Looking at the Monopsony in the Mirror

• Publication year: 2013

Looking at the Monopsony in the Mirror

Maurice E. Stucke

LOOKING AT THE MONOPSONY IN THE MIRROR

Maurice E. Stucke^*

Introduction

Although still a distant second to monopoly, buyer power and monopsony are hot topics in the competition community.¹ The Organisation for Economic Co-operation and Development (OECD),² International Competition Network (ICN),³ and American Antitrust Institute (AAI)⁴ have studied monopsony and buyer power recently. The U.S. Department of Justice and Federal Trade Commission pay more attention to buyer power in their 2010 merger guidelines than they did in their earlier guidelines.⁵ With growing buyer concentration in commodities such as coffee, tea, and cocoa, and among retailers, buyer power is a human rights issue.⁶

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As this Article discusses, both monopolies and monopsonies have significant market power. A monopolist typically is characterized as the only or dominant seller in town.⁷ (Think of the only gasoline station along a long highway stretch, which despite its low costs charges outrageously high prices.) The monopolist can raise its price above competitive levels. The monopolist can also reduce, contrary to its customers' wishes, the quality of its products and services, product variety, and innovation. A monopsonist, on the other hand, is typically characterized as the only or dominant buyer in town.⁸ (Think of the factory in the one-factory town where you either work on the company's terms or you are on your own.) The monopsonist can lower the price below competitive levels for the goods and services it buys.⁹ The monopsonist can also reduce the quality of products it purchases and the amount of innovation that an otherwise competitive market would foster.¹⁰ As one state supreme court recently commented:

The antitrust laws are as concerned about abuse of monopsony power to pay prices below a competitive level as they are about abuse of monopoly power to charge prices above a competitive level. The seller to the monopsony has been harmed as much as the buyer from the monopoly.¹¹

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Monopsony and buyer-power claims are likely to arise in several important industries, including agriculture,¹² health insurance,¹³ and retail.¹⁴ Recently, for example, the DOJ and U.S. Department of Agriculture (USDA) examined buyer power in the seed, hog, livestock, poultry, and dairy industries.¹⁵ The DOJ and USDA deserve credit for setting up their workshops. Professor Peter Carstensen, among others, expressed relief:

For years many of us who follow agricultural competition issues have lamented the failure of both antitrust enforcement and market facilitating regulation to deal with continuing problems that farmers and ranchers confront in both the acquisition of inputs and the marketing of their production.¹⁶

Over 4,000 people attended the public workshops in Iowa, Alabama, Wisconsin, Colorado, and Washington, D.C.¹⁷ The DOJ received over 18,000 public comments.¹⁸ Participants complained that the lack of antitrust

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enforcement enabled "a severely concentrated marketplace in which power and profit are limited to a few at the expense of countless, hard working family farmers" and that "high input prices, low commodity prices, or other hardships, hav[e] invested particular suppliers or buyers with greater market power."¹⁹ Many, the DOJ observed, "specifically raised the issue of monopsony power," and some expressed concern that the enforcers, courts, and competition laws were "inattentive to the monopsony problem."²⁰ Participants complained how processors "depress[ed] the prices of crops or animals below competitive levels."²¹ Others raised social and moral concerns, such as the environmental toll from monopsonies.²² The U.S. livestock industry, observed several states, is more concentrated today than in 1921, when Congress enacted the Packers and Stockyards Act to respond to a market the "Big Five" packers controlled "and to ensure fair competition and fair trade practices in the marketing of livestock, meat and poultry."²³ One account of the hearings stated, "What applies across the board—in cattle ranching and dairy and hog farming—is the stark and growing imbalance of power between the farmers who grow our food and the companies who process it for us, and how this imbalance enables practices unimaginable in any competitive market."²⁴

Despite these concerns, the larger jurisdictions, to date, have challenged few mergers or conduct cases that target monopsony or buyer power.²⁵ The

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DOJ and USDA workshops ended with a whimper.²⁶ And one recent DOJ monopsony case yielded an unusually weak behavioral remedy.²⁷

Nonetheless, the DOJ under the Obama administration promised "[v]igorous antitrust enforcement" after "redoubl[ing] its already active enforcement activities."²⁸ The DOJ, said one official, "is concerned about monopsony harm and is willing to go to court to prevent such harm."²⁹ In Europe, monopsony power is also a significant issue, especially where a few supermarkets dominate the industry.³⁰ Consequently, the monopsony problem is not simply an academic exercise.

