How discounting led to inflation, shortages, and inequality.
Author: Phillip Longman
For years, the only supermarket serving the Pine Ridge Indian Reservation in southwest South Dakota was run-down and a threat to public health. Inspectors from the Indian Health Service repeatedly cited its distant corporate owners for food safety violations, such as mixing rotten hamburger with fresh meat and repackaging it for sale. So leaders of the Oglala Sioux Tribe were thrilled when, in 2018, they persuaded an experienced grocer to buy the store and commit to running it right.
R. F. Buche, whose family business has operated independent groceries throughout South Dakota for four generations, started with months of demolition and extensive remodeling. Today, except for the signs written in Lakota, the store looks just like any supermarket you might find in any middle-class neighborhood. Floors are clean, and shelves generally well stocked, including with an abundance of fruits and vegetables that were never available before. This is particularly important in a community where poverty is so extreme that most people don’t own cars and the next-nearest grocery store is nearly 40 miles away.
But two big problems remain. The first is affordability. To stock his store, Buche has to pay wholesale prices that are often nearly double what Walmart pays and must pass on much of that cost to his customers. The second is that when national shortages of critical items like baby formula emerge, Buche and the Ogala Sioux are often the hardest hit, either having to do without or enduring longer waits for critical supplies than people elsewhere.
Yet while these problems may be extreme on the Pine Ridge reservation and in other very poor places, Americans everywhere are also harmed in serious ways by the zombie policy idea that has created these inequities. It’s a notion that’s supposed to bring everyday low prices for everyone. But in practice it has proved to have the opposite effect, creating more markets in which those with the least power pay the most, while those with the most pay the least.
Economists use a $20 word to describe the kind of market in which this occurs. They say it’s a monopsony. Monopsony is like monopoly but it’s when big buyers, not big sellers, dominate a market. When many sellers compete for the business of just a few big buyers, that gives the big buyers the power to coerce the sellers into giving them discounts and other concessions none of their smaller competitors can get.
Concerned with the way the abuse of monopsony power could suppress fair competition and foster corporate concentration, President Franklin D. Roosevelt signed landmark legislation in 1936, known as the Robinson-Patman Act, that made this kind of business practice illegal. And for many decades afterward, the law was a key pillar of America’s political economy, helping to sustain the broad prosperity of the mid-20th century. But in what has turned out to be a colossal policy mistake, politicians in both parties decided to stop enforcing the act after the 1970s.
That decision, combined with lax enforcement of other antitrust laws, has led to truly baleful consequences. Indeed, though it’s only dimly understood by most people—and outright denied by economists on the left and right who should know better—unrestrained growth of monopsony power has become a major source of the stubborn inflation, supply chain fragility, and gross inequities that define today’s economy. Fortunately, senior officials in the Biden administration are increasingly aware of the problem and willing to do something about it. And they don’t have to get a bill through a suddenly more hostile Congress to do so; they can just enforce a law that’s already on the books...
...The same dynamic is at play in many sectors of the economy, but perhaps most tragically in health care. Ever since health care inflation became a major societal concern in the 1970s, health care policy experts, including highly influential figures like the late Uwe E. Reinhardt, have promoted the idea that health care costs could be best reduced by increasing the monopsony power of large, private purchasers of health care, such as HMOs and other health care insurance plans. The idea was that by subjecting hospitals and other health care providers to more concentrated buyer power, they could be coerced into accepting lower reimbursement rates and other price concessions. But while round after round of mergers and acquisitions among insurers did contribute to a pause in the growth of health care expenditures in the 1990s, it soon set off a counterwave of mergers among hospitals and other providers that is still building, with baleful results.
By now, many communities are completely dominated by a single integrated giant health care system, encompassing hospitals, doctors’ practices, and labs, that faces virtually no competition. Abundant studies show that these behemoths don’t share any savings they might achieve through increased efficiency or economies of scale. Nor do they deliver any better quality of care. Rather, they swell their revenues by jacking up prices for patients and their health care plans.
