Hi,

Welcome to BIG, a newsletter about the politics of monopoly and finance. If you’d like to sign up, you can do so here. Or just read on…

Today I’m going to look at monopolies, from syringe makers to chain drug stores like CVS, and how they helped or hurt vaccine roll-out. Plus:

Competition drove vaccine development.
How social media and leverage are driving the GameStop bubble and destroying hedge funds.
Will Biden appoint anti-monopolist Lina Khan to an antitrust slot?
Brexit Enabling Monopolists to Impose Private Tariffs
Polling on big tech break-ups
As the Chicago School collapses, will the Republican Party turn into an anti-monopoly force?
Annoying hospital beds are a monopoly problem.

First, house-keeping. A lot of you told me you wanted a guide to doing anti-monopoly work, so I’m compiling that. I also spoke with a state attorney general recently who told me he wants complaints from the public, so perhaps it will be useful. Also, my organization came out with a mini-book on the Obama administration’s antitrust and competition policy legacy, and what it means going forward. It’s called “The Courage to Learn.” Enjoy.

And now…

Economies of Scale or Economies of Fail?

Last week, a high level Amazon official penned a letter to new President Joe Biden on the Covid vaccine roll-out, offering to use the corporation’s “operations, information technology, and communications capabilities and expertise to assist your administration’s vaccination efforts.” While the United States is fifth in the world per capita in terms of deploying the medication, injections are going slower than they should, and slower than necessary to ward off the more infectious strain that is already spreading in the U.S.

Enter Amazon. “Our scale,” Amazon’s David Clark wrote, “allows us to make a meaningful impact immediately in the fight against COVID-19, and we stand ready to assist you in this effort.” And Amazon’s not alone. Other big businesses are now pledging to pitch in for the new President, like Starbucks, Walmart, and Costco.

These corporations are using an argument that has dominated most economic policy in the United States since the 1970s, the notion of economies of scale. The idea is that a big plant can make things efficiently and cheaply, and so we want to encourage bigness in our corporations to encourage efficiency and low prices. This argument is everywhere. Google is not a monopoly, it’s just the most efficient search engine, Amazon’s awesome with that two day deliver because it’s big, and so forth. Chain stores, like Walmart and CVS, deliver low prices and are great logistics players, or so goes the theory.

This argument matters in policy. We used to stop monopolization, until policymakers began worrying we’d lose economies of scale. For instance, syringe goliath BD - which has been in and out of court for monopolization since the late 1990s - argued it would be able to offer a broader suite of products when acquiring $24 billion medical supply giant Bard in 2017, claiming merged entity would be “uniquely positioned” to “improve both the process of care and the treatment of disease for patients.” Enforcers let the merger go through. Similarly, CVS used it two years ago to justify to regulators its purchase of health insurer giant Aetna and creating what it called a “uniquely integrated, community-based health care experience.” As the merger with Aetna closed, CVS bragged that “In-store pharmacists have already started providing adherence outreach and counseling to Aetna members identified to be at high risk for an adverse health event.”

If these claims were true, then we should be all set to handle a vaccination campaign. And yet, for medical supplies, it is obviously not true. We face shortages of the specific type of unusual syringe that the combined BD-Bard conglomerate should have been able to produce with its nifty synergies. Shortages have been a consistent problem during the pandemic, and market concentration is one key reason. The basic confusion is that while there are technical factors that make scale more efficient, these are often unrelated to legal scale. A large steel plant might be more efficient than a small one, but ten steel plants managed by one legal entity isn’t necessarily more efficient than each plant having its separate legal ownership structure. In fact, it’s often worse, since distant management creates needless bureaucracy versus a local plant manager with the authority to just fix problems then and there.

