The basic conflict is the struggle between the monopsonist buyer coercing rent from the monopolist seller. The monopsonist often employs perfect price discrimination, or "all or nothing" deals. If the buyer has market power and the supply curve is rising, the average unit price will induce the supplier to supply at below the competitive market price, while still supplying at the same quantity as if the market were competitive. This makes the last unit of the monopsonized good still equal to the marginal cost of production. Thus, the monopsony power wielded by the firm does not affect "price, quantity, and efficiency in the final goods market".2 However, there is a shifting of rents from supplier to the monopsonist. Inducing a supplier to lower the price below the competitive market price and shifting the rents from supplier to buyer, makes it so there is less incentive for the supplier to invest in new technologies, factors of production, etc. and also dampens the supplier competition to enter such a market, as it may be seen as not really worth the trouble. It is true that the supplier could reject the deal and not be subjected to the buyers demands, however, in doing so, the supplier will be denied the monopsonist's share of the market, which could be detrimental to the health of the firm. Competition among the sellers for the buyer's business drives the price toward marginal cost, and allows the buyer to extract rents from their suppliers.2
There is a standard justification for the wielding of buyer power by the monopsonist, and that is that these lower prices can be passed on to the consumers. This has been shown to be an appropriate justification as stated by the Stanford study. Bilateral monopolies have been shown to provide more efficient outcomes and lower prices than would have happened in a competitive market. These lower prices and rises in efficiency in turn benefit consumers. Unfortunately, extracting quasi-rents from suppliers forces some firms out of the market, as opposed to their reinvesting in their facilities. It is just not profitable for them to do so. This may cause the amount of suppliers to shrink until the firms are more concentrated on the supply side. This will in turn affect consumers as there will be less product differentiation. Though there may be decreased competition because of the greater concentration, this allows the suppliers to bargain more effectively with the monopsonist.2
As Wal-Mart is the largest company in the world, they are a massive buyer and seller of goods. This gives Wal-Mart the advantage of enormous economies of scale, which they exploit to lower prices. Because of the size of the retailer, this puts Wal-Mart into a position of a monopsonist extracting rents from their suppliers, and then acting as a near monopolist in the final retail goods market. Some companies such as Dial do over a quarter of their business with Wal-Mart. Wal-Mart dictates the terms, and those suppliers that wish to stay in the game, comply with the mandates.
Charles Fishman neatly sums up the monopsonistic power Wal-Mart has over its suppliers:
It reaches deep inside the operations of the companies that supply it and changes not only what they sell, but also changes how those products are packaged and presented, what the lives of the factory workers who make those products are like - it even sometimes changes the countries where those factories are located.
450 of Wal-Mart's suppliers have opened up offices in Bentonville, Arkansas, to be close to Wal-Mart's headquarters. These suppliers tout that if they didn't open up an office near Wal-Mart, their competitors would. That's Wal-Mart's effect on suppliers. Suppliers try to make themselves as pliant and accessible as possible for the retail giant.3
The Wal-Mart squeeze is a well known phenomenon to suppliers. Each year, for consumer products that don't change, Wal-Mart will approach their suppliers and say, this is what you sold us the product for last year, this is what we can get it for from a competitor, and this is what it will cost if we use our private label. Wal-Mart looks to drop the prices of products by 5% a year, every year.3 Wal-Mart's pressure to produce products cheaply has many suppliers going overseas, which reduces some companies from firms that designed, produced, and packaged their own products simply to importers of products.
There are other serious repercussions to these lowest possible price points. Wal-Mart's constant demand for firms to lower their costs and threatening to find a cheaper option if they don't has suppliers scrambling to cut costs in anyway that they can. This takes the form of lower wages for factory employees, and more often outsourcing production overseas. Lower prices also mean lower profits, which means less money to invest in research and development. Goods are made from lower quality materials and extras have been removed. Many suppliers become very dependent on Wal-Mart, and would go out of business, would file for bankruptcy, or would be forced to merge with another firm to survive if they refused to comply with Wal-Mart's demands.3 This is an example of the power monopsonies have over their suppliers.
