In the typical merger case considered by antitrust law, the main concern is that the merging parties--two airlines, say--will be able to raise the prices they charge purchasers. Some mergers, however, reduce competition among competing buyers, thereby reducing the prices that sellers receive for their products and services. These adverse "buy-side" effects may harm a wide variety of sellers, including workers selling labor, farmers selling agricultural commodities, and video content producers selling sports programming. For example, a merger of Tyson Foods and Hillshire Farms could enable the merged company to reduce the prices paid to pig farmers for animals used to make sausage. (1)
This Feature examines the antitrust treatment of mergers that harm sellers. Our central claim is that harm to sellers in an input market is sufficient to support antitrust liability. We show how economic reasoning and case law support the conclusion that lost upstream competition is an actionable harm to the competitive process, and we defend this conclusion against the contrary view that demonstrated harm to the merging firms' downstream purchasers or final consumers constitutes an essential element of any antitrust claim. Nor is it necessary for plaintiffs to demonstrate a reduction in the input quantity transacted, contrary to the mistaken view that such a reduction must be shown. We further argue that claimed "efficiencies" premised on a reduction in buy-side competition are not efficiencies at all. We focus on mergers, but much of our argument applies to conduct cases as well.
Some mergers of competing buyers harm sellers by increasing the merged firm's incentive to cut back on its purchases of an important input in order to drive down input prices--a classical exercise of monopsony power. (2) A buyer that faces small, interchangeable sellers--for example, a hospital in a small city hiring skilled nurses--has monopsony power that is analogous to a seller's monopoly power. A merger of competing buyers can exacerbate the merged firm's incentive to buy less in order to drive down input prices. Increased monopsony power can have adverse economic effects not only in input markets, but output markets as well.
We argue that although an output market impact is sufficient to support liability, it is not necessary. Courts have recognized antitrust liability even where a competitive output market suffers no adverse effects. (3) This result is consistent with (and reliant upon) the economically symmetric effects of monopoly in output markets and monopsony in input markets. The symmetric treatment of monopoly and monopsony in antitrust law protects the competitive process and the welfare of the merging firms' trading partners, whether purchasers or sellers. (4) Reduced competition between buyers may well harm downstream purchasers, even where that harm is infeasible to prove, but that reduced competition is unlawful even where in fact there is no such harm.
To be sure, courts and commentators often refer to the protection of "consumer welfare," rather than trading partner welfare, as the goal of antitrust law. As we explain, such references are consistent with a trading partner welfare approach, the natural result of living in a world where most cases focus on reduced competition between sellers. Whatever the label applied, an approach focused solely on the welfare of downstream purchasers or final consumers is inconsistent with the case law. We therefore disagree with commentators who would confine antitrust enforcement to conduct with demonstrated output market harms. (5)
Mergers of competing buyers harm sellers alternatively, or in addition, by increasing the new firm's bargaining leverage. The analysis of buy-side harms has been focused largely on classical monopsony, with relatively little attention given to bargaining leverage. (6) Though sometimes ignored or lumped together with the exercise of classical monopsony power by litigants and courts, bargaining leverage should be analyzed separately, given its distinct economic effects.
When buyers and sellers each have some market power--for example, a health insurer facing a hospital--prices may be set through a negotiation process. As we explain, economists have developed a rich theoretical and empirical literature to describe this bargaining process and the determinants of its outcomes. (7) These models suggest that the agreed upon price is a function, in part, of each side's ability to inflict an unattractive "outside option" on the other if bargaining breaks down. A horizontal merger enables the merging parties to inflict a worse outside option--that is the source of the increased leverage--and thus alter the prices paid. Here, the principal effect of reduced competition may be a wealth transfer, with no necessary immediate effect on quantity transacted.
Courts have found that a merger of sellers that enables such a transfer by reducing competition--for example, a merger of two hospitals that worsens an insurer's outside option--is unlawful. (8) A symmetric injury to the competitive process can arise on the buy side--for example, a merger of two insurers that worsens a hospital's outside option and thereby reduces the price paid. We conclude that such a bargaining-based harm suffered by a hospital or other input provider is equally actionable. We therefore disagree with the position adopted by the Federal Trade Commission (FTC) in several matters, and endorsed by some commentators, that buy-side harms are actionable only if there is a demonstrated reduction in the quantity transacted. (9)
Lower input prices--including lower input prices achieved through increased classical monopsony power or bargaining leverage--can benefit those who purchase from the merged parties if the savings are passed through to purchasers. We therefore consider to what extent lower input prices may offer a cognizable defense to an otherwise anticompetitive merger. For example, an increase in buyer size may result in real resource savings, flowing from lower costs to supply the buyer with certain inputs. The upstream seller may then reduce the price a buyer pays, without any change in buyer leverage or monopsony power. Input price reductions from a merger that reflect real resource savings present a potential source of efficiencies that counteract the upward pricing pressure in output markets.
By contrast, savings achieved through the exercise of increased classical monopsony power or bargaining leverage are premised on a reduction in competition. Under existing law developed mainly in the analysis of output markets, such "benefits" are not cognizable efficiencies. Such a savings does not count as an antitrust benefit, even if it is passed through to downstream purchasers.
This Feature proceeds in three parts. Part I considers mergers that increase classical monopsony power, concluding that an output market harm is sufficient but not necessary to support antitrust liability. Part II turns to mergers that increase bargaining leverage, arguing that a bargaining-based harm suffered by an upstream seller is actionable, just like a bargaining-based harm suffered by a downstream purchaser. Part III addresses whether and when lower input prices offer a cognizable defense to an otherwise anticompetitive merger. There we explain why lower input prices caused by increased classical monopsony power or bargaining leverage are not a cognizable basis for an efficiency claim.
INCREASED CLASSICAL MONOPSONY POWER
Input Market Harms
Monopsony is the mirror image of monopoly. The term "monopsony" is sometimes used to refer to a wide range of harms that result from a powerful buyer or a reduction in competition among buyers. We use the term here in its narrower, classical sense--namely, to identify situations in which a firm recognizes that its purchase decisions can change the market price for inputs. (10)
As an initial point of reference, consider a simple monopoly story. The firm has market power in an output market. That is, it recognizes that its decisions affect the selling price. If the firm raises price, its quantity sold falls, but not to zero. Purchasers with high enough willingness to pay still buy the product, while purchasers with lower willingness to pay drop out. By raising the price, the firm charges a higher price on all units, which raises overall profits as long as the increased margin on retained sales more than compensates for the profit lost on the sales no longer made. Part of the purchaser loss takes the form of revenue transferred to the firm as extra profit. Additional loss takes the form of "deadweight loss," wherein some purchasers who value the good more than its marginal cost of production are deflected instead to less desirable alternatives.
Now consider monopsony. The firm has market power in an input market, such as the labor it hires to make a product. The firm recognizes that its decisions affect the purchase price of the input. If the firm reduces the price it pays, the quantity available for purchase falls, but not to zero. In the labor context, workers with a low enough reservation wage still accept a job offer; workers with a higher reservation wage drop out. By reducing its wage offer, the firm pays a lower wage for all employees, which can raise its overall profits.
Part of the workers' loss takes the form of wages transferred to the firm as extra profit. Additional deadweight loss arises as workers whose greatest productivity is working for the firm are instead pushed to less productive employment or out of the labor market entirely. (11) The exercise of monopsony power in hiring skilled labor, such as nurses, may lead to further economic losses over time, as some workers choose not to invest in skill acquisition due to the lower wage rate. (12) When the inputs are produced by upstream firms, such as farmers raising beef cattle to be sold to meat...