Even in markets where some competition still exists, it largely takes the form of insurance company bureaucrats and hospital chain administrators competing to see who can impose what price discrimination on whom, rather than over who can provide the best health care to the community. At the same time, consolidated hospitals have enough monopsony power to drive down the wages they pay to nurses and other health care workers, who have nowhere else to sell their labor without moving to another city whose health care sector has not yet become so thoroughly concentrated. As with meat-packing and many other industries, the combination of monopsony and monopoly power in health care makes the rich richer and leaves most everyone else paying more for less. Though classified as charitable “nonprofits,” many hospitals have found an extractive business model that targets services to the most lucrative patients and treatments while financing inflated CEO compensation packages and imperialistic building programs. In some major cities, like Pittsburgh, the cycle has culminated with the hospitals and health insurers simply consolidating into one giant platform in which buyers and sellers of health care are part of the same entity and as such can legally collude in charging patients and their insurers whatever they please.
Efforts to control health care inflation through the promotion of monopsony power have also backfired when it comes to the supply chains for medical equipment and drugs. As far back as 1910, for example, hospitals began participating in so-called group purchasing organizations (GPOs), which allowed them to gain volume discounts by pooling their orders for hospital supplies in much the same way independent grocers have long relied on buyers’ co-ops like AWG. But in 1987, Congress perverted this cooperative system by granting GPOs exemption from anti-kickback laws.
This led to a system in which the largest GPOs could use their buyer power to coerce special “rebates” and “administrative fees” from suppliers—which they often didn’t deign to share with hospitals. This increase in buyer power and self-dealing in turn incentivized defensive mergers up and down the health care supply chain that ultimately worsened the disease for which it was supposed to be the cure. Major GMOs became captured by major hospital suppliers, like Becton Dickinson. Meanwhile, med-tech companies like GE HealthCare and Medtronic engaged in frantic mergers and acquisitions activity to ensure that they acquired the market share needed to stand up to the increasing concentrated buyer power of GPOs. In turn, GPOs madly merged with each other to maintain or augment their own countervailing power.
Meanwhile mega hospital chains grew so large that they could unilaterally dictate prices to their suppliers, thereby gaining an even greater, competitive advantage over smaller, community-owned hospitals. In his book The Hospital, which chronicles the decline of one such facility in rural Ohio, Brian Alexander notes that the best price it could get for a stent commonly used to open up clogged arteries was around $1,400, while big hospital chains use their monopsony power to buy the same product for roughly half that price. Adding to the social and economic harms set off by the concentration of monopsony in health care have been loss of innovation and shortages of essential drugs. As giant incumbents throughout the supply chain used mergers and decriminalized kickback schemes to suppress competition, key technologies such as lifesaving retractable hypodermic needles, for example, remained unavailable for years, while the number of companies manufacturing antibiotics and oncology drugs dangerously dwindled.
Similar harms have flowed from the growth of so-called pharmacy benefits managers. Reformers hoped that health insurance plans and pharmacies could use these purchasing agents to boost their buyer power and wrest lower prices from drug companies. But as with GPOs, allowing those with the most buyer power to get the lowest prices set off a cycle of collusion, kickbacks, cost shifting, and corporate consolidation that ultimately not only drove up prices but also deeply compromised supply-chain resiliency.
You might be thinking at this point that someone should pass a law to prevent these kinds of inflationary, inequitable, inefficient business practices and channel market competition back to productive purposes. But remember, someone already has.
Championed primarily by the populist Texas Democratic Congressman Wright Patman, the law was mostly intended to benefit small independent grocers, mom-and-pop pharmacies, and other locally owned enterprises. But it did so not by protecting them from competition, as some critics claimed. Instead, the law helped to prevent the abuse of concentrated corporate buyer power and create a fair and level playing field for all businesses by applying basic principles of political economy that Americans had long used to manage competition in other key sectors.
In 1887, for example, Congress passed the Interstate Commerce Act, which made it illegal for railroads to favor large powerful shippers with special rebates and discounts. When everyone paid the same rate for the same freight service, competition shifted from who had the most pull with the railroads to who had the best product. Robinson-Patman similarly made it illegal for retailers, manufacturers, and distributors operating at the wholesale level to engage in price discrimination based on buyer power.
Under Robinson-Patman, it remained permissible to offer volume discounts or adjust prices to reflect the demonstrably different costs of serving different customers. It also remained legal to lower prices across the board to match those offered by a competitor. But it became illegal to offer different prices or terms of service to different customers based simply on their market share. This meant that a large retailer like the A&P, for example, could no longer use its monopsony power to coerce special treatment from its suppliers, such as lower prices, rebates, special advertising allowances, and the like. Under Robinson-Patman such business practices became classified as forms of commercial bribery or kickbacks. In effect, the act required all suppliers to offer the same prices and terms of service to all dealers, large and small.