Wal-Mart's buying power allows them to set prices that have nothing to do with the supply and demand of the market for a good. For example, Wal-Mart used to sell a 12 pound, gallon jar of Vlasic pickles for $2.97. Vlasic and Wal-Mart were making a profit of only one or two pennies a jar, if that. This particular price had nothing to do with the supply of cucumbers or the demand for pickles, but was a false price, imposed by Wal-Mart to draw consumers in with their "abundance of abundance".3 Coercing Vlasic to agree to this price concession transferred most of Vlasic's rents to Wal-Mart.
Wal-Mart also influences a company's products. Firms may drop brands that do not meet with Wal-Mart's performance expectations and try to tailor their products to be sure that Wal-Mart will carry them. Video game maker Planet Moon censored certain aspects of the game Giants, such as changing the color of blood from red to green, clothing a topless character, and toning down offensive language in order to have the game granted a "teen" rating by industry standards. The logic behind the censorship? To ensure that Wal-Mart and other big-box retailers would carry their product. Wal-Mart also refuses to sell CDs with offensive lyrics, and has been known to cover up or discontinue selling "racy" magazines such as Maxim.5 Censorship is an example of lessened product differentiation.
In the pursuit of concessionary lower prices, production quality suffers. TV stands are made thinner, cheaper materials are used, and unnecessary extras are removed from products.3 This extreme influence that Wal-Mart has over the products that are supplied to consumers is a little frightening.The loss of variety, quality, and obvious censorship involved is a disturbing effect that Wal-Mart has on the product market.
More companies may begin to merge in order to meet Wal-Mart's scale. Alone, Wal-Mart accounted for 17% of P&G's sales, while it accounted for 13% of Gillette's. P&G's acquisition of Gillette may give them more bargaining power, as 30% of their sales would be through Wal-Mart, and Wal-Mart couldn't just stop selling Tide over a disagreement with P&G.4 Another Wal-Mart influenced merger was Newell's acquisition of Rubbermaid. When the price of resin rose in the mid 1990's, Rubbermaid was forced to raise the prices of its plastic containers. This price increase was not welcomed by Wal-Mart, and they began to stock their shelves with lower priced rival brands. This ousting by Wal-Mart helped to plunge Rubbermaid into bankruptcy, ultimately leading to their merger with Newell.5 This seems to be a double edged sword, as companies may merge in order to increase their economies of scale for Wal-Mart, which may decrease competition, but it may also create "mega-companies" that Wal-Mart is unable to push around as easily. This increase in scale also cuts marketing costs and frees up resources for research and development, while increasing the company's margins. This is an example of companies banding together in order to have more bargaining power with the buyer. It almost in effect creates a bilateral monopoly beginning from the presence of a monopsonist. It is perhaps most efficient for these companies to merge and engage in a bilateral monopoly so that they may enjoy economies of scale, allowing them to produce at a lower price, and it increases their bargaining power and clout with the monopsonist. Also, if the monopsonist can convince them to pass on the cost savings of the newly created economies of scale, this could be passed on to consumers, thus increasing their welfare. So if Wal-Mart is doing such great things for consumers, why are people concerned?
Section 2 of the Clayton Act was amended in 1936 by the Robinson-Patman Act. Section 2(f) states:
That it shall be unlawful for any person engaged in commerce, in the course of such commerce, knowingly to induce or receive a discrimination in price which is prohibited by this section.
