Review of Industrial Organization

https://doi.org/10.1007/s11151-019-09708-3

Williamson’s Welfare Trade‑Off Around the World

Germán Bet1   · Roger D. Blair2

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Abstract
Fifty years ago, Williamson (Am Econ Rev 58:23, 1968) argued that an efficiency-
enhancing merger that reduces production costs but increases market power could be
saved from antitrust condemnation if the cost savings created by the merger offset
the allocative inefficiency. In this paper, we discuss some extensions of William-
son’s basic welfare tradeoff, and explore the attitudes of several countries around the
world toward merger efficiencies. In spite of its economic logic, Williamson’s analy-
sis has not been embraced by most of the antitrust authorities around the world. We
explore different reasons why antitrust authorities have failed to adopt an explicit
social-welfare standard.

Keywords  Merger · Antitrust · Welfare standard · Efficiencies

JEL Classification  L4 · L44

1 Introduction

Half a century ago, Williamson (1968) explained that an efficiency-enhancing

merger could have conflicting welfare effects. On the one hand, the efficiencies
reduce costs and thereby improve social welfare (i.e., the sum of both consumer and
producer surpluses). On the other hand, the merger may increase the degree of mar-
ket power, which would lead to allocative inefficiency and thereby decrease social
welfare. Consequently, an efficiency-enhancing merger may present a welfare trade-
off in analyzing the net effect on social welfare.

* Germán Bet
cgerman.bet@ufl.edu
Roger D. Blair
rdblair@ufl.edu
1
Department of Economics, University of Florida, 224 Matherly Hall, P.O. Box 117140,
Gainesville, FL 32611, USA
2
Department of Economics and Affiliate Faculty, Levin College of Law, University of Florida,
224 Matherly Hall, P.O. Box 117140, Gainesville, FL 32611, USA

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Vol.:(0123456789)
 G. Bet, R. D. Blair

In the last 50 years, Williamson’s model has been refined in several ways (e.g.,
Farrell and Shapiro 1990). It has also been extended to the case of monopsony (Blair
2010) and to the case of quality-enhancing mergers (Blair and Sokol 2015). In all
cases, under the explicit and implicit assumptions that were made by Williamson
(1968) and absent distributional concerns, Williamson’s point is well taken: If a
merger produces a net improvement in social welfare, then there is no sound eco-
nomic rationale for prohibiting the merger. In spite of its economic logic, William-
son’s analysis has not been embraced by the U.S. antitrust authorities nor by the
European Union (EU) authorities. The attitudes of other countries toward merger-
specific efficiencies vary to some extent.
In this paper, we begin by presenting Williamson’s model, along with some
refinements in Sect.  2. In Sect.  3, we extend Williamson’s model to the case of
monopsony and to the case of quality improvement. Section 4 provides a survey of
the antitrust treatment of merger efficiencies in the U.S., Canada, China, and other
countries. In Sect. 5, we explore various reasons why antitrust authorities have failed
to adopt an explicit social welfare standard. We offer some concluding remarks in
Sect. 6.

2 Williamson’s Tradeoff and Refinements

When an efficiency-enhancing merger reduces production costs and increases mar-

ket power, there is a welfare tradeoff: Williamson (1968) argued that the cost saving
could offset the allocative inefficiency and thereby save an otherwise objectionable
merger from antitrust condemnation. In subsequent work, there have been exten-
sions and refinements of Williamson’s analysis. In this section and the next section,
we examine the welfare tradeoffs from the perspective of social welfare.

2.1 Williamson’s Analysis

Mergers may evoke competitive concerns with regard to either unilateral monopoly
power or collusive monopoly power. In some instances, the merging parties will
experience efficiencies that cannot be realized by other means. These merger-spe-
cific efficiencies may offset the competitive concerns in some cases, but not in oth-
ers. Here, we revisit the welfare analysis that was introduced by Williamson.
When formerly competing sellers merge, concentration in the relevant market
necessarily increases to some extent, which depends on the relative sizes of the
merging firms. If the merger yields merger-specific efficiencies, one of three things
will happen. First, if the market is unconcentrated before and after the merger, this
merger poses few antitrust concerns. Given the pre-merger and post-merger market
structure, this merger would not attract much attention from the agencies.
Second, the merger could alter the market structure in such a way that non-com-
petitive pricing occurs, but the post-merger price is still below the pre-merger price
due to substantial efficiencies. If these efficiencies are merger-specific, then this
merger should still be applauded because consumers benefit from lower prices and

13
Williamson’s Welfare Trade‑Off Around the World

greater output. The fact that prices are above the post-merger competitive level may
nag a bit, but consumers are still better off on balance. In this case, the cost savings
are large enough to result in lower prices for consumers in spite of the increase in
market concentration. Social welfare, defined as the sum of both consumer and pro-
ducer surpluses, is clearly greater after the merger.
The third and most provocative possibility involves the Williamson tradeoff. In
this case, merger-specific efficiencies reduce the per-unit cost of production and/or
distribution, but the increase in market concentration is sufficient to produce a price
above the pre-merger level. This case is illustrated in Fig. 1.
The pre-merger price and quantity, P ­ 1 and Q
­ 1, respectively, are determined by the
equality of demand (D) and the competitive supply, which is shown as M ­ C1 = AC1.
The merger-specific efficiency is reflected in the decrease in costs to ­MC2 = AC2.
Suppose that the merger leads to the indicated cost savings, but that the exercise
of the resulting market power leads to an increase in price from P ­ 1 to P
­ 2 with a
corresponding decrease in quantity from Q ­ 1 to Q
­ 2. The evaluation of this merger is
somewhat complicated.
If one examines this merger from a social-welfare perspective, one encounters the
Williamson welfare tradeoff. Whether social welfare rises or falls depends on the
relative magnitudes of the allocative inefficiency and the cost saving. In Fig. 1, the

