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America’s Major Market Power Problem – Episode 13 of the Building Local Power Podcast

| Written by Nick Stumo-Langer | No Comments | Updated on Mar 9, 2017 The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/market-power-problem-episode-13-of-the-building-local-power-podcast/

Welcome to episode thirteen of the Building Local Power podcast. For full transcript of the podcast, click here.

In this episode, Christopher Mitchell, the director of ILSR’s Community Broadband Networks initiative, interviews Stacy Mitchell, co-director of the ILSR and director of the Community-Scaled Economies initiative. The two discuss the environment for small businesses in the United States, especially noting the fact that the rate of small business creation is at one of its lowest rates since the early 1970s.

Additionally, Stacy and Chris talk about how the issue of small businesses and incentivizing their creation is a bipartisan issue that greatly benefits local economies.

“The economy has grown very concentrated, in a lot of industries, there are just two or three huge firms that control most of the market,” says Stacy Mitchell of the current dismal rate of small business creation. “There’s evidence that [these firms] use that power to actually exclude and block smaller businesses from being able to get to market, to have a fair opportunity to compete.”

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For the report that Stacy referred to this week, check out our report, Monopoly Power and the Decline of Small Business from August 2016.

Monopoly Power and the Decline of Small Business: The Case for Restoring America’s Once Robust Antitrust Policies

Here are Stacy and Chris’ reading recommendations from this week:

From Stacy:

Yale Law Review Journal’s “Amazon’s Antitrust Paradox” by Lina Khan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From Chris:

Anansi Boys” by Neil Gaiman Available from an independent retailer here: http://www.neilgaiman.com/works/Books/Anansi+Boys/.

View the full transcript of the podcast, below.If you missed our previous episodes make sure to bookmark our Building Local Power Podcast Homepage. Please give us a review and rating on iTunes or wherever you subscribe to podcasts.

Full Transcript of Podcast:

Chris Mitchell: Hey, Stacy. I hear that Americans aren’t creating new businesses anymore. What’s going on?
Stacy Mitchell: The rate of new startup businesses in this country is half of what it was in the late 1970’s. We think of ourselves as a nation of startups, but we really aren’t anymore.
Chris Mitchell: Well, that’s actually pretty disturbing that it’s late 1970’s, because that was when I was born, but also, I associate it with a period of economic stagnation in fact.
Stacy Mitchell: Exactly. There are a lot of ways in which I think today’s economy creates this kind of illusion of dynamism and competition, when in fact if we peel back and look a little closer, there’s much less competition than there used to be. It’s harder and harder for ordinary Americans to start and grow a business.
Chris Mitchell: It’s very disturbing. That’s what we’re going to be talking about for this show. You just heard the voice of Stacy Mitchell with our Independent Business Program at the Institute for Local Self-Reliance. She’s coming out of Portland, Maine. I’m Chris Mitchell in Minneapolis. I work on our broadband work. Today, we’re going to be talking about basically what’s hurting local business and small business formation.

Let me just ask you to remember to rate our program, the Building Local Power podcast, on iTunes or wherever you find it. Tell your friends to blog, tweet, do Facebook posts, tumble with it. Do whatever you need to do to get the message out there, please, to share this discuss.

Now, Stacy. Let’s get back into this. Why aren’t new firms being created?

Stacy Mitchell: Well, there’s one reason that a lot of people are looking at, which is that the economy has grown very concentrated. That is that in a lot of industries, there are just two or three huge firms that control most of the market, and there’s evidence that they use that power to actually exclude and block smaller businesses from being able to get to market, to having a fair opportunity to compete. We’ve seen this in lots of different industries where we see big businesses doing this and just making it harder for small businesses to actually get their products to market or be able to compete.
Chris Mitchell: Stacy, you wrote a paper that was published last summer, “Monopoly Power and the Decline of Small Business: The Case for Restoring America’s Once Robust Antitrust Policies.” I find it interesting because I think a lot of people will hear in media that the problem that’s harming businesses is government policy, that there’s too many regulations. I’m curious if you can talk about that. It seems to me that what we’re actually talking about is whether we have good regulations or bad regulations.
Stacy Mitchell: I think that’s absolutely right. There are two storylines out there that are dominant about why small businesses are disappearing. One is the storyline that they’re just inefficient, and they can’t compete, and they’re just going to fall by the wayside naturally because of competition. The other storyline is that government is interfering with them, tangling them up in a bunch of regulations and high taxes and so on.When you look more closely, there’s lots of evidence that small businesses are actually highly competitive, and that there are things that they do better and more nimbly than the big companies, and that the real problem is that they’re getting blocked from the market. When it comes to regulation, I think you’re exactly right. The real question we should be considering is what does the regulation do, and how does it work, does it work well?

