Yesterday’s news that Bayer Pharmaceuticals will purchase the agribusiness giant Monsanto for $66 billion—pending regulatory review—adds fuel to the growing fire of skepticism about current antitrust policy. It follows the announcement of two other megadeals in the same broad industry: DuPont’s merger with Dow Chemical and China National Chemical Corporation’s acquisition of Syngenta. All six of the companies in question have sprawling and overlapping lines of business, and the motive for these mergers is to profit by taking advantage of close product relationships and sweetheart deals. But these profits come at the expense of customers, mostly in the agriculture sector, and ultimately consumers as well.
To take a concrete example of the issues raised by interlocking product lines: Monsanto develops and markets genetically modified seeds that account for the majority of output of many staple crops, and that business is already highly profitable and protected by ironclad intellectual property restrictions that guarantee the company a healthy market share far into the future, no matter whether they invest in innovative new products. Bayer produces chemicals with agricultural applications, such as pesticides and fertilizer. The seeds and the chemicals can be (and to some extent already are) designed in a mutually consistent way to increase the yield of both. That seemingly benign technological advance quickly starts to look exclusionary if customers must purchase both sets of products in order for one to work. In this world of limited choice across linked markets, customers—i.e., farmers—are either locked into the Bayer-Monsanto product space or excluded from it entirely, and the alternative product spaces may be equally circumscribed, if they exist at all.
That brings up another major news story from the past week, albeit one whose implications for competition and market structure were not the headline issue. When Apple announced that the iPhone 7 would no longer include a standard headphone jack, it was treated alternately as a courageous step into the future or expensive-but-inconsequential upselling, as iPhone users would now have to buy pricy Bluetooth headphones. But the major implication is that other companies that wish to reach customers via the iPhone will have to use the so-called Lightning jack, which is a proprietary Apple technology, rather than the decades-old headphone jack they could use for free.
Apple would like the iPhone to be treated as a technologically groundbreaking platform that enables mobile commerce and empowers sellers who wouldn’t otherwise be able to reach customers—in which case Apple should be granted essentially free rein to charge upstream vendors for the privilege of using it. Similarly, the ostensible technological advances embodied in interlocking agribusiness product lines entitle the would-be Bayer-Monsanto to structure its products in a way that locks in customers.
A further and often-overlooked motivation for such anticompetitive behavior is price discrimination among producers: When companies have enough market power to force terms on their counterparties and pick winners among them, often the best strategy for the disadvantaged is to join one of the oppressors, so to speak, by either merging horizontally with the advantaged competitor and thus enjoying his favorable terms, or integrating vertically with the powerful counterparty. That kind of strategic interaction is common in the health sector, where escalating concentration by insurance companies on one hand justifies concentration of care providers on the other, and vice versa, all at the expense of very high and variable health care prices and insurance premiums for consumers.
The standard tests for anti-competitive behavior tend to look first at well-defined and homogeneous markets. For instance, Monsanto produces seeds, Bayer produces chemicals, ergo they are not in competition and there’s no anti-competitive implications of their merger. Insofar as their product lines are linked, that is likely only to benefit consumers by providing superior products, rather than harm them through exclusionary trading terms.
The antitrust environment was not always as permissive as it has been in recent decades. Recent experience of dominant players standing as gatekeepers to the market and charging a healthy toll for the privilege of earning a living harks back to the reason we have antitrust laws in the first place. Since then, and especially with the rise of the “Chicago School” in the 1970s and its instantiation in policy in the 1980s, that more ambitious regulatory role was called into doubt and restraint in applying the extensive powers encoded in antitrust legislation became the rule, both in the regulatory agencies and in the judiciary. But recent experience is starting to revive old arguments. The current permissive approach has manifestly failed even on its own terms of improving consumer welfare, let alone the lofty goals of antitrust legislation as originally conceived: to diffuse power in the economy and make sure no one is in a position to charge a toll for the privilege of earning a living.
9.16.16: Updated to clarify a point on current antitrust law