The Consumer Welfare Standard, Consumer Sovereignty, and Reciprocity

The Consumer Welfare Hypothesis in Law and Economics claims that 1) in a partial equilibrium setting, a definition of allocative efficiency with remarkable pedigree uses a consumer welfare maximization standard; 2) this notion of allocative efficiency clearly fits better with EU antitrust and consumer law than the traditional total welfare hypothesis. The second claim is presented as a good reason for taking this notion of allocative efficiency in the economic approach to law seriously. This chapter shows that the consumer welfare hypothesis is supported by an indirect reciprocity mechanism with robust evolutionary credentials. Applied to a market setting, this indirect reciprocity mechanism is supported by the social norm of consumer sovereignty. Among other things, this account straightforwardly connects central themes of Adam Smith’s thought: reciprocity, moral equality, division of labour, and consumer sovereignty. Consequently, another advantage of the consumer welfare hypothesis over the total welfare hypothesis is that it can rely on a plausible evolutionary mechanism.