Cincinnati-based grocery retailer Kroger has decided to stop carrying “free” alternative weekly newspapers like the Nashville Scene and Out & About Nashville in its stores:

Steve Cavendish on Twitter

Hey, @kroger – why are you kicking community publications out of your stores? https://t.co/tBHfIx7Z1y

According to the Colorado Springs Independent, one such alt-weekly, Kroger was initially mum on the decision, but a division spokesperson reportedly told the Memphis Business Journal last month that the company is foregoing alt-weeklies “because more publications continue to shift to digital formats, resulting in less customers using the products.”  This is now the company line:

Kroger on Twitter

@scavendish We appreciate your feedback and apologize for any inconvenience this may cause you. We are removing these publication racks from our stores because more publications continue to shift to digital formats, resulting in less customers using these products.

Some alt-weeklies, however, aren’t buying the “print is dead” explanation:

Bruce Schlabaugh, the publisher and advertising director for Life After 50, says his company distributes several thousand papers a month–or about 15 percent of its copies–at King Soopers stores [one of Kroger’s subsidiaries] in El Paso and Teller counties.

“One of the lucky things for Life After 50 is that seniors still love to read newspapers, so they’re going through this paper right and left,” he says.

Like the Indy, Life After 50 plans to make up the difference by finding new locations.

“It’s just irritating to have [Kroger] say, ‘Well, print’s dead; however, we’ll keep the Gazette there, we’ll keep The Wall Street Journal,” Schlabaugh says.  “They’re kind of beating up on the free papers, kind of unfairly, I would think.”

Virtually every print-format product is funded, in large part, by advertising revenues (and thus no alt-weekly is “free”–someone is paying for it, even if the end consumer doesn’t).  The price that a print publication can charge an advertiser correlates positively with circulation numbers.  Advertising revenues in media are already at historic lows, so Kroger refusing to allow alt-weeklies to set up shop inside a store hurts the alt-weeklies even more:  if circulation numbers decline, then so does the price that a particular publication can charge its advertising partners for space on a page.  Lower prices for advertisements means fewer revenues for the publication, leading to feature reductions, staff layoffs, and other quality-reducing measures, which then reduce circulation further, which then reduces advertising prices further, and so on and so on in a death spiral until the publication folds.

Poynter Institute analyst Rick Edmonds offered the Independent an alternative take:

“This applies especially to convenience stores, but I think to some extent to grocery stores as well. . . . In the course of managing their business, they’re very, very detailed about sort of seeing what works, what people take–what people buy, especially,” Edmonds says. “The convenience stores, for example, decided some time ago that having a great big magazine rack there just wasn’t the best use of that space.  Better to sell more Cheetos and that kind of thing.”

Retailers with a large capital asset that will depreciate and wear and tear over time, like a building, want to maximize the return on their investment by using the space inside to move inventory that will generate the highest total profits.  (This is why Kroger created the Kroger Plus card, to track what people are buying regularly.  Sorry, it’s not just about giving you a discount on select yellow-tagged products; that discount is simply the price Kroger is willing to pay to be able to keep track of what people are buying.  If Kroger knows what products people buy the most, and it knows what, among those products, generate the highest profits, Kroger can take steps to ensure that it always has those products on the shelf.)  I haven’t seen the numbers, but “free” alt-weeklies, although distributed in grocery stores under a contract with a company called DistribuTech, likely earn Kroger slender profits relative to mainstream dailies or, according to Edmonds, Cheetos.  That is the easy part of the economic analysis.

But antitrust law has been on my brain lately (see here and here), so, when I first started reading about Kroger’s decision, I wondered what antitrust implications, if any, it raised.  That is especially true where, as here, this story uses so much rhetoric that pits little-guy alt-weeklies against a mega-retailer, complete with a slick infographic telling us how much money Kroger makes:

This hustling entrepreneur vs. mustache-twisting fat-cat trope is common among left-leaning antitrust commentators, and, at least anecdotally, virtually every alt-weekly heavily skews ideologically progressive.  So there are no surprises there, and they shouldn’t be faulted for their default posture.

