September 6, 2006

Is Wal-Mart a monopsony?

Ezra Klein thinks so, here is his argument:

Over the past couple of weeks, I've talked about Wal-Mart's near-monopsony powers, and why the perfectly rational and understandable decisions of the company may not, in fact, be in the wider interests of the country. Today, in the Wall Street Journal, there's a concrete example of how their monopsony works:
Recently, for example, the major studios opened negotiations to provide movies to be played on Apple Computer Inc.'s video iPod -- an important step toward Hollywood's digital future. Then Wal-Mart, the biggest seller of DVDs, disrupted the talks when it delivered a pointed warning to the studios not to give Apple a better deal for digital movies than the retailer gets for physical copies.
That, of course, is ridiculous. A physical digital video disc must be produced, printed, labeled, packaged, shipped, affixed with bar codes and pricing information, and shrink-wrapped before selling. This must be done for every single copy. To demand that a download of the actual data -- which requires none of the production, packaging, or delivery costs -- should be priced similarly is nuts. Yet Wal-Mart will likely get their way on this one. They account for more than a third of total DVD sales in the country. Without their cooperation, the movie studios are screwed. And so they'll raise the price on iTunes downloads to retain the retailer's favor.
Klein is pretty misguided here. If Wal-Mart had anywhere near the market power he thinks it wouldn't be selling DVDs at its cut-rate prices. It would be over charging consumers. This isn't the case. Klein's example does show that Wal-Mart is a profit maximizer that is trying to use its power to discourage new competition, but it isn't likely to work. There are just too many other places for people to buy DVDs, other than Wal-Mart (there are a lot more Blockbusters, Best Buys, etc in the US then there are Wal-Marts).Update: Wal-Mart could be a monopsony for unskilled labor, but it definately isn't for DVDs.