Antitrust suits are brought by busted businesses, not consumer crusaders: Dairy edition

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After reading Arthur De Vany’s Hollywood Economics and Winners, Losers, and Microsoft by Stan Liebowitz and Stephen Margolis, I got the impression that antitrust cases on the whole have been misguided and often remarkably stupid. Looking a little more into it, I found that economists now are pretty much agreed on that picture. Here is the entry on antitrust from the Concise Encyclopedia of Economics, which has a nice brief list of references. Most cases are not brought by public representatives, whether elected or self-appointed, but by private companies, often rivals of the defendant who are being driven out of business. Businessmen believe that competition is good if they win but bad if the other guy wins.

Because these facts are not widely known outside of economics circles, and because most of us learned bogus stories about Standard Oil, etc., in high school history class, I figured I’d illustrate them with a recent complaint about alleged anti-competitiveness in the dairy industry. The farmers on the losing side of the commercial contest claim one thing, but I show that the facts prove the opposite.

First, here are free WSJ articles about the small farmers’ complaints and a follow-up on the response of the DoJ’s antitrust division. We can ignore the complaints of all the farmers quoted, as well as the talk from politicians in dairy states, because the very first sentence says that there is a “price-depressing glut of milk.” A monopoly harms consumers by restricting output in order to shoot prices up — think of a diamond company that owns almost all diamonds but only allows a tiny amount to get into circulation. So right away we see that there is the exact opposite of monopolistic practices in dairy — there is a glut rather than a dearth of output, and prices are plummeting rather than soaring.

Is the 2001 merger of two large dairy processors to “blame” for greater output and lower prices, as suggested by the complainers? No. The article doesn’t provide a broader perspective, but I looked up data from the Statistical Abstract of the United States’ agriculture tables. Here is the price of milk received by farmers from 1980 to 2009, both unadjusted and adjusted for inflation using the CPI:

There is clearly no change in the trend during or after 2001. The real price of milk has been falling at least since 1980, and in this decade it has actually slowed down — it’s “showing signs of stabilization,” as we would hear in another context. The nominal price shows no trend up or down, just greater volatility starting around 1995. OK, what about output — was the recent merger responsible for flooding the market? Let’s have a look:

The left graph shows that output has been increasing steadily at least since 1970. The only somewhat recent change is that the increase appears to get faster around 1995, compared to its shallower rate from 1985 to 1995. Again we see no effect of the 2001 merger — let alone a harmful downward one. The graph on the right shows the trend for milk cows’ productivity, or output per cow: it too has been steadily increasing since at least 1970, probably due to some combination of better technology and selective breeding. Here there is no change whatsoever in the rate around 2001 — it’s basically linear after 1975.

So we have greater output, lower prices, and greater productivity. What about having “too much” market share? The articles say that Dean Foods buys less than 15% of the nation’s supply of raw fluid milk, which is hardly a concentration of the industry — even if market concentration mattered per se (which it doesn’t). It is a red herring that it has market shares closer to 70% or 80% in some regions — it could not try to restrict output and thus raise prices in these regions anyway. Why not? If Dean Foods tried to gouge consumers in Michigan, anyone in Michigan could simply buy milk from a state where the supposed monopolistic gouging was absent, transport it to Michigan, and sell it below what the monopolist was charging. And — boom — just like that, competition neuters gouging.

(Looking more generally, milk is a commodity like gold, so just imagine if Michigan residents were charged up the ass for gold, while Ohio residents weren’t. You could get rich quick in Michigan by buying gold in Ohio and selling it in Michigan, low enough to undercut the monopolist but high enough to cover your costs. Since these get-rich-quick opportunities would quickly exhaust themselves and drive down the monopolist’s prices, we don’t expect to see such price-gouging even if the company did have an incredibly large market share.)

But are the big bad companies even driving the little guy out of business? In my quick search, I didn’t find data for this year, but a press release on the state of US agriculture in 2007 says that it’s the middle-sized farms that are getting cleared out, suggesting greater specialization (like Wal-Marts co-existing with tiny local boutiques):

The latest census figures show a continuation in the trend towards more small and very large farms and fewer mid-sized operations. Between 2002 and 2007, the number of farms with sales of less than $2,500 increased by 74,000. The number of farms with sales of more than $500,000 grew by 46,000 during the same period.

