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Considerations of Buyer Power in Merger Review

Considerations of Buyer Power in Merger Review Abstract In most horizontal merger reviews, the focus is on the potential for increasing monopoly power, which adversely affects the output market through increased price and reduced quantity, quality, and product variety. For the most part, a merger’s effect on the input markets has been ignored. Recently, however, academics and policymakers have called for considering a merger’s potential for creating or enhancing buyer power in one or more input markets. A good deal of this concern has centered on monopsony in labour markets as real wages have stagnated and labour’s share of income has declined. In order to address the monopsony concern in the USA, Senator Amy Klobuchar proposed a bill that would amend section 7 of the Clayton Act to explicitly include monopsony concerns in merger review. In this article, we explore the economic foundation and empirical evidence for this rising tide of concern with particular emphasis on the labour market. We broaden the significance of our analysis by pointing to allegations of monopsonistic abuse outside labour markets. Finally, we discuss practical problems of implementing monopsony considerations in merger review and the benefits to consumer welfare that may arise. 1. INTRODUCTION A merger of two firms in the same industry may pose competitive problems.1 Depending on the pre-merger and post-merger market structure, the merger may result in higher output prices, a lower volume of output, or a reduction in quality, service, and product choice. Historically, most—if not all—of the antitrust focus has been on the anticompetitive effects on the output market since monopoly power can directly impair consumer welfare. But mergers may also cause harm in the input market if a merger increases the buyer power of the merging firms. Recently, there has been increasing recognition of the adverse welfare effects of buyer power in various jurisdictions around the world.2 First, a firm that has monopsony power can reduce the quantity that it buys in order to depress the price that it pays for inputs which leads to a social welfare loss. Secondly, a firm with bargaining power can use the threat of walking away from the negotiations to extract surplus from suppliers. Mergers have the potential to increase buyer power and thereby cause substantial . anticompetitive harm. But this harm has traditionally been ignored in merger review. Our improved understanding of the relationship between mergers and buying power has led to requests by Congress and policymakers that the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) pay closer attention to threats of monopsony when conducting their merger reviews. In the USA, at least, policymakers have focused their efforts on monopsony power due to its clear social welfare impact and its relevance to labour markets. Congress and policymakers have proposed bills that would encourage the Agencies to consider monopsony in merger review and would help them to do this by increasing their budget.3 In both the House and Senate, a proposed bill would amend section 7 of the Clayton Act by explicitly including monopsony in the statutory language in order to strengthen the emphasis on monopsony in merger review.4 As we will show in this Article, both the economic theory and the empirical evidence provide support for considering the potential effects of monopsony in merger review. This evidence is particularly clear in labour markets but is also relevant to other input markets. In the next section, we examine the economic theory and social welfare impact of buyer power. In Section 3, we provide empirical evidence for the presence of imperfect labour markets which are vulnerable to monopsonistic exploitation. Section 4 surveys some of the empirical literature which provides evidence that horizontal mergers lead to the exercise of monopsony power in labour markets and therefore pose competitive concerns. We supplement this discussion in Section 5 with examples of buyer power abuse in other input markets. In Section 6, we present the current antitrust policy that governs mergers in the USA. In Section 7, we discuss the practical problems of assessing monopsony in merger reviews. We close in Section 8 with some concluding remarks. 2. ECONOMIC CONSEQUENCES OF BUYER POWER5 Buyer power can manifest itself in two ways: monopsony power and bargaining power. A buyer with monopsony power will reduce quantity in order to depress the price that it pays, while a buyer with bargaining power will use the threat of a quantity reduction to increase its own surplus at the expense of the seller. Monopsony power is relevant in the presence of a competitive supply, while bargaining power is relevant when transactions are determined through bilateral negotiations. In what follows, we explain the theory and economic consequences of monopsony and bargaining power in terms of the labour market. The buyer power concepts explained below can also be applied to markets for other inputs. Monopsony power Monopsony power refers to an input employer’s ability to profitably depress the input price by reducing the quantity employed.6 This possibility exists only if the supply of the monopsonized input is positively sloped.7 It is a common misconception that the exercise of monopsony power will make consumers better off. After all, if an input price falls, this should reduce the employer’s cost which normally leads to an expansion of output with a corresponding reduction in the output price. But the economic results are quite different when the input price falls due to monopsony. In fact, since employment falls, the monopsonist’s output also falls, which will lead to adverse economic consequences in the output market.8 In the short run at least, the reduced total output will cause output price to rise and consumer welfare to fall.9 In general, the adverse economic effects of monopsony will be more pronounced in a local input market relative to those in a broader output market. In order to make the exposition less abstract, consider the production of textiles.10 An employer hires labour to aid in producing textiles. The employer’s demand for that labour depends on the value of labour’s contribution to the firm’s profit, ie, the profit from selling the textiles produced by that labour.11 It is represented by the downward sloping demand curve, DL, in Figure 1. As for labour, the willingness of textile workers to work is captured in the positively sloped supply curve, SL. At each quantity of labour, the height of the supply curve measures the worker’s reservation wage, ie, the wage necessary to induce the worker to supply his or her labour services. The labour supply is positively sloped because reservation wages vary with age, family circumstances, health, education, and other factors. Figure 1. Open in new tabDownload slide Competition, monopsony, and social welfare. Figure 1. Open in new tabDownload slide Competition, monopsony, and social welfare. If the labour market is competitive, supply and demand are in equilibrium and social welfare is maximized at the pre-merger employment (L1) and wage (w1). At that equilibrium, the value of the last worker’s contribution to the firm is precisely equal to his or her reservation wage. Employer surplus is captured by the triangular area, abw1, while employee surplus is given by the triangular area, w1bc.12 The sum of employer and employee surplus, area abc, is a measure of social welfare and is maximized at the equilibrium wage (w1) and employment (L1). Given DL and SL, any other combination of wage and employment will reduce social welfare. This is the economic rationale for antitrust policy. A merger among the local textile producers may well have no discernible effect on the worldwide market price of the textiles or on the market demand for labour.13 If the merger results in monopsony in the local labour market, however, profit maximization by the employer will result in a decrease in employment and a consequent decrease in the wage paid to workers. Since labour supply is positively sloped, the wage rises with employment. The effect on the firm’s total cost of hiring one more unit of labour, therefore, is higher than the wage of that additional worker. For example, suppose that the textile producer pays each of its 10 workers $200 for a day of labour. If the textile producer wishes to hire another worker, it would have to pay that worker, say, $210. But the textile producer must also increase the wage that it pays to its current 10 workers to $210 per day. As a result, the total wage bill rises from $2,000 to $2,310. The marginal increase in the total expenditure on labour is $310, which exceeds the wage, which is $210. Thus, the marginal expenditure of labour, MEL, lies above the supply curve of labour as shown in Figure 1. A profit maximizing employer will expand its employment of labour until the marginal benefit of doing so is just equal to the marginal cost. In Figure 1, this occurs when the demand for labour, DL, intersects the marginal expenditure of labour, MEL. As shown in Figure 1, profit maximization by the monopsonist leads to a reduction in the employment of labour from L1 to L2 with a corresponding reduction in the wage paid from w1 to w2. Employer surplus increases from area abw1 to area adew2, but employee surplus falls from area w1bc to area w2ec. Employee surplus equal to (w1-w2)L2 is redistributed to the employer. Total surplus shrinks by the triangular area dbe due to allocative inefficiency by which we mean that too few units of labour are being employed. For the units of labour between L1 and L2, the reservation wage (as measured by the height of the supply curve) is less than the value of the output to consumers that the employment would have generated (as measured by the height of the DL curve). In a social sense, these units of labour should have been employed. But these units of labour were not employed because it was more profitable for the employer to limit employment to L2. The economic effects of monopsony are not confined to the input market. The reduction in labour corresponds to a reduction in the quantity of textiles produced and a consequent increase in price, which leads to a social welfare loss in the textile market. The effect on price will be greater if the textile producer has a significant market share in the output market.14 Bargaining Power Bargaining power in the context of buyer power can be defined as the relative strength of a buyer in negotiating with a seller. A buyer with bargaining power relies on its threat of purchasing less to transfer supplier surplus to itself. The buyer has substantial bargaining power when this threat is credible; that is, when the buyer has substantial outside options—other sellers who would be willing to buy its products—or the buyer is a gateway to the downstream market—sellers have few other avenues to sell their products. One way to capture the idea of bargaining power and its exercise is in terms of all-or-none offers.15 In exercising bargaining power, the powerful buyer does not depress the price paid by sliding along the supply curve to a lower quantity. Instead, it makes an all-or-none offer. It demands a lower price for the same quantity. In other words, it pushes the supplier off the usual supply curve. Consider the following example. The reservation wage of a worker is, say, $20 per hour for a 40-hour work week, which amounts to $800 per week. If the wage were lower, the worker might only be willing to work 39 hours. But an all-or-none offer does not permit marginal adjustments. Say that the employer offers only $760 for the 40-hour work week. The worker has two choices: work 40 hours for $760 or be unemployed. For the employer to enjoy such bargaining power, the threat to offer nothing must be credible. If an employer could easily offer employment to another willing candidate, the threat is credible. To illustrate the exercise of bargaining power through all-or-none offers, consider Figure 2. Demand D and supply S are equal at a wage and employment of w1 and L1, respectively. A powerful employer may agree to hire L1, but insist on a wage of w2. It is clear that the (L1, w2) combination is not on the supply curve. But this is an all-or-none offer, i.e., the worker can work L1 at a wage of w2 or not work at all. In the case depicted in Figure 2, it makes economic sense to accept the offer because employee surplus is still positive. In other words, the positive surplus area w2ec is greater than the negative surplus area deb. Figure 2. Open in new tabDownload slide Bargaining power—all-or-none offers. Figure 2. Open in new tabDownload slide Bargaining power—all-or-none offers. The antitrust policy significance of the all-or-none bargaining result is a bit complicated. In Figure 2, L1 units of labour services will be employed. But the employer’s muscle redistributes some labour surplus to the employer. This is offensive on equity grounds, but not on economic welfare grounds. It is not obvious that there is an antitrust remedy if the powerful employer simply redistributes surplus without violating the antitrust laws. In contrast, if the employer increases its bargaining power through a series of mergers, equity considerations may be incorporated in merger reviews. Before condemning all increases in bargaining power, we must recognize that the exercise of bargaining power may improve both consumer welfare and social welfare. This positive outcome results when the buyer’s power is used to offset the monopoly power of a seller.16 In this scenario, bargaining power acts as countervailing power.17 Such a situation may occur when health insurers merge in response to hospital mergers. When hospitals merge, their market power is likely to increase allowing them to reduce quantities and thereby increase prices for services offered to an insurer’s policyholders. By merging, health insurers reduce the outside options of the hospitals, which forces them to concede to better terms with insurers which will benefit consumers.18 But there is some possibility that the exercise of bargaining power may have anticompetitive consequences.19 Buyers with bargaining power may force concessions that could be disadvantageous to suppliers or the buyer’s downstream rivals. For example, large grocery stores may be able to force price concessions that are unavailable to smaller rivals.20 Unfavorable terms may eventually lead to the exit of those smaller rivals.21 To the extent that such behavior will lead to consumer harm, it should be condemned. But it can be difficult to determine the long-term effects of the bargaining power, especially if consumers pay lower prices in the short-term due to those price concessions. Mergers that increase bargaining power that lead to consumer harm should be condemned.22 In the simple economic models displayed in Figures 1 and 2, we confined our attention to the effect of buyer power on employment, wages, and social welfare. These bare bones models do not capture the full array of economic consequences that may result from buyer power in the local labour market. Buyer power can lead to lower benefits, such as reduced family leave, sick leave, paid vacations, health and dental insurance, retirement plans, and employer contributions to employee educational programs. Additionally, enhanced buyer power could result in the elimination of bonus plans or profit-sharing plans. Finally, there could be an adverse effect on working conditions that affect employee health and safety. Qualitatively, these deleterious effects are analogous to the economic results that we have captured in our simple models. 