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Big Retail Tightens Its Grip

In an era of bigness, it’s time for regulators and consumers to think small again.

A month ago I went into a local small business in my Los Angeles suburb to buy a “big girl” bike for my daughter. The couple blocks of shops are apparently so good at aping the main streets of middle American small towns that camera crews film there at least once a month. Once I got to the store to buy my daughter her bike, though, I was disillusioned by what the stickers on the bikes said: Made in China. 

I looked up the company on my phone and discovered it was a U.S.-based multinational corporation. If I bought my daughter her bike there, I realized, I would be supporting “small business” only partially. Small retail, apparently, doesn’t mean small-scale industrial production. If I bought a bike at this store would I still fulfill my self-professed goal, in an age of renewed economic nationalism, to be an economic patriot and support America’s strategic decoupling from China? 

Maybe, I thought, I’ll ask the bike store owner why he doesn’t buy from an American producer. But I already knew the answer: “Because then I wouldn’t be able to compete.” 

I ended up buying the bike for many of the same reasons I shopped at Walmart and Amazon during the height of the pandemic—a combination of price and convenience. Could I have scoured Los Angeles for an independent bike manufacturer? The answer is almost certainly yes, given the requisite amounts of gumption and time. If I found one, but it relied on fabricated metals from China, would my purchase still count towards supporting small businesses? Perhaps. Perhaps not.

Bernie Sanders’ runs for president in 2016 and 2020 were made famous for catchall slogans: “oligarchy,” “the 1 percent,” and the notion that we live in a “rigged economy.” As it turns out, he was right. The economy is rigged, in more ways than one, and things like raising taxes and strengthening private sector unions are only a part—albeit an important one—of a necessary response to the great story of business consolidation over the last 30 to 40 years. It was hard for me to find a small bicycle manufacturer to complement my “small business” bicycle purchase because of an economic path consciously chosen over the years by regulators at the FTC and DOJ Antitrust Division, who were in turn influenced by prominent economists and jurists. 

An incisive and eminently comprehensible (by the standard of layman readability) article in the Yale Law Journal by President Biden’s nominee for FTC Commissioner, Lina M. Khan, paints a detailed picture of how we got here—here being the economic quagmire of big box retail and Big Tech dominating an ever-larger share of our nation’s economic activity. Their market dominance increasingly draws the ire of both left and right in this moment of indisputably populist politics. Yet many of us don’t necessarily understand how Walmart, Google, Amazon, Facebook, and Apple, among others, came to be the behemoths that they are now.

In Khan’s telling, American legislation from the Clayton Act (1890) to the Sherman Act (1914) and the Robinson-Patman Act (1936) set our country on a course towards preserving a capitalist system of genuinely free markets. In place of a market dominated by monopolies that could fix prices and collude with fellow large corporations, American legislation and legislators rose to the task of preserving competition and thus innovation and entrepreneurship. Irrespective of costs and benefits to consumers or convenience gained by economies of scale, markets had to be structurally sound to protect against anticompetitive behavior that might suppress competition by creating ever-larger barriers of entry to potential rivals.

A school of thought called “economic structuralism” reinforced these laws. Economic structuralists had a “structure-based view of competition,” meaning that markets were only healthy if they were diversified horizontally and vertically. (Horizontal market diversity meaning a diversity of producers; vertical diversity meaning diversity in the supply-chain of any particular industry.) 

Then, in the 1970s, “price theory” rode the wave of free-market enthusiasm straight into the Reagan years, all the way through to George W. Bush and, arguably, the Obama administration. As long as prices remained low, said the so-called “Chicago School of Economists,” as well as jurists like Robert Bork in his influential book The Antitrust Paradox, concerns over monopolies were generally unfounded. 

According to Khan: “Foundational to this view is a faith in the efficiency of markets, propelled by profit-maximizing actors.” The result of this new wave of thinking in the Washington bubble of elite opinion was a generation of comparatively timid regulators and poor courtroom decisions in favor of monopolists. In hindsight, according to Khan and a growing bipartisan consensus, price theory was given undue deference and allowed a small handful of companies to amass unchecked power.

