The Butter Monopoly?

Antitrust Laws and Enforcement Are Plagued by Many Faults

Can butter lovers in the greater Philadelphia 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 (DOJ) 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 metropolitan area, I launched my own butter investigation 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.

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.” According to these antitrust connoisseurs, there is a significant difference between “branded butter” (like Keller’s, 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 obviously follows that if private label butter cannot substitute for branded butter, then margarine or other spreads are out of the question as well in the government’s view.

Consumers Won’t Switch

So the DOJ is concerned about a possible “small but significant” price increase in certain brands of butter in two metropolitan areas because it believes that some consumers might not switch to another brand. The complaint states: “Due to local consumer preferences for specific brands, retailers and other consumers would not substitute brands of butter 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 government also assumes that other suppliers would not react to a price increase. In summary, the government is saying that consumers 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 markets. Several butter choices and close substitutes 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 barriers to entering the butter market. That’s really all that matters.

It also needs to be remembered that government 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 prohibiting coordination or the sharing of “competitively sensitive information” regarding branded 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 consent decree “prohibits Dairy Farmers of America from agreeing directly or indirectly to charge Dairy Farmers of America’s newly created butter subsidiary, Butter LLC, discriminatory prices for cream, milk or butter.” So we have a rather ridiculous ending to a preposterous 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 margarine 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 economy in general is equally ridiculous. The Clayton Act, for example, prohibits the acquisition of stock or assets “where in any line of commerce 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 U.S. 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.