Question

This question form the course: Competition Law and Policy Economics

1. Give three arguments for and three arguments against the maximization of consumer welfare instead of the maximization of total welfare as the main objective of competition policy.

Answer 1

Arguments for the maximisation of consumer welfare.

*Micro Economic rationale of the market mechanism is the consumer welfare instead of total welfare.

* When a merger between firms takes place, merging firms enjoy information advantages over the competition authority. Adoption of a Consumer welfare standard might counterbalance this asymmerty.

*Competition authority officials might be exposed to the lobbying of firms that can offer them personal reward, but a Consumer welfare standard might counter balance the bias resulting from such lobbying.

* Consumer welfare standard also simplifies the decisions by anti - trust authorities in merger cases.

Arguments against consumer welfare maximisation.

* Consumer welfare doesn't take into account of the gains made by firms.In today's advanced economies, consumers own firms directly through pension and investment funds.Accordingly dividends are distributed to a number of citizens who would hurt, if profits were reduced.

* maximizing consumer surplus this would lead to pricing at a marginal cost, with the firm exiting the industry in the long run or having to be subsidized to cover fixed costs. Result will be the replacement of market with across-the-board regulation.

*Lower prices and profits will have an adverse impact on the firm's incentive to innovate, invest and introduce new products.