3. EMPIRICAL EVIDENCE OF MONOPSONY IN THE LABOUR MARKET There is ample empirical evidence of imperfect labour markets, which are vulnerable to monopsonistic exploitation that results from the exercise of monopsony power. When the supply of labour is perfectly competitive, the labour supply curve is flat and the elasticity of labour supply is infinite.23 When the supply is positively sloped, however, the supply elasticity is finite and monopsonistic exploitation is possible. There is substantial empirical evidence that labour supply elasticities are far from infinite making these markets susceptible to monopsonistic exploitation. Monopsonistic exploitation can be measured by the difference between the value of labour’s contribution to society and the wage that it is paid.24 This gap is related to the labour supply elasticity.25 An infinite elasticity signifies a perfectly competitive market.26 In this case, workers would leave an employer at the slightest decrease in wage.27 But nearly all labour markets are imperfect and therefore, these labour markets are vulnerable to monopsonistic exploitation. This is due to labour market frictions, such as the switching costs of finding a new job28 and varying reservation wages, which may be due to family circumstances, age, health, education, and so on.29 Empirical studies have reported labour supply elasticity estimates that are far from infinite, which supports the claim that the risk of monopsonistic exploitation in labour markets is high.30 A meta-analysis of 801 recent studies found estimates of US labour supply elasticities to be between 1.21 and 4.29 with an average of 3.75. This strongly supports the presence of monopsonistic labour markets and indicates that workers experience a wage markdown of between 23.3 per cent and 82.6 per cent, or 26.7 per cent on average.31 This implies that the last worker hired is only being paid between 17.4 per cent and 76.7 per cent of the worth of his or her labour contribution. Other studies show similar results.32 There is ample evidence that monopsonistic exploitation has surfaced in many labour markets. In most—if not all—instances, it is due to collusion among employers. Such collusion has been alleged in the markets for hardware and software engineers,33 digital animators,34 medical school faculty,35 hospital nurses,36 college athletes,37 mixed martial arts fighters,38 air brake firm employees,39 fashion models,40 and even au pairs.41 In those cases, employers allegedly decided to collude rather than compete to the detriment of the employees. Collusion among employers is a per se violation of section 1 of the Sherman Act. In the U.S., the DOJ and the FTC have made it clear that they plan to file criminal antitrust suits if they find collusion among employers.42 Collusion—either overt or tacit—among employers is more likely when concentration is high. That is, collusion is facilitated when industries are more concentrated, which may occur when firms merge. When labour supply curves are positively sloped, the exercise of monopsony power can lead to decreases in wages, benefits, and other harmful effects to workers. In so far as these results of monopsony are considered undesirable, public policymakers would do well to reduce the ability of employers to exercise their monopsony power. One way to mitigate the emergence of monopsony power is to restrict horizontal mergers that increase concentration of employers to harmful levels. 4. EMPIRICAL EVIDENCE OF MERGERS AND MONOPSONY IN THE LABOUR MARKET43 A horizontal merger combines two or more firms that had been competitors in the output market and thus, necessarily increases market concentration by reducing the number of independent firms in the output market. What often goes unnoticed is the potential adverse economic effects in the labour market caused by horizontal mergers. For example, if Lucas Film and DreamWorks merged, the focus of concern would surely be on the film market. But the impact on the market for digital animators might go unnoticed. This, however, could be a serious oversight. There is mounting empirical evidence that increasing concentration resulting from mergers is correlated with reduced wages and employment. A brief survey of this evidence reveals that there is cause for concern. Although it is obvious that horizontal mergers increase concentration in the output market (by reducing the number of competing firms), it is not entirely evident that this translates to increased concentration in the input market. In fact, as long as merging firms are not competing in the same labour market, there would be no change in concentration in that market. For example, the merger of two accounting firms in different cities should have no effect on the wages of accounting clerks in the two cities. On the other hand, mergers of firms that compete in the same labour market will naturally increase concentration by reducing the number of competing employers. In this case, a merger that does not raise red flags in the output market may have anticompetitive effects in the input market. Higher concentration in labour markets leads to the exercise of monopsony power. As the number of firms in an input market decreases, employers recognize that they have the ability to influence wages by exercising their monopsony power. Profit maximization will lead them to restrict employment and thereby decrease wages.44 In this way, the effect of concentration in the input market on monopsony power is analogous to the effect of concentration in the output market on monopoly power. The use of the Herfindahl–Hirschman Index (HHI),45 which has been traditionally used as a measure of concentration in the output market is also used to describe the concentration of employers in a labour market. An HHI above 2,500 in an input market is often cited as a dangerous level of concentration.46 A number of empirical studies also support the link between concentration and monopsony power, by showing that increases in concentration lead to decreased wages. Azar and others showed that a 10 per cent increase in concentration is associated with a 0.3–1.3 per cent decrease in wages.47 Controlling for other factors, they show that wages are lower in more highly concentrated markets for comparable jobs and indicate that this is a sign of monopsony power. Benmelech and others also found that an increase in concentration is correlated with a reduction in wages. Specifically, a one standard deviation increase in the employer HHI reduces wages between one and two percent. They also find that these effects are less pronounced in industries with high unionization rates, which is consistent with the monopsony model, since the countervailing power of labour unions is one way to offset monopsony power.48 Finally, Pedro S. Martins studied a large database of matched employer–employee data from Portugal. Although concentration was not as pronounced as in the USA, Martins still found a significant link between increased concentration in the labour market and decreased wages.49 These studies show that increases in concentration lead to decreases in wages which is consistent with the economics of monopsony. Finally, empirical studies of hospital mergers have clearly demonstrated how horizontal mergers increase the exercise of monopsony power in the nurse labour market. Researchers looking at hospital merger data have found decreases in wages following the consummation of mergers that increase concentration. Depasquale finds that there is a statistically significant decrease in the number of nurses employed and wages paid after mergers that reduce the number of hospitals in US counties to below 7. 50,51 Prager and Schmitt looked at 10 years of hospital data and employed a difference-in-differences analysis to show that skilled workers, ie, those workers who would find it difficult to move out of healthcare due to search frictions, had lower wages between 1.1 and 6.3 per cent over the four years after hospitals merged within labour markets with an HHI above 2,500. They did not observe these effects with mergers in less concentrated markets or among ‘out-of-market’ mergers, which would not affect the labour market at the respective hospitals.52 Thus, it is of vital importance for the Agencies to limit mergers that increase concentration to levels that create or enhance monopsony power in the labour market. 5. BUYER POWER AND MERGERS IN OTHER INPUT MARKETS Monopsonistic abuses are not confined to labour markets. In recent years, various empirical studies have found evidence of rising concentration in many US industries in part due to increases in mergers and acquisitions.53 The meat packing industry is one example of a highly concentrated market which was consolidated through merger. In the 1980s, this industry was populated with a variety of midsized firms. Consolidation has led to eighty percent of the meat packing industry being controlled by four firms, two of which account for approximately two-thirds of the market.54 Now, there are allegations against the meat packers for exercising both monopoly power and monopsony power to increase prices of meat products55 and to decrease prices paid to farmers,56 respectively. Allegations of monopsony in agriculture have also appeared with chicken,57 milk,58 and rice,59 where consolidation continues to increase. There is good reason to believe that this consolidation has led to increased buyer power that harms farmers.60 In the USA, some senators have found the economic effects of agribusiness mergers so egregious that they have proposed a merger moratorium for food and agribusiness.61 Major supermarket chains wield considerable bargaining power over their suppliers, since they act as a gatekeeper for customers. In other words, by refusing to deal with a supermarket, a supplier would be foreclosed from a large book of business. Hence, supermarkets have considerable bargaining power when it comes to purchasing goods from their suppliers.62 They can demand price concessions or may require that their suppliers always send their deliveries on time and in full. These price concessions reduce the suppliers’ surplus. Additionally, smaller grocery stores may be disadvantaged since they would not be able to achieve the same price concessions. If the small stores cannot compete, they may exit the market leading to higher concentration in the output market. Some might think that major grocery stores offer lower prices to consumers due to the price concessions. But this is not always the case. Indeed, with increased consolidation in the grocery store market, prices increase for consumers allowing the major grocery stores to gain surplus from both their suppliers and their customers.63 Mergers of grocery stores that increase buyer power can have deleterious effects. Collusion among buyers has been alleged in a number of auction markets including antiques,64 timber rights,65 foreclosed real estate,66 and leaf tobacco.67 Monopsonistic exploitation has also been alleged in the markets for elevators,68 lead from recycled batteries,69 and hardwood lumber.70 Bargaining power, meanwhile, is prevalent in any market that relies on bilateral negotiation. Increasing consolidation in US industries resulting from mergers will only serve to increase the buyer power abuses in various input markets. Clearly, in conducting their pre-merger reviews, the antitrust authorities should recognize the competitive threats on the buying side. 6. HORIZONTAL MERGERS AND US ANTITRUST POLICY71 In the USA, the legality of a horizontal merger is governed by section 7 of the Clayton Act,72 which forbids a merger that may substantially reduce competition or tend to create a monopoly in any line of commerce in any section of the country.73 The economic rationale for section 7’s prohibition is obvious: increases in concentration in the output market tend to decrease the vigor of competition and, therefore, may result in higher prices and reduced quantity, which reduce consumer and social welfare. Depending on the pre-merger market structure and size of the firms involved, the proposed merger may be benign, or it may have adverse economic effects. Some horizontal mergers can lead to unilateral effects, ie, the merged firm may be large enough to engage in unilateral conduct that increases price or reduces quality.74 Alternatively, coordinated effects could lead to cooperative efforts to increase price or reduce quality, ie, collusion.75 Not all horizontal mergers run afoul of section 7. In fact, the majority of them do not. If the pre-merger market structure is sufficiently unconcentrated in the output market prior to the merger, the change in concentration is apt to be slight and any change in price will be imperceptible. In principle, a seemingly benign horizontal merger may have significant adverse economic consequences in one or more input markets. For example, suppose that the national demand for textiles is satisfied by 100 textile producers of equal size. If two of them merge, the HHI would increase from 100 to 102.76 Such a merger would arouse no competitive concerns in the textile market. If the merging firms are located in the same local labour market, however, this seemingly benign merger could have adverse effects on the wages and employment of textile workers. In other cases, a horizontal merger may involve efficiencies that provide merger-specific benefits to consumers. According to the ‘Horizontal Merger Guidelines’ published by the DOJ and the FTC, efficiencies can save an otherwise objectionable merger only if the efficiencies are (i) merger specific and (ii) passed on to consumers in the form of lower prices. Put differently, the efficiencies must result in cost savings that offset the effects of reduced competition.77 The question becomes whether the efficiencies gained offset the loss to competition. The answer to this question can become complicated if a merger that increases efficiency will also increase buyer power. Role of the DOJ and the FTC For the most part, it is up to the federal agencies to ensure that only procompetitive and competitively neutral mergers may proceed. The goal of the DOJ and the FTC is to prevent anticompetitive mergers from being consummated. Pursuant to the Hart–Scott–Rodino Act, a proposed merger involving assets of at least $92 million is subject to pre-merger review by either the DOJ or the FTC.78 The Agencies spelled out their review procedure in the 2010 Horizontal Merger Guidelines.79 Generally, the DOJ and the FTC focus on a merger’s potential for creating or enhancing the merged firm’s ability to exert unilateral monopoly power or to facilitate the firm’s ability to collaborate rather than compete. Normally, if there are no competitive concerns in the output market, the merger is permitted without much regard for competitive effects in the input markets. In section 12 of the Horizontal Merger Guidelines, the DOJ and the FTC profess a concern with mergers that may lead to monopsony power which would enable the newly merged firm to depress input prices by curtailing input purchases. Yet, their efforts may have fallen short of those needed to successfully counteract the effects of increasing buyer power due to horizontal mergers. Even though the DOJ and the FTC have been more vocal about monopsony concerns in the past decade, there still appears to be a long way to go to ensure that mergers that pass muster do not cause unreasonable increases in buyer power. Buyer power is increasing in part due to horizontal mergers that have passed muster. In some cases, mergers may not have met the asset threshold and were never reviewed by the Agencies.80 In other cases, the Agencies may have found them to be benign in the output market.81 Even though it is clear that mergers can lead to monopsonistic exploitation, the DOJ and the FTC can cite few cases where monopsony concerns played a substantial role in prohibiting a merger.82 In the next section, we discuss some practical problems of including buyer power in U.S. merger review. 