the changing landscape of supply chain management ... changing landscape of supply chain management,...

The changing landscape of supply chainmanagement, marketing channels ofdistribution, logistics and purchasingGregory T. Gundlach, Yemisi A. Bolumole, Reham A. Eltantawy and Robert Frankel

Coggin College of Business, University of North Florida, South Jacksonville, Florida, USA

AbstractPurpose – The paper seeks to examine the changing landscape of supply chain management, marketing channels of distribution, logistics andpurchasing.Design/methodology/approach – The authors examine and take stock of the changing nature and landscape surrounding the related disciplines ofsupply chain management, marketing channels of distribution, logistics and purchasing. This examination highlights the considerable evolution andsignificant advances occurring within and between these disciplines.Findings – The authors find that this new landscape provides both opportunities and challenges for future scholarship and practice in these relateddisciplines.Originality/value – The examination and findings should be of value to those attempting to understand the evolving nature and interrelationship ofthese fields, and those who currently practise within them.

Keywords Supply chain management, Distribution channels and markets, Distribution management, Purchasing

Paper type Viewpoint

The last two decades have witnessed the development andcontinuing evolution of a number of related disciplinesincluding supply chain management (SCM), marketingchannels of distribution, logistics and purchasing. Reflectiveof both academic development and managerial innovation,advances occurring within these fields and across them haveyielded considerable insights and furthered businessknowledge and practice. At the same time, this evolutionhas fundamentally altered the scholarly landscape addressingthese related fields and their managerial practice.Examples of such changes include the increasing

expansion and prominence of supply chain managementas a field of inquiry and practice, its encompassment oflogistics, the evolving sophistication and re-emergence ofpurchasing as a strategic function, and the increasingemphasis of relationships and dynamic considerationswithin marketing channels research and practice. In thisessay, we examine and attempt to take stock of this newlandscape to better understand the nature andinterrelationship of these disciplines and the implicationsof changes occurring within and across them forscholarship and their consequences for practice. Ourexamination highlights the ongoing changes occurring inthese fields, reveals insights regarding the nature of theirinter-relationship, and points to a number of opportunitiesand implications for scholarship and practice.

Background

Drawing on selected literatures and with the intention ofproviding background (versus an in-depth review), we firstoverview accepted definitions and research topics of interestfor each area, common units and levels of analysis applied toresearch, prevalent theories and methods for such research,and recent trends identified for both research and practice.Table I organizes our analysis framework and summarizes thekey findings of this overview.

Supply chain and supply chain managementDefinitionThe supply chain is generally conceptualized as a network ofcompanies from suppliers to end-users, which have with theintention of integrating supply/demand via coordinatedcompany efforts. The origin of the term “supply chainmanagement” is thought to reside in the work of consultantsduring the early 1980s (Oliver and Webber, 1982). A reviewof the supply chain management literature during the late1980s and the early 1990s reveals the interchangeable use ofneologisms: logistics management, network sourcing,supplier-base reduction, and inter-organizational integration.In the late 1990s, to some extent, supply chain managementsupplanted the term “logistics” (Rogers and Leuschner,2004). In an attempt to clarify confusion surrounding theterm, the Council of Supply Chain ManagementProfessionals (CSCMP) announced a modified definition ofSCM and a statement that clarified its scope and boundaries.CSCMP, formerly the Council of Logistics Management(CLM) and the National Council of Physical DistributionManagement (NCPDM), was formed in 1963 with theobjective to develop the theory and understanding of thesupply chain processes and to foster professional dialogue anddevelopment in the field. Academic textbooks and researchersin the field of logistics and supply chain management typically

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428

TableIAnalysisfram

eworkandsummaryof

findings

Fram

ework

Supp

lychainan

dsupp

lychain

man

agem

ent

Marketing

chan

nelsan

dmarketing

chan

nelman

agem

ent

Logisticsan

dlogisticsman

agem

ent

Purcha

sing

andpu

rcha

sing

man

agem

ent

Defi

nition

sPhenom

enon:The

networkof

companies,o

rindependentbusiness

units,fromsupplierto

end-users

Managem

ent:Planning,coordinatingand

managingsourcing,procurem

ent,

conversion,and

logisticsthrough

collaboratingwith

channelpartners

Phenom

enon:The

setof

interdependent

organizations

involved

intheprocessof

makingaproducto

rservice

availableforu

seor

consum

ption

Managem

ent:Planning,organizing,

coordinating,

directingandcontrolling

effortsof

channelm

embers

Phenom

enon:Totalinbound

andoutbound

flowandstorageof

goods,services,and

inform

ationwith

anem

phasison

integration

Managem

ent:Planning,implem

entingand

controlling;betweenthepointof

originand

consum

ptionto

meetcustom

ers’

requirements

Phenom

enon:Requirementsatisfaction

Managem

entThesystem

aticprocessof

deciding

what,when,

andhowmuchto

purchase

andensuringthat

whatisrequired

isreceived

ontim

einthequantityand

quality

specified

Topics

ofinterest

Themanagerialb

ehavioranddecisions

essentialtothedevelopm

entand

functioning

ofasupplychainincluding:

system

integration,

business

process

managem

ent,reengineering,

andsupplier/

custom

errelationshipmanagem

ent

Themanagerialb

ehavioranddecisions

essentialtothedevelopm

entand

functioning

ofamarketingchannelincluding

channelstructure,governance,and

relationshipmanagem

ent

Themanagerialbehavioranddecisions

essentialtoobtainingtheoptim

alflowand

storageof

goodsandservices

including:

physicaldistribution,

materialshandling,

packaging,

return

goodshandling,

order

processing

andinform

ationsystem

s,and

custom

erservice

Themanageriald

ecisions

essentialto

obtainingtheoptim

alflowof

materials

including:

suppliermanagem

ent,

developm

entandintegrationandthe

optim

izationof

individualfirm

purchasing

performance

Unitan

dlevelof

analysis

Unit:Dyadto

networks

Level:Tactical,operational,strategy

and

strategic

Unit:Individual,dyad,networks

andsystem

sLevel:Tactical,operational,strategy

and

strategic

Unit:Individual,dyad,and

system

sLevel:Operational,tactical,strategy

and

strategic

Unit:Individualto

dyad

Level:Tacticalto

strategic

Theo

ries

and

metho

dology

Theories:Marketing,

industrialeconomics,

organizationalm

anagem

entand

inform

ation

technology

theories,includingtransaction

costtheory,know

ledgeandresource

dependency

theory,institutionaltheory,

interdependencetheory,relationalcontract

theory,o

pensystem

s,agency

theory,and

relationalm

odelstheory

Methodology:D

escriptivequalitative

contextualapproaches

andanalytical

quantitative(deterministic

stochastic)

models

Theories:Econom

ics,sociology,psychology,

marketing,

strategicmanagem

ent,political

econom

y,andlife-cycletheories

Methodology:D

escriptive,quasi-

experim

entaland

analytic(mathematical

andem

pirical)models

Theories:Econom

ics,organizationalstrategy,

andmarketingtheoriesincluding:

transactioncosttheory,resource-based

theory,relationalcontractingtheory

dyadic

coordinationtheory,system

stheory

and

networktheory

Methodology:Positivist,quantitative

approaches,and

interpretative,qualitative

methods.Increasing

useof

case

methods,

andmulti-method(triangulation)approaches

Theories:Transactioncosttheory,

interdependencetheory,managem

ent

theory,d

ecisiontheory,the

resource-based

theory

ofthefirm,and

gamingtheory

Methodology:D

escriptive,qualitative

contextualapproaches

andanalytical

quantitative(mathematicalandem

pirical)

models

The changing landscape

Gregory T. Gundlach et al.


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adopt the CSCMP definitions. According to the CSCMP (seewww.cscmp.org):

Supply chain management encompasses the planning and management of allactivities involved in sourcing and procurement, conversion, and all logisticsmanagement activities. Importantly, it also includes coordination andcollaboration with channel partners, which can be suppliers, intermediaries,third-party service providers, and customers. In essence, supply chainmanagement integrates supply and demand management within and acrosscompanies.

This is a broader and more detailed definition of SCM thanthose put forward by researchers to date, some of whichinclude:

The integration of key business processes from end user through originalsuppliers, that provides products, services, and information that add valuefor customers and other stakeholders (Croxton et al., 2001).

The systemic, strategic coordination of the traditional business functions andthe tactics across these business functions within a particular company andacross businesses within the supply chain, for the purposes of improving thelong-term performance of the individual companies and the supply chain asa whole (Mentzer et al., 2001, p. 18).

The efficient management of the end-to-end process of designing, planningand forecasting, sourcing though complex supplier networks, manufacturing,and distributing products from raw material to the end customer, and thefinal disposal of the product by the customer (Chan and Lee, 2005, p. 31).

The design and management of seamless, value-added processes acrossorganizational boundaries to meet the real needs of the end customer(Institute of Supply Management, 2005).

Although differences exist in terms of the scope of SCMamong these definitions, there are many commonalities. Eachrelies on terms such as coordination and integration andemphasizes the harmonization of operations among supplychain members. A further commonality is their focus oncross-functional business processes with the objective ofproviding value for the entire supply chain (Lambert et al.,2005).

Domain of interestIn the early 1980s researchers focused on understanding thesystem integration of business processes throughout thesupply chain. Emphasis was given to reengineering the chainin order to meet customer requirements and improvecustomer service (Lee et al., 1997). SCM research has sinceevolved to encompass a combination of trends in themanagement literature, such as industrial markets,integrated materials management, systems integration, the“quality” revolution, management of relationships, andbusiness process integration and management.During the late 1990s attempts were made to integrate

different frameworks and views of SCM and, thereby, betterdefine the domain of SCM. Since the late 1990s, severalframeworks have been developed to guide research andpractice, such as the Global Supply Chain Forum (GSCF)(Cooper et al., 1997) framework, the Supply-ChainOperations References (SCOR) model (Supply-ChainCouncil, 2003), and Srivastava et al.’s (1999) businessprocesses and shareholder value framework.Today, according to Mills et al. (2004), research in the area

of SCM has developed into two distinct streams:(1) descriptive research on industrial networks conducted by

researchers from industrial marketing and purchasing;and

(2) prescriptive research on supply chain management,based in the fields of strategic management, operationsmanagement and logistics.

This situation is not a perfect dichotomy, however, asresearchers in each of these areas have carried out both, andother forms of research.

Unit and level of analysisThe predominant unit of analysis in early SCM research wasthe dyad, emphasizing the management of boundary-spanning activities. As the field evolved in the late 1990s,the unit of analysis became predominantly the network asfirms increasingly recognized their role as part of a number ofsupply chains, having multiple customers and multiple as wellas alternative suppliers. During the 2000s, the systemsapproach has been used to provide a framework forunderstanding SCM. “This systems approach provides theframework in which to best respond to business requirementsthat otherwise would seem to be in conflict with each other”(Hugos, 2003). Current interest in differing units of analysescontinues as SCM research aims to provide analytical depthand implementation models for SCM practice. Apart fromdiffering units of analysis, SCM research has encompassed arange of analysis levels including tactical, operational, strategyand strategic orientations.

Theory and methodologyBecause SCM is at the confluence of many other disciplines,drawing on these fields to inform its integrative philosophy, itnecessarily incorporates the various concepts, theories andmethods found in each of these other disciplines. Theseinclude concepts and theories from marketing (customerrelationship management, buying strategies), industrialeconomics (make-or-buy, procurement, supplier/customerevaluation), operations management (inventorymanagement, production planning), logistics (distributionplanning, transportation management), international businessand organizational management (teams and internalcoordination, strategic issues, organization and procedure,partnering and strategic alliances), and informationtechnology (electronic data interchange, online bidding, barcoding). Particular theories include transaction cost theory,knowledge and resource-based theories of the firm forexample resource dependency theory, relational contracttheory, institutional theory, open systems theory, agencytheory, and relational models theory, to name a few.As may be predicted, researchers have also drawn on

various methodologies for examining SCM. These includequalitative, contextual, analytical, and quantitativeapproaches. A primary research focus in SCM has been toprovide a widely accepted definition and model ofmanagement implementation. As a result, it is notuncommon to find the predominant use of exploratoryresearch methods such as pilot surveys, literature review, andcase studies.Today, while some researchers still continue with the

pursuit of a definitional consensus, others have followed ashift in SCM research emphasis to developing managementmodels to guide SCM implementation (i.e. of relationshipsand alliances, customer/supplier segmentation, businessprocess standardization, supply chain performancemeasurement).




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Marketing channels and marketing channel

managementDefinitionThe very earliest formal conceptions of marketing channelsfocused on the functions performed by a distribution systemand the associated utility of these functions and the overallsystem. Reflecting their presence in industrial and transitionaleconomies, marketing channels gradually came to be viewedas the set of interdependent organizations involved in theprocess of making a product or service available for use orconsumption (Coughlin et al., 2001). This institutional-oriented perspective draws attention to those members (e.g.wholesalers, distributors, retailers, etc.) comprising thedistribution system and engaged in the delivery of goodsand services from the point of conception to the point ofconsumption (Anderson and Coughlan, 2002). Themanagement of such institutions through marketing channelmanagement involves the planning, organizing, coordinating,directing and controlling efforts of channel members.Today, according to some scholars the institutional

perspective of marketing channels and their management isgiving way to a more customer-focused view of the channel(El-Ansary, 2005). Reflecting marketing channels withinnewer experienced-based economies and involving valueadding chains and larger networks of members, thisemerging perspective emphasizes marketing channels asproviding for the conception, promotion and delivery ofpositive customer experiences.

Domain of interestConsistent with the functional conception of marketingchannels, early research in channels, circa the 1950s and1960s (see Alderson, 1957), focused on identifying thevarious functions provided by marketing channels andexplaining when and why these functions have utility(Anderson and Coughlan, 2002). Paralleling modernemphasis of the institutions occupying a channel,contemporary research in marketing channels has focusedon the organization and ongoing management among theseinstitutions. This research examines the managerial behaviorand decisions essential to the development and functioning ofa marketing channel.According to Anderson and Coughlan (2002), important

areas of research occupying the institutional domain ofmarketing channels include market channel structure,governance, and relationship management. As these scholarsexplain, to enhance effectiveness and efficiency across thevarious functions performed by members of a marketingchannel, each attempts to influence others to operate in acoordinated fashion and in a manner that recognizes that theirinterdependence creates common interests. Becausestructure, governance and relationship management reflecthow firms garner and then exert influence over one another inorder to be successful and to compete against other marketingchannel systems, these areas have become a dominant focus ofresearch under the institutional perspective.Informal review of recent contributions to the literature

substantiates the observations of Anderson and Coughlan(2002). These include contributions that inform ourunderstanding of the systemic nature and qualitiesassociated with larger channel systems, the role of dualchannel structures, marketing channels and their interplaywith supply chain processes and logistical functions, the

emergence of electronic (e.g. internet) channels ofdistribution, the nature, qualities and performance of inter-firm relationships, the governance of such relationships, theuse of inter-firm influence and power, channel performanceand the choice of channels by consumers among other topics.Detailing scholarly contributions to the literature, Frazier

(1999) reports that considerable progress has been made inour understanding of managerial behavior and decisionssurrounding the development and functioning of a marketingchannel. Frazier (1999, p. 226) notes for example that:

. . . the knowledge that has accumulated in relation to how interfirm poweroriginates and is then applied, how control of the channel relationship isfacilitated, and what intrachannel conflict and channel member satisfactionare based on is impressive. Recent efforts to better understand how strong,long-term channel relationships develop – including the impact of trustcommitment and relational norms on channel interactions are noteworthy.Furthermore, some progress has been made in our understanding oforganizational decisions relating to vertical integration, the use of multiplechannels, distribution intensity and bureaucratic structuring.

The author observes, however, that while the currentknowledge base provides a reasonable foundation ofthought, a variety of issues still exist regarding constructsand topics examined in prior research. In particular, Frazier(1999, p. 226) details that the role of power in channelrelationships is often confused. Interfirm monitoring effortshave received little attention. Few of the various differentfacets of interfirm communication have been examined in anydepth. Intrachannel conflict and its impact on long-termchannel relationships have been largely overlooked. Therelationship marketing paradigm as applied to distributionchannels has been pushed beyond its practical and naturalboundaries. Important factors likely to shape channelintegration, distribution intensity, and bureaucraticstructuring remain largely unexplored. The use andmanagement of multiple channels have been barely touchedon. Physical distribution processes and technologies have notreceived the attention they should in research on channelorganization and management. Further, according to Frazier,many important managerial issues relating to the organizationand management of channels of distribution have yet to beaddressed in empirical channels research. Among thoseconsidered most important are:(1) how resource allocations to channels should be made

across global product markets;(2) how functions are shared-split between channel

members;(3) what combination of push and pull strategy is

appropriate for firms using indirect channels;(4) when and how the internet should be used as a sales-

distribution channel;(5) how coordination is achieved among distributors in

integrated supply networks;(6) how goals are set, plans are developed, and performance

appraised among channel members; and(7) how distributors should operate their businesses (Frazier,

1999, p. 226).

In terms of the future, as the traditional domain of marketingchannels set around the institutional perspective of channelconstituents gives way to a more customer-focused definition,it is likely the domain of marketing channels research willfurther expand to include related topics of interest (El-Ansary,2005).




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Unit and level of analysisAttendant to the functional perspective of marketingchannels, early research adopted the channel system and itsfunctions as its primary unit and level of analysis. As the fieldevolved to a more institutional perspective, research similarlyevolved to capture a particular channel institution’s (mostoften the manufacturer or “channel captain”) perspective andtheir efforts at designing and managing the channel. Viewingthe channel as most often dominated by the manufacturer andinvolving a strategic asset of the firm, inquiry focused oninforming the question of what is the best marketing channelfor a particular firm’s product or service (Coughlin et al.,2001).As both the nature of marketing channels and research

attempting to understand such a phenomenon has evolved,the unit and level of analysis adopted by researchers havesimilarly evolved. This evolution has lead to current emphasison dyadic relationships and emerging inquiry of triadic andlarger network and system-based configurations of thechannel and involving both strategic as well as more day-to-day managerial activities. In the future, increasing emphasis ofcustomer-focus marketing channels will likely call foradoption of units and levels of analysis that comply withthose held by the customer.

Theory and methodologyIn pursuit of insights and understanding, channels researchershave drawn upon a variety of theories and research methodsto inform and conduct their work. In addition to descriptivefield research intended to portray the practices andperformance outcomes associated with channels, scholarshave also employed quasi-experimental settings to isolate andexamine phenomenon associated with the workings of achannel. Analytic models, both mathematical and empirical,have also serviced such inquiry.Beyond a multitude of research settings and methods,

scholars have also borrowed from a number of differenttheoretical frameworks to inform their understanding of suchpractices and phenomenon. As inventoried recently byAnderson and Coughlan (2002), these include:. from economics – explanations attendant to transaction

cost analysis, agency theory, game theory, analyticalmodels of competition and market response andevolutionary economics;

. from sociology – theories of dependence/power and groupprocesses and institutional theories of legitimacy;

. from psychology – theories of social influence,interpersonal relationships and conflict; and

. from marketing and strategic management – theories oftrust, competitive advantage and path dependence andfrom other areas, political economy and life-cycle theories,to name a few.

Given this eclectic state of affairs, these scholars contend thatthe field of marketing channels research is currently in a pre-paradigmatic state with little agreement about how to frameissues and what the appropriate mode of inquiry is. Such astate poses both opportunities and challenges for the future.Given the lack of consensus, on the one hand, researchersexamining channel phenomenon have considerable freedomto proceed in a manner of their choice. At the same time, thelack of consensus (and at times competition among differingperspectives and methods) has made it more difficult toachieve consensus and thus to accumulate findings that yield

robust generalizations concerning important phenomenon.Despite these challenges, as may be observed across time,results from these multiple perspectives and methods arebeginning to converge with some agreement in findings andexplanations about what issues in marketing channels meritfurther inquiry (Anderson and Coughlan, 2002).

Logistics and logistics managementDefinition“Logistics” refers to the inbound and outbound flow andstorage of goods, services, and information within andbetween organisations. As a managerial activity, earlyconceptions of logistics focused on its role in thedistribution of products and as a way to support anorganization’s business strategy and to provide time andplace utility. Prior to the 1980s, logistics was primarilyconcerned with the outbound flow of finished goods andservices, with an emphasis on physical distribution andwarehouse management. During the 1980s, industryglobalization and transportation deregulation led to theexpansion of logistics beyond outbound flows to includerecognition of materials management and physicaldistribution as important elements. In 1986, the CLM(considered by many to be the pre-eminent professionalorganization for academics and practitioners in the logisticsfield) defined logistics as: “the process of planning,implementing, and controlling the efficient, cost-effectiveflow and storage of raw materials, in-process inventory,finished goods, and related information flow from point oforigin to point of consumption for the purpose of conformingto customer requirements” (see www.clm1.org). During the1990s, accelerated market changes due to shrinking productlifecycles, demand for customization, responsiveness todemand, and increased reliance on information technologyled to logistics being defined as “the process of strategicallymanaging the procurement, movement and storage ofmaterials, parts and finished inventory and relatedinformation flow through the organization and its marketingchannels” (Christopher, 1998).The 2000s experienced further changes to how logistics is

defined. Developments in international trade, supply chainmanagement, technology, and business process re-engineeringgenerated a need to re-evaluate the logistics concept. Duringthis period, CLM annually reviewed its definition of logisticsand revised that definition several times: in 2001, CLMdefined logistics as “that part of the supply chain process thatplans, implements and controls the efficient, effective flowand storage of goods, services, and related information fromthe point of origin to the point of consumption in order tomeet customer requirements”. Between this time and before2003, CLM again modified its definition to: “that part of thesupply chain involved with the planning, implementing andcontrolling of the efficient, effective flow and storage of goods,services, and related information from the point of origin tothe point of consumption for the purpose of conforming tocustomer requirements” (see www.clm1.org). Differencesamong these definitions reflected the CLM’s attempts tocapture differences between, and the scopes of, logisticsmanagement and supply chain management.The most recent definition of logistics from CLM (now the

Council of Supply Chain Management Professionals –CSCMP), in 2003 is: “that part of supply chainmanagement that plans, implements and controls the




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efficient, effective forward and reverse flow and storage ofgoods, services, and related information between the point oforigin and the point of consumption in order to meetcustomers’ requirements” (see www.cscmp.org). Manyacademic textbooks and articles in the logistics disciplinetypically adopt this CSCMP definition of logistics andlogistics management (as an example, see Stock andLambert, 2001), while some more recent examples providean alternative, albeit related definition – for example that“logistics refers to the responsibility to design and administersystems to control movement and geographical positioning ofraw materials, work-in process, and finished inventories at thelowest total cost” (Bowersox et al., 2006, p. 22). Mostdefinitions accept the notion that, as in the CLM definition,the emphasis is on leveraging low cost information againstmore expensive logistics assets such as inventory,warehousing, labor and transportation.

Domain of interestEarly logistics management research focused on themanagement of transportation and warehouses. Today,research in logistics addresses two aspects:(1) supply chain logistics, concerned with the flow of goods;

and(2) service response logistics, concerned with the co-

ordination of non-material activities necessary for thefulfillment of the service in a cost – and customer service– effective manner.

An informal review of research topics appearing in the Journalof Business Logistics (JBL) between 2000 and 2005 identifiestraffic and transportation, warehousing and storage, inventorymanagement, packaging and return goods handling, salvageand scrap disposal as key foci of supply chain logistics; andorder processing and information systems, customer serviceand procurement as key foci of service response logistics. Overtime, logistics research has evolved from a pure internal focuson cost control, and functional areas of inventory,transportation, warehousing and order processing to theirrole and impact within business process integration regardingsuppliers and customers.

Unit and level of analysisHistorically, logistics research focused on the firm and itsprofitability. In the mid-1990s, recognition of the importanceof dyadic relationships for achieving this objective emerged.With increasing emphasis on end-to-end logistics integrationand the linkage of multiple dyads, the focus of logisticsresearch further shifted in the 2000s to its present state andfocus on the system as its primary unit of analysis.Paralleling this broadening has been shifts in the level of

analysis employed in logistics research, from a focus on themanagement of operations to optimizing logistics operationsto attain efficiency of the flow of goods, and to serviceresponse logistics. Today, the scope of logistics managementand research includes external and strategic orientationsencompassing consideration of the value adding activitiesinvolved in the process of bringing a product to market.

