Abstract
There have been allegations that the dominant meatpackers have conspired to raise beef prices in violation of §1 of the Sherman Act. In this article, I examine the market structure and find it to be conducive to collusion, which may be tacit or overt. The article analyzes the allegations of collusion in a partial conspiracy model. The empirical evidence appears to be consistent with the implications of the theory. The article also considers evidentiary problems for the plaintiffs as well as the pursuit of private damages and public sanctions.
I. Introduction
The protein markets—beef, chicken, eggs, lamb, pork, salmon, tuna, and turkey—are fraught with allegations of collusion in both the input markets and the output markets. Although many consumers have begun to shy away from red meat, beef continues to be of major importance. In 2020, beef consumption in the United States amounted to 27.6 billion pounds. 1 Beef is over a $123.3 billion industry. 2 Consequently, collusion in the beef market could impose substantial welfare losses.
The focus of this article is on the alleged price-fixing conspiracy among the largest meatpackers in the United States. 3 We begin with an overview of the structure of the beef industry and the conditions that are conducive to collusion. Based on that structure and the allegations in the antitrust complaints, we provide an economic model of collusion by adapting the dominant firm model.
In the next section, I review the structure of the beef market and provide some evidence that it is conducive to collusion among the four major meatpackers: Cargill, JBS, National Beef, and Tyson. In section III, I spell out the antitrust allegations that have been leveled against the four dominant meatpackers. Section IV provides an economic analysis of the alleged conspiracy. Section V examines some evidentiary problems with circumstantial evidence and the possibility of tacit collusion. Section VI offers some complications in estimating private damages. In Section VII, I close with some concluding remarks.
II. Structure of the Beef Market
Figure 1 provides a rough sketch of product flow in the beef industry. It starts with the cattle ranchers who feed and raise the cattle until they reach somewhere between 300 and 500 pounds. Cattle ranching is not concentrated. There are approximately 640,000 cattle ranchers, many of whom are quite small. 4 In fact, a large number are part-time operations that supplement the rancher’s income from his or her “day job.” Many of the cattle are sold from ranchers to stockers until the cattle reach 600 to 800 pounds. Once they reach this weight range, the cattle go to one of approximately 13,000 feedlot operators, many of whom are relatively small family-owned businesses. 5 The feedlot operators provide a specially designed diet until the cattle reach 950 to 1,300 pounds. At that point, the cattle are sold to meatpackers who slaughter the cattle and cut the carcasses into various cuts of beef: steaks, roasts, brisket, and other consumer products.
Supply chain in the beef market.
While the first two stages in the supply chain are not concentrated, the meatpacking stage is highly concentrated. The four major meatpackers—Cargill, Inc., 6 JBS, 7 National Beef Packing Company, and Tyson Foods Inc. 8 —account for some 80 to 85 percent of beef processed and sold. The remaining 15 to 20 percent is supplied by approximately 700 much smaller meatpackers. 9 The product, which is known as boxed beef, is then sold to grocery chains, institutions, and restaurants for resale to consumers of beef. Obviously, the customers of the meatpackers are not concentrated.
Allegedly, collusion has occurred at the meatpacking stage of the supply chain. 10 According to the complaint, there are several industry characteristics that are conducive to collusion. First, meatpacking is highly concentrated as only four meatpackers account for as much as 85 percent of the market. This makes collusion—overt or tacit—more manageable than it would be in an unconcentrated industry. 11 The smaller the number of colluding firms, the easier it is to reach agreement and to monitor adherence to the collusive agreement.
Second, beef is a commodity, that is, there is little—if any—product differentiation across meatpackers. This makes the terms of a collusive agreement easier to articulate and to monitor. Third, there are significant barriers to entry. This is crucial if the cartel success is to be long-lived. With significant entry, the share of total sales going to the cartel will shrink along with the collusive profits. 12
A successful cartel will earn economic profit, which outsiders will find attractive. So high entry barriers are essential for prolonged success. There are a large number of fringe meatpackers, but they have not attained the size necessary to challenge the big four. Fourth, the demand for beef is inelastic at competitive prices. This makes collusion attractive since relatively small reductions in output lead to substantial increases in price and profit. Fifth, the cartel members have frequent opportunities to get together at trade association meetings to reach agreement on their collusive strategies.
