06.11.15

Competing to smoke – when antitrust law undermines the public health

By | Leave a Comment

What if I told you that while one government agency is tasked with reducing the prevalence of smoking in the US, another is making decisions that aim to keep cigarettes cheap and accessible? Well, this bizarre outcome is exactly what happens when antitrust law is rigidly applied to the tobacco industry.
This week, with approval from the Federal Trade Commission (FTC), two of the three largest players in the US tobacco market will merge. Reynolds Inc, best known as the maker of Camel and Pall Mall cigarettes, will acquire Lorillard Inc, the owner of Newport, the best-selling menthol cigarette in the country. Together with Philip Morris USA, these three companies account for about 90% of all cigarette sales.
For antitrust lawyers, this scenario immediately triggers concern. The role of antitrust law, enforced by the FTC, is to promote competition and protect against highly concentrated markets where a few firms dominate (oligopolies). In simple terms, a market in which one player controls the production or distribution of a product (a monopoly) allows that player to maximize profits by raising prices and reducing production. The more players in a market, the more they have to compete for customers by offering a similar product at lower prices. In the case of cigarettes, where the products are very similar and advertising is heavily regulated, companies are forced to compete by lowering prices.
And in respect of almost any other industry, such antitrust laws and the FTC’s merger clearance process are critically important. By blocking mergers that result in a “substantial lessening of competition”, the FTC ensures that consumers continue to have access to basic goods and services like groceries, electronics or airline tickets at cheaper prices. With regards to the Reynolds-Lorillard merger, the FTC has only allowed the merger if the parties first divest (sell off) some of their other cigarette brands to another competitor (Imperial Tobacco Group).
But wait, do we want cheaper cigarettes?
The problem is, we are trying to achieve the exact opposite outcome when it comes to tobacco control. As well as lowering prices and making cigarettes more accessible, firms in a competitive market often have to find other ways to increase profits, such as expanding their markets to sell more products to more people. This leads to higher rates of smoking by youth and adults, and ultimately more deaths from tobacco use. This makes no sense when we are talking about a product that kills 6 million people every year, and is the number one preventable cause of death and disease in the US – a fact the FTC cannot consider. In fact, the law doesn’t allow the FTC to take into account any public health impacts, or even their economic harms (such as $170 billion in health expenditures or $156.6 billion productivity losses caused by smoking each year) when evaluating mergers and acquisitions in the tobacco industry.
At the same time, another arm of the US government, the Food and Drug Administration (FDA), is charged with regulating this exact same industry – but with the aim of protecting and promoting the public health by reducing tobacco consumption. The 2009 Family Smoking Prevention and Tobacco Control Act gives the FDA extensive authority regulate the import, manufacture, distribution, marketing and sale of tobacco products.
The absurdity of antitrust reasoning for tobacco
In this context, it is remarkable how irrational the principles of antitrust law appear when rigidly applied in a tobacco context, as reflected in the FTC’s reasoning. For example, the FTC recognizes that US cigarette producers will compete primarily through retail price reduction, and considers how to make sure they can effectively continue to do so.
Some of the FTC’s discussion seems to spit in the face of tobacco control policies. For example, they want to ensure that Imperial will be able grow its new brands by having:

  • “greater opportunity and incentive to promote and grow sales of the divested brands”
  • incentive to “reduce the price of the divestiture brands in order to grow their market share” and to “reduce prices and promote products in new areas
  • plans to reposition certain brands “and invest in the growth of the brand through added visibility and significant discounting.”
  • ability to “ensure [brands’] visibility at the point of sale.” (my emphasis)

One of the dissenting commissioners even mentions the FDA and the Tobacco Control Act, but only as a barrier to entry that negatively impacts competition (by limiting the ability of companies to grow through aggressive advertising) that must be offset.
Meanwhile, the Tobacco Control Act emphasizes the need to promote cessation as the only safe alternative to smoking. It also specifically states that youth are more price sensitive than adults and are particularly influenced by promotion practices that drastically reduce cigarette prices. It is well established, including in international law, that increasing the price of cigarettes is one of the most effective means of reducing tobacco consumption. The inherent inconsistency between the tasks of the two agencies is clear.
Even if not all antitrust decisions relating to tobacco will necessarily be bad for public health, the fact that the FTC cannot even acknowledge public health is problematic – and can lead to decisions that undermine the public health goals intended by Congress in the Tobacco Control Act.
So what can be done?
At this point, you might wonder, does it make sense for these kinds of antitrust laws to apply to tobacco at all? Why not allow a concentrated market to drive up the costs of tobacco while reducing supply? And you’d probably be right.
In 1997, four of the largest tobacco companies suggested a partial exemption from antitrust regulation, which was strongly opposed by the FTC and others who worried about giving big tobacco so much market power. I won’t go into the details here, but others have argued for an exemption, showing that it would likely have a net positive effect on health, as well as monetary savings on health-care expenses for government.
Exemptions from antitrust law aren’t new, and already exist for certain segments of the insurance industry, Major League Baseball and labor unions. We also allow exemptions for monopolies arising out of intellectual property laws such as copyright and patents.
Alternatively, the FTC should be directed to issue decisions that promote competition only when that is consistent with protecting and promoting the public health. The FTC should be legally required to seek input from, or defer to, the FDA in decisions that impact the tobacco market. The FDA could then identify the key public health concerns that must take precedence and be addressed in the FTC’s merger assessment.
It makes absolutely no sense to have two arms of the US government seeking different outcomes when regulating the same market – particularly when that market is responsible for more deaths every year than AIDS, alcohol, car accidents, illegal drugs, murders and suicides combined.

Posted in FDA, Tobacco ; Tagged: , , .

Comments are closed.

Stay Informed

Signup for our mailing list and stay up to date on the latest happenings at The O’Neill Institute

Or sign up for our RSS Feed

The views reflected in this blog are those of the individual authors and do not necessarily represent those of the O’Neill Institute for National and Global Health Law or Georgetown University. This blog is solely informational in nature, and not intended as a substitute for competent legal advice from a licensed and retained attorney in your state or country.

See the full disclaimer and terms of use.