Prior to a string of Supreme Court cases beginning in 1977, antitrust law policed corporate bigness for the sake of policing bigness.  In the first half of the twentieth century, it was just sort of assumed that a firm with a lot of market share or market power was necessarily harmful to consumers.  That’s about all most people know about antitrust law.  In that string of cases starting in 1977, however, the Court recognized that our understanding of economic principles had matured from, and analytical methods had become more sophisticated since, antitrust’s fledgling days, and courts today thus engage in more rigorous economic analysis to adjudicate whether anti-competitive conduct actually stifles competition or reduces consumer welfare.

Despite that shift, most progressives, up to and including some of the 2020 presidential hopefuls in the Democratic Party, either don’t know about, ignore, or outright reject how courts have been applying antitrust law in the last four decades in favor of more populist, classical trust-busting narratives.  Breaking up big tech companies because of their dominance in certain markets like online advertising/paid search, content, etc., has also become de rigueur across partisan lines in recent years.  So, again, it’s not surprising to see the David vs. Goliath framing here.  But I digress.

One type of superficially anti-competitive conduct that can sometimes give rise to antitrust liability is the exclusive-dealing agreement, and that’s what came to mind when I read about Kroger’s decision.  To be clear, I am speculating and navel gazing here, and I have no idea what actually compelled Kroger to drop alt-weeklies.  But suppose that Kroger and, say, Gannett News (a frequent bête noire of alt-weekly editors and publishers) agreed that Kroger would carry only Gannett’s daily newspapers in its stores, to the exclusion of all area alt-weeklies.

Unlike a horizontal agreement among market competitors, exclusive dealing usually entails a vertical agreement between a manufacturer and a retailer of a particular good, which provides that the retailer will sell only the manufacturer’s product, to the exclusion of other manufacturers of the same type of good.  Exclusive-dealing agreements are governed by both Section One of the Sherman Act, 15 U.S. § 1, which prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce,” and Section Three of the Clayton Act, 15 U.S.C. § 14, which prohibits an agreement between a retailer and a manufacturer under which the retailer buys goods from the manufacturer “on the condition . . . or understanding that the . . . [retailer] shall not use or deal in the goods . . . of a competitor [of the manufacturer] . . . where the effect of such . . . contract for sale or such condition . . . or understanding may be to substantially lessen competition or tend to create a monopoly in any line of commerce.”

As I explained earlier this week, we know from economic modeling and practical, historical experience that some forms of agreements are so obviously harmful to consumer welfare that such agreements are per se illegal under federal antitrust law.  When this occurs, courts apply the “per se rule,” and defendants get no opportunity to argue or put on evidence to defend themselves from the claims.  Second, we also know from economic modeling and practical, historical experience that other types of agreements may have demonstrable pro-competitive justifications.  In these cases, courts apply the “rule of reason” and allow defendants to mount their economic defenses to the claims.

Exclusive-dealing agreements are inherently anti-competitive.  They reduce competition among supplier-manufacturers, raise barriers to market entry when new supplier-manufacturer entrants cannot get access to consumers in a market controlled by incumbent manufacturer-suppliers, and reduce end consumers’ choice of products when they visit a retailer to shop.

Yet exclusive-dealing agreements fall into the second category of anti-competitive conduct, in part because we know that, notwithstanding the potential harms that can arise, there are obvious pro-competitive justifications for the agreements.  For example, an exclusive-dealing agreement encourages innovation and entry into a market by virtually guaranteeing that a market for a particular good will exist, because the buyer (retailer) will always pay the seller (manufacturer) for the good, regardless of whether the price of the good subsequently fluctuates, and ensures that the retailer virtually always has a supply of the good for consumers.  In so doing, the exclusive deal helps offset the heavy fixed start-up costs that come with innovation and market entry, which would otherwise be sunk costs, and ameliorates the manufacturer’s transaction costs of having to find buyers for the stuff if makes, allowing it to deploy its capital to more productive uses, both of which reduce economic waste.  Exclusive dealing also eliminates the problem of inter-brand free-riding, an example of which would be a manufacturer investing in building custom shelves in a retail store to help promote its own products, but the retailer uses the custom shelves to sell another manufacturer’s goods, allowing the other manufacturer to free-ride on the first manufacturer’s investment.  Exclusive dealing also fosters loyalty in business relationships by, for example, incentivizing the retailer to actively promote the manufacturer’s brand.  Exclusive-dealing agreements therefore receive “rule of reason” treatment in American courts and frequently survive antitrust scrutiny.