This collection of industry characteristics has the potential to make collusion among the dominant meatpackers profitable. Since collusion is unlawful under §1 of the Sherman Act, 13 however, it does not follow that overt collusion is inevitable. Although it may be tempting, the companies may have resisted overt collusion. It will be up to the plaintiffs to prove that the defendants did, in fact, collude rather than compete.
III. Antitrust Allegations
The central feature of the alleged conspiracy was an agreement among the defendants to restrict the quantity of slaughtered cattle. 14 By restricting the volume of beef going into the U.S. supply chain, the defendants were able to raise the price of beef to all direct buyers. 15
The Supreme Court’s Socony-Vacuum
16
opinion makes it clear that agreements to curtail output are per se violations of §1 of the Sherman Act. Since reducing output necessarily increases the price, such agreements invariably lead to a reduction in consumer welfare. In Socony-Vacuum, the defendants wanted to reduce the quantity of gasoline flowing into the spot market. Their purpose was to bolster the spot market price since that would bolster the prices charged to independent jobbers under contract with the defendants. Thus, the majors intervened in the spot market by purchasing gasoline from independent refiners to keep these volumes from reducing the spot market price. The Court found this conduct offensive. In a sweeping condemnation, the court ruled as follows:
Under the Sherman Act a combination formed for the purpose and with the effect of raising, depressing, fixing, pegging, or stabilizing the price of a commodity in interstate or foreign commerce is illegal per se.
17
Consequently, collusive agreements to curtail output to raise prices violate §1 of the Sherman Act. 18 In the beef litigation, the defendants arguably reduced the production of beef to raise the price that they could charge and thereby earn more profit. If the defendants are found guilty of a §1 violation, they will be vulnerable to corporate fines of up to $100 million per offense. Some individuals may find themselves in prison for up to ten years and fined up to $1.0 million. 19 In addition, the wrong doers will be vulnerable to private damage suits under §4 of the Clayton Act. 20
IV. Economic Analysis of Alleged Conspiracy
The plaintiffs allege that the four dominant meatpackers conspired to raise the price of beef by restricting its production. The alleged conspirators account for 80 to 85 percent of the beef entering the U.S. supply chain. The other 700 remaining meatpackers account for the remaining 15 to 20 percent. There appear to be no allegations that the smaller meatpackers joined the conspiracy. Assuming this to be the case, the challenge for the colluding firms is to maximize cartel profit subject to the unconstrained conduct of the non-colluders. This cartel strategy can be illustrated with the aid of the cartel variant of the dominant firm model.
In Figure 2, the demand for beef is represented by D while the supply of the non-colluders is Sn. The demand facing the cartel, which is denoted as d, is equal to the difference between D and Sn at each price. The corresponding marginal revenue is labeled mr. The combined marginal cost of the colluders is shown as Sc.
Alleged collusion in the beef market.
To maximize cartel profits, the cartel output is found where mr equals Sc, which is Qc. The corresponding price will be P1, which will induce the non-colluders to supply Qn. The sum of Qc and Qn will equal Q and the market will clear.
As we can see in Figure 2, the cartel members can raise price above the competitive level by restricting their combined output. 21 The impact is mitigated to some extent by the unconstrained output decisions of the non-colluding meatpackers, but the impact is not eliminated entirely.
If the Big Four acted in concert as alleged, they would enjoy significant monopoly power. To get a sense of this, we adapt the Lerner Index of Monopoly to the case of a partial conspiracy. 22
The Lerner Index provides a relative measure of a monopolist’s ability to deviate from the competitive price:
where PM is the monopoly price and PC is the competitive price. It can be shown that the value of
The Lerner Index of Monopoly can be adapted to the alleged conspiracy in the beef market in two ways. First, we can treat the four large meatpackers as one since they allegedly are acting in concert. Second, we can recognize that there are non-conspirators that may behave as a competitive fringe. Under these circumstances, it can be shown that the Lerner Index can be written as,
where s is the combined share of the colluding firms, η is the elasticity of the market demand, and
Estimates of market shares for the alleged colluders are in the 80 to 85 percent range. If we assume that the elasticity of demand for beef is equal to one and the fringe elasticity of supply is also equal to one, then the value of the Lerner Index will be in the 0.67 to 0.74 range.
