Marc Levinson

Tag: Competition

  • Bloodbath

    Since it first carried international trade in the 1960s, the container shipping industry has been notoriously cyclical: years of strong trade growth and strong profits have been followed by periods of less robust trade, excess capacity, collapsing cargo rates, and the exit of carriers too weak to survive in a sea of red ink. That story would have repeated itself in 2024 were it not for the Houthis’ attacks on shipping through the Red Sea; sailing between Asia and Europe around the Cape of Good Hope rather than through the Suez Canal made voyages approximately 30% longer, soaking up capacity and keeping rates high.

    The cycle is about to repeat. The headline is growth: UNCTAD’s latest Annual Review of Maritime Transport, published September 24, projects that the volume of containerized trade — not adjusted for distance — will rise approximately 12% over the next five years. But UNCTAD also warns that the shortening of supply chains, uncertainty about trade policy, and the return of shipping to the Suez Canal “could further dampen growth” of the total mileage traveled by containers moving by sea.

    Even as demand weakens, shipbuilding is going gangbusters. According to Alphaliner, which keeps track of such things, vessels able to carry 9.5 million twenty-foot containers are on order, equivalent to 29% of the industry’s current capacity. This comes on top of 9.7% capacity growth in 2024. Scrappage of container ships, the only moderating force, has been very low since 2020.

    With hundreds of ships coming into a market with limited growth prospects, a bloodbath lies ahead. How will it play out? Nearly two thirds of the capacity on order has been commissioned by the largest carriers, Mediterranean Shipping, Maersk, CMA CGM, and China Ocean Shipping. Of those four, all but Maersk plan to increase the number of boxes their fleets can carry by more than 30%. Those companies probably have strong enough balance sheets to survive the coming rate war. As in past shipping downturns, carriers with tenuous financial situations are unlikely to be so lucky.

  • The FTC Seeks to Shelter Mom & Pop, Again

    In 1909, the Kellogg Toasted Corn Flake Company offered a “Square Deal.” Hoping to get its flakes on more grocers’ shelves, Kellogg set the cash price for wholesalers at 6.8 cents per box. Wholesalers were required to charge retailers 7.8 cents. Kellogg permitted no volume discounts, placing the neighborhood grocery store “on an equal footing with every other retailer, great or small.” Consumers paid 10 cents a box, a 47 percent markup over the factory-gate price, no matter where they purchased their corn flakes. This price-fixing pleased mom-and-pop grocers, but shoppers didn’t buy it: as bargain-hunters sought out cheaper cereals, Kellogg quietly cut prices for its largest customers, and the Square Deal faded away.

    This history is worth keeping in mind as the Federal Trade Commission tries to revive the Robinson-Patman Act, an 83-year-old law against price discrimination. According to press reports, the commission is investigating whether soft drink bottlers and an alcohol distributor violated that law by selling to big retailers on better terms than small ones. On March 27, Lina Kahn, the FTC’s chair, said the commission will move to enforce Robinson-Patman “in short order,” and her fellow commissioners have also called for reviving enforcement of the law. If the FTC does so, it will wade into a dispute that has pitted advocates of efficiency and low prices against supporters of small, independent businesses for well over a century.

    As chain food stores first emerged in the early 1900s, complaints spread that suppliers unfairly favored chains with discounts and inducements not available to smaller wholesalers and retailers. “The general working rules should be, ‘A fair price and the same to everybody,’” an official of the National Association of Retail Grocers demanded in 1914. Just as federal regulations kept railroads from favoring one shipper over another, the reasoning went, the law should require manufacturers and growers to charge all buyers the same price for the identical product. The Clayton Antitrust Act, passed that same year, gave small businesses half a loaf, prohibiting price discrimination when the effect “may be to substantially lessen competition or tend to create a monopoly.”

    And what of consumers? The leading consumer advocate of the day, Louis Brandeis, insisted they would barely be affected by a crack-down on price competition. He envisioned a marketplace where a consumer would not be confused by the possibility that “at some other store he could get that same article for less money.” In 1916, President Woodrow Wilson, an unabashed critic of price discrimination, named the Boston attorney to the Supreme Court.

    Shoppers plainly rejected Brandeis’s view, flocking to chain merchants. The most powerful was the Great Atlantic & Pacific Tea Company. A&P had 4,588 stores when it became the largest retailer in the world in 1920. By 1929, it owned nearly 16,000, along with a produce wholesaler, fish canneries and even a macaroni plant. It flourished because it underpriced competitors. To hold costs down, it demanded that suppliers offer volume discounts, give it rebates for advertising their goods and sell to it directly without paying commissions to wholesalers.