Census results show that the majority of U.S. farms are smaller operations.

Granted, this is for all farms, not just dairy farms, but I’d be surprised if the pattern were in the other direction for the subset of dairy farms. Again, even if it were, that might make us feel bad about small farmers going out of business, but it would not be evidence of monopoly, anti-competition, or whatever else. Output and productivity are going up, and prices are going down. It doesn’t get any simpler than that.

As the CEE antitrust entry notes, most lawsuits are brought by companies who are suppliers or buyers of the targeted company. That’s what we have here, since Dean Foods buys milk from the embittered dairy farmers. The incentive to make it an antitrust suit is that they can win three times the damages than if they didn’t.

So the next time you hear about some company coming under antitrust scrutiny, just keep this big picture in mind. Pretty much all such cases are bogus. Rather than crusades in the consumers’ interests, they are cowardly attempts by a loser to have the referee handicap the winner just as they’re about to get knocked out. I encourage readers to look through some of the references in the CEE entry; it is quite illuminating to see how backwards the history of antitrust has been, and how baldly we were lied to in high school about Standard Oil and the rest.

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9 Comments

  1. The Chicago School decided a decade or more or go that monopoly was not a problem, but their reputation is plummeting at the moment.  
     
    The stories about Standard Oil were not bogus.

  2. Speaking as a citizen of the dairy state, Dean is the last company I’d blame for a retail price slump, because Dean-brand milk is routinely 8 cents or so more than the other major brands. I suspect they make up the difference on other milk-derived products — Dean-brand creams and cheeses retail for less than most competitors.

  3. Interestingly, Gabriel Kolko, a leftist historian, gave some contrary observations in his book “Triumph of Conservatism”. He basicly stated that most antitrust legislation came into being because of intense lobbying by more established companies who don’t like competition. He gave a lot of anecdotal and empirical evidence, you might want to check it out, if you’re interested in exploring this topic. 
     
    I am, thanks for the Microsoft pointer. I’m going to read Liebowitz’ take on the matter, it sure sounds like a good book.  
     
    Anyway, whatever the nature of companies to get antitrust legislation going — big business winners or losers — both Kolko and Liebowitz agree that antitrust legislation is a front for companies beating competitors by using governmental actions. It could be possible that both winners AND losers can manipulate government for their own purposes. It doesn’t necessarily have to be “losers” beating “winners” or “winners” beating “newcomers”. 
     
    Anyway, smart people will always collaborate in interest groups to maximize their piece of the pie. C’est la vie.

  4. The stories about Standard Oil were not bogus. 
     
    Yeah they were. Leading up to the Standard Oil case, prices had been plummeting and output increasing. There were over 100 oil companies, some of them big ones that are still around (Gulf, Texaco, etc.), and Standard Oil’s market share had been falling as well. 
     
    Like I said, this new view of antitrust is virtually a consensus, Chicago School affiliation or not. Here are a few more examples of really big antitrust cases that embarrass contemporary economists: 
     
    http://www.reason.com/news/show/28207.html

  5. The Chicago School decided a decade or more or go that monopoly was not a problem, but their reputation is plummeting at the moment.  
    Any problems the Chicago School might or might not be having are to do with issues of macroeconomics and financial markets. But macro has always been the most dubious area of economics. See, for example this 
    http://falkenblog.blogspot.com/2009/09/macroeconomist-says-macroeconomics.html 
     
    While financial markets suffer from the related difficult of monetary economics being so problematic, lacking an analytical consensus 
    http://blogsandwikis.bentley.edu/themoneyillusion/?p=188 
     
    The point about monopoly is more that between the issue of market entry and difficulties in defining what is the ambit of competition (e.g. is a bus company a monopoly or a competitor in a wider transport market?) it came to seem much less important than previously thought. Particularly given the history of the public policy misuse of the concept.

