tl;dr

Background: Concerns have been raised that the proposed merger of grocers Kroger and Albertsons may leave the combined firm with monopsony power in the markets for wholesale produce  and for grocery workers. This follows last year’s ruling by a federal court blocking the merger of Penguin Random House LLC and Simon & Schuster, similarly on grounds of labor-market monopsony. The argument is that the company would dominate in areas where the merging firms formerly competed for employees and other inputs. The combined firm could then use that power to suppress wages, reduce employment, or impose unreasonable working conditions on workers.

This isn’t the first time U.S. antitrust regulators have targeted monopsony in labor markets. In addition to merger review, other recent efforts have included lawsuits against “no-poach” agreements, as well as the Federal Trade Commission’s (FTC) recent proposal to ban  noncompete agreements in employment contracts.

But… Monopsony power often derives from labor-market frictions that antitrust can’t address. Most labor markets aren’t highly concentrated and most workers have multiple potential employers from which to choose. In other words, labor markets are generally poor targets for antitrust enforcement. As explained below, this raises several significant challenges for antitrust enforcers.

KEY TAKEAWAYS

MOST LABOR MARKETS ARE COMPETITIVE

So-called “company towns,” in which one firm dominates or actually owns a community, are rare. Most workers in the labor force have a broad range of employment opportunities across occupations, industries, and locations. A supermarket cashier can find employment at another supermarket, at another retail outlet, or shift their occupation to hospitality, food service, or distribution and logistics. They can also move to locations with better employment opportunities. A merger of supermarkets won’t suppress those opportunities.

The most compelling monopsony claims tend to concern labor markets that demand extensive or idiosyncratic skills, which couldn’t easily be transferred to other occupations or industries. For example, the Penguin/Simon & Schuster case centered on writers of bestsellers whose book advances exceed $250,000.

PRODUCT MARKETS IN ANTITRUST

All antitrust claims require defining a relevant market, but the endeavor is significantly more complicated in the context of labor markets. 

For example, what is the relevant labor market for supermarket employees? Surely, Costco employees should be included, even if Costco does not technically qualify as a “supermarket,” but what about employees of other retailers? What about hospitality and fast-food workers? When examining the labor market for workers who lack extensive or idiosyncratic skills, just about any reasonable definition of the relevant market would be too large to allege that any one firm possesses market power.

In a perfect world, these questions could be tested empirically. Unfortunately, antitrust enforcers often don’t have the requisite data and must rely on anecdotal evidence to delineate labor markets.

GEOGRAPHIC MARKETS IN ANTITRUST

U.S. workers are highly mobile. Roughly half of American adults live in a state other than the one in which they were born. Indeed, much of U.S. demographic history concerns people relocating for work. This makes it especially challenging to define a relevant geographic market for labor-monopsony claims. 

This is particularly true in urban environments, where there are many employment opportunities within commuting distance, especially for workers with fewer skills or less experience. Hence, stronger claims of labor-market monopsony tend to concern rural markets with limited job opportunities. It’s much easier to claim that Walmart holds labor-monopsony power in a small town than in even a medium-sized city.

UNION POWER AND ANTITRUST

Antitrust enforcers also need to account for the countervailing market power held by labor unions. Obtaining and exerting market power is unions’ raison d’être. As the old song says: “There is power in a union.”

For instance, if the FTC challenges the Kroger-Albertsons merger (as is expected) by alleging labor-market monopsony, the agency will have to contend with the fact that roughly 60% of the merged company’s workforce will be unionized. Attempts to exercise monopsony power would likely be dampened by the effects of unions collectively bargaining to maintain high wages and prevent layoffs.

BALANCING CONSUMER & WORKER WELFARE

The final challenge to labor-monopsony cases is that the primary purpose of antitrust enforcement is widely accepted to be protecting against harms to competition or to consumers. In labor cases, this will almost inevitably require important tradeoffs. 

While a merger might suppress the wages that would otherwise be paid by the merging companies, these wage reductions may then be passed on to consumers in the form of lower prices. Reduced labor input for a particular type of worker or workers does not mechanically translate into reduced output for consumers. This can be the case, for example, when a merger results in restructuring. 

In evaluating a merger, the agencies and the courts must balance the anticipated harms to employees against the potential benefits to consumers. This is a daunting task that may prove insurmountable in many cases.

For more on this issue, see the International Center for Law & Economics (ICLE) issue brief “Five Problems with a Potential FTC Challenge to the Kroger/Albertsons Merger.” See also, “FTC Should Allow Kroger-Albertsons Merger to Go Through” by Eric Fruits and Geoffrey Manne.

