Emerging Issues in Buyer Power Analysis

Buyer power that is exercised by businesses to the detriment of their suppliers has emerged as one of the largest unresolved, and relatively unexplored, areas of antitrust inquiry.  Questions include:  how to measure buyer power; how to determine when it is used in an anticompetitive manner; and how to determine when harm to suppliers creates harm to competition.   These issues are examined in, “Emerging Issues in Buyer Power Analysisby Professor Peter C. Carstensen of the University of Wisconsin Law School.  The full text of the article can be found in the Agriculture and Food Committee’s Winter 2012 Newsletter, which appears on the Committee’s website. 

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5 responses to “Emerging Issues in Buyer Power Analysis

  1. Peter, you have covered many of the underlying economic arguments but there are a few assumptions that need to be cleared up. One in particular is the transfer of value by meat packers to the market because they have been able to suppress their suppliers with non market forces or dictates due to their market power. The meat packer argument is that these “efficiencies” are transferred to the consumer. In fact, there is much evidence that this is nothing but an argument of convenience. During a time of fierce competition among meat packers for their buyers, this indeed might be the case. When the competition is not there, there are market examples where this is not the case.

    Meat packers are there to maximize their investments, not pass on savings they get unless it benefits them relative to their competitors. If they can break the law and get cheaper labor (which has been the case) through illegal sources in order to out compete their competitors, they will. If they can source cheaper products in their feed that have not been tested for safety, they will (BSE was known to be spread by feeding beef offal to beef cattle as a feed ingredient). Courts have been too unwilling to make these companies pay for the damages their business models are forcing on the economy.

    The assumption many courts have made is that the meat packer savings will be passed on to consumers. It is an argument of convenience. We saw an example of this when the meats industry experienced a major shock—that of meat from Canada being banned because of mad cow (BSE – Bovine Spongiform Encephalopathy,) disease from shipping meat to the U.S.

    Before that supply shock happened, wholesale chicken prices via Georgia Dock prices were around 52 to 54 cents per lb. After the shock hit the U.S., the Georgia Dock prices for poultry went up to over 90 cents per lb. when there was relatively no increase in the cost of the item. During that time the meat packers also increased the supply of poultry as a substitute to red meat and increased the velocity of their operations to make windfall profits. Why were the meat packers using supply and demand dynamics to increase profits if they believe in the “pass through” argument of consumer welfare? This example shows that meat packers may use the pass through argument for economic arguments over consumer welfare as a matter of convenience while in fact, something else is going on.

    The “pass through” of the savings poultry integrators get by not following the economic concepts and rules in the Packers and Stockyards Act are not used to increase consumer welfare, but are used to give a barrier of entry credit to the integrators who are lower cost because they were able to defraud their suppliers. Federal courts have allowed this because they labeled the Packers and Stockyards Act an “anti trust” law and so have picked up the requirement of proving “competitive injury” which twisted the Packers and Stockyards Act from a law prohibiting meat packers from illegal actions to allowing them to collude as defense against the prohibitions. This is, of course, anti competitive when not all market participants participate in the collusion. In the Amicus briefs in these cases, there were many groups who represented poultry producers who did not use their market power to suppress the cost of their supplies. They were damaged by the actions of these companies colluding in this novel defense by the court in relation to the Packers and Stockyards Act by the lower prices of those who are colluding in the frauds. The court made the assumption that there was no competitive injury based on the pleadings when in fact there was. It was never proven that there weas not competitive injury because there was never a chance to do so. They tried the case with facts not in evidence. Indeed the collusive amicus briefs by the industry cabal who have captured much of the industry based on this business model was in itself evidence of collusion.

    Free market economics and price determination depends on transparency and a supply curve of willing participants. For suppliers to meat packer there is no transparency. The intersection of the supply curve with the demand curve determines the price. When competitors are able to cheat those in their supply chains because of their market power they often become the dominant industry leader while crushing the competition through their lower prices. The Packers and Stockyards Act was meant just for this reason. The meats industry structure is such that meat processors are the funnel that their suppliers must go through in the processing of their products for the consumer. Many suppliers use one processor. This concentrates the power of the processor while lessens the bargaining power of the suppliers. The Packers and Stockyards Act prohibits such actions that allow the processor to take advantage of this larger bargaining power to push the producer (poultry growers) lower by prohibiting meat packers from
    (a) Engage in or use any unfair, unjustly discriminatory, or deceptive practice or device; or

    (b) Make or give any undue or unreasonable preference or advantage to any particular person or locality in any respect whatsoever, or subject any particular person or locality to any undue or unreasonable prejudice or disadvantage in any respect whatsoever; or……

    An economic reading of the Packers and Stockyards Act would prohibit price discrimination, especially those not based on the product being produced (as defined in the act) as a tool to capture value from suppliers to be used as a barrier to entry to other competitors.