What we see a lot of is that big companies game government in ways that result in regulation that doesn’t impede their behavior, but puts a lot of problems in the way of small businesses. Really, as you said, it’s a question of how does government either support a dynamic and diverse economy or not? It’s not a matter of more or less regulation.

Chris Mitchell: It strikes me that you’ve talked about this before in that if you look at surveys of the groups that are pro big business, they’ll often talk about how some of the worst places to do business are San Francisco, maybe, or Vermont. These are areas that actually have the highest number of local businesses. Am I getting that pretty close?
Stacy Mitchell: Yeah. It’s absolutely right. Texas has one of the lowest rates of small business and Texas is a state that we often think of as free and open economy. Vermont, on the other hand, has the highest rate of small businesses. When I look at it, I see Vermont is a state that has done a pretty good job of keeping big companies in check. They use regulation really to ensure competition and ensure opportunity, as opposed to allowing big companies just to use their market power to crush smaller businesses.
Chris Mitchell: Now, as you know, I am a huge book lover. I used to work in a used bookstore. I have 2,500 volumes in my small home. I think it’s actually an interesting little experiment that seems to have been run because small bookstores seems to be getting destroyed when Barnes & Noble and Borders were running rampant. Then the market changed enough that those big bookstores seemed to go away. It seems to me that small bookstores are now actually bucking the trend. There’s been a lot of new, small bookstores that have been created, right?
Stacy Mitchell: That’s right. We’ve added over 500 new, independent bookstores in the last five years or so.
Chris Mitchell: There hasn’t been a major change in government regulations, but it strikes me that there has been a change in basically unfair, very large, consolidated competition.
Stacy Mitchell: It’s been a couple of things that I think are driving that growth of new bookstores. One is that Borders failed. That opened up a lot of territory for bookstores to go in. We lost one of the biggest chains.

Then one of the other drivers is that the buy local movement has, for various reasons, heavily benefited bookstores. When people think about the kinds of community businesses that are important to them, bookstores have been sort of like the local food movement, the other real focal point of those efforts. Independent bookstores have benefited. There’s also a new generation of bookstore owners who are figuring out this new territory and how to be successful in the current market.

That said, Amazon is now incredibly dominant in the book business. The reason that Borders failed and that Barnes & Noble is quite shaky right now is because Amazon’s got a lot of market power. When independent bookstores, they’ve done fairly well in recent years, but when they look to the future, they’re quite concerned about where things are headed.

Chris Mitchell: One of the things that your paper, “Monopoly Power and the Decline of Small Business,” notes is that authors get a lot more sales from small businesses, particularly unknown authors who readers like me learn about them through word of mouth, from local businesses. Is that one of those things you were noting that local businesses just tend to do better?
 Stacy Mitchell: This is one of the most important things that we’ve documented across a lot of different industries, books being one, which is that if you have this diversity of independent retailers and a diversity of distributors and so on, you have a much wider range of products that actually make it to market. What big chains do, and even Amazon, is that they really funnel consumers to a handful of top products. They actually can even manipulate the search results that you’re seeing in order to channel you to products that have a higher profit margin for them. In the case of Amazon, it’s increasingly manufacturing or publishing its own books. It publishes many books. It’s steering consumers to a small number of titles.The result is that a new author or a small publisher has a much harder time breaking into that market. If there are independent bookstores, as a new author, you can get going simply by having some of those bookstore owners notice your book and start hand-selling it to consumers. Then word of mouth starts to take off and you can actually find your way to an audience. That’s true not just of books, but it’s true of toys, clothing. Everything else in the marketplace there’s this same story.

