What Role for Antitrust in the Era of Rising Inequality? The Importance of Power in Supply Chains

Concentration of power in supply chains is a prime mechanism by which dominant companies consolidate power and profits.

 

 

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Marshall Steinbaum

The Sherman Antitrust Act of 1890 was passed almost unanimously and with one goal in mind: to keep the cartels that dominated the nation’s railroad network from shaking down yeoman farmers. If they wanted to sell their goods, farmers had to pay the railroads’ exorbitant prices for freight, and any time demand increased, the railroads increased their prices and so captured the entire windfall. The Sherman Act, along with later U.S. antitrust legislation, aimed to diffuse market power in supply chains. The premise of the act was that individual small-scale producers should be allowed to make a living without paying powerful gatekeepers for the privilege.

 

For the most part, that has not been the standard applied by regulators and courts in enforcing antitrust law over the last four decades. Instead, they have looked almost exclusively at consumer welfare rather than the relative power of different suppliers to set prices and other trading terms. And policymakers and experts have tended to assume that large suppliers serve consumers’ interest by competing out inefficient producers—meaning that concentrating power in supply chains is, at least most of the time, beneficial to the public. That intellectual trend is reflected in the prioritization of different types of cases by the antitrust enforcement agencies, and also in the judiciary with the Supreme Court’s move to consider vertical price-fixing cases under the Rule of Reason following the 2007 Leegin case.

 

But new research shows that concentrated power in supply chains can actually cause harm to consumers. Consider the proposed merger between Comcast and Time Warner Cable, the first and third-largest cable networks in the country. Because the two companies’ customer bases were largely geographically distinct, few consumers would suffer directly from less choice in the market for cable service. But regulators concluded that the merger would harm welfare nonetheless, by allowing Comcast to foreclose upstream rivals in the market for streamed video content that would compete with its own traditional television programming. A nationally dominant cable network would be able to charge any content producer exorbitant fees to reach the only customer base, and customers would likely suffer from diminished programming options.

 

The foreclosure threat to consumer welfare represented by the Comcast-Time Warner merger has its counterpart in the theoretical literature. Before and after Leegin, a new literature has illuminated potential threats to consumers from vertical price-fixing and other exclusionary behavior. And examples of dominant suppliers profiting at consumers’ expense points to a role for antitrust policy in mitigating rising inequality, since the owners and managers of dominant producers are likely to be rich relative to the broad class of consumers. Furthermore, recent evidence concerning rising monopoly rents alongside increasing concentration ratios across nearly all US industries implies that the sole use of the consumer welfare standard has not, in practice, actually increased consumer welfare.

 

Recently, there’s been a resurgence of interest in antitrust law as a remedy to rising inequality, on the grounds that high corporate profits may be caused by anti-competitive behavior that is only permissible under the more relaxed antitrust standards of recent decades, compared with the previous era of lower tail inequality, concentration indices, and corporate profits. Daniel Crane wrote a paper objecting to this idea in expansive terms, and it’s fair to say the consensus among expert antitrust practitioners is that the tools of antitrust law are ill-suited to the problem of rising inequality. From this perspective, inequality is a social problem—if it is one—that exists outside the question of whether markets are functioning properly to consumers’ benefit, which is the sole concern of antitrust regulators, the judiciary, and of the body of law they enforce and interpret. But a look at some of the root causes of rising inequality belies this clear delineation and shows that concentration of market power in supply chains is in fact a core contributing factor that antitrust law was originally designed to remedy and reverse.

 

Consider the outsourcing of labor, a strategy to make firms more profitable for their owners and managers by pushing workers outside the walls of “lead firms.” David Weil wrote about this in his book The Fissured Workplace, and Alan Krueger and Lawrence Katz documented the sharp rise in the share of the workforce that labors in what they call “alternative work arrangements,” namely as temps, contractors, freelancers, and so on, has increased from 10.1 to 15.8 percent of the workforce over just the past 10 years. A recently revised study of interfirm inequality by Song, Price, Guvenen, Bloom, and von Wachter concludes that segregation of workers into low-wage and high-wage firms—and not productivity heterogeneity at the firm level—accounts for the bulk of rising inter-personal labor income inequality. Together, these studies imply that a major factor in rising inequality is indeed that power in supply chains has concentrated, because workers are increasingly being pushed into subordinated upstream firms.

