Everyday High Prices: How discounting led to inflation, shortages, and inequality.

AuthorLongman, Phillip

For years, the only supermarket serving the Pine Ridge Indian Reservation in southwest South Dakota was rundown and a threat to public health. Inspectors from the Indian Health Service repeatedly cited its distant corporate owners for food safety violations, such as mixing rotten hamburger with fresh meat and repackaging it for sale. So leaders of the Oglala Sioux Tribe were thrilled when, in 2018, they persuaded an experienced grocer to buy the store and commit to running it right.

R. F. Buche, whose family business has operated independent groceries throughout South Dakota for four generations, started with months of demolition and extensive remodeling. Today, except for the signs written in Lakota, the store looks just like any supermarket you might find in any middle-class neighborhood. Floors are clean, and shelves generally well stocked, including with an abundance of fruits and vegetables that were never available before. This is particularly important in a community where poverty is so extreme that most people don't own cars and the next-nearest grocery store is nearly 40 miles away.

But two big problems remain. The first is affordability. To stock his store, Buche has to pay wholesale prices that are often nearly double what Walmart pays and must pass on much of that cost to his customers. The second is that when national shortages of critical items like baby formula emerge, Buche and the Ogala Sioux are often the hardest hit, either having to do without or enduring longer waits for critical supplies than people elsewhere.

Yet while these problems may be extreme on the Pine Ridge reservation and in other very poor places, Americans everywhere are also harmed in serious ways by the zombie policy idea that has created these inequities. It's a notion that's supposed to bring everyday low prices for everyone. But in practice it has proved to have the opposite effect, creating more markets in which those with the least power pay the most, while those with the most pay the least.

Economists use a $20 word to describe the kind of market in which this occurs. They say it's a monopsony. Monopsony is like monopoly but it's when big buyers, not big sellers, dominate a market. When many sellers compete for the business of just a few big buyers, that gives the big buyers the power to coerce the sellers into giving them discounts and other concessions none of their smaller competitors can get.

Concerned with the way the abuse of monopsony power could suppress fair competition and foster corporate concentration, President Franklin D. Roosevelt signed landmark legislation in 1936, known as the Robinson-Patman Act, that made this kind of business practice illegal. And for many decades afterward, the law was a key pillar of America's political economy, helping to sustain the broad prosperity of the mid-20th century. But in what has turned out to be a colossal policy mistake, politicians in both parties decided to stop enforcing the act after the 1970s.

That decision, combined with lax enforcement of other antitrust laws, has led to truly baleful consequences. Indeed, though it's only dimly understood by most people--and outright denied by economists on the left and right who should know better--unrestrained growth of monopsony power has become a major source of the stubborn inflation, supply chain fragility, and gross inequities that define today's economy. Fortunately, senior officials in the Biden administration are increasingly aware of the problem and willing to do something about it. And they don't have to get a bill through a suddenly more hostile Congress to do so; they can just enforce a law that's already on the books.

To illustrate how the neglect of Robinson-Patman affects his business, Buche starts with the example of the price he must pay for a box of Tide laundry detergent. Like many independent grocers, Buche belongs to a purchasing coop called Associated Wholesale Grocers, which he uses to get volume discounts. In business since 1924, AWG is a big operation with huge economies of scale. It consolidates more than $10 billion in yearly wholesale purchases from 3,100 independent grocery stores in 28 states. As David Smith, the president and CEO of AWG, recently explained in testimony to Congress, because the co-op buys by the truckload and operates highly efficient billion-dollar-plus warehouse facilities, it can get volume discounts for its member stores that they could not get if they acted alone.

Yet the best wholesale prices the co-op can consistently get for its members are still far above what Walmart and other giant grocery chains routinely pay to restock their shelves. When Buche buys a standard-size box of Tide from AWG, for example, he typically must pay around $21. By contrast, Procter & Gamble, the maker of Tide, sells the same product to Walmart for a much lower price. Just how low is a trade secret, but it is so low that the Walton family makes money reselling it, even in its most remote stores, at an everyday retail price of $14 dollars and change.

Why do the co-op and its member grocery stores like Buche's have to pay P&G so much more than Walmart does for the same product? It's not because it costs P&G more to deliver a truckload of Tide to one of AWG's warehouses than to one of Walmart's. In fact, it has almost nothing to do with the actual cost of making and delivering products. Instead, it's because of Walmart's monopsony power over its suppliers.

If Walmart ever decided, for example, not to stock P&G products in its 10,000-plus stores, or even to just give those products less prominent shelf space, P&G sales would tank and there would be no way for the company to sell that much product to other retailers. As Albert Foer, former president of the American Antitrust Institute, pointed out in a 2006 study, P&G was at that time (and still is) one of Walmart's largest suppliers, but it accounted for only 2 percent of Walmart's sales...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT