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

Buyer power in competition policy Basic economics 1.Text book monopsony 2.Bilateral bargaining 3.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

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

Basic Economics

Three scenarios with lower input prices 1.Higher prices for final consumers Textbook monopsony 2.Same prices for final consumers Bilateral bargaining 3.Lower prices for final consumers Effective competition with pass-through

Price Quantity D S 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.

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

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

Three scenarios for lower input prices 1.Higher prices for final consumers (monopsony) Harms consumer and producer surplus Case for intervention: but downstream market power essential 2.Same prices (bilateral bargaining) Consumer welfare same, upstream efficiency washes out? No clear role for competition policy intervention 3.Lower prices (effective compeittion) Welfare higher, pro-competitive, pro efficiency behaviour No case for intervention on competition grounds Food for Thought: Costly False Positives

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

Harmful Buyer Power

Exploitative harm 1.Monopsony with downstream market power Cases relatively rare. US law does prohibits monopolisation not possession or exploitation of monopoly 2.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

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

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)

Policy Conclusions

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)

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

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

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