The main purpose of the Robinson-Patman Act was to focus on the possibility that large buyers could use their market power to extract significant concessions from their suppliers. Interestingly, though the Act's original intent was to protect small suppliers from the monopsony of large retail chains, in almost every case brought to court, it is the seller that is under attack for discriminating prices.6
Though not as common in law, the idea of frustrated, disgruntled competitors and worn suppliers pleading for legal relief from a monopsonist is not a new concept. The Great Atlantic & Pacific Tea Co. was the Wal-Mart of its day. In the case United States v. New York Atl. & Pac. Tea Co., 173F.2d79 (7th Cir. 1949), the Court ruled that A&P was guilty of violating antitrust laws "by oppressing competitors through the abuse of the defendants' mass buying and selling power". A&P's ability to induce a lower price from its suppliers allowed it to charge a lower price to consumers and this had the effect of forcing some competitors to exit the market and thus increasing A&P's market share. A&P's innovation caused a new breed of more efficient suppliers, but it did not monopolize the grocery industry. It is the shared opinion of most antitrust scholars that the decision in the A&P case was wrongly decided. They feel that A&P was unfairly penalized for being one of the first efficient retail chains.2 It is not difficult to see the parallels that can be drawn between the A&P case and the climate that Wal-Mart now finds itself in. Wal-Mart has so far been the most efficient retailer in history. As stated by Fishman, Wal-Mart has increased the efficiency of its supply chains through methods such as loading supply trucks to half capacity, which allows the trucks to be unloaded quickly and more productively. They also require their suppliers to adopt various efficiency methods, such as removing unneeded packaging in shipping, so that shipping costs will be lower, and computerized inventory systems.3
There may still be cause for concern, however. In an example of supplier concessions, Wal-Mart utilizes a concept called "category captains". Category captains are preferred suppliers that assume the responsibility for the planning and implementation of a specific product category at Wal-Mart. The category captains analyzes store needs and offers suggestions and services to Wal-Mart. In other words, they do all of Wal-Marts work for them. The categories include the brands and products of competing brands, and all of the planning and implementation for products placement, etc. is given to one preferred supplier. This just smacks of anti-competitiveness. This gives rise to Robinson-Patman Act concerns, as these captaincies present the opportunity of larger retailers to "coerce Category Management services from manufacturers that a manufacturer does not, or cannot, offer smaller stores on proportionally equal terms".7 This, along with the price concessions Wal-Mart is able to persuade it's suppliers to give, should induce the legal community to keep a wary eye on the Beast of Bentonville.
On June 24, 2004, Wal-Mart's chairman of the board Rob Walton made an appearance in front of a group of antitrust attorneys in Washington D.C. The purpose of the meeting was to discuss "Buyer Power" and to explore the idea that some firms were such large buyers of goods that they constitute a threat to the free market. Walton made a rare speech about Wal-Mart's relationships with its suppliers. He called the relationships "special" and referred to the suppliers as "partners". As seen from previous evidence, this fairytale relationship is nowhere near the truth. The antitrust attorneys walked away from the meeting not terribly convinced of Wal-Mart's benevolence toward its suppliers.3
One relevant question is, should monopoly and monopsony be treated symmetrically under antitrust law? As stated by Roger Noll of Stanford University, one argument in favor of asymmetry is the argument of distributive justice. This is the concept that it is sometimes "socially desirable to redistribute income to a group of buyers even if doing so is costly to other members of society". In doing so, consumers may be better off in the form of lower prices. However, monopoly and monopsony should not be treated differently under law if consumers are harmed and there is significant dead-weight loss. Also, in the treatment of bilateral monopolies, it is imperative to take into account whether creating monopsony power that offsets monopoly power may create improvements in efficiency and consumer welfare.2
Are there possible antitrust implications of Wal-Mart's extreme buying power over its suppliers? Does it indeed make the supplier market less competitive? This is a delicate subject that must be dissected with a very sharp scalpel. The antitrust laws of today leave many gray areas untouched. Pertinent unanswered questions such as: should there be a limit on a firms bargaining power? As with most economic issues, there is no definitive answer, as it all depends and is relevant to the situation at hand. Like A&P, it is possible for Wal-Mart to restrain trade by competing with its suppliers, i.e. making products with its own private labels. As Wal-Mart is the largest retailer in North America, this would restrain the sales of non-complying companies that had been replaced by Wal-Mart's private label. Companies may feel forced to comply with price concessions to stay in the game or they will be replaced.8 However, the monopsonistic ability of Wal-Mart to extract rents from its suppliers enables it to pass these lower prices on to consumers, which increases consumer welfare. And what good are economies of scale if no one can accommodate you? Though on the other hand, these lower prices may also come with the costs of less product differentiation, less incentive for suppliers to invest in things like research and development, and may also come as social costs such as outsourcing concerns. Antitrust economics enables us with the legal tools to combat anti-competitive behavior, though it may not be the most effective tool in some cases. A company such as Wal-Mart should not be faulted for being efficient, but it should be faulted if it oversteps the thin line outlined in the Robinson-Patman Act. As they say, it depends. The main goal isn't always about efficiency, but sometimes it's not always about equality, either.