We’ve done a lot of interviews with small manufacturers and they are very concerned about consolidation in the retail sector, that there are so few chains, and Amazon is so dominant. What they all talk about, when you hear them describe the role of independent retailers, it’s clear that they’re like this keystone species for the whole industry. That the health of the independent retail part of the industry is so critical to those new products having a chance to be discovered by consumers in the first place. Just to give you a statistic, you’re about three times more likely to discover a new book that you didn’t know about, but that you’d like to read, if you’re browsing in an independent bookstore than if you’re shopping at Amazon.

Chris Mitchell: It’s interesting to me that you can create a bookstore. I think it’s a little bit easier than, for instance, starting a new pharmacy. In part, that’s because of you have monopoly in a middle layer here, where if you want to start a pharmacy, you have to deal with something called pharmacy benefit management companies. I wonder if you can just tell us a little bit about how that impacts whether or not we can have competitive pharmacies.
Stacy Mitchell: That’s a great question. Pharmacy benefit management companies or PBMs. Most consumers have never even heard of these companies, but they’re among the most powerful players in the health care market, and particularly in prescription drug benefits. PBMs, there are just two of them that control almost 80% of all the prescriptions in this country. They hugely dominate the market.PBMs are basically hired by your health insurance provider to decide what to control your pharmacy, your benefits. They’re the ones that decide which pharmacies are going to be in the network that you can use. They also set the reimbursement rates so when those pharmacies dispense a drug to you, how much they get paid back from the insurance company, that’s set by the PBMs.

The PBMs, what’s astonishing to me is that the PBMs own their own mail-order pharmacies. The largest PBM, CVS Health, owns the second-largest chain of chain pharmacies, CVS. What these companies do is that they use their contracts with independent pharmacies. They basically go to independent pharmacies and they say, “You have two choices. You can either be in the network and be one of the pharmacies that’s covered by this big insurance plan, but in order to be in the network, we’re going to set these reimbursement rates that basically leave you barely getting by or, in fact, losing money on the prescriptions that you dispense.”

You’re stuck between this rock and a hard place as an independent pharmacy. The reason that these companies do that, of course, is that they just want to steer all the business to their pharmacies, to their own mail order, or in the case of CVS, to the CVS chain.

The analysis that we did a couple of years ago that I think is really eye-opening is that we looked at the state of North Dakota. North Dakota doesn’t allow chain pharmacies to operate in the state. A state only has independent pharmacies. This is a law that goes back to 1963. It’s unique in the United States, but it’s similar to laws in a lot of European countries.

It offers this great and sort of unusual test case to look at, “Well, what happens in a market where there are only independents?” We’re trained to imagine that that would be not very competitive. It wouldn’t be good for consumers. It might be high-priced and bad service. All these stereotypes we have about small businesses in our head.

It turns out that North Dakota has among the lowest prescription drug prices in the country and they have very high levels of health care service. They also have a lot of pharmacies. They have more pharmacies per capita than any other state in the country. You can go to these tiny town in North Dakota with 500 people and there will be a pharmacist there, often the only professional health care provider in the community.

The reason that independent pharmacies are so healthy in North Dakota is because unlike pharmacies, they still have to deal with the PBMs, but because there is no other chain in North Dakota, it basically levels that negotiation playing field. The PBMs have to really negotiate with independents instead of just handing them this take-it-or-leave-it contract that is going to ultimately destroy their business, such as what we’ve seen happen in all the other states.