23
These values of
V. Evidentiary Problems
Edward Chamberlin introduced the oxymoron, “tacit agreement” in The Theory of Monopolistic Competition. 24 He explained that sophisticated people in business recognize that a fair share of the maximum industry profit is more than an equivalent share of any other profit. As a result, he suggested that the incumbent and the entrant would find their way to the joint profit maximizing level, and the industry participants would divide the spoils in the same fashion. The Folk Theorem of modern game theory teaches us that the monopoly solution can be reached without any overt agreement. 25 This is bad news for everyone other than the firms since tacit collusion is beyond the reach of the Sherman Act.
Tacit collusion is not monopoly, so §2 of the Sherman Act is unavailing. By definition, tacit collusion does not involve an actual agreement, so §1 is similarly unavailing. No doubt, this is frustrating for the antitrust enforcers—the Antitrust Division of the Department of Justice and the Federal Trade Commission. But close-knit oligopolies have been a source of enforcement frustration for many years. 26 The bottom line is that plaintiffs in the beef cases need some evidence that Cargill, JBS, National Beef, and Tyson overtly, albeit perhaps clandestinely, agreed among themselves to restrict production to raise prices and consequently enhance their profits.
To prove that the economic results spelled out above are unlawful, the plaintiffs must prove with direct or circumstantial evidence that the alleged colluders actually agreed among themselves to pursue this course of action.
A. Direct Evidence
To be sure, the plaintiffs have pointed to some direct evidence. They have pointed to witnesses that will testify that they were privy to conversations with employees of the defendants that there were agreements among the defendants to restrict the slaughter volume. 27 It is not completely obvious how the jury will react to this testimony. It depends in part on the actual testimony and how the witness responds to cross-examination. In addition, it will depend on the scope of the testimony, that is, whether it indicts all of the defendants. To bolster the direct evidence, the plaintiff will turn to circumstantial evidence of collusion.
B. Circumstantial Evidence
From an evidentiary standpoint, the problem with circumstantial evidence is that it is often ambiguous on the question of collusion. 28 If the collection of circumstantial evidence is ambiguous, that is, equally consistent with collusion and competition, the plaintiff is not entitled to an inference of collusion. 29 No matter how much circumstantial evidence the plaintiffs produce, it will not carry the day if it is ambiguous. 30
For example, a Tyson meatpacking plant that accounted for 5 percent of industry capacity was closed due to a fire. This event has been offered as an explanation for slaughter reduction. Similarly, Covid problems in some plants have been offered as a reason for slaughter reductions. These problems may provide valid explanations. If they are found to be pretextual, however, they will support an inference of collusion.
One of the two largest meatpackers, JBS, has doled out some $53.0 million to settle some of their antitrust damage claims relating to beef. 31 Although this may arouse suspicion, it does not support an inference that JBS was actually guilty of participating in a beef cartel. It can be shown that buying one’s way out of a lawsuit may be sensible even if one is innocent. 32
In the absence of direct evidence—confession, email messages, voicemail, or recordings—the plaintiffs will have to rely on proof of parallel conduct and one or more so-called “plus factors,” which would tip the scales in favor of collusion. If the alleged conspirators restricted their outputs at the same time, this would be parallel conduct, which could further efforts to raise price and thereby earn higher profit.
C. Alleged “Plus Factors”
In their Complaint, the plaintiffs offered several “plus factors” to support an inference of collusion. As we will see, all of these “plus factors” are ambiguous on the issue of collusion.
1. Meatpacking Is Highly Concentrated
It is undeniable that meatpacking is highly concentrated. The defendants account for some 80 to 85 percent of the beef output. The rest is accounted for by a highly disaggregated fringe of relatively small meatpackers. Overt collusion is far more manageable with fewer firms. Unfortunately, the same is true of tacit collusion. Accordingly, high concentration is ambiguous on the issue of unlawful collusion.