And that’s what we see not just with syringes, but with the vaccine deployment. The government partnered with chains CVS and Walgreens to deploy the vaccine, and these chains have done a bad job. There’s a natural experiment showing how independently owned pharmacies have outperformed the chains. Roughly 35% of pharmacies are independent, so we can look at where there are a lot of chain pharmacies, and where there aren’t, and then compare the two. A lot of the places dominated by chains, like Virginia and California, are blue states with significant public health systems and expertise, while red states like South Dakota and Alaska tend to have more suspicion of government and have more independent pharmacies.

And what do we find? Illinois, where Walgreens has its headquarters, is 11th slowest in the country in terms of vaccine roll-out (based on the percentage of supply used). Rhode Island, where that wonderful consumer-based CVS is based, is one of the very worst, in the bottom five. Who is doing well? The leading states are rural, South Dakota, West Virginia, and New Mexico. Now, rolling out this kind of campaign is difficult, and the type of drug store ownership structure is only one factor. State leadership and public institutional make-up matters. But private infrastructure is key as well. And in fact, if you look at one state that has been leading since the beginning of the roll-out - West Virginia - one reason it has done a better job is precisely because it doesn’t really have very many chain pharmacies.

West Virginia is poor and rural, precisely what would make it harder to organize a vaccine strategy. And yet, the state, with its strategy based on independent pharmacies, managed to offer vaccines to every nursing home resident by the end of December, a month before nearly everyone else. As NPR’s Yuki Noguchi reported, West Virginia stumbled into its independent pharmacy strategy by accident. The Trump administration organized the vaccine roll-out with a recommendation that states partner with large chains CVS and Walgreens on vaccinating people in nursing homes and long-term assisted living facilities. But in West Virginia, there just aren’t have enough CVS or Walgreens stores for the partnership to make sense. So instead, the state had to go directly to its local pharmacies, of which there are 250, mostly in rural areas.

It was a blessing in disguise, as these pharmacies turned out to be better than the unwieldy “bureaucracy of huge national chains,” as Noguchi put it. The small pharmacies already had data on many patients, and they could schedule appointments, match doses, and handle paperwork quickly, all of which confounded the giants.

Independent Pharmacists Are Community Leaders

Competence from independent pharmacists and bureaucratic nonsense from the chains isn’t just a pandemic-related phenomenon.

Last year, the New York Times did an important series on how pharmacies at big chains are run like sweatshops, leading to mistakes in prescriptions, medical errors, and death. Employee pharmacists at CVS and Walgreens described “understaffed and chaotic workplaces where they said it had become difficult to perform their jobs safely.” So during an emergency, it’s not a surprise that the vaccine roll-out isn’t going well where CVS and Walgreens are in charge. They aren’t good during non-emergencies, why would they improve when the pressure is on?

I spent some time talking to Stacy Mitchell of the Institute for Local Self-Reliance, who has studied independents, CVS/Walgreens, and new entrant Amazon. “Ownership structure matters,” she said. “Pharmacists are health care workers, so when they own the pharmacies, they prioritize care.”

Across the board, in fact, independent pharmacies are better for consumers. Chains, Mitchell said, “offer worse health care delivery in terms of the time pharmacists spend with patients, the range of tests that they do, what they offer in terms of screenings.” Moreover, the pricing of independents is much better. As ILSR noted, “For a basket of five commonly prescribed drugs, independents had an average retail price of $107 for a month’s supply. Walgreens sold that same basket for $752, Rite Aid for $866, and CVS for $928.”

Independents are also rural and small town institutions, with 77% of these pharmacies serving communities with fewer than 50,000 people. In these places, the independent pharmacist often is the health care infrastructure. Seven in ten do free home delivery, a service which is virtually non-existent with chains.

Why Does CVS Exist in a Market Economy?

I’ve interviewed a number of independent pharmacists, and what Mitchell told me rings true. And yet, they also all told me that it’s harder and harder to make it as an independent. The numbers bear this out. Since 2005, the number of independent pharmacies has fallen from 24,500 to 21,683. Over the last five years, independent pharmacy sales have fallen from $81.4 billion to $73.7 billion, even as the overall drug store market has grown by about 20%. Independent pharmacies are one of the only parts of a highly cost-inflated health care system that is shrinking.