Theory and methodologySurveying theories applied in logistics research, Stock (1995)concluded that logistics benefits from borrowing from othertheories as it is suited to approaches which “adoptmultidisciplinary methodological pluralism”. Althoughlogistics has benefited from application of insights from

mathematics to psychology, theories of particular relevanceinclude those having origins in economics, organizationalstrategy, and marketing including transaction cost theory,resource-based theory, relational contracting theory anddyadic coordination theory. Reflecting its evolution toinclude more systemic and strategic considerations, logisticshas most recently begun to integrate systems and networktheory.Logistics research has also evolved in its use of research

methods. Some research tends to be more positivist in nature,utilizing variations of quantitative approaches, while otherstend to be more interpretative, and as such qualitative innature. Frankel et al. (2005) examined articles published inthe Journal of Business Logistics between 1999 and 2004 andfound a variety of data gathering techniques and forms ofanalysis including literature reviews, interviews, personalobservation surveys/questionnaires, focus groups, casesstudies, experiments and content analysis. They identified anumber of trends including the increasing use of case analysis,multi-method (triangulation) approaches and use of theinternet for data collection.The current state of logistics research reflects its evolution

from an emphasis on operational and functional areas to anemphasis on the efficiencies that can be gained through theintegration and interface(s) between disparate areas and otherfunctional departments within the organization includingmanufacturing, human resources, finance/accounting, etc.Today, logistics research is responding to recent calls formeasuring the performance of the logistics system and sub-systems and its implications for overall firm performance,especially with an emphasis on the efficiencies that can begained from extending this functional integration throughcollaboration across the entire supply chain.

Purchasing and purchasing managementDefinitionPurchasing involves the satisfaction of individual firms’requirements. Early definitions of purchasing emphasizedthe tactical and clerical decisions involved in the purchasing ofproducts and supplies. During the 1990s purchasing evolvedto be viewed as part of a broader function called procurementor “the systematic process of deciding what, when, and howmuch to purchase; the act of purchasing it; and the process ofensuring that what is required is received on time in thequantity and quality specified” (Burt and Pinkerton, 2003,p. 64). As a function, procurement included purchasing,consumption management, vendor selection, contractnegotiation and contract management (Poirier, 1999, p. 64).At the beginning of the 2000s, the terms “purchasing” and“procurement” became synonymous in the profession(Monczka et al., 2002).Today, many researchers are taking a broader view of

purchasing that emphasizes “managing the supply” ofmaterials, services, and information. Supply managementresearch tends to focus on studying the phenomenon ofpurchasing defined as requirement (i.e. need) satisfaction.While there is no agreement on the exact definition and scopeof supply, professionals at all levels do agree that supply is aseries of linked relationships that add value at various levels(Kauffman, 2002). Supply management encompasses“organizing the optimal flow of high-quality, value-for-money materials or components to manufacturingcompanies from a suitable set of innovative suppliers”




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(Wagner, 2003). Concepts of interest in supply managementinclude management, development and integration ofsuppliers (Antonette et al., 2002).

Domain of interestEarly research in purchasing focused on improving theinternal efficiency of an individual firm within the supplynetwork. Researchers focused on exploring the most efficientapproaches to performing purchasing responsibilities inrelation to: direct or strategic materials needed to producethe company’s products, and indirect or MRO (maintenance,repair, and operations) products consumed by the companyas part of its daily operations (Poirier, 1999).From the late 1990s on, researchers took a broader view of

purchasing. Emphasis was given to “managing the supply” ofmaterials, services, and information and resulted in a shiftfrom focus on internal efficiency to other long-term outcomessuch as collaborative learning, reductions in cycle time, andnew product development cycle. This emphasis extended intothe use of the internet and technology developments andexamining team driven decision-making, which fosteredcollaborative activities with suppliers aimed at meeting thegoals of the firm (Giunipero and Handfield, 2004).With the beginning of the 2000s, researchers began to

realize the importance of coordinating the supply of products,services, and information rather than merely focusing onbuying the least expensive materials. After reviewing theJournal of Supply Chain Management (JSCM, considered bymany to be the leading journal in purchasing and supplyresearch), Carter and Ellram (2003) reported several changesin the subject categories of topics across time that reflect theevolution from purchasing to supply management. Accordingto the authors, one-third of the contributions to “purchasingperformance” and the “status” and “recognition” of thepurchasing function were made during 1975-1979. Themajority of the contributions to “inventory and productionmanagement” were made in the 1970s and 1980s. Materialrequirements planning (MRP) appeared from 1977 to 1984,while the majority of just-in-time (JIT) contributions weremade from 1986 to 1994. In the 1990s the emphasis on thestrategic impact of purchasing emerged. Almost allcontributions dealing with supply chain issues were madeafter 1994, emphasizing the broadening and integration ofpurchasing into supply management and supply chainmanagement. This also mirrors the general recognition ofthe supply chain concept by purchasing professionals andscholars (Carter and Ellram, 2003).

Unit and level of analysisEarly purchasing research emphasized the internalperformance of individual firms’ purchasing function as aunit of analysis and focused on the performance of thepurchasing department, measured by cost savings. With theincreased recognition that the success of purchasing dependson the extent to which its performance fits the needs of thebusiness and on the consistency between purchasingcapabilities and the competitive advantage sought by thebusiness, in the 1990s the unit of analysis expanded to includeassessment of dyadic relationships. Emphasis on supplymanagement during the 2000s motivated researchers toextend their unit of analysis to include second tier suppliersand to collect data from multiple sources in the same supplychain.

Expansion of the unit of analysis employed by researchersin purchasing has also been accompanied by changes in thelevel of analysis. Early research addressed purchasing inrelation to its tactical/clerical role. During the 1970s and the1980s purchasing was viewed as a non-strategic function andhad less organizational status relative to other major functionsin the firm (Ammer, 1989). The 1990s brought a change inthe focus of purchasing to include strategic considerationswith an emphasis on total cost savings and value-addedactivities (Burt and Pinkerton, 2003). Today, research onpurchasing is beginning to examine the value of cooperation,redirecting the tactical focus on internal efficiency towardstrategic network improvement, and soliciting the help ofwilling partners interested in building a dominant supplychain in a particular industry (Burt and Pinkerton, 2003).

Theory and methodologyEarly research on purchasing utilized transaction cost theoryto examine purchasing’s contribution to internal efficiency,i.e. cost savings attained by reducing raw materials costs andselecting suppliers that offer the lowest prices, within a firm’sboundaries. From that time, purchasing/supply researchershave incorporated other theories including interdependencetheory to explore dyadic considerations between purchasersand suppliers. Other researchers used agency theory,management theory, resource-based theory of the firm,decision theory, and gaming theory to analyze the impact ofpurchasing/supply strategies on performance.During the early 1990s, typically, purchasing/supply

research relied upon descriptive methods with the objectiveof identifying best practices and assisting purchasingprofessionals in their benchmarking efforts. Althoughdescriptive and benchmarking research is still widely usedtoday, researchers from the 1990s onwards employed a varietyof methods and modeling techniques ranging from qualitativecontextual approaches to analytical quantitative ones.Today, the most influential trend on purchasing/supply

research is the emergence of SCM (Carter and Narasimhan,1996). SCM denotes the integration of purchasing and supplywith other functions in the firm (Wisner and Tan, 2000).With the realization of the importance of coordinating thesupply of products, services, and information with the otherfunctions, rather than focusing on buying the least expensivematerials, most purchasing researchers’ attention shifted from“purchasing” to “supply management”. Terms such as“integrated purchasing strategy” are being used in theliterature today to address certain elements or stages of thisnew management philosophy (i.e. SCM). Many researcherstoday assess purchasing and supply strategies’ contribution onthe basis of their contributions to SCM success (Wisner andTan, 2000).

Analysis and discussion

Our overview of the related disciplines of supply chainmanagement, marketing channels of distribution, logistics andpurchasing highlights significant developments and changesoccurring in these fields reveals insights regarding therelationship among them and points to a number ofopportunities and challenges for scholarship and attendantconsequences for practice. We briefly describe key findingshere.




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Key developments and changesA number of significant developments and changes that havethe potential of impacting scholarship and practice withineach of the disciplines are identifiable from our examination.

Supply chain and supply chain managementPerhaps the most prominent of these involves the rapiddevelopment and evolution of the field of SCM. Arising in themid-1980s, the field has expanded through its processorientation to integrate processes and functions whichinclude institutional concepts and issues addressed inmarketing channels, flows common to logistics and activitiespreviously the domain of purchasing. Importantly, while thesefields remain vital in their own right, the emergence anddevelopment of SCM has yielded an overarching domain thataspires to provide for their common integration andcoordination in ways not imagined before.As a discipline, SCM continues to become increasingly

market oriented, assessing and responding to the needs oftarget customers and other stakeholders by organizing andcoordinating resources and activities with the goal of creatingvalue. Such an evolution reflects the natural maturation of thefield’s original goals.At the same time, a considerable lack of consensus

continues to exist within the field of SCM in relation to itsprecise definition and whether the field constitutes amanagement philosophy, implementation of a managementphilosophy, or a set of management processes. Such confusionshould not be unexpected given the field’s early stage ofdevelopment and rapid evolution and will likely be resolvedover time both in terms of scholarship and practice.

Marketing channels and marketing channel managementWithin marketing channels, paralleling a shift in the largerdiscipline of marketing from focus on transactional exchangeto include exchange relationships, perhaps the most impactfuldevelopment has been the field’s emphasis of relational (e.g.collaborative) versus competitive (e.g. arm’s length)interactions among institutions comprising the marketingchannel. This change has fundamentally altered the scholarlylandscape and practice of marketing channels and marketingchannel management.Accompanying the field’s emphasis of relationships and

collaborative interaction has been a broadening of itsinstitutional perspective from that of an individualinstitution (and its channel) to that of dyads and larger andmore complex units of analysis including triads, networks andsystems of institutions and their relationships. This evolutionhas also been accompanied by expansion of marketingchannel concepts and theory from that which is informativeto understanding the organization and management of adominant institution’s channel at a point in time to conceptsand theory helpful for understanding the organization andmanagement of relationships and larger configurations ofrelationships comprising a marketing channel over time.Together, the changes and developments in marketing

channels represent considerable progress in understanding theinstitutions and functioning of marketing channels andmarketing channel management. As a result, these changeswill likely enable the field to better understand and explainphenomenon occurring within marketing channels ofdistribution.

Logistics and logistics managementThe field of logistics has also undergone importantdevelopments and changes that are likely to be impactful toscholarship and practice. Reflecting its independent origin yetsubsequent importance and association with SCM, the fieldhas redefined itself over time to both conceive of logistics aspart of SCM, but also an independent function of broadeningand strategic importance to the firm. Both perspectives havemerit given the acknowledged critical role of logistics in SCM(i.e. logistics is recognized as an integrative supportmechanism to enhance efficiencies across the supply chain)as well as the separable functions which define the field oflogistics itself. Together, these developments and changesrepresent important advances for the field that will likely paydividends through elevating our understanding of logisticsand enhancing the development of SCM both in terms ofscholarship and practice.

Purchasing and purchasing managementFinally, important changes in the field of purchasing that arelikely to impact scholarship and practice include its evolutionfrom a tactical and internal efficiency oriented functionencompassing the firm and its immediate suppliers to includestrategic and external effectiveness based considerationsencompassing the firm and the larger network of firmsoccupying the value chain. These changes reflect both theindependent development of the field and the impact of SCMand are captured in the evolution of terminology describingthe field.Consequently, the broadening of the discipline of

purchasing implies a greater emphasis on the implications ofpurchasing decisions on firm and supply chain performance.Today, effective purchasing is not necessarily one thatpromises maximum efficiency or least total cost, but ratherone that fits the needs of the business and strives forconsistency between its capabilities and the competitiveadvantage being sought throughout the supply chain. Thesedevelopments and changes reflect advances that are likely toenhance the role and prominence of purchasing in bothscholarship and practice.

Connections across the disciplinesTaken together, recognition of the important changes anddevelopments in each of the disciplines helps to provideinsights for understanding how these disciplines relate to oneanother including their similarities and distinctions. Notablein this regard is how some recent conceptions of SCM informthis understanding through defining marketing channels,logistics and purchasing as part of SCM. For example, SCMis defined by CSCMP to “include coordination andcollaboration with channel partners” – a key thrust ofmarketing channel management and to “include [as a part ofSCM] all logistics management activities” and further inrelation to purchasing, “all activities involved in [. . .]procurement”. Further credence to this conception isprovided through logistics definitions that conceive of thefield of logistics as “part of the supply chain” and itsmanagement.The basis for including marketing channels, logistics and

purchasing as part of SCM likely extends from SCM’sintegrative orientation and therefore necessarily expansivescope compared to the more functional orientation andnarrower breadth of these related disciplines. Integrating such




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functions across the supply chain is an important and usefulgoal. Of note, however, is that some more recent conceptionsof SCM are not limited to merely the integration of thesefunctional areas. For example, read literally, the recentCSCMP definition advances beyond integration to includethe actual “planning” and “management” of these functionsas well as other business processes across the supply chain.What implications attend a conception of SCM as

including, beyond its integrative orientation, the actualplanning and management of the functional domains ofmarketing channels, logistics and purchasing? Whatconsequences result for scholarship and practice withinSCM? Within each of the functional domains? The answersto such questions appear more than academic given they arecurrently under consideration by those within the field ofSCM. The Journal of Business Logistics (2006), for example, inrecognition of the intense and continuing interest in SCM fortwo decades, but still remaining “uncertainty as to what SCMis and what functions and/or processes should be includedwithin it”, recently issued a call for a special issue of thejournal to “document and describe the scope and domain ofsupply chain management”. The insights and understandingdeveloped from such an effort and others is likely to beimportant to both SCM and its related fields.For those who might be concerned with the breadth and

depth of intellectual and practice-based aspirations reflectedby CSCMP’s conception of the SCM discipline, a helpfuldistinction is that SCM’s larger philosophy has beensuggested by others to be limited to the integration andcoordination of the respective disciplines it embraces ratherthen their more specific planning and management (Mentzeret al., 2001; Chan and Lee, 2005; Croxton et al., 2001).These distinctions have also been addressed by others. Forexample, the alternative perspectives represented in thedifferent viewpoints of CSCMP and others has been labeledby Larson and Halldorsson (2002) as reflecting the“Unionist” versus the “Intersectionist” view of SCM.According to Larson and Halldorsson (2002), under the“Unionist” view, where SCM subsumes logistics, marketing,operations management, purchasing, etc., supply chainmanagers have greater decision making authority than otherfunctional managers, requiring that the reportingrelationships within the firm be altered. This view isgenerally consistent with the perspective offered by theCSCMP through its definition of SCM. Alternately,according to Larson and Halldorsson (2002), under the“Intersectionist” view, SCM is considered a broad strategywhich cuts across business processes both within the firm andthrough the channels. This view is generally consistent withMentzer et al.’s (2001) perspective that supply chainmanagement involves the strategic coordination oftraditional business functions and the tactics across thesebusiness functions as well as Croxton et al.’s (2001)perspective that supply chain management involves a changefrom managing individual functions to integrating activitiesinto key supply chain processes. In this fashion, theintersectionist perspective of SCM does not imply a unionof marketing, logistics, and purchasing. Rather, under such aperspective SCM coordinates cross-functional efforts acrossmultiple firms (Mentzer et al., 2001; Chan and Lee, 2005).Importantly, for both perspectives most agree that SCM is

critically dependent on the depth of understanding andmanagerial insights developed in each of the functional

disciplines for achieving its goals. Such knowledge is essentialfor overcoming hurdles to achieving SCM’s goals. Forexample, observers have noted that such goals are oftencountered by conflict and individual firm’s efforts tomaximize their own performance through exercise of powerand control and the use of opportunistic business practices.Such behavior and its resolution is at the core of researchefforts within marketing channels. Integration and reliance onsuch knowledge should be helpful to SCM in overcomingsuch challenges. Indeed, absent such reliance and continueddevelopment of other insights within the individual disciplinesof relevance to SCM, it will likely be challenging for theexpansive and worthy goals of SCM to be fully achieved.

Opportunities and challenges for scholarshipExamination and assessment of the developments andchanges occurring in SCM, marketing channels ofdistribution, logistics and purchasing also reveals a numberof implications for scholarship. These include bothopportunities and challenges for research (i.e. knowledgegeneration) as well as teaching and instruction (i.e. knowledgedissemination) within and across the fields.

ResearchOf particular note for research are the increasing overlaps indefinitions and topics of interest that have developed overtime across these disciplines. For example, both SCM andmarketing channels identify and specify the coordination andcollaboration of channel partners as a topic of interest,although from different vantage points and applying varyingmethods and theories. Further, SCM specifically identifies thefield of logistics as encompassed in its domain of interest.Similar observations and overlaps are present and attend therelationship of purchasing and SCM.Accepting differences in perspective and orientation, the

presence of such overlaps yield significant opportunities forinterdisciplinary research and development. In some instancessuch cross-disciplinary efforts have already been identifiedand are currently being explored to a considerable extent (e.g.SCM/logistics) and in other instances to a somewhat lesserextent (e.g. SCM/purchasing). In both cases, continuedacross disciplinary efforts are likely to prove fruitful.In other areas (e.g. SCM and marketing and marketing

channels as well as other functional areas) such integrationremains a continued opportunity. For example, Grimm(2004, p. 59) points out:

While many academic disciplines are conducting research in supply chain,there is an unfortunate lack of communication and cooperation amongst thevarious disciplines regarding supply chain research. [. . .] This is unfortunate,as each field offers contributions to the whole of the cross-disciplinary worldof supply chain management.

With particular respect to SCM and marketing, the evolutionof SCM to focus on end-user considerations overlaps withcore marketing concepts including the marketing concept andmarket orientation. Further development and integration ofthese fundamental insights both within and across eachdiscipline is likely to be beneficial to both. In addition, inrelation to marketing channel management and SCM,development and integration of insights regarding thecoordination and collaboration of channel partners has thepotential of furthering understanding of such phenomenon inways that elevate the efficiency and effectiveness of managerialinitiatives in both SCM and marketing channels.




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Teaching and instructionIn addition to research, implications for instruction andteaching, including curriculum enhancement, extend from thechanges and developments occurring within and across thedisciplines of SCM, marketing channels, logistics andpurchasing. Many of these implications may be cast asquestions for consideration and contemplation by thoseinvolved in such efforts.Of first impression is whether existing curricula adequately

cover the changes and developments that are occurring withinthese subject areas? Although programs designed to instillknowledge of many of the specific functions (e.g. logistics,marketing channels, etc.) may be identified, is the content inthese curricula adequate given the changes and developmentsthat have occurred within these disciplines? Do such curricularequire amendment to adequately address these changes anddevelopments?A further question is whether existing curricula should be

integrated to cover and bridge these related disciplines? Doexisting curricula adequately cover the subject knowledge thathas developed over time and currently resides within andacross these related disciplines? Should they? What challengesresult in attempting to develop such an integrativecurriculum? What content should be included? Excluded?A related question regards how curricula intended to cover

and bridge these subjects should be labeled? Given theintegrative goals of SCM, should such curricula be labeledsimilarly and include content on the functional areas?Alternately, given the functional orientation of marketingchannels, logistics and purchasing, should such labels remainwith the addition of SCM as a kind of capstone perspectiveintended to provide students with insights and understanding(if not a philosophy) of how such functions can be successfullyintegrated to achieve optimal performance across the supplychain? Or should such a philosophic orientation as providedthrough SCM be positioned as a foundation course, withthose functions that it coordinates being positioned aselements to be embraced and added as courses over time?At present, both pedagogical approaches may be foundcurrently in practice (or under consideration) at manyinstitutions where consideration is being given to how bestto include supply chain management in their curricula(Rutner and Fawcett, 2005).Finally, a larger question regards how other business

functions should be treated with respect to the changes anddevelopments that have occurred within and across theserelated disciplines? Overall, the challenge for educationalinstitutions is to expand their perspective while at the sametime improving the relevance and quality of their offerings. Inthis regard, it is important that these and other questions beapproached following an integrative process-orientedpedagogy that provides ample opportunity for the input andparticipation of relevant stakeholders.

Consequences for practiceTogether with the implications for scholarship, importantconsequences for practice extend from the changes anddevelopments occurring within and across the related fields ofsupply chain management, marketing channels ofdistribution, logistics and purchasing and theirinterconnections. Many of these parallel those alreadydiscussed. For example, although the practice of SCM hasbeen adopted and progressed in many organizations, given its

rapid emergence, other organizations have yet to benefit fromits application. At the same time, lack of consensus aboutwhat SCM is and what it is not likely has resulted in confusionand in some instances inhibited its adoption its adoption inways that provide benefits to practice.Other parallels are also identifiable. For example, the shift

in focus from competitive to collaborative interaction inmarketing and marketing channel management is detectablein many aspects of marketing channel practice ranging fromthe increasing prevalence of institutions such as joint ventures,strategic alliances, and partnerships to the nature ofinteractions that may be found in many day-to-day channelexchanges. Similarly, the integration of logistics into SCM isalso identifiable in many organizations. Finally, the evolutionand broadening of purchasing to include strategic andexternal effectiveness considerations may be found in someorganizations.Also paralleling changes and developments within each of

the areas of SCM, marketing channel, logistics andpurchasing management is consideration by manyorganizations of how best to go about the managerialchallenges of practising across these related areas. Whilesome organizations continue to work on them, others havesuccessfully met the challenges of understanding andintegrating these related disciplines to their overall benefit.For example, although very different retailers, Wal-Mart andTarget have been able to achieve profitable sales, increasecustomer count, increase trip frequencies, increasetransaction size, increase productivity; and reduce costs byaligning and focusing all marketing (including marketingchannels), purchasing and logistics functions on achievingtheir overall supply chain goals (Hoyt and Company, 2005).

Conclusion

The related disciplines of supply chain management,marketing channels of distribution, logistics and purchasinghave undergone significant development and evolution in thelast two decades. Spurred by both external and internalforces, changes in and across these disciplines havefundamentally altered the scholarly landscape to which theyrelate and the way in which they are practiced. This essaysought to examine and take stock of this new landscape and toreveal its opportunities and challenges for scholarship and itsconsequences for practice.

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Corresponding author

Gregory T. Gundlach can be contacted at: [email protected]




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SHORT ENDS OF THE STICK: THE PLIGHT OF GROWERS AND CONSUMERS

IN CONCENTRATED AGRICULTURAL SUPPLY CHAINS

DIANA L. MOSS* C. ROBERT TAYLOR**

Introduction ........................................................................................... 338

I. Agricultural Supply Chains and Competition �“Bottlenecks�” ........ 339 A. Characteristics of Supply Chains ........................................... 339 B. Growing Concentration in Input, Processing, Food

Manufacturing, and Retail Grocery Markets ........................ 341 II. Horizontal and Vertical Integration in Agricultural Supply

Chains ......................................................................................... 344 A. Efficiency Motivations for Integration .................................. 344 B. Corporate Wingspans and the Explosion of Integration ........ 346 C. Integration for Strategic Competitive Reasons ...................... 347

III. Producers and the �“Deadly�” Combination of Vertical and Horizontal Integration ................................................................ 348 A. Backward Integration and Contracting .................................. 348 B. Loss of Transparency and Inadequate Antitrust Metrics ....... 352

IV. Adverse Effects on Consumers .................................................. 353 A. Market Dominance and the Façade of �“Consumer Choice�” .. 353 B. Category Captains and Slotting Fees ..................................... 355

V. Challenges for Antitrust Enforcement ......................................... 356 A. What the Merger Enforcement Statistics Tell Us .................. 356 B. Expanding Antitrust�’s Narrow Focus on Economic

Efficiency .............................................................................. 358 C. Antitrust Immunities and Exemptions: The Case of

Fertilizer ................................................................................ 360 D. Challenges of Antitrust and Intellectual Property: The

Case of Transgenic Seed ....................................................... 362 Conclusion: Observations and Implications .......................................... 365

A. Increased Domestic and International Cooperation in Antitrust Enforcement ........................................................... 366

B. Importance of a Complementary, Public, and Private Enforcement Approach ......................................................... 366

C. Reconciling Regulatory and Antitrust Approaches to Competition Enforcement and Policy ................................... 367

* Vice President, American Antitrust Institute. ** Alfa Eminent Scholar of Agricultural Policy, Auburn University.

