Section 7 of the Clayton Act prohibits mergers and acquisitions “the effect of [which] may be substantially to lessen competition, or to tend to create a monopoly.” The test for prohibiting mergers thus refers to competition, not consumer welfare. The two concepts are different. Competition means rivalry among firms—the struggle for customers and other trading partners through price reduction, quality improvement, marketing, and related activities. Consumer welfare refers to the difference between price and willingness to pay of customers. Through a long and complicated process, the consumer welfare standard has made inroads on the competition standard in many areas of antitrust law, though without (in the case of merger law, my focus here) the sanction of the Supreme Court or the clear acknowledgment of any circuit court. And while the policy motivation for this transformation is clear enough, it has been taken for granted rather than adequately defended; it also lacks democratic sanction.

Robert Bork promoted what he called the consumer welfare standard but he meant allocative efficiency (that is, total surplus, which is the sum of consumer and producer surplus), a standard he borrowed from Oliver Williamson’s 1968 paper, Economies as an Antitrust Defense: The Welfare Tradeoffs. That paper introduced in highly qualified form the idea that mergers should be approved if the efficiency gains exceed the deadweight loss—a simple cost-benefit analysis that counts the impact of the merger on everyone (or everyone in privity with the merging parties) equivalently. The law does not take this view. A common but controversial view of the law is that a merger will be blocked if it reduces consumer welfare (surplus); this is equivalent to saying that a merger will be blocked if it increases prices or quality-adjusted prices (or, in the case of input markets, reduces prices, although sellers are not “consumers,” one of the many sources of confusion caused by Bork’s choice of words). One might think of the “consumer welfare test” as a “price test” as in nearly all cases regulators and courts focus on the predicted impact of the merger on consumer prices, and will usually approve the merger if they predict that prices will fall or not rise.

Williamson’s 1968 article did not actually endorse total (or consumer) surplus so much as cautiously advance it as a relevant consideration for the DOJ and FTC in their enforcement decisions. Williamson recognized that the law, as voiced by the Supreme Court, spoke in terms of competition, not surplus or efficiency. He also acknowledged that a test based on the tradeoff between cost savings and price effects omitted many of the harms associated with loss of market competition—the political influence of powerful firms, harms to equity, what he called “social discontent” with corporate power that spurred the various antitrust laws, and harms to innovation. These other harms associated with loss of competition, with the partial exception of harms to innovation, have been mostly forgotten—and with them, the idea that competition is the proper focus of merger enforcement.

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