 

To get more concrete about the relevance of labor outsourcing to antitrust policy, consider a private lawsuit against Uber under the Sherman Act that will go to trial in federal district court in New York City in autumn—a case I wrote about for The American Prospect. At issue is whether Uber and its drivers are together party to an illegal price-fixing conspiracy. (For strategic reasons, the suit was initially filed with only Uber’s CEO, Travis Kalanick, as the defendant, but he recently won a motion to join the company he runs to the case.) This is happening against a backdrop of employment classification lawsuits and regulatory actions against Uber in many jurisdictions, which allege that Uber’s control over its drivers amounts to statutory employment and hence entitles those drivers to the emoluments attached to that status: company benefits, minimum wage and overtime, compensation for gas and vehicle depreciation, the right to unionize, and so on. The private suit under the Sherman Act is an attempt to open up a second front against Uber in that classification war, because if the drivers are independent contractors, as Uber alleges, then Uber’s business model and its path-breaking smartphone app amount to a conspiracy to fix prices across hundreds of thousands of independent businesses—much as the railroads dominated the nation’s yeoman farmers during the Gilded Age.

 

Thus far, Uber and Kalanick have avoided defending themselves using their strongest case under antitrust law: that their (vertical) price-fixing arrangement does indeed exist, but it is legal because it benefits consumers. Their strategy may change at trial, but it seems clear now that they are concerned that admitting they contract with drivers to provide rides and thus increase consumer welfare in the market for on-demand, app-ordered car rides risks tying them dangerously closely to those drivers when it comes to employment classification. This is why Alan Krueger and Seth Harris’ proposal to legislate a “third category” of employment for tech-industry contract workers stipulated that it include an antitrust exemption, though those authors motivate such an exemption by arguing that it would allow such “independent workers” to unionize—currently permitted for employees but not for contractors. But with the antitrust exemption, what the third category would actually do is allow Uber to build its dominant platform monopoly while solving its regulatory problems at a stroke, by avoiding liability under both labor and antitrust law.

 

Instead, and regardless of the outcome of the New York City case, we should consider moving in the opposite direction, one in which the regulatory agencies—including, at the federal level, the Department of Labor, the Federal Trade Commission, and the Justice Department’s Antitrust Division—take up arms against the fissured workplace. After all, this model is designed to thwart labor law by erecting a barrier between employer and employee—namely, the wall of a firm. Hence, establishing a vertical supply chain does what the Sherman Act was designed to prevent by charging a toll to earn a living.

 

Since we now know that a major contributor to rising inequality is stratification of the economy at the firm level, that points directly back to the founding principles of antitrust law: that the public interest is served by spreading market power throughout the supply chain. That is not to say the consumer welfare standard should be abandoned, because there are many cases in which policy might aim to balance benefits to consumers arising from concentration among suppliers against the harm to disadvantaged suppliers, or in which concentration among suppliers itself causes harm to consumers—as the private Uber lawsuit shows. In fact, the balancing of interests between consumers, competitors, upstream suppliers, workers, and the economy as a whole is exactly the standard articulated in the Sherman Act and subsequent legislation and in the earliest cases interpreting antitrust law, like Northern Securities.

 

Over the past few decades, the so-called Law and Economics movement ostensibly brought economic analysis into the law, and in antitrust, that meant privileging consumer welfare as the sole standard for evaluating purported anti-competitive behavior and casting a skeptical eye on arguments that power in supply chains had become too concentrated. Indeed, the central argument among antitrust experts has been whether to go even further, to a “total surplus” or “pure efficiency” standard that would be even more permissive than consumer welfare.

 

But what we’re seeing now is that concentration of power in supply chains is a prime mechanism by which dominant companies and their already-rich owners consolidate power and profits, serving as gatekeepers to the market for upstream suppliers and competitors. That implies it’s not time to make antitrust regulation still more permissive, but rather to return to its roots. Economics is not a new entrant to the analysis of antitrust, in other words—it’s been there from the start.

 

(Note: Marshall Steinbaum is an economist and Visiting Fellow at the Roosevelt Institute researching the labor market, inequality, higher education, and student debt.)

 

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