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338 WISCONSIN LAW REVIEW

INTRODUCTION

Competition in U.S. agricultural markets has been shaped and reshaped over the course of decades by a number of factors. These include long-standing statutory exemptions from the U.S. antitrust laws for some forms of agricultural business organizations, changes in regulation, advances in technology, the rise of intellectual property protection, and globalization. More recent changes, however, have fundamentally altered the landscapes of domestic and global agricultural markets. This has been driven largely by horizontal and vertical consolidation, which has created tight oligopolies and by the emergence of powerful players at critical stages in increasingly complex agricultural supply chains.

One major segment where the effects of high concentration are apparent is in agricultural inputs. These include agricultural fertilizers, chemicals, and conventional and genetically modified crop seed. Supra-competitive pricing resulting from coordinated behavior and single firm dominance in these input sectors has taken a toll on growers through higher prices and fewer choices.1 Another area of growing concentration is the processing of agricultural commodities such as meat and poultry, milk, and grains into manufactured commercial and retail food products.2 Consolidation of the midstream segments has led to fundamental shifts in economic power and the strategic enhancement of market power within important supply chains.3

Despite these escalating problems, relatively little legal-economic analysis has been devoted to systematically examining the phenomena of increasingly concentrated agricultural supply chains and their implications for the two most vulnerable stakeholders: growers and consumers. For example, in 2010, the U.S. Department of Justice (DOJ) and U.S. Department of Agriculture (USDA) held a series of workshops on competition in agriculture.4 A major theme of the testimonials heard in the workshops was the systematic squeezing of the producer and consumer through the exercise of market power at other levels.5 The

1. See, e.g., infra Part V.C. 2. See, e.g., infra Part II.C. 3. Id. 4. U.S. DEP�’T OF JUSTICE, COMPETITION AND AGRICULTURE: VOICES FROM THE

WORKSHOPS ON AGRICULTURE AND ANTITRUST ENFORCEMENT IN OUR 21ST CENTURY ECONOMY AND THOUGHTS ON THE WAY FORWARD 2�–4 (2012), available at http://www.justice.gov/atr/public/reports/283291.pdf [hereinafter DOJ, VOICES FROM THE WORKSHOPS].

5. See, e.g., U.S. DEP�’T OF JUSTICE, PUBLIC WORKSHOPS EXPLORING COMPETITION ISSUES IN AGRICULTURE: DAIRY WORKSHOP 85, 190, 235 (2010), available at www.justice.gov/atr/public/workshops/ag2010/wisconsin-agworkshop-transcript.pdf [hereinafter DOJ, DAIRY WORKSHOP].


2014:337 Short Ends of the Stick 339

DOJ/USDA effort culminated in a report acknowledging problems.6 However, there was little to no subsequent heightened enforcement or investigation. Moreover, the DOJ/USDA collaboration oddly did not involve the participation of the antitrust enforcement agency with purview over competition in downstream segments of the agriculture and food industries (for example, retail grocery markets), and much of the fertilizer industry, the Federal Trade Commission (FTC).7 The 2010 workshops were followed closely by a number of key agriculture antitrust enforcement issues, including the closing of a DOJ investigation into Monsanto�’s controversial practices in markets for transgenic seed traits without any enforcement action,8 and the FTC�’s decision not to challenge the merger of food manufacturing giants ConAgra and RalCorp.9

This Article attempts to lend some order to what is likely one of the most troubling phases in U.S. agricultural history�—namely the squeezing of the ends of the supply chain through the exercise of market power in the upstream and midstream segments. It proceeds in six sections. Part I examines characteristics of agricultural supply chains and describes growing concentration at the input, midstream processing and food manufacturing, and downstream retail levels. Part II analyzes horizontal and vertical integration in supply chains, including efficiency motivations and strategic competitive incentives. The implications of integration for producers and consumers are examined further in Parts III and IV. Part V takes up key challenges for antitrust enforcement that result from concentrated agricultural supply chains and provides important examples from fertilizer and transgenic seed. The final Part concludes with observations and policy recommendations.

I. AGRICULTURAL SUPPLY CHAINS AND COMPETITION �“BOTTLENECKS�”

A. Characteristics of Supply Chains

The term �“supply chain�” describes a network of relationships and transactions between sellers and buyers that results in the production and distribution of a product.10 A supply chain thus encompasses all the

6. DOJ, VOICES FROM THE WORKSHOPS, supra note 4, at 5�–15. 7. See id, at 2�–4 (discussing the partnership between solely the DOJ and

USDA to host the 2010 workshops); infra notes 106�–07107 and accompanying text. 8. See infra Part V.D. 9. See Bill Donahue, US, Canada Approve $6.8B ConAgra, RalCorp Deal,

LAW360 (Jan. 16, 2013, 7:08 PM), http://www.law360.com/articles/407986/us-canada-approve-6-8b-conagra-ralcorp-deal. See also infra Part V.A. (describing other mergers and antitrust enforcement issues).

10. Benita M. Beamon, Supply Chain Design and Analysis: Models and Methods, 55 INT�’L J. PRODUCTION ECON. 281, 282 (1998).



coordinated steps necessary to move and transform inputs from the upstream producer to the downstream consumer.11 Supply chains are an inherently interdisciplinary concept. For example, the marketing literature focuses on the relational aspects between buyers and sellers at various stages in the supply chain.12 Economic analysis centers on the transactional component of linkages between buyers and sellers and whether they are internal to a vertically integrated firm or are negotiated at arm�’s-length between independent parties.13 Law and economics adds the critical perspective of how buyers and sellers are affected by incentives for players to engage in procompetitive or anticompetitive behavior, much of which is determined by the underlying structure of markets that make up the supply chain.14

Numerous supply chains populate agriculture, ranging from grains to fruits, vegetables, meat, poultry, and milk. Agricultural input markets such as fertilizers, chemicals, and crop seed are particularly important for growers of crops, cattle, hogs, and chickens. Many of these commodities pass physically or virtually through the hands of traders or marketers before reaching the midstream segment. This encompasses activities within the industrial food production system that transform unprocessed products into highly standardized, consumable foods including beef packing, chicken processing, dairy processing, and grain milling. Processed commodities are then directed into food manufacturing for the production of packaged foods, then they are distributed to consumers through food service or retail grocery outlets. Figure 1 depicts a typical agricultural supply chain with various segments and the major competition �“bottlenecks�” that frequently exist. Innovation is shown to the left because it affects most stages in the supply chain. This generalized depiction of an agricultural supply chain is particularly important for understanding competitive issues.

11. Id. 12. See, e.g., Gregory Gundlach & Diana L. Moss, Systems Competition and

Challenges to Antitrust Thinking, 56 ANTITRUST BULL. 1, 4�–5 (2011). 13. Id. 14. See id.



B. Growing Concentration in Input, Processing, Food Manufacturing, and Retail Grocery Markets

At the top of Figure 115 are input markets, which include products such as crop seed, fertilizers, and agricultural chemicals. Many of these markets have been the subject of significant competitive concern such as anticompetitive coordination (tacit or explicit collusion) in fertilizers and single-firm dominance in genetic traits for crop seed.16 These input markets are thus shown with a smaller bubble to depict a less competitive segment. In a seminal 2011 report on competition, the USDA highlighted growing concentration in key agricultural input markets: crop seed and biotechnology, agricultural chemicals, farm machinery, animal health, and animal genetics.17

Between 1994 and 2009, for example, the four-firm concentration

15. See Letter from Diana Moss, Vice President American Antitrust Inst., to Edith Ramirez, Chairwoman, Fed. Trade Comm�’n 2 fig.1 (Feb. 25, 2014), available at http://www.antitrustinstitute.org/sites/default/files/AAISyscoUSFoodsMergerLetter_0.pdf.

16. See infra Parts V.C., V.D. 17. KEITH O. FUGLIE ET AL., U.S. DEP�’T OF AGRIC., ECON. RESEARCH

INVESTMENTS AND MARKET STRUCTURE IN THE FOOD PROCESSING, AGRICULTURAL INPUT, AND BIOFUEL INDUSTRIES WORLDWIDE 14�–15 (2011) [hereinafter FUGLIE ET AL., RESEARCH INVESTMENTS], available at http://www.ers.usda.gov/media/199879/err130_1_.pdf; see also Keith O. Fuglie et al., Rising Concentration in Agricultural Input Industries Influences New Farm Technologies, AMBER WAVES, Dec. 3, 2012, [hereinafter Fuglie et al., Rising Concentration], available at http://ageconsearch.umn.edu/bitstream/142404/2/4risingconcentration.pdf.

Innova on

Producers

Trading, Marke ng, Risk Management

Processing

Food Manufacturing

Consumers

Food Service Retail Grocery

Figure 1: Compe on �“Bo lenecks�” in Agriculture Supply Chains

*Larger bubbles represent less concentrated segments of the supply chain

Inputs



ratio for agricultural chemicals increased by 86% from 28.5% to 53%.18 The markets for potash and phosphate fertilizers are tight oligopolies, with three U.S.- and Canada-based firms accounting for the bulk of North American output.19 In 2011, concentration in phosphorus fertilizer was 3,163 Herfindahl-Hirschman Indices (HHI) and in potash fertilizer was 4,604 HHI.20 The levels of global concentration and increases in concentration of key input markets are the highest in crop seed.21 For example, between 1994 and 2009, the market share of the four largest firms in the crop seed industry more than doubled to 54%.22 In the late 2000s, the four largest companies held 95% of the U.S. market for cottonseed, 72% of the market for corn seed, and 55% of the soybean seed market.23 In the 2009 traits markets, the �“Big 6�” biotechnology firms held greater than 95% of trait acres for corn, soybeans, and cotton, with Monsanto alone accounting for 90% of these acres.24

In Figure 1 producer markets are shown below input markets. Markets for crops and animals generally contain many atomistic participants with relatively little�—if any�—ability to control price and with limited bargaining power to leverage against powerful buyers in the downstream processing segments. Many markets in the midstream processing segments of many agricultural supply chains have become highly concentrated in the last two decades with dominant firms that are integrated into upstream activities and multiple midstream activities.

18. Fuglie et al., Rising Concentration, supra note 17, at 2. In 2009, the four-firm ratio was 54% for crop seed and biotechnology and 53% for agricultural chemicals. Id.

19. C. ROBERT TAYLOR & DIANA L. MOSS, AMERICAN ANTITRUST INST., THE FERTILIZER OLIGOPOLY: THE CASE FOR GLOBAL ANTITRUST ENFORCEMENT 16�–18 (2013), available at http://www.antitrustinstitute.org/content/fertilizer-oligopoly-case-global-antitrust.

20. Id. at 14�–15 (�“Market shares based on production capacities can be used to calculate Herfindahl-Hirschman Indices (HHI) of market concentration for regional and global markets.�”).

21. Fuglie et al., Rising Concentration, supra note 17, at 2. 22. Id. 23. FUGLIE ET AL., RESEARCH INVESTMENTS, supra note 17, at 35; see also

DIANA L. MOSS, AMERICAN ANTITRUST INST., TRANSGENIC SEED PLATFORMS: COMPETITION BETWEEN A ROCK AND A HARD PLACE? 13�–14 (2009), available at http://www.antitrustinstitute.org/sites/default/files/AAI_Platforms%20and%20Transgenic%20Seed_102320091053.pdf.

24. Fuglie et al., Rising Concentration, supra note 17, at 4. The �“Big 6�” are: Monsanto, Syngenta, Dow, Bayer, DuPont, and BASF. Id. In the same year, Monsanto traits were reportedly planted on about 77% of total cotton acres, about 82% of corn acres, and about 95% of soybean acres. See MONSANTO SUPPLEMENTAL INFORMATION FOR INVESTORS: AS OF MONSANTO SECOND-QUARTER 2012 EARNINGS, MONSANTO (2012), available at http://www.monsanto.com/investors/Documents/2012/FINAL_Q2_Investor_Supplement_04.03.2012.pdf. See also MOSS, supra note 23, at 13.



Meat, poultry, and milling are leading examples of high and/or growing market concentration.

For example, in the cattle slaughter industry, the four-firm ratio increased from 79% in 2002 to 84% in 2011 for steers and heifers and from 39% to 53% for cows and bulls.25 Fed-beef packing in the United States is essentially controlled by three firms�—Cargill, Tyson, and JBS�—which together accounted for 68% of the market in 2012.26 The top four firms accounted for about 81% of output.27 The four-firm concentration ratio for hog slaughter increased from 55% in 2002 to 64% in 2011.28 Reports in early 2012 indicated that the top three firms�—Smithfield, Tyson Foods, and Swift�—controlled about 54% of pork-packing capacity in the United States, and the top four firms controlled 62%.29 In poultry, USDA data reported that the four-firm concentration ratio for broilers decreased from 57% to 52% from 2008 to 2011.30 Data from 2012 showed that the top four broiler processing firms�—Tyson Foods, Pilgrim�’s Corp., Sanderson Farms, Inc., and Perdue Farms, Inc.�—controlled about 54% of the market.31

In the milling of wheat flour, three firms�—ConAgra, Cargill, and Archer Daniels Midland (ADM)�—account for over 50% of the national market.32 As is the case with most agricultural markets, however, transportation costs constrain the geographic region in which producers and consumers seek out alternative sources and outlets. Market shares and concentration are therefore typically higher on a local geographic market level. Food manufacturing also resides in the midstream segment and has become decidedly more concentrated. Single-firm dominance is prevalent in major food groups, with two to four companies holding a 75% to 95% market share in U.S. grocery stores for items such as baby formula, sport drinks, microwaveable packaged dinners, beer, granola

25. U.S. DEP�’T OF AGRIC., GRAIN INSPECTION PACKERS & STOCKYARDS ADMIN., 2012 ANNUAL REPORT: PACKERS AND STOCKYARDS PROGRAM 35 (2013) [hereinafter GIPSA 2012 ANNUAL REPORT], available at http://www.gipsa.usda.gov/Publications/psp/ar/2012_psp_annual_report.pdf.

26. CME GROUP, DAILY LIVESTOCK REPORT (Jan. 18, 2013), available at http://www.dailylivestockreport.com/documents/dlr%2001-18-13.pdf.

27. Id. 28. GIPSA 2012 ANNUAL REPORT, supra note 25, at 35. 29. Steve Meyer, Slaughter Projects Will Test Packer Capacities, NAT�’L HOG

FARMER (May 15, 2012), http://nationalhogfarmer.com/marketing/slaughter-projections-will-test-packer-capacities.

30. GIPSA 2012 ANNUAL REPORT, supra note 25, at 42. 31. Gary Thornton, U.S. Chicken Companies Enter 2013 with Production

Increases, WATT POULTRY USA, Mar. 2013, at 12, 13, available at http://www.wattpoultryusa-digital.com/201303#&pageSet=7.

32. GRAIN & MILLING ANNUAL 2013, at 94 (2013).



bars, pet food, potato chips, and many other categories of food.33 PepsiCo, Nestle, General Mills, Kraft Foods, and ConAgra are dominant in a variety of food areas.34

Equally troubling is the growing concentration in the retail segment. The four-firm ratio increased from 30% in 2002 to 36% in 2011, while the eight-firm ratio in 2011 was 49%.35 Another source estimates that about 54% of dollars spent on groceries in 2012 went to the top four retailers�—Walmart, Kroger, Target, and Safeway.36 Again, in regional geographic markets, market concentration can often be higher. The growth of Walmart factors significantly into increasing concentration in the retail grocery markets. The retailer�’s share of the national retail grocery market has increased from virtually nothing in the 1980s to 28�–32% in 2013.37 Growing concentration in the midstream and downstream segments of the supply chain sets the stage for examining the competitive problems associated with combined horizontal and vertical integration.

II. HORIZONTAL AND VERTICAL INTEGRATION IN AGRICULTURAL SUPPLY CHAINS

A. Efficiency Motivations for Integration

Market concentration and the emergence of dominant firms can result from organic growth through developing commercially successful technologies, products, and marketing strategies. But it can also result from horizontal and vertical integration. Consolidation of the input, midstream, and downstream segments of agricultural supply chains has been particularly pronounced over the last two decades. For example, firms have integrated horizontally and vertically to diversify geographically and in the array of products they offer. Consolidation can

33. FOOD & WATER WATCH, GROCERY GOLIATHS: HOW FOOD MONOPOLIES IMPACT CONSUMERS 7 (2013), available at http://documents.foodandwaterwatch.org/doc/Grocery_Goliaths_12-19-13.pdf.

34. Id. at 8. 35. Retail Trends, U.S. DEP�’T OF AGRIC. ECON. RESEARCH SERV.,

http://www.ers.usda.gov/topics/food-markets-prices/retailing-wholesaling/retail-trends.aspx#.UpQwJChiwnh (last updated Dec. 29, 2013).

36. FOOD & WATER WATCH, supra note 33, at 2. 37. Grant Gerlock, What Does Walmart Have to Do with ConAgra�’s Move into

Store Brand Food?, NET NEB. (Apr. 10, 2013, 6:30 AM), http://netnebraska.org/article/news/what-does-walmart-have-do-conagras-move-store-brand-food.



also lead to enhanced access to research and development, new or needed distribution channels, and the reduction of financial risk.38

Another incentive for integration is the exploitation of various economies. For example, some businesses have merged to streamline operations and to increase scale to reduce fixed costs. Funding research and development in proprietary agricultural genomics may be possible only on a relatively large scale.39 In livestock production, scale has expanded significantly. The production �“locus�” between 1987 and 2002 �“increased by 60 percent in broiler, 100 percent in fed-cattle, 240 percent in dairy, and 2,000 percent in hog production.�”40 The ability of a single firm to produce a range of products at lower cost than individual firms manufacturing single products or product lines (scope economies) has often been at the heart of integration, particularly in food manufacturing. The same is true of vertical economies (or economies of coordination). Complementarities between traits and traited seed assets may achieve vertical economies such as reduced transaction costs; backward integration of food manufacturers into processing may ensure reliable supplies and maintain quality control.41

Vertical economies of coordination, coupled with scale and scope economies, are likely to factor into antitrust analysis of mergers on the efficiency side of the ledger, as are other merger-related efficiency arguments, such as quality control and the enhanced ability to get new products to market faster. However, with increasing concentration and the competitive concerns it raises, the burden on merging firms to defend their efficiencies claims becomes heavier.

38. See DARREN HUDSON & CARY W. HERNDON, MISS. STATE UNIV. DEP�’T OF AGRIC. ECON., MERGERS, ACQUISITIONS, JOINT VENTURES, AND STRATEGIC ALLIANCES IN AGRICULTURAL COOPERATIVES 23 (2000).

39. Nicholas Kalaitzandonakes, Biotechnology and the Restructuring of the Agricultural Supply Chain, 1 AGBIOFORUM 40, 40 (1998).

40. JAMES M. MACDONALD & WILLIAM D. MCBRIDE, THE TRANSFORMATION OF U.S. LIVESTOCK AGRICULTURE: SCALE, EFFICIENCY, AND RISKS iii (2009), available at http://www.ers.usda.gov/publications/eib-economic-information-bulletin/eib43.aspx#.UpuFiyhiwni. Locus statistics represent the midpoint of the range of farm sizes (in terms of annual sales) at which one half of national production comes from larger farms and half from smaller.

41. See Rachel E. Goodhue et al., Biotechnology, Intellectual Property and Value Differentiation in Agriculture 1, 8�–9 (Univ. of Cal. at Berkeley Dep�’t of Agric. & Res. Econ. & Policy, Working Paper No. 901, Rev., 2002), available at http://escholarship.org/uc/item/9w85z5r6; see also Gregory D. Graff et al., Agricultural Biotechnology�’s Complementary Intellectual Assets, 85 REV. ECON. STAT. 349, 349, 360�–61 (2003).



B. Corporate Wingspans and the Explosion of Integration

Description and analysis of the global food system is greatly complicated by large transnational corporations that have sizeable �“wingspans�” that reach into multiple levels of agricultural supply chains both domestically and abroad. Wingspans exist because many of the agribusiness corporations are not only dominant in certain product and geographic markets across the globe, but also because they are involved with the production of numerous agricultural and food products. For example, Cargill, the world�’s largest private corporation, is involved in almost every aspect of food.42 It not only processes (mills) grains, but is also integrated upstream into commodity trading, marketing, risk management, and financial services that producers rely on to manage and market their production.43 ConAgra is one of the largest packaged food companies in the United States44 and is integrated upstream into processing operations (like flour milling).45 Tyson�—which began as a vertically integrated, specialized American poultry producer�—is now engaged in the production and sales of not just poultry, but also of beef and pork in many parts of the world.46

Webs of corporate integration connect multiple agricultural inputs; processing and retailing firms through dozens of corporate subsidiaries; joint ventures; strategic alliances; and partial ownership of smaller, more specialized firms by transnational corporations. For example, Archer Daniels Midland (ADM) has sales around $90 billion annually and full or joint venture ownership interests in multiple companies scattered throughout the world.47 The Potash Corporation of Saskatchewan (Potash

42. America�’s Largest Private Companies, FORBES (Dec. 2013), http://www.forbes.com/largest-private-companies/list/.

43. See Cargill Products & Services, CARGILL, http://www.cargill.com/products/index.jsp (last visited Mar. 7, 2014).

44. See CONAGRA FOODS, http://www.conagrafoods.com/ (last visited Mar. 7, 2014) (stating ConAgra Foods can be found in �“99 percent of America�’s homes�”).

45. See, e.g., More Than Just a Mill, CONAGRA MILLS, http://www.conagramills.com/about_us/about_us.jsp (last visited Jan. 27, 2014).

46. An Enduring Culture �– A Commitment to Values, TYSON FOODS, INC., http://www.tysonfoods.com/Our-Story/Heritage.aspx (follow �“1950s�” hyperlink; then select image number 3) (last visited Feb. 1, 2014) (describing Tyson�’s structural expansion to become vertically integrated from breeding to packaging); A Snapshot of Tyson Foods, Inc., TYSON FOODS, INC., http://www.tysonfoods.com/Our-Story/Tyson-Overview.aspx (last visited Mar. 7, 2014).

47. ADM Facts, ARCHER DANIELS MIDLAND (ADM), http://origin.adm.com/en-US/company/Facts/Pages/default.aspx (last visited Jan. 27, 2014); Profile: Archer Daniels Midland Co (ADM), REUTERS, http://www.reuters.com/finance/stocks/companyProfile?symbol=ADM (last visited Jan. 27, 2014). See, e.g., Archer-Daniels-Midland Co., Transition Report (Form 10-K) (Feb. 28, 2013), available at http://www.sec.gov/Archives/edgar/data/7084/000000708413000014/adm10ktfy125.htm (detailing ADM annual reports and SEC filings).



Corp.) has interests that cover potash fertilizer operations in Canada, phosphate fertilizer operations in the United States, and nitrogen fertilizer operations in the United States and Trinidad and Tobago.48 Their web includes membership in Canpotex, a Canadian potash export cartel with a limited exemption from Canadian antitrust laws49 and significant smaller potash producers in Chile, Israel, and China.50 Agrium, Inc., one of the three members of Canpotex, owns hundreds of retail fertilizer, seed, crop protection chemical, and agricultural service centers in the United States and Canada.51

C. Integration for Strategic Competitive Reasons

Unlike efficiency-driven integration, a major motivation for horizontal and vertical consolidation is strategic competition. Perhaps the simplest form of this is the accretion of market share and associated market power, which can be exercised to erect strategic entry barriers in the form of scale economies or brand-name loyalties or to engage in predatory behavior. In addition to the enhancement of seller market power, consolidation can reinforce monopsony (buyer) power, particularly at the processor level where firms are simultaneously buyers and sellers in a market. Integration at the midstream level is increasingly motivated by the quest to create or enhance countervailing market power between processors and retailers. Moreover, extensive vertical integration, coupled with concentration, can enhance the ability and incentive for dominant agribusinesses to exclude rivals in upstream and downstream markets.

Regardless of the motivation, integration in agriculture has, according to the USDA, resulted in �“fewer, larger buyers that effectively control terms of trade�” that �“demand more from suppliers in specific product attributes, volume, timing, and costs.�”52 Food manufacturers and grocery retailers want to deal with fewer, larger processors, which causes

48. See Facilities & Investments, POTASHCORP, http://www.potashcorp.com/about/facilities/potash/allan/ (last updated Feb. 28, 2014) (listing facilities by what they produce under each tab at the top of the screen).

49. See Ian Austen, Takeover Bid Shines Spotlight on Crucial Player in Potash, N.Y. TIMES, Sept. 9, 2010, http://www.nytimes.com/2010/09/10/business/global/10potash.html?_r=0.

