Should Antitrust Exempt Joint Monopsony Conduct to Countervail Monopoly?

Steve Salop —  19 October 2009

Geoff and Josh raise an interesting issue about collective market conduct by buyers.  Suppose that a group of final consumers face a monopolist.  Should the consumers be permitted to band together into an “association” to jointly negotiate a lower price from the monopolist?  Some would say that such buyer “cooperatives” are permitted, whereas others would say that such buyers “cartels” are antitrust violations.  Putting aside the terminology (which simply reflects the commentator’s conclusion rather than any real analysis), this hypothetical example raises a number of interesting antitrust questions.

First, if this buyer association involves final consumers and they move the market from the monopoly output to the competitive output, is that a “cognizable” efficiency under the antitrust laws, even if it involves what appears to be “naked” price fixing (i.e. price fixing not accompanied by any “integration” of production facilities or incentives)?  What should the law conclude?  What would Ronald Coase and John Nash say?

Second, should the antitrust outcome depend on how the incremental “total surplus” is split?  In particular, suppose that the association actually reduces the monopolist’s surplus, aside from whatever effects it has on total output.  Is that transfer of surplus from the monopolist to the consumers to be applauded (“antitrust is a consumer welfare prescription”), or attacked as counterproductive (“monopoly prices is what attracts business acumen”), or treated neutrally (“merely a transfer”)?

Third, suppose that the association moves the market from an inefficient monopoly output to an inefficient monopsony output, but the new outcome involves higher consumer surplus.  Should the increase in consumer surplus be a complete defense under the Sherman Act?  If the total surplus falls, should the conduct be illegal under the rule of reason? Or, should the law simply apply the per se rule to this concerted action.

Fourth, should the analysis be different if the seller is not a monopolist but rather a joint venture with monopoly power, or a group of (legally) tacitly coordinating sellers?  For example, in BMI, the Supreme Court placed considerable weight on the fact that the composers granted non-exclusive licenses to ASCAP and BMI, and the Court relied on the assumption that customers were able to constrain prices by negotiating directly with the composers.  However, suppose that it were assumed instead that such direct negotiation would be an ineffective constraint on prices.  In that scenario, should the music users be permitted to negotiate jointly with ASCAP and BMI over the terms of the blanket license?  Would permitting such a buyer association have been a better remedy than the price regulation remedy constrained in the consent decree with the Justice Department?

While he was an Appeals Court judge, Justice Breyer dealt with some of these issues in the Kartell case.  (If you don’t know the case, I promise that I have not made up the name.)  In Kartell, a group of dentists (including Dr. Kartell) wanted to block the arguably monopsony conduct of Blue Cross of Massachusetts.  As the case name might have pre-ordained, Blue Cross was exonerated.  Then-Judge Breyer’s reasoning was a bit peculiar, however,  He characterized Blue Cross as a single buyer, not as a buyer association. But, hedid not characterize Blue Cross as a reseller with market power, despite its dominant market share.  Instead, he dodged that issue by suggesting that Massachusetts insurance regulations somehow would force Blue Cross to pass on the fee reductions to consumers in the form of lower insurance prices.  Of course, this is the same result that would be achieved if Blue Cross were the cartel ringmaster for an insurance buyer cartel.

So, what do you make of this opinion?  In writing my article on “anticompetitive overbuying,” I raised the question of whether Judge Breyer was adopting the consumer welfare standard over a total welfare standard.  Or, was he simply relying on the kindness of regulation to replace market forces?  Or, did he make the classic error of assuming that monopsony is inherently good because it leads to a lower input price without noticing that it also reduces output and leads to a higher output price?

Now, to return to Josh and Geoff’s posts, what are the implications of Judge Breyer’s reasoning for the merchants who accept credit cards and want to join together to countervail the joint monopoly power of the Visa and MasterCard banks?  Would it be permissible under the Sherman Act for all the merchants unilaterally or through and agreement hire a single agent to provide them with buyer-side “interchange transfer services,” and then rely on that agent to negotiate lower interchange fees with Visa and MasterCard?

