The Federal Trade Commission’s (FTC) recent complaint challenging the proposed merger of the supermarkets Kroger Co. and Albertsons Companies Inc. has important implications for antitrust enforcement in labor markets. Central to the FTC’s case is how it chooses to define the relevant markets, and particularly the commission’s focus on unionized grocery workers. The complaint alleges that the combined firm would dominate these markets, substantially lessening competition for unionized labor.
By emphasizing the merger’s potential to enhance Kroger’s bargaining leverage in union negotiations, rather than its incentives to reduce overall employment through increased monopsony power, the complaint departs from the traditional antitrust focus on quantity effects, not to mention output effects. Instead, it adopts a novel approach that treats mere transfers of surplus between the merged firm and its unionized workers as cognizable harms, even absent evidence of reduced output or higher prices. This bargaining-leverage theory of harm, if accepted, would represent a significant expansion of antitrust liability. My guess is that the FTC hopes the court will clarify some subtleties about the consumer welfare standard, and ultimately side with the commission.
I’m skeptical of the economics. The fundamental tension is that any change of bargaining power that does not result in reduced product output will benefit consumers in standard economic models. In the extreme, all of the benefits of a better negotiating position are passed on to consumers. I do not envy being the lawyer who has to argue that “passing cost savings on to consumers actually goes against the consumer welfare standard.”
Bargaining Versus Monopsony in the FTC’s Complaint
A close reading of the FTC’s complaint reveals that its theory of harm is primarily grounded in bargaining-leverage concerns, rather than conventional monopsony output effects. While not explicitly rejecting a monopsony claim, the FTC’s complaint against the Kroger/Albertsons merger appears more focused on the deal’s potential to enhance the combined firm’s bargaining power over workers than on monopsony effects. The complaint repeatedly emphasizes how the merger would “substantially increase[] Kroger’s negotiating leverage.” Therefore, “Kroger could use this increased negotiating leverage to reduce (or refuse to increase) wages” (Complaint ¶70).
In contrast, there is no discussion of whether the merger would enable the combined firm to lower employment and output due to monopsony power. (The complaint does still allege output effects for standard reduced-competition-in-the-product-market reasons.) This emphasis on bargaining leverage, rather than monopsony power, is noteworthy, because increased bargaining power does not necessarily imply the sort of anticompetitive effects (i.e., quantity reductions) that are the traditional concern of antitrust law.
In an influential article on “Mergers that Harm Sellers,” C. Scott Hemphill and Nancy L. Rose distinguish “classical” monopsony power from increased buyer leverage. Classical monopsony power…
increases the firm’s perceived marginal cost and reduces output. Far from lowering output prices, the increased monopsony power raises price in output markets (if the firm faces downward sloping demand for its output) or else leaves it unchanged.
From an antitrust perspective, there is no tension here with the consumer welfare standard. Both workers and consumers are harmed by a merger that increases classical monopsony power.
In contrast, increased bargaining power does not result in a deadweight loss, but is simply a redistribution from sellers to buyers. Instead of raising the perceived cost from Kroger’s perspective, bargaining leverage lowers the perceived cost. Moreover, the new leverage will be partially passed through to consumers as lower prices. If the only effect of the merger were this bargaining-leverage effect, workers would lose out, but consumers would benefit. This is the tension with which the court and the parties will have to grapple.
By focusing more on bargaining outcomes than on employment levels and output effects, the FTC’s complaint is an attempt to expand antitrust doctrine to address redistributive concerns, rather than efficiency losses. One may or may not think that to be a good idea, but we should recognize that that’s the claim.
The Meaning of Consumer Welfare
The FTC’s approach in the Kroger/Albertsons case highlights the tension between the statutory language of the Clayton Act, which prohibits mergers that harm competition in “any line of commerce,” and the practical challenges of considering effects across multiple markets, including labor markets. As Dan Gilman, Geoff Manne, and I wrote in an article on out-of-market effects:
[I]f the any market rule is truly a rule–taken both literally and seriously–why haven’t the agencies, over, say, the past 100 years, opposed more mergers on labor grounds, while refusing to consider productive efficiencies or other merger benefits on the grounds that they are ‘cross-market’ or ‘out-of-market’ efficiencies and, consequently, that there was no proper justification for harm to a single labor market?”
The historical lack of enforcement actions based solely on labor-market harms (despite the “any market” language) suggests that there may be good reasons for the traditional focus on consumer welfare in merger analysis.
To illustrate, consider a merger that does not increase market power upstream or downstream, but simply eliminates redundancies, allowing the combined firm to produce the same output with fewer workers. By assumption, this merger lowers consumer prices, increases consumer welfare and total welfare, but would it be a harm? After all, it harms input markets for the laid-off workers; fewer workers are hired, and wages may fall (even though, by assumption, there is no monopsony power pushing down wages).
One could argue that this example is a strawman, because the harm to workers from a merger that improves efficiency is not really an antitrust “harm.” But what is the harm from bargaining, if not lower wages? In the bargaining theory, by assumption, there is no effect on economic efficiency, since there is no monopsony power. It is merely a transfer.
Ioana Marinescu and Herb Hovenkamp recognize that assessing a monopsony claim requires looking at both the input and output market:
To have a chance of succeeding, an efficiency case for a merger affecting a labor market must show that post-merger reorganization will decrease the need for workers and will not lower total production. Both of these requirements are essential. A merger that decreases the need for workers may represent nothing more than an exercise of monopsony power, but in that case, ceteris paribus, it will also reduce production. By contrast, a merger that eliminates duplication can also reduce the need for workers, but production will not go down. Indeed, it should go up to the extent that the post-merger firm has lower costs.
More broadly, challenging mergers based solely on increased bargaining leverage in input markets sits uneasily with the consumer welfare standard that animates modern antitrust law. Under this standard, mergers are judged primarily by their effects on consumers, not suppliers.
None of this is to deny the importance of the labor-market issues raised by the Kroger/Albertsons deal, or to suggest that antitrust law should never address them. Mergers that demonstrably reduce labor-market competition, depress wages, and thereby harm downstream consumers may well be appropriate targets for enforcement. But the FTC’s apparent view that increased labor-bargaining leverage alone is sufficient to violate the Clayton Act represents a departure from the consumer-focused approach that courts have historically taken.
Ultimately, while the Kroger/Albertsons case raises important and difficult questions about the goals of antitrust law and the treatment of labor-market harms, the FTC’s complaint does not provide satisfactory answers. Perhaps that’s not a major problem. It is, after all, just the initial complaint.
But by uncritically embracing the Hemphill-Rose view that buyer-side leverage is a cognizable harm, even absent consumer injury, the complaint seeks to dramatically expand antitrust doctrine without grappling with the tensions this creates with existing precedents, which emphasize consumer welfare. A more cautious, grounded approach is warranted unless and until Congress or the Supreme Court provides clearer guidance on these issues.