50. POTASHCORP, FOOD MATTERS: 2013 ANNUAL INTEGRATED REPORT 10, 54 (2013), available at http://potashcorp.s3.amazonaws.com/2013_PotashCorp_Annual_Integrated_Report.pdf.

51. See What We Do, AGRIUM, http://www.agrium.com/about_us/what_we_do.jsp (last visited Mar. 7, 2014); Where We Are, AGRIUM, http://www.agrium.com/about_us/where.jsp#retail (last visited Mar. 7, 2014).

52. JOHN R. DUNN ET AL., U.S. DEP�’T OF AGRIC., AGRICULTURAL COOPERATIVES IN THE 21ST CENTURY 3 (2002), available at http://www.rurdev.usda.gov/rbs/pub/cir-60.pdf.



ripple effects up the supply chain, particularly in the midstream processing segment.53 Responses to these pressures have triggered countervailing consolidation in the midstream segment of the industry. It is well-known that Walmart exerts significant monopsony power over some of its suppliers, forcing down their prices and squeezing margins.54 Food manufacturers whose products are considered second- and third-tier brands are particularly susceptible to the dictates of downstream retail grocers.55

For example, almost 20% of ConAgra�’s consolidated net sales in recent years were to Walmart.56 Managing the �“supply chain�” in response to this pressure is what likely motivated ConAgra�’s 2012 joint venture with Cargill-dominated Horizon Milling, LLC.57 As one industry source observed of retail grocers: �“Keeping costs down is what keeps prices low for consumers. But the savings have to come from somewhere and the ripple effects can reach all the way back to the farm.�”58 The result of midstream consolidation is to create a supply chain with producer and consumer segments that are highly disaggregated and in possession of relatively little economic power, and to create levels in the midstream segment that are dominated by tight oligopolies of highly integrated firms.

III. PRODUCERS AND THE �“DEADLY�” COMBINATION OF VERTICAL AND HORIZONTAL INTEGRATION

A. Backward Integration and Contracting

Production of raw agricultural commodities�—farming and ranching�—is relatively unconcentrated for most commodities in the United States and throughout much of the world. However, farmers and ranchers are often caught in what has been called a �“vise�” because many

53. DOJ, DAIRY WORKSHOP, supra note 5, at 85, 190, 235. 54. See, e.g., Tom Van Riper, The Walmart Squeeze, FORBES (Apr. 24, 2007,

6:00 AM), http://www.forbes.com/2007/04/23/walmart-suppliers-margins-lead-cx_tvr_0423walmart.html.

55. Martinne Geller & Jessica Wohl, Analysis: Wal-Mart�’s Price Push Tests Manufacturers�’ Prowess, REUTERS (Mar. 6, 2012, 3:59 PM), http://www.reuters.com/article/2012/03/06/us-usa-consumer-walmart-idUSTRE8250GM20120306.

56. ConAgra Foods, Inc. Annual Report (Form 10-K) (July 20, 2012), available at http://phx.corporate-ir.net/phoenix.zhtml?c=97518&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTgzNzI4MjMmRFNFUT0wJlNFUT0wJlNRREVTQz1TRUNUSU9OX0VOVElSRSZzdWJzaWQ9NTc%3d.

57. See Owen Fletcher, U.S. Scrutinizes Joint Venture by Cargill, ConAgra, CHS, WALL ST. J., July 4, 2013, http://online.wsj.com/news/articles/SB10001424127887323899704578584652560048688.

58. Gerlock, supra note 37.



inputs to agricultural production must be obtained from oligopolistic input suppliers, while their raw commodities are marketed in highly concentrated, vertically integrated supply chains.59 The economic models underlying monopsony and oligopsony assume that the buyer will permit sellers to determine the quantity to be sold at given prices. However, this may be an unrealistic assumption in the context of the food supply chain because powerful retailers (like Walmart) can dictate price and quantity to wholesalers (such as ConAgra or Tyson) who, in turn, dictate price and quantity to farmers and ranchers. This �“all-or-nothing�” model can result in economic inefficiency because producers are forced to accept lower-than-competitive prices.60 But it also results in a significant redistribution of surplus from producers to downstream firms.61 Food processors have expanded control over distribution and have integrated backward into raw materials through ownership or various forms of legal control of production. The USDA has noted that these developments �“rob producers of decision-making authority and market choices�” and limit their bargaining power.62 In light of this, it is not surprising that agricultural cooperatives have beefed up to countervail the growth of market power in the processing segment of various industries. For example, between 1975 and 2009, the percentage of total gross sales by large cooperatives (one billion dollars or more in annual sales) increased from 17%63 to 43%.64 But many of these cooperatives�—such as Dairy Farmers of America, Inc. and Land O�’Lakes, Inc.�—are now dominant firms, expanding out of the production segment into processing and food production.65 Some industries�—like poultry�—are almost completely vertically integrated, while many�—such as the cattle and beef industry�—are only

59. Concentration in Agriculture and an Examination of the JBS/Swift Acquisitions: Hearing before the Subcomm. on Antitrust, Competition Policy and Consumer Rights of the S. Comm. on the Judiciary, 110th Cong. 6�–8 (2008) (statement of Peter Carstensen, Professor of Law, University of Wisconsin Law School), available at http://www.gpo.gov/fdsys/pkg/CHRG-110shrg45064/pdf/CHRG-110shrg45064.pdf.

60. See, e.g., ROGER D. BLAIR & JEFFREY L. HARRISON, MONOPSONY: ANTITRUST LAW AND ECONOMICS 73 (1993).

61. See C. Robert Taylor, Monopsony and the All-or-Nothing Supply Curve: Putting the Squeeze on Suppliers 19 (Auburn Univ., Working Paper No. ES.6.2003, 2003) (on file with authors).

62. DUNN ET AL., supra note 52, at 4. 63. U.S. DEP�’T OF AGRIC., FARM MARKETING, SUPPLY AND SERVICE

COOPERATIVE HISTORICAL STATISTICS 71 (2004), available at www.rurdev.usda.gov/rbs/pub/cir1s26.pdf.

64. U.S. DEP�’T OF AGRIC., COOPERATIVE STATISTICS 2009, at 18 (2009), available at www.rurdev.usda.gov/supportdocuments/sr70-2009.pdf.

65. JAMES J. WADSWORTH, U.S. DEP�’T OF AGRIC. RURAL BUS. COOPERATIVE SERV., COOPERATIVE UNIFICATION: HIGHLIGHTS FROM 1989 TO EARLY 1999, at iv, 3�–4 (1999), available at www.rurdev.usda.gov/supportdocuments/rr174.pdf.



partially integrated. Partial vertical integration can occur because a firm wants to satisfy predictable, high probability demand but does not want to fully integrate to meet demand that is riskier or has lower profit margins.66 Coupled with horizontal consolidation, vertical integration creates a number of what have been termed �“deadly�” problems for farmers, ranchers, and eventually food consumers.67 Full, backward-vertical integration of processors, for example, creates a capital barrier to entry because potential competitors cannot enter the vertical chain at a single stage of production but must enter as a vertically integrated business involving two or more stages of production. Moreover, potential entrants may have to enter on a large scale to meet the volume requirements of large retailers. Second, and perhaps more important, there is a good deal of partial integration or integration via contract. �“Marketing and production contracts covered 39[%] of the value of U.S. agricultural production in 2008.�”68 Some contracts between processors, wholesalers, and food retailers are cost-plus contracts that attempt to lock in a profit margin for retailers.69 Moreover, agricultural production that is vertically integrated via contract between producer and processor is often a one-sided arrangement, reflecting the relatively greater economic power of the processor.70 This type of integration makes markets particularly susceptible to market manipulation by buyers further down the supply chain. This is best illustrated in the beef-packing markets where, because of partial vertical integration over the last two decades, buyers of slaughter cattle may also be sellers of slaughter cattle, blurring the lines between markets.71

66. See Martin K. Perry, Vertical Integration: Determinants and Effects, in 1 HANDBOOK OF INDUSTRIAL ORGANIZATION 183, 185 (Richard Schmalensee & Robert Willig eds., 1989), available at http://www.economia.esalq.usp.br/intranet/uploadfiles/3557.pdf.

67. Neil Harl, Why Worry about Changing Structure?, IOWA ST. U. EXTENSION & OUTREACH: AG DECISION MAKER (Sept. 2000), http://www.extension.iastate.edu/agdm/articles/harl/HarlSept00.htm.

68. JAMES D. MACDONALD & PENNI KORB, AGRICULTURAL CONTRACTING UPDATE: CONTRACTS IN 2008, USDA ECONOMIC INFORMATION BULLETIN NUMBER 72, at i, 31 (2011), available at http://www.ers.usda.gov/publications/eib-economic-information-bulletin/eib72.aspx#UqsiK6WvvHg.

69. Id. at 1�–3; see Benjamin F. Sturgeon, Fiduciary Duties in Cost-Plus Contracts for Construction, 34 CONSTRUCTION L. 24, 24 (2014) (defining cost-plus contracts).

70. Significant portions of the following two paragraphs and accompanying footnote text are drawn from C. ROBERT TAYLOR, THE MANY FACES OF POWER IN THE FOOD SYSTEM 6 (2004), available at http://www.justice.gov/atr/public/workshops/docs/202608.pdf.

71. Id. at 3, 6.



For example,

[t]hrough ownership, joint ventures, and various contracts�—collectively known as captive supply�—the major beef packers own or control roughly 50% of their slaughter needs. The rest of their slaughter needs are obtained from the cash market. [Moreover,] packers feed cattle, and often sell slaughter cattle to other packers.72

Most captive supply is dispensed with through marketing agreements.73 �“In typical marketing agreements, the base price is tied by a �‘formula�’ to an announced cash price . . . for slaughter cattle slaughtered in the same week.�”74 With a fed-cattle marketing agreement, what firms pay on the cash market determines not just what they pay for the small proportion of fed cattle acquired through that channel but for the vast proportion they acquire through captive agreements.75

Because a packer can satisfy (or threaten to satisfy) daily slaughter needs from his or her own cattle, from the cash market, or from contracted supplies, they have incentives to manipulate the market to their advantage. Being on both sides of the [often �“thin�” (weekly)] cash market for a perishable commodity provides beef packers with many opportunities that may result in cash prices below a competitive level.76

For example, depending on the packer�’s expectations regarding prices and their relative commitment of captive supply, it can delay entry or exit in the cash market and force feeders to accept prices lower than what would prevail in a competitive market.77 Packers can also discriminate against different feedlots, giving preferential deals to feeders that agree

72. Id. �“Roughly 5% of fed cattle are in packer-owned or controlled feedlots and another 5% are known as forward contracts usually tied to the futures market for slaughter cattle.�” Id.

73. Id. 74. Id. 75. Id. Some of the large beef packers also own or control a significant number of cattle in other countries, especially Canada, Australia and New Zealand. These international captive supplies provide additional opportunity to manipulate cattle and meat markets. . . . [The analytics] are further complicated by the fact that there is a futures market for cattle. As is well known, cash and futures prices tend to move together; directly manipulating one of these markets will indirectly manipulate the other market.

Id. at 5�–6. 76. Id. 77. Id. at 4�–5.



to �“expand production, which has the effect of lowering cash price�” and facilitating the packers�’ control of �“entry and exit of other feeders.�”78 Exclusive deals between packers and some feedlots can also �“preempt other buyers from accessing those cattle.�”79

B. Loss of Transparency and Inadequate Antitrust Metrics

Antitrust generally assumes that market power can be exercised by buyers or by sellers in any number of settings, including bilateral monopoly.80 But it is not well equipped to handle cases where a single market participant has incentives to exercise both.81 Reported concentration measures are typically on the seller side of the market.82 While these may be appropriate indicators of the power imbalance farmers face in purchasing inputs, they are often irrelevant as indicators of the power imbalance farmers face in marketing production.83 For example, transportation costs greatly limit the geographic range for marketing, and perishability puts a powerful buyer in a favorable power position of influencing the market by strategically delaying or threatening to delay the acquisition of raw commodities.84 As a preliminary matter, therefore, concentration statistics need to be developed for �“captive draw areas,�” reflecting economically viable time and distance constraints for marketing raw agricultural commodities. Perhaps more troubling is that the combination of packers operating as buyers and sellers�—coupled with distorted incentives created by captive supply arrangements�—may result in the exercise of particularly damaging market power even in a market that is not highly concentrated by traditional standards.85 Lack of transparent business transactions�—

78. Id. at 5. 79. Id. 80. Id. at 3. 81. Id. 82. See, e.g., MARY HENDRICKSON & WILLIAM HEFFERNAN, CONCENTRATION OF

AGRICULTURAL MARKETS (2007), available at http://www.nfu.org/media-galleries/document-library/func-startdown/392/.

83. PETER C. CARSTENSEN, BUYER POWER AND MERGER ANALYSIS�–THE NEED FOR DIFFERENT METRICS 12�–13 (2004), available at http://www.justice.gov/atr/public/workshops/docs/202606.pdf.

84. See id. at 15�–16. 85. C. ROBERT TAYLOR, supra note 70, at 5. Packers hold a clear information advantage over feeders and undoubtedly use that information to their advantage. Even under mandatory livestock price reporting begun in April 2001 and revised in August 2001, some large transactions might not be reported. A merger of packers could thus result in even less price and captive supply information reported due to confidentiality requirements involved more often. Thus, a merger could strengthen the information advantage packers already hold over cattle feeders.



particularly in contracting�—in the horizontally concentrated, vertically integrated web of large agribusiness market participants is increasingly problematic for farmers as well as food consumers. To the extent that retailers use contracts with processors to lock in a profit margin and processors use contracts with farmers to lock in their profits, farm-level production and prices become a shock absorber for the vertical industry. Farmers and ranchers who thus prefer the independence of traditional cash markets to contracts that restrict economic freedom may face more risk and uncertainty in prices and market access due to the contracts and business practices far upstream. Squeezing farmers in the foregoing ways will further impair the ability of growers to obtain competitive prices for their products.

IV. ADVERSE EFFECTS ON CONSUMERS

A. Market Dominance and the Façade of �“Consumer Choice�”

Big-box grocery stores project a visual impression of brand variety and magnitude, but looks can often be deceiving. Many companies sell multiple brands of the same product, and the grocery store down the street may be owned by the same corporate entity.86 In addition to brand names masking limited consumer choice, large grocery chains operate under different names.87 Kroger Co. owns chains that operate under numerous different names.88 Similar examples of brand proliferation under the ownership of a single conglomerate are also available. JBS, a Brazilian corporation, markets poultry under at least ten brands.89 JBS also offers at least five brands of pork and a plethora of private-label brands.90 Smithfield Foods, now owned by a Chinese company, specializes in pork and markets under multiple brand names,91 and Tyson

Id. at 6.

86. FOOD & WATER WATCH, supra note 33, at 4�–5, 7. 87. Id. at 3�–4.

88. Id. at 4. These include: Kroger, Ralphs, Food 4 Less, FoodsCo, Jay C, Owen�’s, Pay Less Super Markets, Scott�’s, Ruler Foods, City Market, King Soopers Marketplace, Fry�’s Food & Drug, Smith�’s, Fred Meyer, QFC, Dillon�’s Food Stores, and Baker�’s. Id. at 4 tbl.1.

89. Chicken Brands, JBS USA, http://www.jbssa.com/Brands/Chicken/default.aspx (last visited Jan. 13, 2014). 90. Pork Brands, JBS USA, http://www.jbssa.com/Brands/Pork/default.aspx (last visited Jan. 13, 2014).

91. Our Brands, SMITHFIELD FOODS, http://www.smithfieldfoods.com/our-brands/ (last visited Jan. 13, 2014).



Foods, which produces poultry, pork, and beef products, markets under numerous brand names and unidentified house brands.92 Major grocery chains also sell �“private label�” or �“house�” brands, suggesting that there is additional consumer choice. In fact, however, the same firm with numerous other brands on the same shelf likely manufactured private-label products.93 The consumer cannot easily determine the source of private-label products, only that the product was �“packaged�” for the grocery chain.94 Brand names and associated advertising are key product differentiation strategies for gaining market share. Yet for some products like poultry and pork, there may be little, if any, difference.95 In the industrial food production system from which the bulk of products consumed are derived, practices are standardized even at the farm level. For example, the pork market is dominated by essentially a single genotype of pig raised under the same conditions, fed the same feed, and processed the same way.96 Similarly, poultry comes from a very narrow genetic base raised under carefully controlled conditions.97 Thus, while there may be numerous brands on the meat shelf in a grocery store, the products may have come from essentially the same hog or chicken. The norm in the industrial food system is that consumers pay for numerous brand names for the same or essentially the same product. Yet in 2011, advertising amounted to about $31.5 billion (2.4%) of expenditure on food by U.S. consumers.98 Informative advertising and marketing is often of value to consumers, but deceptive advertising is of highly questionable redeeming social value. Food advertising may be highly deceptive. For example, more foods are marketed as �“natural,�”

92. Branded Programs, TYSON FOODS, http://www.tysonfoods.com/Great-Food/Branded-Programs.aspx (last visited Jan. 13, 2014).

93. See, e.g., Ellen Byron, 101 Brand Names, 1 Manufacturer, WALL ST. J., May 9, 2007, http://online.wsj.com/news/articles/SB117867462888496739.

94. Id. 95. Id. 96. PEW COMMISSION ON INDUSTRIAL FARM ANIMAL PRODUCTION, PUTTING

MEAT ON THE TABLE: INDUSTRIAL FARM ANIMAL PRODUCTION IN AMERICA 1 (2008), available at http://www.pewtrusts.org/our_work_report_detail.aspx?id=38442.

97. Id. See also Special: Biodiversity for Food and Agriculture, SDDIMENSIONS (Feb. 1998), http://www.fao.org/sd/epdirect/epre0040.htm.; See, e.g., HOPE SHAND, HUMAN NATURE: AGRICULTURAL BIODIVERSITY AND FARM-BASED FOOD SECURITY 43�–51 (1997).

98. Total food expenditures in 2011 were $1.312 trillion. Expenditure data is available in Table 1, downloadable at Overview, USDA ECON. RESEARCH SERV., http://www.ers.usda.gov/data-products/food-expenditures.aspx#.Ut_Y1nl6gmI (last updated Feb. 19, 2014) (open attachment labeled �“Table 1-Food and alcoholic beverages: Total expenditures�”). In 2011, advertising accounted for 2.4% of those expenditures, or roughly $31.5 billion. Food Dollar Series: Documentation, USDA ECON. RESEARCH SERV., http://www.ers.usda.gov/data-products/food-dollar-series/documentation.aspx#industry (last updated Mar. 5, 2013).



�“local,�” from a �“family farm,�” or a �“natural food raised by a local family farmer.�” Such labels have no concrete legal meaning and are often used as marketing devices. �“Natural�” labeling does not equate to safety and �“local�” food products may be sourced from a variety of locations and relabeled. Likewise, a �“family farm�” is no guarantee of sourcing from a small family farming enterprise. The lack of legal labeling standards, coupled with growing concentration at the midstream level of the agricultural supply chain, puts consumers at a distinct disadvantage�—not only in securing competitive prices and choice, but also in obtaining accurate information about what they consume.

B. Category Captains and Slotting Fees

The market power that accompanies size is often revealed by the emergence of �“category captains�” and �“slotting fees�” in retailing. For example, food retailers and manufacturers increasingly rely on a category captain to essentially run a sub-business for a related group of food products, such as meat, poultry, or breakfast foods.99 A product category is typically defined as interrelated or even substitutable products. Because of the wingspan of food processors and the multiplicity of their brands (including house brands), employees of the processors�—not employees of the grocery chain�—may be managing sections for the store. For example, a JBS or Tyson employee may be responsible for stocking the meat counter in a grocery store and performing day-to-day management of inventory and display. Food manufacturers and grocery chains employ category managers.100 Typically these captains are in charge of a product line not just for area stores but nationally or even globally.101 Often a retailer�’s category captain may be working with the manufacturer�’s captain in a form of bilateral monopoly. This business arrangement can skew competition, affecting product pricing and also limiting market access, particularly for potential large entrants and for small, local producers or producers of specialty products.102 Many manufacturers pay slotting fees to get their products in highly visible, high-traffic areas of a grocery store or for introduction of a new grocery product. A new grocery product or brand introduced nationally may require several million dollars in

99. See, e.g., Deadline Draws Near for Category Captains Award Entries, PROGRESSIVEGROCER.COM (July 26, 2013), http://www.progressivegrocer.com/page-category-captains-128.html (discussing categories for awards by the Progressive Grocer organization that gives insight into grocery management).

100. See, e.g., Albert A. Foer, Divestiture and the Category Captain: New Considerations in Merger Remedies, FTC: WATCH (Nov. 21, 2001), http://www.antitrustinstitute.org/node/10508.

101. Id. 102. See id.



slotting allowances.103 The antitrust concern is that these fees may lead to anticompetitive exclusion of rivals or potential small entrants into food manufacturing.104

V. CHALLENGES FOR ANTITRUST ENFORCEMENT

A. What the Merger Enforcement Statistics Tell Us

The complexity of market power in agricultural supply chains is revealed in a number of ways, ranging from noncompetitive prices or noncompetitive contract terms, asymmetric information, price discrimination, barriers to entry, control of market entry and exit, and control of innovation. But economic power in agriculture has also translated to the use of intimidation, capture of regulatory agencies and trade associations, and attempts to control or influence legislation aimed at restoring competition. Agribusiness and agribusiness organizations�—generally aligned with corporate interests�—wield considerable political power. This can be used to change the rules of the market and to obtain legislation that favors them over independent farmers, ranchers, and food consumers. Political influence may thus dynamically worsen the plight of producers and consumers in concentrated agricultural and food supply chains, eventually raising the cost of food.105 Over a decade ago, the USDA characterized consolidation at the processing, wholesale, and retail levels as �“unabated�” and

103. Fed. Trade Comm�’n, Slotting Allowances in the Retail Grocery Industry: Selected Case Studies in Five Product Categories 56�–57 (2003), available at http://www.ftc.gov/reports/use-slotting-allowances-retail-grocery-industry.

104. See, e.g., Gregory T. Gundlach, Antitrust Analysis of Exclusionary Arrangements Involving Slotting Allowances and Fees: Issues and Insights 4�–5 (American Antitrust Inst., Working Paper No. 05-03, 2005), available at http://www.antitrustinstitute.org/content/aai-working-paper-no-05-03-antitrust-analysis-exclusionary-arrangements-involving-slotting.

105. Examples of use of political influence and political contributions to influence rules of the agricultural and food industries include delaying implementation of mandatory Country of Origin Labeling (COOL) for meat and poultry products, see Chanjin Chung, Effects of Country of Origin Labeling in the U.S. Meat Industry with Imperfectly Competitive Processors, 38 AGRIC. & RESOURCE ECON. REV. 406, 406 (2009), available at http://ageconsearch.umn.edu/bitstream/59255/2/ARER%2038-3%20406-417%20Chung.pdf; defunding implementation of the USDA�’s Grain Inspection and Packers and Stockyards (GIPSA) rules intended to establish competition and fairness as called for in the 1921 Packers & Stockyards Act, see Joel L. Greene, Cong. Research Serv., R41673, USDA�’s �“GIPSA Rule�” on Livestock and Poultry Marketing Practices 13�–14 (2014); and implementing food safety legislation that would essentially create barriers for small food producers marketing directly to final consumers, see Jim Slama, Will Feds Bankrupt Small Farms with Food Safety Rules?, HUFFINGTON POST (Nov. 7, 2013, 4:55 PM), http://www.huffingtonpost.com/jim-slama/food-safety-rules_b_4235080.html.