    The argument over the Packers and Stockyards Act has been another example of large corporations gaming our political and legal system for their own benefit in the economy and at the expense of others. It is not Pareto efficient but a transfer of wealth through market power. It makes a mockery out of our judicial and political system when we need them the most.

    Tom T.

    • The joint USDA-DOJ industry meetings made clear that: packers are becoming more concentrated; forward contracts are becoming more prevalent; producers are getting a lower percentage of the food dollar; and some producers are not getting prices as high as they think they should. But, none of that is necessarily illegal or anticompetitive.

      Tom’s response ignores a number of views raised at the USDA-DOJ industry meetings in 2010 which put these facts in a larger context:

      •concentration in the meat industry results from the nature of the market, which is subject to significant economics of scale.
      •the most comprehensive recent study – GIPSA’s Livestock and Meat Marketing Study in 2007 – found that forward contracts did create cost efficiencies by permitting packers to insure a steady stream of animals that will fully utilize their plants’ capacity.
      •the packer percentage of the food dollar spent on meat is also going down.
      •many innovative producers, who are giving consumers the premium and branded products they want, are adamantly opposed to changes in the current system, such as the rules GIPSA proposed in 2010.
      •packers sell to retail grocery chains, such as WalMart, that are even more concentrated and powerful than the packers and will not permit them to retain any surplus.

      The challenge we all face is to determine (1) when, and in what circumstances, packer conduct is likely or unlikely to be anticompetitive – when it decreases consumer welfare and total/aggregate welfare (and, more fundamentally, which is the appropriate test); (2) how to develop appropriate measures or indices of increases or decreases in total and consumer welfare; and (3) how to identify and distinguish between true efficiencies as opposed to reallocations of surplus up and down the supply chain. These are the issues about which Professor Carstensen’s article was trying to promote discussion. Tom’s comments do not address any of these important issues.

  2. Jack my post did cover the challenges you say the issues pose. I will cover them point by point.

    1) The Packers and Stockyards Act was clearly a law that prohibited actions by meat packers. They have had a historic place of natural market power due to the structure of the industry (many suppliers feeding into one meat packer). The law clearly does clearly define what conduct is not prohibited. The meat packer strategy has been to say that it is okay to abuse market power if that market power abuse is transferred to consumers. They use that strategy while they concentrate the market. It does not hold when there are market shocks that completely blow that theory away as one of an argument of convenience. The plain language of the law completely addresses the issue you bring up and it is up to a jury to determine the facts, not federal judges which are unduly influenced by the arguments you pose because the federal judges labeled this law in order to not enforce it. It was labeled as an “anticompetitive” law to allow the market power gained to abuse suppliers and thus gain a barrier of entry to new competitors. In essence, the meat packers are using their power to capture the producer surplus. Your argument is that if the producer surplus is transferred to the consumers, then there is no harm. I totally refute this claim based on real economics, not convenient economics, that allows those with market power to capture markets even more and I gave an example of this. The act of doing that by price discrimination to suppliers is the essence of a) and b) of the Packers and Stockyards Act, convenient economic arguments notwithstanding. The argument you pose here is whether or not price discrimination on the same or like item can be used by those with market power to gain a competitive edge over those who have not developed that market power. I argue it is not and that the plain wording of the act along with the history of the act argue the same.

    2) The Packers and Stockyard Act gives the standards of appropriate measures in a) and b) explicitly. If only federal judges would follow the plain text instead of playing economists, and bad ones at that, we wouldn’t have this issue brought up. The massive amount of economic and political power has given this question its relevance, not the plain wording of the law or competent economic theory.

    3) True efficiencies are important. When meat packers abuse their market power to discriminate against suppliers not based on the items received, they are able to capture all of the producer surplus and use it as a barrier to entry. This is an anti-competitive edge based on market power, not on market fundamentals of efficiency. It is efficiency of market power, not economic efficiency.