Fig. 1  The Williamson tradeoff

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 G. Bet, R. D. Blair

allocative inefficiency is given by the triangular area abc. The cost saving is given by
the rectangle ­P1cdAC2.
As Fig. 1 is drawn, the cost saving appears to be larger than the allocative inef-
ficiency. In that event, the merger should not be barred because the social benefits of
the cost saving outweigh the allocative inefficiency. But this need not always be the
case. When the allocative inefficiency outweighs the cost saving, the merger reduces
both consumer welfare and social welfare. Such a merger should be forbidden.
Since we cannot presume that the net effect of an efficiency-enhancing merger
of rival sellers will inevitably be positive or negative, we need reliable estimates of
the cost savings as well as of the allocative inefficiency. This is particularly daunt-
ing because both estimates are needed before the merger is actually consummated.1
Moreover, the merging parties typically know more about the efficiencies that will
be created by their merger than do the agencies, and thus they have an incentive to
overstate these efficiency gains to obtain regulatory approval.2

2.2 Extensions and Refinement

Two critical points about the Williamson trade-off argument involve the assumption
that the pre-merger price is competitive, and the implicit assumption that there are
no differences across firms since it is assumed that there is a single level of marginal
cost in the market (before and after the merger). Farrell and Shapiro (1990) relax
these assumptions and extend Williamson’s model for the special case in which
competition takes a Cournot form.
When firms engage in Cournot competition, Farrell and Shapiro (1990) show that
for the price to fall following a merger the merged firm’s marginal cost at the pre-
merger joint output of the merging firms must be below the marginal cost of the
more efficient merging firm. Intuitively, a price decrease requires an output expan-
sion, and the merged entity will have incentives to increase output marginally only
if the marginal cost at the pre-merger joint output of the merging firms decreases:
if it is lower than the marginal cost of the more efficient merging firm. This condi-
tion implies that mergers that involve no synergies, but only a reallocation of output
across the firms, cannot reduce the price. Not surprisingly, the same is true for merg-
ers that reduce fixed costs but not marginal costs.
When an agency wants to evaluate the social welfare impact of a merger, an
assessment of the merger efficiencies created by the merger is required. This is par-
ticularly challenging, since the merging parties always have an incentive to overstate
the size of these efficiency gains in order to obtain regulatory approval. These effi-
ciency gains are realized only after the merger is consummated, and any prospective

1
  Mergers that have already been consummated can, of course, be challenged after the fact. In that event,
proof of the cost saving will be possible—at least in principle—but estimating the allocative inefficiency
will be no easy task.
2
  Given this, agencies are more likely to accept documents as credible statements about efficiencies, syn-
ergies, or economies of scale in the ordinary course of business rather than consulting studies that are
created shortly before or after the merger announcement.

13
Williamson’s Welfare Trade‑Off Around the World

claim is hard for an antitrust authority to verify. Moreover, the post-merger diffi-
culty of “unscrambling the eggs”, along with the possible complications of verify-
ing whether promised cost reductions have actually occurred, makes the pre-merger
efficiency judgments even more demanding.
In this context, Farrell and Shapiro (1990) obtain a sufficient condition for a
merger to increase social welfare that does not require an assessment of the effi-
ciencies claimed by the merging parties. They presume that the proposed merger is
profitable for the merging parties, which allows Farrell and Shapiro to focus on the
external effects on consumers and on nonparticipant firms.3 Then, under the pre-
sumption that any proposed merger is privately profitable, it will also increase wel-
fare if it has a positive external effect.
In particular, they show that for a merger that will reduce output by the merging
parties, a sufficient condition for a privately profitable merger to enhance social wel-
fare is:
∑ ( )
sI < − si dxi ∕dX
i∉I

where sI is the collective market share of the firms in set I (i.e., set of merging firms);
si is firm i’s pre-merger market share; and dxi ∕dX is the change in non-merging firm
i’s output when industry output changes marginally. Typically, the above condition
is more likely to be satisfied when the merging firms are small and the non-merging
firms are large. Part of this is explained by the fact that, in this case, the output of
the non-merging firms increases after the merger. Then, the effect of this reshuffling
of production on non-merging firms’ profits is more positive when the non-merging
firms are large.
Note that this has the practical advantage that assessing the external effect
requires much less information than assessing the overall welfare effect, since the
effect on merging firms’ profits depends on internal cost savings which are often
hard to observe. In particular, the condition requires only readily available infor-
mation on pre-merger outputs and on the slopes of the non-merging firms’ best
response functions (in order to know dxi ∕dX ).4
The analysis is more complicated in the context of a differentiated price competi-
tion model. In this setting, products are strategic complements (i.e., best response
functions are upward sloping); and if the merger causes the merged firm to increase
its prices, then all prices in the market will rise. Moreover, a merger between two
or more competing firms will cause upward price pressure, which is due to the
internalization of business-stealing effects.5 When a merger creates efficiencies and

3
  Nonparticipant firms are the non-merging firms. The external effect is defined as the change in joint
profits of the non-merging firms plus the change in consumer surplus (and is equivalent to the change in
total welfare that is associated with a merger minus the change in joint profits of the merging firms).
4
  Farrell and Shapiro (1990) show that this last condition can be weakened at the expense of additional
assumptions on the demand and cost sides.
5
  When two former competitors merge—for example, firms A and B—a decrease in the price of the
product that is produced by firm A creates extra sales. Some of these additional sales come from product
B. Those sales that are lost on product B represent a new marginal cost for the merged entity. The inter-
nalization of this effect will cause an upward pricing pressure.