7. CONSIDERATIONS OF MONOPSONY IN MERGER ENFORCEMENT In this section, we discuss budget constraints and the difficulties that arise in identifying potential buyer power increases in merger review. Naturally, since both Agencies have budget constraints, they must select those cases that offer the largest returns, ie, the cases where the largest welfare losses are at stake. These budget constraints manifest themselves in the limited number of second requests conducted and the Hart–Scott–Rodino pre-merger notification threshold. Since the Agencies’ budgets have remained relatively stagnant over the past decade, they can only conduct a limited number of second requests.83 Once an Agency determines that a proposed merger may be anticompetitive after its initial review, they conduct a more extensive review of the proposed merger based on the documents provided pursuant to a second request. The number of these second requests has stayed relatively stable. Between 2010 and 2019, the Agencies only asked for second requests for 43–61 filings per year, which did not reflect the trend in the number of merger filings per year, which was rapidly increasing.84 Over this time period, the number of merger filings increased by 79 per cent.85 One would expect that more merger filings would translate into more second requests. The absence of this trend suggests that budget constraints limit the Agencies’ ability to review mergers. In order to maximize social welfare, the Agencies may ignore some mergers that pose no competitive threat in a national output market while having anticompetitive consequences in the local labour market. Although the impact may be quite large in the local market, it may be dwarfed by the size of the national output market. In many instances, a proposed merger may fall below the Hart–Scott–Rodino (HSR) pre-merger notification threshold. In that event neither the potential changes in the output market nor the potential changes in one or more input markets will be scrutinized by the DOJ or the FTC. For example, in 2017, Otto Bock HealthCare acquired Freedom Innovations in a merger deal that was not subject to the HSR Act.86 Otto Bock was the leading manufacturer of mechanical prosthetic knees, while Freedom was its main competitor. Ordinarily, one would reasonably expect the consummation of such a merger to result in higher prices, reduced quantity, and even lower quality. Fortunately, the FTC investigated the merger soon after its consummation and dismantled it. This kind of localized merger may be widespread with substantial harmful effects across the country. In principle, the DOJ and the FTC could challenge such mergers, but this may not be a sensible allocation of their limited enforcement budgets. Fortunately, senators and representatives are aware that the Agencies have limited resources and have proposed increasing their budgets so that they can effectively address monopsony concerns in merger review. For example, Senator Amy Klobuchar introduced the Merger Filing Fee Modernization Act of 2019 which would increase fees on mega merger deals that could fund the Agencies.87 In addition, Senator Klobuchar introduced the Consolidation Prevention and Competition Promotion Act, which would, if passed, shift the burden of proof to the merging parties.88 A merger would be assumed to be harmful if it would significantly increase concentration, unless the merging parties could offer significant procompetitive justification.89 This would mitigate the Agencies’ resource needs for evaluating mergers. Such proposals, however, do not come without consequences. By increasing fees and legislative challenges, these policies would disincentivize mergers, even those that are procompetitive on balance. Some mergers that would pass muster if the DOJ or the FTC only analysed the economic effects in the output market may well be challenged if the economic effects in the input market(s) are considered. Challenging mergers that create or enhance buyer power may prove to be difficult in some instances. For example, consider the merger of two firms that are participants in a competitive output market, but duopsonists in the local labour market. Their merger may lead to no discernible effect in the output market, but the change in market structure from duopsony to monopsony may have large effects on the labour market. Identifying buyer power in merger review In order to evaluate a proposed merger’s potential for creating or enhancing monopsony power, the DOJ or the FTC can adapt their analytical procedures used to evaluate competitive effects in the output market. Section 12 of the Horizontal Merger Guidelines advises that the Agencies will ‘focus on the alternatives available to sellers in the face of a decrease in the price paid by a hypothetical monopsonist’ when evaluating the potential harm of a merger.90 When sellers have ample opportunities to sell their goods to other buyers, a single buyer has little buyer power. Thus, considering how a merger affects the availability of outside options will inform the Agencies on whether a merger will enhance buyer power to a detrimental level. When evaluating a merger, the Agencies begin by defining the market in which the merging firms participate. They want to isolate their analysis only to the market at issue, ie, the market for the contested good or service as well as its close substitutes. If the market is defined too broadly, the market may appear to be too competitive to warrant a challenge; the Agencies may miss the potential for anticompetitive harm. If the market is defined too narrowly, the market may appear to be too concentrated; the Agencies may condemn procompetitive mergers. Once a market is defined, the Agencies will review the change in the market structure that a merger will induce to determine whether buyer power would be enhanced. The more outside options, i.e., the more buyers willing to buy products from the seller, the less likely that one buyer will have enough buyer power to cause anticompetitive harm. The Agencies may also consider the likelihood that buyers could turn to self-supply, which would diminish the bargaining power of the sellers, and the existence of barriers to entry on the buyer side. When barriers are present, entrants will not provide a check on a buyer’s market power, which would exacerbate the potential harm of the merger. Reviewing outside options, however, is a rather imprecise method of determining potential anticompetitive harm. More precise methodology, such as Marinescu and Hovenkamp’s method which Naidu and others refer to as the ‘Market Definition-Concentration’ (MDC) approach, may provide more accurate results, but are more resource-intensive.91,92 The MDC approach adapts the customary method used in analyzing the output market to the input market. It involves defining the relevant antitrust market, measuring concentration in that market, and inferring the economic impact of the merger on the basis of economic theory, empirical evidence, and experience. If the Agencies employ the MDC approach in evaluating a proposed merger’s effects in both the output market and the input market, the work will be burdensome. Not only must the Agencies define the relevant product or service market, but they must also define the relevant input market(s). In most cases, these are two separate exercises. The output market may be the US market for men’s leather belts while the relevant input market may be the local labour market for leather workers. Since the demand for labour services is derived from the demand for men’s leather belts, there is an obvious relationship on the demand side of the two markets. On the supply side, supply conditions in the labour market will affect the producer’s costs and, therefore, will affect supply in the output market. Concentration in the men’s leather belt market may be far different from concentration in the labour market. The proposed merger may involve two relatively small players in the retail market for men’s leather belts, but they could also be the sole employers of the local leather workers. In that event, the merger may be innocuous in the output market, but anticompetitive in the local labour market. Suppose that the merging men’s leather belt producers are the only producers of men’s leather belts in the local labour market. This does not necessarily mean that the post-merger firm will be a monopsonist. It may well be the case that local leather workers have employment opportunities with the producers of women’s leather belts, handbags, wallets, key cases, shoes, vests, and other leather goods. To make matters more confusing, the merging firms may not be in the same output market but compete in one or more input markets. For example, suppose that Firm A produces furniture and firm B produces baseball bats. If they merge, this would be a conglomerate merger with no obvious effects in either output market. Surely, it would pass muster on this basis. But the combined firm may have monopsony power in the market for lathe operators and possibly should be challenged on that basis. In most cases, the HHI value of concentration for a market will be a good indicator of potential anticompetitive effects of a consummated merger. Although following this method includes an added burden of defining a second (or multiple other) market(s), the benefits of preventing anticompetitive effects due to monopsony may be substantial. As the Agencies gain experience with evaluating the potential anticompetitive harm of buyer power, they will be able to further refine their methodology. Senator Amy Klobuchar has proposed collecting post-merger data to better inform current analysis of mergers, which would lighten the burden of evaluating mergers for monopsonistic harms.93 8. CONCLUSION Economic theory and empirical evidence of monopsonistic effects in labour markets provide ample support for the concerns of Congress and policy analysts. The welfare losses due to buyer power are just as real and just as harmful as the welfare losses due to monopoly. The only difference is that they are less familiar. Based on the theory and the evidence, it is clear that merger reviews should involve serious considerations of buyer power as well as monopoly. There is no doubt that antitrust enforcers will experience some growing pains as they incorporate this new dimension in their analyses of competitive effects. But the process should begin. Footnotes 1 For expositional convenience, ‘merger’ refers to acquisitions, consolidations, and mergers, which are legally, but not economically, distinct. 2 South Africa and Kenya have recently published antitrust guidance on the economic problems associated with buyer power. See Competition Commission South Africa, ‘Buyer Power Enforcement Guidelines’ (2020), <https://www.compcom.co.za/wp-content/uploads/2020/05/Buyer-Power-Guidelines.pdf> accessed 09 September 2021; and Competition Authority of Kenya, ‘Buyer Power Guidelines’ (2017), <https://cak.go.ke/sites/default/files/CAK_Buyer_Power_Guidelines.pdf> accessed 09 September 2021. Buyer power has been recognized in Europe for some time, especially in the context of large grocery retailers. See UK Competition Commission, ‘The supply of groceries in the UK market investigation’ (2008), <https://webarchive.nationalarchives.gov.uk/20140402235418/http:/www.competitioncommission.org.uk/assets/competitioncommission/docs/pdf/non-inquiry/rep_pub/reports/2008/fulltext/538.pdf> accessed 09 September 2021. 3 Randy M. Stutz, ‘The Evolving Antitrust Treatment of Labor-Market Restraints: From Theory to Practice’ (2018) AAI White Paper; Mark DeSaulnier and others, ‘The Future of Work, Wages, and Labor: Findings & Policy Recommendations’ (2018), <https://desaulnier.house.gov/sites/desaulnier.house.gov/files/REPORT%20-%20Future%20of%20Work%2C%20Wages%2C%20and%20Labor%20-%2018.09.05.pdf> accessed 29 September 2021; Alan B. Krueger and Eric A. Posner, ‘A Proposal for Protecting Low-Income Workers from Monopsony and Collusion’ (2018), The Hamilton Project; Seth Moulton, ‘Congressional Antitrust Caucus Lead Letter to FTC Requesting Information on How Corporate Consolidation Affects American Workers, Consumers, and Small Businesses’ (2018), <https://moulton.house.gov/press-releases/moulton-congressional-antitrust-caucus-lead-letter-to-ftc-requesting-information-on-how-corporate-consolidation-affects-american-workers-consumers-and-small-businesses> accessed 29 September 2021; Merger Filing Fee Modernization Act of 2019, S.1937, 116th Congress (2019–2020). 4 Consolidation Prevention and Competition Promotion Act of 2019, s 307, 116th Congress (2019) and Economic Freedom and Financial Security for Working People Act of 2018, HR 5630, 115th Congress (2018). 5 Those readers who are familiar with buyer power may safely omit this section. For those who want a more extensive treatment of monopsony, see Roger D Blair and Jeffrey L Harrison, Monopsony in Law and Economics, (CUP 2010). Zhiqi Chen, ‘Defining Buyer Power’ (2008) 53 Antitrust Bulletin 241–50 gives an overview of buyer power. 6 Jeffrey Church, ‘Monopsony and Buyer Power’ (OECD Roundtable 2008), <https://www.oecd.org/daf/competition/44445750.pdf > accessed 29 September 2021 similarly defined monopsony power as the ability to ‘profitably reduce the price paid below competitive levels by withholding demand’. Also see Jonathan Jacobson and Gary Dorman, ‘Joint Purchasing, Monopsony, and Antitrust’ (1991) 36 Antitrust Bulletin 1–79 and Jonathan Jacobson, ‘Monopsony 2013: Still Not Truly Symmetric’ (2013) Antitrust Source. If supply is perfectly elastic, ie, perfectly flat, then a single buyer will have no monopsony power because the price will not change based on the quantity purchased. 7 V Bhaskar and others, ‘Oligopsony and Monopsonistic Competition in Labor Markets’ (2002) 16 Journal of Economic Perspectives 155–74 explore the pervasive presence of monopsony in the economy. 8 Tirza J Angerhofer and Roger D Blair, ‘Collusion in the Labor Market: Intended and Unintended Consequences’ (2020) CPI Antitrust Chronicle 1–8. 9 The greater the market power that the monopsonist has in the output market, the more pronounced will be its impact in the output market. 10 For some of the technical details, see Roger D Blair and Christine Piette Durrance, ‘The Economics of Monopsony’ in W Dale Collins (ed), Issues in Competition Law and Policy (American Bar Association Chicago 2008). 