Antitrust as Corporate Governance: Why a Firm's Mission Is to Earn No Profit

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Abstract

The consumer welfare standard in antitrust law requires that firms maximize the margin between price and product quality, a quantity called consumer welfare by economists. This standard, adopted in the 1970s, resolves the long-running debate about which corporate constituency has a right to the profits of the firm, because profits and consumer welfare are a zero-sum game: Profits can be generated only by reducing the margin between price and quality, in effect redistributing wealth from consumers to firms. The rule that consumer welfare must be maximized therefore means that profits must be minimized. The consumer welfare standard requires that firms pay their profits out in full to the one constituency that has hardly figured in debates over corporate mission: the consumer, by charging consumers the lowest possible prices in exchange for products of the highest possible quality.

Rules once thought to determine the distribution of corporate wealth, from the voting rights of shareholders, to the fiduciary duties of boards, to charitable contribution statutes, are all of no relevance, because federal antitrust law requires that firms earn no profits at all but work instead for the exclusive benefit of their customers. I argue in a recent paper that these other rules are preempted by federal antitrust laws that are supreme over all conflicting behavior authorized by state laws. The only exception to supremacy is for behavior that is directly supervised by state regulators. But state regulators do not directly supervise boards’ exercise of their state-corporate-law-granted authority to maximize profits. The states do not even require, as they do of many rate regulated firms, that corporations notify regulators of the prices they charge to consumers, let alone meaningfully regulate those prices.

Original languageAmerican English
Specialist publicationThe CLS Blue Sky Blog
StatePublished - Mar 28 2018

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