    It is true that meat packers can gain “efficiencies” through contracts. In the Pickett Case, these contracts allowed Tyson and other large meat packers to thin the price setting cash market and then the meat packers were able to discriminate against the cash market. It was illegal and a jury of 12 decided as to damages. It was federal judges who overturned this verdict which allowed the then meat packers to get away with abusing their market power to take dollars the economy would have allocated to beef production from the supplier side. It was clear that federal judges could not enforce the economic provisions of the Packers and Stockyards Act against the elite controlling the industry and had to find a way to counter this law. Your argument that there is an overbearing economic argument of lower prices to consumers being the controlling theory is an esoteric economic argument, not one based in the law itself or historical reality. It is an argument of convenience. Again, a) and b) of the Packers and Stockyards Act give the best guidance to the questions you brought up. These questions are not new. They are the same basis for the economic rules that the electrical monopolies have to follow. They can not vary the costs of electricity to customers based on the customer’s status. They are the tried and true economic rules that economists and policy makers have given to natural monopolies like utility companies.

    Your arguments on this item seem to give an exception to those with market power as to market price signals. I would agree with you that those with market power can get lower prices, especially in capital intensive industries through price discrimination for the same product. The theoretical limit is that those with market power can reduce suppliers to their average variable costs which excludes profit on their investment. Those with market power are able to decrease the economic benefits to the average variable costs and then are able to capture that value to use against their competition. The meats industry has become concentrated based in part to these economic realities. The fact is that federal judges will not enforce the creative destruction that the law and economics requires. Meat packers are able to capture the value of their suppliers based on abuse of their market power pricing, not on efficiencies. Supplier owned co-ops like Gold Kist were gobbled up. The meat industry in both beef and poultry have been consolidated due to federal judges allowing meat packers to have national markets but local or individual prices for the same item produced.

    “Efficiencies” are getting mixed up with that capture of value due to weak economic arguments. The law is pretty clear in a) and b). It is only an aversion to enforcement of the law on elites that creates the questions you raise. It is nothing more than an elitist economic argument that is plain wrong. Meat packers are deathly afraid of juries and so ask the federal courts to make up law to protect their economic gains and benefits they have obtained by breaking the law. Our anti-trust enforcement in this country is laughable. Perhaps it is because all the good economists are hired away by those with huge market power to make up such esoteric excuses for their crimes against the economy. Their PR firms are able to change the question being asked from one based on facts of prohibited practices to whether breaking these prohibited practices has consumer welfare value. Market power under the conditions you describe deflate profit out of suppliers. It concentrates the wealth of the nation into the hands of the few with market power. We end up with an economy run by elites who are able to toss aside economic laws that protect the economy and its participants because there is some “larger” issue at stake. They are afraid the 99% will not agree with them so they ask the 1% to make buy elitist arguments on their behalf.

    I will address some of your other points:

    {concentrations in the meat industry results from the nature of the market, which is subject to economics of scale}

    This is a partly true statement. The structure of the industry does result in market power because each individual farmer supplier then does not have to butcher his own animals for the market. Vertical integration has strengthened this market power and allowed the meat packers (especially in the poultry industry) to use the point of the spear against suppliers in direct contradiction to the plain wording in the Packers and Stockyards Act). They also gain value through abuse of their market power and price discrimination with inelastic suppliers (note the study Carstensen cited by Blair). These facts were well supported by the DOJ conferences.

    {The most recent comprehensive study by GIPSA….. forward contracts create market efficiencies…..}

    This has never been a contentious issue. The issue was whether or not the meat packers were dividing the market and then discriminating against the price setting mechanisms of the market. This question is divided into two parts: 1) do the meat packers use forward contracts to gain market efficiencies or 2) do they use the forward contracts to divide the market and then discriminate against the same products in the market to lower overall market prices to suppliers? The Pickett jury found the latter to be the case and awarded damages accordingly. Instead of continuing the concentration of wealth by the meat packers through these economic frauds, the federal courts made excuses for them. Again, an elitist argument not covered under the plain text of the law being litigated.