11 The firm’s demand for labour is derived from the consumer’s demand for textiles. For a competitive firm, the value of the marginal product of labour is its derived demand for labour (the demand for labor services is determined by labour’s contribution to the firm’s revenues). When an additional unit of labour is hired, output rises. This increase is the marginal product of labour. If that increase is multiplied by the output price, one has the value of the marginal product. 12 Employer surplus is the difference between the value of the labour’s contribution to the firm less the amount that must be paid for labour. Employee surplus is the difference between the wages paid and the reservation wages. 13 If the merger does not alter the technology employed by the firm, the demand for labour in the local labour market will not change. 14 It can be shown that the social welfare loss depicted in Figure 1 is equivalent to the corresponding social welfare loss in the output market. For a mathematical derivation, see Roger D Blair and Richard Romano, ‘Collusive Monopsony in Theory and Practice: The NCAA’ (1997) 42 Antitrust Bulletin 681–719. 15 For technical details, see Jill Boylston Herndon, ‘Health Insurer Monopsony Power: The All-or-None Model’ (2002) 21 Journal of Health Economics 197–206. 16 In the case of a monopoly supplier and a monopsony buyer, the market structure is considered one of ‘bilateral monopoly’. The correct analysis is found in AL Bowley, ‘Bilateral Monopoly’ (1928) 38 Economics Journal 641–58 and explained more clearly in Fritz Machlup and Martha Taber, ‘Bilateral Monopoly, Successive Monopoly, and Vertical Integration’ (1960) 27 Economica 101–19. A pedagogical treatment can be found in Roger D Blair and others, ‘A Pedagogical Treatment of Bilateral Monopoly’ (1989) 55 South Economics Journal 831–41. 17 See John Kenneth Galbraith, American Capitalism: The Concept of Countervailing Power (Houghton, Mifflin Co 1952). 18 See Erin E Trish and Bradley J Herring, ‘How do Health Insurer Market Concentration and Bargaining Power with Hospitals Affect Health Insurance Premiums?’ (2015) 42 Journal of Health Economics 104–14. 19 OECD, ‘Monopsony and Buyer Power’ (OECD Roundtable 2008), <https://www.oecd.org/daf/competition/44445750.pdf> accessed 29 September 2021. 20 See UK Competition Commission, ‘The supply of groceries in the UK market investigation’ (2008), <https://webarchive.nationalarchives.gov.uk/20140402235418/http:/www.competition-commission.org.uk/assets/competitioncommission/docs/pdf/non-inquiry/rep_pub/reports/2008/fulltext/538.pdf> accessed 29 September 2021. 21 In the USA, price discrimination is unlawful if the result is a substantial lessening of competition or a tendency to create a monopoly. Section 2(f) of the Clayton Act, 15 USC s 13(f) specifically prohibits a large buyer from demanding a discriminatory price concession. 22 Dennis Carlton and Mark Israel, ‘Proper Treatment of Buyer Power in Merger Review’ (2011) 39 Review of Industrial Organization 127–36 discusses how mergers that enhance buyer power should be evaluated. 23 The elasticity of labor supply is εL=(dL/dw)(w/L) ⁠. In this expression, dL/dw is the inverse of the slope of the supply curve. When the slope of the supply curve is zero, ie, the supply of labour is perfectly elastic, then εL is infinite. Employers will have no monopsony power. 24 See Joan Robinson, The Economics of Imperfect Competition (Macmillan 1933). In an earlier work, AC Pigou, The Economics of Welfare (Macmillan 1920), also identified the adverse economic consequences of monopsony. 25 This gap is related to the Lerner Index of monopsony power, which may be written as λ=VMP-ww ⁠. For a profit maximizing monopsonist, it can be shown that λ=1εL where εL is the labour supply elasticity. Abba Lerner, ‘The Concept and Measurement of Monopoly’ (1934) 1 Review of Economic Studies 157–75 was concerned with monopoly rather than monopsony. The Lerner Index of monopoly can be adapted to the case of monopsony; see, eg, Roger D Blair and Jeffrey L Harrison, ‘The Measurement of Monopsony Power’ (1992) 37 Antitrust Bulletin 133. The rate of exploitation can be traced to AC Pigou. See (n 24). 26 In this event, λ will be zero. 27 In Alan Manning, Monopsony in Motion: Imperfect Competition in Labor Markets (Princeton University Press 2003), Manning conducts a thought experiment that considers what would happen if an employee’s wage were reduced by a penny. If the supply of labour were infinitely elastic, the employee would leave and find another job at no additional cost. In reality, this is not the case since there are many frictions in the labour market. 28 ibid. 29 Robinson (n 24). 30 Suresh Naidu and others, ‘Antitrust Remedies for Labor Market Power’ (2018) 132 Harvard Law Review 536–601, 567. 31 See Anna Sokolova and Todd Sorensen, ‘Monopsony in Labor Markets: A Meta-Analysis’ (2021) 74 ILR Review 27–55. 32 See, for example, DA Webber, ‘Firm Market Power and the Earnings Distribution’ (2015) 35 Labour Economics 123–34; Douglas O Staiger, Joanne Spetz and Ciaran S Phibbs, ‘Is there Monopsony in the Labour Market? Evidence from a Natural Experiment’ (2010) 28 Journal of Labour Economics 211–36; Daniel Sullivan, ‘Monopsony Power in the Market for Nurses’ (1989) 32 Journal of Law and Economics 135–78; Barry T Hirsch, and Edward J Schumacher, ‘Classic or New Monopsony? Searching for Evidence in Nursing Labor Markets’ (2005) 24 Journal of Health Economics 969–89; and Michael Ransom and David Sims, ‘Estimating the Firm’s Labor Supply Curve in a “New Monopsony” Framework: School Teachers in Missouri’ (2010) 28 Jounal of Labor Economics 331–35. 33 In re High-Tech Employee Antitrust Litigation [2011] No 11-CV-2509-LHK. 34 In re: Animation Workers Antitrust Litigation [2015] D Cal Case No 14-cv-04062-LHK 123 F.Supp.3d 1175. 35 Danielle Seaman v Duke University [2018] MDNC No 1:2015cv00462. 36 Cason-Merenda v Detroit Medical Center [2012] ED Mich No 2:06-cv-15601. 37 NCAA v Alston [2021] 594 US ___. 38 Le v Zuffa, LLC, [2015] D Nev No 2:15-cv-01045. 39 US v Knorr-Bremse AG and Westinghouse Air Brake Technology Corp [2018] DDC No 1:18-cv-00747. 40 The Council of Fashion Designers of America [1995] Docket C-3621. 41 Beltran v InterExchange Inc, [2018] DCol No 1:14-cv-03074. 42 See Department of Justice Antitrust Division and Federal Trade Commission, ‘Antitrust Guidance for Human Resource Professionals’ (2016) <https://www.justice.gov/atr/file/903511/download> accessed 29 September 2021. 43 We focus on monopsony power since the empirical studies we cite explicitly refer to monopsony power. But concentration also tends to increase bargaining power since it reduces the outside options for sellers. It can be difficult, however, to determine whether bargaining power would be harmful since it could also act as countervailing power. 44 Employers can only exploit monopsony power if the supply curve is positively sloped, which is the case for labour markets. See Section 3 for the empirical evidence of positively sloped supply curves. 45 The Herfindahl–Hirschman Index (HHI) is the sum of the squared market shares of all of the firms in the industry. Decimals are avoided by multiplying by 10,000. Thus, a market share of 0.05, which would become 0.0025 once squared, would correspond to a value of 25. See US Department of Justice and Federal Trade Commission ‘Horizontal Merger Guidelines’ (2010), <https://www.justice.gov/atr/horizontal-merger-guidelines-08192010> accessed 29 September 2021. 46 In José Azar and others, ‘Labor Market Concentration’ (2019) NBER Working Paper No 24147, the authors found that 54 per cent of labour markets had concentrations above 2,500 when they defined the geographic market using commuting distance. This evidence certainly suggests that there is some cause for competitive concern in many labour markets. 47 Azar, ibid. 48 Efraim Benmelech and others, ‘Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?’ (2018) NBER Working Paper No 24307. 49 Pedro S Martins, ‘Making their Own Weather? Estimating Employer Labour-market Power and its Wage Effects’ (2018) Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research, Working Paper 95. 50 Christina Depasquale, ‘Monopsonistic Exploitation: Theory and Evidence’ (2018) Working Paper. 51 For a market with seven firms, the HHI must be at least 1,429. 52 Elena Prager and Matt Schmitt, ‘Employer Consolidation and Wages: Evidence from Hospitals’ (2021) 111 American Economics Review 397–427. 53 Gustavo Grullon and others, ‘Are U.S. Industries Becoming more Concentrated?’ (2018) Swiss Finance Institute Research Paper, No 19-41; Matias Covarrubias and others, ‘From Good to Bad Concentration? U.S. Industries over the past 30 years’ (2019) NBER Working Paper No 25983. 54 See David McLaughlin, ‘States Urge DOJ to Probe Meat Packers over Price Manipulation’ (2020), <https://www.bloomberg.com/news/articles/2020-06-04/doj-subpoenas-four-biggest-meatpackers-in-antitrust-probe> accessed 29 September 2020. 55 Eleven US Attorneys General encouraged the DOJ to investigate price-fixing in the beef market. Press Release, Iowa Dep’t of Justice, Miller, ‘10 AGs Urge Federal Investigation of Meatpacking Practices’ (2020), <https://www.iowaattorneygeneral.gov/newsroom/meatpackers-antitrust-barr-justice> accessed 29 September 2021. 56 In re Cattle Antitrust Litig, [2020] US Dist Minn No 19 1222. 57 Charles Morris v Tyson Chicken Inc, [2020] WD Ky No 4:15-cv-00077. 58 Allen v Dairy Farmers of Am, Inc [2014] D Vt No 81193. 59 United States v Rice Growers Ass’n of California and Pacific International Rice Mill [1953] ND Cal 110 F Supp 667. 60 See Testimony of Peter Carstenson, ‘Single Buyer Markets in Agriculture’, Senate Judiciary Committee, 30 October 2003. 61 In 2018, Senator Cory Booker introduced the Food and Agribusiness Merger Moratorium and Antitrust Review Act of 2018, which would have imposed a moratorium on agribusiness, food and beverage manufacturing, and grocery retail mergers due to concerns of rising concentration that would lead to monopsonistic exploitation. Food and Agribusiness Merger Moratorium and Antitrust Review Act of 2018, HR 6800, 115th Congress (2018). 62 For some brands, such as Coca Cola, Gerber baby food, and Heinz ketchup, the retailer’s bargaining power is much weaker than for less popular brands. 63 See Todd Sharkey and Kyle Siegert, ‘Impacts of Nontraditional Food Retailing Supercenters on Food Price Changes’ (2006), <https://www.researchgate.net/publication/228790460_Impacts_of_nontraditional_food_retailing_supercenters_on_food_price_changes/link/0c960519b7ab1a5191000000/download> accessed 10 July 2021. 64 For example, see US v Pook [1988] ED Pa No 87-274. 65 US v Champion International Corp [1977] 557 F.2d 1270. 66 For example, see United States of America v Avi Stern, Stuart Hankin, and Christopher Grave [2017] SD Flor No 17-80204. 67 DeLoach v Phillip Morris Cos [2000] DDC 132 F Supp 2d 22. 68 Kone AG and Others v ÖBB-Infrastruktur [2014] AG C-557/12. 69 Campine NV and others [2017] AT.40018. 70 Weyerhaeuser Company, Petitioner v Ross-Simmons Hardwood Lumber Company, Inc [2007] 549 US 312. 71 Ariel Ezrachi and Maria Ionnaidou, ‘Buyer Power in European Union Merger Control’ (2014) 10 European Competition Journal 69–95 describe the prevalence and implications of buyer power in merger review in the European Union. 72 15 USC s 18. 73 15 USC s 18 applies to all types of mergers—horizontal, vertical, and conglomerate. 74 For example, a merger could create a dominant firm that has a much larger market share than a number of smaller fringe firms. This could lead to price leadership, where the merged firm unilaterally increases the price which is then adopted by the fringe firms. 75 When there are fewer firms in a market, it is easier to organize and implement a cartel. See for example, George J Stigler, ‘A Theory of Oligopoly’ (1964) 72 Journal of Political Economy 44–61. 76 The Department of Justice and Federal Trade Commission, ‘Horizontal Merger Guidelines’ (2010), <https://www.justice.gov/atr/horizontal-merger-guidelines-08192010> accessed 29 September 2021 consider industries with an HHI below 1,500 to be unconcentrated. 77 ‘Horizontal Merger Guidelines’, s 10, ibid. 78 Thresholds for the minimum value of the assets and minimum size of the parties are adjusted annually. These numbers may be found in the 2021 adjustment, which can be accessed at <https://www.ftc.gov/news-events/blogs/competition-matters/2021/02/hsr-threshold-adjustments-reportability-2021> accessed 29 September 2021. 79 ‘Horizontal Merger Guidelines’ (n 76). 80 The proposed merger of Sanford Health and Mid-Dakota Clinic is a good example of how concentrated local markets can be, although it involves monopoly power. The HHI would have changed from 5,200 to 10,000 in the general surgery market in the Bismark-Mandan area. This merger was under the HSR threshold and would have escaped notice had not private parties brought the case to the Agencies’ attention. Federal Trade Commission v Sanford Health [2019] 926 F. 3d 959. 81 In Section 4 above, we cited studies of hospital mergers that caused havoc in the nurse labor market. These mergers went unchallenged by the FTC either because they did not meet the HSR Act threshold or because the FTC believed them to be benign. 82 The DOJ has not ignored the possibility that a horizontal merger may create, or increase, monopsony power. In their Anthem-Cigna Complaint, the DOJ alleged that the merger of the second and third largest health insurers would increase monopsony in their dealings with health care providers. United States v Anthem, Inc and Cigna Corp [2016] Case No 1:16-cv-01493, Complaint <https://www.justice.gov/atr/file/903111/download> accessed 29 September 2021. The District Court ignored this issue since it found the merger presumptively unlawful based on predictable effects in the output market. United States v Anthem, Inc and Cigna Corp [2016] DC Case No 1:16-cv-01493-ABJ <https://www.justice.gov/atr/case-document/file/940946/download> accessed 29 September 2021. Additionally, in 2011, the DOJ challenged George’s Food LLC for a proposed merger of chicken processors, which the DOJ feared could affect the broiler prices paid to growers. United States of America v George’s Foods LLC Western District of Virginia [2011] No 5:11-cv-00043-GEC. 83 s 307. See (n 4). 84 These figures were calculated from FTC annual reports. Federal Trade Commission, ‘Annual Competition Report, 42nd Report (FY 2019)’ (2019), <https://www.ftc.gov/policy/reports/policy-reports/annual-competition-reports> accessed 29 September 2021. 85 ibid. 86 In the Matter of Otto Bock HealthCare North America, Inc [2017] FTC Docket No 9378. 87 Merger Filing Fee Modernization Act of 2019, s1937, 116th Congress (2019–2020). Senator Klobuchar proposed decreasing the fees on smaller mergers but would add substantial fees for large mergers which have aggregate total assets in excess of $1,000,000,000. 88 s 307. See (n 4). 89 South Africa, for example, shifts the burden of proof to the merging parties. 90 ‘Horizontal Merger Guidelines’, s 12. See (n 76). 91 See Iona Marinescu and Herbert J Hovenkamp, ‘Anticompetitive Mergers in Labor Markets’ (2019) 94 Indiana Law Journal 1031–63. 92 See Naidu and others (n 30). The authors offer an alternative method that adapts the so-called ‘upward pricing pressure’ concept to monopsony. They propose using ‘downward wage pressure’. 93 s 307. See (n 4). © The Author(s) 2021. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Antitrust Enforcement Oxford University Press

Considerations of Buyer Power in Merger Review

Journal of Antitrust Enforcement , Volume Advance Article – Oct 18, 2021

