Unpacking Antitrust: When is a Monopsony, a Buyer’s Monopoly, an Antitrust Violation?
Author: Molly Donovan
The Short Answer: In a monopoly, a seller has market power to increase its selling prices to above-competitive levels. In a monopsony, a buyer has market power to lower its purchasing prices to below-competitive levels. A monopsony is an antitrust violation when a seller has monopsony power (serious market power over a buying market) and engages in exclusionary conduct resulting in antitrust injury.
Why Is that an Antitrust Problem? Aren’t Below-Competitive Purchase Prices Beneficial To Consumers?:
- Courts and commentators say that while there may be short-term benefits of monopsony power, over the long run, where payments to suppliers of consumer goods and services are artificially suppressed the ultimate result is reduced output and therefore, higher prices for consumers. Suppressed payments to suppliers can also discourage development and innovation for the goods and services at issue as suppliers shift research and resources to other goods and services.
- Consider this predatory bidding example: a firm with monopsony power (a seafood processor) overbids for caught fish until competing bidders are forced to drop out—the fish get too expensive. Once the monopsonist is left alone with no competition, its bids get lower and the monopsonist ends up recouping what it spent over bidding with supracompetitive profits later. The monopsonist doesn’t pass on the profits to consumers, but keeps them. Ultimately, fewer fish are sold, there is decreased seafood output and seafood costs more for consumers.
- Indeed, courts won’t assume that monopsonists will pass-through profits to consumers. This was at issue in United States v. Anthem, Inc., 428 U.S. App. D.C. 403 (2017), where the district court enjoined the merger of two health insurance companies and the Court of Appeals affirmed. Among other reasons, the Court of Appeals doubted that Anthem’s claimed “medical costs savings” would actually be passed through to consumers, rather than “simply bolstering Anthem’s profit margin.” The court said that the merger would result in the loss of a key buy-side competitor, creating “upward pricing pressure” and, if left unchecked, would increase (not decrease) consumer prices long term.
How Do Monopsony Cases Arise?
- At least one court has said that monopsony claims are typically brought under Section 2—the “domain” of market dominance. Section 2 claims are challenges to monopsony power being exercised unilaterally. To establish a Section 2 claim, a plaintiff must prove monopsony power and exclusionary conduct to eliminate rivals: for example, a firm with monopsony power using exclusionary tactics—like exclusive contractual provisions with suppliers of consumer goods and services—to exclude competition on the buy side.
- Challenges to mergers that would result in monopsony power. For example, in Boardman v. Pac. Seafood Grp., 822 F.3d 1011 (9th Cir. 2016), plaintiffs (sellers of fish) sued two seafood processers who planned to merge. Plaintiffs sued under Section 7 of the Clayton Act to challenge the transaction alleging that the two firms post-merger would enjoy a high share in an already-concentrated market with multiple barriers to entry. On a bid for a preliminary injunction, the district court held that the acquisition would substantially reduce competition in multiple buyers’ markets (different types of fish) and enjoined it. The Ninth Circuit affirmed.
- Challenges to monopsony power exercised pursuant to a horizontal cartel agreement. For example, two firms that both buy fresh fish collude to fix the purchasing terms or prices of fish.
How Do Courts Determine Whether a Firm Is a Buyer or a Seller?
Most firms are both. For example, a firm that buys fish also sells processed seafood.
Most firms are buyers in the employment context as purchasers of labor.
Sometimes it’s difficult to tell—for example, where goods or services are traded, courts may struggle to determine who buys and who sells. The same is true for internet platforms and electronic applications where it may be unclear who is buying and who is selling.
Assuming a Firm is Behaving as a Buyer, How Do Courts Determine Whether It Has Monopsony Power?: Courts use the same framework that they use on the sell side to determine whether monopoly power exists. To be a monopsonist, a buyer (or buyers acting jointly) must have market power: power to control prices or to exclude competition within a defined relevant market.
In other words, market power is not measured based on the sheer size of a firm. Market power is based on a company’s ability to control pricing within a particular product and geographic market.
To determine market power within a relevant market, the focus of the inquiry is typically on whether the buyer has sufficient market share—used as a proxy for market power. One-hundred or 90% market share is not necessary to be deemed a monopsonist. Depending on the circumstances, even 50-70% share could indicate monopsony power or a dangerous possibility thereof.
But, generally, market share alone is not enough to establish a monopsony. Whether market power exists also depends on the number of competing buyers; the barriers to entry (IP, physical production of a product, heavy regulations), and other factors affecting the strength of competition within the relevant market.
Does the Government Care About Monopsony Power?:
Yes. President Biden’s 2021 Executive Order affirmed his Administration’s policy “to enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony”—especially as these issues arise in labor markets, agricultural markets, Internet and platform industries, healthcare and other markets. There has been an increase in prosecutions of employer wage-fixing and other conduct that reduces competition for buying labor.
In 2021, the Antitrust Division of the DOJ sued to block Penguin Random House’s acquisition of Simon & Schuster—two of the top 5 buyers of publishing rights in the United States. The DOJ alleged that the acquisition would result in a post-merger firm that would enjoy too much market power for the purchasing of publishing rights generally, and in particular, for books anticipated to be top sellers.
The court ruled that the DOJ proved that the merger would result in a substantial decrease in competition with the new firm set to enjoy a post-merger market share of 49%—which the court said is “far above the levels deemed too high in other cases.” United States v. Bertelsmann SE & Co., 2022 U.S. Dist. LEXIS 202847 (D.D.C. Oct. 31, 2022). The court also pointed to the dangers in eliminating “head-to-head competition” between Penguin and Simon: the “larger number of bidders leads to more upward pressure so that in general the price paid at auction can increase because of the number of participants”—the more participants, the more aggressive they are in bidding.
The court also found the government’s argument persuasive that higher concentration in the publishing industry risked horizontal collusion in an industry that was no stranger to that concern: “coordinated effects are likelier in concentrated markets; indeed, the idea that concentration tends to produce anticompetitive coordination is central to merger law.”