 

The Federal Communications Commission (FCC) is no stranger to undertaking controversial and potentially counterproductive regulatory projects. The commission’s digital-discrimination proceeding is expected to continue in November, and FCC Chair Jessica Rosenworcel just announced that the FCC will revive the warmed-over corpse of the 2015 Open Internet Order. This latter item highlights how the FCC’s Democratic majority has been emboldened to pursue risky regulatory adventures with the addition of recently confirmed Commissioner Anna Gomez.

But given that the FCC will already have a plate full of difficult docket items, it should continue to avoid a further landmine that some advocates have been pressing to take up this year: reopening former Chair Tom Wheeler’s proceeding on multichannel video programming distributors (MVPDs). First proposed in late 2014 but ultimately not adopted by the commission, the Wheeler FCC’s notice of proposed rulemaking (NPRM) would bring over-the-top linear-video providers like YouTube TV and Hulu Live under the FCC’s program access and carriage rules.

Read the full piece here.

There is mounting evidence that both the Federal Commission (FTC) and the U.S. Justice Department’s (DOJ) Antitrust Division (DOJ) are, under their current leadership, hostile to mergers. There are multiple elements to this evidence.

Read the full piece here.

My colleagues at the International Center for Law & Economics (ICLE) often engage not only in excellent analysis of proposed mergers and acquisitions, but also have been known to offer retrospectives on past mergers. Today, I want to offer a very personal version of this.

Read the full piece here.

Abstract

The EU Commission’s recent proposal for a regulation on standard essential patents (SEPs) envisages a radical overhaul of the current framework, introducing an essentiality check system, a conciliation process for fair, reasonable and non-discriminatory (FRAND) terms, and a mechanism to determine a reasonable aggregate royalty. However, both the economic justification and the approach endorsed by the proposal are questionable. Indeed, on one hand, there is no evidence of a market failure to justify the initiative and, in addition, the provisions appear to be one-sided, apparently being aimed only at addressing a hold-up problem and pursuing a value-distribution goal from SEP owners to implementers. Accordingly, this paper views the proposal critically, arguing that it departs from the well-established meaning and rationale of FRAND commitments by disregarding hold-out problems, and it jeopardises the suitability of SEPs to serve as valuable financial collateral, thereby endangering future investments in innovation.

With yet another win for NetChoice in the U.S. District Court for the Northern District of California—this time a preliminary injunction granted against California’s Age Appropriate Design Code (AADC)—it is worth asking what this means for the federally proposed Kids Online Safety Act (KOSA) and other laws of similar import that have been considered in a few states. I also thought it was worthwhile to contrast them with the duty-of-care proposal we at the International Center for Law & Economics have put forward, in terms of how best to protect children from harms associated with social media and other online platforms.

In this post, I will first consider the Bonta case, its analysis, and what it means going forward for KOSA. Next, I will explain how our duty-of-care proposal differs from KOSA and the AADC, and why it would, in select circumstances, open online platforms to intermediary liability where they are best placed to monitor and control harms to minors, by making it possible to bring products-liability suits. I will also outline a framework for considering how the First Amendment and the threat of collateral censorship interacts with such suits.

Read the full piece here.

Investors, customers, and employees are increasingly interested in evaluating firms’ environmental impact. This is good news. We are all better off when companies are accountable for their actions. Seizing on this trend, the SEC has a pending proposal to mandate disclosure of companies’ carbon emissions and Governor Newsom has committed to signing a bill that does the same in California. This is bad news. Mandatory disclosures will do more harm than good.

Read the full piece here.

tl;dr

Background: The Federal Trade Commission (FTC) and 17 states this month filed a major antitrust complaint against Amazon. The much-anticipated suit comes more than two years after Lina Khan became FTC chair and more than six years since her student note criticizing Amazon’s practices. The complaint describes a broad scheme in which Amazon (1) used various practices to prevent sellers from offering prices at Amazon’s rivals below the level at Amazon (anti-discounting), and (2) conditioned a product’s eligibility for Amazon Prime on whether the seller used Fulfillment by Amazon (FBA). This conduct allegedly violates Section 5 of the FTC Act as an unfair method of competition, Section 2 of the Sherman Act as maintenance of monopoly, and various state laws.

But… It will be difficult for the FTC and the states to prove Amazon’s monopoly power and to discredit the procompetitive justifications for the challenged conduct. Retail competition is robust and the proposed narrow markets are ripe for criticism. Moreover, the challenged conduct is core to Amazon’s offer of important consumer benefits, such as fast and reliable shipping. Whatever remedy the FTC ultimately pursues, it risks undermining the benefits Amazon has created for consumers and sellers alike.