As if to prompt a pang of latent guilty conscience determined to resurface after my moral semi-failing at the bike store, a story appeared a few weeks later in the Wall Street Journal titled “Amazon is the Target of Small-business Antitrust Campaign.” On NPR was another nudge: an interview with Alec MacGillisdiscussing his new book about the company, in which he states that many of us don’t like to ponder Amazon’s explosive growth during the pandemic because “we’re all complicit.” We all ordered products “the safe way,” to our door, and used quarantine guidelines as our rationale while Amazon hired 400,000 more people and grew its warehouse space by over 50 percent.

By some measures Amazon is now tied to two-thirds of all internet commerce, and studies have shown that many online shoppers—particularly once they’ve purchased a Prime membership—eschew even a web search in their online shopping, going straight to the Amazon website instead. These Prime memberships are subsidized by Amazon at a loss in order to gain market share. 

This raises the sort of problems Khan and others mean when they speak of “structuralist” economic concerns. Once Amazon has squeezed out all its remaining competitors, what’s to stop it from raising prices? How will new rivals even be able to compete with the company’s outsized market power and its ability to both sell and control the selling infrastructure? Amazon simultaneously operates sales platforms that third parties use and launches competing products on those platforms with data gleaned from their rivals.

Stacy Mitchell looks in our current moment of Big Tech and big box dominance like something of a prophet—a Jonah who has just completed a fifteen-year slog through a Nineveh enthralled by “free market” theorists. Mitchell is co-director at the Institute For Local Self-Reliance and a key organizer of the Small Business Rising Coalition profiled in the front-page Wall Street Journal article mentioned above. As early as 2006, Mitchell wrote a book titled Big Box Swindle: The True Cost of Mega-Retailers and the Fight for America’s Independent Businesses.

What Mitchell helped me to understand, in addition to the aforementioned concerns about structurally unsound markets over-reliant on hyper-consolidated producers and supply chains which suppress competition, is how Big Box stores and Big Tech relate to the other stirrings of populist disquiet in our electorate, like outsourcing and income inequality.

“A substantial driver of income inequality,” Mitchell explained to me in an interview, “is consolidation in the market…When you have too few companies in the market, there is less competition for your labor, which holds down wages. And you have less negotiating power as a worker because it’s harder for you to leave and find another employer.” 

When I ask Mitchell if there is a connection between outsourcing and big box consolidation her response is instantaneous. “Absolutely,” she says, “consolidation in retail drove manufacturing overseas. Demands for ever lower prices from big box retailers meant lower labor costs and lower quality to get to that lower price point.” The answer, we all know now, much to the devastation of our economy and the social fabric of America’s rust belt, was to send factories overseas.

According to Mitchell, American politicians on both sides of the political divide are waking up to the concerns of the economic structuralists that have gone unheard for the last 30 to 40 years. Both the House Antitrust Report on Big Tech, written by Democrats, and the minority Republican response to it, Congressman Ken Buck’s Third Way Report, “echo one another fundamentally” in their findings that serious structural problems exist in the American economy as it is currently configured. A caveat to that consensus is that Democrats seem more open to the idea of additional regulatory agencies—much like the Consumer Financial Protection Bureau that emerged from the crucible of the Great Recession—while Republicans like Buck would first like to see greater antitrust enforcement by the FTC and the DOJ Antitrust Division. 

Buck points out that the FTC and DOJ have a combined budget of only $510 million per year to enforce antitrust law, while the Big Tech sector (Amazon, Google, Apple, Facebook) represent $2 trillion in economic activity per year and over 10 percent of America’s GDP. Continued pressure from Congress through further committee investigations—such as the one recently conducted on Big Tech, along with the allocation of more funding and resources to the FTC and DOJ—would be important steps, in lieu of immediate legislation, in the inauguration of a new era of trust-busting under President Biden’s watch.

Mitchell pointed out to me that opinion polls suggest broad bipartisan support for such actions. In an answer to critics who say consumers like the Amazon experience, Mitchell argues that just because you “love e-commerce, doesn’t mean you love Amazon” per se. What is more, Mitchell explains to me the fundamental threat to entrepreneurship and innovation presented by the Big Tech and big box store economy:

“The key to introducing new products to the market is independent retailers,” Mitchell tells me. “Amazon is good for search but bad for discovery.” Small retailers are where new companies are most likely to place their products initially, and it is the climate of the small retail experience that introduces customers to new products. Mitchell cites studies and anecdotes of toy sellers and books shops which demonstrate that consumers are more likely to encounter a new toy or a new author through small sellers, which is precisely why polling also demonstrates a consistent consumer preference for the non-chain retail experience.  