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2050-0688
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Abstract

Abstract In most horizontal merger reviews, the focus is on the potential for increasing monopoly power, which adversely affects the output market through increased price and reduced quantity, quality, and product variety. For the most part, a merger’s effect on the input markets has been ignored. Recently, however, academics and policymakers have called for considering a merger’s potential for creating or enhancing buyer power in one or more input markets. A good deal of this concern has centered on monopsony in labour markets as real wages have stagnated and labour’s share of income has declined. In order to address the monopsony concern in the USA, Senator Amy Klobuchar proposed a bill that would amend section 7 of the Clayton Act to explicitly include monopsony concerns in merger review. In this article, we explore the economic foundation and empirical evidence for this rising tide of concern with particular emphasis on the labour market. We broaden the significance of our analysis by pointing to allegations of monopsonistic abuse outside labour markets. Finally, we discuss practical problems of implementing monopsony considerations in merger review and the benefits to consumer welfare that may arise. 1. INTRODUCTION A merger of two firms in the same industry may pose competitive problems.1 Depending on the pre-merger and post-merger market structure, the merger may result in higher output prices, a lower volume of output, or a reduction in quality, service, and product choice. Historically, most—if not all—of the antitrust focus has been on the anticompetitive effects on the output market since monopoly power can directly impair consumer welfare. But mergers may also cause harm in the input market if a merger increases the buyer power of the merging firms. Recently, there has been increasing recognition of the adverse welfare effects of buyer power in various jurisdictions around the world.2 First, a firm that has monopsony power can reduce the quantity that it buys in order to depress the price that it pays for inputs which leads to a social welfare loss. Secondly, a firm with bargaining power can use the threat of walking away from the negotiations to extract surplus from suppliers. Mergers have the potential to increase buyer power and thereby cause substantial . anticompetitive harm. But this harm has traditionally been ignored in merger review. Our improved understanding of the relationship between mergers and buying power has led to requests by Congress and policymakers that the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) pay closer attention to threats of monopsony when conducting their merger reviews. In the USA, at least, policymakers have focused their efforts on monopsony power due to its clear social welfare impact and its relevance to labour markets. Congress and policymakers have proposed bills that would encourage the Agencies to consider monopsony in merger review and would help them to do this by increasing their budget.3 In both the House and Senate, a proposed bill would amend section 7 of the Clayton Act by explicitly including monopsony in the statutory language in order to strengthen the emphasis on monopsony in merger review.4 As we will show in this Article, both the economic theory and the empirical evidence provide support for considering the potential effects of monopsony in merger review. This evidence is particularly clear in labour markets but is also relevant to other input markets. In the next section, we examine the economic theory and social welfare impact of buyer power. In Section 3, we provide empirical evidence for the presence of imperfect labour markets which are vulnerable to monopsonistic exploitation. Section 4 surveys some of the empirical literature which provides evidence that horizontal mergers lead to the exercise of monopsony power in labour markets and therefore pose competitive concerns. We supplement this discussion in Section 5 with examples of buyer power abuse in other input markets. In Section 6, we present the current antitrust policy that governs mergers in the USA. In Section 7, we discuss the practical problems of assessing monopsony in merger reviews. We close in Section 8 with some concluding remarks. 2. ECONOMIC CONSEQUENCES OF BUYER POWER5 Buyer power can manifest itself in two ways: monopsony power and bargaining power. A buyer with monopsony power will reduce quantity in order to depress the price that it pays, while a buyer with bargaining power will use the threat of a quantity reduction to increase its own surplus at the expense of the seller. Monopsony power is relevant in the presence of a competitive supply, while bargaining power is relevant when transactions are determined through bilateral negotiations. In what follows, we explain the theory and economic consequences of monopsony and bargaining power in terms of the labour market. The buyer power concepts explained below can also be applied to markets for other inputs. Monopsony power Monopsony power refers to an input employer’s ability to profitably depress the input price by reducing the quantity employed.6 This possibility exists only if the supply of the monopsonized input is positively sloped.7 It is a common misconception that the exercise of monopsony power will make consumers better off. After all, if an input price falls, this should reduce the employer’s cost which normally leads to an expansion of output with a corresponding reduction in the output price. But the economic results are quite different when the input price falls due to monopsony. In fact, since employment falls, the monopsonist’s output also falls, which will lead to adverse economic consequences in the output market.8 In the short run at least, the reduced total output will cause output price to rise and consumer welfare to fall.9 In general, the adverse economic effects of monopsony will be more pronounced in a local input market relative to those in a broader output market. In order to make the exposition less abstract, consider the production of textiles.10 An employer hires labour to aid in producing textiles. The employer’s demand for that labour depends on the value of labour’s contribution to the firm’s profit, ie, the profit from selling the textiles produced by that labour.11 It is represented by the downward sloping demand curve, DL, in Figure 1. As for labour, the willingness of textile workers to work is captured in the positively sloped supply curve, SL. At each quantity of labour, the height of the supply curve measures the worker’s reservation wage, ie, the wage necessary to induce the worker to supply his or her labour services. The labour supply is positively sloped because reservation wages vary with age, family circumstances, health, education, and other factors. Figure 1. Open in new tabDownload slide Competition, monopsony, and social welfare. Figure 1. Open in new tabDownload slide Competition, monopsony, and social welfare. If the labour market is competitive, supply and demand are in equilibrium and social welfare is maximized at the pre-merger employment (L1) and wage (w1). At that equilibrium, the value of the last worker’s contribution to the firm is precisely equal to his or her reservation wage. Employer surplus is captured by the triangular area, abw1, while employee surplus is given by the triangular area, w1bc.12 The sum of employer and employee surplus, area abc, is a measure of social welfare and is maximized at the equilibrium wage (w1) and employment (L1). Given DL and SL, any other combination of wage and employment will reduce social welfare. This is the economic rationale for antitrust policy. A merger among the local textile producers may well have no discernible effect on the worldwide market price of the textiles or on the market demand for labour.13 If the merger results in monopsony in the local labour market, however, profit maximization by the employer will result in a decrease in employment and a consequent decrease in the wage paid to workers. Since labour supply is positively sloped, the wage rises with employment. The effect on the firm’s total cost of hiring one more unit of labour, therefore, is higher than the wage of that additional worker. For example, suppose that the textile producer pays each of its 10 workers $200 for a day of labour. If the textile producer wishes to hire another worker, it would have to pay that worker, say, $210. But the textile producer must also increase the wage that it pays to its current 10 workers to $210 per day. As a result, the total wage bill rises from $2,000 to $2,310. The marginal increase in the total expenditure on labour is $310, which exceeds the wage, which is $210. Thus, the marginal expenditure of labour, MEL, lies above the supply curve of labour as shown in Figure 1. A profit maximizing employer will expand its employment of labour until the marginal benefit of doing so is just equal to the marginal cost. In Figure 1, this occurs when the demand for labour, DL, intersects the marginal expenditure of labour, MEL. As shown in Figure 1, profit maximization by the monopsonist leads to a reduction in the employment of labour from L1 to L2 with a corresponding reduction in the wage paid from w1 to w2. Employer surplus increases from area abw1 to area adew2, but employee surplus falls from area w1bc to area w2ec. Employee surplus equal to (w1-w2)L2 is redistributed to the employer. Total surplus shrinks by the triangular area dbe due to allocative inefficiency by which we mean that too few units of labour are being employed. For the units of labour between L1 and L2, the reservation wage (as measured by the height of the supply curve) is less than the value of the output to consumers that the employment would have generated (as measured by the height of the DL curve). In a social sense, these units of labour should have been employed. But these units of labour were not employed because it was more profitable for the employer to limit employment to L2. The economic effects of monopsony are not confined to the input market. The reduction in labour corresponds to a reduction in the quantity of textiles produced and a consequent increase in price, which leads to a social welfare loss in the textile market. The effect on price will be greater if the textile producer has a significant market share in the output market.14 Bargaining Power Bargaining power in the context of buyer power can be defined as the relative strength of a buyer in negotiating with a seller. A buyer with bargaining power relies on its threat of purchasing less to transfer supplier surplus to itself. The buyer has substantial bargaining power when this threat is credible; that is, when the buyer has substantial outside options—other sellers who would be willing to buy its products—or the buyer is a gateway to the downstream market—sellers have few other avenues to sell their products. One way to capture the idea of bargaining power and its exercise is in terms of all-or-none offers.15 In exercising bargaining power, the powerful buyer does not depress the price paid by sliding along the supply curve to a lower quantity. Instead, it makes an all-or-none offer. It demands a lower price for the same quantity. In other words, it pushes the supplier off the usual supply curve. Consider the following example. The reservation wage of a worker is, say, $20 per hour for a 40-hour work week, which amounts to $800 per week. If the wage were lower, the worker might only be willing to work 39 hours. But an all-or-none offer does not permit marginal adjustments. Say that the employer offers only $760 for the 40-hour work week. The worker has two choices: work 40 hours for $760 or be unemployed. For the employer to enjoy such bargaining power, the threat to offer nothing must be credible. If an employer could easily offer employment to another willing candidate, the threat is credible. To illustrate the exercise of bargaining power through all-or-none offers, consider Figure 2. Demand D and supply S are equal at a wage and employment of w1 and L1, respectively. A powerful employer may agree to hire L1, but insist on a wage of w2. It is clear that the (L1, w2) combination is not on the supply curve. But this is an all-or-none offer, i.e., the worker can work L1 at a wage of w2 or not work at all. In the case depicted in Figure 2, it makes economic sense to accept the offer because employee surplus is still positive. In other words, the positive surplus area w2ec is greater than the negative surplus area deb. Figure 2. Open in new tabDownload slide Bargaining power—all-or-none offers. Figure 2. Open in new tabDownload slide Bargaining power—all-or-none offers. The antitrust policy significance of the all-or-none bargaining result is a bit complicated. In Figure 2, L1 units of labour services will be employed. But the employer’s muscle redistributes some labour surplus to the employer. This is offensive on equity grounds, but not on economic welfare grounds. It is not obvious that there is an antitrust remedy if the powerful employer simply redistributes surplus without violating the antitrust laws. In contrast, if the employer increases its bargaining power through a series of mergers, equity considerations may be incorporated in merger reviews. Before condemning all increases in bargaining power, we must recognize that the exercise of bargaining power may improve both consumer welfare and social welfare. This positive outcome results when the buyer’s power is used to offset the monopoly power of a seller.16 In this scenario, bargaining power acts as countervailing power.17 Such a situation may occur when health insurers merge in response to hospital mergers. When hospitals merge, their market power is likely to increase allowing them to reduce quantities and thereby increase prices for services offered to an insurer’s policyholders. By merging, health insurers reduce the outside options of the hospitals, which forces them to concede to better terms with insurers which will benefit consumers.18 But there is some possibility that the exercise of bargaining power may have anticompetitive consequences.19 Buyers with bargaining power may force concessions that could be disadvantageous to suppliers or the buyer’s downstream rivals. For example, large grocery stores may be able to force price concessions that are unavailable to smaller rivals.20 Unfavorable terms may eventually lead to the exit of those smaller rivals.21 To the extent that such behavior will lead to consumer harm, it should be condemned. But it can be difficult to determine the long-term effects of the bargaining power, especially if consumers pay lower prices in the short-term due to those price concessions. Mergers that increase bargaining power that lead to consumer harm should be condemned.22 In the simple economic models displayed in Figures 1 and 2, we confined our attention to the effect of buyer power on employment, wages, and social welfare. These bare bones models do not capture the full array of economic consequences that may result from buyer power in the local labour market. Buyer power can lead to lower benefits, such as reduced family leave, sick leave, paid vacations, health and dental insurance, retirement plans, and employer contributions to employee educational programs. Additionally, enhanced buyer power could result in the elimination of bonus plans or profit-sharing plans. Finally, there could be an adverse effect on working conditions that affect employee health and safety. Qualitatively, these deleterious effects are analogous to the economic results that we have captured in our simple models. 