    Wholesalers and independent grocers complained bitterly. They were supported by small-town politicians and business groups, who feared that economic opportunity would be suppressed by “foreign” companies based in New York or Chicago. Chain store employees, advertisements in Springfield, Missouri proclaimed, were “‘mechanical operators’ controlled entirely by a set formula.” From Washington, the U.S. Chamber of Commerce warned that “the death knell has been sounded” for hundreds of thousands of small retailers.

    With early radio talk-show hosts fueling the uproar, governments raced to aid mom and pop. By 1933, 17 states hit chain stores with punishing taxes. State “fair trade” laws regulated mark-ups and required chains to maintain identical prices in every store. Officials in Kansas attacked A&P for charging more for coffee in Kansas City than in Topeka. A&P could sell five boxes of Waldorf tissue for 19 cents in Indiana, but across the state line in Ohio, that price was illegally low.

    The federal government joined in. To stem the spiral of wage and price cuts amid the Great Depression, Congress enacted the National Industrial Recovery Act of 1933, which authorized private industries to adopt binding codes of conduct. The code for the grocery trade mandated a specified percentage mark-up on each item, putting an end to loss leaders and two-for-one sales. This was intended to protect the small shops that provided livelihoods for hundreds of thousand of families, and it worked: with price discounting prohibited, chains rapidly lost market share.

    In May 1935, the codes were overturned by a unanimous Supreme Court, freeing chain retailers to demand better deals from suppliers and pass the savings on to customers. Within days, H. B. Teegarden, the general counsel of the Wholesale Grocers Association, drafted legislation to limit the impact of the court’s ruling by making it illegal, in most circumstances, for manufacturers to offer volume discounts. The bill barred lower prices for direct purchasers such as A&P than for retailers that purchased through wholesalers. A manufacturer paying a giant customer for advertising its product had to offer a proportionate allowance to the tiniest business.

    Manufacturers generally opposed this legislation: it cost them far less to sell by the boxcar than by the case, and they worried that higher prices might drive more retailers into manufacturing. Nonetheless, Congress enacted Teegarden’s bill as the Robinson-Patman Act in 1936. President Franklin Roosevelt apparently approved it reluctantly, for there are no known photographs of him signing it.

    The two main antitrust agencies responded in very different ways. The Department of Justice, which handles most industrial competition matters, generally ignored Robinson-Patman, while the FTC, which oversees competition in retailing, enforced the law aggressively. In 1938, it required A&P to pay for brokerage commissions on purchases involving no brokers. A decade later, it restrained the Morton Salt Company from selling small quantities of table salt at $1.60 per case while charging less to customers buying by the rail carload. These sorts of orders, repeatedly upheld by the courts, forced chain stores to raise prices. The discount revolution would be postponed by several decades, to help keep small businesses alive.

    By the 1960s, though, competition was driving manufacturers and retailers to find ways to work around Robinson-Patman. Can’t offer a volume discount to a big retailer? No problem: tinker with the product, so a giant chain can order a customized version, perhaps with a unique brand name, at a lower price. Want to grant a big buyer a discount for purchasing directly, without going through a wholesaler? Permit a discount for small customers, too—if they can master the technical demands for ordering, paying and taking delivery on the same terms as their larger competitors. With such circumventions, discount chains gained market share as Robinson-Patman fell into disuse.

    Global supply chains have made Robinson-Patman even less relevant. Large retailers and manufacturers commonly deal directly with foreign suppliers. Whether they are selling fuel injectors, frozen fish fillets or jars of artichoke hearts, those suppliers have no obligation to offer their goods at the same price to all U.S. customers. Despite all the talk about “reshoring” manufacturing, if the FTC tightens enforcement of Robinson-Patman, you can expect to find even more imported merchandise at the store, because shoppers’ interest in saving money is unlikely to go away.  

  • How the Supreme Court Made Jeff Bezos’s Fortune

    The arcane legal principle of stare decisis — literally, to stand by things decided — is in the spotlight as the Senate considers the nomination of Amy Coney Barrett to the U.S. Supreme Court. Opponents of her nomination, concerned to protect the court’s past decisions establishing a constitutional right to abortion, demand that she pledge to stand by those precedents. Some of her supporters reject stare decisis, at least in cases where, in their belief, the court misconstrued the Constitution. Barrett herself has written a good bit about stare decisis, and her work suggests that, at the very least, her commitment to upholding precedent is a good bit less than ironclad.

    This should be no surprise. Over the years, the justices have embraced stare decisis when it suited them, ignored it when it did not. The world’s wealthiest man, Amazon.com founder Jeff Bezos, owes his fortune to the court’s inconsistency on this point.

