New Concern with Buyer Market Power: The Adobe Case and the New Guidelines

The Department of Justice Antitrust Division (DOJ) has shown increased interest in buyer market power both in a recent case and in the new Horizontal Merger Guidelines. DOJ recently filed a complaint against several high tech firms that had agreed not to “cold call” each others’ employees. The complaint in this case, U.S. v. Adobe Systems, Inc., Apple, Inc., Google, Inc., Intel Corporation, Intuit, Inc., and Pixar   (“Adobe”), stated that these agreements were per se violations of Section 1 of the Sherman Act that “disrupted the normal price-setting mechanisms that apply in the labor setting.” DOJ was solely concerned with market power that the defendants might exercise as buyers of labor and did not allege any effects in output markets.

The economic analysis of buyer market power is very similar to the analysis of seller market power. A firm that is the only buyer in a relevant antitrust market for an input is called a monopsonist. A monopsonist can influence the price it pays for an input, such as labor, by changing the amount that it buys. Just as a monopolist restricts output to increase price, a monopsonist restricts the number of workers hired to reduce wages. While a competitive firm will hire workers until the price of labor (wages and benefits) equals the marginal value of an additional worker, a monopsonist would hire workers until the marginal labor cost equals the marginal value of an additional worker. The marginal labor cost is greater than the price of labor, because by raising its price to hire additional workers the monopsonist increases the price it must pay all workers. The monopsonist thus pays workers less than their marginal value and hires fewer workers than a competitive firm would, just as a monopolist charges buyers higher prices and produces less output than a competitive firm. Monopsony results not only in a transfer of wealth from labor to the firm, but also in economic inefficiency due to the lower quantity of labor hired.

If labor does not have market power, the lower wages a monopsonist pays do not result in lower output prices because the monopsonist bases its output decisions on the higher marginal cost of labor, not the wage. Output prices may be competitive, for example, when the monopsonist competes with other firms (perhaps in other geographic areas) who face competitive input markets. Because the firms with monopsony power no longer employ the optimal quantity of labor, however, economic inefficiency can occur even if output prices are competitive.

Since the effects of buyer market power on economic efficiency depend on the reduction in labor purchases, it is important to examine whether such reductions occur. In Adobe, DOJ did not discuss the effect of the agreement on the number of workers hired. Monopsony may not cause economic inefficiency under certain conditions, such as bilateral monopoly, which exists when a market with only one buyer also has only one seller. Bilateral monopoly can eliminate the effect of monopsony on the quantity purchased, as the FTC found in Caremark Rx, Inc./AdvancePCS. The FTC declined to challenge that 2004 merger because it did not find that the acquisition would lower overall purchases. The 2010 Horizontal Merger Guidelines (“2010 Guidelines”), however, indicate that the Antitrust Agencies do not require a short-run effect on quantities purchased to indicate that a merger will increase buyer market power.

The 2010 Guidelines provide more detail about mergers that are likely to enhance buyer market power than did the 1992 Horizontal Merger Guidelines. While the Adobe case was not a merger, the issues that the 2010 Guidelines describe are relevant to the consideration of buyer market power in that case. First, the 2010 Guidelines explain that the relevant market would include alternatives available to sellers in the face of a decrease in the price paid by a hypothetical monopsonist. Buyer market power may exist in a local area because inputs, such as labor, cannot easily move to other areas. Some of the employees in the Adobe case are employed by firms with locations in the Silicon Valley. If Silicon Valley employees could easily relocate, that would limit Silicon Valley firms’ ability to exercise buyer market power.

Second, the 2010 Guidelines recognize that monopsony can have anticompetitive effects even in cases where there are no downstream effects. This concept is not new. For example, in a predatory monopsony case, Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., the Supreme Court recognized that a predatory monopsonist could potentially recoup its losses in the input market and would not necessarily raise prices in the output market. In Adobe, the competitive impact statement refers only to the effect on competition for high tech employees. No mention is made of any effect in output markets. In fact, the Adobe defendants do not compete in the same output markets.

Finally, the 2010 Guidelines discuss efficiencies in buyer arrangements, such as those that may lower “transactions costs or allow a firm to take advantage of volume-based discounts.” In a case under Sherman Section 1, the effects of an agreement that has procompetitive benefits that are an intrinsic part of the collaboration are analyzed under the rule of reason. In Adobe, DOJ rejected the rule of reason by arguing that the agreements had no intrinsic benefits. Had the case been litigated, the defendants might have argued that the agreements were needed to realize significant efficiencies. The defendants might also have argued that the agreements had a negligible, if any, anticompetitive effect, as they limited only one method by which workers learn of employment opportunities. Google stated in its “Public Policy Blog” that options for potential employees include LinkedIn, job fairs, employee referrals, and direct contact. The measurement of the effect of the “no call” agreement on both wages and employment levels would have been an important issue.

In summary, when investigating a matter involving buyer market power, the Agencies consider the options available to suppliers and any efficiencies from the merger or agreements being considered, but do not necessarily consider effects in the downstream market. Had the Adobe case gone to trial, these principles likely would have been applied to the arguments on both sides of the case.

Gloria J. Hurdle has submitted testimony and testified at deposition on economic damages in a number of employment matters, including discrimination, wrongful termination, and accidental injury. She also has testified on antitrust issues related to airline and other transportation matters.