3. EMPIRICAL EVIDENCE OF MONOPSONY IN THE LABOUR MARKET There is ample empirical evidence of imperfect labour markets, which are vulnerable to monopsonistic exploitation that results from the exercise of monopsony power. When the supply of labour is perfectly competitive, the labour supply curve is flat and the elasticity of labour supply is infinite.23 When the supply is positively sloped, however, the supply elasticity is finite and monopsonistic exploitation is possible. There is substantial empirical evidence that labour supply elasticities are far from infinite making these markets susceptible to monopsonistic exploitation. Monopsonistic exploitation can be measured by the difference between the value of labour’s contribution to society and the wage that it is paid.24 This gap is related to the labour supply elasticity.25 An infinite elasticity signifies a perfectly competitive market.26 In this case, workers would leave an employer at the slightest decrease in wage.27 But nearly all labour markets are imperfect and therefore, these labour markets are vulnerable to monopsonistic exploitation. This is due to labour market frictions, such as the switching costs of finding a new job28 and varying reservation wages, which may be due to family circumstances, age, health, education, and so on.29 Empirical studies have reported labour supply elasticity estimates that are far from infinite, which supports the claim that the risk of monopsonistic exploitation in labour markets is high.30 A meta-analysis of 801 recent studies found estimates of US labour supply elasticities to be between 1.21 and 4.29 with an average of 3.75. This strongly supports the presence of monopsonistic labour markets and indicates that workers experience a wage markdown of between 23.3 per cent and 82.6 per cent, or 26.7 per cent on average.31 This implies that the last worker hired is only being paid between 17.4 per cent and 76.7 per cent of the worth of his or her labour contribution. Other studies show similar results.32 There is ample evidence that monopsonistic exploitation has surfaced in many labour markets. In most—if not all—instances, it is due to collusion among employers. Such collusion has been alleged in the markets for hardware and software engineers,33 digital animators,34 medical school faculty,35 hospital nurses,36 college athletes,37 mixed martial arts fighters,38 air brake firm employees,39 fashion models,40 and even au pairs.41 In those cases, employers allegedly decided to collude rather than compete to the detriment of the employees. Collusion among employers is a per se violation of section 1 of the Sherman Act. In the U.S., the DOJ and the FTC have made it clear that they plan to file criminal antitrust suits if they find collusion among employers.42 Collusion—either overt or tacit—among employers is more likely when concentration is high. That is, collusion is facilitated when industries are more concentrated, which may occur when firms merge. When labour supply curves are positively sloped, the exercise of monopsony power can lead to decreases in wages, benefits, and other harmful effects to workers. In so far as these results of monopsony are considered undesirable, public policymakers would do well to reduce the ability of employers to exercise their monopsony power. One way to mitigate the emergence of monopsony power is to restrict horizontal mergers that increase concentration of employers to harmful levels. 4. EMPIRICAL EVIDENCE OF MERGERS AND MONOPSONY IN THE LABOUR MARKET43 A horizontal merger combines two or more firms that had been competitors in the output market and thus, necessarily increases market concentration by reducing the number of independent firms in the output market. What often goes unnoticed is the potential adverse economic effects in the labour market caused by horizontal mergers. For example, if Lucas Film and DreamWorks merged, the focus of concern would surely be on the film market. But the impact on the market for digital animators might go unnoticed. This, however, could be a serious oversight. There is mounting empirical evidence that increasing concentration resulting from mergers is correlated with reduced wages and employment. A brief survey of this evidence reveals that there is cause for concern. Although it is obvious that horizontal mergers increase concentration in the output market (by reducing the number of competing firms), it is not entirely evident that this translates to increased concentration in the input market. In fact, as long as merging firms are not competing in the same labour market, there would be no change in concentration in that market. For example, the merger of two accounting firms in different cities should have no effect on the wages of accounting clerks in the two cities. On the other hand, mergers of firms that compete in the same labour market will naturally increase concentration by reducing the number of competing employers. In this case, a merger that does not raise red flags in the output market may have anticompetitive effects in the input market. Higher concentration in labour markets leads to the exercise of monopsony power. As the number of firms in an input market decreases, employers recognize that they have the ability to influence wages by exercising their monopsony power. Profit maximization will lead them to restrict employment and thereby decrease wages.44 In this way, the effect of concentration in the input market on monopsony power is analogous to the effect of concentration in the output market on monopoly power. The use of the Herfindahl–Hirschman Index (HHI),45 which has been traditionally used as a measure of concentration in the output market is also used to describe the concentration of employers in a labour market. An HHI above 2,500 in an input market is often cited as a dangerous level of concentration.46 A number of empirical studies also support the link between concentration and monopsony power, by showing that increases in concentration lead to decreased wages. Azar and others showed that a 10 per cent increase in concentration is associated with a 0.3–1.3 per cent decrease in wages.47 Controlling for other factors, they show that wages are lower in more highly concentrated markets for comparable jobs and indicate that this is a sign of monopsony power. Benmelech and others also found that an increase in concentration is correlated with a reduction in wages. Specifically, a one standard deviation increase in the employer HHI reduces wages between one and two percent. They also find that these effects are less pronounced in industries with high unionization rates, which is consistent with the monopsony model, since the countervailing power of labour unions is one way to offset monopsony power.48 Finally, Pedro S. Martins studied a large database of matched employer–employee data from Portugal. Although concentration was not as pronounced as in the USA, Martins still found a significant link between increased concentration in the labour market and decreased wages.49 These studies show that increases in concentration lead to decreases in wages which is consistent with the economics of monopsony. Finally, empirical studies of hospital mergers have clearly demonstrated how horizontal mergers increase the exercise of monopsony power in the nurse labour market. Researchers looking at hospital merger data have found decreases in wages following the consummation of mergers that increase concentration. Depasquale finds that there is a statistically significant decrease in the number of nurses employed and wages paid after mergers that reduce the number of hospitals in US counties to below 7. 50,51 Prager and Schmitt looked at 10 years of hospital data and employed a difference-in-differences analysis to show that skilled workers, ie, those workers who would find it difficult to move out of healthcare due to search frictions, had lower wages between 1.1 and 6.3 per cent over the four years after hospitals merged within labour markets with an HHI above 2,500. They did not observe these effects with mergers in less concentrated markets or among ‘out-of-market’ mergers, which would not affect the labour market at the respective hospitals.52 Thus, it is of vital importance for the Agencies to limit mergers that increase concentration to levels that create or enhance monopsony power in the labour market. 5. BUYER POWER AND MERGERS IN OTHER INPUT MARKETS Monopsonistic abuses are not confined to labour markets. In recent years, various empirical studies have found evidence of rising concentration in many US industries in part due to increases in mergers and acquisitions.53 The meat packing industry is one example of a highly concentrated market which was consolidated through merger. In the 1980s, this industry was populated with a variety of midsized firms. Consolidation has led to eighty percent of the meat packing industry being controlled by four firms, two of which account for approximately two-thirds of the market.54 Now, there are allegations against the meat packers for exercising both monopoly power and monopsony power to increase prices of meat products55 and to decrease prices paid to farmers,56 respectively. Allegations of monopsony in agriculture have also appeared with chicken,57 milk,58 and rice,59 where consolidation continues to increase. There is good reason to believe that this consolidation has led to increased buyer power that harms farmers.60 In the USA, some senators have found the economic effects of agribusiness mergers so egregious that they have proposed a merger moratorium for food and agribusiness.61 Major supermarket chains wield considerable bargaining power over their suppliers, since they act as a gatekeeper for customers. In other words, by refusing to deal with a supermarket, a supplier would be foreclosed from a large book of business. Hence, supermarkets have considerable bargaining power when it comes to purchasing goods from their suppliers.62 They can demand price concessions or may require that their suppliers always send their deliveries on time and in full. These price concessions reduce the suppliers’ surplus. Additionally, smaller grocery stores may be disadvantaged since they would not be able to achieve the same price concessions. If the small stores cannot compete, they may exit the market leading to higher concentration in the output market. Some might think that major grocery stores offer lower prices to consumers due to the price concessions. But this is not always the case. Indeed, with increased consolidation in the grocery store market, prices increase for consumers allowing the major grocery stores to gain surplus from both their suppliers and their customers.63 Mergers of grocery stores that increase buyer power can have deleterious effects. Collusion among buyers has been alleged in a number of auction markets including antiques,64 timber rights,65 foreclosed real estate,66 and leaf tobacco.67 Monopsonistic exploitation has also been alleged in the markets for elevators,68 lead from recycled batteries,69 and hardwood lumber.70 Bargaining power, meanwhile, is prevalent in any market that relies on bilateral negotiation. Increasing consolidation in US industries resulting from mergers will only serve to increase the buyer power abuses in various input markets. Clearly, in conducting their pre-merger reviews, the antitrust authorities should recognize the competitive threats on the buying side. 6. HORIZONTAL MERGERS AND US ANTITRUST POLICY71 In the USA, the legality of a horizontal merger is governed by section 7 of the Clayton Act,72 which forbids a merger that may substantially reduce competition or tend to create a monopoly in any line of commerce in any section of the country.73 The economic rationale for section 7’s prohibition is obvious: increases in concentration in the output market tend to decrease the vigor of competition and, therefore, may result in higher prices and reduced quantity, which reduce consumer and social welfare. Depending on the pre-merger market structure and size of the firms involved, the proposed merger may be benign, or it may have adverse economic effects. Some horizontal mergers can lead to unilateral effects, ie, the merged firm may be large enough to engage in unilateral conduct that increases price or reduces quality.74 Alternatively, coordinated effects could lead to cooperative efforts to increase price or reduce quality, ie, collusion.75 Not all horizontal mergers run afoul of section 7. In fact, the majority of them do not. If the pre-merger market structure is sufficiently unconcentrated in the output market prior to the merger, the change in concentration is apt to be slight and any change in price will be imperceptible. In principle, a seemingly benign horizontal merger may have significant adverse economic consequences in one or more input markets. For example, suppose that the national demand for textiles is satisfied by 100 textile producers of equal size. If two of them merge, the HHI would increase from 100 to 102.76 Such a merger would arouse no competitive concerns in the textile market. If the merging firms are located in the same local labour market, however, this seemingly benign merger could have adverse effects on the wages and employment of textile workers. In other cases, a horizontal merger may involve efficiencies that provide merger-specific benefits to consumers. According to the ‘Horizontal Merger Guidelines’ published by the DOJ and the FTC, efficiencies can save an otherwise objectionable merger only if the efficiencies are (i) merger specific and (ii) passed on to consumers in the form of lower prices. Put differently, the efficiencies must result in cost savings that offset the effects of reduced competition.77 The question becomes whether the efficiencies gained offset the loss to competition. The answer to this question can become complicated if a merger that increases efficiency will also increase buyer power. Role of the DOJ and the FTC For the most part, it is up to the federal agencies to ensure that only procompetitive and competitively neutral mergers may proceed. The goal of the DOJ and the FTC is to prevent anticompetitive mergers from being consummated. Pursuant to the Hart–Scott–Rodino Act, a proposed merger involving assets of at least $92 million is subject to pre-merger review by either the DOJ or the FTC.78 The Agencies spelled out their review procedure in the 2010 Horizontal Merger Guidelines.79 Generally, the DOJ and the FTC focus on a merger’s potential for creating or enhancing the merged firm’s ability to exert unilateral monopoly power or to facilitate the firm’s ability to collaborate rather than compete. Normally, if there are no competitive concerns in the output market, the merger is permitted without much regard for competitive effects in the input markets. In section 12 of the Horizontal Merger Guidelines, the DOJ and the FTC profess a concern with mergers that may lead to monopsony power which would enable the newly merged firm to depress input prices by curtailing input purchases. Yet, their efforts may have fallen short of those needed to successfully counteract the effects of increasing buyer power due to horizontal mergers. Even though the DOJ and the FTC have been more vocal about monopsony concerns in the past decade, there still appears to be a long way to go to ensure that mergers that pass muster do not cause unreasonable increases in buyer power. Buyer power is increasing in part due to horizontal mergers that have passed muster. In some cases, mergers may not have met the asset threshold and were never reviewed by the Agencies.80 In other cases, the Agencies may have found them to be benign in the output market.81 Even though it is clear that mergers can lead to monopsonistic exploitation, the DOJ and the FTC can cite few cases where monopsony concerns played a substantial role in prohibiting a merger.82 In the next section, we discuss some practical problems of including buyer power in U.S. merger review. 