Potatoes With All the (Price) Fixins
Americans love potatoes. The U.S. is second to only China and India in annual tons of potatoes consumed. Taking population into consideration, we’re basically a country of Hobbits.
Another thing Americans love? Convenience, especially when it comes to the kitchen. Thus, the frozen potato industry is large and in charge in the U.S. The market encompasses a variety of products from french fries to tater tots to hash browns — and everything in between. The potato game is valued at approximately $68 billion annually, making it a significant segment of the food industry.
Where there is so much money at stake in a market with a few big key players, there’s always a risk of anti-trust violations. The frozen tater oligopolies have just been slapped with a lawsuit for allegedly conspiring to fix prices. Buckle in, because this legal battle is over no small potatoes.
An Anti-Competitive Market
The market for frozen potato products is characterized by several distinct features that make it susceptible to anti-competitive practices such as price-fixing.
Firstly, the industry is highly concentrated, with only a few major sellers dominating the market. Specifically, four companies — Lamb Weston, McCain Foods, J.R. Simplot, and Cavendish Farms — control 97% to 98% of the market. We’ll call them the Big Four. This concentration gives the Big Four significant market power and makes it easier for them to coordinate actions, such as price increases, without fear of losing customers to competitors.
Secondly, the market has high barriers to entry, which deter new competitors from entering the industry. One barrier is the fact that in order to enter the frozen potato game, you need to set up production facilities, which require substantial capital investment and time to build. On top of that, you need to have established relationships with potato growers, particularly in key growing regions like the Pacific Northwest. The Big Four have all of this, but it takes time to establish if you’re new on the playing field. Such barriers protect the dominant players from new entrants who might otherwise disrupt the market by offering lower prices or innovative products.
Additionally, the market's demand is inelastic, meaning that consumers do not significantly reduce their purchases in response to price increases. For example, french fries are staple items for many food service establishments, and there are few substitutes available that can match their convenience and popularity. This inelastic demand allows companies like the Big Four to raise prices without experiencing a substantial drop in sales volume, further facilitating coordinated price increases.
Finally, the buyer side of the market is fragmented, with numerous small and medium-sized purchasers such as restaurants, grocery stores, and food service distributors. This fragmentation weakens the bargaining power of buyers, making it more difficult for them to resist price increases imposed by the dominant sellers. Collectively, these market characteristics create an environment where collusion among the few major sellers can thrive, leading to higher prices and reduced competition.
Price Hike Patterns
In theory, this kind of market concentration would allow the Big Four to exert substantial influence over pricing and production within the industry. And indeed, price hikes are just what happened.
In a span of about a year around 2021-2022, each of the Big Four announced price increases for their products. In February 2021, McCain Foods initiated a price increase, which was quickly mirrored by J.R. Simplot and Cavendish Farms.
This sequence of events marked the beginning of a series of lockstep price hikes that would continue over the following years. On February 11, 2022, Lamb Weston announced a significant price increase set to take effect in April, targeting both battered and non-battered frozen potato products. Just a few days later, on February 15 and 16, J.R. Simplot, McCain, and Cavendish Farms followed suit, announcing similar price increases.
By April 2022, restaurant owners began to report these simultaneous and uniform price hikes from all major suppliers, raising suspicions of collusion. Since this is a big legal no-no, it’s no shock that lawsuits were filed.
Tater Companies Taken to Court
Last week, a Reading, Pennsylvania-based company called Redner’s Markets took the Big Four to court. Redner’s operates as a retail grocery store chain, providing a variety of food and household products to consumers — including, of course, frozen potato products.
Redner’s claimed that it purchased frozen potato products at artificially inflated prices due to the alleged price-fixing conspiracy among the Big Four. The retailer brought a class action lawsuit in a federal court on behalf of itself and all other similarly situated people or companies that purchased frozen potato products directly from the Big Four during the time in question.
