Popular notions of oligopoly and monopoly tend to focus on the danger that firms, having gained control over a marketplace, will then be able to dictate an unfairly high price, extracting a sort of tax from society as a whole. But what should concern us today even more is a mirror image of monopoly called “monopsony.” Monopsony arises when a firm captures the ability to dictate price to its suppliers, because the suppliers have no real choice other than to deal with that buyer. Not all oligopolists rely on the exercise of monopsony, but a large and growing contingent of today's largest firms are built to do just that. The ultimate danger of monopsony is that it deprives the firms that actually manufacture products from obtaining an adequate return on their investment. In other words, the ultimate danger of monopsony is that, over time, it tends to destroy the machines and skills on which we all rely.
Examples of monopsony can be difficult to pin down, but we are in luck in that today we have one of the best illustrations of monopsony pricing power in economic history: Wal-Mart. There is little need to recount at any length the retailer's power over America's marketplace. For our purposes, a few facts will suffice—that one in every five retail sales in America is recorded at Wal-Mart's cash registers; that the firm's revenue nearly equals that of the next six retailers combined; that for many goods, Wal-Mart accounts for upward of 30 percent of U.S. sales, and plans to more than double its sales within the next five years.
The effects of monopsony also can be difficult to pin down. But again we have easy illustrations ready to hand, in the surprising recent tribulations of two iconic American firms—Coca-Cola and Kraft. Coca-Cola is the quintessential seller of a product based on a “secret formula.” Recently, though, Wal-Mart decided that it did not approve of the artificial sweetener Coca-Cola planned to use in a new line of diet colas. In a response that would have been unthinkable just a few years ago, Coca-Cola yielded to the will of an outside firm and designed a second product to meet Wal-Mart's decree. Kraft, meanwhile, is a producer that only four years ago was celebrated by Forbes for “leading the charge” in a “brutal industry.” Yet since 2004, Kraft has announced plans to shut thirty-nine plants, to let go 13,500 workers, and to eliminate a quarter of its products. Most reports blame soaring prices of energy and raw materials, but in a truly free market Kraft could have pushed at least some of these higher costs on to the consumer. This, however, is no longer possible. Even as costs rise, Wal-Mart and other discounters continue to demand that Kraft lower its prices further. Kraft has found itself with no other choice than to swallow the costs, and hence to tear itself to pieces.
The idea that Wal-Mart's power actually subverts the functioning of the free market will seem shocking to some. After all, the firm rose to dominance in the same way that many thousands of other companies before it did—through smart innovation, a unique culture, and a focus on serving the customer. Even a decade ago, Americans could fairly conclude that, in most respects, Wal-Mart's rise had been good for the nation. But the issue before us is not how Wal-Mart grew to scale but how Wal-Mart uses its power today and will use it tomorrow. The problem is that Wal-Mart, like other monopsonists, does not participate in the market so much as use its power to micromanage the market, carefully coordinating the actions of thousands of firms from a position above the market.
Another basic premise of the free-market system is that the price of a commodity or good carries vital information from actor to actor within an economy—say, that cherries are scarce, or vinyl floor tiles abundant, or the latest iPod includes a new technology. Again, no one can deny that, technically, every firm that supplies Wal-Mart is free to ask whatever price it wants. But again, we must ask whether this holds true in the real world. Every producer knows that Wal-Mart is, as one of its executives told the New York Times, a “no-nonsense negotiator,” which means the firm sets take-it-or-leave-it prices, which as we know from the previous paragraph are far harder to leave than to take. Every so often Wal-Mart will accept a higher price, but then the retailer's managers may opt to punish the offending supplier, perhaps by ratcheting up competition with its own in-house brands. Price, within the consumer economy, increasingly carries but one bit of information—that Wal-Mart is powerful enough to bend everyone else to its will.
Those who would use the word “free” to describe the market over which Wal-Mart presides should first consult with Coca-Cola's product- design department; or with Kraft managers, or Kraft shareholders, or the Kraft employees who lost their jobs. These results were decided not within the scrum of the marketplace but by a single firm. Free-market utopians have long decried government industrial policy because it puts into the hands of bureaucrats and politicians the power to determine which firms “win” and which “lose.” Wal-Mart picks winners and losers every day, and the losers have no recourse to any court or any political representative anywhere.