    Back in 1992, before Amazon was a twinkle in Bezos’ eye, the court heard a case filed by a catalog retailer, Quill Corporation. Quill sold office supplies, taking orders by phone and mail and shipping the purchases from warehouses in three states. About 3,000 of its customers were in North Dakota, and the state tax commissioner insisted that Quill pay sales tax on its sales in the state. Quill objected that its sales should not be taxed there because it had no place of business in North Dakota. The justices ruled unanimously in Quill’s favor, citing previous decisions and “the doctrine and principles of stare decisis.”

    Internet retailing did not exist when the court ruled in Quill Corp. v. North Dakota. But when Amazon.com started selling books in 1995 from a warehouse near Seattle, Quill allowed it to sell to customers in other states tax-free, while local bookstores had to add state and local sales taxes — around 7.25% in California, up to 8.25% in Texas, nearly 10% in Tennessee — onto every transaction. As I note in my book The Great A&P, internet merchants, of which Amazon was easily the largest, may have avoided charging their customers as much as $33 billion a year in sales taxes thanks to Quill. The playing field was tilted sharply in Amazon’s favor, helping it cut deeply into the sales of bricks-and-mortar competitors.

    Fast forward to 2018. By then, Amazon’s strategy had changed. Next-day delivery had become its big selling point, requiring it to build distribution centers by the score. It had also acquired hundreds of Whole Foods supermarkets. With a physical presence in almost every state, Amazon had to collect sales taxes everywhere, while many other internet retailers did not. Quill, which once gave Amazon an edge, now left it at a cost disadvantage.

    The Supreme Court came to Amazon’s rescue. In 2018, in a case called South Dakota v. Wayfair, it threw stare decisis overboard, ruling that states could tax sales by out-of-state sellers. “Quill’s physical presence rule intrudes on States’ reasonable choices in enacting their tax systems,” the court found. “And that it allows remote sellers to escape an obligation to remit a lawful state tax is unfair and unjust.” Henceforth, all out-of-state sellers would have to comply with the state sales tax laws that already applied to Amazon. The threat that other online merchants could undercut Amazon by not charging sales taxes magically disappeared.

    Not a word of the Constitution changed between Quill and Wayfair, but the Supreme Court’s reliance on stare decisis changed enormously. Had it been as eager to override precedent in 1992 as it was in 2018, Amazon might never have become one of the world’s most valuable companies, and your neighborhood store might still be in business.

  • The Great A&P Revisited

    When it was published back in 2011, many readers took my book The Great A&P and the Struggle for Small Business in America as an allegory about Walmart: the battle between a highly efficient, vertically integrated grocery chain and the mom-and-pop grocers it was driving out of business seemed to parallel the modern conflict between the giant discounter and the locally owned retailers who could not match up. But things change: now, as I publish a second edition of The Great A&P, Walmart has almost ceased to be regarded as a villain, and the merchant most widely blamed for destroying brick-and-mortar retailers is Amazon.

    Walmart is, in many ways, similar to A&P. Its sheer size enables it to bargain low prices for merchandise, it runs a highly efficient logistics operation, and it aims to build local market share, especially in food retailing, to gain efficiencies in distribution and advertising. In recent years, it has even followed A&P’s lead by integrating vertically: Walmart now bottles milk in its own plant, contracts with ranchers to raise Angus beef cattle to Walmart’s standards, and last month opened its first beef processing plant .

    Amazon, on the other hand, is quite unlike A&P. The brothers who controlled A&P, George L. and John A. Hartford, stubbornly insisted on earning a profit; Amazon founder Jeff Bezos was willing to tolerate losses for years in order to build the business. For all Bezos’s ambition and imagination, Amazon’s rapid rise owed much to the federal government: in 1992, the U.S. Supreme Court ruled unanimously that a state could not collect sales taxes on goods sold to its residents unless the seller had physical presence in the state, which gave Amazon a huge advantage. By the time the Supreme Court unanimously reversed itself in 2018, declaring that its 1992 decision “creates rather than resolves market distortions,” Amazon was well established and hundred of thousands of retail establishments had closed their doors. Amazon also benefits immensely from its ability to capture and use more customer data than its competitors, allowing it to control pricing and product selection in a way that A&P could not. In the twenty-first century, information technology creates economies of scale in ways that were impossible in the Hartfords’ day.

    These differences point to the need for fresh thinking about competition. Those who argue that the only test of excessive market power is whether a firm can raise prices to consumers did not foresee that consumers might be asked to pay by surrendering personal information rather than dollars and cents, or that a seller can change prices instantaneously based on an individual consumer’s behavior, or that its trove of information about customers might give an established company an unsurmountable advantage over potential challengers. Unfortunately, the dusty volumes of court rulings about monopoly dating back to the 1890s provide only limited guidance for measuring market power in the digital age.