    {the packer percentage of the food dollar spent on meat is also going down}

    This may or may not be true but it does show that the pushdown of suppliers through market power in other sectors of the economy (the Walmarts of the world) should also be a concern to economists and policy makers. It is not an excuse for the downstream suppliers to break the law even in their competition with others on their level or levels in the marketing channel above them. This is the “my friend did it so I did it” excuse. My mother never did buy that excuse. Perhaps federal judges or meat packers or their legal counsel or hired economists had no such standards. It is a non sequitur for murderers, people who drive off without paying for their gas, or any other law breaker. The labeling of the Packers and Stockyards Act as an “anti-trust” law has allowed this theory its legs. It does give credence to the notion that many promoting this excuse did not good parental guidance. Perhaps, Jack, you would like to argue this on the Robinson Patman Act? That would fit more into your implicit argument above.
    {many innovative producers who are giving consumers the premium and branded products they want, are adamantly opposed to changes in the current system, such as the rules GIPSA proposed in 2010}

    This indeed is a true statement. It is also true that meat packers have threatened the very existence of these programs because of their market power.
    See http://agpolicy.org/weekcol/581.html

    This is a common meat packer tool: deny or threaten to deny producers access to markets through their funnel.
    If there was any deception that should be actionable under the Packers and Stockyards Act, this one should be it. The damage of this threat is the present value of the value of the assets being threatened.

    {•packers sell to retail grocery chains, such as WalMart, that are even more concentrated and powerful than the packers and will not permit them to retain any surplus.}

    While this may be true, why is this an excuse for downstream market participants to break the law and gain competitive cost advantages with respect to other competitors? If other their competitors are breaking the law in the same manner then they all gain a barrier to entry with respect to new market entrants who have no market power to exert on their suppliers. This breaks the other economic prohibitions in the Packers and Stockyards Act against collusion. This would lead to more concentration in the industry because those companies who have more complexes can inflict costs onto their suppliers while minimizing the effect of suppliers saying ”no”. This reduces their supplier’s bargaining power referenced by Carstensen in the Blair article.

    To sum up, we have just gone through a stint in our economy where the interests of the greedy elite was misaligned with the policies of the nation. The Glass Steagal Act and other depression era laws like the Packers and Stockyards Act and the anti-trust laws have once again been captured by the elite in our economy to be capture profits, market share, or both. All of these laws were designed to reign in the power of the elite in their quest to use basic economic principles to capture the wealth of the nation. It has brought our country to its knees in the worst economic downturn since the Great Depression. It is not by chance that these economic frauds were overseen by economists like Phil and Wendy Gramm and a willfully uninformed political and judicial elite. Phil Gramm spearheaded the policy to undo the separation of the investment and commercial banks which lead the investment banks to skim off the scam deals procured by the banking industry with little risk. Wendy Gramm sat on the board of Enron who did the same in the California energy market and IBP, later Tyson, who was sued under the Pickett case. Wendy and Phil also oversaw the second political bites of the apple that killed the proposed GIPSA rules. These are not hard issues for competent economists. The complexity is bought by money and the inability to enforce the law by an elite judicial branch. One must wonder if the $150,000.00+ salary and benefits of federal judges puts them in too elite of a group to be able to do their job correctly. Are we mistakenly integrating policies that end up leveraging the economy to the hilt and making the new Robber Barons of today? Is not this concentration of wealth and the gaming this money brings to our political system one of the major problems in our democracy’s governance for the people and not just the elite?

    Tom T.

  3. The above article was accidentally posted before I was able to make typographical and grammatical corrections. One can easily spot them and apply those corrections intuitively based on context.

    Tom T.

  4. Federal Courts and many economists have missed the mark on our capitalistic market economy to the detriment of the economy. The “lowest cost” and consumer welfare arguments have been used by federal courts and some psuedo economists, following on the heels of the Phil Gramms of the world to enrich the rich and shaft the rest. Our economy is becoming slanted towards those with money to buy the system to push this Robber Baron psuedo argument of “good economic thought” that trumps justice. Here is an excerpt from the following article which nails it:

    “Essentially, economic policy has not supported good jobs over the last 30 years or so,” said EPI. “Rather, the focus has been on policies that were thought to make consumers better off through lower prices: deregulation of industries, privatization of public services, the weakening of labor standards including the minimum wage, erosion of the social safety net, expanding globalization, and the move toward fewer and weaker unions. These policies have served to erode the bargaining power of most workers, widen wage inequality, and deplete access to good jobs. In the last 10 years even workers with a college degree have failed to see any real wage growth.”

    From the article:

    http://www.huffingtonpost.com/harlan-green/what-has-caused-record-in_b_1463090.html?ref=business

    Tom T.