Trading Gains and Losses in Antitrust: Why Losses Should Count More than Gains — An Implication of Behavioral Economics for Antitrust Losses

Posted by Social Science Research Network

Trading Gains and Losses in Antitrust: Why Losses Should Count More than Gains — An Implication of Behavioral Economics for Antitrust Losses Richard O. Zerbe Jr. (University of Washington)

Abstract: In mainstream antitrust law the nature of economic efficiency has not been investigated in great depth. Such an investigation has important implications for antitrust law and economics. Among these are the following: (1) Behavioral economics shows that consumer surplus measures of losses underestimate consumer damages, often considerably, while producer surplus measures generally do not. (2) Thus an efficiency-based approach to antitrust should weigh consumer losses much more heavily than producer gains. (3) This conclusion has profound effects on many areas of antitrust, including every area that involves both market power and efficiency effects. The fact is that consumer surplus measures of losses underestimate consumer damages, often considerably, while producer surplus (profits) measures generally do not. This is because economic efficiency requires that losses be weighed more than gains. This result suggests that the optimal antitrust penalty as suggested by Landes and Posner is an underestimate.

I show further that the concept of economic efficiency furnishes a justification for a focus on consumer protection as the correct role for antitrust law. This justification is related to the underestimates of consumer losses. The gain-loss disparity suggests a rationale in antitrust law for the emphasis on consumer protection rather than using a total surplus standard.