As such, unfortunately for the alt-weeklies, the answer whether Kroger’s decision amounts to exclusive dealing in violation of antitrust law is, at best, “probably not.”  A Supreme Court case from 1961 lights the analytical path.

In Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961), the City of Tampa, Florida agreed to buy 225,000 tons of coal annually for 20 years from only the Nashville Coal Company, for use in the boilers of the city’s electric plants.  When the price of coal started to change, Tampa wanted out of the deal because it was on the hook for coal purchases for two decades.  It filed an antitrust lawsuit as a defense to contract enforcement, alleging that its own agreement with Nashville Coal Company restrained trade in violation of the Clayton Act.  The trial court granted summary judgment to Tampa, finding that the geographic market for coal was only regional, and thus the agreement had a substantial effect on competition in the coal market, and the Eleventh Circuit affirmed.  The Supreme Court, however, found reversible error in the lower courts’ failure to analyze the relevant geographical market, which it held was essentially “anywhere coal is produced,” because that’s where Tampa could have turned if it didn’t like Nashville Coal Company’s prices.  Through that lens, Tampa’s coal purchases amounted to less than one percent of the total market for coal, and any effect the parties’ agreement had on that market was negligible.  Tampa Electric Co. thus stands for the proposition that, to prevail on a Clayton Act claim that challenges an exclusive-dealing agreement, an antitrust plaintiff must demonstrate that the agreement affects a substantial share of a properly defined geographical and product market.

Alt-weeklies describe their product market as “community news.”  The Colorado Springs Independent, according to its own report, distributes over 4,000 copies of its papers every week in 14 King Sooper’s stores.  Kroger’s decision to drop alt-weeklies thus eliminates twelve percent of the Independent‘s total distribution at 855 retailers across three counties.  A twelve percent reduction in distribution may have a substantial affect on the Independent, but the Independent‘s distribution does not reflect the total market for community news in those three counties.  The total market is comprised of anyone who produces and consumes community news, including all the dailies and their customers, in that geographical area.  And as for the relevant geographical market, an interesting conundrum arises in the context of “community news.”  Is a community just a neighborhood?  A city?  A county?  A state?  Some alt-weeklies, like the Nashville Scene, cover far more than just the local community’s happenings, and thus the product may be consumed far outside the local community–perhaps even further diluting the share of the overall market affected by a hypothetical exclusive deal to sell only Gannett papers.

The fact that alt-weeklies publish, well, weekly also cuts against them in an antitrust analysis.  If community news is available seven days per week from other outlets, a reduction in one publication–or even several, as we have here in Nashville–on one day of the week is not likely to have a substantial affect on the overall market, even viewing the geographical scope of the market narrowly.  The total number of alternative community-news publications (including other “free” outlets, like blogs) dilutes the alt-weeklies’ share of the total market for community news that would be affected by a hypothetical exclusive-dealing agreement between Kroger and Gannett News.  Therefore, although Kroger’s decision may be painful for alt-weeklies, it appears to be a far cry from a problem that antitrust law can appropriately solve.

For the record, I don’t buy Kroger’s explanation, either, but not because I think anything nefarious is going on here.  I think the company line simply strains to creatively couch its decision to drop alt-weeklies–essentially a decision to use the space in its stores to sell more profitable goods–as a move that is good for its own customers, based on its customers’ ostensible news consumption habits.  Welcome to corporate marketing.

In the end, I maintain my position that the best way to ensure that media outlets survive is to “tell all the stories that are worth telling, regardless of [reporters’ and editors’] own views . . . [and] resist the temptation to use the newsroom as a personal fiefdom where they grind ideological axes.  Be thorough in [the] coverage and transparent about . . . motives, and [news outlets] will begin earning the trust of consumers again,” and the revenues that come with higher circulation numbers.  That is, alt-weeklies should rethink their coverage and try to become publications that Kroger and its customers cannot live without.