13
 G. Bet, R. D. Blair

marginal cost savings, the upward pricing pressure that is created by the merger can
be fully or partially offset by these efficiencies.
Farrell and Shapiro (2010) show how these two opposite forces can be compared
without predicting the full equilibrium adjustment of the industry to the merger. In
particular, they obtain a simple indicator of whether a proposed merger between
rivals in a differentiated product industry is likely to raise prices. This indicator is
based only on the price–cost margins of the merging firms’ products and the diver-
sion ratio or extent of direct substitution between them.6 The diversion ratio affects
the stringency of merger approval under a consumer-surplus standard. For values
of diversion ratio close to zero, the merger poses no threat. On the other hand, a
high diversion ratio makes the merger a non-starter, unless it creates tremendous
efficiency gains.

3 Extensions of Williamson’s Insights

In this section, we consider two extensions of Williamson’s original insights: First,

we show that much the same welfare tradeoff may exist when an efficiency-enhanc-
ing merger results in buyer power. Second, we examine the welfare effects of qual-
ity-enhancing mergers.

3.1 Efficiency‑Enhancing Mergers Among Buyers

We begin with the Williamson welfare tradeoff as adapted to the case of mergers
among buyers. When formerly competing buyers merge, concentration on the buy-
ing side of the relevant market necessarily increases to some extent, which depends
on the relative sizes of the merging firms. In order to focus on the Williamson wel-
fare tradeoff, we assume that the merger results in buyer power.7 The buyer contin-
ues to be a competitor with respect to sales of its output in the relevant market(s).
In this case, merger-specific efficiencies reduce the transaction costs of the buy-
ers, but the increase in market concentration is sufficient to produce an input price
and quantity below the pre-merger level.
More specifically, we are considering the situation in which the buyers purchase
an intermediate good that is used to produce a final good. The demand for the inter-
mediate good is derived from the consumer demand for the final good. If the cost of
transforming the intermediate good into a final good falls, then the derived demand
will shift to the right: The intermediate good becomes more valuable to the buyers.
In this case, transactional efficiencies lead to a shift in the derived demand for the
intermediate good in question. At the same time, buyer concentration increases, and
buyer power is exercised. The economic effects are illustrated in Fig. 2.
6
  The diversion ratio from product A to product B is the share of the lost sales of product A that are cap-
tured by product B when A’s price increases.
7
  We define buyer power as a situation in which a downstream firm can affect the terms of trade with
upstream suppliers. This arises when the share of purchases in the upstream input market by the down-
stream firm is sufficiently large that it can influence the market input price, causing it to fall by purchas-
ing less.

13
Williamson’s Welfare Trade‑Off Around the World

Fig. 2  Welfare tradeoff for efficiency-enhancing mergers among buyers

The pre-merger input price (­ P1) and quantity (­ Q1) are determined by the equality
of derived demand (­ D1) and supply (S). The efficiencies that result from the merger
of buyers lead to a shift in the derived demand from ­D1 to ­D2.
If the efficiency-enhancing merger results in buyer power, the quantity purchased
will be determined by the equality of the marginal expenditure (ME) and the derived
demand ­(D2). In Fig. 2, the profit maximizing quantity falls from ­Q1 to ­Q2, and the
input price also falls from P­ 1 to ­P2. As a result, there is a welfare loss that is due to
allocative inefficiency as well as enhanced buyer surplus that flows from the effi-
ciency.8 To be sure, there will be an increase in buyer surplus that is simply a trans-
fer from producers (i.e. upstream suppliers). But there is additional buyer surplus
that results from the efficiency. It is only the latter that should be compared to the
allocative inefficiency in evaluating the impact on social welfare.9
On social-welfare grounds, the allocative inefficiency that is represented by the
triangular area cef must be compared to the reduction in cost that is represented by
the area between the two derived demand curves: area abcd. If the cost savings out-
weigh the allocative inefficiency, then the merger should be allowed; otherwise, it
should not be allowed.

8
  It is possible for the derived demand to shift enough for the post-merger quantity to increase in spite of
the buyer power. In this event, producer surplus would increase even though there would be some alloca-
tive inefficiency. This is the second possible outcome of a merger that was described earlier.
9
  If the lawfulness of this merger depends solely on its impact on the competitive suppliers, then the
merger would be unlawful due to the reduction in producer surplus from the pre-merger area ­P1eg to the
post-merger area ­P2fg.

13
 G. Bet, R. D. Blair

In the event that the reduction in transaction costs outweighs the allocative inef-
ficiency, the merger should not be barred. In this event the merger increases social
welfare. But this need not always be the case. When the allocative inefficiency out-
weighs the cost saving, the merger reduces both producer welfare and social welfare.
Such a merger should be forbidden.
The problems that are associated with providing a sound evidentiary basis for
drawing inferences with regard to the welfare effects of a merger of buyers is the
same as those for a merger of sellers. Since we cannot presume that the net effect of
an efficiency-enhancing merger of rival buyers will inevitably be positive or inevita-
bly be negative, we need reliable estimates of the prospective cost savings as well as
of the prospective allocative inefficiency. By definition, these estimates are needed
before the merger is consummated and the economic effects are realized. Therefore,
this requirement is particularly problematic.

