If one ranked industries by the degree of government intervention, schools and dairies would place at or near the top of the list. Various governmental organs ruthlessly manipulate the price, quantity, and demand for public schooling and fluid, pasteurized cow's milk. So it's no great no shock when the government further intervenes in the market for milk that is actually sold to the schools.
The Justice Department's Antitrust Division has long postulated the existence of a distinct school milk market entitled to protection under the antitrust statutes. The Division's latest test comes against Dean Foods, a large dairy company that acquired two Wisconsin-based milk processing plants from Foremost Farms USA, a dairy farm cooperative, last year. The Justice Department, joined by the attorneys general of three states, wants to undo the transaction and force Dean to sell the plants to a buyer selected by the Antitrust Division.
The plaintiff governments complain that Dean's acquisition of the Wisconsin plants illegally reduced competition for the overall sale of fluid milk in parts of three states, but more specifically, it harmed competition for the sale of school milk:
School milk is fluid milk packaged and distributed for sale to school districts, typically in half-pint containers. Dean, Foremost, and other school milk suppliers often use distributors to supply and service school districts. Dairy processors generally use on distributor per service area. While school milk contracts occasionally include other products, school milk accounts for the vast majority of the dollar value of these contracts.
School milk delivery is not just a matter of dropping product off at the curb. Different school districts specify their individualized service requirements in contracts with processors. For example, some school districts require multiple deliveries per week because they have limited refrigerator space; some require guaranteed emergency deliveries. Most school districts require the capability to deliver to all of the schools in the district. Many require early morning or other specific delivery times to avoid conflicts with the arrival of schoolchildren and buses. Other services can include milk reordering, cooler supply, cooler restocking, cooler cleaning and maintenance, carton rotation, retrieval of spoiled and damaged product, and automatic allotment of credit for retrieved product.
The number of processors from which a school district can successfully solicit competitive bids is often very small. Given the limited volume of milk delivered to each school, the extensive and highly individualized service requirements, and the seasonal nature of school milk demand, among other considerations, it is almost always uneconomic for a dairy processor to supply a new contract unless the processor already has significant fluid milk distribution in or near the school district's area. Dairy processors that do not already distribute fluid milk locally can rarely bid competitively. This is particularly relevant in sparsely populated areas such as northern Wisconsin and the [Upper Peninsula of Michigan].
Individual school districts solicit bids for school milk, although groups of school districts will occasionally solicit bids collectively. However, even school districts involved in collective solicitations typically award their contracts separately. Consequently, dairy processors tailor their bids to each school district or school district group that solicits collectively. Bid prices are based on the processor's product, transportation, and service costs, the processor's capacity utilization, and the number and competitiveness of processors likely to offer competing bids, among other factors.
What's established here is that an individual customer has unique economic preferences that one or more sellers may try to satisfy. This is uncontroversial even among free-market supporters. Indeed, it is the foundation of the Austrian School.
School milk, however, differs from a free market in many respects, notably the role of government in generating artificial demand. The Division's complaint acknowledges as much:
The United States Department of Agriculture sponsors several programs to reimburse schools for meals served to students from lower-income families. To qualify, schools must offer milk to every student, regardless of family income. Schools will not substitute other products for school milk even at substantially higher milk prices because they would lose their federal meal reimbursement.
So the demand for school milk isn't driven by individual preference so much as federal mandate. And the same federal government that directs school districts to purchase milk claims that Dean Foods has offended competition by reducing the number of available competitors for school-milk contracts:
School districts in Wisconsin and the [Upper Peninsula] have only a few choices for school milk suppliers. There are numerous school districts, particularly in northeastern Wisconsin and the western UP, for which the Acquisition merged the two processors that were best situated to serve the district. In many cases, the Acquisition created a merger to monopoly, leaving Dean as the only likely bidder. These school districts include those where Dean and Foremost were the only two dairy processors to bid in recent years. The elimination of head-to-head competition between Dean and Foremost will likely substantially lessen competition in these school milk markets and enable Dean to raise prices and/or reduce services.
The Justice Department defines the relevant market for antitrust purposes as a specific segment of customers; here, a single customer - each school district - is the alleged relevant market. Accordingly, each school district is legally entitled to a federally-determined number of bidders for its federally-mandated milk contract.
Now, before further exploring the Antitrust Division's concept of competition, let's review two ancillary problems with the governments' complaint:
First, this is a post-merger challenge. Most Division cases target mergers that were announced but not completed pending government antitrust review. Dean's purchase of the Foremost plans was actually too small to trigger mandatory federal review. Statute requires a pre-merger filing for transactions over a certain value; Dean's acquisitions fell well short.
