This is the final instalment that looks at how monopolists destroy the competition. In this third post, we look at how the courts are used by monopolists, like RCA’s David Sarnoff, lawyer the competition to death. We also look at how a pharmacy giant uses its monopoly-power to reduce the revenues of its competitors and then offer to buy them. You really can’t make this stuff up. For the previous post on Amazon, click here and for the first post, on how Yelp and Foundem.com got “Googed”, click here.
#2 RCA: Lawyering the competition out of business
When it comes to technology, there is the ability to defend one's intellectual property in court. David Sarnoff, founder and CEO of RCA, used their superior legal firepower to destroy the competition. Edwin Armstrong, initially Sarnoff's friend, foolishly shared his technological innovations with Sarnoff only to be betrayed by him. As noted on PBS:
"In 1933, Armstrong, a friend of Sarnoff's since 1914, devised a new scheme for radio broadcasting called frequency modulation, or FM. Superior to amplitude modulation, or AM, radio which virtually all RCA broadcasting systems used, FM drastically reduced static and provided a much clearer sound. Armstrong proposed switching the RCA broadcasting system to FM; Sarnoff opposed this vigorously… Armstrong left RCA to start his own FM station. In 1948, he sued RCA and NBC, alleging a conspiracy to influence the FCC in limiting the development of FM radio. Sarnoff sent for his lawyers, and bludgeoned his former friend in the courts for six years. In January, 1954, despondent and nearly destitute, Armstrong committed suicide.” [Emphasis added]
As with Foundem, FM was superior technology to AM. FM Radio technology had the potential to share data, such as faxes - back in the 1930s. And like Google, RCA just used its superior firepower to eliminate the competition. Can you imagine the state of wireless technology had this technology been allowed to flourish? Only Allah (swt) Knows.
How could Islam stop such tactics? RCA was able to dominate the radio airwaves through US governmental protection of its patents. Armstrong was not the only victim of RCA's lawsuits. Initially, radio technology was like the Internet. Many companies sprung up to offer programming. RCA was able to suppress the competition through a “patent crackdown, suing smaller companies for patent infringement and refusing to sell radio components to dealers who did not exclusively carry RCA’s entire line of radios. Small independent radio producers united to attack the monopolistic practices of RCA…"
In Islam, when someone is sold something, they do whatever they like with it. The seller can’t restrict how that object is used. For example, if I sell you a chair, I can’t tell you how to use the chair. Similarly, I can’t do that if I sell you a book or a radio. For the latter, anyone is free to reverse engineer it. Consequently, Islam favours an open-source approach to innovation, which would eliminate IP-based monopolies like RCA. For more on intellectual property, click here.
#1 Pharmacy or Harmacy? CVS is given Control over its Competitors Revenues
CVS is not just a pharmacy, but a “pharmacy benefits manager” (PBM), who “reimburses other pharmacists for dispensing drugs." As noted in this Prospect article, authored by David Dayen:
“A PBM negotiates with drug companies over prices on behalf of health plans, and then pays back pharmacies when patients use their drug benefit to purchase the medications. PBMs set reimbursement prices at their discretion, through maximum allowable cost (or MAC) lists that vary from pharmacy to pharmacy. A pharmacist often doesn't know what reimbursement they'll receive on a particular prescription until the moment they ring up a sale. So CVS Caremark, manager of tens of millions of individual drug benefits and also a pharmacy, sets their competitors' profit margins, while gaining access to all their sales records." This led to CVS cutting their competitors revenues:
"when CVS/Aetna negotiations were first disclosed, independent pharmacists began to notice significant cuts to reimbursement rates for prescription drugs on plans managed by CVS Caremark, the nation’s second-largest pharmacy benefit manager (PBM).”
The article also notes that these pharmacists received inquiries from CVS "about buying their stores," which stated:
“I know what independents are experiencing right now: declining reimbursements, increasing costs, a more complex regulatory environment” [emphasis added].
CVS defends this practice by claiming “that their pharmacy acquisition program and PBM business are “completely unrelated” with “stringent firewall protections.” But as Dayen comments: “the solicitations, on the heels of actions by the parent company that threaten independent pharmacists’ livelihoods, are beyond suspicious." [Emphasis added]
Can you believe that Capitalism is this corrupt?
How can one private entity be put in charge of paying the revenue of its competitors? This crazy arrangement came to light during the CVS buyout of Aetna. Dayen then wrote: “The Maryland Department of Insurance confirmed to me that the complaints are under investigation. This could complicate the CVS/Aetna merger in states where insurance commissioners have the jurisdiction to review the deal.” He was wrong about the last part. It didn’t complicate the deal at all. Regulators “waved through the CVS-Aetna Merger." According to the Wall Street Journal:
“Judge Leon on Wednesday said the critics’ testimony ultimately was unpersuasive. He said the health-care markets at issue in the case “are not only very competitive today, but are likely to remain so post-merger.”
The WSJ went on to say the American Medical Association was against the merger, but what do doctors know about medicine? But the kicker is that the Judge “also said CVS is unlikely to use its strong market position in the management of pharmacy benefits to disadvantage companies that compete with CVS’s newly expanded health-insurance business.“
But we know that’s not true. This is the insidious of Capitalism. It’s not like a dictatorship that wins 99% of the vote and everyone knows that it’s a big joke. Rather, Capitalism gaslights you into thinking that there is civility, rules and governance. But it’s a jungle where the strong kill the weak and the anti-trust regulator signs off on it.
How could Islam stop such tactics? Islam would, as with technology, abolish drug-related patents. Most people (excluding Martin Shkreli) get this. How can you profit from people’s misery? More importantly, healthcare is a right in Islam. That being said, it is permitted for private pharmacies to exist. But private pharmacies are not the issue. The problem here is the privatization of the pharmacy benefits manager. As with Amazon, CVS is taking over something that is governmental in nature. The State should be the one reimbursing the citizenry for their medicine and healthcare-related expenses, not a private entity.