�“unprecedented.�”106 Agriculture is one of several industries where antitrust enforcement is shared by two agencies�—the DOJ and the FTC. Traditionally, the DOJ has taken clearance on all mergers involving downstream segments of the industry, ranging from production of crops and animals to processing of meat and grains. The FTC, in contrast, has historically handled enforcement involving food manufacturing through the retail grocery segment. A look at antitrust enforcement statistics for animal production, crop production, food manufacturing, and food and beverage stores (such as supermarkets) over the last ten years is helpful in determining the intensity and characteristics of antitrust enforcement.107 For example, over the last ten years (2003�–12), over 80% of total agricultural and food transactions reported under the Hart-Scott-Rodino Premerger Notification Program involve processing and food manufacturing.108 Mergers of grocery stores account for about 13% of total transactions reported, and crop and animal production account for the remaining 7%.109 Key merger challenges over the period from 2008 to 2012 include two grocery mergers, four mergers involving agricultural inputs, three mergers of agricultural processors, and two food manufacturing transactions.110 Since 2013, the FTC has allowed the merger of branded and private-label food manufacturers ConAgra and Ralcorp to move forward.111 The joint venture involving ConAgra and Horizon Milling, LLC is, as of the time of this writing, still under review

106. DUNN ET AL., supra note 52, at 3�–4. 107. North American Industry Classification System (NAICS) codes are 111

(crop production), 112 (animal production and aquaculture), 311 (food manufacturing), and 445 (food and beverage stores). See Introduction to NAICS, CENSUS.GOV, http://www.census.gov/eos/www/naics/ (last updated Feb. 27, 2014).

108. The following text draws from analysis and calculations performed by the authors using information contained in the Annual Reports to Congress filed pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Percentages and other figures were generated using numbers from the reports from 2003 through 2012. The calculations and analyses are on file with the authors. For the individual reports, see Annual Competition Reports, FED. TRADE COMMISSION, http://www.ftc.gov/policy/reports/policy-reports/annual-competition-reports (last visited Mar. 23, 2014) (containing links to the reports covering the years from 1977 to 2012).

109. See id. 110. See United States v. Grupo Bimbo, No. 1:11-CV-01857 (D.D.C. Feb. 16,

2012); United States v. George�’s Foods, LLC, No. 5:11-CV-00043 (W.D. Va. Nov. 4, 2011); United States v. Dean Foods Co., No. 10-CV-0059 (E.D. Wis. July 29, 2011); United States v. Monsanto Co., No. 1:07-CV-00992 (D.D.C. Nov. 6, 2008); United States v. JBS S.A., No. 08CV5992 (N.D. Ill. Oct. 20, 2008); F.T.C. v. Whole Foods Mkt., Inc., No. 07-cv-01021 (D.D.C. Aug. 16, 2007); In re Koninklijke Ahold N.V., No. C-4367 (F.T.C. Aug. 16, 2012); In re NuFarm, Ltd., No. C-4298 (F.T.C. Sept. 7, 2010); In re Agrium Inc., No. C-4277 (F.T.C. Feb. 3, 2010); In re McCormick & Co., No. C-4225 (F.T.C. Sept. 12, 2008); In re Agrium Inc., No. C-4219 (F.T.C. June 10, 2008).

111. Donahue, supra note 9.



by the DOJ.112 The joint venture would create an entity with about 36% of the national market in wheat flour milling, with the top two suppliers accounting for 56%.113 Reported mergers in food production show a large increase in the mid-2000s (2005�–06), with a fall off until 2009, followed by a sharp rise by 2010.114 From 2003�–12, there were no second requests for mergers involving crop and animal production.115 Alternatively, 5.6% of reported transactions involving food manufacturing and grocery stores went to a �“second request,�” or were further investigated by the antitrust agency to which the transaction was cleared (assigned).116 This compares to a 3.4% second request issuance rate for all types of mergers over the same period.117 While the rate of second requests for merger transactions involving food manufacturing and retail grocery is higher than the all-industry average, it is important to qualify this observation. First, the rate of second requests involving food manufacturing mergers has trended downward over the 2003�–12 period, falling below the average for all types of mergers in 2012.118 Moreover, grocery store mergers have received second requests on a highly erratic basis, with investigatory action only in 2007 and 2012, and none in the intervening years119 despite a 70% annual average rate of increase in reported transactions over the 2003�–12 period.120

B. Expanding Antitrust�’s Narrow Focus on Economic Efficiency

Antitrust enforcement focuses on the relatively narrowly dimension of economic efficiency. Depending on the school of thought, mergers and various forms of exclusionary conduct are generally evaluated in the context of static effects on consumer surplus or total economic surplus. The focus is therefore on anticompetitive output restrictions and supra-competitive prices as well as any cost-lowering effects of, or

112. Diane Bartz, Exclusive: States Join U.S. Probe of Cargill/ConAgra Flour Deal, REUTERS (July 3, 2013, 4:21 PM), http://www.reuters.com/article/2013/07/03/us-cargill-conagra-antitrust-idUSBRE96218P20130703.

113. Letter from Diana Moss, Vice President, American Antitrust Inst., to William J. Baer, Assistant Attorney Gen., U.S. Dep�’t of Justice Antitrust Div., & Edith Ramirez, Chairwoman, Fed. Trade Comm�’n (April 29, 2013), available at http://www.antitrustinstitute.org/sites/default/files/AAI%20Letter_Horizon-ConAgra_FL.pdf.

114. See supra note 108 (analysis on file with authors). 115. See supra note 108 (analysis on file with authors). 116. See supra note 108 (analysis on file with authors). 117. EDITH RAMIREZ, FED. TRADE COMM�’N & WILLIAM J. BAER, DEP�’T OF

JUSTICE, HART-SCOTT-RODINO ANNUAL REPORT: FISCAL YEAR 2012, at 7 (2012), available at http://www.ftc.gov/policy/reports/policy-reports/annual-competition-reports.

118. See supra note 108 (analysis on file with authors). 119. See supra note 108 (analysis on file with authors). 120. See supra note 108 (analysis on file with authors).



consumer benefits from, mergers or certain types of business practices. Antitrust analysis also considers, when appropriate, dynamic measures such as the effect of mergers or anticompetitive conduct on innovation. But generally speaking, little else is typically considered in an assessment. Antitrust�’s traditional focus on price and output may be adequate in the context of some industries. But in others, such as agriculture, traditional antitrust concerns surrounding price and output intersect more visibly with broader public policy objectives such as quality, human health and safety, stability of the supply chain, and promoting sustainability and the development of alternative food systems such as organics and locally grown products. For example, the concept of supply chain �“fragility�” is increasingly relevant in operations research, marketing, economics, and even sociology. Supply chains featuring only a few competitors and high entry barriers at critical junctures are excessively exposed to the risk of disruption and collapse following an exogenous shock. Shocks can range from input-market disruptions to political events, weather, and quality control problems. Under the influence of the �“Chicago School,�” antitrust analysis has focused primarily on attaining efficiency, which entails the relentless reduction of redundancy.121 This has direct implications for consolidation in agricultural supply chains. In determining whether a merger is likely to substantially lessen competition, antitrust enforcers may not consider its effect on exacerbating the fragility of a supply chain by eliminating numbers and diversity of suppliers. Excessive consolidation also has effects on quality and reliability. The vertical and horizontal integration that is typical of large agribusiness calls into question the ability of managers to effectively implement and monitor quality control programs that ensure safety and reliability of the food supply. Indeed, the Center for Disease Control (CDC) reported that in 2012, �“data showed a lack of recent progress in reducing foodborne infections and highlight[ed] the need for improved prevention.�”122 CDC data indicate upward trends in rates of certain types of foodborne infections from 1999 to 2012.123 Whether these statistics are related to consolidation in the food supply chains�—particularly processing and food manufacturing�—is worthy of additional study.

121. See Richard A. Posner, The Chicago School of Antitrust Analysis, 127 U. PA. L. REV. 925, 926�–32 (1979).

122. Trends in Foodborne Illness in the United States, 2012, CENTER FOR DISEASE CONTROL & PREVENTION, http://www.cdc.gov/features/dsfoodnet2012/index.html (last updated Apr. 18, 2013).

123. Trends in Foodborne Illness in the United States, 2012, Figure 2, CENTER FOR DISEASE CONTROL & PREVENTION, http://www.cdc.gov/features/dsfoodnet2012/figure2.html (last updated Apr. 18, 2013).



C. Antitrust Immunities and Exemptions: The Case of Fertilizer

Producers have struggled with powerful buyers at the midstream level for decades. This gave rise to protectionist legislation near the turn of the twentieth century through laws such as the 1918 Webb-Pomerene Act124 and the 1921 Capper-Volstead (Cooperative Marketing Associations) Act.125 These statutes generally exempt certain �“cooperative�” forms of conduct and organization from the antitrust laws, thus allowing producers to band together to create countervailing seller power against more powerful �“middlemen.�”126 Without statutory exemptions, such cooperation could otherwise raise concerns about anticompetitive agreements under Section 1 of the Sherman Act.127 Supra-competitive pricing of fertilizers is a particularly good illustration of the perils of outdated and harmful statutory antitrust exemptions. Industrial farming in much of the world is heavily dependent on external inputs of nitrogen, phosphorus, and potassium or potash fertilizer. The global industry is dominated by two government-sanctioned export associations: PhosChem in the United States and Canpotex in Canada, a privately traded monopoly sanctioned and likely controlled by the Moroccan government (Office Chérifien des Phosphates (OCP)), and a cabal of three potash companies in the former Soviet Union (Belaruskali, Silvinit, and Uralkali, operating through their marketing cartel, Belarusian Potash Company (BPC)).128 �“Collusive

124. 15 U.S.C. §§ 61�–66 (2012). 125. 7 U.S.C. §§ 291, 292 (2012). 126. See, e.g., Sunkist Growers, Inc. v. F.T.C., 464 F. Supp. 302, 309 (C.D. Cal.

1979). 127. 15 U.S.C. § 1. 128. The current web page for Belarusian Potash Company (BPC) states that it is

�“a sole supplier of potash fertilizers manufactured by JSC Belaruskali (the Republic of Belarus).�” BELARUSIAN POTASH COMPANY, http://www.belpc.by/en (last visited Mar. 8, 2014). Governmental involvement amplifies the problematic nature of the competition issue in fertilizer markets. Reports indicate that the Belarusian government �“skims�” Belaruskali�’s high profits. Semashko: Skimming of Excess Profit Will Not Shatter Belaruskali�’s Economy, BUS. NEWS BELARUS (Nov. 26, 2012), http://doingbusinessby.com/semashko-skimming-of-excess-profit-will-not-shatter-belaruskalis-economy. This response is not fundamentally different from the Canadian government�’s support for maintaining Canpotex because high prices generate commensurately high tax revenues. Rob Gillies, Potash Corp Criticizes Government Report, SEATTLE TIMES, Oct. 5, 2010, http://seattletimes.com/html/businesstechnology/2013080821_apcncanadapotashcorpbhp.html. PotashCorp notes the contribution of government involvement (which favors �“production over profitability�”) to price volatility for phosphate. Business Risks: Cyclicality in Phosphate, POTASHCORP 2011 ANN. REP., http://www.potashcorp.com/annual_reports/2011/our_business/risk_management/business_risks/phosphate/ (last visited Mar. 30, 2014). For example, in their hostile takeover offer for PotashCorp, mining giant BHP Billiton asserted it would break up the cartel. Brenda Bouw, Canpotex Fate Spurs Closer Look at Potash Corp. Takeover, THE GLOBE & MAIL (Aug. 24, 2010, 7:51 PM), http://www.theglobeandmail.com/globe-investor/canpotex-fate-spurs-closer-



agreements between fertilizer producers on prices and market shares pepper the history of the global commercial fertilizer industry dating back to the 1880s.�”129 The underlying structure of the current global industry remains conducive to anticompetitive coordination�—a landscape that likely prompted The Wall Street Journal commentators to observe that �“the global price sets a benchmark so American farmers pay essentially what the cartels dictate.�”130 Recent analysis strongly supports the notion that �“global fertilizer producers have likely acted in a coordinated fashion to raise prices, to the detriment of competitors and consumers.�”131 For example,

[f]ollowing an industry shakeout from 1998 to 2004, fertilizer prices increased dramatically in 2008. High prices persisted for several quarters, dipped in 2009, and have since returned to supra-competitive 2008 levels. The fertilizer industry has, and continues to be, marked by considerable excess capacity. At the same time, large buyers of fertilizer such as China and India are becoming increasingly powerful, putting downward pressure on high prices. Earlier in 2013, the decision of key eastern European potash producers to refuse to deal with such buyers or cut their prices has caused significant disturbance among global producers, with falling profits industry-wide.132

The disruption caused by powerful buyers and the subsequent breakdown in any tacit or explicit agreement among fertilizer manufacturers should be a strong signal that anticompetitive coordination has been at play and that fertilizer markets are long overdue for rigorous and meaningful investigation by global antitrust enforcers. Frédéric Jenny and Eleanor Fox note that sanctioned export-cartel exemptions and the implicitly sanctioned Russian potash cabal are flagrant manifestations of a �“beggar thy neighbor�” approach to competition law.133 look-at-potash-corp-takeover/article1378108/. The Canadian government blocked the takeover, noting that a breakup of Canpotex was unacceptable because it would lower tax revenues. Christopher Donville, Canada Blocks BHP�’s $40 Billion Bid for Potash Corp., BLOOMBERG NEWS (Nov. 3, 2010, 7:09 PM), http://www.bloomberg.com/news/2010-11-03/bhp-billiton-s-40-billion-takeover-bid-for-potash-corp-blocked-by-canada.html.

129. TAYLOR & MOSS, supra note 19, at 7. See also MIRKO LAMER, THE WORLD FERTILIZER ECONOMY 621�–35 (1957); GEORGE W. STOCKING & MYRON W. WATKINS, CARTELS IN ACTION: CASE STUDIES IN INTERNATIONAL BUSINESS DIPLOMACY 118�–71 (1946) (describing the role of cartels in the distribution of nitrogen fertilizers).

130. Lauren Etter, Lofty Prices for Fertilizer Put Farmers in a Squeeze, WALL ST. J., May 27, 2008, http://online.wsj.com/article/SB121184502828121269.html.

131. See TAYLOR & MOSS, supra note 19, at 9. 132. See id., at 6. 133. Eleanor Fox, Antitrust Challenges of Deep Globalization, AMERICAN

ANTITRUST INST. (June 23, 2011), http://www.antitrustinstitute.org/sites/default/files/



Supra-competitive fertilizer prices initially harm farmers and quickly translate into higher food prices throughout the world. Because this problem raises related strategic, food sustainability, and environmental issues for the United States and other countries, it transcends traditional competition policy concerns.

D. Challenges of Antitrust and Intellectual Property: The Case of Transgenic Seed

High concentration in the markets for genetic traits for crop seed such as corn, soybeans, and cotton has attracted significant attention in recent years. This has resulted in more intense scrutiny of mergers and firm conduct, particularly in light of the central role played by intellectual property. Merger activity has likely accounted for the major increases in market concentration in genetic traits and transgenic seed markets over the past two decades.134 During the late 1990s through the 2000s, for example, Monsanto alone acquired almost forty companies, including agricultural biotechnology firms and independent seed companies that historically held the substantial base of seed germplasm needed by traits developers to breed new varieties.135 Also, between 1985

Fox%20Presentation.pdf; see also Frédéric Jenny, Export Cartels in Primary Products: The Potash Case in Perspective, in TRADE, COMPETITION, AND THE PRICING OF COMMODITIES 99, 126 (Simon J. Evenett & Frédéric Jenny eds., 2012), available at http://www.voxeu.org/sites/default/files/CEPR-CUTS_report.pdf; Frederic Jenny, Global Potash Trade & Competition, ECON. TIMES, (Nov. 25, 2010, 7:55 AM), http://articles.economictimes.indiatimes.com/2010-11-25/news/29382665_1_potash-saskatchewan-bhp-billiton.

134. The second wave brought a number of large mergers, including the formation of Syngenta from AstraZeneca and Novartis Seeds in 2000, Bayer�’s acquisition of Aventis Crop Sciences in 2002, and BASF�’s takeover of Cyanamid in 2000. It was during this period that seed companies such as Pioneer, DeKalb, Trojan, Northrup-King, Cargill, and Golden Harvest were acquired. See JORGE FERNANDEZ-CORNEJO, ECON. RES. SERV., U.S. DEP�’T AGRIC., AGRIC. INFO. BULL. NO. 786, THE SEED INDUSTRY IN U.S. AGRICULTURE: AN EXPLORATION OF DATA AND INFORMATION ON CROP SEED MARKETS, REGULATION, INDUSTRY STRUCTURE, AND RESEARCH AND DEVELOPMENT 32�–34 (2004), available at http://www.ers.usda.gov/media/260729/aib786_1_.pdf; U.N. CONFERENCE ON TRADE & DEV., TRACKING THE TREND TOWARDS MARKET CONCENTRATION: THE CASE OF THE AGRICULTURAL INPUT INDUSTRY 5, 9�–10 (2006), available at http://unctad.org/en/Docs/ditccom200516_en.pdf; Gregory D. Graff et al., Agricultural Biotechnology�’s Complementary Intellectual Assets, 85 REV. ECON. & STATISTICS 349, 360�–61 (2003); Carl Pray et al., Innovation and Dynamic Efficiency in Plant Biotechnology: An Introduction to the Researchable Issues, 8 AGBIOFORUM 52, 60 (2005), available at http://agbioforum.org/v8n23/v8n23a01-oehmke.pdf.

135. Monsanto acquired biotechnology firms and seed companies such as Agrecetus, Calgene, Holdens, and Asgro. See FERNANDEZ-CORNEJO, supra note 134, at 33�–34.



and 2000, the Big 6 biotechnology firms acquired about 75% of small-to-medium-sized enterprises engaged in biotechnology research.136

Perhaps one of the most important findings in recent empirical research is that increasing levels of concentration in agricultural input markets (including crop seed) are no longer generally associated with higher research and development or a permanent rise in research and development intensity.137 Concentration in genetic crop traits has important implications for farmers and, ultimately, consumers in direct and subtler ways. For example, growers pay supra-competitive prices and agree to restrictive licensing requirements to use proprietary, genetically modified varieties. However, a more subtle competition story is revealed in how genetic traits are combined in crop seed for soybeans, corn, and cotton.

Stacked traits have quickly become the industry standard in corn and cotton and are beginning to emerge in soybeans, which have until recently been single-traited (herbicide-tolerant) products. The USDA notes �“tracking traits will become increasingly complex as multiple GM [genetically modified] traits from a variety of firms are inserted into individual varieties.�”138 Stacking addresses multiple issues, including the drive for higher yields from multiple modes of action (for example, insect resistance and herbicide tolerance) and �“refuge�” concerns�—or �“requirements that growers plant both conventional and non-transgenic seed to combat growing resistance of insects to a particular aging mode of action.�”139

Growers and consumers benefit when there is competition to develop new stacks of genetic traits for corn, soybeans, and cotton.

136. Fuglie et al., Rising Concentration, supra note 17, at 4 (�“Of 27 crop biotechnology [small and medium-sized enterprises] . . . 20 were acquired either directly by one of the Big 6 or by a company that itself was eventually acquired by a Big 6 Company.�”).

137. FUGLIE ET AL., RESEARCH INVESTMENTS, supra note 17, at 2, 14�–16. (The USDA examined whether market concentration was correlated with the share of industry revenues invested in research and development.).

138. Id. at 44. 139. Diana L. Moss, Competition, Intellectual Property Rights, and Transgenic

Seed, 58 S.D. L. REV. 543, 553 (2013) (�“In 2000, just 1% of corn acres and 20% of cotton acres were planted with stacked trait varieties. These each increased to 52% by 2012.�”). See NAT�’L AGRIC. STATISTICS SERV., 2000 USDA ACREAGE 25, 26, 29 (2000), available at http://usda01.library.cornell.edu/usda/nass/Acre//2000s/2000/Acre-06-30-2000.pdf; NAT�’L AGRIC. STATISTICS SERV., 2012 USDA ACREAGE 29 (2012), available at http://usda01.library.cornell.edu/usda/current/Acre/Acre-06-29-2012.pdf. Market penetration of stacked traits is also apparent in the �“profiles�” of traits available on the market. For example, of the forty-five total trait profiles on the market in 2009, over one-third were single trait profiles, and the remainder were conventional or stacked trait profiles. See DMRKYNETEC & MONSANTO, CORN TRAIT PROFILES, COTTON TRAIT PROFILES, AND SOYBEAN TRAIT PROFILES 1�–3 (2009), available at http://www.monsanto.com/newsviews/Documents/corn_and_soybean_agronomic_traits.pdf.



Competition means choice in comparable stacked products, vigorous price competition, and ongoing pressure on rivals to innovate. �“New stacked trait �‘profiles�’ are possible through�” both �“intra-firm�” and �“inter-firm�” stacking, which is enabled by innovators engaging in a variety of technology licensing agreements, including cross-licensing and outlicensing of patented genetic traits.140 In the case of intra-firm stacking, a single innovator combines its own traits.141 In 2009, �“38% of all stacks were intra-firm combinations.�”142 A second possibility is �“inter-firm�” stacking, �“or combinations of multiple rival innovators�’ traits.�”143 �“These accounted for 62% of total stacks.�”144 High concentration and the dominance of a single firm (Monsanto) have a number of competitive implications for stacking competition. For example, it is not surprising that �“Monsanto traits appear in 91% of intra-firm stacks.�”145 And �“Monsanto traits appear in 50% of inter-firm stacks�” for corn, soybeans, and cotton.146 �“All inter-firm stacks in soybeans and cotton involve a Monsanto trait.�”147

Even the simple, foregoing statistics on trait stacking reveal a number of competitive problems. For example, the presence of a dominant Monsanto traits �“�‘platform�’ serves as a barrier to entry or expansion to competing inter-firm stacks that do not contain Monsanto traits.�”148 Inter-firm stacking that involves collaborating with a dominant firm is also �“potentially limited by licensing conduct of the sort that has been the subject of antitrust counterclaims in patent infringement cases. This includes selective or discriminatory royalties and cross-licensing or outlicensing requirements.�”149 Finally, �“the �‘ubiquity�’ of a dominant firm�’s traits in inter-firm stacks creates incentives for both seed companies and rival biotechnology developers to �‘standardize�’ on that platform,�”150 particularly given the seed-saving restrictions that keep farmers buying new seed every year create recurring revenue streams for biotechnology innovators.151

140. Moss, supra note 139, at 554. 141. Id. 142. Id. 143. Id. 144. Id. 145. Id. 146. Id.at 554�–55. 147. Id. at 555. 148. Id. 149. Id. 150. Id. 151. Peter Carstensen, Post-Sale Restraints via Patent Licensing: A

�“Seedcentric�” Perspective, 16 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 1053, 1073 (2006).



Whether inter-firm collaborations can inject sufficient competitive discipline in the market for stacked traits remains unclear.

Since 2009, the firms that occupy the portion of the inter-firm stacking market that do not involve Monsanto collaborations have largely continued their associations. For example, Dow and Syngenta have reached an agreement to cross-license corn traits. . . . [And] Dow entered into cross-licensing agreements with Bayer and Syngenta to develop stacked trait cotton varieties. Also worthy of note is that Monsanto and DuPont-Pioneer recently reached an agreement to [dismiss] their longstanding patent infringement and antitrust counterclaim issues relating to stacking traits.152

CONCLUSION: OBSERVATIONS AND IMPLICATIONS

The foregoing analysis highlights a number of issues that are central to both competition and public policy in agriculture moving forward. Given the complexity of agricultural supply chains, the range of products and services that are encompassed by them, and the complex incentives motivating (and created by) consolidation, many observers are asking how policy can be realigned to address what are recognized now as serious and systemic competitive problems in parts of the U.S. agricultural supply chain. Protecting the producer and consumer will require competition enforcers domestically and abroad to craft a comprehensive, multipronged competition policy that: (1) promotes the competitive health of the supply chain overall; (2) recognizes the nature of competitive relationships between the production, processing, and retailing levels; and (3) prioritizes competition problems at any given level in light of the severity of competitive issues elsewhere in the supply chain. Four specific recommendations are also in order. The first is the need for a coordinated, multi-jurisdictional approach to antitrust enforcement. Midstream processing and food manufacturing markets are critically interrelated with upstream producers and downstream retail grocers. Thus, a comprehensive approach to evaluating the potential competitive consequences of mergers and certain types of conduct involving participants in the agricultural supply chains is needed. Domestically, this would take the form of increased coordination between the DOJ and FTC on mergers and would include tapping the USDA�’s institutional knowledge of markets. The coordinated

152. Moss, supra note 139, at 556. Furthermore, �“[t]he settlement includes a licensing agreement that would, in part, allow DuPont-Pioneer to stack traits in exchange for Monsanto�’s access to DuPont-Pioneer technologies for disease and defoliation control.�” Id.



involvement of all agencies involved in competition enforcement and policy would also better capture some of the broader implications of consolidation and conduct on food safety, security, and supply chain stability.

