offer
‘Aucust 2000
The Butter Monopoly?
by Raymond J. Keating
Cc butter lovers in the greater Philadel-
phia and New York City metropolitan
areas spread a little easier knowing that the
federal government is looking out for them?
Antitrust regulators are on guard against
the tiniest of price increases that might result
from a proposed merger in the butter industry.
The U.S. Department of Justice (DON filed a
civil antitrust lawsuit March 31 against the
merger of Dairy Farmers of America, Inc.,
and SODIAAL North American Corporation.
Dairy Farmers of America sells Breakstone’s
butter, while SODIAAL makes Keller's and
Hotel Bar,
The DOJ direly warned: “If the merger
were allowed to proceed, Dairy Farmers of
America, Inc., and one other supplier would
control almost 100 percent of branded butter
sales in these markets.”
As a consumer in the New York metropoli-
tan area, I launched my own butter investiga-
tion by visiting the two supermarkets in my
hometown. As it turns out, the local butter
market is quite robust and competitive. King
Kullen offered 18 different brands of butter,
margarine, and spreads, while Waldbaum’s
pushed the number up to 19. Checking many
of the labels, there were at least nine different
manufacturers. For good measure, coupons
and sales abounded.
Contributing editor Raymond Keating is chief econo-
‘mist for the Small Business Survival Committee and a
‘Newsday columnist. His new book, U.S. by the Num-
bers: What's Left, Right, and Wrong with America
State by State, has just been published.
19
So what's the problem? For one thing, the
Justice Department has arbitrarily decided to
narrow the relevant market. The government's
complaint refers to “branded butter.” Accord-
ing to these antitrust connoisseurs, there is a
significant difference between “branded but-
ter” (like Keller’, Hotel Bar, Breakstone’s,
and Land O'Lakes) and “private label butter”
(or “butter marketed under a label owned or
controlled by the retailer”). According to the
government, “Retail consumers of branded
butter consider it to be a product better than
private label butter.” Continuing, the DOJ
claims that “a small but significant increase in
the price of branded butter will not cause a
sufficient number of consumers of branded
butter to substitute private label butter or
other products to make such a price increase
unprofitable.”
The government's sensitive palate also
breaks branded stick butter and branded
whipped butter into separate markets. It obvi-
ously follows that if private label butter can-
not substitute for branded butter, then mar-
garine or other spreads are out of the question
as well in the government's view.
Consumers Won’t Switch
So the DOJ is concemed about a possible
“small but significant” price increase in cer-
tain brands of butter in two metropolitan areas
because it believes that some consumers
might not switch to another brand. The com-
plaint states: “Due to local consumer prefer-20 IDEAS ON LiverTy * Aucust 2000
ences for specific brands, retailers and other
consumers would not substitute brands of but-
ter promoted and sold outside the greater
Philadelphia and New York metropolitan
areas, and are likely to pay higher prices as a
result of the proposed acquisition.” The gov-
ernment also assumes that other suppliers
would not react to a price increase. In sum-
mary, the government is saying that con-
sumers are stupid and the butter market has
stopped working in the Philadelphia and New
York City regions.
In reality, of course, there are no looming
threats of monopoly or dire market power in
the Philadelphia and New York butter mar-
kets, Several butter choices and close substi-
tutes are available, and that will continue to be
the case when the merger between the Dairy
Farmers of America and SODIAAL goes
ahead.
‘And most critically, there are no legal bar-
riers to entering the butter market. That's real-
ly all that matters.
It also needs to be remembered that gov-
ernment lawyers and bureaucrats do not
have a clue if the price of so-called branded
butter will actually rise or fall due to a
merger; nor do they know how other market
players will react. These regulators are just
speculating,
In this case, the government's. speculation
ended with a May 18 consent decree prohibit-
ing coordination or the sharing of “competi-
tively sensitive information” regarding brand-
ed butter between Dairy Farmers of America
(merged with SODIAAL) and its competitor
Land O'Lakes. In addition, according to the
Justice Department's press release, the con-
sent decree “prohibits Dairy Farmers of
America from agreeing directly or indirectly
to charge Dairy Farmers of America’s newly
created butter subsidiary, Butter LLC, dis-
criminatory prices for cream, milk or butter”
So we have a rather ridiculous ending to a pre-
posterous government antitrust action.
Antitrust laws and enforcement are plagued
by many faults. In this case and others, such.
as the Microsoft action, the definition of the
relevant market can be manipulated far too
easily to fit the political view of regulators.
For antitrust purposes, drawing distinctions
between branded versus private-label butter,
stick versus whipped, and butter versus mar-
garine and other spreads is as preposterous
from an economics standpoint as excluding
Apple computers from the PC marketplace, as
the government did in the Microsoft case.
‘That antitrust law instructs government
lawyers and bureaucrats to speculate on the
future of particular industries and the econo-
my in general is equally ridiculous. The Clay-
ton Act, for example, prohibits the acquisition
of stock or assets “where in any line of com-
merce or in any activity affecting commerce
in any section of the country, the effect of
such acquisition may be substantially to
lessen competition, or to tend to create a
monopoly.”
As illustrated by the government's butter
‘case, regulators can’t even grasp the current
status of industry and the economy, never
mind figuring out the future. Empowering.
antitrust enforcers to predict and effectively
‘manipulate the future of US. industry is
grossly misguided. It's time to get rid of the
antitrust laws, rein in the government, and
leave it to consumers to decide who wins and
‘who loses in the marketplace. a