19:   Washington Discovers the Evils of "Oligopsony"

William Krehm

There was something portentous when Columbus, having discovered America, honestly believed that he had come to India. Ever since, US governments have been prone to confusion where continents are concerned. The are too ready to impose as benefactions overseas what they would see as evil back home.

The Wall Street Journal (27/01, "Bully Buyers – How Driving Prices Lower Can Violate Antitrust Statues" by John R. Wilke) informs us: "As more of the world’s markets become dominated by a few big companies, a rare form of antitrust abuse is raising new concern: when corporations illegally drive down the prices of their suppliers.

"On the coast of Maine, blueberry growers alleged last year that four big processors conspired to push down the price they would pay for fresh wild berries. A state-court jury last year awarded millions in damages. In South Carolina, International Paper Co. faces a lawsuit that it conspired with its timber buyers to depress softwood prices in several states. In Alabama and Pennsylvania, federal antitrust enforcers last year targeted insurance companies that imposed contracts forcing down fees charged by doctors and hospitals. The insurers abandoned the practice."

Super-inflation on the Top — Deflation Below

However, the same government has pushed through globalization that seeks to level all barriers that prevent the ever fewer large corporations from organizing to keep prices low. It has also mobilized the international monetary bureaucracy – the International Monetary Fund and the World Bank – to increase Third World companies’ exports of staples – no matter at what prices to service their debt. It is servicing debt rather than the interplay of supply and demand that increasingly determines the prices of staples on the world market. At the same time other features of the Globalization and Deregulation program make local governments liable for damages if they outlaw advantages already enjoyed by foreign corporations that have proved ruinous to the environment or society.

And it is equally clear the rejigging of the international system so that interest rates are the sole "tool" for "fighting inflation" hit the Third world between the eyes. As did the removal of the firewalls between banking and stock market gambles financed at wild leverages by "derivatives" that put them under the wheels of the financial juggernauts. That. too. can be seen as a means of "fighting inflation" since it allows the US to import at bankruptcy prices – largely denominated in US currency that the US financial system can produce at practically no cost. That provides more elbow-room for the financial hyperinflation that has taken over both in the US and abroad.

But let’s return to the tardy but yet very different reactions to Monopsony on the home front.

"The power to drive down prices is an issue as well in a Federal Trade Commission investigation of R.J. Reynolds Tobacco Co.’s pending $2.6 acquisition of BAT PLC’s Brown & Williamson unit, lawyers close to the case say. The FTC is looking at whether the combined company could force tobacco-leaf growers to accept lower prices. Other major US cigarette makers recently agreed to pay tobacco farmers $1.2 billion to settle a private lawsuit accusing them of secretly agreeing to avoid competitive bidding at tobacco auctions.

"‘Price fixing and other forms of collusion are just as unlawful when the victims are sellers rather than buyers.’ R. Hewitt Pate, the Justice Department’s antitrust chief, told a Senate Judiciary Committee hearing late last year. The hearing aired farmers’ concerns that a few giant agribusinesses now control commodity prices in many markets.

"Usually relegated to the back pages of law books, this mirror image of monopoly is known as ‘monopsony,’ or when more than one company is involved, ‘oligopsony.’ It arises when one or more companies gain enough buying power to push their suppliers’ prices down.

"It isn’t a new legal theory, but it is getting more attention now because of the rise of giant companies in a global marketplace. Buyer muscle has become more visible in recent years as markets become more concentrated through mergers and joint ventures. In meat-packing, the business of slaughtering cattle and pigs, four companies control 80% of the market. In four out of 10 US cities, a single health insurer has at least a 50% market share. Concentration is also rising in markets from aluminum refining to baby food.

"Most of the time, there is nothing wrong when big companies squeeze suppliers for lower prices. Hard bargaining by profit-minded business buyers can help drive down prices for consumers.

"But if dominant buyers use their clout to distort the market and push prices down, the legal theory goes, consumers ultimately can lose. That’s based on the assumption that producers will stop innovating, or producing at all, if they can’t get a fair price. Monopsony, which has been found to violate federal antitrust statutes, can be alleged in either government or private suits.

"Finding the fine line between healthy, price-cutting competition and harmful price-reducing monopsony has historically made government antitrust enforcers cautious about taking action in this area. The world’s largest retailer has enormous power to squeeze suppliers, who have repeatedly asked regulators to rein it in. But many economists see Wal-Mart as an example of how buyer power can benefit consumers."

The Search for Consumers who Don’t Produce

What is odd is that the learned legal experts, undoubtedly advised by learned economists, overlook that before a mortal can become a consumer, he must be a producer. And by ruining producers and Third World countries, they are doing nothing for the mass of consumers at home, many of whom will find themselves without a job, or working at ever lower wages.

And meanwhile the rate of growth achieved in the stock market prices of the shares of the aforesaid large corporations is extrapolated into the remotest future and incorporated into their current price. As is the rate of growth of the rate of growth of that price, and the past acceleration of that growth rate, and all higher growth rates to infinity.

For all these "higher derivatives of growth" are driven to keep pace with the increase of the rate of growth of the stock price. And the slightest failure to keep up those growth rates will bring the stock price crashing. And those stocks serve as collateral for further financings, and the slightest failure to maintain the pattern and justify what has already been embedded in the stock price, leads to its collapse. This happens to be the mathematics of the atomic bomb – exponential growth. So the blood squeezed out of Third World producers is never enough since the rate of increase of that process has to be maintained. And before the CEOs can admit to failure at this, they are likely put everything they learned at Sunday school on hold and cook their books and bribe their accountants. That is why the high courts of the superpower will have to learn something about the pitfalls of official economics.

William Krehm

from Economic Reform, April 2005