Finally, regarding the specific question raised by Josh — if you were counseling the merchants , would you be confident that you would be exonerated under the antitrust laws?  Or would you try to obtain an antitrust exemption as a little extra insurance?

4 responses to Should Antitrust Exempt Joint Monopsony Conduct to Countervail Monopoly?

  1. 

    Steve:

    Let me start with the answer to your question in the last paragraph. Given the choice, I’d counsel any and every client to get an antitrust exemption if that was a politically feasible option. Heck, an exemption that would cover not only the sort of collective bargaining against an upstream monopolist that you have in mind, but undoubtedly, through either intentional or unintentional drafting, would probably prohibit liability for other and more certainly pernicious forms of conduct.

    So bottom line: sure, I’d advise it … there is certainly some risk of judges getting it wrong even when the joint negotiation increases output or leads to greater consumer/total welfare under the appropriate standard. You won’t catch me arguing that false positives are not a real concern for antitrust (even holding aside the institutional comparative advantage/ rent seeking issues Geoff raises in his comment).

    I think the examples and questions you raise are great and push hard at some of the sensitivity of antitrust outcomes to the choice of welfare standard and the ability of judges to get (with the help of agencies and experts) the economics right. Or right enough.

    The question ought to be whether the particular downstream coalition increases or decreases the decided upon measure of welfare (punting on that for now). Which leads me to my own question:

    Assuming we think that antitrust agencies and courts are so prone to error in these cases that we think it appropriate to use the political process to craft inevitably overbroad exemptions, and we cannot otherwise constrain judges from committing errors with bright line rules of presumptive legality of illegality where appropriate on the basis of strong scientific evidence about the practice’s competitive effects, shouldn’t we abandon having courts do any of this stuff?

  2. 

    Steve: Excellent questions. I think I could write 15 comments in response. Instead I’ll start with one comment, raising two points. First is the “meta” question that your post doesn’t seem to address, at least not directly: Should antitrust exemptions be granted by congress in such settings? The very questions you raise point to the ambiguity of the effect of these practices. My biggest concern is not with their eventual legality or illegality but with the question whether we want congress absolving such activity through the political process. This is a very different issue. Whatever the possible merits of such behavior, is it really likely that congress will guess correctly in advance which agreements are always or sufficiently-close-to-always pro-competitive to get it right? Is there any reason to believe that there is a correlation between, on the one hand, the buyer cartels with enough political power and will to seek and obtain (pay for?) an antitrust exemption and, on the other, welfare-enhancing outcomes (by whatever standard)? My guess would be the correlation is weak at best. The problem with the granting of antitrust exemptions is really the political problem.

    Second and related: As your reference to Coase suggests and as BMI demonstrates, the answer should probably turn on transaction costs and property rights. I think most definitely a total welfare standard is preferable, and within that paradigm, a buyer cartel that facilitated efficient transactions that wouldn’t otherwise have occurred for transaction costs should be exonerated; mere transfers should not. In the credit card case, the transactions are occurring and cheaply so. No agreement among merchants is necessary to permit the merchants to exercise their property rights (they may not like the terms, but the agreements do take place). The proposed cartel is almost certainly about distribution of surplus. In BMI the matter was very different–there the agreement facilitated the exercise of existing property rights that otherwise were swamped by the costs of transacting.

    Now there is a lot more to this answer. Of course the effects are related–perhaps there would, indeed be more merchants taking credit cards if they could keep more of the gains from trade. Moreover, it is not necessarily the case that the law would get the economics right. And exonerating property rights presupposes something about the propriety of the property right in the first place. Etc., etc. But this seems like the right starting point, total welfare seems like the right standard, skepticism seems like the right presumption, and complete avoidance of congressional (and almost immutable) exemptions seems like the only sensible approach.

  3. 

    Flip the circumstances around. Suppose there is a monopsonist buyer. Should sellers be permitted to form a cartel to increase monopoly power. This has been a justification for labor unions. What is the empirical evidence on market outcomes? How important have the unintended consequences been? (For example, in Josh’s example of buyer’s coordinating to deal with a monopolist, will their coordination also allow them to “deal” with other input suppliers that are not monopsonists? Will their coordination in input markets allow them to coordinate in output markets?)

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