Buyer Power and Retailing: Conference Breakout Session
Buyer Power and Retailing: A Summary of Conference Breakout Session
June 22, 2004: Buyer Power Conference of the American Antitrust Institute
Buyer Power and Antitrust: Report of the Retailing Panel
Facilitator: Warren Grimes, Southwestern University School of Law
Peter de la Cruz, Keller Heckman Gregory Gundlach, University of North Florida James Fishkin, Swidler Berlin Shereff Friedman, LLP Paul Dobson, Loughborough University, U.K.
Rapporteur: Diana Moss, American Antitrust Institute
Warren Grimes introduced the panelists, welcomed session attendees, and gave each of the panelists several minutes to speak on buyer power in the retailing sector, to be followed by questions from the audience.
Peter de la Cruz noted that an integrated distribution function that lowers operating costs for retailers and lowers costs to suppliers are both desirable. He went on to observe that there is a general lack of criteria for assessing buyer market power. Analytical models are available, but they are often difficult to apply. Moreover, the economic literature contains no precedent for “rules of thumb” in assessing buyer power. There is a need for rough policies, which could be informed by some valuable experiences that elucidate the case law.
Greg Gundlach made a number of points. First, he noted that the function and workings of distribution channels are well-known and the topic of considerable scholarship in marketing. This research could provide substantial benefit to antitrust analysis of buyer power. Second, experience with WalMart-like concentration at the retail level has prompted recognition of buyer power and a shift of thinking in the vertical domain, so there is a new understanding of buyer power. Third, assessing buyer power introduces a number of subtleties, for example, in identifying and investigating: (1) differing sources of buyer power (e.g., information asymmetries, concentration, and control of information) and (2) varying ways in which buyer power may be exercised (e.g., slotting fees and other vertical strategies). Gundlach emphasized the importance of integrating insights from marketing and fully considering these subtleties in analyzing buyer power.
James Fishkin focused on analyzing retailer buyer power issues in merger cases under Clayton Section 7 as opposed to single firm conduct cases under Sherman Section 2. Fishkin noted that the FTC has challenged a number of retail mergers on the basis of the merged firm’s likely ability to raise prices to consumers (seller market power) (e.g., FTC v. Staples, supermarket mergers, drug store mergers, etc.), but not on the basis of the merged firm’s ability to lower prices paid to suppliers (buyer market power). Fishkin explained that the market for examining seller market power may not be the same as that for examining buyer market power. For example, if two supermarket chains were to merge in a given city, the relevant market may be no larger than supermarkets in the city with the merged firm accounting for a 35% + market share. But the same merged firm may have a very small share of a much broader market for purchasing food products. This is because food suppliers probably sell many of the same types of products (1) in other distribution channels (e.g., club stores and mass merchandisers) and (2) to many other retailers across a larger region, or nationally. Fishkin also explained that analysis of buyer power (much like seller market power) in single firm conduct cases for retailers is no different than that for manufacturers. By itself, a retailer that uses its high market share to get lower prices from suppliers is not violating the Sherman Act since a violation requires that a retailer have market power and use it in a manner that harms competition. As in a buyer power merger case, the market in a buyer power conduct case is likely to be broader than the market based solely on seller power concerns.
Paul Dobson offered a number of thoughts on buyer power based on experience in the UK retailing sector, a subject that has been debated since 1981 with the advent of buyer power issues in grocery retailing. He noted a 1,200 page report produced by the UK Competition Commission that addresses many useful aspects of buyer power. Dobson went on to observe that buyer power is not only about squeezing price. It is also about the ability to impose extraordinary terms and conditions on suppliers. The UK report articulates some 50 vertical restraints that apply on the buyer side (e.g., risk shifting, decreases choice, foreclosure, exclusive purchasing agreements, etc.). Dobson emphasized that the real gain to a retailer from the exercise market power on the buyer side comes when it can also exercise it on the seller side, as lower input prices do not have to be fully passed on to consumers with correspondingly lower retail prices, a notion that supports Steiner’s “dual stage” theory. A UK Competition Commission decision in 2003 to block a major grocery retail merger, for example, was based on the long-term implications of control over suppliers and consumers. Retailers have a number of characteristics that are important for assessing the nexus between buyer and seller market power: (1) retailers are customers and so are a potential threat to their suppliers; (2) retailers are competitors because they sell private labels, thus giving them bargaining power in dealing with suppliers; and (3) retailers are suppliers of shelf and retail space, for which suppliers must bid for directly or through targeted rebates.
Warren Grimes then opened the floor for questions. A number of questions and comments came up, including:
- Concern that enforcement of buyer power in the U.S. is lacking (e.g., Kroger’s acquisition of Fred Meyers). This was rebutted by one member of the audience.
- Buyer power could be addressed under Robinson Patman, but few cases are ever brought. Could WalMart face charges under Robinson Patman? Cost-justified discrimination and the fact that no suppliers are complaining does not bode well for RPA cases. One panelist noted that key decisions involving buyer power issues could be better explained (referring to the merits of the Kesko/Tuko European Commission case involving two Finnish retailers).
- Retail markets are the primary challenge for assessing buyer power, but criteria or precedent for market definition and thresholds for concern are important (e.g., Toys R’ Us). One panelist confirmed the uncertainty surrounding how relevant markets are defined for the purposes of assessing buyer power, noting also the complicating factor that supplier markets can become more concentrated as a result of concentration in the retail sector.
- Should the non-price effects of entry by power buyers be considered in antitrust analysis? A number of panelists noted that:
- The perception that consumer prices are the start and end of welfare analysis is unfortunate--other factors are also relevant.
- FTC Commissioner Leary has promoted the idea of consumer choice as part of antitrust, but a “loss of variety” is hard to quantify and translate into harm.
- The recent UK Competition Commission decision regarding Safeway identified the “elimination of a brand(s)” to be a critical issue in a retail merger.
The session closed with more discussion of market analysis in buyer power cases and competitive effects. One panelist noted that the UK Competition Commission has thought carefully about relevant market issues, distinguishing between “one-stop-shopping” and “top-up shopping” in the retail grocery sector, and in which the Commission used an 8% market share as a threshold for exercising buyer power. Another panelist noted that retailers are differentiated, which could factor into a story about enhanced coordinated effects (e.g., Kroger/Winn Dixie). A final commenter noted interrelationships between horizontal and vertical are important in assessing buyer power and that concentration thresholds may be smaller than on the seller side.