Buyers Beware!

Globalisation increases buying power, says Robin Jackson, but makes it more crucial for procurement professionals to guard against abuse of the market.

There have been many investigations in recent years into alleged abuse of the market by companies joining forces to set prices to consumers. Just look at the inquiry in the UK last year into pricefixing by BA and other airlines, for example.

In the past the question has been whether the growing power of the big supermarkets, for example, is good for consumers. Now it is also increasingly a question of whether they have become so powerful that they are abusing their buying power to squeeze their suppliers, so damaging the profitability of food manufacturers and
farmers and even driving some to bankruptcy. Big supermarkets face claims by farmers that the price of milk and other items is unfairly driven down by the big chains who are often their main or sole customers.

The risk of being found guilty of abusing power to set artificially low buying prices paid to suppliers is increasingly important to business today. There is increasing interest by regulators in price fixing and collusion when the victims are the sellers not the buyers. Usually relegated to the back pages of law books, this mirror image of monopoly - where the seller abuses its market dominance - is known as a monopsony.

The main reason monopsony is getting more attention now is because of the rise of giant companies in the global marketplace with huge spends. Businesses that have always attempted to increase their margins and profits by avoiding selling price competition through collusion can now achieve the same results by consolidating and exploiting their buying power.

The phenomenon is becoming more widespread across industrial and commercial sectors. The great shift towards buying domination that we have seen with food retailers and processors is being followed in the finance and banking, telecommunications, media, automotive components, aluminium refining, baby food and other
sectors.

Apart from the obvious moral considerations involved, the danger is of facing serious legal action. In the US, blueberry growers in Maine alleged that four big processors had conspired to rig auctions to push down the price they would pay for fresh produce. A state-court jury agreed and awarded $18.7 million in damages. Last year in the UK the Office of Fair Trading (OFT) referred the supermarket sector to the Competition Commission amid claims that top supermarkets had become too powerful. The investigation concluded that the supermarket giants Tesco and Asda had not been unfairly pressuring suppliers to cut prices to unsustainable levels.

Even so, the very fact that monopsony abuse was considered by the regulator is a precedent for future investigations. The abuse of buyer power drives a “spiral effect” where higher market share leads to higher volume discount, leading in turn to lower prices, leading to higher market share and so on. It can also create a “threat point” at which suppliers, which have been forced into a position of economic dependency, are in danger of bankruptcy if they lose the buyer’s business.

It’s worth taking a moment to examine some of the characteristics of the monopsony. The necessary market conditions in which a monopsony will thrive are the mirror image of those required for a monopoly. A monopoly thrives where there are few sellers, for example, while a monopsony requires few buyers. In the monopoly
scenario there are high barriers of entry for sellers and there are one or a few dominant sellers in the marketplace. In a monopsony the reverse is the case: there are only one or a very few dominant buyers and the barriers of entry for newcomers are high.

The issues surrounding recent developments involving monopsony can be seen as an early warning to procurement professionals of likely growing interest by competition regulators in business’s buying activities.

The patterns of concentration and dominance created when a market is dominated by only a few buyers will be repeated across business sectors as the unstoppable force of globalisation drives a rise in the number of mergers, acquisitions and strategic alliances amongst supposed rivals.

Most of the time, there is nothing wrong when big companies squeeze suppliers for lower prices. Effective strategic sourcing by profit-minded business buyers can help drive down prices for both the buyer and ultimately the consumer.

But finding the fine line between healthy price reduction through competitive and effective sourcing and harmful price reducing monopsony has made fair trading and anti-trust enforcers globally cautious about taking action in this area. Competition authorities tend to bring fewer monopsony cases than monopoly cases.

However, this is likely to change as over recent years buying power has become a recurring issue in competition investigations in the UK, Europe and the US.

There is no doubt that as the consolidation of many business sectors continues that monopsony power will become a major policy issue not globally. Questions of how competition policy makers should respond to the creation of monopsony need to be answered.

However, in future a greater emphasis is likely to be placed on the anti-competitive effects of increased purchasing power. So procurement professionals must beware: today’s price negotiation may be tomorrow’s anti-trust investigation.

Robin Jackson is CEO of ADR International

This article has been provided by ADR International, one of our global underwriters and network partners, and represents the views and opinions of that company. The Procurement Leaders Network has no involvement in the production of this article and its final content.