Why would that be, if their prices and service are better than the competition? And why would CVS be expanding, if it is pricier and the quality worse? The answer is that, like any monopolist, the chains have captured the underlying infrastructure of commerce.

Last February, I wrote a piece called “How CVS Became a Health Care Tyrant,” showing how CVS bought its way to dominance. CVS’s strategy isn’t oriented around offering better service, but to become a bottleneck for health care the way that Google is a bottleneck for the internet. The center of this strategy is their pharmacy network; CVS has 9,900 pharmacies, which is 26% of the drug store market nationally. Using its chain stores as a base, CVS added a large insurance company and a weird but important business called a pharmacy benefits manager (PBM). It became a “uniquely powerful platform,” even using the language of big tech to describe its strategy. (Walgreens too is mimicking big tech, a month ago it announced the launch of a data-driven advertising subsidiary.)

Here’s a brief list of CVS’s acquisitions over the last thirty years, with the non-pharmacy acquisitions important ones in bold.

1990, CVS buys 490-store-chain People Drug Stores in the mid-Atlantic
1997, CVS buys 2600-store-chain Revco D.S. across the midwest for $3.7 billion
1998, CVS buys 200-store-chain in Michigan for $1.5 billion
1999, CVS buys online drug store Soma.com
2002, CVS buys bought assets from bankrupt discount drug store chain Phar-Mor
2004, CVS buys 1260-store-chain Eckerd stores, plus Eckerd Health Services mail order and $1 billion mail order pharmacy benefits management business, plus three distribution centers from J.C. Penney
2006, CVS buys 700-stand-alone Sav-On and Osco drugstores from Albertson’s
2007, CVS buys Caremark RX pharmacy benefits manager for $26.5 billion
2008, CVS buys 521-store-chain Long Drug Stores for $2.9 billion, including Rx America, a PBM with more than 8 million members
2015, CVS buys Target corporation’s pharmacy business
2018, CVS buys Aetna health insurance for $69 billion

Today CVS is a giant. As the corporation’s 2018 annual report put it, they "engage with one in three Americans as part of their everyday activities.” CVS wields its buying and selling power on every side of the market. If you are an Aetna customer, CVS can nudge you towards its pharmacies and away from rivals, even if going to a rival drug store more convenient for you.

Then there’s Caremark, the PBM, which sets pricing terms for insurance companies, drug stores, and drug companies. A PBM is, as Mitchell notes, “the most powerful part of the healthcare industry that no one's ever heard of.” I described this business model last year; a PBM works for insurance companies as a sort of drug payment system. It keeps lists of drugs, what they do, and negotiates prices to pay to drug companies and reimbursement rates to pharmacies, taking fees for processing the payments from insurers to drug companies and drug stores. It’s a concentrated industry; just three companies control 70% of the PBM market, and CVS is one of those companies.

CVS owning a PBM is a lot like Amazon the retailer also owning its third party marketplace. CVS owns the entity that tells independent drug stores what prices they receive, even as it competes with them. And it exploits this power. In 2018, the Capitol Forum reported how CVS began telling independent pharmacies that their reimbursement rates for key medicines was going to go down, and then sent them letters asking if they’d be interested in selling their stores. Basically CVS would threaten their revenue, and offer to buy them out, a sort of offer they can’t refuse.

And what does CVS do with drug stores they buy? They often shut them down, and force people in rural or poor neighborhoods to travel a long way to get to the nearest CVS, or to use its specialty mail order pharmacy. There are no economies of scale here, there is just worse care, higher prices, and fewer bathroom breaks for the pharmacists who work at these monopolists.

