Matt Stoller’s antitrust-focused “The Big Newsletter” has a long piece focusing on a complaint made by the Biden-era Federal Trade Commission (FTC) against Walmart and Pepsi, accusing the two companies of colluding to keep prices high.
Some excerpts:
• “A nonprofit just forced the government to unseal a complaint lodged by Lina Khan’s FTC against Pepsi for colluding with Walmart to raise food prices across the economy. A Trump official tasked with dealing with affordability tried to hide this complaint, and failed. And now there’s a political and legal storm as a result.”
• “The allegation is price discrimination, which is a violation of the Robinson-Patman Act, a law passed in 1936 to prevent big manufacturers and chain stores from acquiring too much market power. The specifics in the complaint are that Pepsi keeps wholesale prices on its products high for every outlet but Walmart, and Walmart in return offers prominent placement in stores for Pepsi products. This approach internally is called a ‘price gap’ strategy. It’s a partnership between two giants to exclude rivals by ensuring that Walmart has an advantage over smaller rivals in terms of what it charges consumers, and so that Pepsi maintains its dominance on store shelves.
“This partnership comes in a number of forms. Pepsi offers allowances for Walmart, such as ‘Rollback’ pricing, where specially priced soft drinks go into bins in highly visible parts of the store. The soft drink company gives Walmart ‘Save Even More’ deals, online coupons and advertisements, and other merchandizing opportunities. Other outlets don’t get these same allowances, meaning they are charged higher prices.”
• The story points out that since Walmart is its biggest customer, Pepsi was willing to go to considerable lengths to keep it happy and preserve its price advantages.
“To ensure that prices would go up at rival stores, Pepsi would adjust allowances, such as “adjusting rollback levers.” It would punish stores that refused to cooperate by raising wholesale prices. Retailers who were trying to discount Pepsi products to better compete with Walmart would find it increasingly difficult to do so; not only would Pepsi take away their promotional allowances, but they might find that discounting six-packs of soda would lead to Pepsi charging them higher wholesale prices for the soda.”
• “This arrangement benefits each side by extracting from consumers and rivals. Walmart gets to have a price advantage in Pepsi soft drink products against rival grocery stores and convenience stores, and Pepsi is able to exclude competitor access to better shelf space at the most important retailer. Consumers end up paying more for soda, new companies find it harder to get distribution access for new soft drink products to compete with Pepsi, and all non-Walmart retail stores are put at a disadvantage to Walmart … Walmart appears to be a low-cost retailer, but that’s because it induces its suppliers to push prices up at rivals. The net effect is less competition at every level. There are more areas without grocery competition, which increases food inflation. And suppliers like Pepsi gain pricing power, such as that they exploited during the post-Covid moment.”
• “The original allegation was filed in January, in the last days of the Khan FTC. We knew the general outline of the argument, but we didn’t know specifics, because the complaint was highly redacted. Was it a real conspiracy? Was it just that Pepsi considered Walmart a “superstore” and had different prices for different channels? Was there coercion? None of these questions could be answered; there were so many blacked out words we couldn’t even say for sure that the large power buyer referenced in the document was Walmart.
“Economists and fancy legal thinkers mocked the case endlessly. The FTC hates discounts! Price discrimination is good, it ends up lowering prices for consumers. The Robinson-Patman Act is stupid and pushes up prices. Suppliers always can only charge what ‘the market will bear’ and if they could charge higher prices they’d already be doing it. And they’d never offer lower prices to any distributor; no lower than they had to. Yet these claims relied on the complaint never seeing the light of day.”
Which it almost didn’t.
• “Trump Federal Trade Commission Chair Andrew Ferguson abruptly dropped the case in February after Pepsi hired well-connected lobbyists. Small business groups were angry, but what was most interesting was the timing. Ferguson ended it the day before the government was supposed to go before the judge to manage the unsealing process. And that kept the complaint redacted. With the complaint kept secret, Ferguson, and his colleague Mark Meador, then publicly went on the attack. Ferguson’s statement was a bitter and personal invective against Khan; he implied she was lawless and partisan, that there was ‘no evidence’ to support key contentions, and that he had to ‘clean up the Biden-Harris FTC’s mess,’ which fellow commissioner Mark Meador later echoed.
“And that was where it was supposed to stay, secret, with mean-spirited name-calling and invective camouflaging the real secret Ferguson was trying to conceal. That secret is something we all know, but this complaint helped prove – the center of the affordability crisis in food is market power. If that got out, then Ferguson would have to litigate this case or risk deep embarrassment. So the strategy was to handwave about that mean Lina Khan to lobbyists, while keeping the evidence secret.”
• The “secret” is out, because of a lawsuit filed by The Institute for Local Self-Reliance (ILSR), an anti-monopoly group. The US Chamber of Commerce, which apparently is more concerned with representing Walmart’s interests than those of small retailers, and Pepsi opposed the unsealing of the complaint. The judge in the case agreed with the ILSR, and so the complaint finally has seen the light of day.
• “The political reaction is just starting. Ferguson has pretended that he’s taking a leading role in the ‘affordability’ strategy of the Trump administration, it wouldn’t surprise me if there’s internal anger at him among Republicans for flubbing such an obvious way to lower consumer prices and then lying about it. The grocery industry, especially rural grocers victimized by this price discrimination, leans to the right.”
As all this was transpiring, the National Grocers Association (NGA) weighed in:
“The unsealed Federal Trade Commission complaint alleging preferential pricing and promotional treatment for Walmart highlights longstanding concerns among independent community grocers about anticompetitive practices in the marketplace.
“When massive national chain retailers receive discounts, allowances, or services that are not offered to competitors on equitable terms, it places Main Street businesses at a structural disadvantage. The Robinson-Patman Act was designed to promote fair competition by preventing price discrimination that harms smaller retailers, and it is a vital tool that has been recognized on a bipartisan basis by FTC commissioners to protect competition and fair markets.
“Independent grocers are not asking for special treatment, only a level playing field, which ultimately supports local jobs, strengthens competition, and ensures consumers continue to have choice and value at the grocery store. NGA calls on the FTC to enforce the Robinson-Patman Act against the power buyers who violate the law by undercutting the competition by forcing their competitors and American consumers to pay higher prices for groceries.”
The Stoller piece is excellent, and you can read it here.
KC’s View:
Stoller writes that this is all happening in the context of the broader affordability conversation: “Last month, the Atlanta Fed came out with a report showing a clear relationship between consolidation in grocery stores and the rate of food inflation. Unsurprisingly, where monopolies prevail, food inflation is 0.46 percentage points higher than where there is more competition. The study showed that from 2006-2020, the cumulative difference amounted to a 9% hike in food prices, and presumably since 2020, that number has gone much higher.
“Affordability, in other words, is a market power problem.”
Or, to put it another way, maybe we’ve all been talking about affordability in the wrong context.
There was the story last week about Instacart and some of its client retailers being accused of dynamic pricing that charged different customers different prices even if they were shopping at the same online store at the same time. The accusations were denied by Instacart, but the degree to which the accusations garnered media attention highlighted consumer sensitivity to the affordability issue.
Retailers and suppliers – unless they are catering exclusively to the top 5-10 percent of the US economic class, which seems to be immune at the moment to these pressures and concerns – need to pay attention.
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