The Antitrust Division and the Federal Trade Commission have brought a handful of challenges to completed mergers in recent years. Some of these cases have extended seven or eight years past the merger's consummation. Indeed, there's no way to know how long the Dean Foods case will last, especially if there are future appeals.
Second, the Division's complaint cites Dean Foods' motives rather then simply assessing the economic effects of the Foremost acquisitions:
Dean saw competitors such as Foremost and other local competitors with excess capacity as posing a serious problem for Dean's profitability. Dean's Chief Executive Officer, Gregg Engles, articulated the competitive issue facing Dean in a September 2008 speech to Dean's top executives:
Every one of you has an irrational local competitor story. . . . Why do we have irrational local competitors? Because we have too much capacity in this industry. . . . these guys are losing share, . . . they have less volume in their plants, . . . so they default to the same game that gets played in industries that have little volume growth and too much capacity everywhere around the world. People play for share, and in this category, you play for share with price.
[ . . . ]
As part of Dean's 2008 Strategic Growth Plan, Dean proposed future acquisitions, which included problematic local processors. Ed Fugger, Dean's acquisitions chief, highlighted that fragmentation [d]rives margin compression, and that a significant part of the fluid milk market remains highly fragmented. In handwritten notes he wrote in preparation for his speech to Dean's senior management, and later, Dean's Board of Directors, Fugger wrote that the benefit of acquisition in these m[ar]k[e]ts is margin expansion (emphasis added). In other words, by eliminating this fragmentation Dean could increase its profits.
Any business - whether it's a sole proprietor or a multi-national conglomerate - seeks to increase profits, often at the expense of competitors. Frankly, if this wasn't Dean's motive for acquiring the Foremost plants, I'd question the competence of the company's management. Presumably, the acquisition was not for charitable reasons.
The Division argues this was bad, however, because, There was an alternative to this outcome. At the time Foremost accepted Dean's offer to acquire these plants, another potential buyer was pursuing Foremost's plants. The implication is that Foremost should have accepted the other bid in order to thwart Dean's anti-competitive scheme. But the complaint offers no explanation of this other bid or why it would have been better for Foremost and its previous owners. Surely, Foremost wasn't legally required to accept an inferior bid for its own property - unless the Antitrust Division considers a refusal to engage in fiduciary misconduct a duty under the antitrust statutes. (Well, maybe it does.)
So now let's reassess whether Dean's acquisition of Foremost was anti-competitive. The Antitrust Division maintains a simple formula: Competition = lower prices = better products = happy consumers. Since Dean's acquisition reduces the number of competitors, that means less competition, higher prices, worse products, and unhappy consumers. End of story.
The basic flaw with this argument is that competition does not, in and of itself, yield lower prices, better products, or happy consumers. Competition plays a supporting role. What does lead to lower prices, better products, and happy consumers is the recognition and protection of property rights.
The benefits of competition - a phrase common in antitrust propaganda - are really the benefits of private property. The antitrust establishment tries to convince us otherwise. They claim competition comes first, and property rights must yield in the event of a conflict.
Remember, there is competition outside the scope of human action. Animals and insects compete in nature for scarce resources. Humans also compete for scarce resources, but within the scope of human action, there is always the potential for cooperation and voluntary trade. Private property is a recognition of those very concepts. Of course, the alternative of violent (or political) competition always remains. Every government on Earth is a recognition of that concept.
Antitrust is a form of political competition where businesses compete for the attention and favor of regulators like the Antitrust Division. This competition raises costs - and ultimately prices - and diverts scarce capital away from improving products and satisfying consumers. In the particular case of Dean Foods, there are additional layers of political competition within the dairy industry, and certainly within the government schooling industry.
In a technical sense, the Antitrust Division is correct: Dean's actions were politically anti-competitive, since the company's actions contradicted the wishes of the Division. But in a free-market, private property sense, there's nothing to see here. One property owner transferred title to another property owner in exchange for consideration. It's a single, unremarkable transaction in the grand scheme of things.
But for the Antitrust Division, the Dean Foods case represents an important opportunity. By challenging a relatively small merger after-the-fact, the Division hopes to stimulate a new frenzy of spending by smaller firms on outside antitrust counsel -- which, in turn, means more jobs for Antitrust Division lawyers who later enter the private sector via revolving door.