3.2 Merger Efficiencies that Result in Increased Quality

The Williamson argument focuses on price as the only point of competitive interac-
tion among firms. More generally, however, firms compete on several dimensions
that include quality, innovation, product variety, and service. Here we analyze the
case of product quality. In many jurisdictions, the antitrust authorities consider the
effect of merger efficiencies on product quality. Welfare tradeoffs may be necessary
in evaluating a quality-enhancing merger.
To this end, consider a merger that leads to a better product. All consumers prefer
the improved product over the old, lower-quality product. The improved product is
worth more to all consumers; and, therefore, they are willing to pay more for it.10 In
short, the demand for the improved product lies above the demand for the old prod-
uct. The result of a merger that improves quality may well be an increase in price,
but that does not necessarily mean that the merger is anticompetitive. The effect on
consumer welfare is ambiguous. In fact, consumer surplus may rise, fall, or stay the
same—depending on what happens to price.11
In Fig. 3, ­D1 represents the demand for the product in question before the qual-
ity-improving merger and S is the supply. The pre-merger price and quantity are P ­1
and ­Q1, respectively. Now, suppose that a merger enables the newly merged firm to
improve the quality of the product. For ease of exposition, we assume that the effi-
ciencies in terms of design cost permit the product improvement without an increase
in production cost.12 This means that the supply curve of the improved product

10
  Quality is a general term that acquires content from the context. It may refer to fit, finish, durability,
color fastness, taste, appearance, and functionality, among other things. In this context, we assume that
all consumers agree that more of any attribute is usually desirable and, therefore, enhances the product’s
value to the consumer.
11
  Firms compete strategically by choosing both price and quality, in order to maximize profits. In this
subsection, we abstract from this problem by making some strong assumptions. The purpose is to focus
on the Williamson tradeoff.
12
  This assumption can be relaxed, but doing so adds some complications that are not relevant to the
present analysis.

13
Williamson’s Welfare Trade‑Off Around the World

Fig. 3  Welfare tradeoff for a quality-enhancing merger

is identical to the supply of the old, lower-quality product. The improved quality
causes the demand to shift. Assuming that all consumers value the improved quality
equally, there will be a parallel shift in demand from ­D1 to ­D2.13
Suppose that the quality-improving merger resulted in substantial market power.
The enhanced market power leads, say, to an increase in price from P ­ 1 to ­P2 and a
decline in quantity from Q ­ 1 to ­Q2. In that event, we would face a welfare tradeoff
that is analogous to the one developed by Williamson. In this case, the allocative
inefficiency is equal to the triangular area cef, while the gain in consumer and pro-
ducer surplus that is due to the quality improvement is equal to area abcd.14 The
relative magnitudes of these two areas cannot be determined on an a priori basis. If
the gain due to the quality improvement exceeds the loss in allocative efficiency, the
merger is desirable in spite of the increase in market power. This merger improves
social welfare and, therefore, should be permitted on that basis. Conversely, if the
allocative inefficiency swamps the gain in consumer surplus, then the merger is
undesirable on social welfare grounds.
The antitrust agencies in the U.S., the E.U., and most other jurisdictions focus on
consumer welfare rather than social welfare. On this more restrictive basis, the rele-
vant comparison is: a) area abgd, which is the increase in consumer surplus that is due
to the quality improvement; and b) area ­P2geP1, which is the allocative inefficiency
plus the conversion of pre-merger consumer surplus into profit. If the former exceeds
the latter, then the merger is pro-consumer and would be desirable on that basis.
When the focus is on consumer welfare and the merger has improved product
quality, the central point should not be the impact of the merger on post-merger
price. Instead, the central issue is whether the increase in consumer surplus created
by the quality improvement is greater or less than the fall in consumer surplus due

13
  The assumption that all consumers value the quality improvement equally is unimportant to the gener-
ality of the welfare results when the supply is perfectly elastic.
14
  For simplicity, we ignore the efficiency gains that are generated by the merger.

13
 G. Bet, R. D. Blair

to the price increase. After all, the quality of the product has changed due to the effi-
ciency and, therefore, each unit is worth more to the consumers.

4 Merger Efficiencies and Antitrust Law

Almost every competition-law jurisdiction recognizes that merger-specific efficien-

cies can provide net benefits to consumers in the form of lower prices, improved
quality, better service, greater product choice, and more rapid innovation. With the
exception of Canada and possibly Australia, New Zealand, and South Africa, how-
ever, the efficiencies must be great enough to offset completely any adverse effect on
consumers. Consequently, there is no room for the Williamson welfare tradeoff in its
classic formulation. Instead of weighing the cost savings at the post-merger output
against the welfare losses that are due to allocative inefficiency, the focus is on the
consumer surplus rather than total surplus. If consumer surplus is expected to fall
due to the merger, then the merger will be challenged.
In this section, we examine the U.S. policy in some detail and then provide a sur-
vey of other jurisdictions. We also examine the policy in Canada, which embraces
the Williamson welfare tradeoff, as well as the complex case of China.
From the perspective of social welfare, Williamson is unambiguously correct: If
the cost savings due to a merger-specific efficiency outweigh the allocative ineffi-
ciency of an increase in market power due to the merger, the merger should not be
barred. This conclusion has not been embraced by the U.S. nor by many other coun-
tries. As will become apparent, the problem lies in the use of a consumer welfare
standard rather than a social welfare standard. Below, we will spell out the limited
role that efficiencies play in the U.S. and elsewhere.