A. Increased Domestic and International Cooperation in Antitrust Enforcement

As agriculture markets become more globalized�—particularly involving input markets�—it will be important for competition enforcement agencies to coordinate on issues of cartel enforcements and merger review, especially when there are international jurisdictional issues that can only be resolved through cooperation and simultaneous action by enforcement agencies. Fertilizer is a prime example. Markets are global, and the damages from collusive pricing impact millions of growers and billions of consumers. As the meat industry becomes more global, this will also become an issue. Part of a globally oriented competition enforcement effort will be to coordinate rollback of exemptions for �“beggar thy neighbor�” export associations and to revamp statutes that grant immunity to cooperative marketing associations that themselves have become dominant, integrated players in the market.

B. Importance of a Complementary, Public, and Private Enforcement Approach

The complexity of competition issues in agriculture emphasizes the importance of a complementary balancing approach that recognizes the value of both public and private enforcement. A lack of government antitrust enforcement has arguably put more pressure on private antitrust litigation to address the harm to direct and indirect purchasers resulting from collusive behavior. Private litigation alone, however, cannot protect competition and consumers from the harm caused by anticompetitive conduct in food and agricultural markets for two reasons. First, the effectiveness of private litigation is limited in many instances because anticompetitive conduct at any one of many vertical stages of the chain may be passed downstream through several stages to food consumers through cost-plus pricing or market adjustments. In such a case, food consumers may be harmed, but they do not have standing to sue under Illinois Brick v. Illinois.153 Second, the threat of private litigation will be an inadequate deterrent when the firm directly harmed by anticompetitive conduct is immediately downstream, and must rely on one or a few large firms for

153. 431 U.S. 720, 728�–29 (1977).



inputs. For example, a fertilizer retailer in the United States can obtain product only from a few manufacturers with wide-reaching wingspans and interconnecting webs. The retailer�—which would not have standing in this case�—may be intimidated by explicit or tacit threats by manufacturers that they will restrict or cut off the retailer�’s supplies. The very real threat of retaliation, which in itself is an anticompetitive issue, may thus dampen the effectiveness of private litigation in deterring anticompetitive practices. These examples demonstrate the importance of a complementary public-private approach to antitrust enforcement. At the same time, while it can compensate for limits on private enforcement, public enforcement should not attempt to displace the private bar for purposes of compensatory damages and deterrence.

C. Reconciling Regulatory and Antitrust Approaches to Competition Enforcement and Policy

A final recommendation in beginning to address competitive problems involving agricultural supply chains is to reconcile regulatory and antitrust approaches. One troubling development in recent agricultural and food antitrust litigation is that courts have departed from deference to Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc.,154 ignoring the long-standing interpretation of antitrust legislation by the USDA and DOJ. In particular, courts have opined that plaintiffs must show �“harm to competition�” to recover damages under the 1921 Packers & Stockyards Act (PSA)155 even though the plain wording of Sections 202 (a)�–(b) refers only to business practices �“with the purpose or effect�” of being unfair or deceptive and does not refer to �“competition�” as in other sections of the Act.156 For example, if individual producers are not able to show that a meat packer�’s business practices harmed competition, legislation intended to protect livestock and poultry producers will be essentially eviscerated, assuming this interpretation prevails in future litigation. Also, circuit court opinions on the issue of harm to competition�—or on what constitutes harm to competition�—are not consistent. If federal regulatory actions are to be consistent with the courts�’ determinations, regulations and enforcement may�—to be applied consistently�—force the interpretation that such rules differ by region. This was not the intent of the original legislation. A second troubling development is that in the historic Pickett v. Tyson Fresh Meats, Inc.157 cattle case, the Court dismissed a substantial body of case law and economics reflecting application of the

154. 467 U.S. 837 (1984). 155. Been v. O.K. Indus., Inc., 495 F.3d 1217, 1230 (10th Cir. 2007). 156. 7 U.S.C. § 192(a)�–(b) (2012). 157. 420 F.3d 1272, 1278�–87 (11th Cir. 2005).



long-standing rule-of-reason (ROR).158 The ROR, which dates back to a 1911 Supreme Court opinion, is a doctrine that any pro-business benefit of a contested practice should be balanced against harm to the market.159 The Pickett trial judge departed from the ROR standard by adding separate questions on the jury verdict form such as: �“Did Tyson lack a legitimate business reason for using captive supply?�” and �“Did use of captive supply have an anticompetitive effect on the cash market?�”160 The jury found Tyson�’s arguments about having a legitimate business reason to be pretextual, answered �“yes�” to both of these (and other) questions, and awarded $1.3 billion in actual damages.161 However, the Eleventh Circuit overturned the verdict, essentially appointing themselves �“fact-finders�” by opining that Tyson did indeed have a legitimate business reason for engaging in captive supply.162 Departing from the ROR in this way means that any pro-business benefit (no matter how small) trumps harm to the market (no matter how large). These fundamental inconsistencies between regulatory and private litigation create considerable confusion in the agricultural and food sector, leading to associated inefficiencies and murkiness related to what business practices market participants can legally employ.

158. Id. at 1286�–88; C. Robert Taylor, Buyer Power Litigation in Agriculture: Pickett v. Tyson Fresh Meats, Inc., 53 ANTITRUST BULL. 455, 645�–67 (2008).

159. Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 58�–66 (1911). 160. Pickett v. Tyson Fresh Meats, Inc., 315 F. Supp. 2d 1172, 1174 (M.D. Ala.

2004). 161. Id. For additional discussion of legal and economic issues in the Pickett

case, see Taylor, supra note 158. 162. Pickett, 420 F.3d at 1286�–88.

When Congress summoned Enron’stop executives this February and made them sit, hands folded, in front of theTV cameras, we at home were treated to a familiar display of Washingtontheater. Because most of these men had invoked their Fifth Amendment rightnot to incriminate themselves, no one expected much new information tobe revealed. But our congressmen certainly were not going to let pass achance to broadcast to the world their indignation at the gross mismanage-ment of a company that had once been so powerful, and so generous. Evenat the highest pitch of their fury, however, few of the politicians ever actu-ally said that what the executives had done was illegal. Although the erst -while pipeline company had certainly become more skilled at pumping debtinto subterranean partnerships than at earning money by pumping petrole-um, it was not clear that any of Enron’s bosses had in fact overstepped thebounds Congress had set for the conduct of their business. But then this wasnot the first time our elected representatives had publicly chastised one oftheir children for smashing the car, knowing full well that they themselveshad liquored the kid up beforehand and slipped him the keys.

What most amazed me was not the elasticity with which Democrats andRepublicans alike twisted their faces into expressions of outrage. Rather, itwas that a risk to the nation so very analogous to Enron, yet potentially somuch more dangerous, was, and still is, being ignored by these same publicservants. Then again, it’s easy to string up a single bad Andrew Fastow, or adisingenuous Jeffrey Skilling or Kenneth Lay. But what’s a government to dowhen a whole generation of corporations prove prodigal?

Out of sight, out of mind, or so seems the philosophy these days at Texascorporations and Georgia crematoriums. But this only works for a while. Even-tually a neighbor’s dog yanks some nasty treat onto the road. Or a few bil-lion dollars in vanished debt leaches up through a Houston swamp. So wemight as well prepare ourselves now for similar revelations, one of thesedays, about our “global” manufacturers. Much as Enron spent the 1990s

Barry Lynn is the former executive editor of Global Business magazine and a former re-porter for the Associated Press and Agence France-Presse.

ESSAY 33

E S S A Y

UNMADE INAMERICA

The true cost of a global assembly lineBy Barry Lynn

shifting debt off its books, America’s manufacturers spent those same hap-py years shifting many basic operations right off their factory floors. And bythis I don’t mean simply offshore but right out of the company, along withthe responsibility to make sure their world-spanning assembly lines alwaysrun right. Like Enron, our manufacturers did so largely to pump up the val-ue of their stocks. And, like Enron, they will probably get to watch one dayas their empty edifices collapse. Unlike Enron, however, this crash maybring down a lot more with it than one or a few companies. The global as-sembly lines that manufacturers such as Dell, Ford, Motorola, and Intelhave so expertly engineered these last few years—in which, say, a single semi-conductor might be cut from a wafer in Taiwan, assembled in the Philippines,tested in China, fit into a subcomponent in Malaysia, plugged into a com-ponent in Brazil, and loaded with a program designed in India—are just asaudaciously complicated as any of Enron’s financial schemes. Yet because man-ufactured goods are so much less fungible than money, these systems are vast-ly more vulnerable to the mysterious mutterings of God or the deliberate handof man and state. We now live in a world where a single earthquake, or ter-rorist attack, or embargo, could in a moment bring our economy to a haltand, if played right by some smart state, might well threaten the very fun-daments of our national wealth and power. And for this we received what?A few thousand points on the Dow? A half-percent uptick in annual pro-ductivity growth? A capital gain, as it were, on every 1040?

And I suppose we will be treated to another fine show from the Thespian Club on the Potomac. This time, however, it will play as tragedy.Globalization is many things, and much has been written about it

and said. But throw all the tomes and studies and placards into a giant try-works, and you’ll render two simple arguments:

(1) Globalization is good because it spreads what is good in America,such as a liberal approach to business, and McDonald’s.

(2) Globalization is bad because it spreads what is worst about America,such as a liberal approach to business, and McDonald’s.

But while so much energy was spent these last few years studying the ex-tent to which the Happy Meal affects a nation’s quality of life, hardly any-one bothered to examine in depth the fundamental changes that were tak-ing place in the nature of the manufacturing corporation, and in the natureof manufacturing itself, as thousands of companies scrambled to adapt them-selves to a world radically remade by the sudden economic opening of dozensof countries and the simultaneous arrival of the information age.

Watch one of the new commercials for UPS and it’s hard not to feel in-spired by the images of all those jets full of cargo ricocheting round theworld, round the clock. Whether Chevrolet fuel pump, Baxter intra-venous-infusion pump, or Ralph Lauren faux-lizard pump, the averagemodern product contains parts that are more well traveled than are mostof us. After conception in a design studio—perhaps in Detroit, perhaps inMilan—these components embark on the modern equivalent of a GrandTour. East Asia, South America, Eastern Europe, Southeast Asia, CentralAmerica—all the premier destinations of the developing world may bevisited before the product makes its way at last to the final assembly linesomewhere, perhaps, in North America. But, even as the corporations cel-ebrate with their 30-second symphonies the rise of the globalized industri-al network, almost no one asks what would happen if just one of the stillvery sovereign nations that underlie this web were to grab hold of a few ofthe strands and start yanking. Almost no one studies how “our” corpora-tions have quite literally manufactured new forms of foreign dependencefor the United States that may soon leave us gazing fondly back to thedays when our nation was joined at the aorta only to such dear fellow citi-zens of the world as Saudi Arabia and Venezuela.

Much as Enron was the most cocksure of the elite club of trading corpo-

34 HARPER’S MAGAZINE / JUNE 2002

HARDLY ANYONE HAS BOTHERED

TO EXAMINE IN DEPTH THE

CHANGES THAT HAVE TAKEN

PLACE IN THE NATURE OF THE

MANUFACTURING CORPORATION

rations, so is Dell Computer the perfect archetype of the post-national man-ufacturer. Dell assembles its OptiPlex business desktop at the Topfer Man-ufacturing Center in Austin, Texas. The operation is relentless, the plant flo o ra tight maze of conveyor belts and elevators amidst which men and womenwork, often hidden from view, in nestlike workstations or “build cells.” Foreight or more hours each day, the employees on the line face near terror. Fromthe moment an elevator delivers a tray loaded with a half-made computeruntil the moment the elevator returns to take the tray back to the overheadconveyor line, a worker has only one to three minutes to install his or hercomponents. Drop goggles in the elevator gearing and the light atop the work-station will flick from green to red. Since Dell’s success depends at least asmuch on the efficiency of its processes as on the quality of its product, noth-ing is dreaded more than a red light.

These days, Dell’s anxiety is not limited merely to the smooth function-ing of its North American plants. The modern Dell assembly line actuallystretches out far past the trucks parked at the delivery dock and down In-terstate 10 to the monitor plants of Tijuana. And it stretches back throughDallas/Fort Worth International Airport to the component manufacturersstrung from Malaysia to Korea and clustered especially thickly in Taiwan andChina. From those suppliers it stretches on back through another three orfour “tiers” to the subsuppliers and sub-subsuppliers. To ensure green lightsat all points along this line, Dell logisticians must watch hundreds of potentialbottlenecks around the world, as some 4,500 parts from hundreds of suppli-ers make their way to Austin, Texas. On any day, a single missing shipmentof components can slow or stop the whole operation.

Five years ago, when Compaq Corporation bestrode the personal-computerindustry, manufacturers commonly kept 60 or even 120days of inventory on hand, and most moved this mater-ial from one company-owned plant to another. When Dellpassed Compaq last year to become the world’s top PCmaker, it had trimmed its inventory to four days’ worth,and most of that now flows to and from plants owned notby Dell but by companies that supply Dell. In essence, theDell production model is to cut inventory and otherforms of sunk capital as low as possible, largely by relyingon other companies to do the manufacturing. To keeppace, Compaq for years has hacked ruthlessly and re-lentlessly at its own inventory, while following Dellinto dependence on components made by Taiwaneseand Chinese companies. Yet still Compaq loses groundto Dell, as do the personal-computer divisions of Hewlett-Packard, IBM, and Sony. Which only increases the pres-sure to cut further or, in the case of Compaq, to give upand sell out to Hewlett-Packard.

Not that electronics firms are alone in playing thisgame. Even the biggest of traditional “multinational”corporations now operate very differently than whenthe first George Bush sat in the White House. Theability to sell in many more markets, and to manufac-ture in many more countries, has created two vital im-peratives: Corporations must now race against their di-rect competitors for global scale, which means theymust grow so big that another company cannot beat orbuy them. And they must keep costs low by structuringtheir worldwide operations as efficiently as possible.This is what Ford does if, say, it centralizes productionof a particular fuel injector at a plant in Brazil whileclosing similar lines in Michigan and Germany.

Aided by recent radical advances in information man-agement and communications, and by the never-ending

ESSAY 35

EVEN THE BIG “MULTINATIONAL”

CORPORATIONS NOW OPERATE

VERY DIFFERENTLY THAN

WHEN THE FIRST GEORGE BUSH

SAT IN THE WHITE HOUSE

Illustrations by Brad Yeo

effort to rethink corporate structure, a growing number of industries have “ra-tionalized” along global lines. This is what happens if, say, General Motorsand DaimlerChrysler hire, perhaps unknowingly, the same fuel-injectormanufacturer that Ford relies on in Brazil to manufacture their componentsas well. In many instances, especially in the electronics industry, such aback-door consolidation has already taken place. Last year, nearly 90 percentof the world’s scanners and most of the world’s computer motherboardswere manufactured in Taiwan, many in a single industrial park in Hsinchu.

Some see beauty in this system. In a borderless world, each company andeach community can concentrate on what it does best, be it growing arti-chokes, stamping out motorcycle gears, designing marketing strategies, or en-gineering global assembly lines. Unfortunately, such concentration—the

growing reliance by entire industries on single sources of sup-ply—violates one of the most basic rules of manufacturing,which is always to have an alternative at the ready.On September 21, 1999, an earthquake measuring 7.6 on the Richter

scale killed some 2,500 people in Taiwan. Within days, the stock prices ofDell, Apple, and Hewlett-Packard plummeted as investors focused for ashort moment on just how much these companies depend on Taiwan-basedfactories. Although most of the island’s suppliers were back on line withina week, worldwide orders for electronics in October fell 7 percent. Had thequake been a few tenths of a point stronger, or centered a few miles closerto the vital Hsinchu industrial park, great swaths of the world economycould have been paralyzed for months.

In March 2000, in the midst of Taiwan’s presidential campaign, Chinathreatened war if Taiwanese voters chose the candidate Beijing opposed.

Again the stock prices of Dell and other Taiwan-dependent firms dropped, as investors remembered, ifonly for a moment, the missiles China landed near theisland before the 1996 elections and the resulting defacto blockade.

Then came September 12, 2001. Much of the manu-facturing activity in the United States came to a halt af-ter the Bush Administration closed U.S. borders andgrounded all flights in the wake of the attacks on theWorld Trade Center and the Pentagon. Ford, Daimler-Chrysler, and Toyota North America were among thecompanies that shut plants when they found themselvescut off from supplies.

This is not Henry Ford’s vision of manufacturing.Ford’s immense industrial experiment during the 1920s,at the River Rouge complex in Michigan, was revolu-tionary in that he gathered in one place everythingneeded to manufacture an automobile. Fed up withpoor quality and spotty delivery by outside suppliers,Ford wanted to oversee production of all the parts andcomponents that went into one of his cars: seats, mir-rors, and tires as well as engines and chassis. By 1927ships were unloading iron ore at one end of the com-plex while employees drove finished Model A’s ontorailroad cars at the other. Companies such as GeneralElectric, Westinghouse, and Xerox soon emulated theRiver Rouge concept. Nothing was too small to makein-house. Hewlett-Packard was famous for machiningits own screws; Nortel for cooking its own silicon.

Today, we are witnessing the breaking up of empire, thedismantling of the River Rouge concept, as hundreds ofvertically integrated manufacturers cast their constituentoperations to the far corners of the world. Most start by


TODAY WE ARE WITNESSING THE

BREAKING UP OF EMPIRE, AS

MANUFACTURERS CAST THEIR

CONSTITUENT OPERATIONS TO

THE FAR CORNERS OF THE WORLD

off-loading the manufacture of a cheap component or a light assembly op-eration. Many then go further: In January 2001, mobile-phone maker Erics-son sold off all its manufacturing and transport operations to a Singapore-based company named Flextronics. Even high-end manufacturers such as Sonyand IBM can’t resist sloughing off a factory or four.

How else, really, to compete with a company like Cisco Systems, which inthe 1990s grew to be the world’s largest manufacturer of communications equip-ment, and for a time the most highly valued corporation in the world, by op-erating as a “virtual company.” This means that Cisco relies almost entirelyon a stable of other companies to do everything from design its chips to man-ufacture its circuit boards to deliver its Cisco-brand products. The company’srole, its executives say, is to exert a sort of postindustrial “Command and Con-trol” over this vast network of outsourced production. Much the same can besaid of Dell. Despite the fact that a tiny American flag graces each of the com-pany’s Web pages, Dell, in the words of one semiconductor executive, isreally little more than “a delivery channel for Taiwanese-made products.” ThinkWal-Mart, but in place of store shelves jammed with foreign-made toys andtowels substitute laptops loaded with foreign-made components: CD-ROMdrives and video cards and memory chips.

Executives and consultants have for years debated the wisdom of this dis-integration, but there has been no coherent mainstream discussion aboutwhether this scattering leaves the global industrial system—and by exten-sion the entire global economy—more liable to catastrophic shutdownslike the one barely avoided after the Taiwan quake. At River Rouge, Hen-ry Ford could walk from one end of his operation to the other. At Cisco andDell, it is unlikely that any employee has visited all the suppliers, and cer-tainly no one has visited all the subsuppliers. If the production of doorhandles fell behind schedule at River Rouge, Ford could throw on more ma-chines and people, and in the meantime survive out of inventory. These daysbig manufacturers have almost no inventory on which to rely while they fixany problem, and ever less ability to spot potential bottlenecks in theirworldwide supply chains. Until the Taiwan-based TSMC stopped shipping semiconductors after the 1999 quake, for instance, Dell executives

knew almost nothing of their dependence on the chipmak-er, because the actual purchases were made not by Dell butby Dell’s suppliers.Our modern faith in globalization was founded, at least in part, on

the premise that it was the right thing to do. We were outmaneuvering theEuropeans and Japanese for new export markets. Better yet, American in-vestments abroad would spread skills and wealth among the beggared and be-nighted. This consensus had formed even before the fall of the Berlin Wallin 1989. The oil shocks and debt crises of the 1970s and 1980s had chokedoff growth in much of Latin America and Asia, and by the late 1980s reformistpoliticians in many countries were ready to ally themselves with the transna-tionalists to the north. In exchange for debt relief and direct investment intheir countries, the local reformers pledged to sell off state companies andhack away the thicket of tariffs and regulations that protected local indus-try and labor. To voters in these countries, the promise at times seemed noth-ing less than freedom—from corrupt authoritarian governments, from trea-sury-looting populists, from hyperinflation, from inefficient local businessmonopolies. Foreign companies, so it was often believed (and so it sometimesproved), would bring better services, lower prices, and more jobs.

Yet by the middle of the next decade evidence began to mount that thesegrand reforms would never deliver all the promised economic benefits. Someprices fell, but others rose. Foreign companies brought higher-quality prod-ucts, but they manufactured fewer in-country. Hyperinflation was indeedchoked off, but so too was growth. Not that we bothered to notice. S u r e ,D o o n e s b u r y made a few of us question what shoes we wore on our feet, and,yes, we did make Kathie Lee cry, but how many of us actually twisted around

ESSAY 37

HENRY FORD COULD WALK FROM

ONE END OF HIS OPERATION TO

THE OTHER. NO DELL EMPLOYEE IS

LIKELY TO HAVE VISITED ALL HIS

COMPANY’S SUPPLIERS

to check what was printed on the labels of our underwear? Crises came—Mex-ico in ’94, Asia in ’97, Russia in ’98, Argentina again and again—but our carsgrew brawnier, our computers grew brainier, and all this new wealth burdenedus with new existential challenges. What would a soaring Nasdaq do to ourcore values? How badly would we spoil the children?

By the late Clinton years, globalization had come to mean simply that some-one else would do the dirty work, someone far away. Our own industrial work-ers, once we emancipated them from the lines? Why, they could wait tablesand drive FedEx vans. They could answer the phones in our new charitablefoundations and lug around buckets of goat milk on our hobby farms. Ournational duty was no longer to produce but to consume. The slightest twitchin Peoria set off klaxons a world away, calling workers by the thousands totheir stations. “America’s women need a half inch more on their heels!America’s men need ten million more inflatable Budweiser chairs!”

Yes, the market would provide. To this mantra, this Muzak of the ’90s, welistened and we believed. Right through the end of the Cold War, we nev-er lost the conviction that government was the proper means by which toshare our wealth and to protect ourselves. But our faith now began to shift.Speed and efficiency, we came to believe, were the forces that would bringus comfort and riches. And sure enough, these last ten years the goods keptcoming, unloaded into our malls at night from tractor trailers, delivered athigh noon by UPS. Everything the mind could conjure, in Faustian profu-sion. So why not cut another of those harnesses that government once daredto set on the shoulders of capital? Why not ignore the transnational al-chemies eating away at the institutions that for two centuries have provid-ed us our only shelter? Compaq, Chrysler, Xerox, Thailand, Argentina,Japan—there is no security even for giant corporations and powerful states.Yet we still cling to the belief that some sort of secret social compact will al-

ways hold for us. That our state, however battered, how-ever corroded, will continue to shield our bodies should ournew best friend, the global market, ever turn against us.When Robert Schuman, the foreign minister and former prime

minister of France, first proposed the European Coal and Steel Communi-ty in 1950, he was a sixty-four-year-old pious Christian Democrat. Born toa French-speaking family from the Lorraine, Schuman had served in the Ger-man army in the First World War, then found himself a French citizen af-ter Germany ceded control of the region in 1919. By 1950, Schuman’s goalwas to prevent a third war in Western Europe by making such a conflict eco-nomically impossible. He proposed placing control over the coalfields andblast furnaces that stretched from the Ruhr to the Lorraine under a multi-national institution, so that neither Germany nor France could ever buildgreat numbers of weapons without the other being aware and, presumably,able to stop it. Despite the strong backing of the Truman Administration,it took the French government two years to gain approval for the plan,which grew to include the coal and steel industries of Belgium, Italy, Lux-embourg, and the Netherlands. Even amidst the rubble and economic des-titution left by the war, opposition to the plan was strong and complex.Communists throughout Western Europe marched in protest. Italian steel-makers, Belgian coal-mining companies, and De Gaulle’s French national-ists denounced the plan. The British waffled, then opted to keep their ownsteel and coal industries independent. All the while, these newly restoreddemocracies engaged in open, thoughtful, albeit sometimes bitter debate aboutwhat amounted to a sharing of sovereignty.

