Is Current Antitrust Policy Neglecting Monopsony Power?

Tuesday, November 21st, 2017 at 2:50 pm by Jordyn Giannone

On November 1, 2017, New Jersey Democratic Senator Cory Booker wrote a letter to the Justice Department’s Antitrust Division and the Federal Trade Commission (“FTC”), declaring that both agencies, “have not prioritized the responsibility to ensure that workers have meaningful choices that allow them to fairly bargain among potential employers.” Booker’s letter voices his concerns about the increasing power of “monopsonies” in the market. He cites monopsonies as a potential contributor to the growing trend of corporate concentration, which has ultimately led to a labor market comprised of fewer employees working for lower wages.

Are Booker’s claims true? In his letter, Booker argues that antitrust officials have neglected to consider potential monopsonies in the context of reviewing mergers. However, it seems that current officials are simply following traditional antitrust jurisprudence by applying the same legal standards to both buyers and sellers in antitrust cases, rather than treating buyer conduct less strictly.

What is a Monopsony, and Why is it Dangerous?

Often overlooked in favor of its more well-known relative the monopoly, a monopsony can have an equally negative impact on the overall economy. As Levin College of Law Professor Jeffrey Harrison describes, a monopsony can be thought of as the mirror image of monopoly. He explains, “Monopsonists use buying power to lower prices while monopolists use seller (or market power) to raise them.” In either instance, such conditions can result in an unequal wealth transfer and misallocated resources in the marketplace. Jonathan Jacobson, partner at Wilson Sonsini Goodrich & Rosati, writes that monopsony power forces vendors to lower their prices just to sell their products, leading to a wealth transfer from the sellers to the monopsonists.

Booker connects monopsony power to the growing trend of market concentration in a limited number of industry sectors. His argument, based on research from economists Jan de Loecker and Jan Eeckhout, and Simcha Barkai, contends that this rise in industry concentration has led to a market in which workers do not have adequate bargaining power with their employers. Booker asserts that employers in these few sectors possess monopsony power at the expense of workers. By letting monopsonists run rampant, Booker insists, the Antitrust Division and FTC have overlooked a dangerous contributing factor to stagnating wages and rising wealth inequality.

The Supreme Court’s Take on Monopsonies

But have the FTC and the Antitrust Division truly ignored monopsonies as Booker suggests? Both agencies have adopted the 1992 Horizontal Merger Guidelines, which specifically outline an analytical framework when contemplating potential monopsony concerns. However, Booker’s concerns seem to focus on what he views as the agencies’ lackadaisical enforcement in practice. Yet, antitrust officials do not have a large amount of latitude when it comes to monopsony power enforcement.

The Supreme Court most recently addressed monopsonies in the 2007 case Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc. Sawmill operator Ross-Simmons brought suit in the case, alleging that the lumber Weyerhaeuser had driven Ross-Simmons out of business by bidding up the market price for alder logs. This strategy, known as predatory bidding, gives the predatory bidder monopsony power, so it can eventually limit its input purchases to below a competitive level. The jury found that defendant Weyerhaeuser had overbid for the logs and paid “more than it needed to pay.” And while the Ninth Circuit affirmed the jury verdict in favor of Ross-Simmons, the Supreme Court unanimously reversed.

The Court rejected the “more than needed” basis for sustaining a verdict in favor of the plaintiff, and instead described the acceptable standard for analyzing instances of predatory buying. Specifically, the Court required the plaintiff to show that (1) “the predator’s bidding on the buy side must have caused the cost of the relevant output to rise above the revenues generated in the sale of those outputs,” and (2) “that the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power.” This heightened standard is analogous to the one previously articulated in Brooke Group v. Brown & Williamson Tobacco Co., a case focusing solely on the selling side. Ultimately, the Court’s decision in Weyerhaeuser now requires antitrust officials to treat situations of monopoly and monopsony symmetrically, applying comparably stringent standards in either case.

The Future of Antitrust Policy

In light of the Weyerhaeuser decision, Booker’s claims about antitrust officials seem unwarranted. However, the Court’s decision in Weyerhaeuser has reopened a debate on whether antitrust officials should embrace a “total welfare” standard or a “consumer welfare” standard when applying antitrust laws. As Antitrust Division attorney Natalie Rosenfelt explains, those adopting a total welfare standard analyze the impact of antitrust laws on society’s wealth maximization as a whole, while advocates of the consumer welfare standard focus specifically on consumers purchasing a final end product. In Weyerhaeuser, the Supreme Court appears to embrace a total welfare standard by requiring just as stringent enforcement of buy side behavior as sell side conduct in the marketplace. It is possible that Booker’s concerns are an attempt to advocate for espousal of the consumer welfare standard when it comes to antitrust enforcement. By focusing on potential impacts to the middle class and consumers at the end of the distribution chain in his letter, Booker seems to directly challenge the more traditional total welfare standard embraced by the court system.

Overall, monopsonies usually fly under the radar when compared to monopolies, their more well-known economic counterpart. However, monopsony enforcement based on a total welfare standard may face increased scrutiny in the future as lawmakers continue to emphasize wealth inequality and a sluggish middle class.