2. High Barriers to Entry in Meatpacking
It takes $250 to $350 million and at least two years to build a state-of-the-art meatpacking plant. 33 Whether this is an entry barrier or not, 34 this tells us nothing about collusion among the existing meatpackers.
3. Beef Is a Commodity
The plaintiffs contend that beef is homogeneous. No doubt, some would dispute this contention, but for now, I accept this as true. Collusion is easier with homogeneous products because the firms have to agree on fewer things. With product heterogeneity, the firms would have to settle on a schedule of prices and equilibrium price differentials. This added complication makes collusion more difficult. Given the market structure in meatpacking, product homogeneity makes collusion—overt or tacit—easier. But it does not shed light on the question of unlawful, that is, overt, collusion.
4. Demand for Beef Is Inelastic
If the demand for beef is inelastic at non-collusive prices, collusion is more attractive than it would be if the demand were elastic. When demand is inelastic, a decrease in output raises both the price and total revenue. Since reducing output reduces costs, profit must rise. If the evidence shows that the demand for beef was inelastic during the cartel period, however, this fact supports an inference of no collusion.
A profit maximizing cartel will try to find the “sweet spot” where marginal revenue is equal to marginal cost. If the demand is inelastic, marginal revenue would be negative. 35 Since marginal cost cannot be negative, a negative marginal revenue cannot equal marginal cost.
5. Opportunities to Collude Were Plentiful
As in other industries, there are many trade association meetings throughout the year that provide frequent opportunities for the major meatpackers to refine their collusive agreement. The plaintiffs have provided ample documentation of frequent opportunities to get together, 36 but no proof that representatives of the firms actually conducted cartel business at any of the meetings. Once again, this “plus factor” provides no support for an inference of collusion.
6. Defendants Failed to Expand Output in Response to Lower Cattle Prices. 37
This business decision may have a sensible, competitively neutral explanation, but the defendants did not respond to lower input prices as simple economics would have suggested. It is not clear how to interpret this fact. If a cartel is maximizing profit and the price of a significant input falls, the cartel will find it profitable to expand output. Surely, the defendants are interested in higher profit. So, what is going on here? Whatever it is, it does not provide evidence of overt collusion.
The “plus factors” outlined in the Complaint are individually and collectively ambiguous on the existence of collusion. It may be true that the defendants colluded in the beef market, but the circumstantial evidence is not persuasive—at least, not in my view. To be sure, the defendants had “means, motive, and opportunity,” but that does not necessarily mean that a crime was committed. If more compelling circumstantial evidence cannot be found, the plaintiffs will have to rely solely on the direct evidence at their disposal.
VI. Antitrust Damages
Under §4 of the Clayton Act, some—but not all—victims of antitrust violations may sue the wrongdoers. 38
[A]ny person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor in any district court of the United States in the district in which the defendant resides or is found or has an agent, without respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney’s fee.
Read literally, there would be an enormous number of plaintiffs—some near, some far—in any price-fixing case. This, of course, would be unmanageable as it would swamp the judicial system. For this reason and possibly others, the Supreme Court has restricted just who “any person” may be. First, in its Hanover Shoe 39 and Illinois Brick 40 decisions, the Supreme Court limited antitrust standing in a price-fixing case to direct purchasers. 41 Thus, indirect buyers, input suppliers, employees, consumers of substitutes, producers of complements, and shareholders have been denied the right to sue for damages.
Accordingly, this leaves the grocery stores, restaurants, and institutions that bought directly from one or more of the defendants as viable plaintiffs. Those who bought directly from one of the non-colluding meatpackers would be “umbrella plaintiffs.” 42 The price paid by these buyers is higher than it would have been but for the collusion; these firms arguably have suffered antitrust injury. The issue of antitrust standing for umbrella plaintiffs under §4 of the Clayton Act is not entirely clear. In some courts, they have standing; in others, they do not.
An antitrust plaintiff also must have suffered antitrust injury, which the Supreme Court has defined for us:
antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful. The injury should reflect the anticompetitive effect either of the violation or anticompetitive acts made possible by the violation.
