A Critique of Antitrust Econometrics: Aggregation,the Representative Consumer,and the Broader Concerns of the New Brandeis School

Abstract

Some economists argue antitrust policy should be based on empirical methods used by the Industrial Organization subdiscipline of economics, but those methods contain assumptions that noneconomists should recognize. Those assumptions underlie econometric “identification,” and underlie treating aggregate demand as if it were generated by a representative consumer (Muellbauer’s “generalized linear” preferences). We explain aggregation bias in Almost Ideal Demand System models, then show that data limitations make it even harder to justify economists’ restricting aggregate demands as one would the demand of one individual. Such problems notwithstanding, the main problem with antitrust econometrics may be that there is not enough of it. Whether firms maximize profit is understudied empirically; many may maximize return on assets instead, leading to firms with assets and employees below their profit-maximizing level. There is insufficient empirical study of this and many other topics of concern to New Brandeisians.