Oligopsonies and "cost fixing"
In today's Wall Street Journal (1/27/2004), an article called "How Driving Prices Lower Can Violate Antitrust Statutes" points out, as we have, the way in which oligopsonies have become an even greater antitrust issue than oligopolies.
Unfortunately, the article's subtitle "'Monopsony' Suits Mount As Companies Are Accused Of Squeezing Suppliers" confuses monopsonies (almost nonexistent, for the same reason that monopolies) with oligopsonies - or often, in fact, what we call oligonomies. This is important because it's precisely because there is (friendly) competition between a few buyers that these situations get ignored traditionally by antitrust groups. Also, the problem is not in reducing prices, in generally a good thing, but in reducing costs unfairly.
Beyond that, the article describes the ways in which big companies squeeze their suppliers. We might call the more collusive efforts "cost fixing", the complement to price fixing.
As the article states, oligopsony as a legal issue is nothing new, "but it is getting more attention now because of the rise of giant companies in a global marketplace. Buyer muscle has become more visible in recent years as markets become more concentrated through mergers and joint ventures. In meatpacking, the business of slaughtering cattle and pigs, four companies control 80% of the market. In four out of 10 U.S. cities, a single health insurer has at least a 50% market share. Concentration is also rising in markets from aluminum refining to baby food."
Among the examples that have led to legal action are:
- Four big processors conspired to keep down what they would pay for Maine blueberries.
- Several paper companies conspired to "depress softwood prices" in South Carolina, lowering them by 35%
- Insurance companies in Alabama and Pennsylvania imposed contracts that forced down doctor and hospital fees
As is usual in any antitrust issue, Wal-Mart comes up in the article, which contests the old-line thinking that since Wal-Mart reduces prices to the consumer, anything it does must by definition be healthy for the economy. The idea that price-cutting I always good means that the government rarely brings antitrust suits against oligopsonies.
For that reason, most of the lawsuits are coming from the aggrieved suppliers themselves, if they have the resources to enter a prolonged and expensive lawsuit, and the risk of alienating the buyers that they are dependent on.
In the tobacco industry, cigarette companies conspired to lower what they would pay tobacco farmers by agreeing not to bid against each other at tobacco auctions. The article quotes one well-known auctioneer as stating that "despite the appearance of active bidding 'there's been virtually no price competition' since the mid-1990s.'" (The tobacco companies have settled out of court).
In the meatpacking industry, a number of suits against the packers say that they are consciously manipulating the market to keep prices artificially low. A class action suit against Tyson Foods has just gone to a federal court.
Needless to say, the cost fixers all vigorously deny any wrongdoing and they have the ability to finance legal appeals if they lose, discourage government oversight, and bar any new laws that target their activities. For the complaining suppliers, unless they are unusually well organized and are unique suppliers, they can be punished by simply being bypassed in favor of a more compliant group in another state or country. And most of this manipulation goes on away from any public outrage, particularly when consumer prices are held low.
Like price fixing, cost fixing does not require a meeting in a closed room. Competitors know that it's in their mutual interest not to compete too hard on cost or price. Once there are only a few buyers, the can signal acceptable costs to each other, just as they signal acceptable prices. Such silent coopertaion is almost impossible to regulate or litigate against. I'm convinced that it is commonplace.
We're encouraged that the existence of oligopsony is getting some attention in the mainstream media, though the article only scratches the surface. Far more situations exist, as we've demonstrated on this site, with issues that never get to court because the suppliers are too disorganized or to poor or eventually run out of business.
