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I recently picked up a copy of the July Harper’s Magazine to read an essay by Barry C. Lynn entitled, “Breaking the Chain: The Antitrust Case Against Wal-Mart.” If you can’t tell from the title, the basic point is that antitrust authorities should break up Wal-Mart and put an end to the immense havoc that the retail giant has caused the economy. There is very little in the way of actual analysis in the article. It is mostly hand waving about retail consolidation without economic coherence, with some dramatic parade-of-horribles-type hyberbole mixed in. A few examples of the hyperbolic rhetoric before I move on to the merits of Lynn’s antitrust case against Wal-Mart:

“For a generation, big firms have enjoyed almost a complete license to use brute economic force to grow only bigger. And so today we find ourselves in a world dominated by immense global oligopolies that every day further limit the flexibility of our economy and our personal freedom within it.”

Whoa. Personal freedom? Really? Here’s some more:

“The ultimate danger of monopsony is that, over time, it tends to destroy the machines and skills on which we all rely.”

Or my favorite:

“If, however, we choose the path of the free market, and of individual freedom within the market; if we choose to ensure the health and flexibility of our economy and our industrial systems and our society; if we choose to protect our republican way of government, which depends on the separation of powers within our economy just as our political system–then we have only one choice. We must restore antitrust law to its central role in protecting the economic rights, properties, and liberties of the American citizen, and first use that power to break Wal-Mart into pieces.”

Wow. There is a lot to talk about here. Let me first summarize the Lynn’s argument and then discuss why they are entirely wrong as a matter of economics and sensible antitrust policy below the fold. Here are the basic moves in Lynn’s case against WM:

First, Wal-Mart is a monopsonist. Lynn writes that one in five of every American retail sales occurs at WM, and WM is dominating its retail rivals.

Second, WM leverages its monopsony power in a manner which antitrust law should prohibit. Lynn seems to have two antitrust harms in mind here.

The first is that WM has “changed the game” with respect to bargaining between supplier and retailers. WM dominates upstream suppliers by demanding lower prices, and using its own in-house brands to discipline suppliers, resulting in shrinking manufacturer profit margins. The article discusses WM’s reputation as a hard-nosed, no nonsense negotiator and cites examples of negotiations with Coca-Cola and Kraft. Lynn points to the use of “category management,” a practice where retailers delegate shelf space display decisions to a manufacturer (called the “category captain”) within a product category (say, sodas or soups).

Of category management, Lynn alleges without any substantiation that the practice has resulted in collusion by suppliers as well as retailers:

“one common result is that many producers simply stop competing head to head . . . . in many instances, a single firm ends up controlling 70% or more of US sales in an entire product line . . .. In exchange, its competitor will expect that firm to yield 70% or more of some other product line, say, snacks or spices. Such sharing out of markets by oligopolies is taking place throughout the non-branded economy . . . but nowhere is it more visible than in the aisles of Wal-Mart.”

Note the tension between the claim of supplier collusion and shrinking supplier margins. However, more importantly is the notion that category management and other changes in the bargaining relationships are necessary bad on antitrust grounds. There has been very little economic analysis of category management As a side note, Benjamin Klein, Kevin M. Murphy and are working on a paper entitled “Exclusive Dealing and Category Management in Retail Distribution,” which analyzes the economics of these arrangements as well as exclusive dealing contracts in retail (I will post a draft to SSRN when it is ready). From an antitrust perspective, it is difficult to imagine why category management would be any more of a concern than exclusive dealing, which is analyzed under the rule of reason and violates the Sherman Act when a number of conditions are satisfied (monopoly power, substantial foreclosure, barriers to entry, etc.). Category management only grants the manufacturer the right to favor his own product, and can be terminated by the retailer at any time, whereas exclusive dealing completely forecloses rivals from shelf space.

The fundamental point here, however, is that Lynn does nothing more than make assertions about the presence of collusion. Assertions that contradict evidence about profit margins earned by both retailers and suppliers over the past 20 years.

The second antitrust harm Lynn points to is equally unconvincing. Lynn writes that even if WM is efficient, increased concentration in retail represents a “gathering of power unchecked and unaccountable,” and those who would defend efficiency must “view the American citizen not as someone who yearns to decide for himself or herself what to buy and where to work in a free market but to say, instead, ‘let them eat Tastykake.'”

There are so many problems with this analysis that it is difficult to know where to start. But I sketch out a response below the fold. Continue Reading…

In response to Thom’s post on the merits of federal subsidies for private efforts to develop alternative fuels, frequent and thoughtful commentor William Goodwin issues a critique of Thom’s post, and of TOTM more generally. I will leave the merits of Mr. Goodwin’s specific criticisms (do read them) to Thom, but this particular portion caught my eye:

As for Hayek, public choice, etc., these critiques apply to all government action, and say nothing interesting or specific about how to solve the collective-action problem raised by positive externalities. And while I realize that every post at Truth on the Market effectively ends: “Let the market figure it out,� at some point it’d be nice to hear a more nuanced, and less ideological, position.

Do TOTM bloggers advocate market-based solutions for public policy problems more frequently than our friends at the other blawgs? Probably. But I’m puzzled by the notion that the prescription to “let the market figure it out” is an inherently simplistic and ideology-driven position. This sort of criticism is often leveled at those who advocate market-based solutions to public policy problems, so I do not mean to single out Mr. Goodwin, but this view, in my mind, suggests a fundamental misunderstanding of how markets work. Why? Continue Reading…