43
It is plain to see that the direct buyers have suffered antitrust injury since the price that they paid exceeds the price that they would have paid in the absence of the unlawful conduct.
A. Measuring Antitrust Damages
According to the Supreme Court’s instruction in Bigelow,
44
antitrust damages are measured:
by comparison of profits, prices and values as affected by the [antitrust violation], with what they would have been in its absence under freely competitive conditions.
45
In a price-fixing case, the correct measure of damages would be,
To estimate the antitrust damages in the beef litigation, the plaintiff can rely on business records for the actual price paid (Pa) and the actual quantity purchased (Qa), but the but-for price (Pbf) will have to be inferred from statistical evidence. The plaintiff may employ a reduced form price equation to “explain” beef prices:
where P is the price of beef,
The coefficient on Ct provides an estimate of the impact of the cartel, that is, the overcharge. 46
The use of multiple regression allows the damage expert to control for factors other than the collusion that influence the but-for price or the overcharge. This econometric effort will be complicated since the damage period spans at least seven years. In addition, there have been a substantial number of transactions during that period. To avoid charges of “speculation,” 47 however, the econometric challenges must be met.
VII. Conclusion
Soaring beef prices have alarmed consumers as household budgets are being stretched. The widening gap between the price of cattle and the price of beef has resulted in calls for investigations. In an expression of congressional concern, the CEOs of the four major meatpackers—Cargill, JBS, National Beef, and Tyson—were summoned to Washington to assure Congress that they were competing rather than collaborating in the beef market. In spite of their steadfast denials, several private antitrust suits are pending.
In this article, I have analyzed the structure of the meatpacking sector in the supply chain of cattle and beef. The structure is certainly conducive to collusion, but that alone is insufficient to condemn the four dominant meatpackers. It takes persuasive direct and/or circumstantial evidence. The plaintiffs have alleged both. It is difficult to evaluate the strength of the direct evidence, but I found the circumstantial evidence to be weak. By and large, the circumstantial evidence is equally consistent with cooperation and collusion. As a result, it cannot support an inference of collusion. If the cases do not settle, we will find out how the trier of fact views all of the evidence.
Footnotes
Acknowledgements
Many thanks go to Sara Bensley for advice on legal matters, and to Chris Prevatt and Derrell Peel for their advice on economic issues in the cattle and beef markets. Germán Bet, Javier Donna, and Richard Romano also gave me some useful advice about the Folk Theorem. Brianna Alderman, Peter Carstensen, and David Sappington provided some much-needed advice and suggestions on an earlier draft.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: The University of Florida has provided financial support for the work on this article.
Disclosure
I have not been retained by any party with an interest in the beef or cattle litigation.
2.
Id.
3.
The allegations of collusion among the major meatpackers in purchasing fed cattle are addressed elsewhere. See Brianna L. Alderman, Meatpackers Feed on Fed Cattle, 68 A
4.
See the 2017 Agricultural Census, Table 48.
5.
Id.
6.
Referred to as “CMS” in Complaint.
7.
Referred to as “JBS USA” in Complaint. The JBS entities include JBS USA, Swift Beef Company, and JBS Packerland, Inc.
8.
Referred to as “Tyson Foods” in Complaint. This includes Tyson Fresh Meats, Inc.
9.
This estimate was provided by Dr. Derrell Peel, Professor of Agricultural Economics and the Extension Livestock Marketing Specialist for Oklahoma State University.
10.
My focus is on the output market, but the real action may have occurred in the fed cattle market. See Alderman supra note 3.
11.
Collusion is possible in unconcentrated markets. For example, the collusive agreement in American Column and Lumber Co. v. United States, 257 U.S. 377 (1921) involved 365 firms.
12.
Dean A. Worcester, Jr., Why “Dominant Firms” Decline, 65 .
13.
15 U.S.C. §1.
14.
In re Cattle and Beef Antitrust Litigation, Case No. 0:20-cv-1319 (JRT/HB), at ¶101.
15.
