Brian White thinks that monopsony is a good thing because, in the case of Wal-Mart, the power of being the biggest, and in some cases the only, buyer of a wide range a products is allowing Wal-Mart to single-handedly stave off big, bad inflation.

From Blogging Stocks:

It seems odd that [Wal-Mart] could be responsible for single-handedly controlling prices in such a way that could be interpreted as controlling inflation….

Yes it does. Very odd. This is what happens when you lose sight of truly long-term consequences, like those likely to result from burning muscle to win a race.

In business there are four ways a retailer can reduce costs to the consumer: it can reduce its own profits; it can reduce its internal (primarily wages) costs; it can reduce its external (supplier) costs; or it can leverage technology to make its operations more efficient.

Wal-Mart squeezed a tremendous amount of savings using technology during its early days. And, it continues to collect marginal savings through its recent emphasis on environmental savings. That is all to the good.

Wal-Mart is not about to reduce its profits, because as Robert reminds me, it is the stock dividend, not the stock price, that the Waltons, and, by association the rest of the company, are focused on.

That leaves options two and three.

Can anyone imagine how Wal-Mart could cut its payroll further? I can’t.

What remains is probably what Wal-Mart is best at and known for: sucking the economic blood — profit — from its suppliers until they blow away like the dried husks flies caught in the spider’s web.

Vladimir Lenin foresaw all of this at the beginning of the 20th century. Frustrated that German workers would not rise up in revolution against their Capitalist oppressors, he realized that colonialism — the exploitation of workers and resources outside of Europe — had created an economic reality that externalized Capitalism’s true costs.

A century later we have replaced Imperial Colonialism with the Global Economy and the results are much the same.

While Science Fiction writers attempted to tag the 20th century as the Atomic Age, it was really the Petroleum Age. What we accomplished over the past years was literally fueled by hundreds of millions of years of accumulated decayed organic matter transformed into petroleum.

Despite the drill-and-pump crowd’s best exhortations, oil, as we knew it in the last century, is gone. Global demand by emerging nations (primarily China and India) have pushed us past $100 per barrel oil and we are rapidly closing in on $200, $300 and even $500 per barrel prices.

The global economy demands cheap energy. Even a Japanese super container ship burning the least expensive bunker oil, still burns oil. Getting from A to B costs more in 2008 than it did in 2007 and it will continue to become more expensive.

That means that suppliers can’t reduce delivery costs. And if Wal-Mart isn’t willing to pay a higher wholesale price based on that increase, then suppliers have two choices: cut costs elsewhere or go out of business.

Where can suppliers cut costs? They can reduce their end-product quality. They can reduce their employee wages. They can reduce their raw material expense. They can find technology breakthroughs that allow them to produce their goods more efficiently.

In a perfect world we all hope for the fourth option. And it does happen. But it’s much more likely that options one and two will dominate any savings to Wal-Mart. (Option three is subject to the same four criteria at a more basic level.)

That means that your cheap plastic crap will grow crappier and the people working to make the cheap plastic crap will look more and more like slaves

Think about it.

Jeff Hess: Have Coffee Will Write.

This entry was posted on Monday, June 16th, 2008 at 1155 by Jeff Hess and is filed under Customer Satisfaction, Economics, Groceries. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.