4.1 United States Antitrust Policy

In the U.S., antitrust policy in practice is governed by §7 of the Clayton Act, judi-
cial interpretation of §7, and the Department of Justice (DOJ) and the Federal Trade
Commission (FTC) enforcement efforts. Section 7 of the Clayton Act is a preventive
measure:
No person engaged in commerce… shall acquire, directly or indirectly, the
whole or any part of the stock or… the whole or any part of the assets of
another person engaged also in any activity affecting commerce, where in any
line of commerce… in any section of the country, the effect of such acquisition
may be substantially to lessen competition, or to tend to create a monopoly (15
U.S.C. §18).
From this language, it is clear that Congress wanted to prevent mergers that could
yield anticompetitive results if they were consummated. Thus, merger challenges
would be based on reasonable post-merger expectations of economic outcomes. To
aid this enforcement effort, Congress passed the Hart-Scott-Rodino (HSR) Act in
1976.

13
Williamson’s Welfare Trade‑Off Around the World

Under the HSR Act, the merging firms (above a specified size) must notify the
DOJ and FTC of their intentions and provide a substantial amount of information.
The agency uses this information to draw a reasonable inference regarding the likely
economic effects of the merger. Almost always, it must do this before the merger is
consummated. This is where the claimed efficiencies come into play. The current
Horizontal Merger Guidelines expressly recognize the role that efficiencies play in
analysis of post-merger economic effects.
The 2010 Merger Guidelines are grounded in Section 7 of the Clayton Act. Sec-
tion 7 is a prophylactic measure that is designed to prevent changes in market struc-
ture that may facilitate coordinated behavior or noncompetitive unilateral behavior.
Given the prophylactic nature of §7, the assessment of competitive effects must be
made before a merger is consummated. The pre-merger market structure is com-
pared to the post-merger market structure, and inferences are drawn with regard to
the probable economic effects. The language of §7 and the structural analysis that is
usually employed create considerable difficulty for mounting a successful efficien-
cies defense when there is a presumption that the merger under review is apt to be
anticompetitive.
If a merger would result in a monopoly or a substantial increase in market con-
centration, the Clayton Act would appear to condemn such a merger irrespective of
any efficiencies. In spite of §7’s language, however, efficiency considerations have
crept into some merger decisions.15 Moreover, the possibility that an apparently
objectionable merger may result in procompetitive efficiencies has been recognized
in the Merger Guidelines (Merger Guidelines 2010, §10).
The Guidelines explicitly recognize that a merger can produce efficiencies that
“may result in lower prices, improved quality, enhanced services, or new products”
(Merger Guidelines 2010, §10). By “efficiency”, the Guidelines are referring to
changes that cause the merged firm’s marginal cost to decrease. Cost savings that
are due to reductions in output, quality, or product variety are not efficiencies and
will not be considered by the agencies. Moreover, the efficiency must be merger-
specific.16 Thus, only efficiencies that are likely to be realized specifically as a con-
sequence of the proposed merger—but are unlikely to be realized in the absence of
the merger—are cognizable.
The burden of proving that the claimed efficiencies are real rather than imaginary
falls squarely on the shoulders of the merging parties. They must clearly identify the
source(s) of the efficiency and estimate its magnitude so that the agencies can verify
the claimed efficiency’s existence and economic significance.
The agencies’ consideration of efficiencies must be understood in the overall con-
text of the Guidelines. Fundamentally, the Guidelines are designed and intended to
protect consumers:

15
  Some recent examples are Saint Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke’s Health Sys., Ltd. (St.
Luke’s), 778 F.3d 775 (9th Cir. 2015); United States v. Anthem, Inc., 236 F. Supp. 3d 171, 186 (D.D.C.),
aff’d, 855 F.3d 345 (D.C. Cir. 2017); or United States v. AT&T Inc., 2018 WL 2930849 (D.D.C. June 12,
2018). See Blair and Sokol (2012) for a summary of cases that involve efficiencies.
16
  In determining merger specificity, the agencies will not require firms to pursue the claimed efficien-
cies in ways that are not practically available to them.

13
 G. Bet, R. D. Blair

The unifying theme of these Guidelines is that mergers should not be permitted
to create, enhance, or entrench market power or to facilitate its exercise……A
merger enhances market power if it is likely to encourage one or more firms to
raise price, reduce output, diminish innovation, or otherwise harm customers
as a result of diminished competitive constraints or incentives (Merger Guide-
lines 2010, §1, emphasis added).
With respect to efficiencies, the Merger Guidelines explain that:
The agencies will not challenge a merger if cognizable efficiencies are of a
character and magnitude such that the merger is not likely to be anticompeti-
tive in any relevant market. To make the requisite determination, the agencies
consider whether cognizable efficiencies likely would be sufficient to reverse
the merger’s potential to harm customers in the relevant market, e.g. by pre-
venting price increases in the market (Merger Guidelines 2010, §10).
Thus, the agencies have a “pass-through” requirement—an efficiency must be
sufficient to result in no predictable increase in price above the pre-merger level.17
The role of the efficiencies defense is further limited in the following way. If the
structural change that would accompany a merger suggests that anticompetitive
results are likely, the agencies demand substantial efficiencies:
The greater the potential adverse competitive effect, the greater must be the
cognizable efficiencies, and the more they must be passed through to custom-
ers…When the potential adverse competitive effect of a merger is likely to be
particularly substantial, extraordinarily great cognizable efficiencies would be
necessary to prevent the merger from being anticompetitive (Merger Guide-
lines 2010, §10).
This demand for substantial efficiencies reflects the focus on consumer welfare.
From an economic perspective, however, this demand for substantial efficiencies
may be misguided. Under certain conditions, rather small efficiency gains can offset
fairly large increases in price and thereby increase social welfare.