In Congressional testimony, the CEOs of Cargill, JBS, National Beef, and Tyson denied that they conspired to raise beef prices or manipulate supply. They offered an assortment of explanations for the surge in beef prices and the widening gap between the price paid for cattle and the price received for beef. These explanations included market forces of supply and demand, labor shortages and transportation challenges, and production slowdowns.
16.
United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).
17.
Id. at 223.
18.
This makes economic sense since collusion on price and collusion on output are two sides of the same coin. Both lead to consumer surplus losses.
19.
These are all maximum penalties. In practice, the maximum sanctions are seldom—if ever—imposed.
20.
15 U.S.C. §15.
21.
The data on the number of cattle slaughtered by the alleged cartel members and the non-members are consistent with this economic analysis. While the cartel members curtailed their output, the non-members expanded theirs. Cattle and Beef Litigation at ¶¶14–16.
22.
See Abba Lerner, The Concept of Monopoly and the Measurement of Monopoly Power, 1
23.
It has been alleged that both demand and supply are inelastic, so the values of
24.
Edward Chamberlin, The Theory of Monopolistic Competition (8th ed. 1963) at 47.
25.
26.
In its Complaint in E. I. Du Pont De Nemours & Co. v. Federal Trade Commission 729 F.2d 128 (1984), the FTC tried to argue that manufacturers of gasoline additives—DuPont, Ethyl Corporation, Nalco Chemical Company, and PPG Industries—had a “shared” monopoly that violated the antitrust laws. It failed to convince the Court.
27.
Cattle and Beef Litigation at ¶¶119–26.
28.
According to Jacquemin and Slade, “it is impossible to distinguish pure tacit collusion from illegal price-fixing or other explicit cartel agreements. What matters for the empirical estimates is the outcome and not the cause of the noncompetitive pricing.” Alexis Jacquemin and Margaret Slade, Cartels, Collusion, and Horizontal Merger,
29.
In Matsushita Electric Industrial Company v. Zenith Radio Corporation, 475 U.S. 574, 588 (1986), the Supreme Court observed, “But antitrust law limits the range of permissible inferences from ambiguous evidence in a §1 case. Thus, . . . conduct as consistent with permissible competition as with illegal conspiracy does not, standing alone, support an inference of antitrust conspiracy . . . To survive a motion for summary judgment or for a directed verdict, a plaintiff . . . must present evidence ‘that tends to exclude the possibility’ that the alleged conspirators acted independently . . . [I]n other words, [the plaintiffs] must show that the inference of conspiracy is reasonable in light of the competing inferences of independent action . . . ”
30.
Roger D. Blair and Jill Boylston Herndon, Inferring Collusion from Economic Evidence, 15
32.
For an extensive survey, see Katherine Spier, Litigation IN
33.
In re Cattle Antitrust Litigation, Civil No. 19-cv-1222(JRT/HB) at ¶305.
34.
For Nobel Laureate George J. Stigler, a barrier to entry is “defined as a cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry.” Large capital requirements for building a state-of-the-art meat processing plant are not a barrier to entry since incumbent firms also incurred capital costs. See
35.
Marginal revenue is equal to
36.
Cattle and Beef Litigation at ¶216.
37.
Id. at ¶¶154–57.
38.
15 U.S.C. §15.
39.
Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968).
40.
Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
41.
There is an extremely limited exception for those who buy from the direct buyers on a fixed quantity, cost-plus contract. Kansas v. Utilicorp United, 497 U.S. 199 (1990). For an analysis, see Herbert Hovenkamp, The Indirect Purchaser Rule and Cost-Plus Sales, 103
42.
Roger D. Blair and Christine Piette Durrance, Umbrella Pricing: Antitrust Injury and Standing
43.
Brunswick Company v. Pueblo Bowl-O-Mat, 429 U.S. 477 (1977).
44.
Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251 (1946).
45.
Id. at 264.
46.
For an examination of damage estimation, see Philip Areeda, Herbert Hovenkamp, Roger d. Blair, and Christine Piette Durrance, Antitrust Law (2021) at ¶390–99.
47.
On speculative damages, see Roger D. Blair and William H. Page, Speculative Antitrust Damages, 70