Before we ended our interview, Mitchell pointed me to Chris Jones of the National Grocers Association (NGA) and the comparative lack of media coverage of predatory tactics designed to eliminate competition from small grocers. The grocery business has undergone an alarming transformation, and not for the better. As with e-commerce, the trend has only been accelerated by the pandemic. A quarter of all grocery sales nationally—the percentage is higher in some states—are made through Walmart.

A recent white paper by the NGA, “Buyer Power and Economic Discrimination in the Grocery Aisle,” provides a shocking revelation of Walmart’s morally execrable and legally dubious practices to squeeze out competitors amid the pandemic:

In 2017, Walmart announced a new requirement that suppliers for Walmart stores and Walmart’s e-commerce business must provide on time and in full deliveries 75 percent of the time. Since then, Walmart has repeatedly tightened this requirement, raising the bar for on time, in full deliveries from 75 percent to 85 percent and then to 87 percent in 2019. In September 2020, while manufacturers and suppliers throughout supply chains were struggling to safely meet demand during the COVID-19 pandemic, Walmart raised the bar again, demanding 98 percent on time, in full deliveries. Walmart punishes suppliers that fail to meet its demands by charging a penalty of 3 percent of the cost of goods sold—a devastating penalty in an industry already operating with razor-thin margins.

The result, of course, was that in times of crisis-induced scarcity—and due to no fault of their own on the side of smaller grocers—supplier product was diverted from smaller stores to Walmart in order to avoid “a devastating penalty.” Prior to the pandemic, these same stores were often charged more by their suppliers for the same goods. Walmart’s P.R. arm would argue that this is simply a function of healthy markets; economies of scale allow Walmart to purchase larger quantities, thus securing lower prices. 

Advocates like Chris Jones would argue that this is in fact an example of predatory pricing which further squeezes out independent grocers as well as the smaller-scale farmers who can’t compete with big agribusiness. As Jones pointed out to me in an email exchange:

The FTC traditionally oversees competition in the grocery sector. We have not seen a price discrimination or an exclusionary conduct case in the grocery sector brought by the FTC in over 20 years despite overwhelming evidence that grocery power buyers are influencing supplier terms in their favor at the expense of independents.

Like Khan and Mitchell, Jones cites misguided economic theory along with lacunas in antitrust law as deserving of blame:

We suspect it’s a combination of the engrained Chicago School mindset that wrongly regards the exercising of buyer power as a market efficiency that benefits consumers. We rebut this notion in the White Paper. The lax enforcement approach is also attributable to the difficulty of bringing a case in the courts due to the nearly impossible burden of proof requiring a plaintiff to show market wide harm to competition in the case of the Robinson Patman Act.

Perhaps it’s worth reminding readers here that Amazon also has a grocery arm, as well as burgeoning roles in health services and pharmaceuticals and even the financial sector. As Mitchell states to me with eminently quotable precision and pithiness: “There are vanishingly few parts of the economy where Amazon doesn’t have its tentacles.” 

Her observation reminded me of an op-ed, written early on in the pandemic by William Galston, about the inherent tradeoffs between “efficient” and “resilient” economic systems. Hasn’t COVID made it abundantly clear that our economy has sacrificed far too much at the altar of efficiency, gutting small- to medium-sized businesses, manufacturers, and other producers in the process? Whether the pandemic has cemented our conviction that supply chain and producer diversity are needed now more than ever, or simply forged a deeper dependence on consolidated big businesses like Amazon and Walmart, will depend in large part on whether Congress demonstrates the resolve to put its money where its mouth is.  

As I have pondered my small business-bought but Chinese-made bike, alongside the illuminating conversations with Mitchell and Jones, Khan’s Yale Law paper, the House committee reports, and the National Grocers Association’s white paper, I’ve arrived at a few realizations: One, the American economy needs deep structural reform; two, there is a bipartisan consensus to launch a new era of trust busting, even if the devil is in the details; and three, in an era of Biden’s multi-trillion dollar “new New Deal,” legislators on both sides of the aisle must ensure that this spending blowout does not further entrench the structural flaws of the mega-business agenda that, by all appearances, has a powerful lobbying arm in Washington dedicated to making sure the opposite comes to fruition. 

Kurt Hofer is a native Californian with a Ph.D. in Spanish Literature. He teaches high school history in a Los Angeles area independent school.

This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.

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