CVS and Walgreens aren’t really even chain drug stores at heart, they are financial institutions set up to gain market power in the drug store market. The reason these firms didn’t well in the pandemic is because of institutional design. It’s not that their executives are evil. Starting with Ronald Reagan, policymakers structured public rules so that corporate executives focus on acquiring market power by lying about economies of scale to antitrust officials who in turn approve their mergers. That’s the game they are playing, and they are good at it. It’s just not a very useful one when it comes to Covid.

The Prayers to Bigness

And this brings me back to Amazon’s offer to Joe Biden. One would think that Amazon might introduce some competition into this market, since CVS and Walgreens are brittle and Amazon seems to show more competence. And yet there’s a whole lot less to Amazon’s announcement than meets the eye.

So why is Amazon making this promise to Biden? Mitchell, a savvy Amazon watcher, says there’s a political agenda at work. “You have a company that wants to avoid scrutiny and avoid being broken up in particular,” she said, “by telegraphing that it can do the government's job better than the government can.” Moreover, Amazon has big plans for the health care sector, entering the own pharmacy business by buying Pillpack.

Amazon’s dominance in pharmacies would move us further in the wrong direction, first killing the independents. It would take more care out of the hands of independent pharmacists, who are health care professionals, and put it into the hands of “another monopolistically minded corporation.” On a more practical level as Mitchell notes, what is Amazon actually promising? What can it actually help with? The vaccines need special storage so the they can’t be distributed easily, but even if Amazon could deliver them, it’s not like people can vaccinate themselves. “It’s a completely empty offer,” Mitchell said.

What Is to Be Done? Get Rid of Economies of Fail.

You go into a pandemic with the health care infrastructure you have, and ours happens to be quite concentrated and corrupt. But fortunately, we have this natural experiment. Where there are independent pharmacies, we get the benefits of community leaders owning the infrastructure needed by the community. Going forward, the right way to address the problem we have with chains is simple. If something is too big and complicated, make it simpler and smaller. On a Federal level, the Federal Trade Commission should break the PBMs off as independent businesses, so that there are no conflicts of interest in drug pricing.

Once there are open markets again that aren’t designed to destroy independent owners, we can start addressing the ownership of the chains themselves. On a state level, states can regulate who gets to own drug stores, and they can begin requiring pharmacies to be owned by pharmacists. Perhaps some bridge financing to help employed pharmacists actually buy the store at which they work would help. For those remaining at large chain stores, it’s important for pharmacists to have collective bargaining rights, so they can look out for safety standards.

Regardless, the great experiment in consolidation that is CVS, or BD, or any other large unaccountable firm with market power is over. They failed. No more economies of fail.

Competition Drives Vaccine Development: One of the most astonishing positive surprises of 2020 was the remarkable international effort to develop a vaccine, one spearheaded by the U.S. government’s savvy competition policy framework (and funding of the underlying mRNA research going back a decade). Olivia Webb wrote up how it happened for the American Prospect. The government “contracted with at least six drugmakers to manufacture vaccines. Within this diverse portfolio, it spread the risk by backing several different types of vaccines, in case one type of technology failed to come to fruition. The U.S. government also preordered enough doses to cover the U.S. population four times over, assuming all vaccines in the portfolio are eventually FDA-approved.”

The research funding went to a mix of big and small firms, meaning there was competition. In addition, the government structured a market with buying power. The net effect is that on January 11, 2020, China published the DNA sequence of Covid. Less than a year later, the “first semi trucks stocked with an approved, mass-distributed vaccine began rolling away from a plant in Portage, Michigan.”

It’s an astonishing success for government.

GameStop: The big story in finance over the past week is how a bunch of people rigging stocks on Wall Street are losing out to a bunch of people rigging stocks from Reddit, all centered around a corporation - GameStop - which is a video game retailer that has little value as a business. Normally, hedge funds can manipulate stock prices by making a bet and then releasing 'research’ on why the company is over or under valued. But now gamers broadly speaking decided to outplay the hedge funds.