The Federal Trade Commission rigorously enforced Robinson-Patman until the mid-1970s. The results were salutary. The law encouraged competition and innovation at the retail level while also preventing ever-tightening cycles of offensive and defensive mergers leading to more and more corporate concentration. During this era, for example, American consumers benefited from the spread of modern, well-stocked supermarkets and department stores. But enforcement of Robinson-Patman ensured that most were operated by local or regional chains and not controlled, like the old A&P, by a handful of distant Wall Street banks.
Moreover, enforcement of Robinson-Patman ensured that the growth of large retailers was based on superior efficiency, service, selection, and real economies of scale, not on using monopsony to coerce special discounts and rebates from suppliers and thereby suppress competition from other stores. America thus enjoyed a vibrant, balanced, and diverse retail sector in the postwar decades in which locally owned stores and locally owned suppliers thrived alongside national chains. In the mid-1950s, more than 70 percent of retail sales went to independent retailers with a single location. More than a fifth of all retail workers owned the store in which they worked, either as a sole proprietor or in partnership with others. Small store and restaurant ownership, from kosher groceries and Greek diners to hardware and hobby stores owned by other “hyphenated” Americans continued to provide ladders of upward mobility for generations of immigrant families.
Key figures in both parties are realizing that enforcing Robinson-Patman will help build the fairer and more competitive economy demanded by Americans across the political spectrum.
Despite these clear benefits, however, Robinson-Patman came under growing attack from increasingly powerful elements in both parties. As Matt Stoller chronicles in his book Goliath, by the early 1970s a new generation of Democrats tended to view Robinson-Patman and other expressions of Depression-era populism as embarrassing relics. Concerns over building inflation also caused leading voices within the party to become increasingly persuaded by Galbraith’s argument that government should encourage the unrestrained growth of giant discount stores as a way of getting better prices for consumers.
Meanwhile, an increasingly powerful movement of “free market” conservatives also attacked the law, arguing that any tendency toward monopoly that might follow from its repeal would be automatically corrected by market forces. Robert Bork, who once attacked Robinson-Patman as the “Typhoid Mary of antitrust,” published a highly influential book in 1978 in which he blithely rejected concerns that legalizing price discrimination based on buyer power could ever lead to monopoly. “Impossible,” he wrote. If power buyers abused their market strength, he promised, “the market” would simply replace them.
Today, we know better. Congress never dared to repeal Robinson-Patman, but enforcement slowed dramatically in the late 1970s and effectively stopped after Ronald Reagan became president, with long-term results that should have been predictable. When combined with lax enforcement of other antitrust and competition policies, the retreat from Robinson-Patman gradually restructured industry after industry in ways that are today driving up prices, suppressing wages, and contributing to the undersupply and maldistribution of more and more essential goods and services—from baby formula and affordable healthy food to prescription drugs and hospital beds.
Fortunately, key figures in both parties are waking up to the need to enforce this vital law once again. The FTC, under the chairmanship of the Biden appointee Lina Khan, announced in June that it is studying the use of Robinson-Patman to prosecute illegal bribes and rebates among pharmacy benefit managers. Alvaro M. Bedoya, an FTC commissioner, has also become an articulate champion of expanding enforcement of Robinson-Patman across the board. This follows a letter sent to Khan in March by 43 members of Congress, more than half of them Republicans, urging her and the other FTC commissioners to use Robinson-Patman to investigate the anticompetitive effects of price discrimination that “ripple through the entire supply chain—harming consumers as well as independent producers.”
As in the 1930s, much of the support for Robinson-Patman comes from struggling small business owners in rural congressional districts—notably independent grocers like Buche as well as increasingly well-organized independent pharmacists. But today the role of monopsony in driving up prices and deepening inequities across the board gives the broader public a building case for insisting that Robinson-Patman be enforced. It may be that the act should be amended to make it clearer what companies and practices it covers and how it applies to today’s giant e-commerce platforms like Amazon. But as it is, enforcing the law provides a ready vehicle, requiring little to no appropriation from Congress or use of tax dollars, for rebuilding the fairer and more competitive economy demanded by Americans across the political spectrum. It’s high time we used it.