Brittany Peterson/AP Photo
Third-generation cattle ranchers Jim Stanko, left, and his wife, Jo Stanko, pose for a photo as they stand together on their land near Steamboat Springs, Colorado, July 14, 2021.
Editor’s note: Alvaro Bedoya, a commissioner at the Federal Trade Commission, gave this speech to the Midwest Forum on Fair Markets on September 22. The Prospect is reprinting it today.
A Call for Fairness, a Rule for Efficiency
The President nominated me to this position roughly a year ago. I spent a good bit of that time reading antitrust treatises cover to cover.
Doing that, I quickly read that the purpose of antitrust is to maximize efficiency. I read that the Supreme Court declared it “axiomatic” that the antitrust laws were passed to protect competition, not competitors, which is a way of saying that antitrust laws are not intended to protect the small and allegedly inefficient.
But I also used that time to read a lot of history, which told a very different story. I learned that small farmers pressed Iowa to pass the nation’s first antitrust law in 1888. I learned that when Congress convened in 1890 to debate the Sherman Act, they did not talk about efficiency. No, the most common complaint in the Sherman Act debates was that a cartel of meatpackers was cheating cattlemen out of a fair price for their livestock. In 1936, Congress spent months debating a bill to protect small-town grocers being driven out of business by powerful chain stores who got secret payoffs from their suppliers.
“What are we trying to get away from these chains?” asked one of the bill’s supporters. “What we are trying to take away from them is secret discounts, secret rebates, and secret advertising allowances. We are trying to take away from them those practices that are unfair.”
It wasn’t just 1890 or 1936. Five times in 60 years, Congress passed antitrust laws that in letter or spirit demanded fairness for small business, often rural small business. Yet today, it is “axiomatic” that antitrust does not protect small business. And that the lodestar of antitrust is not fairness, but efficiency.
How did this happen? What has this focus on efficiency meant for rural America? And what would it look like to return to fairness?
A Child in West Virginia
In many parts of rural America, independent pharmacies are the one place where you can fill your prescriptions, get your shots, and get answers to medical questions. Here’s a story I read on the website of the West Virginia state insurance commissioner about something that happened at one of those pharmacies.
A family walks into a pharmacy. Their child has cancer. The pharmacist has the child’s medicine behind the counter, ready to dispense. But when that pharmacist calls the pharmacy benefit manager, or PBM, for the family’s insurance company, they are denied authorization to give the family that medicine. Instead, they are told that the medicine can only be dispensed by the PBM’s own mail order specialty pharmacy. The family was to go home and wait up to two weeks to receive the medicine for their child in the mail.
How did this happen?
Picture a set of 39 companies. Some pharmacies, some PBMs, some insurers. Twenty years ago, these were all separate. Today, those 39 companies have merged into just three vertically integrated entities. And so today, when most people fill a prescription, just one of three entities mediates what medicine they get, what they pay for it, and how they will get it—and that corporate entity makes money by making sure that prescription is filled by its own pharmacy. Even, apparently, when it is cancer medicine. And even, apparently, when doing that will force a child to wait for two weeks.
How did this happen? This change from 39 companies to just three?
Merging companies usually predict that the merger is going to save them money by merging. They then predict that they will pass those predicted savings on to consumers via lower prices. For many years, however, it was not a mainstream idea that those predicted price reductions could offset the harm of a merger that increases market power.
That started to change in the 1970s and ’80s. The idea took hold within enforcement agencies that mergers, particularly vertical ones, were presumptively good for the economy and good for consumers. This idea was given the greatest weight for vertical mergers, the kind of mergers that help make it so that a pharmacy middleman has an interest in steering a patient to their own pharmacy.
There are certainly many factors in merger analysis. But it is inescapable that this presumption of efficiency significantly contributed to making 39 separate companies into the three vertically integrated firms that exist today.
Today, rural independent pharmacies are closing one after another after another. In Minnesota, from 2003 to 2018, 30 rural zip codes lost their only pharmacy.
Cattlemen in Iowa
I was in Des Moines for a conference; I asked our team to set up a listening session with some cattlemen and corn growers. It was about nine or ten people. Every one was in crisis.
The prices of seeds, feed, fertilizer, and farm equipment were going up. The prices of their products were going down. Farmers used to make 40 cents on every dollar spent at the grocery; they make 16 now. They are going out of business by the thousands. “We have a noose around our necks and we’re standing on an ice cube,” said one. “It’s like being picked apart by a chicken,” said another.
The group talked about a lot of factors behind these changes, but they kept returning to consolidation. Fertilizer, seeds, grain buying, meatpacking: There used to be dozens of firms, sometimes over a hundred, in each of these sectors. Now each is dominated by just four; depending on the region, there may now be just one supplier of a key input, or just one meatpacking plant.
What is it like to be down to just one place to sell your livestock? We’ve known since 1890 that it can depress farmers’ prices. But it’s more than that. One of the cattlemen described through tears how he had to gas a warehouse full of cattle when the one processing plant accessible to him was shut down because of COVID.
Another described animal abuse on the lot that he said was unheard of in competitive markets. A cow that he raised was bolted in the head, killed, dragged out of a trailer with a log chain, and dumped in the garbage because she had slipped in the trailer on the drive to the processing plant. The producer pleaded with the lot worker to take the cow home instead so she would have time to recover and heal, but the worker informed the producer that no livestock leaves the premises. The cow was given a couple of minutes to try and get up and was then shot.
