BIG BUYERS BEWARE THE NEW TRUSTBUSTERS / THGE WALL STREET JOURNAL

Big Buyers Beware the New Trustbusters

Growing industry concentration and better data have been fueling concerns about companies’ ‘monopsony’ power over labor and suppliers

By Paul J. DaviesBig Buyers Beware the New Trustbusters/ Photo: Peter Oumanski 


When Apple AAPL +0.53%▲ cut production for its current lineup of iPhones in November, the share prices of its huge network of suppliers tanked. Around the same time, Amazon was making a decision on where to put its secondary headquarters, ending a feverish effort by U.S. cities to win the retailer’s favor.

The power of large companies has never been more apparent. It isn’t just technology: The market share of the biggest companies in many industries has risen dramatically over recent decades. Top companies are much more profitable than others, and some think they are harming competition.

Regulators are increasingly focusing on the power that these companies have over their workers and suppliers, and companies appear to be aware of the risk. This helps explain big wage increases this year by Walmart WMT +1.49%▲ and Amazon, which boosted its minimum hourly rate to $15, following criticism that the retail giants use their scale to give staff a raw deal.

Both the Justice Department and the Federal Trade Commission are now looking more at labor issues in merger cases, according to David Wales, antitrust partner at Skadden, Arps, Slate, Meagher & Flom in Washington, D.C. “It has come up in a couple of pending investigations where the staff has asked the parties to answer questions about the impact of the merger on labor,” Mr. Wales said, adding this is the first time he’s seen this happen.

So far, no antitrust case has been brought on behalf of labor, and very few challenges have been made in modern times on the broader grounds of a company’s buyer power over labor, goods or services. But this appears to be changing. The Justice Department’s case against the merger of health insurers Anthem and Cigna last year included its first-ever citation of their increased buyer power over doctors and hospitals as a stand-alone argument. That deal was ultimately blocked on traditional concerns about customers, however.

In the U.K., where supermarkets have attracted much political criticism for their treatment of suppliers, competition authorities are examining supplier effects as part of their review of Walmart’s deal to sell its British unit, Asda, to a top-three rival.

For decades, the main yardstick in antitrust cases has been consumer welfare, which often boils down to prices. If merging companies can show evidence that prices won’t rise, regulators assume an industry remains efficient and competitive.

But while low prices can be achieved through efficiency and scale, they can also come from weakening suppliers. Some companies have even cited a greater ability to squeeze suppliers in antitrust defenses, according to Scott Hemphill, a law professor at New York University.

Concern about dominant buyers or so-called monopsonies—as opposed to dominant sellers or monopolies—has bubbled up from the academic world to become a leading theme of the Federal Trade Commission’s current hearings on whether antitrust practice is working. Such hearings are rare: The last set was in the mid-1990s.

Suppliers’ reliance on large individual customers has grown in several industries. Since 1978, listed U.S. companies have had to disclose whether any customer accounts for more than 10% of revenue and, if so, how much. A recent study of this data by Nathan Wilmers of MIT Sloan School of Management found that for manufacturers, wholesalers and shipping companies, these dominant buyers have grown to represent 20% to 25% of sales, from less than 10% in the early 1980s. He also links the rising share of purchases made by big retailers, such as Walmart, with falling wages at suppliers.

Long-stagnant wages have focused academic attention on monopsony power. In the U.S., better data from government sources and online job sites in just the past few years have allowed labor economists to show that competition among employers is far weaker than was long assumed.

The argument even reached central bankers and economists at the Federal Reserve’s annual retreat in Jackson Hole, Wyo., this summer. Some in attendance, such as economist John Van Reenen of MIT Sloan, argued rising industrial concentration is due to “superstar” firms beating out lesser rivals and that it is too soon to worry about their ability to abuse market power. Others, like economist Alan Krueger of Princeton University, were more concerned that concentration is a problem.

It matters whether a dominant, highly profitable company is very efficient or simply exploiting a powerful position—whether it is a superstar or just supersized—because pressure for more intervention is building. Companies can help their case by paying staff better. But investors need to wake up to the risks.