Consumer Welfare and Antitrust Regulation

By Cassie Ma 08020023

While doing the M&A activities, legal and regulatory issues are very important because they contribute the last barrier to the closing of a deal. Once the deal is rejected by the authorities on the ground of some legal and regulatory reasons, all the previous efforts are in vain just as the Hui yuan & Coco Cola acquisition case ended up with a huge waste of time and effort. Among all these legal issues, antitrust regulation stands out to be most frequently used tool by the government. The key point in antitrust regulation is the assessment of “antitrust”, i.e. what criteria should be matched in order to call the deal “ trust”. Addressing to the assessment, there are several antitrust acts identifying the criteria.

All American antitrust laws date back to the Sherman Antitrust Act of 10 that was passed by Congress to remove limits on competitive trade with Section 2 deeming it illegal for a company or an individual \"to monopolize, or attempt to monopolize.“ The Sherman Antitrust Act mainly concerned about the potential monopoly power in terms of trade. The subsequent Clayton Antitrust Act of 1914 clarified certain additional activities that had been discovered to fall outside the scope of the Sherman Antitrust Act, namely price discrimination between different purchasers, exclusive dealing agreements, tying of contracts and M&A that substantially reduce market competition.

From these legal statements, the criteria of trust or monopoly is whether the M&A deal will lessen the market competition. Because once a company gain the monopoly power, it can lead to price-rigging, reducing the availability of goods and services, lowering the quality of products and innovation. There can be no doubt that price-rigging harms consumers by causing them to pay more for products and services and by depriving them of other byproducts of true competition. Standing on consumer’s point, antitrust regulation definitely benefit them by protecting the market competition. We are comfortable to conclude that the final goal of antitrust regulation is to protect the consumer’s benefits from being deprived by monopolies. However, in practice, are consumers really better-off ? Different cases end up with

different results.

The Hui yuan & Coco Cola acquisition case was rejected by the Ministry of Commerce of China because they deemed Coco Cola would substantially concentrate the beverage market in China after the acquisition and thus Coco Cola would rig the price, threatening Chinese consumer’s benefits. This is a typical antitrust regulation against M&A activities. The usual result would be an increase of price. This time Coco Cola didn’t make it, but there were successful pioneers such as French company Group Danone that successfully acquired Chinese leading company Wahaha in drinking water market, expanding its market share by 20% and increasing its price by more then 10%. The American company Kodak also managed to acquire three Chinese film companies and squeeze another two film companies out of the market. The consequence was that Kodak film express topped the list of the total market share, not only because its above-average quality but also because there were only two film companies left, namely Japanese company Fuji Film and Chinese company Lucky Film, while the latter couldn’t be even counted as a competitor to Kodak.

It seems that most M&A deals have the potential to be the next monopoly and that most deals will squeeze consumer’s surplus. Therefore, in my point of view, legal regulation will achieve its intended goal in M&A activities. However, as I put forward just now, are consumers better-off in all cases? Not necessarily. A good example is the Microsoft antitrust case in 1990s.

Unlike antitrust regulation against M&A deals, the antitrust investigation subjected to Microsoft was not related to any merger or acquisition, but was addressed only to one company on its products. The Department of Justice alleged (1)that Microsoft monopolized the market for operating systems of personal computers and took anti-competitive actions to maintain its monopoly; (2) that it bundled its browser(IE) with Windows to prevent other browser products’ application on Windows. These three charges all emphasized the lessened competition since Microsoft and its Windows product had covered a substantial market share. But the most important criteria was missed---the consumer’s welfare. Would consumers be better-off or not if the government succeeded? Or did Microsoft really abuse its

monopoly power to squeeze consumer’s surplus? I think the answer was not consistent with what the DOJ alleged.

Microsoft priced its operating system at a ridiculously low price compared to the static monopoly price, which was estimated to be a large multiple of Microsoft’s actual price. Microsoft claimed that its low pricing was due to actual and potential competition. Even if objectively it is difficult to see the big threat from potential competitors, it is clear that Microsoft’s executives constantly felt the fear of potential competition. On the pricing of Windows, I am inclined to believe Microsoft’s view: Microsoft priced low because of the threat of competition. From the consumer’s perspective, they may have directly benefited from the relatively low price of Windows. Since its initial cost was substantially large but the marginal cost was nearly zero, Microsoft had a large range of pricing, but it set a price that was quite low compared to other operating systems such as Linux setting its price at $150 with fewer applications than Windows had. These facts highlighted a huge contradiction in government’s case. If Microsoft were a true malevolent monopoly unconstrained by potential competition, it would charge far more for Windows than it does.

As to the bundling of IE and Windows, I think consumers also benefit from it. Just as Microsoft claimed, consumer would prefer an operating system with more available applications on it to save the efforts to install them one by one. In addition, bundling the IE with Windows doesn’t impede other browsers’ function on Windows as well as consumer’s choice because consumers are totally free to install other browsers anytime.

In the Microsoft case, the government fails to consider the consumer’s benefit and welfare so that its antitrust regulation isn’t well grounded, thus it can’t achieve the intended goal to maximize consumer’s benefit.

There are also many Chinese state-owned monopolies that mainly represent the governmental interest rather than consumer welfare. But none of them are subjected to antitrust investigation. Since the ultimate purpose of antitrust regulation is to protect consumer welfare, those who act by the consumer’s preference should not be the target of antitrust regulation, but those who don’t.