KEY TAKEAWAYS

SEEMINGLY TRADITIONAL THEORIES OF HARM

The complaint relies on two overarching theories of anticompetitive conduct: anti-discounting and conditioning Prime eligibility on a seller using FBA.

The first is reminiscent of a challenge to “most-favored nation” (MFN) provisions, in which a defendant demands terms that are equivalent to or better than those given to its rivals. However, MFNs are agreements typically challenged under Section 1 of the Sherman Act; the FTC doesn’t explicitly claim that Amazon’s unilateral policy constitutes an MFN.

The second theory appears similar to a tying claim. But the FTC doesn’t allege an actual tie between the sale of two distinct products, perhaps because sellers cannot buy the Prime badge; they must qualify for it by meeting the two-day shipping requirement (which FBA ensures).

NARROW RELEVANT MARKETS

Both of the relevant markets put forward in the FTC’s complaint fail to reflect real-world competition.

Amazon allegedly possesses monopoly power in the “online superstore market.” According to the FTC, online “superstores” provide a unique breadth and depth of products and unique services that brick-and-mortar stores and smaller online retailers don’t. Thus the commission alleges that these rivals cannot constrain Amazon’s market power over consumers. 

This alleged market is so narrowly drawn that it appears to include just Amazon, eBay, and the online stores offered by Walmart and Target. This excludes single-brand online retailers, product-category-specific online retailers, and all brick-and-mortar stores. It beggars belief that these rivals don’t exert competitive constraints on Amazon. After all, no consumers shop exclusively online, and price-comparison services like Google Shopping facilitate shopping across all online outlets. This will almost certainly prove to be a sticking point when the case goes to trial.

The FTC also defines a relevant market for “online marketplace services”—i.e., the services needed to sell products online (including access to shoppers, online interface, pricing capabilities, customer reviews). This excludes traditional wholesalers and e-commerce platforms like Shopify that offer software allowing sellers to create their own online stores.

As with the first market, it’s hard to imagine these claims will be borne out by the evidence. Most retail sales still occur offline and manufacturers and brands readily access these outlets. And the recent success of new marketplaces like Shein and Temu—which entered the U.S. market during the FTC’s investigation of Amazon—further undermines both the alleged market and Amazon’s market power.

OVERLOOKING THE BENEFITS OF AMAZON’S CONDUCT

While both unlawful MFNs and unlawful tying would be legitimate theories of harm, both are also vertical restrictions reviewed under the rule of reason, which requires weighing the anticompetitive and procompetitive effects.

The economics literature shows that MFNs can promote efficiency by protecting investments that couldn’t have been recouped without the protections offered by an MFN, such as Amazon’s substantial investment in the infrastructure to deliver products within two days. These provisions can benefit consumers by cutting their search costs and offering retailers incentives to improve the quality of their search and display capabilities.

Economic theory also suggests that it can be cheaper to offer some products together, rather than selling them separately; in some cases, it may be necessary to sell the products together in order to offer the products at all. If Amazon’s FBA services are critical for it to dependably deliver on Prime’s promise of two-day-shipping, then the alleged tying may be procompetitive. 

RESTORING ‘FAIR COMPETITION’

While the FTC’s complaint doesn’t explicitly ask for Amazon to be broken up, it does ask for the court to provide “equitable relief, including but not limited to structural relief, necessary to restore fair competition.” 

It’s anyone’s guess what this means. “Fair competition” isn’t part of U.S. antitrust case law or mainstream economic terminology.

This seemingly innocuous wording may be used to impose the FTC’s idiosyncratic—and nostalgic—vision of online retail on Amazon. Worse, it may be a euphemism for breaking up the company.

 

Abstract

Becker and Murphy (1992) proposed that task specialization raises productivity but is limited by the costs of coordinating workers. We propose that automation enables workers to specialize without coordination costs. To the extent that the cost of effort exhibits increasing differences, workers increase effort in non-automated tasks and productivity. The proposition is supported by a field experiment among supermarket cashiers. Conventionally, supermarket cashiers perform two tasks — scanning purchases and collecting payment. Cashiers exhibited increasing differences in the cost of effort: when they scanned faster, they took longer to collect payments. We rotated cashiers between the conventional job design and one in which they specialized in scanning. The new job design increased cashier productivity in scanning by over 10 percent. The faster scanning was not due to customer sorting or cashier learning. The proposition is also validated by a survey of taxi drivers. Drivers who reported that difficulties in way-finding affected their driving were more likely to use map apps.