Chris Mitchell: I actually classify this law in North Dakota as weird law. I’ve mentioned this in a previous Building Local Power episode. In Minnesota, we actually just lost a ban on Sunday liquor sales because it was seen as being antiquated. In fact, banning Sunday liquor sales is not about puritanical desires. It’s about supporting small businesses because small businesses, people who run them would like a day off. It turns out that if you allow Sunday liquor stores sales, you’re not going to have a whole bunch of new sales. You’re just going to spread your cost and your revenue across more widely. That’s going to be bad for small businesses, but it’s great for big chains. I’m curious, do you think that we need more of these weird laws to level the playing field?
Stacy Mitchell: I think we do, especially in the absence of federal antitrust action. I think it’s really up to states and cities in this environment to step up and insist that there be a competitive open market that not only serves consumers well, but creates opportunities for people to start businesses, grow jobs, all the other things that our competition laws at the federal level are, in theory, supposed to protect. North Dakota’s pharmacy ownership law is a great example in the sense that it’s a regulation that actually supports more competition and a healthier, freer, more productive, dynamic market by interfering in that way. That’s effectively what you get.
Chris Mitchell: I also think one of the benefits of that North Dakota law is that you probably don’t have the pharmacies shaping the rules. As you well know, in North Dakota, some big companies like Walmart tried to come in and muscled their way in and changed the rules in North Dakota using various means, but they didn’t have the political power to just change the rules because political power was dispersed because of each community having its own pharmacy, effectively.
Stacy Mitchell: Well, yeah. This is another very powerful reason, it seems to me, that we should be, as a society, very concerned about consolidation, about this drop-off in small business. Is that ultimately the goal of dispersing economic power, going back to the Boston Tea Party, has always been about protecting democracy. The ways in which corporations are able to use their leverage with government to get their way, to make us citizens less and less powerful, that in and of itself should be a reason to break up concentrations of power and to really insist on an economy where power is much more dispersed.
Chris Mitchell: As we round out the interview, I just want to note a report from the Economic Innovation Group called, “Dynamism in Retreat.” It says that the missing companies, if we had just created small businesses along historical norms, that we would have one million more jobs today in the United States than we do. That’s pretty incredible.
Stacy Mitchell: It is. It’s really striking. Another thing that I found quite striking in this data that they just released last month is they looked at how the last four years during this economic recovery period, how many new businesses were created versus previous recoveries in the early 2000’s, the early ’90’s, and the 1980’s. They found that the rate of business creation in this recovery is 1/3 of what it was during the recovery in the 1990’s.

Also, what was most striking is that in previous recoveries, new business formation has been happening all across the country. What they found now is that there are only five metro areas where there’s significant new business growth. All the other metro areas are not seeing that. In fact, in 60% of all metros right now, there are more business deaths than there are business births. In history, we’ve never seen that before. It’s really a remarkable shift and one that, particularly for the reason of job creation, but lots of other reasons, is quite alarming.

Chris Mitchell: One of the things that I liked about this report is that it was pretty nonpartisan. I think sometimes you see reports like this and they just want to say, “This is happening because the Democrats are terrible or the Republicans are for the big guy.” This really, I think, I don’t want to say down the middle, but it’s pretty independent. It notes consolidation within the banking sector, something that I think Republicans tend to support. It notes the rising level of regulations and challenges of starting a new business, which is something that I think Democrats take a little bit more responsibility for at times.

I’m just curious if you have any reactions to that because I think it’s one thing if you have people being like, “Well, that’s just because Obama hated businesses.” I really want to be clear that I think we would root the problems with small-business formations in the deficiencies of both parties, really.

Stacy Mitchell: I think that’s absolutely right. I think in some ways, some of the kinds of reforms that we’ve been advocating at the policy level, we’ve had a tough time with Republicans in the House and Senate, to be clear. That’s certainly the case with respect to beefing up antitrust enforcement. We’ve seen much more movement and leadership from Democrats on that.

On the other hand, there are areas, and I think banking is an excellent example, where the mess that we find ourselves in right now where we have a handful banks that own most of the market, where we’ve lost one out of every four community banks in the last seven years, that kind of consolidation has been driven both by Republicans and Democrats. It was Bill Clinton that passed the two major banking laws that really shifted banking policy and gave the upper hand to Wall Street banks.

There’s a lot to like about Dodd-Frank, the financial reform bill that was passed in the wake of the financial crisis. I like the Consumer Financial Protection Bureau. I think it’s done a lot of good things. The law certainly closed off some of the worst shenanigans on the part of Wall Street banks. I don’t want to paint it with one brush, but it also didn’t really address the issue of consolidation. It didn’t break up these big banks. At the same time, it created new compliance obligations for community banks that has made it a little bit more difficult to stay in business. I think when you look at banking it’s really clear that powerful wings of each party have played a significant role in causing that consolidation and not really addressing the problem.