  6. I have a brief, quick critique of at least one of the author’s points: namely, fluid milk is NOT like gold at all. Fluid milk is more like fresh fish; difficult and fiddly to transport and very susceptible to spoilage. So, when Dean Foods controls 80% of the fluid market, as it does in the Eastern United States, one cannot simply start importing milk and make a ‘killing.’ Likewise, the federal milk marketing order scheme in place since the Depression (the real one) adds a layer of complex, byzantine, and impenetrable laws to the mix if one endeavored to ship milk and market it as fluid. 
    Furthermore, the graphs and evidence of provided only follow the wholesale milk price at the farm gate, so to speak, not the price of milk in the store – that is, there is no data supporting the supposition that low prices paid to dairy farmers equate to low prices in front of shoppers’ eyeballs. If there is no strong divergence between wholesale milk prices paid to farmers and retail prices paid by consumers in areas dominated by Dean Foods versus areas without a market dominant company (or Canada, where strict market quotas limit the supply of the raw material), then one can make an argument that the monopoly of Dean Foods in the fluid milk market is not, in fact, harming consumers. Whether or not Dean Foods is stifling competition is another matter; with the very high cost of entry into the fluid milk manufacturing, maintaining a price low enough to deter competition may in fact be low enough to not ‘harm’ consumers but still pull in enough cash to pay dividends – as high as $15 per share (no, that is not a typographical error).

  7. agnostic: 
     
    “Back in the day,” Rockefeller didn’t merely negotiate lower rates with railroads but managed to get lower rates in many cases by ownership of railroads, by bribery of executives of competitors (and of legislators on railroad matters). He was no archvillain–these were all prevalent practices of the time, however illegal. 
     
    You are entirely correct in the general thrust of your commentary, of course–”antitrust” is an anticonsumer cartelization of authority and the favored participants (including the tamed). It’s noteworthy that (though i can’t cite where I read it), before the action against Microsoft, neither the company nor Gates had ever contributed to the political campaigns of either party nor had spent as much as a penny on lobbying. After the case, they’ve become big donors (both parties, mostly Democrat) and employ scads of lobbyists in DC. It is plain they’ve “learned their lesson.” 
     
    I know of another extraordinary case involving a Chicago-area mfr. of ceramic roof tiles. Back in the mid-20s, the excellence of their product had won them a market share approaching 80% before being set upon by the trustbusters. They weren’t actually convicted of any wrongdoing but were p[ersuaded by the length and expense of defense to enter into a “consent decree” which forbade them from certain practices. Over the years, their market share dropped steadily (as did also the market for the particular type of tile in which they were specialized). Every few years or so, they’d go back petitioning the DOJ to permit their competition in the market, offering their reduced prominence (and profitability) as evidence favoring their position. The most recent was just 3 or 4 years ago, at which time their market share had dropped below 4%; again, they were refused.

  8. agnostic: 
     
    It might also be on topic to mention that the combination of high taxes and extensive regulation is one of the most effective bars that established firms have against the competition of newcomers. The taxes retard accumulation of investment capital critical to growth; regulation is both an expense and a diversion of effort (to compliance) more burdensome to smaller firms than to the established, who enjoy economies of scale. 
     
    The belief that the Republican party is that of the “moneyed,” the corporations, is extremely prevalent throughout the population, whether the cognoscenti or the “illiterati.” But the 2000 campaign by G.W. Bush (against Gore) is typical (and illustrative. Bush raised the largest “war chest” in history to that date. The average contribution was $73. Gore didn’t do badly, either–but the average contribution was somewhat over $22,000. That should be an eye-opener. 
     
    Similarly, the public perception of the media is somewhat skewed. All the networks contribute to political candidates. The one usually thought of as “right wing” is FOX and they do, in fact, employ a substantially greater percentage of Republicans than the others (about 50%). And you can tell where their sympathies lie, at least somewhat, by their political contributions, where they are the one contributing most greatly to Republican candidates. They’re so stingy toward the Democrats that they only give them 92%!

  9. Econ Journal Watch is generally a good source on whether economists agree on something. Though its editor pushes classical liberalism, he’s quite willing to acknowledge that the rest of the profession isn’t completely on board (in fact he spends a lot of time complaining about that!). The CEoE is hosted by the Library of Economics and Liberty and edited by David Henderson, and my impression is that they try to present a relatively libertarian view (though not completely so). That appeals to me, but it makes me skeptical that they give a representative picture of the field’s views. 
     
    There are legitimate arguments that can be made against agnostic’s view on antitrust/monopoly (I think I made some myself in earlier posts of his), but John Emerson completely fails to do so. Instead he associates it with Chicago and says everybody hates Chicago. The sort of intellectual laziness I’d expect from Fark rather than GNXP.

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