4.2 Summary of U.S. Requirements

For efficiencies to be cognizable and sufficient to save an otherwise objectionable

merger, the efficiency must be

• merger-specific
• quantifiable
• verifiable
• large enough to prevent the post-merger price from exceeding the pre-merger
price

17
  For an analysis of the pass-through requirement see Yde and Vita (1996) and Yde and Vita (2006).

13
Williamson’s Welfare Trade‑Off Around the World

The most critical feature of the U.S. enforcement policy is its concern with con-
sumer welfare.

4.3 Survey of Other Countries

The OECD (2012) surveyed the role that merger-specific efficiencies play in merger
analysis in a number of jurisdictions.18 Most other countries have adopted some-
thing close to a consumer welfare standard that effectively precludes the Williamson
welfare tradeoff.19 These countries recognize that efficiency-enhancing mergers may
yield consumer benefits in the form of lower prices, improved quality, greater choice
of goods and services, and greater innovation.
The efficiencies will not be recognized unless they are merger-specific: If the effi-
ciencies can be realized in the absence of the merger, then they cannot be relied
upon to excuse an otherwise objectionable merger.
The efficiency claims cannot be vague: The efficiencies must be quantifiable and
verifiable. Otherwise, they will be accorded no weight. As in the U.S., the burden of
proving efficiency claims falls on the merging parties.20
For the merger-specific efficiencies to save an otherwise objectionable merger,
the efficiencies must offset the anticompetitive consequences of the merger. This is
basically the same thing as the pass-through requirement under the U.S. Guidelines.
Consequently, these countries focus on consumer welfare rather than social welfare,
which makes the Williamson tradeoff impossible.

4.4 Merger Efficiencies in Canada

In stark contrast to the U.S. and most O.E.C.D. countries, Canada appears to have
embraced fully the Williamson welfare tradeoff. Section 96 of the Canada Competi-
tion Act provides a statutory foundation for an efficiency defense. The Act recog-
nizes that efficiencies make the Canadian economy more competitive through cost
savings. Unlike the U.S., there is no pass-through requirement.
Consequently, determining whether merger-specific efficiencies can save an oth-
erwise objectionable merger necessarily requires the sort of welfare tradeoff analysis
that was envisioned by Williamson. Facey et al. (2018) point out that “…efficiencies
could save a merger to monopoly in Canada even if it leads to higher prices or less
choice for consumers.” The cost–benefit analysis provided by § 96 of the Act seeks
to maximize social welfare – rather than consumer welfare.21

18
  These jurisdictions include Australia, Chile, Colombia, European Union, Germany, Indonesia, Japan,
Korea, Mexico, New Zealand, Russian Federation, South Africa, Sweden, Switzerland, Chinese Taipei,
Turkey, and the United Kingdom.
19
  Australia, New Zealand, and South Africa are the only O.E.C.D. countries that allow for a total wel-
fare standard to play a role in merger evaluation.
20
  Exceptions to this are Australia and Switzerland.
21
  More precisely, Canada applied an explicit total welfare standard until the Superior Propane case.
Currently, Canada has a “balancing weights” standard, in which the agency applies weights to consumer
and producer surplus that reflect the social weight that corresponds to transfers between consumers and

13
 G. Bet, R. D. Blair

In Canada, efficiencies must be merger-specific and must not be available in the

absence of the merger. Cost savings that flow from reductions in output, service,
quality, or consumer choice are not cognizable efficiencies and will not be credited.
In a § 96 dispute, the burdens of proof seem to fall where they should. The gov-
ernment must prove the adverse competitive effects, while the merging parties must
prove the efficiencies.

4.5 China

China is an unusual case. It is a huge country with the largest economy in the world,
but its antitrust policy is ambiguous because it has conflicting goals. According to
Article 1 of China’s Anti-Monopoly Law (AML), the law’s objectives are
to prevent and restrain monopolistic conduct, to promote fair competition, to
enhance economic efficiency, to ensure that consumer interests and the public
interest are protected, and to promote the development of the socialist market
economy (Choi and Youn 2013, 952).
The language of the law initially seems to suggest that the AML’s goal is to
protect the interests of consumers. The last part of the Article, however, seems to
broaden the objectives of the Chinese AML beyond defending the consumers’ inter-
ests, by including the public interest and the socialist market economy. To the extent
that these objectives are inconsistent, predicting the outcome of a merger investiga-
tion borders on speculation.22

Footnote 21 (continued)
shareholders. These weights may be merger specific, in the sense that they may vary from one merger to
another. See Ross and Winter (2003, 2005) for a detailed discussion about this and the Superior Propane
case.
22
  The problem does not seem to rely uniquely on the language of the law. During the last few years, the
powers to enforce the AML were divided between different units: the Anti-monopoly and Anti-unfair
Competition Enforcement Bureau of the State Administration for Industry and Commerce (SAIC), the
Price Supervision and Anti-monopoly Bureau of the National Development and Reform Commission,
the Anti-monopoly Bureau of the Ministry of Commerce (MOFCOM), and the Anti-monopoly Commis-
sion of the State Council. These antitrust enforcement units issued substantive rules that implement the
AML that were not entirely consistent and released procedural rules that were similar but not identical
and that were characterized by different cultures and enforcement styles. Recently, China’s government
agencies have been reorganized. As part of the restructuring, China has established a State Market Regu-
latory Administration (SMRA), which will merge and undertake the responsibilities that were previously
held by the SAIC, the General Administration of Quality Supervision, the Inspection and Quarantine
Administration (AQSIQ), the Certification and Accreditation Administration (CAC), the Standardization
Administration of China (SAC), and the China Food and Drug Administration (CFDA). In addition, the
SMRA will govern a newly formed State Intellectual Property Office (SIPO) to regulate intellectual prop-
erty rights. This reorganization could have a profound impact on antitrust enforcement in the country,
since it integrates into one single authority the antitrust and price supervision functions of the aforemen-
tioned antitrust enforcement units. In this sense, the merger of the previous antitrust enforcement units
is expected to enhance enforcement efficiency and consistency, and to reduce the uncertainties that were
related to the different applicable rules and enforcement styles that were present in the previous regime.

