Monday, June 02, 2003

Antitrust News: The District v. CVS

Saturday’s Washington Post reported on the District of Columbia’s efforts to force drugstore giant CVS to finance their competitors:

District lawyers argue that consumers were put "at risk of substantial harm" after CVS Corp. last year bought a competing pharmacy in Northwest Washington and promptly closed it down, according to a lawsuit filed yesterday.

The city filed the suit in Superior Court, alleging that CVS violated D.C. antitrust regulations when it purchased an Anchor Pharmacy in the Palisades neighborhood in March 2002.

The Anchor store was at 4883 MacArthur Blvd. NW, a few doors from a CVS store. When CVS closed its acquisition, it left a sign directing customers to its other location.

In a seven-page filing, lawyers for the Office of the Corporation Counsel allege that consumers are at risk "because CVS Corporation can profitably choose to reduce service or increase prices."

The city has asked the court to direct CVS and Anchor companies to "provide monetary incentives sufficient to induce the opening of a competing retail pharmacy."

A CVS spokesman reacted with outrage.

"The suit is totally void of merit," Todd Andrews said.

"Anchor made its own decision to close because the location was not profitable. We purchased the assets after they approached us to purchase them. We are deeply disappointed that the District's legal office decided to take this action."

City attorneys believe differently. They contend that the Anchor Pharmacy was not a failing store and that CVS figured it would be easier to buy out its competitor than defeat it through competitive business practices.

"Defendants monopolized or attempted to monopolize trade or commerce," states the lawsuit, which also names Anchor Pharmacies Inc. of Westminster, Md., and the CVS store on MacArthur Boulevard as defendants.

Here at CAC, our first instinct is to look at a case like this as a government effort to violate the property rights of private businesses. Obviously that instinct is correct here, but there’s a more precise message one should derive from D.C.’s actions. My colleague Donald Luskin suggests we need to view antitrust as a “systematic tax” on businesses which harm productivity. The D.C. case against CVS demonstrates exactly what Luskin means. After all, the District isn’t seeking to stop or undo CVS’s acquisition—the government only seeks a tribute payment to a potential competitor. When the government appropriates private wealth for a “public” good—in this case the good is “competition”—that’s a tax. And unlike traditional taxes, the antitrust tax is arbitrarily imposed.

More interestingly, the antitrust tax is often regressive in its application. Consider the worst-case scenario for CVS: They pay several thousand dollars to support a competing store. CVS is a $24 billion company with thousands of stores nationwide. The overall impact of a single antitrust judgment would be negligible in the long-run. In contrast, many recent antitrust cases I’ve dealt with involve far less wealthy defendants who receive far greater damage. For example, in one physician collective negotiating case the FTC pursued last year, one of the defendants—a management consultant for the doctors—reported that his business was off by almost one-third as a result of the antitrust settlement he was forced to sign. This consultant has nowhere near the financial impact on the economy that CVS does, yet he faced a far harsher penalty under the antitrust tax.

This is why the “small” antitrust cases matter a great deal to us at CAC. They don’t get the media attention that Microsoft or CVS gets, but they do far greater damage to America’s free-market system in the long haul.

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