Organizing on Reddit, a group of normal investors decided to take on the hedge funds, and so far, they have been driving up the price of the stock in a way that has caused hedge funds to lose billions. Using apps like Robinhood, these people can effectively bet with borrowed money, greatly magnifying their buying power. It’s a sort of weird populist Trading Places-type story, of corrupt insiders being tricked by outsiders using the same corrupt tricks.

So that’s the story. What I hadn’t considered is the role algorithms are playing in amplifying the conflict. This piece describes the dynamic.

Social media — which includes the curation algorithms of TikTok, Reddit, Robinhood, Amazon, Netflix, etc. — is designed not to do anything good for you (the consumer) but to keep you engaged on the platform you happened to launch from your phone. Nearly by definition, this leads you down a funnel into which it is very difficult to return. Once your TikTok feed is full of stock tips, it’s nearly impossible to get rid of them. Once you start following /r/WallStreetBets, you’re going to get the most sensational, clickbait posts bubbled to the top of your window: Go deep, Go narrow, Stay engaged. And do it in a market designed to take those few seconds of attention and execute on them….
That’s what’s new here. It’s not that this generation of daytraders has invented daytrading or learned how to use options for the first time or even swarmed a “story stock” (now we call them “meme stocks” I guess). What’s new is that an entire generation of investors is locked at home with little to do and a set of services on their phone designed to funnel them into the most extreme, most dopamine-driving financial ideas.

So GameStop is a combination of financial leverage and social leverage.

Will Biden appoint anti-monopolist Lina Khan to an antitrust slot? Over the past few weeks, I’ve been writing about Rohit Chopra, a key commissioner at the FTC, and what it means that he’s leaving the antitrust world to do consumer regulation. There’s a big open seat where he used to operate. As it turns out, according to the Capitol Forum, the most important anti-monopoly thinker of our time, Lina Khan, is reportedly gaining traction for a possible Biden spot in the antitrust agencies. Khan worked for Chopra at the FTC, and was a lead investigator for the House Antitrust Subcommittee. Biden choosing Khan would reflect an important signal.

There are a bunch of candidates up for the Assistant Attorney General slot at the Department of Justice, either floating their own names or having their names floated by Biden-world. The rumor is that Attorney General Merrick Garland wants Facebook attorney Susan Davies, and a large group of corporate defense bar types are throwing their hats in the ring. In the non-defense bar world, I’ve heard the names of ex-FTC official Jonathan Kanter, New York antitrust chief Chris D’Angelo, Texas trial lawyer Barry Barnett, and antitrust attorney Jay Himes. I have no idea how likely any of these names are, or how far along in the process they are. Biden-world seems random, and the Senate confirmation process seems opaque, so these are some very muddy waters.

Brexit Enables Private Tariffs: In response to the dissolution of the UK’s bond with the European Union, Mastercard is raising the transaction fees on credit and debt cards more than fivefold for British customers when they buy from European stores. According to the Financial Times, “From October 15, Mastercard will charge 1.5 per cent of the transaction value for every online credit card payment from the UK to the EU, up from 0.3 per cent at the moment. For debit card payments, the fee will jump from 0.2 per cent to 1.15 per cent.”

The EU had a cap on these fees, but Mastercard says this cap no longer applies because the UK is not in the EU. Visa hasn’t followed suite, but if the UK doesn’t crack down, it’s hard to see why it wouldn’t. Effectively, this is an imposition of a private 1% tariff by a payment network monopolist against European firms selling into the UK. One theme of this newsletter is how private monopolists are exercising the power formerly reserved to democratic nation-states. This move in the wake of Brexit offers a great example.

America Turns Against Big Tech: Remember the contact tracing apps? Last spring, when Covid was relatively new, big tech did a massive PR campaign. Google and Apple rolled out contact tracing app capacity, Amazon hired 175,000 workers in the midst of the downturn, and New York Governor Andrew Cuomo appointed Google’s ex-CEO Eric Schmidt to a blue panel commission to restructure New York state in the wake of the pandemic. Schmidt himself said that the public should be more grateful to big tech, and indeed, polling showed people were grateful.