But maybe the most shocking thing was how scared they were that something they said would somehow get back to their suppliers or their purchasers and that they would pay for it.
How did this happen?
The merger wave began in the 1980s. Tellingly, when farmers have raised alarms about the consolidation of input and product markets, economists have answered that the consolidation “unquestionably enhance[s] efficiency.”
When antitrust was guided by fairness, these farmers’ families were part of a thriving middle class across rural America. After the shift to efficiency, their livelihoods began to disappear.
A Grocer in South Dakota
That shift didn’t just affect farmers. It also affected the communities that depend on them and their products.
Like independent pharmacies, independent groceries serve places that bigger companies do not. The lower the income, the lower the population, the more likely it is to be served by an independent.
I recently watched video testimony of an independent grocer named R.F. Buche, who owns 21 stores in South Dakota Indian country. Mr. Buche’s family has been serving Indian country for 117 years. Many of his stores are the only place where locals can easily get fresh milk and produce. Many of them are over an hour’s drive from the nearest big box store.
Yet Mr. Buche faces challenges that those big box stores do not. Manufacturers sell products to the big box stores in sizes and packages that they don’t offer to him. When he is offered the same products, he cannot get the same prices for them. And that’s not because of quantity.
Like most independent grocers, Mr. Buche works with a wholesaler. By bundling the orders of multiple independent grocers, that wholesaler can often meet the order sizes of the big box stores. But even then, his wholesaler is not given the same price. That price is kept secret.
When the pandemic hit, manufacturers cut supplies to Mr. Buche and his wholesaler. “Picture this, please,” he told Congress. “Pine Ridge, one of the poorest counties in the nation, not having WIC items like formula for babies on their grocery store shelf.” Note that this was months before the baby formula shortages caused by the Sturgis plant in Michigan.
The only way Mr. Buche could keep products like baby formula, ground beef, or Pedialyte on his shelves was by driving over a thousand miles each week to move essential products between his low-volume and high-volume stores. Yet when Mr. Buche would walk into a big box store 50 or 100 miles from his own, those shelves would be full of those products.
What is happening to Mr. Buche is happening to independent groceries around the country. They are closing, by the thousand, creating food deserts across rural America.
How did this happen?
Efficiency happened. In 1936, Congress passed the Robinson-Patman Act, the law I talked about earlier that bans “unfair practices” like “secret discounts” and “secret rebates,” available only to the large and powerful. When it passed that law, Congress went out of its way to “keep open the door of opportunity for the small-business man as well as large.” For decades, Robinson-Patman was a mainstay of FTC enforcement. It arguably prohibits many of the practices Mr. Buche is experiencing.
Then, as efficiency gained ground in the mid-1980s, a view took hold among enforcers and then courts: First, that Robinson-Patman was an outlier among antitrust statutes because the Congress that passed it focused on harms to supposedly inefficient small businesses. Second, that the law raised consumer prices. Enforcement slowed to a trickle, and then stopped completely.
Those claims are unproven or incorrect. To my knowledge, some 86 years after its passage, there is not one empirical analysis showing that Robinson-Patman actually raised consumer prices. And none other than Professor Herbert Hovenkamp has explained that Robinson-Patman was not an outlier. According to him, the congressional debates around each of the other major antitrust laws were also “fairly dominated … by a strong desire to protect small business.”
A Return to Fairness
We need to step back and question the role of efficiency in antitrust enforcement.
If efficiency is so important in antitrust, then why doesn’t that word, “efficiency,” appear anywhere in the antitrust statutes that Congress actually wrote and passed?
If efficiency is the goal of antitrust, then why am I charged by statute with stopping unfair methods of competition, and not “inefficient” ones?
We cannot let a principle that Congress never wrote into law trump a principle that Congress made a core feature of that law. I think it is time to return to fairness.
People may not know what is efficient—but they know what’s fair. It may be efficient to send a child home to wait two weeks for their cancer medicine. We all know it isn’t fair. It may be efficient to force cattlemen to sell their livestock to just one meatpacker. It may be efficient for Pine Ridge to go without baby formula. We all know that that’s not what fair markets look like.
That visceral understanding of fairness has often been dismissed as ambiguous and “impressionistic.” I disagree. Because Congress and the courts have told us, directly and repeatedly, how to implement protections against unfairness.
Certain laws that were clearly passed under what you could call a fairness mandate—laws like Robinson-Patman—directly spell out specific legal prohibitions. Congress’s intent in those laws is clear. We should enforce them.
But Congress did more than that. As FTC Chair Lina Khan has explained, Congress deliberately charged the FTC to go beyond the limits of the Sherman Act. And then, the Supreme Court came in and repeatedly reaffirmed the idea that our Section 5 authority goes beyond Sherman. So I support Chair Khan’s goal to reactivate enforcement under our unfairness authority, and to issue a policy statement setting out the scope of that authority.
My own focus is on people living paycheck to paycheck. For me, that’s what antitrust is about: your groceries, your prescriptions, your paycheck. I want to make sure the Commission is helping the people who need it the most. And I want to make sure we don’t leave behind rural America.
