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Antitrust Enforcers to Take on Big Business and Shortage Profiteering
The Federal Trade Commission just launched the first major investigation into shortages and monopoly power, sending letters to Amazon, Walmart, Tyson Foods, and Proctor & Gamble. This matters.
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It’s become clear to most of us that there is something deeply wrong with our economy. Despite shortages and supply disruptions from Covid, or perhaps because of them, two thirds of large publicly traded corporations are reporting *much* higher profit margins than they had in 2019. When the main agents in an economy profit from dysfunction, it only creates incentives for more dysfunction.
In this issue, I actually have some good news about this dynamic. On Monday, the Federal Trade Commission launched the very first government investigation into the relationship between big businesses and shortages. Do big firms cause or manipulate supply disruptions? Do they profit from them? The Federal Trade Commission wants to know, and it sent some very serious demands for data. I’ll explain why the FTC’s actions matter, and how you can help.
Also in this issue is a piece for paid subscribers on a specific example of how the merger boom is creating monopolies. I looked at a merger between two firms - Lucid and Cint - in survey research technology, or “ResTech.” Lucid-Cint is a good example of how technology and lax antitrust law leads to market dominance, not just in big markets but in weird niche areas.
Finally, a quick announcement. My organization is hosting a discussion today between small business leaders, labor, and the White House’s anti-monopoly team at 3pm ET today. You can sign up here to join. Leaving the culture warring noise in the media aside, these are the kinds of events where real political economy policy gets discussed.
Where Are the Investigations into Shortages?
It’s hard to look at a newspaper or the business press these days without seeing stories about inflation, shipping problems, or shortages. Yesterday the Wall Street Journal had a piece titled “Is Inflation Sticking Around? Bicycle Makers Offer Some Clues,” but you can easily find stories about everything from higher prices for beer cans to the New York City taxi shortage, and of course partisan sniping over who is responsible for these problems. “It’s all disruption, which costs money,” said one manufacturer, on the trouble he’s having sourcing materials. “It’s the Wild West out there.”
Yet despite the constant front-page headlines, no one in government has launched a major investigation what is going on in our markets when it comes to these problems, especially when doing so requires getting data from powerful firms who don’t want to give it up. This is a very weird state of affairs. The American government used to have remarkable insight into commerce. For instance, when I was researching the conglomerate merger wave in the late 1960s, I found that nine different government agencies or Congressional committees were concurrently investigating the problem, often by getting information from private firms.
Conglomerate mergers mattered, but they were not the big deal that inflation and shortages are today, and yet there was so much more interest from people in government about that problem. Today, there isn’t a single meaningful Congressional investigation into our shortage issue. There’s little focus in our regulatory apparatus in trying to understand the root of shortages, and certainly no one is doing so by looking at the behavior of the most powerful firms in our economy.
What’s especially strange about this dynamic is that inflation and shortages aren’t neutral forces. These problems seem to be *helping* big business, with profit margins for large firms up 50% above 2019 pre-Covid levels. In order to start addressing inflation and shortages, it’s important to ask why they are happening and who has an incentive to keep them going.
And no one in government was asking, until this week.
Lina Khan Gets to Work
On Monday, the Federal Trade Commission announced it had voted 4-0 to investigate the relationship between competition and supply chain problems. “Supply chain disruptions are upending the provision and delivery of a wide array of goods, ranging from computer chips and medicines to meat and lumber,” said FTC Chair Lina Khan.
The idea of a study into market power and shortages has been floating around for some time. In September, I wrote up what I saw as some basic relationships between market power and shortages, and why a monopolized economy worsens supply disruptions. Shortly thereafter, FTC Commissioner Rohit Chopra began linking competition and inflation, saying “One of the effects we are seeing of the growing concentration in our economy is supply shortages.” In October, independent businesses began pushing the FTC explicitly for such a study.
In announcing an investigation the FTC did two things. First, the FTC sent letters to nine dominant firms in supply, retail, and wholesale, mandating they respond within 45 days to a host of questions, as well as give internal documents on various topics. The targets of the investigation are the big guys: Walmart, Amazon, Kroger, Procter & Gamble, Tyson Foods, Kraft Heinz, C&S Wholesale Grocers, Associated Wholesale Grocers, and McLane. That’s the retail, consumer packaged goods, meatpacking, and wholesaling sectors.
The letters are meaningful information requests, basically subpoena-type demands, and they require firms to provide extensive information and internal documents on everything from how they use ocean containers and chassis availability to how their management team sees disruption affecting competitors to the use of rebates and what are known as ‘category captains’ to structure shelf space. You read the letters here. This information is going to give the FTC a granular view of where there are pain points in supply chains, as well as how big firms allocate and price limited supply.