If prosecutions of monopsonies increase, one challenge, given the infrequent prosecutions, is that the legal standards for monopsony claims are less developed than for monopoly claims. In recent years, courts, competition

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agencies, and scholars began their analysis with a simple premise: Monopsony is the mirror image of monopoly.³¹ In the leading monopsony case, Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., the Supreme Court's initial premise was that monopoly and monopsony power were economically similar and shared a close theoretical connection.³² Given the "kinship" between monopoly and monopsony power, the Court suggested "that similar legal standards should apply" to monopolization and monopsonization claims.³³ But, as this Article argues, developing the legal standards for evaluating monopsonization claims will be more complex than simply mirroring the monopolization standards.

First, monopsonies, as Part I describes, can impose significant economic, social, and moral harms. Thus, courts do not want to needlessly immunize monopsonies' anticompetitive behavior. Part II discusses the first significant risk in assuming monopsonies to be the mirror image of monopolies: The agencies and courts may require the same market-share thresholds for both monopsonization and monopolization claims. A plaintiff challenging a monopsony (or monopoly) under § 2 of the Sherman Act³⁴ must first show that

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the defendant possesses monopsony (or monopoly) power. Thus, if a 50% market share is insufficient for monopolization claims, agencies and courts may similarly conclude that a 50% market share is insufficient for monopsonization claims. Requiring high market-share thresholds for monopsony claims increases the risk of false negatives, chills enforcement, protects monopsony abuses, and enables mergers to monopsony.

Part III examines a second significant risk in assuming a monopsony to be the mirror image of monopoly: The agencies and courts will require consumer harm as a threshold screen for monopsony claims. Among the principles the D.C. Circuit observed from "a century of case law on monopolization under § 2" is that a monopolist's act must "harm the competitive process and thereby harm consumers."³⁵ Although the courts, over the past thirty years, have called the Sherman Act a "'consumer welfare prescription,'"³⁶ Part III discusses why a consumer welfare screen, contrary to its aim, increases, rather than decreases, the risks and costs of false negatives. It also promotes greater subjectivity and reduces predictability and transparency. The deficiencies of a consumer welfare screen are compounded when one shifts from the neoclassical economic theory's assumption of economic self-interest to the more realistic economic findings of consumers' other-regarding behavior and concerns over fairness.

Consequently, as this Article argues, courts and agencies cannot solely rely on market-share thresholds because firms can exercise monopsony power at relatively lower market shares. This Article, consistent with the DOJ's enforcement actions, provides courts with a sliding scale that they can use to assess whether a firm possesses monopsony power. Nor should the agencies and courts add a superfluous consumer welfare screen. Instead, plaintiffs should prevail after showing that the buyer willfully attained or maintained its

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monopsony with exclusionary or predatory conduct, even when the ultimate consumer is unaffected.

I. Monopsony & Buyer Power

A. Monopsony

Monopsony often is characterized as the mirror image of monopoly.³⁷ The monopsonist purchases fewer widgets than buyers otherwise would purchase in a competitive market. As a result, the monopsonist forces down the price of the sellers' widgets.³⁸ The sellers have little, if any, market power.³⁹ They decide how many widgets to sell at the per-unit price.⁴⁰ The widget industry's aggregate supply curve is upward sloping, in that sellers will produce more widgets if offered a higher price to cover the increase in their marginal cost.⁴¹ The monopsonist profits more by buying fewer widgets at the lower price per unit and selling less of its final product than in buying more widgets, albeit at a higher price, and selling more output.

B. Buyer Power

Buyer power has different definitions.⁴² One definition is the "[a]bility of one or more buyers, based on their economic importance on the market in question, to obtain favourable purchasing terms from their suppliers."⁴³ Buyer

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power is about superior bargaining position and terms relative to rivals and the competitive norm.⁴⁴ This can occur when a purchaser obtains a lower net price or better terms compared to its rivals. The terms buyer power and countervailing power are used favorably, such as when "powerful buyers may discipline the pricing policy of...