The complaint alleges that these defendants conspired to fix the prices of frozen potato products, such as french fries, hash browns, and tater tots, in violation of the Sherman Antitrust Act. The Sherman Act is the primary U.S. antitrust law that prohibits business activities considered to be anti-competitive, such as price-fixing. Section 1 of the Sherman Act outlaws any contract, combination, or conspiracy that unreasonably restrains interstate and foreign trade.
According to Redner’s attorneys, the announcements of price increases made by each of the Big Four were closely aligned in timing and magnitude, reinforcing the perception of a coordinated effort among the companies.
No Alternative Explanation
Of course, there are other reasons why prices could increase uniformly across a market that have nothing to do with collusion. Inflation or the cost of labor can sometimes cause prices to rise across an industry. But the plaintiffs rebuffed these other explanations, pointing to data on the potato market during the period in question.
According to the complaint, input costs for the defendants peaked around the third quarter of 2022 and then declined substantially. However, from July 2022 to July 2024, the prices for frozen potato products increased by 47%, even as input costs fell by about 33% during the same period.
This discrepancy between declining input costs and rising product prices is used to support the allegation of price-fixing among the defendants, suggesting that the price increases were not driven by higher production costs but rather by collusion to maintain high prices and profit margins. The lawsuit argues that in a competitive market, such a significant drop in input costs would typically lead to lower product prices, but the defendants' coordinated actions prevented this from happening.
Redner’s claims that the uniformity and timing of these increases across the leading processors, despite declining input costs, suggest a deliberate strategy to maintain elevated prices and profit margins, to the detriment of competition and consumers.
Market Insiders Chime In
In their complaint, Redner’s also points to opinions from analysts and industry insiders to support their position. These experts highlight a significant shift in competitive dynamics. The profit margins achieved by the Big Four have apparently been unprecedented. Such margins are atypical in a competitive market, where price competition typically pressures profit margins downward. Instead, according to these experts, the sustained high prices and profit margins suggest a lack of competitive pressure among these dominant players, reinforcing suspicions of collusion.
The plaintiffs also point out that former executives and directors from the frozen potato products industry have openly acknowledged a prevailing lack of incentive to compete aggressively for market share among the Big Four. These executives have described an environment where the focus is not on undercutting competitors to gain market share, but rather on maintaining high profit margins through coordinated pricing strategies.
A former vice president at Lamb Weston notes that this tacit understanding among the companies to "behave themselves" and avoid aggressive competition has led to unprecedented profit margins. A former senior director at McCain Foods recounted being advised against pursuing additional market share by competing on price.
This environment, as described by insiders, creates a "nirvana" for the largest market participants, where the focus shifts from competing on price to maintaining profitability through coordinated actions. Redner’s claims that these admissions suggest that the companies are more interested in preserving the status quo than engaging in price wars, which could erode their profitability. Such behavior effectively stabilizes the market at elevated price levels, to the detriment of consumers and smaller competitors.
Concealment Efforts
Redner’s also goes on to claim that the Big Four aren’t just colluding, they’re trying to cover their tracks. The complaint claims that the leading companies have made a deliberate strategy to obscure potentially incriminating communications regarding competitor pricing.
According to the complaint, Lamb Weston instructed its managers to use text messaging rather than email to discuss sensitive information about competitor pricing and business intelligence. This directive was reportedly aimed at avoiding the creation of email records that could be easily discovered during an antitrust investigation. By using text messages, which are often perceived as more transient and less formal than emails, Lamb Weston sought to minimize the risk of leaving a paper trail that could expose their alleged involvement in price-fixing activities. The lawsuit suggests that this practice was part of a broader effort to conceal the conspiracy to fix prices.
It seems the Big Four may have found themselves in some hot oil. It’s still too early to tell whether the potato poohbahs will face serious scrutiny in court, get the case dismissed, or settle—so stay tuned in for how the case hashes out.
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- World's Biggest Oil Companies Settle Price-Fixing Scheme (FindLaw's Courtside)