The second thing the FTC did was to ask for public comments. The goal is to let anyone participate and offer information on the problem, whether a consumer, business owner, distributor, or worker. (Incidentally, if you are seeing shortages and supply chain disruptions, you should submit a comment here, which you can do anonymously if you are afraid of retaliation. Already, there’s a great comment about the impact of ocean carrier consolidation on small retailers.)
These letters and this docket represent the first attempt by the government, as far as I know, to understand what is going on in retail markets by getting information from those who dominate those markets.
Will this Investigation Fix Anything?
It can be irritating when a policy response to a problem is to study it, because that often means finding an excuse for inaction. But sometimes, we do actually need information to generate results. For example, a recent lawsuit against the pharmaceutical firm Teva for blocking the entrance of a competitive multiple sclerosis drug into the market is a direct result of documents uncovered in a 2020 House Oversight investigation of drug pricing. As another example, when the House Antitrust Subcommittee undertook an eighteen month-long investigation of big tech, the report it produced helped lead to lawsuits and legislative activity in the U.S. and abroad, including the UK halting Facebook’s acquisition of Giphy, and likely changes to antitrust law itself. (Not coincidentally, Khan was the lead investigator for that big tech report.)
So investigations, if they are uncovering new information, can be quite effective. This dynamic is especially true for the FTC. The research and investigative authority of the commission predates the existence of the commission itself. In 1903, Teddy Roosevelt chartered the Bureau of Corporations as an investigative agency, and then the bureau was folded into the FTC when it was created in 1914 by Woodrow Wilson. Such studies helped lead to the break-up of the meatpackers, structure grain futures trading, end Standard Oil rebating practices, prepare the U.S. for World War II, and regulate Wall Street and public utilities, among other accomplishments. Before the creation of the Council of Economic Advisors in the 1940s and the intellectual take-over of policy by macro-economists, the FTC was a key source of information on the economy for the President.
More recently, even modest information gathering efforts have had similar effects. For example, the FTC has recently gotten active in the ‘right to repair’ space, and as a result, firms like Apple and Microsoft have begun allowing consumers to repair their own equipment. This change in firm behavior was the result of a 2019 FTC workshop and public comment period, which led to a report in May of this year. Armed with this information, the FTC finally ramped up enforcement of right-to-repair restrictions under Khan, and states kept debating new legislative efforts. Apple and Microsoft saw the writing on the wall, and much of the electronics industry will likely follow.
Information-gathering, in other words, is the first step towards using legal tools to restructure markets. And not only can the FTC actually pursue such policy goals directly, but its reports can influence Congress and states, who need expert information gathering to understand how to solve complex market problems.
So this investigation is a big deal, and it’s sort of crazy it’s the first investigation of this kind over the recent bout of supply disruptions. It’s not of course the first investigation into inflation ever. The FTC investigated the ‘cost of living’ during World War I, and has traditionally played a major role during inflationary periods in looking into prices and market dominance. But for decades, the FTC, and government in general, has been largely dormant in looking into major market problems in a meaningful way. Large firms have been quite happy about this state of affairs.
And this brings me to the politics, and why there’s a shift away from the status quo.
Independent Business Finds Its Voice
Two weeks ago, the U.S. Chamber of Commerce openly declared war on Lina Khan and the anti-monopoly movement. I’ve talked to a bunch of Chamber insiders, and they all tell me that while corporate America views Khan with suspicion, there is no broader war on the FTC, only one financed by a few big tech firms. Still, such an attack does have a historical precedent. One hundred years ago, that very same U.S. Chamber of Commerce fought back bitterly against the FTC when Wilson’s appointees launched a set of investigations, with bankers calling the FTC a “hectoring tyrannical… and tireless snooper.”
Google’s current campaign through the Chamber is already having an effect. Yesterday, a new Biden-appointed commissioner, Alvaro Bedoya, had his nominating vote in the Senate Commerce Committee. Unlike Khan and Jonathan Kanter, Bedoya didn’t get a single Republican vote, with Republican Senators expressing concern about the increasingly partisan nature of the commission.
And indeed, the FTC has been descending into rancor, but not because of partisanship. Indeed, the two holdover Republican commissioners Noah Phillips and Christine Wilson have been using partisanship as a rhetorical method to protect the interests of dominant firms like Facebook and the antitrust defense bar, defending, oddly enough, Obama’s lax approach to big tech and competition. But while these commissioners have been attempting to frustrate Khan’s agenda on almost every item, often using process arguments, they voted to go along with this study. Why did this investigation into dominant firms sail through the FTC without a single dissenting vote?
The reason is that independent businesses are beginning to find their political voice.
The main force behind this study is a group of smaller firms who have banded together into the “Main Street Competition Coalition.” These are independent grocers, pharmacists, farmers, restaurants and beer/wine distributors, all of whom are noting that big box competitors are getting better terms than they are for the same class of service. ‘Economic discrimination,’ as they call it, has been a problem for decades, but it has gotten much worse during the pandemic, at this point causing shortages.