7. CONSIDERATIONS OF MONOPSONY IN MERGER ENFORCEMENT In this section, we discuss budget constraints and the difficulties that arise in identifying potential buyer power increases in merger review. Naturally, since both Agencies have budget constraints, they must select those cases that offer the largest returns, ie, the cases where the largest welfare losses are at stake. These budget constraints manifest themselves in the limited number of second requests conducted and the Hart–Scott–Rodino pre-merger notification threshold. Since the Agencies’ budgets have remained relatively stagnant over the past decade, they can only conduct a limited number of second requests.83 Once an Agency determines that a proposed merger may be anticompetitive after its initial review, they conduct a more extensive review of the proposed merger based on the documents provided pursuant to a second request. The number of these second requests has stayed relatively stable. Between 2010 and 2019, the Agencies only asked for second requests for 43–61 filings per year, which did not reflect the trend in the number of merger filings per year, which was rapidly increasing.84 Over this time period, the number of merger filings increased by 79 per cent.85 One would expect that more merger filings would translate into more second requests. The absence of this trend suggests that budget constraints limit the Agencies’ ability to review mergers. In order to maximize social welfare, the Agencies may ignore some mergers that pose no competitive threat in a national output market while having anticompetitive consequences in the local labour market. Although the impact may be quite large in the local market, it may be dwarfed by the size of the national output market. In many instances, a proposed merger may fall below the Hart–Scott–Rodino (HSR) pre-merger notification threshold. In that event neither the potential changes in the output market nor the potential changes in one or more input markets will be scrutinized by the DOJ or the FTC. For example, in 2017, Otto Bock HealthCare acquired Freedom Innovations in a merger deal that was not subject to the HSR Act.86 Otto Bock was the leading manufacturer of mechanical prosthetic knees, while Freedom was its main competitor. Ordinarily, one would reasonably expect the consummation of such a merger to result in higher prices, reduced quantity, and even lower quality. Fortunately, the FTC investigated the merger soon after its consummation and dismantled it. This kind of localized merger may be widespread with substantial harmful effects across the country. In principle, the DOJ and the FTC could challenge such mergers, but this may not be a sensible allocation of their limited enforcement budgets. Fortunately, senators and representatives are aware that the Agencies have limited resources and have proposed increasing their budgets so that they can effectively address monopsony concerns in merger review. For example, Senator Amy Klobuchar introduced the Merger Filing Fee Modernization Act of 2019 which would increase fees on mega merger deals that could fund the Agencies.87 In addition, Senator Klobuchar introduced the Consolidation Prevention and Competition Promotion Act, which would, if passed, shift the burden of proof to the merging parties.88 A merger would be assumed to be harmful if it would significantly increase concentration, unless the merging parties could offer significant procompetitive justification.89 This would mitigate the Agencies’ resource needs for evaluating mergers. Such proposals, however, do not come without consequences. By increasing fees and legislative challenges, these policies would disincentivize mergers, even those that are procompetitive on balance. Some mergers that would pass muster if the DOJ or the FTC only analysed the economic effects in the output market may well be challenged if the economic effects in the input market(s) are considered. Challenging mergers that create or enhance buyer power may prove to be difficult in some instances. For example, consider the merger of two firms that are participants in a competitive output market, but duopsonists in the local labour market. Their merger may lead to no discernible effect in the output market, but the change in market structure from duopsony to monopsony may have large effects on the labour market. Identifying buyer power in merger review In order to evaluate a proposed merger’s potential for creating or enhancing monopsony power, the DOJ or the FTC can adapt their analytical procedures used to evaluate competitive effects in the output market. Section 12 of the Horizontal Merger Guidelines advises that the Agencies will ‘focus on the alternatives available to sellers in the face of a decrease in the price paid by a hypothetical monopsonist’ when evaluating the potential harm of a merger.90 When sellers have ample opportunities to sell their goods to other buyers, a single buyer has little buyer power. Thus, considering how a merger affects the availability of outside options will inform the Agencies on whether a merger will enhance buyer power to a detrimental level. When evaluating a merger, the Agencies begin by defining the market in which the merging firms participate. They want to isolate their analysis only to the market at issue, ie, the market for the contested good or service as well as its close substitutes. If the market is defined too broadly, the market may appear to be too competitive to warrant a challenge; the Agencies may miss the potential for anticompetitive harm. If the market is defined too narrowly, the market may appear to be too concentrated; the Agencies may condemn procompetitive mergers. Once a market is defined, the Agencies will review the change in the market structure that a merger will induce to determine whether buyer power would be enhanced. The more outside options, i.e., the more buyers willing to buy products from the seller, the less likely that one buyer will have enough buyer power to cause anticompetitive harm. The Agencies may also consider the likelihood that buyers could turn to self-supply, which would diminish the bargaining power of the sellers, and the existence of barriers to entry on the buyer side. When barriers are present, entrants will not provide a check on a buyer’s market power, which would exacerbate the potential harm of the merger. Reviewing outside options, however, is a rather imprecise method of determining potential anticompetitive harm. More precise methodology, such as Marinescu and Hovenkamp’s method which Naidu and others refer to as the ‘Market Definition-Concentration’ (MDC) approach, may provide more accurate results, but are more resource-intensive.91,92 The MDC approach adapts the customary method used in analyzing the output market to the input market. It involves defining the relevant antitrust market, measuring concentration in that market, and inferring the economic impact of the merger on the basis of economic theory, empirical evidence, and experience. If the Agencies employ the MDC approach in evaluating a proposed merger’s effects in both the output market and the input market, the work will be burdensome. Not only must the Agencies define the relevant product or service market, but they must also define the relevant input market(s). In most cases, these are two separate exercises. The output market may be the US market for men’s leather belts while the relevant input market may be the local labour market for leather workers. Since the demand for labour services is derived from the demand for men’s leather belts, there is an obvious relationship on the demand side of the two markets. On the supply side, supply conditions in the labour market will affect the producer’s costs and, therefore, will affect supply in the output market. Concentration in the men’s leather belt market may be far different from concentration in the labour market. The proposed merger may involve two relatively small players in the retail market for men’s leather belts, but they could also be the sole employers of the local leather workers. In that event, the merger may be innocuous in the output market, but anticompetitive in the local labour market. Suppose that the merging men’s leather belt producers are the only producers of men’s leather belts in the local labour market. This does not necessarily mean that the post-merger firm will be a monopsonist. It may well be the case that local leather workers have employment opportunities with the producers of women’s leather belts, handbags, wallets, key cases, shoes, vests, and other leather goods. To make matters more confusing, the merging firms may not be in the same output market but compete in one or more input markets. For example, suppose that Firm A produces furniture and firm B produces baseball bats. If they merge, this would be a conglomerate merger with no obvious effects in either output market. Surely, it would pass muster on this basis. But the combined firm may have monopsony power in the market for lathe operators and possibly should be challenged on that basis. In most cases, the HHI value of concentration for a market will be a good indicator of potential anticompetitive effects of a consummated merger. Although following this method includes an added burden of defining a second (or multiple other) market(s), the benefits of preventing anticompetitive effects due to monopsony may be substantial. As the Agencies gain experience with evaluating the potential anticompetitive harm of buyer power, they will be able to further refine their methodology. Senator Amy Klobuchar has proposed collecting post-merger data to better inform current analysis of mergers, which would lighten the burden of evaluating mergers for monopsonistic harms.93 8. CONCLUSION Economic theory and empirical evidence of monopsonistic effects in labour markets provide ample support for the concerns of Congress and policy analysts. The welfare losses due to buyer power are just as real and just as harmful as the welfare losses due to monopoly. The only difference is that they are less familiar. Based on the theory and the evidence, it is clear that merger reviews should involve serious considerations of buyer power as well as monopoly. There is no doubt that antitrust enforcers will experience some growing pains as they incorporate this new dimension in their analyses of competitive effects. But the process should begin. Footnotes 1 For expositional convenience, ‘merger’ refers to acquisitions, consolidations, and mergers, which are legally, but not economically, distinct. 2 South Africa and Kenya have recently published antitrust guidance on the economic problems associated with buyer power. See Competition Commission South Africa, ‘Buyer Power Enforcement Guidelines’ (2020), <https://www.compcom.co.za/wp-content/uploads/2020/05/Buyer-Power-Guidelines.pdf> accessed 09 September 2021; and Competition Authority of Kenya, ‘Buyer Power Guidelines’ (2017), <https://cak.go.ke/sites/default/files/CAK_Buyer_Power_Guidelines.pdf> accessed 09 September 2021. Buyer power has been recognized in Europe for some time, especially in the context of large grocery retailers. See UK Competition Commission, ‘The supply of groceries in the UK market investigation’ (2008), <https://webarchive.nationalarchives.gov.uk/20140402235418/http:/www.competitioncommission.org.uk/assets/competitioncommission/docs/pdf/non-inquiry/rep_pub/reports/2008/fulltext/538.pdf> accessed 09 September 2021. 3 Randy M. Stutz, ‘The Evolving Antitrust Treatment of Labor-Market Restraints: From Theory to Practice’ (2018) AAI White Paper; Mark DeSaulnier and others, ‘The Future of Work, Wages, and Labor: Findings & Policy Recommendations’ (2018), <https://desaulnier.house.gov/sites/desaulnier.house.gov/files/REPORT%20-%20Future%20of%20Work%2C%20Wages%2C%20and%20Labor%20-%2018.09.05.pdf> accessed 29 September 2021; Alan B. Krueger and Eric A. Posner, ‘A Proposal for Protecting Low-Income Workers from Monopsony and Collusion’ (2018), The Hamilton Project; Seth Moulton, ‘Congressional Antitrust Caucus Lead Letter to FTC Requesting Information on How Corporate Consolidation Affects American Workers, Consumers, and Small Businesses’ (2018), <https://moulton.house.gov/press-releases/moulton-congressional-antitrust-caucus-lead-letter-to-ftc-requesting-information-on-how-corporate-consolidation-affects-american-workers-consumers-and-small-businesses> accessed 29 September 2021; Merger Filing Fee Modernization Act of 2019, S.1937, 116th Congress (2019–2020). 4 Consolidation Prevention and Competition Promotion Act of 2019, s 307, 116th Congress (2019) and Economic Freedom and Financial Security for Working People Act of 2018, HR 5630, 115th Congress (2018). 5 Those readers who are familiar with buyer power may safely omit this section. For those who want a more extensive treatment of monopsony, see Roger D Blair and Jeffrey L Harrison, Monopsony in Law and Economics, (CUP 2010). Zhiqi Chen, ‘Defining Buyer Power’ (2008) 53 Antitrust Bulletin 241–50 gives an overview of buyer power. 6 Jeffrey Church, ‘Monopsony and Buyer Power’ (OECD Roundtable 2008), <https://www.oecd.org/daf/competition/44445750.pdf > accessed 29 September 2021 similarly defined monopsony power as the ability to ‘profitably reduce the price paid below competitive levels by withholding demand’. Also see Jonathan Jacobson and Gary Dorman, ‘Joint Purchasing, Monopsony, and Antitrust’ (1991) 36 Antitrust Bulletin 1–79 and Jonathan Jacobson, ‘Monopsony 2013: Still Not Truly Symmetric’ (2013) Antitrust Source. If supply is perfectly elastic, ie, perfectly flat, then a single buyer will have no monopsony power because the price will not change based on the quantity purchased. 7 V Bhaskar and others, ‘Oligopsony and Monopsonistic Competition in Labor Markets’ (2002) 16 Journal of Economic Perspectives 155–74 explore the pervasive presence of monopsony in the economy. 8 Tirza J Angerhofer and Roger D Blair, ‘Collusion in the Labor Market: Intended and Unintended Consequences’ (2020) CPI Antitrust Chronicle 1–8. 9 The greater the market power that the monopsonist has in the output market, the more pronounced will be its impact in the output market. 10 For some of the technical details, see Roger D Blair and Christine Piette Durrance, ‘The Economics of Monopsony’ in W Dale Collins (ed), Issues in Competition Law and Policy (American Bar Association Chicago 2008). 11 The firm’s demand for labour is derived from the consumer’s demand for textiles. For a competitive firm, the value of the marginal product of labour is its derived demand for labour (the demand for labor services is determined by labour’s contribution to the firm’s revenues). When an additional unit of labour is hired, output rises. This increase is the marginal product of labour. If that increase is multiplied by the output price, one has the value of the marginal product. 