The contact tracing apps turned out to be irrelevant or useless, Amazon has continued to grab market share, and Cuomo’s reputation as a Covid hero has unraveled. If democracy had a public relations budget, we’d never stop hearing about the failure of Google’s and Apple's contact tracing app strategy. Indeed, Americans have soured on corporate power as the answer to our social problems, and now 60% of Americans - with Republican voters representing stronger anti-monopoly sentiment than Democratic voters - want to break up big tech.

The Republicans Becoming an Anti-Monopoly Party? Well, no, not yet. Still, 17 Republican freshmen members of Congress wrote Biden and said they wanted to work together on enforcing antitrust laws against big tech monopolies. And influential House Republican Ken Buck fired a warning shot on big tech appointments in Biden-world, citing a left-wing anti-monopoly magazine’s reporting.

Congressman Ken Buck @RepKenBuck

Joe Biden should not be appointing someone who worked for Google and Amazon to lead the Antitrust Division. This is very concerning for those of us who want to hold Big Tech accountable.

prospect.orgBig Tech Critics Alarmed at Direction of Biden Antitrust PersonnelRenata Hesse, who has worked for Google and Amazon, is the leading candidate to run the Justice Department’s antitrust division.

Meanwhile, the Chicago School thinkers have been almost entirely silent on the problem of big tech censorship and market power. They can’t say they support the right of private monopolists to censor as they normally would, because they are Republicans and realize that Facebook censorship Trump will get them tossed from their position of social influence. For instance, influential libertarian Tyler Cowan, who writes 2-3 blog posts a day on every topic under the sun with a focus on big business, has said little that I can find on the controversy. The only one who really has said anything is Chicago School libertarian @RichardAEpstein in the Wall Street Journal, who tied himself into knots over his dislike over Twitter’s censorship of Trump, eventually coming around to public utility rules for big tech, before concluding that that wouldn’t work either.

Republicans will soon stop listening to the Chicago School, because Hamlet, while a great play, is an incoherent political agenda.

Uncomfortable hospital beds are a monopoly problem: I got this note from a reader:

“My wife and I recently had a new baby in SF. Everything went great, baby is healthy and our treatment was top notch. We’re really blessed, especially to have great insurance through my wife’s work. One thing that wasn’t great though was the hospital bed.
Not trying to be a complainer but even talking to the nurses at UCSF they remarked that all of their equipment is high tech but sometimes nothing works. It reminded me of Spaceballs “even in the future nothing works!”.
The hospital bed in particular first had a giant divot in the middle that gave my wife back pain. Turned out it wasn’t plugged in. Once we did get it plugged in it hummed the whole time using electricity, there were dozens of buttons and it kept inflating and deflating. It seemed way over engineered and expensive for something that wasn’t great. The bed is made by Hill-Rom which I think is one of only a couple hospital bed manufacturers in the United States. One of the opening lines from your book stuck with me about how US healthcare “overtreats and kills” patients. It seems the monopolies and overspending flows into medical and hospital equipment too!”

As it turns out, yes, uncomfortable hospital beds reflect a market power issue. The dominant firm in the space, Hill-Rom, was sued in 1995, 2006, and 2015 on antitrust charges involving excluding competitors from the standard hospital bed market. In 2015, it was described as a “serial monopolist” with 70-90% market share. Hospital market purchasing is consolidated, and hospital staff have very little choice over what they can buy, whether it’s syringes or beds. Monopolies are why we can’t have nice things.

Thanks for reading. Send me tips, stories I’ve missed, or comment by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues of BIG, a newsletter on how to restore fair commerce, innovation and democracy. If you really liked it, read my book, Goliath: The 100-Year War Between Monopoly Power and Democracy.

cheers,

Matt Stoller

BIG by Matt Stoller

How Monopolies Slowed the Vaccine Roll-Out…