Chris Mitchell: I’d like to wrap it up, I think, by just noting that even though we would say both parties have a share of responsibility, under no circumstances are we claiming that that’s shared 50/50. Had Hillary been elected, I have no doubt that we would be very angry at the level of influence that Goldman Sachs would have over White House. However, the level of Wall Street input into the Trump White House is off the charts. I don’t want to do any false equivalence here.
Stacy Mitchell: Well, that’s absolutely right. It’s infuriating to watch the Republican leadership in the House and Senate right now saying, “Oh, we’ve got to roll back Dodd-Frank in order to help community banks.” When you look at the actual provisions of Dodd-Frank that they want to roll back, it’s often related to things that have nothing to do with community banks. It has to do with securities trading, and derivatives, and all this other stuff that Wall Street banks are up to. It’s particularly galling, I think, when you purport to be doing something on behalf of small businesses or local banks when all you’re really doing is giving out big favors and easing up on these large corporations.
Chris Mitchell: We like to end with a reading recommendation. Is there anything that you’ve read recently you want to share with the audience?
Stacy Mitchell: I have two, but they’re both kind of wonky reads. They’re not necessarily curl up by the fireside kinds of reads, but they’re really great. The first one is an article called, “Amazon’s Antitrust Paradox.” This was in the Yale Law Journal just last month. It’s by Lina Khan, who is a fellow at the New America Foundation and also a Yale law school student. It’s really terrific.It’s a look at the way that antitrust law has been changed over the last 30 years or so and how those changes have made our current antitrust policy really not be able to effectively grapple with the anti-competitive concerns that are raised by Amazon in particular. Although it’s a law journal article, it’s very readable and really walks you through some of those changes and what the implications are and the issues raised by Amazon. I think it’s a great companion piece to the report that we published late last year about Amazon.

Then the other thing that I’ve been reading, and again is deep in the weeds, is a book called, Virtual Competition, by two legal scholars, Maurice Stucke and Ariel Ezrachi. It’s a really fascinating book about how the new world of online commerce and the various ways that the internet has altered business, how in that world there are lots of things that make it seem to us very competitive, but in fact, is a kind of veneer that hides all sorts of ways in which that market is much easier for collusion, and behavioral discrimination, and all kinds of things to actually work against competition and harm consumers.

 Chris Mitchell: Great. Since you’re going to be a little bit wonky, I’ll just note that I just picked up a Neil Gaiman book that I hadn’t read yet, Anansi Boys, which I’m not sure how to pronounce exactly. If people aren’t familiar with Neil Gaiman, or Gaiman, I don’t know how to pronounce anything apparently relating to him, I was blown away by his book, Neverwhere. A little less wonky, a little more fun. May not be right for everyone, but I sure loved him. Thank you so much for coming on the show.
Stacy Mitchell: Thanks, Chris. It’s been great.
Lisa Gonzalez: That was Stacy Mitchell joining Christopher for Episode #13 of the Building Local Power podcast. Stacy is Co-Director of ILSR, as well as heading up the Independent Business Program. Christopher, no relation to Stacy, Mitchell is the Director of the Community Broadband Networks Initiative. To download the “Monopoly Power” report Christopher and Stacy discuss, go to ilsr.org and check out the resources in the Independent Business Initiative.

We encourage you to subscribe to this podcast, and all of our other podcasts, on iTunes, Stitcher, or wherever else you get your podcasts. You can also sign up for our monthly newsletter at ilsr.org.

Thanks to Dysfunction_AL for the music, licensed through Creative Commons. The song is “Funk Interlude.”

I’m Lisa Gonzalez from the Institute for Local Self-Reliance. Thanks again for listening to Episode #13 of the Building Local Power podcast.

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Audio Credit: Funk Interlude by Dysfunction_AL Ft: Fourstones – Scomber (Bonus Track). Copyright 2016 Licensed under a Creative Commons Attribution Noncommercial (3.0) license.