Less than a week before the end of her tenure as chairman of the Federal Trade Commission, Lina Khan and the Attorneys General of Illinois and Minnesota filed a federal lawsuit against John Deere, arguing that Deere “has throttled the ability of farmers and independent repair providers (‘IRPs’) to repair Deere equipment, leaving farmers wholly reliant upon Deere’s network of authorized dealers (‘Deere dealers’) for many key repairs.”
Khan fancies herself an economist and expert on industrial organization by virtue of a law degree and a deeply flawed 2017 article in the Yale Law Review. It can surprise no one, therefore, that throughout her tenure as FTC chairman, Khan consistently promoted arguments and economic “analyses” so silly that they were roundly criticized as such by a broad spectrum of actual economists.
The lawsuit gets better, or, rather, dumber:
Deere’s increasingly sophisticated agricultural equipment requires a software tool to diagnose and repair problems that relate to electronic functions, and only Deere has the information and knowledge to create this essential tool. By making this tool available only to Deere dealers, Deere forces farmers to turn to Deere dealers for critical repairs rather than complete the repairs themselves or choose an IRP that may be cheaper, closer, faster, or more trusted. Deere’s unlawful business practices have inflated farmers’ repair costs and degraded farmers’ ability to obtain timely repairs, which is especially critical in times of planting and harvesting.
Deere has monopoly power in the market for fully functional repair tools capable of enabling all repairs on Deere agricultural equipment. Only Deere has the requisite information and knowledge to develop a fully functional repair tool for Deere equipment.
As a consequence, Deere’s dealers are able to maintain a 100% market share and charge supracompetitive prices for restricted repairs, and Deere itself reaps additional profits through parts sales.
Let us begin with the argument that “monopoly power” in the repair market yields “additional profits” for Deere. Khan and the AGs cannot believe that buyers of Deere equipment are unaware of the structure of the repair market. Accordingly, the more expensive and difficult the prospective repair process, the less that buyers of Deere equipment will be willing to pay for that equipment. After all, suppose in a conceptual extreme case that such repairs were impossible; were something to go wrong with, say, a tractor recently purchased, the buyer would be out of luck, stuck with a useless tractor.
In that extreme case buyers of Deere equipment would not be willing to pay prices much higher than zero. The more general reality is that a repair market that imposes unnecessary (that is, inefficient) costs on buyers reduces the demand — the price that Deere can command — for its equipment. The Khan/AGs argument is wholly at odds with standard economic analysis. It is nonsensical because the central underlying premise is that manufacturers can increase their profits by making life more difficult for their customers. Seriously?
The Khan/AGs argument makes no sense for an additional reason. An equipment market comprising both current sales and future repairs is an example of what economists for decades have called the “successive monopoly” market structure. In the case in which the demands for equipment sales and repairs are roughly proportional — a very reasonable assumption in the market for agricultural equipment — the seller (in this case, Deere) can obtain all the “monopoly” profits from both sales and repairs merely by charging the profit-maximizing price at the sales stage of the two-stage market. “Monopolizing” the repair market would yield no additional profits. And so the central “monopolization/profits” argument advanced in the lawsuit makes no economic sense at all.
For obvious reasons, neither Khan nor the AGs bother to ask why it might be efficient for Deere to organize its dealer/repair market as it has. One problem that Deere must address is that of intellectual property protection: One risk of allowing independent repair operations and the equipment buyers themselves to perform some sophisticated software functions is the erosion of the value of intellectual property as embodied in the attendant software. The effect of such erosion would be a reduction in investment in such intellectual property, a resulting reduction in the quality of (the services provided by) the equipment, and an economic loss for both the producers and the consumers of the equipment.
And then there are the warranty and brand name problems. Suppose that an independent repair service or an equipment owner perform a repair incorrectly, or suppose that the reason for an ensuing problem is complex and not easily attributable to either Deere or to the independent repair process. What would happen with any applicable warranty? Is it the position of Khan and the AGs that Deere should honor the warranties regardless? If Deere were to do so, that would increase production costs, and therefore prices; would that make Deere’s customers better off?
Were Deere not to honor warranties in that case, can anyone doubt that a series of class-action lawsuits would ensue? Again, cost and prices would rise, and every party — except the lawyers — would be made worse off. The value of the Deere brand name would decline. The upshot of the Khan/AG argument is a market smaller, with lower quality equipment, and higher costs and prices.
Beware lawyers and AGs — politicians — pretending to be economists. In the case of the AGs in particular, with ambitions for higher office, incentives are particularly perverse. (That is why AGs and prosecutors generally ought not be elected or allowed to run for higher office.) The Illinois and Minnesota AGs are playing politics for applause from their agricultural constituents, with zero understanding or regard for what they are doing to the larger market for equipment. Their arguments are perverse.
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