For years, I have been criticizing Wal-Mart for its disgusting domestic and international labor practices, its reliance on sweatshop labor, and its corrosive effective on communities. In this wonderful (and long!) article, Barry Lynn discusses the vicious control that Wal-Mart has over the retail economy due to its unchecked authority.

The Case For Breaking Up Wal-Mart
By Barry C. Lynn

…Popular notions of oligopoly and monopoly tend to focus on the danger that firms, having gained control over a marketplace, will then be able to dictate an unfairly high price, extracting a sort of tax from society as a whole. But what should concern us today even more is a mirror image of monopoly called “monopsony.” Monopsony arises when a firm captures the ability to dictate price to its suppliers, because the suppliers have no real choice other than to deal with that buyer. Not all oligopolists rely on the exercise of monopsony, but a large and growing contingent of today’s largest firms are built to do just that. The ultimate danger of monopsony is that it deprives the firms that actually manufacture products from obtaining an adequate return on their investment. In other words, the ultimate danger of monopsony is that, over time, it tends to destroy the machines and skills on which we all rely.

Examples of monopsony can be difficult to pin down, but we are in luck in that today we have one of the best illustrations of monopsony pricing power in economic history: Wal-Mart. There is little need to recount at any length the retailer’s power over America’s marketplace. For our purposes, a few facts will suffice — that one in every five retail sales in America is recorded at Wal-Mart’s cash registers; that the firm’s revenue nearly equals that of the next six retailers combined; that for many goods, Wal-Mart accounts for upward of 30 percent of U.S. sales, and plans to more than double its sales within the next five years.

The effects of monopsony also can be difficult to pin down. But again we have easy illustrations ready to hand, in the surprising recent tribulations of two iconic American firms — Coca-Cola and Kraft. Coca-Cola is the quintessential seller of a product based on a “secret formula.” Recently, though, Wal-Mart decided that it did not approve of the artificial sweetener Coca-Cola planned to use in a new line of diet colas. In a response that would have been unthinkable just a few years ago, Coca-Cola yielded to the will of an outside firm and designed a second product to meet Wal-Mart’s decree. Kraft, meanwhile, is a producer that only four years ago was celebrated by Forbes for “leading the charge” in a “brutal industry.” Yet since 2004, Kraft has announced plans to shut thirty-nine plants, to let go 13,500 workers, and to eliminate a quarter of its products. Most reports blame soaring prices of energy and raw materials, but in a truly free market Kraft could have pushed at least some of these higher costs on to the consumer. This, however, is no longer possible. Even as costs rise, Wal-Mart and other discounters continue to demand that Kraft lower its prices further. Kraft has found itself with no other choice than to swallow the costs, and hence to tear itself to pieces.

The idea that Wal-Mart’s power actually subverts the functioning of the free market will seem shocking to some. After all, the firm rose to dominance in the same way that many thousands of other companies before it did — through smart innovation, a unique culture, and a focus on serving the customer. Even a decade ago, Americans could fairly conclude that, in most respects, Wal-Mart’s rise had been good for the nation. But the issue before us is not how Wal-Mart grew to scale but how Wal-Mart uses its power today and will use it tomorrow. The problem is that Wal-Mart, like other monopsonists, does not participate in the market so much as use its power to micromanage the market, carefully coordinating the actions of thousands of firms from a position above the market.

One of the basic premises of the free-market system is that actors are free to buy from or sell to a variety of other actors. In the case of Wal-Mart, no one can deny that every single firm that supplies the retailer is, technically, free not to do so. But is this true in the real world? After all, once a firm comes to depend on selling through Wal-Mart’s system, just how conceivable is the idea of walking away? Producers own and maintain machines, employ skilled workers, lease land and buildings. Even with careful planning, most would find the sudden surrender of 20 percent or more of their revenue to be extremely disruptive, if not suicidal.

To read the entire article, click here.