Buyer Power

1. Buyer Power John Fingleton, OFT 30th November 2007 5th ACE Conference: Toulouse NB. The views expressed here are my own, and not necessarily those of the OFT.

2. Buyer power in competition policy • Basic economics • Text book monopsony • Bilateral bargaining • Effective competition and beneficial buyer power • Harmful buyer power • Exploitation: low prices, buyer cartels • Exclusion: over-bidding, waterbed effects, dynamic • Policy Implications • Countervailing BP in mergers, Government BP in markets • Treatment of buyer groups • Downstream market power as first threshold for intervention

3. Highly topical • Been around a while • See Monopsony: Blair and Harrison • Fordham 2000: papers by UK, US, Commission and German government officials, private lawyer, Patrick Rey • Renewed interest in policy and economic literature • Antitrust Law Journal 2005: “Symposium on Buyer Power and Antitrust”, Salop paper • Academic papers by Inderst, Majumdar, Dobson, Wey • cases in mergers, abuse of dominance, cartels in US and EU • Retailer buyer power in supermarket retailing

4. Basic Economics

5. Three scenarios with lower input prices • Higher prices for final consumers • Textbook monopsony • Same prices for final consumers • Bilateral bargaining • Lower prices for final consumers • Effective competition with pass-through

6. 1. Textbook Monopsony Price D S Quantity

7. 1. Textbook Monopsony • Outcome • Lower input price, higher selling price, lower output • Monopoly mark up against buyers and mark-down on sellers • Lower welfare: matching supply side Harberger triangle • Assumptions • Upward sloping supply curve (realistic) • A single input (relevance to retail markets) • Linear pricing (price discrimination may be common) • Market power on the selling side.

8. 2. No change in downstream price • Push down prices for inputs but not change in final consumer price • Pure bilateral bargaining (no pass through) • Welfare effects neutral/unclear • Consumer welfare unchanged • Upstream firms have higher incentives to be efficient • Intermediate firms may have less incentive to be efficient

9. 3. Effective competition (easily forgotten) • Aggressive lowering of prices for inputs is a feature of effective competition • A firm that lowers its input costs can win market share downstream • A downstream monopolist has less market incentive to reduce input costs (X inefficiency, rent sharing) • Upstream competition and efficiency driven by downstream competition • True regardless of the relative sizes or bargaining power of the buyer and its sellers • Pass-through depends on whether marginal cost reductions • Example: aviation

10. Three scenarios for lower input prices • Higher prices for final consumers (monopsony) • Harms consumer and producer surplus • Case for intervention: but downstream market power essential • Same prices (bilateral bargaining) • Consumer welfare same, upstream efficiency washes out? • No clear role for competition policy intervention • Lower prices (effective compeittion) • Welfare higher, pro-competitive, pro efficiency behaviour • No case for intervention on competition grounds Food for Thought: Costly False Positives

11. Two Cases • Monaghan Poultry Products (MPP) • A chicken processor, sole buyer locally, reduced prices paid to its growers who sued alleging monopsony power • Irish Court found dominance but no abuse • MPP competed vigorously in a competitive downstream market with strong buyers (supermarkets) and increasing imports and went out of business several years later. • Travel agents: Irish Competition Authority/OFT • Travel agents complained about reduction of fees paid to travel agents by Aer Lingus and British Airways respectively • Agencies decided no infringement because move to selling tickets online was beneficial to consumers. • Here downstream dominance might have been argued

12. Harmful Buyer Power

13. Exploitative harm • Monopsony with downstream market power • Cases relatively rare. US law does prohibits monopolisation not possession or exploitation of monopoly • Cartel behaviour, with our without market power • A more common feature of the case law in the US, even without downstream market power • Old Case: Mandeville Island Farms on sugar refiners • Bid rigging at antique auctions • Information sharing at Treasury auctions • 100 Boston restaurants boycott American Express • Financial aid for university students • Baseball Free Agent marke

14. Exclusionary harm • Over-bidding to reduce horizontal competition • Predatory or high pricing on the buyer side that raises rivals costs or excludes rivals (Salop 2005) • Salop paper and Weyerhaeuser case: US Supreme court • Waterbed effect • Lower prices  higher prices for rivals (Inderst, 2007) • Lower prices  exit of suppliers to smaller rivals (Majumdar, 2005) • Dynamic or Investment stories • Incentives for buyers (investment/acquisition) • Ex post exploitation of relationship specific sunk costs • Short-termism and innovation

15. UK Supermarkets • OFT referred issues to CC • Planning (entry) & low pricing & supermarkets vs small shops (local) • Buyer power including waterbed effect • Findings on buyer power & supply chain • Efficient supply chain, delivers low prices and high innovation • Difficulty of getting evidence • No problem with: financial viability; barriers to entry, own-label • Harm to consumers standard • Buyer power exists but no evidence of • harm to upstream investment and innovation • decline of share of supply by small sellers • Issue with retrospective changes in prices (risk transfer)

16. Policy Conclusions

17. Buyer Power: A false friend • Mirror image of monopoly for the analytical framework • NOT the mirror image for welfare • In policy terms, we should be cautious about buyer power • Can be good for competition, consumer welfare & productivity growth • False negatives very costly • Classic for “protecting competitors not competition” allegations • But recognise that buyer power can sometimes harm competition and consumers • Not just textbook monopsony and cartels • Distinguish fairness/social issues (not competition policy) • Calls for limits on bargaining power (e.g., labour inputs)

18. Competition policy aligned with economics • Mergers • Countervailing buyer power • Efficiencies as part of competitive effects analyssi • Advocacy • Role of the government as monopsony buyer (e.g., pharmacies) • Monopolisation cases • MPP and Travel agents get the right answer • But not without a burden on the buyers • Buyer Groups • Recognition that cooperative purchasing has efficiencies and should be permitted

19. RBB study for OFT on Buyer Groups • Distinguishes “buyer power” from “market power” • Discusses bargaining, pass through • Theories of competitive harm • Reduced downstream competition directly • Indirect harm to downstream competition via raising rivals’ cost • Indirect harm to downstream competition via waterbed effects • Rent sharing and rent shifting effects • Dynamic/Investment stories • Recommends a screen based on downstream market competition • Recognises efficiencies: usually pro-competitive

20. Policy approach • Rule of reason analysis • A consumer harm test is appropriate • Various authors propose 4-stage rule of reason tests with this • Clear theory of having or acquiring market power downstream • Preferably at first stage in the analysis (screen) • To avoid unnecessary burdens and false negatives • [US antitrust injury standard, private enforcement & standing] • Avoid “faux amis” • Clarity of language: avoid simplistic “mirror images” • Buyer/bargaining power is not anti-competitive market power • Relative market shares of buyers and sellers tell us little