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Wednesday, February 10, 2010

Competition in Agriculture Symposium: Comments of Jeff Harrison

Posted by Jeff Harrison (University of Florida Levin College of Law)

There seems to be little doubt that buyers in many sectors of agricultural markets possess monopsony power.  A typical scenario is one in which growers make substantial investments in their productive facilities and find themselves faced with one or a handful of buyers.  This means lower prices for their output and, unless the buyers are able to push the sellers onto an “all or none” supply curve, decreased output. In short, as with monopolies there are both allocative and distributive consequences. Two problems are probably most responsible for the plight of sellers.

Unless less the monopsony power is actually possessed by an oligopsony involving collusion, an important factor complicates the measures that can be taken to relieve sellers. As with monopolies, monopsonies are not illegal. As Justice Hand noted, monopolization is different from simply being a monopolist. Monopolization requires some actions that undermine competition without off setting benefits. That seems to have evolved into the requirement of a predatory action. Similarly, monopsonization must be regarded as something other being a monopsonist. This requires the identification of the “bad acts” that are off limits to buyers vis a vis other buyers. And, if the law of monopsonization is to track that of monopolization, those acts should be of a predatory nature. That is, they should make no sense unless the firm’s primarily or only goal is to eliminate a competing buyer. The barriers to a lawsuit in this type of situation are formatable.

Sellers, whether selling to monopsonies or oligopsonies, are faced with another problem. The issue here is at what  time does the existence of monopsony power count. A good way to think about it is to consider the Kodak tying case of the early 90s. In that case the buyers were arguably “locked in.” The Court stressed switching costs and information costs as the causes of the lock in. But what happens if you lock yourself in? That is, before signing on the dotted line or making a significant investment in productive facilities, you know that there are only one or a few buyers in the market.  This characterizes many of the instances in which sellers of agricultural commodities find themselves selling to those with monopsony power and the buying power they contend with can be viewed as something opted into.

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Your second point is particularly important in this discussion and has largely been ignored in the debate. The implicit assumption underlying the antitrust argument is that, because an individual has been farming for some period of time, that individual has a right to continue farming...and to farm profitably. That the land is long-lived is confused with the relative short-term and revolving nature of the actual production of agricultural commodities.

Each season farmers choose to continue farming. That choice is made knowing (as well as one might) the economic environment of that season...and certainly the degree of monopsony in the local market. Farmers repeatedly opt-in to that market setting.

The question then is whether the decision to continue farming rises to the level of necessity. While it may seem that way to many farmers, in fact it is not. Most marginal farms (and farmers) already rely heavily on off-farm and non-farm income. Farms producing less than $250,000 in revenue rely almost entirely on their non-farming activities to support their households. Thus, there is no economic necessity that forces them to continue farming. It is as much a choice of lifestyle consumption as it is a choice of economic production. And while antitrust is allegedly intended to protect consumers, this is not the type of consumption (trade-off) that antitrust is intended to protect.

Posted by: Michael Sykuta | Feb 10, 2010 9:17:41 AM

Mike and Jeff: Indeed, this is a great point. I see it as an important starting point for addressing Kyle's claim at the end of his post ( that we should look at farmer welfare rather than consumer welfare in assessing competitive effects of seed manufacturer conduct. He claims that consumer welfare effects would be hard to measure. Given this point, however, I'm not so sure farmer welfare effects would be any easier to measure (and, as an aside, I would note that looking for one's keys where the light is better because it's hard to see where they were actually dropped is rarely a good strategy). Thoughts? (I'll also post this question at Kyle's post).

Posted by: geoff manne | Feb 11, 2010 9:11:20 AM

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