The Role of a Consumer Harm Test in Competition Policy

Abstract

This essay discusses the role of a consumer harm test in competition policy.First we consider whether consumer surplus is a better standard than total welfare.Second we consider the relationship between competition and consumer harm.Finally we offer concluding remarks. Consumer Surplus Versus Total WelfareMost competition authorities pursue a consumer standardthey seek to deliver an improvement in consumer surplus (i.e. the difference between what consumers are willing to pay and what they actually pay, aggregated across all consumers who purchase the good in question).Under this standard, if improving consumer surplus reduces profits, those lost profits are not taken into account.What do economists think about this?Microeconomic textbooks would imply that we should focus on total welfare, i.e. the sum of consumer surplus and profits.The standard argument here is that shareholders are ultimately consumers and so there is no reason to prefer consumer surplus to profits.An interesting response to this argument is that pursuing a consumer standard may actually be better for total welfare.'The basic idea is that where firms have a choice of many profitable * I am grateful to Simon Baker and Luke Garrod for comments.This draws on the insight of Bruce R. Lyons, Could Politicians be More Right than Economists?A Theory of Merger Standards, (May 15, 2002) (working paper for Centre for Competition & Regulation)