13
Williamson’s Welfare Trade‑Off Around the World

The role of efficiencies in China’s antitrust policy is somewhat confusing

because, as mentioned above, the welfare standard is unclear. Article 29 of the AML
provides:
…that a merger that is deemed to have the effect of eliminating or restricting
competition may be allowed if the parties can demonstrate that the transaction
would bring about benefits that significantly outweigh the negative impacts.
Article 29 appears to suggest social welfare.
On the other hand, Article 28 holds:
Where a concentration has or may have the effect of eliminating or restricting
competition, the Anti-monopoly Authority under the State Council shall make
a decision to prohibit the concentration. However, if the business operators
concerned can prove that the concentration will bring more positive impact
than negative impact on competition, or the concentration is pursuant to pub-
lic interests, the Anti-monopoly Authority under the State Council may decide
not to prohibit the concentration.
Therefore, the language of Article 28 initially appears to protect the interests of
consumers, but then seems to expand the welfare standard by allowing a higher mar-
ket concentration if it promotes the public interest.
Similarly, Article 27 seems to cover both a consumer surplus and a total welfare
standard when listing the different factors that will be considered when challenging
a merger, such as: the likely effects on consumers and producers; the role of entry
barriers or innovation; or the merger’s overall effect on economic development.23

5 Commentary on Merger Policy

In Williamson’s model, there is complete information: The magnitude of the cost

savings and any allocative inefficiency are known with certainty. In addition, there
are no transaction costs that accompany a proposed merger.
Under his explicit and implicit assumptions, Williamson is unambiguously cor-
rect: If the cost savings that are due to a merger-specific efficiency outweigh the
allocative inefficiency of an increase in market power due to the merger, the merger
should not be barred: because the merger increases social welfare.
In spite of the compelling economic logic of Williamson’s analysis, his insights
have not been embraced by the antitrust agencies in the U.S. or in most other juris-
dictions. As we have seen, these agencies have adopted a consumer welfare standard
rather than a social welfare standard in evaluating proposed mergers. In principle,
this appears to be a serious blunder. In practice, however, the focus on consumer
welfare may be well-advised. As we discuss below, both economic and political

23
  Shan et al. (2012) study the welfare standard that is applied by the Chinese AML by examining seven
recently challenged mergers. The conclusion that they draw is that the primary weight is placed on con-
sumer surplus.

13
 G. Bet, R. D. Blair

considerations provide incentives for the antitrust authorities to favor a consumer

welfare standard for evaluating a proposed merger.
In recent years, a consensus has emerged among antitrust agencies around the world
that efficiencies should be considered in analyzing proposed mergers. In most jurisdic-
tions, efficiencies must be large enough to prevent the post-merger price from exceeding
the pre-merger price to save an otherwise objectionable merger. Consequently, the legality
of a merger is determined by its impact on consumer welfare rather than social welfare.
In evaluating the competitive effects of a proposed merger the antitrust agencies
are at an informational disadvantage. Ordinarily, the merging firms have more infor-
mation regarding the likelihood and extent of the claimed efficiencies than do the
antitrust agencies.
In some circumstances, it can be shown that asymmetric information makes the
consumer welfare standard preferable to a social welfare standard when analyzing
a proposed merger: Besanko and Spulber (1993) focus on a setting of asymmetric
information in which the merging firms have better information about the cost sav-
ings than do the antitrust authority. The merging parties know the value of the effi-
ciencies that will be created by the proposed merger.
At the same time, the antitrust authority knows only the distribution of the
merger-specific values. Consequently, enforcers can pre-commit only to a single
probability that a proposed merger will be challenged. In addition, the merging firms
must incur the costs of proposing the merger.
In this setting, Besanko and Spulber demonstrate that expected social welfare is
maximized when the antitrust authority employs a welfare standard that accords more
weight to consumer surplus than to total surplus. The intuition is that a welfare standard
that gives relatively greater weight to consumer surplus would help to counteract the
negative consequences of the information bias in estimating the cost savings that are
generated by the merger. Since the firms must incur considerable costs in proposing
a merger and face the risk of it being disallowed, the expected profit that is associated
with the merger must also be considerable. The profitability of the merger is positively
correlated with the extent of the cost savings due to the merger specific efficiencies.
The fact that the merger is proposed conveys good information to the antitrust author-
ity about the prospective efficiencies from the merger. In fact, since Besanko and Spulber
assume that the changes in both producer and consumer surplus are positively related to
the efficiencies that are created by the merger, the self-selection into proposing a merger
implies that the agency is likely to face a better-than-average-quality merger proposal.24
Besanko and Spulber (1993) make the point that antitrust policy may reflect
external considerations to the agencies, and therefore merger review should be con-
sidered in the context of a complex system with multiple participants: each of them
trying to maximize its own goal. Other papers of this type are Neven and Roller

24
  The assumption that the profitability of the merger is positively correlated with the extent of costs sav-
ings due to merger specific efficiencies implies that both producer and consumer surplus are positively
related to the efficiencies created by the merger. Therefore, the most profitable merger is also the most
favorable to consumers in terms of changes in consumer surplus. This rules out situations in which the
profitability of the merger arises due to increased market power effects, lowering consumer surplus by
more than the change in producer surplus. There are some other caveats in the analysis conducted by
Besanko and Spulber (1993). See Farrell and Katz (2006) for a formal discussion of the paper.