12 Employer surplus is the difference between the value of the labour’s contribution to the firm less the amount that must be paid for labour. Employee surplus is the difference between the wages paid and the reservation wages. 13 If the merger does not alter the technology employed by the firm, the demand for labour in the local labour market will not change. 14 It can be shown that the social welfare loss depicted in Figure 1 is equivalent to the corresponding social welfare loss in the output market. For a mathematical derivation, see Roger D Blair and Richard Romano, ‘Collusive Monopsony in Theory and Practice: The NCAA’ (1997) 42 Antitrust Bulletin 681–719. 15 For technical details, see Jill Boylston Herndon, ‘Health Insurer Monopsony Power: The All-or-None Model’ (2002) 21 Journal of Health Economics 197–206. 16 In the case of a monopoly supplier and a monopsony buyer, the market structure is considered one of ‘bilateral monopoly’. The correct analysis is found in AL Bowley, ‘Bilateral Monopoly’ (1928) 38 Economics Journal 641–58 and explained more clearly in Fritz Machlup and Martha Taber, ‘Bilateral Monopoly, Successive Monopoly, and Vertical Integration’ (1960) 27 Economica 101–19. A pedagogical treatment can be found in Roger D Blair and others, ‘A Pedagogical Treatment of Bilateral Monopoly’ (1989) 55 South Economics Journal 831–41. 17 See John Kenneth Galbraith, American Capitalism: The Concept of Countervailing Power (Houghton, Mifflin Co 1952). 18 See Erin E Trish and Bradley J Herring, ‘How do Health Insurer Market Concentration and Bargaining Power with Hospitals Affect Health Insurance Premiums?’ (2015) 42 Journal of Health Economics 104–14. 19 OECD, ‘Monopsony and Buyer Power’ (OECD Roundtable 2008), <https://www.oecd.org/daf/competition/44445750.pdf> accessed 29 September 2021. 20 See UK Competition Commission, ‘The supply of groceries in the UK market investigation’ (2008), <https://webarchive.nationalarchives.gov.uk/20140402235418/http:/www.competition-commission.org.uk/assets/competitioncommission/docs/pdf/non-inquiry/rep_pub/reports/2008/fulltext/538.pdf> accessed 29 September 2021. 21 In the USA, price discrimination is unlawful if the result is a substantial lessening of competition or a tendency to create a monopoly. Section 2(f) of the Clayton Act, 15 USC s 13(f) specifically prohibits a large buyer from demanding a discriminatory price concession. 22 Dennis Carlton and Mark Israel, ‘Proper Treatment of Buyer Power in Merger Review’ (2011) 39 Review of Industrial Organization 127–36 discusses how mergers that enhance buyer power should be evaluated. 23 The elasticity of labor supply is εL=(dL/dw)(w/L) ⁠. In this expression, dL/dw is the inverse of the slope of the supply curve. When the slope of the supply curve is zero, ie, the supply of labour is perfectly elastic, then εL is infinite. Employers will have no monopsony power. 24 See Joan Robinson, The Economics of Imperfect Competition (Macmillan 1933). In an earlier work, AC Pigou, The Economics of Welfare (Macmillan 1920), also identified the adverse economic consequences of monopsony. 25 This gap is related to the Lerner Index of monopsony power, which may be written as λ=VMP-ww ⁠. For a profit maximizing monopsonist, it can be shown that λ=1εL where εL is the labour supply elasticity. Abba Lerner, ‘The Concept and Measurement of Monopoly’ (1934) 1 Review of Economic Studies 157–75 was concerned with monopoly rather than monopsony. The Lerner Index of monopoly can be adapted to the case of monopsony; see, eg, Roger D Blair and Jeffrey L Harrison, ‘The Measurement of Monopsony Power’ (1992) 37 Antitrust Bulletin 133. The rate of exploitation can be traced to AC Pigou. See (n 24). 26 In this event, λ will be zero. 27 In Alan Manning, Monopsony in Motion: Imperfect Competition in Labor Markets (Princeton University Press 2003), Manning conducts a thought experiment that considers what would happen if an employee’s wage were reduced by a penny. If the supply of labour were infinitely elastic, the employee would leave and find another job at no additional cost. In reality, this is not the case since there are many frictions in the labour market. 28 ibid. 29 Robinson (n 24). 30 Suresh Naidu and others, ‘Antitrust Remedies for Labor Market Power’ (2018) 132 Harvard Law Review 536–601, 567. 31 See Anna Sokolova and Todd Sorensen, ‘Monopsony in Labor Markets: A Meta-Analysis’ (2021) 74 ILR Review 27–55. 32 See, for example, DA Webber, ‘Firm Market Power and the Earnings Distribution’ (2015) 35 Labour Economics 123–34; Douglas O Staiger, Joanne Spetz and Ciaran S Phibbs, ‘Is there Monopsony in the Labour Market? Evidence from a Natural Experiment’ (2010) 28 Journal of Labour Economics 211–36; Daniel Sullivan, ‘Monopsony Power in the Market for Nurses’ (1989) 32 Journal of Law and Economics 135–78; Barry T Hirsch, and Edward J Schumacher, ‘Classic or New Monopsony? Searching for Evidence in Nursing Labor Markets’ (2005) 24 Journal of Health Economics 969–89; and Michael Ransom and David Sims, ‘Estimating the Firm’s Labor Supply Curve in a “New Monopsony” Framework: School Teachers in Missouri’ (2010) 28 Jounal of Labor Economics 331–35. 33 In re High-Tech Employee Antitrust Litigation [2011] No 11-CV-2509-LHK. 34 In re: Animation Workers Antitrust Litigation [2015] D Cal Case No 14-cv-04062-LHK 123 F.Supp.3d 1175. 35 Danielle Seaman v Duke University [2018] MDNC No 1:2015cv00462. 36 Cason-Merenda v Detroit Medical Center [2012] ED Mich No 2:06-cv-15601. 37 NCAA v Alston [2021] 594 US ___. 38 Le v Zuffa, LLC, [2015] D Nev No 2:15-cv-01045. 39 US v Knorr-Bremse AG and Westinghouse Air Brake Technology Corp [2018] DDC No 1:18-cv-00747. 40 The Council of Fashion Designers of America [1995] Docket C-3621. 41 Beltran v InterExchange Inc, [2018] DCol No 1:14-cv-03074. 42 See Department of Justice Antitrust Division and Federal Trade Commission, ‘Antitrust Guidance for Human Resource Professionals’ (2016) <https://www.justice.gov/atr/file/903511/download> accessed 29 September 2021. 43 We focus on monopsony power since the empirical studies we cite explicitly refer to monopsony power. But concentration also tends to increase bargaining power since it reduces the outside options for sellers. It can be difficult, however, to determine whether bargaining power would be harmful since it could also act as countervailing power. 44 Employers can only exploit monopsony power if the supply curve is positively sloped, which is the case for labour markets. See Section 3 for the empirical evidence of positively sloped supply curves. 45 The Herfindahl–Hirschman Index (HHI) is the sum of the squared market shares of all of the firms in the industry. Decimals are avoided by multiplying by 10,000. Thus, a market share of 0.05, which would become 0.0025 once squared, would correspond to a value of 25. See US Department of Justice and Federal Trade Commission ‘Horizontal Merger Guidelines’ (2010), <https://www.justice.gov/atr/horizontal-merger-guidelines-08192010> accessed 29 September 2021. 46 In José Azar and others, ‘Labor Market Concentration’ (2019) NBER Working Paper No 24147, the authors found that 54 per cent of labour markets had concentrations above 2,500 when they defined the geographic market using commuting distance. This evidence certainly suggests that there is some cause for competitive concern in many labour markets. 47 Azar, ibid. 48 Efraim Benmelech and others, ‘Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?’ (2018) NBER Working Paper No 24307. 49 Pedro S Martins, ‘Making their Own Weather? Estimating Employer Labour-market Power and its Wage Effects’ (2018) Queen Mary, University of London, School of Business and Management, Centre for Globalisation Research, Working Paper 95. 50 Christina Depasquale, ‘Monopsonistic Exploitation: Theory and Evidence’ (2018) Working Paper. 51 For a market with seven firms, the HHI must be at least 1,429. 52 Elena Prager and Matt Schmitt, ‘Employer Consolidation and Wages: Evidence from Hospitals’ (2021) 111 American Economics Review 397–427. 53 Gustavo Grullon and others, ‘Are U.S. Industries Becoming more Concentrated?’ (2018) Swiss Finance Institute Research Paper, No 19-41; Matias Covarrubias and others, ‘From Good to Bad Concentration? U.S. Industries over the past 30 years’ (2019) NBER Working Paper No 25983. 54 See David McLaughlin, ‘States Urge DOJ to Probe Meat Packers over Price Manipulation’ (2020), <https://www.bloomberg.com/news/articles/2020-06-04/doj-subpoenas-four-biggest-meatpackers-in-antitrust-probe> accessed 29 September 2020. 55 Eleven US Attorneys General encouraged the DOJ to investigate price-fixing in the beef market. Press Release, Iowa Dep’t of Justice, Miller, ‘10 AGs Urge Federal Investigation of Meatpacking Practices’ (2020), <https://www.iowaattorneygeneral.gov/newsroom/meatpackers-antitrust-barr-justice> accessed 29 September 2021. 56 In re Cattle Antitrust Litig, [2020] US Dist Minn No 19 1222. 57 Charles Morris v Tyson Chicken Inc, [2020] WD Ky No 4:15-cv-00077. 58 Allen v Dairy Farmers of Am, Inc [2014] D Vt No 81193. 59 United States v Rice Growers Ass’n of California and Pacific International Rice Mill [1953] ND Cal 110 F Supp 667. 60 See Testimony of Peter Carstenson, ‘Single Buyer Markets in Agriculture’, Senate Judiciary Committee, 30 October 2003. 61 In 2018, Senator Cory Booker introduced the Food and Agribusiness Merger Moratorium and Antitrust Review Act of 2018, which would have imposed a moratorium on agribusiness, food and beverage manufacturing, and grocery retail mergers due to concerns of rising concentration that would lead to monopsonistic exploitation. Food and Agribusiness Merger Moratorium and Antitrust Review Act of 2018, HR 6800, 115th Congress (2018). 62 For some brands, such as Coca Cola, Gerber baby food, and Heinz ketchup, the retailer’s bargaining power is much weaker than for less popular brands. 63 See Todd Sharkey and Kyle Siegert, ‘Impacts of Nontraditional Food Retailing Supercenters on Food Price Changes’ (2006), <https://www.researchgate.net/publication/228790460_Impacts_of_nontraditional_food_retailing_supercenters_on_food_price_changes/link/0c960519b7ab1a5191000000/download> accessed 10 July 2021. 64 For example, see US v Pook [1988] ED Pa No 87-274. 65 US v Champion International Corp [1977] 557 F.2d 1270. 66 For example, see United States of America v Avi Stern, Stuart Hankin, and Christopher Grave [2017] SD Flor No 17-80204. 67 DeLoach v Phillip Morris Cos [2000] DDC 132 F Supp 2d 22. 68 Kone AG and Others v ÖBB-Infrastruktur [2014] AG C-557/12. 69 Campine NV and others [2017] AT.40018. 70 Weyerhaeuser Company, Petitioner v Ross-Simmons Hardwood Lumber Company, Inc [2007] 549 US 312. 71 Ariel Ezrachi and Maria Ionnaidou, ‘Buyer Power in European Union Merger Control’ (2014) 10 European Competition Journal 69–95 describe the prevalence and implications of buyer power in merger review in the European Union. 72 15 USC s 18. 73 15 USC s 18 applies to all types of mergers—horizontal, vertical, and conglomerate. 74 For example, a merger could create a dominant firm that has a much larger market share than a number of smaller fringe firms. This could lead to price leadership, where the merged firm unilaterally increases the price which is then adopted by the fringe firms. 75 When there are fewer firms in a market, it is easier to organize and implement a cartel. See for example, George J Stigler, ‘A Theory of Oligopoly’ (1964) 72 Journal of Political Economy 44–61. 76 The Department of Justice and Federal Trade Commission, ‘Horizontal Merger Guidelines’ (2010), <https://www.justice.gov/atr/horizontal-merger-guidelines-08192010> accessed 29 September 2021 consider industries with an HHI below 1,500 to be unconcentrated. 77 ‘Horizontal Merger Guidelines’, s 10, ibid. 78 Thresholds for the minimum value of the assets and minimum size of the parties are adjusted annually. These numbers may be found in the 2021 adjustment, which can be accessed at <https://www.ftc.gov/news-events/blogs/competition-matters/2021/02/hsr-threshold-adjustments-reportability-2021> accessed 29 September 2021. 79 ‘Horizontal Merger Guidelines’ (n 76). 80 The proposed merger of Sanford Health and Mid-Dakota Clinic is a good example of how concentrated local markets can be, although it involves monopoly power. The HHI would have changed from 5,200 to 10,000 in the general surgery market in the Bismark-Mandan area. This merger was under the HSR threshold and would have escaped notice had not private parties brought the case to the Agencies’ attention. Federal Trade Commission v Sanford Health [2019] 926 F. 3d 959. 81 In Section 4 above, we cited studies of hospital mergers that caused havoc in the nurse labor market. These mergers went unchallenged by the FTC either because they did not meet the HSR Act threshold or because the FTC believed them to be benign. 82 The DOJ has not ignored the possibility that a horizontal merger may create, or increase, monopsony power. In their Anthem-Cigna Complaint, the DOJ alleged that the merger of the second and third largest health insurers would increase monopsony in their dealings with health care providers. United States v Anthem, Inc and Cigna Corp [2016] Case No 1:16-cv-01493, Complaint <https://www.justice.gov/atr/file/903111/download> accessed 29 September 2021. The District Court ignored this issue since it found the merger presumptively unlawful based on predictable effects in the output market. United States v Anthem, Inc and Cigna Corp [2016] DC Case No 1:16-cv-01493-ABJ <https://www.justice.gov/atr/case-document/file/940946/download> accessed 29 September 2021. Additionally, in 2011, the DOJ challenged George’s Food LLC for a proposed merger of chicken processors, which the DOJ feared could affect the broiler prices paid to growers. United States of America v George’s Foods LLC Western District of Virginia [2011] No 5:11-cv-00043-GEC. 83 s 307. See (n 4). 84 These figures were calculated from FTC annual reports. Federal Trade Commission, ‘Annual Competition Report, 42nd Report (FY 2019)’ (2019), <https://www.ftc.gov/policy/reports/policy-reports/annual-competition-reports> accessed 29 September 2021. 85 ibid. 86 In the Matter of Otto Bock HealthCare North America, Inc [2017] FTC Docket No 9378. 87 Merger Filing Fee Modernization Act of 2019, s1937, 116th Congress (2019–2020). Senator Klobuchar proposed decreasing the fees on smaller mergers but would add substantial fees for large mergers which have aggregate total assets in excess of $1,000,000,000. 88 s 307. See (n 4). 89 South Africa, for example, shifts the burden of proof to the merging parties. 90 ‘Horizontal Merger Guidelines’, s 12. See (n 76). 91 See Iona Marinescu and Herbert J Hovenkamp, ‘Anticompetitive Mergers in Labor Markets’ (2019) 94 Indiana Law Journal 1031–63. 92 See Naidu and others (n 30). The authors offer an alternative method that adapts the so-called ‘upward pricing pressure’ concept to monopsony. They propose using ‘downward wage pressure’. 93 s 307. See (n 4). © The Author(s) 2021. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

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Journal of Antitrust EnforcementOxford University Press

Published: Oct 18, 2021

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