commons, and the Law and Economics Commons Recommended Citation Using the "Consumer Choice" Approach to Antitrust Law, 74 Antitrust L.J. 175 (2007) This Article is brought to you for free and open access by the Faculty Scholarship at ScholarWorks@University of Baltimore School of Law. It has been accepted for inclusion in All Faculty Scholarship by an authorized administrator of ScholarWorks@University of Baltimore School of Law. For more information, please contact [email protected]. USING THE "CONSUMER CHOICE" APPROACH TO ANTITRUST LAW NEIL W. AVERITT ROBERT H. LANDE* The current paradigms of antitrust law-price and efficiency-do not work well enough. True, they were an immense improvement over their predecessors, and they have served the field competently for a genera­ tion, producing reasonably accurate results in most circumstances. Accu­ mulated experience has also revealed their shortcomings, however. The price and efficiency paradigms are hard to fully understand and are not particularly transparent in their application. Moreover, in a disturbingly large number of circumstances they are unable to handle the important issue of nonprice competition. In this article we suggest replacing the older paradigms with the somewhat broader approach of "consumer choice." 1 The choice framework has several advantages. It takes full account of all the things that are actually important to consumers­ price, of course, but also variety, innovation, quality, and other forms of non price competition. It is also far more transparent, which is an important administrative virtue even where, as in the great majority of cases, it will reach the same result. And in some important real-world situations it will lead to better substantive outcomes. There are a number of variety-valuing industries and circumstances that can be assessed cor­ rectly only by including an effective analysis of non price factors. We identify several of those in the article. To illustrate their importance we * Respectively, Attorney in the Office of Policy and Coordination, Bureau of Competi­ tion, Federal Trade Commission; and Venable Professor of Law, University of Baltimore School of Law. The views expressed in this article are solely the authors' own and are not necessarily those of the Federal Trade Commission or any individual Commissioner. We are grateful for valuable suggestions from Alden Abbott, Terry Calvani, Russell Damtoft, Albert Foer, Paul Halpern, Caswell Hobbs, ElizabethJex, Paul Karlsson, William Kovacic, Thomas Krattenmaker, Thomas Leary, Michael Moiseyev, James Mongoven, John Parisi, Suzanne Patrick, Robert Skitol, Mary Lou Steptoe, Randolph Tritell, Oscar Voss, and Erika Wodinsky. We are also grateful for helpful research assistance from Alice Arcieri, Fran Cariaga, Benson Cohen, Sarah Duran, Joseph Pulver, J. Andrew Stevens, Andrea Tony, and Thomas Werthman. Any errors remain our own. I We refer to this as the "consumer choice," or sometimes, for linguistic ease, as simply the "choice" model. 175 176 ANTITRUST LAW JOURNAL [Vol. 74 go on to identifY eight noteworthy recent cases that would probably have been decided differently under a choice approach. Throughout the article the focus is on the practical issues of day-to-day management, and we show how the choice approach can be made as predictable and administrable as the other paradigms. The current price and efficiency models can deal only awkwardly with nonprice competition. At best, they try to help consumers achieve nonprice objectives indirectly, by folding them into the price analysis in the form of quality adjusted prices, or by assuming that markets that are price competitive will also be competitive for non price preferences. That surrogate analysis usually produces reasonable results, but it is not partic­ ularly intuitive. In some cases, moreover, it does not work properly. In those cases the choice factors will have to be addressed directly if they are to be considered at all. Antitrust encounters at least three common situations in which a simple price analysis is inadequate. First, in some markets there is little or no price competition to begin with, as a result of regulation, joint ventures, or third-party insurance payors. There is no good way to assess consumer welfare in those markets without considering the nonprice choice issues. Second, some conduct-such as horizontal agreements to limit advertising-will increase consumers' search costs or otherwise impair their decision-making ability. This will cause consumers to select products that are less desirable or less well-suited to their particular needs. A complete rule of reason analysis must take account of these adverse effects on suitability and satisfaction as well as the adverse price effects of the conduct. Finally, in some markets the firms compete not primarily on price but rather through independent product development or creativity. These efforts may involve areas, such as high-tech innova­ tion, delivery of new patient-friendly hospital services, or editorial inde­ pendence in the news media. Effective innovation in these markets may sometimes require more providers than are required to ensure price competition. Thus market concentration principles taken from a price context may not ensure robust competition in the respects most relevant to consumers of these kinds of products. In all three situations, the explicit use of a choice approach to antitrust is likely to lead to enforce­ ment decisions that better reflect consumer concerns and preferences. Our proposal for dealing with these issues attempts to combine the virtues of narrowness and breadth-to offer both relatively cautious substantive reform and relatively broad conceptual change. To begin with, the proposal accepts that the price and efficiency models have brought some much-needed discipline and rigor into anti- 2007] CONSUMER CHOICE APPROACH 177 trust analysis, and it advocates new consideration for choice in only a limited number of cases on the margin. The choice model is anchored in current practice in at least five different ways. First, in over 95 percent of cases either the relevant choice is still going to be based on price, or price competition will ensure effective non price competition. In these circumstances enforcement will simply continue along familiar lines. Second, even where the antitrust analysis should focus on nonprice effects, we propose only a more explicit and rigorous consideration of those factors than before, not a fundamental break with the past. Third, our approach would not condemn practices that result in only trivial reductions in the range of options. A reduction from ten to nine provid­ ers would not normally be an antitrust concern, even though there has been, in principle, some loss of variety.2 Fourth, the choice approach will not condemn practices that limit options through ordinary market competition. It asks only whether a particular business practice has resulted in some unreasonable and significant limitation on consumer choice, un mediated by a marketplace test. And fifth, a choice approach is not a return to the "social and political values" paradigm of the 1960s and 1970s, which proved standardless and unduly hostile to business.3 A consumer choice theory based on these principles can operate in as disciplined and predictable a way as any other model of the antitrust laws. At first glance, the choice approach may seem to have less scientific objectivity and rigor than the efficiency or price models. Those older models, however, are based not only on science, but also on long experi­ ence and seasoned judgment. In this article we will demonstrate that a choice model, carefully developed through case-by-case analysis and supplemented by retrospective case studies and experimental economics, can build the same kind of empirical foundation for itself. Such a founda­ tion will identify the relevant standards and thresholds, which can then be expressed and applied in administrable and predictable ways. For example, the enforcement agencies might announce that they will apply the Herfindahl (HHI)4 figures in the Horizontal Merger Guidelines more 2 This is true by analogy to the price model, which does not condemn a practice likely to result in only a trivial increase in price. 3 The social-political paradigm rested on an underlying suspicion of or even hostility toward big business, and this animus is not present in an approach that merely tries to factor consumers' nonprice desires into the analysis. 4 The Herfindahl-Hirschman Index (HHI) is a measure of market concentration used in the antitrust agencies' merger guidelines, calculated by summing the squares of the individual market shares of all the participants. See U.S. Dep't of Justice & Federal Trade Comm'n, Horizontal Merger Guidelines (1992, revised 1997),4 Trade Reg. Rep. (CCH) ~ 13,104 at n.17, available at http://www.ftc.gov/bc/docs/horizmer.htm. 178 ANTITRUST LAW JOURNAL [Vol. 74 strictly in particular markets where choice is likely to be important, or choice might be identified as an explicit additional factor for a