And here is America careening toward a similar economic integration withhalf the world amidst a near absence of debate and without any of the com-pelling reasons that drove Europeans together a half century ago. There isno recent history of war. There are no occupying armies to ensure fair useof the industrial capacity we “pool” with everybody. Many of our new part-ners are not democracies, and their internal workings, long-term goals, and


MANY OF OUR NEW PARTNERS

ARE NOT DEMOCRACIES, AND

THEIR LONG-TERM GOALS AND

ABILITY TO LIVE PEACEFULLY

REMAIN OBSCURE AT BEST

ability to live peacefully in the world we imagine ourselves to be making re-main obscure at best. The Europeans deliberately contemplated marriage; wehave leaped, greased from head to toe, into a global orgy.

In the arguments over both NAFTA and the expansion of trade with Chi-na, Robert Schuman played a part in spirit if not in name. Back in the ear-ly 1990s, when Boris Yeltsin was clambering atop tanks, and Argentines werespending their dollar-guaranteed pesos, and Japan Inc. still loomed over thefar Pacific, one of the main arguments in favor of expanding trade with Chi-na was that the flow of American money and expertise into that country wouldmake us more secure. Not only would China come to depend on U.S. fundsand technology but its citizens would perhaps be inspired to clamor again forpolitical reform. So, anyway, said the first Bush Administration. So, too, saidBill Clinton.

Somehow, the inverse possibility—that economic interlinkage mightmake the United States dependent on China—was never considered, nor havewe revisited this subject in depth in the ten years since. Even as U.S. cor-porations invested billions of dollars directly into China and Taiwan, andindirectly through outsourced production agreements, none of our electedofficials or civil servants ever really examined in detail the risks of joininghands with one of the least stable and least transparent states on earth, Chi-na, and with that state’s number-one potential target, Taiwan. A decade ago,no large U.S. company was dependent on China or Taiwan as either a mar-ket or a place for production. Today, hundreds are. When he took office

early last year, George W. Bush inherited from his prede-cessor and from his own father perhaps the greatest failurein the history of American geopolitical thought. Why did we so grievously fail to understand that

running our ever more delicate assembly lines across somany fault lines, political and tectonic, might endangerour power and our well-being? I had occasion late lastyear to put the question to Larry Wortzel, director of TheHeritage Foundation’s Asian Studies Center. Wortzel wasthe assistant U.S. Army attaché in Beijing at the time ofthe Tiananmen protests, then directed the Strategic Stud-ies Institute of the U.S. Army War College. He has veryclose ties to some of the most anti-Beijing Bush appointeesin the departments of State and Defense, as well as in theo f fice of the Vice President. Wortzel maintained that in-volvement among the American, Chinese, and Taiwaneseeconomies would not endanger America’s security, be-cause no large company would dare rely too much onsales in China. And what of cross-border supply chains,single sourcing, the Taiwan earthquake? Our economy, heinsisted, in no way depends on manufacturing capacity lo-cated abroad. When I mentioned that Andrew Grove,the chairman of Intel—the largest manufacturer of semi-conductors in the world—believes the integration of man-ufacturing activities has made war between the UnitedStates and China essentially impossible, Wortzel becamered in the face. He lurched forward and said, “If Grove isthat dependent on that source then he has assured the de-struction of his own corporation.”

Wortzel’s reaction reveals the fundamental incom-patibility of the two great political-economic systemsthat now operate in parallel. One is a global-manufac-turing system created by companies such as Intel, whichincreasingly act independently of national considera-tions. Beneath that lies an older system, comprising gov-ernments whose ways of thinking date back to a time

ESSAY 39

A DECADE AGO, NO LARGE U.S.

CORPORATION WAS DEPENDENT

ON CHINA AS EITHER A MARKET

OR A PLACE OF PRODUCTION.

TODAY, HUNDREDS ARE

when economies were still largely national, when imports and exports wereof raw materials and finished goods, and when the idea of a large, vital cor-poration moving its center of gravity abroad was unthinkable.

We have, it seems, outsourced one time too many. Often I have asked man-ufacturers to explain how they would keep their production lines running ifthe supply of a key component were suddenly cut off. Almost always they startby mentioning the robustness of their contingency plans: within days they couldeasily restart production elsewhere. And if an 8.5 quake strikes Hsinchu?Well, that might pose a challenge—a matter of weeks, not days. And if Chi-na ever invades Taiwan? Here the reassurances cease. “There are no modelsfor that,” the CEO of one electronics company told me. That, it would seem,is a question for Washington.

But does Washington know how to compose an answer? Would it be al-lowed to if it did? The CEOs who lobby the White House and Congress mayhunt and fish and eat Delmonico steak like the American industrialists ofold, yet Washington somehow ignores the fact that these men now repre-sent corporations whose interests are no longer purely “American,” andwhose global expansions are driven more by panic than by political nuance.Our corporations have seemingly reduced the average individual “nation”to little more than a nasty knot of taxes, work rules, and other geographicidiosyncrasies to be unbound and intertwined with those of the neighbors,but sit through a discussion of trade policy at The Brookings Institutionthese days and you might be tempted to go buy tickets to a Senators game.You would think that America still swapped Xerox copiers for rusty tools andpoorly dyed T-shirts, that there was still such a thing as “competition amongnations,” and among “national industries,” for “export markets.”

And as we prattle on here, what goes on twelve time zones away? Chi-na seems content to allow the great river of commerceto flow over its ledges and slip between its boulders.And why shouldn’t it? As long as Beijing sits quietlyand smiles, its palms upturned, the market will rewardits patience and good humor with a steady increase inindustrial capacity. Taiwan, Japan, Korea, Mexico, allfret about losing core industrial activity to China, andnow Beijing pats its lap and winks at the global semi-conductor industry. At the end of the day, who “owns”the actual semiconductor plant matters far less thanwhere the plant is located, because whoever physicallycontrols the production of semiconductors can paralyzethousands of the world’s assembly lines with the flick ofa switch. Beijing need not even declare a blockade ofTaiwan, backed by a threat to use its missiles, in orderto cause economic havoc. If it succeeds in luringenough key manufacturing capacity, Beijing will needonly to threaten a peaceful closure of its own border, asit-down strike if you will, organized by the most pow-erful labor syndicate in the world.

On being presented with this thesis, the experts inWashington revert to a stance learned a generationago, in the era of thermonuclear gamesmanship. This,they insist, would be the economic equivalent of Mutu-ally Assured Destruction. China could no more venturesuch a risk than could we. But there is doubt in theirvoices. And is there not some reason to fear a Falk-lands-like scenario in the event that China’s own econ-omy turns sour? Might it not one day prove perfectlyrational for Beijing to shut down, if only temporarily,the world’s assembly lines? Did Arab oil exporters nots a c r i fice immediate revenues for long-term power andplunder in 1973? Did Jefferson not attempt to exact


WHOEVER PHYSICALLY CONTROLS

SEMICONDUCTOR PRODUCTION

CAN PARALYZE THOUSANDS OF

THE WORLD’S ASSEMBLY LINES

WITH THE FLICK OF A SWITCH

greater respect from Great Britain and France by denying them Americancotton, grain, and tobacco through the Embargo Act of 1807? Did Eisen-hower not cut off oil supplies to coerce those same two countries out ofSuez in 1956? Would a similar act, from Beijing’s point of view, be anyless valid?

For years Sovietologists have debated whether Lenin once said, “A cap-italist would sell rope to his own hangman.” Change “rope”to “supply chain,” and, whether Lenin made the statement ornot, it is still clearly true.If terrorists ever want to strike at the heart of American manufactur-

ing, they need not sneak into Ohio to do so. More certain success, with moreconcentrated results, awaits along the industrial boulevards of Taiwan. Andwhat of the Philippine colonel or Indonesian autocrat who one day wakesto find that the electronics industry, in its rational wisdom, has placed 80 per-cent of the world’s chip-assembly, or even chip-testing, operations in his coun-try? Must we now abide and buy off cranks such as Malaysia’s Mahathir theway we must abide the Dos Santoses of the world and the families Saud? Asour companies continue to scatter industrial capacity to the far corners of theglobe, then to trim slack at home until they come to depend on that distantcapacity, are we not witnessing the creation of a new strategic commoditylike oil, control of which can be exploited to wrangle away our wealth andsecurity? And once a country expropriates industrial capacity in this way wouldit not be able to use its influence to prevent the affected industry from everbuilding competing capacity elsewhere again?

Then there is China. Thirteen years ago, Francis Fukuyama wrote an es-say called “The End of History?” Human political thought, he argued, had stum-bled at last through the gates of a Hegelian heaven. Political perfectionwould forevermore be defined as Liberal Democracy supported by a capital-istic economic system. Published during the summer of Tiananmen, when itseemed that all the world’s authoritarian regimes were withering away, thearticle (perhaps unintentionally) set the tone for an American triumphalismthat did not crest until well after the Soviet Union collapsed in 1991. Yet atopthe seas of champagne that engulfed the world in those days there floated anark with so little in its hold, and so much blood on its deck, and such ridicu-lous Khrushchev-era weaponry, that it seemed barely worth another glance.It is clear now that the vessel did not sink, and that in its hull it carried ananswer to, if not a refutation of, Fukuyama’s argument. The liberal demo-cratic state, its powers continuously eroded by the immense forces of themodern market, simply leaves too much up for grabs. And grab is exactly whata more cohesive political entity than our own may try to do.

The greatest danger of all may not be that Beijing one day dares try tocoerce the West but that the plan to undermine Beijing actually works,that the massive movement of money, goods, and ideas will lure free-dom-seeking citizens back to Tiananmen. Revolutions, as we sometimesforget, can turn violent. How long, if violence strikes China, will wehave to wait for our shipments of semiconductors and alternators andgaskets to arrive? Might we not find ourselves obliged one day, by theselfsame economic interdependence that was supposed to undermineBeijing, to prop up that regime in order to ensure the proper functioningof our own economy?

After two decades of deregulation, of voting away our few slight powersin exchange for BMWs and bass boats, we may soon discover, like Lear,that our children do not remain grateful for our generosity forever. Wesoared out of the 1990s convinced that we could inhabit forever our Cis-co-style role as the commanders and controllers of an outsourced world.Now, barring a revolution in how we view business, we may be lucky toeke out a few good years as the corporate front end, the marketing depart-ment, for China. Unless, of course, Beijing decides to vertically integratethat activity too.

ESSAY 41

MUST WE NOW ABIDE CRANKS

SUCH AS MALAYSIA’S MAHATHIR

THE WAY WE ABIDE THE DOS

SANTOSES OF THE WORLD AND

THE FAMILIES SAUD?

DEVELOPMENTS Book Review - Barry C. Lynn, End of the Line: The Rise and Coming Fall of The Global Corporation (2005) By Fenner Kennedy-Stewart * [Barry C. Lynn, End of the Line: The Rise and Coming Fall of The Global Corporation (NEW YORK: DOUBLEDAY, 2005, ISBN: 0-385-51024-1). CAN$ 21.00]

�“Our corporations have built the most efficient system of production the world has even seen, perfectly calibrated to a world in which

nothing bad ever happens�”

- Barry Lynn, End of the Line A. Introduction Barry Lynn�’s End of the Line, published in 2005, stresses the dangers, which he associates with the emergence of the global production network as the preferred model for organizing manufacturing in the twenty-first century. Over eleven chapters, if one includes the introduction and conclusion, Lynn weaves together a collection of stories, which he gathered throughout his tenure as a business journalist, to provide an enlightened explanation of how and why corporate managers have taken advantage of technological innovations in logistics and transportation in order to devise, then execute, numerous strategies for outsourcing production. These strategies have lead to the ad hoc construction of vast interconnected and overlapping transnational production systems, which have irrevocably modified how corporations are ordered. From one vantage point, this evolution can inspire a degree of optimism, for such global systems are evolving in spaces where companies and countries increasingly share their technology, their capital and their labor in order to receive the fruits of their cooperation. But as will

* LL.B., LL.M. University of British Columbia; Ph.D. Candidate, Osgoode Hall Law School. Email: [email protected]

1092 [Vol. 08 No. 11 G E R M A N L A W J O U R N A L

be discussed, Lynn writes from a much different vantage point and does not share in such optimism. Lynn�’s journalistic style pays dividends for his readers, as he stacks corporate tales from the successes and failures of companies like General Motors, Toyota, Walmart, Dell, Cisco, Boeing and Flextronics until his reader has a comprehensive account of the historical events, which inspired managers to re-focus corporate action away from physically manufacturing products and toward coordinating component-makers and component-assemblers throughout the world. Accordingly, management teams have restructured their corporations to model a new form - a form that on the one hand appears to be more cooperative, but on the other also appears to have a darker side. This new form generally has fewer assets, fewer employees and almost no reserve inventories, which may not be inherently so bad. However, it also has less direct control over its production systems than ever before, often relies too heavily upon too few inputs for supplies, and, worst of all, often has no idea where risk hides within its transnational production system(s), or for that matter, what the nature of this risk may be, considering such systems are exposed to a wide variety of potentially serious calamities from a plethora of different countries. If this combination of factors is not enough to make the risk-adverse shudder, Lynn suggests that the situation appears to be deteriorating further. By shedding both the capital assets and the large labor forces necessary for in-house production, Lynn explains how firms have reduced their direct responsibility over production and thus increased their ability to achieve greater profitability by contracting with suppliers, who are vastly more efficient and flexible than traditional forms of in-house production. Generally, these suppliers create such efficiency and flexibility by not operating within regulatory-laden jurisdictions. Lynn explains how firms squeeze their buyer-dependent suppliers by insisting upon ever-greater efficiency to meet both the challenges of hyper-competition and the expectations of profit-minded investors. This quest to maximize efficiency becomes problematic when suppliers are already operating on a shoestring budget, yet find themselves under pressure to find new ways to generate even more products in even less time for even less money, or gamble being replaced by a supplier that will. As suppliers stretch the boundaries of intelligent and responsible business practice to meet the demands for faster and cheaper production, risk flourishes throughout global production networks.1 1 Mr. Zhang Shuhong�’s tragic story provides a glimpse into: a) the pressures that suppliers might be enduring from lead firms, and b) the risk lead firms assume by outsourcing production. Mr. Shuhong was a co-owner of the Lee Der Toy Company, which supplied toys for Fisher Price, a subsidiary of the American toy giant Mattel. On August 2, 2007, Fisher Price recalled almost one and a half million toys supplied by Mr. Shuhong�’s company, after learning that they were coated with non-approved paint

2007] 1093 The Rise and Coming Fall of The Global Corporation

This book review has two purposes. The first is to provide an overview of Lynn�’s book. The following three sections provide a general overview of the book�’s argument, in part, explaining in greater detail Lynn�’s apprehensions over the dangers of global production networks, and then observing and evaluating his recommendations for improvement. The second purpose is to better understand Lynn�’s observations in the context of a discussion about corporate regulation. Lynn notes that his title, End of the Line, is inspired in part by his observation that the era of the vertically integrated assembly line has come to an end.2 The next section describes this vertically integrated relic, as explained by Peter Drucker in 1946, in order to help visualize what sort of corporate structure did exist, so as to be able to properly draw a distinction between Drucker�’s model and Lynn�’s observations of today�’s corporation. Finally, the book review ends by suggesting how the new challenges created by global production systems might require a change in the manner in which legal thinkers consider how law can be used to influence these systems. B. End of the Line �– An Overview In his introductory chapter, Lynn explains that the rise of the global production system marks the death of the Ford-inspired vertically integrated assembly line and the birth of a new corporate order.3 He proclaims that the debate regarding whether to globalize domestic economies has concluded with the ever-greater global integration of investment, labor, production and regulation.4 However, having sites of production scattered throughout the world inspires new debate about the pigment that contained a dangerous level of lead. See: Toys recalled over safety fears, BBC News (2 August 2007), available at: http://news.bbc.co.uk/2/hi/asia-pacific/6927156.stm, last accessed 14 August 2007. On August 13th, it was reported that Mr. Shuhong hanged himself in his factory. See: Chinese toy boss 'kills himself', BBC News (13 August 2007), available at: http://news.bbc.co.uk/2/hi/asia-pacific/6943689.stm, last accessed 14 August 2007. The following day, after a two-week review of the work of Mattel�’s Chinese subcontractor, Mattel reported that it would have to recall over 18 million toys. See: Mattel recalls millions more toys, BBC News (14 August 2007), available at: http://news.bbc.co.uk/2/hi/business/6946425.stm, last accessed 14 August 2007. As the story progressed, after even more recalls and the firing of several firms, Thomas Debrowski, Mattel�’s executive vice president for world operations, made a statement to the press stating: �“The vast majority of these products that we recalled were the result of a flaw in Mattel's design�” and not the fault of Chinese manufacturers. See: Mattel sorry for 'design flaws', BBC News (21 September 2007), available at: http://news.bbc.co.uk/2/hi/business/7006599.stm, last accessed 28 September 2007. 2 BARRY C. LYNN, END OF THE LINE: THE RISE AND COMING FALL OF THE GLOBAL CORPORATION (2005), 16. 3 Id., 16. 4 Id., 17.


emerging global interdependence, which creates novel challenges for those wishing to draw a distinction between domestic and international interests, as well as between one company and another.5 In other words, Lynn suggests that the globalization of production networks changes traditional understanding of what the boundaries of the corporation are (when its production system is so fragmented and decentralized), and, one can only assume, what the nation-state�’s role in corporate governance is (when corporations appear to be operating more and more beyond any single domestic jurisdiction). One clear conclusion which can be drawn is that the competitive pressure that pushed managers toward the outsourced-offshore model of production serves as a notice that no single country or company can possess the de jure or de facto capacity to monitor and/or control all aspects of industrial production any longer. These global production systems are a �“fait accompli�”, Lynn explains, and now the remaining challenge is for actors (like governments and corporations, but also other hybrid organizations with influence within the transnational realm) to ensure that their norm creation (generally considered having a spectrum from �“public�” regulation to �“private�” adoption of best practices) facilitates the continued growth of the system, while more importantly taking steps to ensure greater protection from risk.6 Chapter One, Two and Three tell the tales of corporate legends (like Henry Ford, Albert Sloan, Jr., Jack Welch, Lee Iacocca, Jose Ignacio Lopez de Arriortua, and Robert Galvin), tracing their ascensions to prominence in order to illuminate the development of American business practices today. For a broader perspective of this American corporate narrative, Lynn layers these stories with an explanation of how the American government, from Washington�’s Administration to the present one, influenced the evolution of these business practices. This political story progresses from Alexander Hamilton�’s strategy to achieve a rational economic self-dependence of America from Europe, which finally ended with Truman�’s post-war agenda of the liberal restructuring of the Japanese and European industrial systems to compliment and integrate with America�’s. This post-war phase was then replaced by a third phase, which Lynn�’s argues started during the Clinton Administration. Lynn points to the collapse of the Soviet Union as the trigger for events that convinced American policymakers that The End of History7 was upon them. He argues that instead of allowing American political vision and strategy to continue to guide the creation of the emerging global industrial commons, American policymakers dismantled the existing international structures in hopes

5 Id., 16-17. 6 Id., 17. 7 FRANCIS FUKUYAMA, THE END OF HISTORY AND THE LAST MAN (1992).


that �“the market would take care of us all�”.8 Although these chapters are interesting, Lynn�’s exclusive focus on the American historical narrative may cause more globally minded readers to lose confidence in the potential scope of his arguments, but be patient, for Lynn delivers in later chapters. Chapters Four, Five, Six and Seven, which are the most rewarding chapters of the book, look at the history and consequences of outsourcing. In part, Lynn draws a distinction between traditional logistics and today�’s logistics. Traditional logistics, he suggests, focus on the management of supplies flowing into a company, on one side, and the management of the flow of finished goods out of the firm, on the other.9 Lynn declares that, with the rapid innovation of information technologies coupled with the innovation in transport services throughout the last quarter of the twentieth century, 10 logistics have now become the �“nervous system�” for modern production systems,11 providing firms with the ability to transport, track and connect the components of any assembly process across a multitude of national boundaries with ease. This innovation has enabled companies to hire suppliers from all corners of the earth in the quest for ever-cheaper locations for production. The evolution has forged a radical interdependence between nations, which may be beyond what individual policymakers or industrialists can appreciate. Chapter Six focuses on another piece of the corporate globalization puzzle - mergers and acquisitions. This phenomenon has resulted in greater consolidation of control within industries, not only for lead firms, like Cisco, but also for supply firms, like Flextronics.12 Lynn points to various reasons for the great consolidation, which are all variations of Coase�’s theorem,13 including to �“maintain leadership�” in an environment where competitors within an industry are consolidating, to �“innovate by buying dozens of smaller, tech-laden firms�”, and/or to �“rationalize the service and supply activities�”.14 When the phenomena of outsourcing and consolidation are combined, the result is ever-greater concentrated supply systems, which are stripped of their redundancy by lead firms, which depend on the

8 LYNN, supra note 2, at 72. 9 Id., 111-113. 10 Id., 136-137, and 139-141. 11 Id., 127. 12 Id., 177. 13 Ronald H. Coase, The Problem of Social Cost, 3 J.L. & ECON 1 (1960). 14 LYNN, supra note 2, at 177.


systems, but have little responsibility for, control over, or understanding of the risk within these evermore single-sourced networks.15 Lynn points to companies like Cisco, which have mastered strategic outsourcing and which have come to dominate their high-tech sectors. Such lead or hub firms are emerging as �“the center�” of global production networks, reducing competitors �“to the status of satellites�”.16 The results of this evolution, in Lynn�’s mind, are threefold. First is �“a huge but one-time leap in efficiency�”.17 Two is �“a phenomenal shift of power �– away from individual workers, and small firms, and slower-moving big firms, and the state �– to the companies with the most nimble management teams and to the capital that backs them�”.18 Three is the �“extinction of the traditional vertically integrated producer, and of that producer�’s traditional focus on mitigating risk and planning for the future�”.19 Chapters Eight and Nine discuss what Lynn observes to be the dangers of this evolution. This topic is taken up in detail in Section C. In his concluding chapter, Lynn offers some recommendations to help ensure the stability of global production systems and to ensure their ability to �“keep growing�”.20 These recommendations are explained and evaluated in Section D. C. What Lurks in The Shadows? Even though Lynn acknowledges that global production systems have vastly increased the efficient use of resources worldwide,21 he laments over their dominance as a model for production, because of what he perceives to be lurking in their shadows. In chapter 8, Lynn questions whether the construction of these global production systems has been prudent, observing that it is more likely the haphazard result of �“what happens when globalization and outsourcing are 15 Id., 179-180. 16 Id., 141. 17 Id., 154. 18 Id., 154. 19 Id., 154. 20 Id., 17. 21 Id., 154.


combined with an entire lack of regulation by governments".22 Fearing the fragility of these ever-more single sourced production systems, he emphasizes that any number of factors could lead to, as he puts it, �“cascading economic breakdowns, from causes that are often all but impossible to conceive until the moment they hit�”.23 Still in chapter 8, Lynn draws a distinction between vertically integrated firms, which tended to take seriously their long-term survival and thus invested in their future, and what he calls the �“arbitrage-oriented firm�”. The latter was named so because of its distinctive function of merely purchasing and selling products within the production network without engaging in the process of production itself �– generating revenue without manufacturing product. He dislikes this shift in corporate ordering, explaining the havoc that he believes these firms to be causing in the following passage:

[T]oday�’s institutional structure serves to encourage companies to tear apart the very attributes we once celebrated in our traditional vertically integrated corporations, such as the ability to plan and protect, to invest and innovate, to provide stability and security. Opportunity lies in turning the more formal and carefully made structures of the past against the owners of these assets. The very goal of many upstarts is to break down these older, safer systems in order to free up and capture the wealth that has been built into what are, in essence, privately managed social infrastructures.24

Further along, he reiterates his concern by adding that the arbitrage-oriented firm has �“no inherent interest in long-term planning�”, but rather its �“method of operation is not to grow by introducing innovative new products, nor to focus on the safe operation of the system of production itself, but simply to ceaselessly exercise its power to destabilize both its suppliers and direct competitors�”.25 He accuses such firms of being �“blind to the needs of the system that feeds them, and

