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Economies as an Antitrust Defense: The Welfare Tradeoffs

By  |  October 30, 2006

Apr 01, 2005

In this article, Oliver Williamson sets out the case for taking efficiency gains into account when analyzing allegedly anticompetitive conduct, especially in the case of mergers. The welfare tradeoff model applies most easily to the case of two firms that merge into a monopoly. The analysis begins by recognizing that in the case of a demand curve that is relatively elastic, the efficiency gains from a cost-reducing merger (toward monopoly) could easily outweigh the incremental deadweight loss from (post-merger) monopoly pricing. Given the cost of including an efficiency defense in merger litigation, Williamson concedes it might be desirable to require that the gains cross a threshold of substantiality before being admitted into court as evidence. Using a very simple model, Williamson has provided the core theoretical basis used today for taking efficiencies into account in horizontal merger analysis and for treating vertical and horizontal mergers differently.

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