13
Williamson’s Welfare Trade‑Off Around the World

(2005), Lyons (2002), and Fridolfsson (2007).25 Most important, these papers make
the crucial point that perhaps the best standard for promoting a particular welfare
goal could be a criterion other than the goal itself.
The issue of asymmetric information, uncertainty about efficiencies, and its
effects on enforcement has also been pointed out by Scherer (2012), who recognizes
the wisdom of Williamson’s insights, but has some reservations about the correct
implementation. He notes that uncertainties are great when predicting the scale of
the cost savings. But these uncertainties cannot be avoided because decisions must
be made before the merger is consummated and the efficiencies are realized.
Political considerations may influence the choice of the welfare standard that is
employed in analyzing proposed mergers. Antitrust policy is, of course, also affected
by the preferences of policy-makers or distributional concerns. Agencies incur type-
I (i.e., false positives) and type-II (i.e., false negatives) errors when challenging a
merger.26 In this context, it is clear that political considerations may have a direct
impact on a jurisdiction‘s approach to efficiency claims. If agencies care more about
the risk of incurring type-I errors than of incurring type-II errors, then an approach
in which efficiencies play a prominent role will most likely prevail. The opposite
would be true if agencies care more about incurring type-II errors.27
Political considerations that are coupled with variations in hierarchical struc-
ture, staff compensation and motivation schemes—as well as methods of adjudica-
tion, formal legal tests, and notification requirements, among others—make it very
unlikely that different jurisdictions draw fully identical conclusions as to how to
integrate efficiency claims in merger evaluation.28

25
  Neven and Roller (2005) focus on how merger reviews at the agencies work, and analyze how lobby-
ing can influence the choice of a welfare standard. Their argument to favor a consumer welfare stand-
ard relies on the assumption that firms can influence the antitrust authority, but consumers are unable
to do so. Therefore, a consumer welfare standard should be biased towards the interests of consumers
in order to counteract the bias that can arise from asymmetric lobbying. Lyons (2002) and Fridolfsson
(2007) note that when firms are expected to propose the most profitable merger among those that will
be allowed, then the use of a consumer surplus standard (which restricts the set of mergers that can be
proposed) can in some cases lead to proposed mergers that increase social welfare. See Farrell and Katz
(2006) for an excellent discussion of these papers.
26
  A type-I error, in this case, would be the prohibition of a pro-competitive merger. A type-II error, on
the other hand, would be permitting an anticompetitive merger.
27
  Since most jurisdictions appear to favor a consumer welfare standard, it seems that they care more
about avoiding type-II errors. Even though we do not attempt to shed light here on the different political
reasons for this choice, a plausible explanation may be related to the visibility of the two different types
of errors: The economic consequences of a type-II error are more visible than are the forgone benefits
that result from a type-I error. Type II errors are apt to lead to price increases, quality degradation, quan-
tity reductions, and limitations on product choice.
28
  Farrell and Katz (2006) discuss how the motivation and compensation of agency staff and manage-
ment may affect what standard the agencies and agencies’ staff should use. They also discuss how merger
policy may also be affected by the passive or reactive role of the courts in adjudicating agency challenges
but not themselves initiating challenges. Pittman (2007) argues that the structure of the U.S. Antitrust
Division and FTC are biased against merger challenges. He argues that under these circumstances, an
attempt by the agencies to maximize total welfare will lead to the challenge of too few mergers. On the
other hand, a decision rule that is based on consumer surplus would help to counteract this bias.

13
 G. Bet, R. D. Blair

Finally, there is a question of whether the differences in the role of efficiency

claims in merger evaluation across different jurisdictions is explained by different
interpretations of the relevant economic insights, or by the result of different con-
clusions as to the appropriate translation of the relevant economic insights into the
legal process of competition law and enforcement practice. Understanding these dif-
ferences would be helpful for the debate on the different approaches to the role of
efficiency claims in merger evaluation.

6 Concluding Remarks

If a country’s antitrust policy is intended to protect consumer welfare, there can be

no Williamson tradeoff. Irrespective of how much the marginal cost of production
and distribution may fall, if the post-merger price is above the pre-merger price,
then consumer surplus will be reduced. As we have seen, some efficiency-enhancing
mergers will increase social welfare, but that does not matter. In these cases, con-
sumers are worse off with the merger than without it. Consequently, the merger is
objectionable and will be barred.
Many countries have adopted a consumer welfare standard in evaluating mergers.
Prominently, these countries include the United States, the European Union, Japan,
Korea, and the United Kingdom. With the clear exception of Canada, and the pos-
sible exceptions of Australia, New Zealand, and South Africa, it is hard to find sup-
port for the Williamson welfare tradeoff. As a result, it is safe to say that the Wil-
liamson welfare tradeoff has not fared well either at home or abroad.
Finally, it is not completely obvious which countries have gotten it right. Real
world markets are plagued with imperfect information, and an inability to forecast
future events. It may be the case that the appropriate goal(s) may differ across coun-
tries and/or across industries. These unresolved issues provide fertile ground for
future research.

Acknowledgements  We thank Jessica Haynes, the late David Kaserman, and D. Daniel Sokol for past
collaboration. We also thank Tirza Angerhofer for her research assistance, Stephen Martin, David Sap-
pington, and Larry White for helpful comments and suggestions, and D. Daniel Sokol for some much
needed advice.

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