One BIG reader, an administrative assistant at a small college, noted she’s seeing “shortages in previously plentiful food items.” There are a host of foods they can’t get anymore. “We order from Sysco mainly, and we sometimes can't get basic things like spicy chicken breasts for sandwiches. We get the same spicy chicken that Wendy's serves, so we presume Wendy's is taking priority on this.” Sysco has tremendous market power in food distribution, it is what is known as a power buyer, using a system of rebates to coerce suppliers and buyers into using its services.
Power buying is why large firms like Walmart are out-competing small ones. Walmart, for instance, tells its suppliers they must deliver on time 98% of the time, or it will fine them 3% of the cost of goods. “Known in the industry as "power buyers," large retailers have had an advantage for years when buying goods because they order larger quantities than smaller wholesalers do,” wrote CNN’s Nathan Meyersohn on this problem. “Large retailers' scale and buying clout make them a top priority for manufacturers, he said, and they often get promotions, special packaging or new products early.”
Price discrimination means smaller firms, both producers, distributors, and retailers, can’t get access to what they need to do business, and small firms are often more flexible than big ones, and serve customers in rural or niche areas. In West Virginia, for instance, where small pharmacists were the key vaccine operators, the roll-out of the vaccine to nursing homes was initially far quicker than in states that used CVS and Walgreens. The collapse of niche specialties, or the disappearance of small dealers who can fix products or service customers, is one result.
A month and a half ago, the Main Street Competition Coalition asked the FTC for an investigation into “arrangements between dominant retailers and suppliers” on the problem of “economic discrimination” against smaller firms. Their ultimate goal is to revive the on-the-books-but-dormant Robinson-Patman Act, a law that bars economic discrimination by the big against the small.
And the voice of small business had an impact. At the open hearing before the FTC vote, roughly a dozen business owners from around the country testified and asked the FTC to conduct this study. When the vote came, the commissioners agreed to pass the resolution. So this week, we finally have our first investigation of how dominant firms and supply disruptions interact.
Rejecting John Kenneth Galbraith’s Affluence Politics
While such an investigation will only move the needle so much, it is important for a couple of reasons. First, it is ideological victory for populists. For decades, we’ve been operating in what famed mid-20th century socialist John Kenneth Galbraith called the ‘Affluent Society,’ which is to say, a society that has already figured out all questions on production, such that the only real political questions become spiritual, environmental, cultural or educational.
Under the affluence framework, asking political questions about how we move, build, and distribute stuff hasn’t just been unimportant, but the realm of naive fools. “It is part of the vanity of modern man,” Galbraith once wrote, “that he can decide the character of his economic system.” Man’s “area of decision, in fact, is vanishingly small.” Affluence as a way of understanding the world led us to conceive of ourselves not as citizens, but as consumers. We stopped imaging ourselves as capable of even making decisions about commerce. The scientists, aka the economists at the Fed, tracked things like inflation and production, but normal people could ignore it, because that stuff just wasn’t part of politics. It thus became easy for conservatives like Robert Bork to take Galbraith’s historical frame and create the consumer welfare standard for antitrust. Just let the scientists handle it.
Until the financial crisis of 2008, such an attitude was dominant among our political elites. Even today, the power of this left-libertarian framework is still strong. Both Trump and Biden relied on summits of big well-branded firms to show they could capably deal with economic problems related to the pandemic, with Biden meeting with Walmart’s CEO to demonstrate seriousness on the matter. The idea of public government officials actually crafting policy to structure markets is still viewed with suspicion.
But increasingly, the Galbraithians who dismiss questions of market power or seek to leave things to economists and technocratic corporate experts are the ones who seem naive. Before the pandemic struck in force, I predicted that shortages would become a core political problem, which is something that economists completely missed as they engineered our just in time delivery model. And so it has.
And yet rejecting the ideological framework of Galbraith, and his right-wing analogues, is only half the battle. We also have to re-learn how to govern, because right now, Walmart and Amazon know how to structure our markets, but our democratic government doesn’t have much visibility into what is happening. That era, however, is ending. Finally, there’s a serious government investigation into market dominance and supply chains. It’s about time.
I wrote up what looks like a merger to monopoly in the survey research space as Cint buys Lucid. Antitrust enforcers allowed the transformation of online advertising into a monopolistic business model with ‘AdTech,’ now the shift to change survey research into a similar business model with ‘ResTech’ is on. (This piece is for paid subscribers only, so if you want to subscribe, you can sign up here.)
Thanks for reading.
And please send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation and democracy. And consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member.
P.S. Canadians, please send me examples of monopolies in your neck of the woods for a possible issue on market power in the land of maple syrup. I know your oligarchs are super polite, but I’m told they do fix bread prices with the help of certain high-profile ex-McKinsey consultants.