on Aug 8th, 2006Walmart’s Monopsony (reverse monopoly)
It’s been noted for a while that not only does Walmart act in a monopolistic way, but it also applies the same logic to it’s suppliers. What I never knew is that there is a term for this, called monopsony. Which is a case where there is only one Buyer facing many suppliers.
Being the biggest buyer allows Walmart to dictate terms and conditions to its suppliers that can literally drive them out of business. Most importantly it disrupts the level of competition between suppliers that is a cornerstone of a healthy free market.
In Breaking The Chain Barry Lynn, writing for Harpers, describes how this process works, and why its bad for businesses and consumers. Some examples:
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.
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.
So, in other words, not only does Walmart dictate recipes to companies it forces them to act against their own self-interest. And all of this is probably in the long term against the best interests of consumers. Even if on the day to day it means low low prices.
Its an interesting article even if it does end with a lame whiny appeal to the Government to do _something_.
(Although to be fair, in a free market Capital depends on Government to smooth out the actions of Capital for Capital’s long term prosperity. Capital without restraints will always act in its short term interests to the detriment of long term profit and prosperity. So, despite the complaints of “free marketeers” the answer probably really is for the Government to do something about Walmart.)