22 Id., 224. 23 Id., 215. 24 Id., 220. 25 Id., 232.


blind to the effect of their own power on undermining the structure on which they themselves stand along with the rest of us�”.26 Lynn is suggesting that outsourcing and the reckless strategies of arbitrage-oriented firms continually deconstruct all of the safeguards that may have historically hampered what some might call efficiency. Lynn is also suggesting that such historic inefficiencies prudently fortified domestic economies from potential disruptions of production (like national strikes, natural disasters, global epidemics, terrorism, and wars) that today could occur in any number of countries, suspend global production and seriously damage any number of domestic economies. Most disturbing is that corporate leaders are aware of the potential for �“cascading economic breakdowns�”, but do little to prevent them.27 Lynn provides many examples of minor global production system failures that caught the attention of the business community.28 One such example, which he opened the book with, stands out.29 In 1999, a shock wave from an earthquake damaged two Taiwanese manufacturing plants. This event made headline news in the business press, because of the unforeseen domino effect it caused among many economies throughout the world. Although the two plants were only shut down for one week, they were the main producers of a highly specialized semiconductor chip necessary in the production of many high-tech products manufactured worldwide. As a consequence of relying on this single source within the production system, the world output of electronics was 7% lower than predicted for the month of the earthquake and production levels could not fully recover to their pre-earthquake outputs for an additional two months. Thousands of workers were laid-off in the US, stock value in high-tech firms dropped and consumers paid higher prices. Upon reflection, for any reader unfamiliar with the amount of risk lurking within today�’s industrial production complex, the natural reaction to Lynn�’s observations may be shock. If he is correct in his observations, then global production systems are stretched so thinly that they cannot weather, without serious cost, an incident like the closure of two important production plants for one week. One shudders to imagine the fallout from a real disaster, like others suggested by Lynn, such as a

26 Id., 232. 27 Id., 213-216. 28 Id., 214-215. 29 Id., 1-3, 177, 215, 217, and 218.


war between India and Pakistan, which was narrowly averted in 2001, or a flu-like pandemic, which appears to be threatening every year.30 Yet, what makes matter worse is that, even with this knowledge of the risks, these production systems are spread across so many domestic jurisdictions and are exploited by so many highly competitive private interests that no one is sure who will take responsibility, or for that matter who can take responsibility, to safeguard these systems from such disasters over the long term. One could conclude from Lynn�’s observations that until public and/or private authorities step forward and cooperatively sort out this state of affairs, all that can be done is to continue business as usual and hope for the best. D. Lynn�’s Solutions In his concluding chapter, Lynn offers some suggestions to his reader, which are designed to help avoid what Lynn perceives to be the self-destructive course of the global economy. He presents a list of recommendations, which he asserts would help fortify the global economy, including: (1) implementing more stringent anti-trust regulations, (2) requiring multiple inputs for key components of production, (3) strengthening the ability of suppliers to resist unreasonable demands from lead firms, (4) requiring greater disclosure of sourcing and supply-chain relationships to investors, (5) empowering workers, (6) reducing incentives for management to pursue share price maximization strategies, and (7) questioning the nationality of lead firms, even when their head offices are within the United States, so as to better shape domestic policies in areas of technology sharing, taxation, and public subsidization of the private sector.31 Lynn does not elaborate much upon his list of suggestions, nor does he address the potential opposition to them, but merely asks his reader to accept them prima facie. This is unfortunate for Lynn, because certain readers indubitably will regard one or more of his recommendations as problematic. Greater elaboration upon the potential drawbacks of his recommendations might have made them more difficult to immediately dismiss by those he may have wished to win over. For instance, the pros and cons of more stringent anti-trust regulations have been debated endlessly,32 but for the purpose of this work, it will suffice to say that it is

30 Id., 214-215. 31 Id., 256-257. 32 ADAM SMITH, AN ENQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS (1776); Edward S. Mason, Methods of Developing a Proper Control of Big Business, 18:2 PROCEEDINGS OF THE ACADEMY OF POLITICAL SCIENCE 40 (1939); JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM, AND DEMOCRACY (1950);


contentious and debatable. As regards his second recommendation, requiring multiple inputs for key components appears to be the only sensible option, so the suggestion of this recommendation may not be controversial. That said, in highly competitive industries, implementing this recommendation might not be so easy and could generate controversy, if implementation undercut the competitive potential for business emanating from the jurisdiction attempting to reform unilaterally. As regards his third recommendation, if Lynn is correct in his assessment of the tremendous risk associated with the power imbalance between lead firms and buyer-dependent suppliers, then strengthening the bargaining position of suppliers seems like a non-contentious recommendation; for few would agree openly that suppliers should be forced to quietly undermine global production. However, this issue can also be recast in a different light. Why should one assume that empowering suppliers necessarily would improve risk management strategies? Regarding his fourth recommendation, greater disclosure of information makes the markets function better - one could dare to suggest - in all situations, so this recommendation might also seems non-contentious. That said, if implementation of this recommendation is not thoughtful, it could become overly onerous to business. One just has to recall Sarbanes-Oxley�’s (SOX) famous, expensive, and problematic section 404. This knee-jerk reaction to regulate highlights some of the problems with throwing together such disclosure requirements in a slapdash manner.33 Next, empowering workers appears to be a socially responsible suggestion; however, such initiatives also need to be sensitive to the importance of labor market reforms in many jurisdictions, so finding the appropriate manner to empower labor is far more problematic than agreeing that in many countries labor empowerment is of critical importance.34 As regards the Edward S. Mason, Schumpeter on Monopoly and the Large Firm 33 REV. OF ECONOMICS AND STATISTICS 139 (1951); Adolf A. Berle, The Developing Law of Corporate Concentration, 19 U. OF CHIC. L. REV. 639 (1952); RICHARD ORME WILBERFORCE, ALAN CAMPBELL, AND NEIL P. M. ELLES, THE LAW OF RESTRICTIVE TRADE PRACTICES AND MONOPOLIES (1966); JOHN KENNETH GALBRAITH, THE NEW INDUSTRIAL STATE (1967); RICHARD A. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE (1st ed., 1976); ROBERT H. BORK, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF (1978); Frank Easterbrook, The Limits of Antitrust, 63 U. TEX. L. REV. 1 (1984); ALFRED D. CHANDLER AND TAKASHI HIKINO, SCALE AND SCOPE: THE DYNAMICS OF INDUSTRIAL CAPITALISM (1990); JOHN E. KWOKA AND LAWRENCE J. WHITE, THE ANTITRUST REVOLUTION: ECONOMICS, COMPETITION, AND POLICY (1999); MASSIMO MOTTA, COMPETITION POLICY: THEORY AND PRACTICE (2004); TONY PROSSER, THE LIMITS OF COMPETITION LAW: MARKETS AND PUBLIC SERVICES (2005); and Howard Shelanski and Michael Katz, Merger Analysis and the Treatment of Uncertainty: Should we Expect Better?, forthcoming, ANTITRUST L.J. (2007). 33 Smelly old SOX, THE ECONOMIST 384:8539 (July 28 - August 3 2007). 34 For the important of reformer laborlabor markets for securing economic stability and growth in the European context, see for instance: Can Europe's recovery last?, The Economist 384:8537 (July 14th-20th, 2007). For the connections between gross domestic production, and social conditions and well-being of citizenry, see generally: Organisation for Economic Co-operation and Development, ECONOMIC POLICY REFORMS: GOING FOR GROWTH (2006).


problem of stock price maximization strategies, the arguments have been clearly presented,35 however there is still debate as to whether these incentives are actually hurting the long-term interests of the firm.36 Lynn�’s last recommendation appears unproblematic, if one accepts that corporations, which are deemed to be American, ought to have special advantages within the American marketplace. That said, not all free trade advocates, within and outside America, would agree with this position. So, upon reflection, although Lynn�’s recommendations may appear sound prima facie, more rigorous contemplation of them needs to be offered by Lynn in order to be able to assess their true merit. One area where Lynn�’s recommendations are clearly lacking is in his understanding of how the global economic commons will have to be �“regulated�”.37 To be fair to Lynn, his expertise is in business, not law. That said, he does venture into the legal realm with his recommendations without an adequate sensitivity to how such regulation must come about in a transnational environment. Where Lynn first gets into trouble with his recommendations is when he explains that he selected all of his recommendations because the American government can implement each of them unilaterally.38 This admission is surprising because he acknowledges that serious opposition may arise to �“the merest spectre of American unilateralism�” in this area.39 And yet, he presses forward, rationalizing that there is room for �“multinational actions�”,40 but �“when it comes to industry, it is far faster to

35 David Millon, Why Is Corporate Management Obsessed with Quarterly Earnings and What Should Be Done About It? 70 GEO. WASH. L. REV. 890 (2002), and also Leo E. Strine, Jr., Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a more Rational System of Corporate Governance, The Dorsey & Whitney Foundation Lecture, 10 March 2007, forthcoming, J. CORP. L. (2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=989624, last accessed 28 October 2007; for a comment on Strine�’s paper (and Stephen Bainbridge�’s reaction), see Peer Zumbansen, Varieties of Capitalism and the Learning Firm: Corporate Governance and Labor in the Context of Contemporary Developments in European and German Company Law, UNIVERSITY OF CAMBRIDGE, CENTRE FOR BUSINESS RESEARCH, WORKING PAPER No. 347/2007 & CLPE COMPARATIVE RESEARCH IN LAW & POLITICAL ECONOMY RESEARCH PAPER 21/2007, forthcoming, EUR. BUS. ORG. L. REV. 2007, available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=993910, last accessed 28 October 2007. 36 Jam today: Worries about short-termism grip America�’ business elites �– wrongly perhaps, The Economist 384:8537 (July 14th-20th, 2007). 37 LYNN, supra note 2, at 254-256. 38 Id., 256. 39 Id., 258. 40 Id., 259.


act at the national level�”.41 He hopes, with complete lack of acknowledgment of his earlier concession, that if America takes the lead and implements his recommendations, then it �“will make it far easier for other nations to follow our lead�”.42 But what if there is a reaction? What if although it may be easy to follow America�’s lead, other nations are offended and refuse to follow? He does not address this possibility. Even worse, what if - with the rise of other world stock exchanges and the ability of global investment to ignore national borders - �“American�” firms and �“American�” investment choose to exit Delaware for less stringent, more investor-friendly jurisdictions? One can easily conclude that Lynn may be a little too romantic about the ability of America, or any nation-state for that matter, to unilaterally change, as Lynn puts it, the �“structural�” nature of �“our global commons�”.43 But maybe Lynn merely sees domestic unilateralism as the better of two evils, the other being multinational action. In fact, Lynn says as much when he admits that he selected recommendations that can be enacted unilaterally, because of �“the obvious and huge obstacles to forging any multinational agreement in the near term�”.44 What is more obvious is that he does not address the literature that informs transnational legal theory.45 This literature helps one to appreciate that there is a �“highly

41 Id., 259. 42 Id., 259. 43 Id., 254-255. 44 Id., 256. 45The capacity of the nation-state to control transnational corporations has been in decline throughout the twentieth century. For example, nation-states have faced erosion of the corporate tax system, resulting in a lesser ability to redistribute wealth within society. See John Braithwaite, Markets in Vice, Markets in Virtue (2006), 16-34. Enforcement issues aside (which are significant), Braithwaite observes the catch-22 of tax policy in the age of globalization between �“attracting capital and securing growth on a small-government, low-taxation-of-capital, weak-safety-net trajectory, or having a bigger-government, lower-growth trajectory where the gulf between rich and poor is not allowed to widen�”. The challenge for smaller nations to maintain sovereignty against transnational corporate interests is grossly amplified. See Raymond J. Michalowski and Ronald C. Kramer, The Space between Laws: The Problem of Corporate Crime in a Transnational Context, 34 SOC. PROB. 34 (1987). In addition, other aspects of the decline of the nation-state in the age of the transnational corporation and globalization has been well documented, see amongst many others: Sally Engle Merry, Anthropology, Law, and Transnational Processes, 21 ANNUAL REV. OF ANTHROPOLOGY 357 (1992); Richard Falk, Towards Obsolescence: Sovereignty in the Age of Globalization, 17 HARV. INT�’L L. REV. 34 (1995); Viven A. Schmidt, The New World Order Incorporated: The Rise of Business and the Decline of the Nation State, 124 DEADALUS 75 (1995); Gunther Teubner ed., GLOBAL LAW WITHOUT A STATE: STUDIES IN MODERN LAW AND POLICY (1997); Gunther Teubner, Societal Constitutionalism: Alternatives to State-Centred Constitutional Theory?, in TRANSNATIONAL GOVERNANCE AND CONSTITUTIONALISM, 3, (Christian Joerges, Inger-Johanne Sand, and Gunther Teubner, eds., 2004); JACK L. GOLDSMITH AND ERIC A. POSNER, THE LIMITS OF INTERNATIONAL LAW (2005); Oona A. Hathaway and


pluralistic mixture of legal regimes�”, ranging from state-oriented systems to hybrid and private regimes, which influence normative development in transnational spaces.46 Added to such legal regimes are other �“norm entrepreneurs�”, which may influence law, but also generate social norms, which may not achieve the status of law, but still make important contributions to the construction of such normative environments.47 Lynn never gets past state-oriented legal regimes, but again to be fair to Lynn, he should not have to take ownership of devising the solution to one of the most complicated challenges presented to legal scholarship today. Nonetheless, to address the problem of risk within global production systems, which Lynn so impressively describes, this literature must be taken seriously. E. Observations of the Modern Corporation and Implications for Regulation Contrasting Barry Lynn�’s book to Peter Drucker�’s Concept of the Corporation48 (1946) draws one�’s attention to the remarkable evolution of the modern corporation from the post-war period to today, and to the influence this observation can have on one�’s understanding of corporate risk and regulation. When the Concept of the Corporation was first published, Europe had endured almost a half-century of total war. Many, like Karl Polanyi, suspected this catastrophe could have been averted, if it had not been for the economic rationalities, which guided the nineteenth century liberal project.49 This suspicion generated a general conviction in American society that governments must intervene in economic activities in order to stabilize national economies, and convinced policy-makers and

Ariel N. Lavinbuk, Rationalism and Revisionism in International Law, 119 HARV. L. REV. 1404 (2006); Duncan Kennedy, Three Globalizations of Law and Legal Thought: 1850-2000, in: THE NEW LAW AND ECONOMIC DEVELOPMENT: A CRITICAL APPRAISAL, (David M Trubek and Alvaro Santos, eds., 2006); and Orly Lobel, The Paradox of Extralegal Activism: Critical Legal Consciousness and Transformative Politics, 120 HARV. L. REV. 937 (2007). 46 Oren Perez, Normative Creativity and Global Pluralism: Reflections on the Democratic Critique of Transnational Law, 10 IND. J. GLOBAL LEGAL STUD. 25 (2003), at 25. 47 GRALF-PETER CALLIESS AND PEER ZUMBANSEN, ROUGH CONSENSUS, RUNNING CODE: A THEORY OF TRANSNATIONAL PRIVATE LAW, TRANSTATE WORKING PAPER 2007, 8-9, available at http://www.sfb597.uni-bremen.de/download/de/ueber/Preprint_zumbansen_2007.pdf, last accessed 28 October 2007. 48 PETER F. DRUCKER, CONCEPT OF THE CORPORATION (1946). 49 KARL POLANYI, THE GREAT TRANSFORMATION (1944), 3.


scholars that unregulated capitalism was a recipe for further disaster.50 Needing an alternative economic rationality, John Maynard Keynes had been constructing a model,51 in which governments could plan modern economies, in hopes of achieving greater equality, stability and thus peace within society than had been previously achieved since modern capitalism emerged in Europe during the early nineteenth century. The agreement reached at the United Nations Monetary and Financial Conference at Bretton Woods, in 1944,52 cemented this economic theory in a new international economic order, which defended the policy autonomy of nation states, by providing a national economic space for the growth of Keynesian planning. This was a decisive shift from the classical liberal economic order of the nineteenth century. It was in this context that Drucker envisioned the modern corporation as a powerful non-state entity, which assisted government efforts to achieve full employment and peace. His study offered an insider�’s view of the inner workings of General Motors Corporation (GM). GM, at the time, was not only one of the largest corporations in the world, but also one of the most innovative. GM�’s CEO, Albert P. Sloan Jr., implemented a dynamic strategy of decentralization, which reorganized command-and-control management structures, so that middle managers, who were better informed about particular aspects of this complex worldwide organization, could exercise their discretion within their area of knowledge, allowing for more effective and informed decision-making by GM as a system. This management structuring was called decentralization, because it created smaller systems of self-direction throughout all levels of management.53 Drucker concluded that the decentralized, yet still vertically integrated, corporation would be the corporate model of the future, operating with the main objective of assisting governments�’ efforts to better order modern society for the benefit of the community.54

50 For the position of an American scholar, who was also a statesman and policymaker at the time, see: Adolf A. Berle, Jr., Government Function in a Stabilized National Economy, 33 AM. ECON. REV. 27 (1943), 1. 51 JOHN MAYNARD KEYNES, THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY (1937). 52 United Nations Monetary and Financial Conference at Bretton Woods (22 July 1944). 53 DRUCKER, supra note 48, at 286-298. 54 DRUCKER, supra note 48, at 284-290.


But even with the dramatic shift from the classical liberal economic order to the new doctrines of Keynes,55 physical production still remained the same, relying on giant in-house assembly lines, much like Ford�’s Rouge River Production Complex of the pre-Keynesian world.56 Management�’s core strategy for efficient production, being to exploit economies of scale and to ensure uninterrupted operation of assembly lines, remained steadfast. Production strategies still focused upon controlling as many aspects of the production process as possible. And for those few aspects of the production system that were most efficiently outsourced, the parent producer forged long-term commitments with allied suppliers, which fostered a high level of reliance and trust, and minimized the risks potentially associated with outsourcing. Sloan�’s GM model, as presented by Drucker, is still the model that comes to mind, when many think of the corporation, with its multidivisional structure filled with a hierarchy of managers, who more or less autonomously supervise a number of different aspects of an in-house production system. GM is still regarded as an American company, because its cars are �“made in America�”, which has some value to nationalistic consumers, although less in recent years.57 This perception of the corporation is associated with nationality, hierarchical structure and permanence. A danger for corporate observers is in maintaining such underlying assumptions, for they can lead to erroneous presumptions when attempting to understand the twenty-first century corporation. Examples of such erroneous presumptions are that corporations have control over their production systems; or they are aware of the business practice involved in their production systems; or a national government, if it wished, has the power to impose responsible business practice upon their corporations.58 This potential for making erroneous presumptions adds credence to the suggestion that Lynn�’s book is an important foundation for those wishing to understand the corporation today. Lynn constructs an image of the corporation, which is much different from Drucker�’s. With corporate reliance upon global production systems, instead of one business producing a product from an in-house assembly system, which exists within one national jurisdiction, production systems can span across 55 For more detail, see: Jeffrey D. Sachs, Twentieth-Century Political Economy: A Brief History of Global Capitalism, 15 OXFORD REV. OF ECON. POL�’Y 90 (1999), 93-95. 56 THOMAS K. MCCRAW, AMERICAN BUSINESS, 1920-2000: HOW IT WORKED (2000), 18-27. 57 The road to recovery, THE ECONOMIST 384:8541 (August 11th- August 17th, 2007). 58 For an example of result of such fallacious assumptions, see: JOEL BAKAN, THE CORPORATION: THE PATHOLOGICAL PURSUIT OF PROFIT AND POWER (2004), 160-164.


many nations and many companies. This observation ought to have a profound influence in the way one ought to think about corporate responsibility. Lynn writes:

The result, when outsourcing has spread widely and deeply enough through any industrial system, is that many responsibilities are not so much shifted from one company to another as from one company to no company. �… Nobody looks for risk in the system, nobody analyzes risk in the system, nobody seeks to lessen risk in the system, nobody accepts any liability for risk in the system. If anything, the nature of competition results in a race among users to exploit the common system most effectively. 59

Lynn�’s conclusion forces one, at least, to reconsider the traditional assumptions about responsibility within production systems. Possibly, this leads one to the conclusion that the implementation of responsible business practice does not involve the relationship between one governmental regulator and one producer, but the efforts of many legal regimes (state-based, private and hybrid) and other norm-producers to generate a less competitive, and more cooperation, normative environment, so that global production systems can be better managed by a collection of users. Implicit in this conclusion is that not only an appreciation of the production system�’s evolution is necessary. It is also necessary to understand how the procedures and institutions, which create the normative environments of such systems, operate. At the time Drucker wrote Concept of The Corporation, Keynesian planning dominated regulatory theory, and although serious challenges to Keynes�’s theory were being espoused at the time,60 it would not be until the late 1970s that his theory was debunked.61 At this point, new perspectives on law and regulation were merging.62 As economic globalization matured so did an

59 LYNN, supra note 2, at 11. 60 FRIEDRICH A. VON HAYEK, INDIVIDUALISM AND ECONOMIC ORDER (1948), 77-91. 61 DANIEL YERGIN AND JOSEPH STANISLAW, THE COMMANDING HEIGHTS: THE BATTLE FOR THE WORLD ECONOMY (1998, 2002) 96-138. 62 In particular, see from a law and sociology perspective: Gunther Teubner, Substantive and Reflexive Elements in Modern Law, 17 L. & SOC. REV. 139 (1983). And see from a law and economics perspective: RICHARD A. POSNER, THE ECONOMICS OF JUSTICE (1981).


understanding of global law.63 Therefore, a historical narrative that describes the individuals and events, which helped - and are helping - to shape global law, would dovetail nicely with Lynn�’s narrative. Such a narrative may be required to provide a practical rationale for why certain developments in global law are necessary for the �“regulation�” of global production in a manner that can be easily appreciated by a non-law readership. In conclusion, when Lynn makes recommendations as to how to regulate global production, he lacks the sensitivity to the regulatory and political landscapes in which these systems operate. Since Philip Jessup�’s seminal piece in 1956,64 legal scholarship has been attempting to better understand the relationship between law, social norms, and decision-making within the transnational spaces that some systems operate within. What is unique about these spaces is that law appears to detach itself from the nation-state,65 and yet still appears to function. This still-emerging understanding of a non-hierarchical acceptance of formal and informal �“law�” does not rest comfortably with a more traditional legal mindset, which is still loyal to the rationalization of the legitimization of norms into laws from a Westphalian explanation of legal order. The decentralization of norm/law-making has instigated a proliferation of sites of norm generation, and thus has vastly altered the process for regulating.66 The conceptual trap of insisting upon the Westphalian explanation of legal order, like the one Lynn fell into, is of utmost concern for legal scholarship as the crisis of law beyond the state needs to be properly understood if legal systems are to have a constructive role in assisting in the creation of more socially beneficial normative spaces. Lynn must be commended for his inspired explanation of a real-world situation that presents just such a test for legal systems, which may have to broaden their understanding of how norms can be legally legitimated, if they are going to embrace the proliferation of �“norm entrepreneurs�”,67 which transcend the historical 63 Duncan Kennedy, Three Globalizations of Law and Legal Thought: 1850-2000, in: THE NEW LAW AND ECONOMIC DEVELOPMENT: A CRITICAL APPRAISAL (David M Trubek and Alvaro Santos, eds., 2006); and also TEUBNER ED., GLOBAL LAW WITHOUT A STATE, supra note 45. 64 PHILIP C. JESSUP, TRANSNATIONAL LAW. STORRS LECTURES ON JURISPRUDENCE (1956). 65 CALLIESS AND ZUMBANSEN, supra note 47, at 284-290. 65 POLANYI, supra note 49, at 3. 66 Peer Zumbansen, Transnational Law, in: ELGAR ENCYCLOPEDIA OF COMPARATIVE LAW, 738 (Jan Smits, ed., 2006). 67 CALLIESS AND ZUMBANSEN, supra note 47, at 8-9.


narratives of their native nation-state to join the membership of autonomous and pluralistic �“legal�” actors that possess the range of vantage points necessary to properly inform the normative environment. These norm entrepreneurs, when necessary, operate �“before the law�”,68 facilitating the decision-making of complex and ever-changing social systems, like the production systems described by Lynn in his book. If the law cannot adjust to its environment, and norm entrepreneurs continue to be successful in filling the normative void, it is quite possible that the gatekeepers of the law will turn on their traditional masters, and instead of ever-keeping �“man�” �“before the law�”, they will ever-keep law before man.69

68 Calliess and Zumbansen comment on the role of law in shaping processes of �“private�” interaction by comparing the role/non-role of law within this interaction to the anti-parable of �“before the law�” presented to K., the protagonist of Kafka�’s The Trial, by a priest. This passage can be found in the chapter entitled "In the Cathedral�” within the book. See: CALLIESS AND ZUMBANSEN, supra note 47, at 7. Also see: FRANZ KAFKA, THE TRIAL (1957). 69 For evidence of such a project, take seriously the significance of: Richard A. Posner, Creating a Legal Framework for Economic Development, 13 THE WORLD BANK OBSERVER 1 (1998).