10. Oligopoly

10. Oligopoly President Harry Truman wrote, in the summer of 1949, to the Chairman of the House Judiciary Committee saYIng, There is no more serious problem affecting our country and its free institutions than the distortions and abuse of our economic system which results when . . . whole industries are dominated by one or a few large organizations which -:an restrict production in the interest of higher profits and thus reduce employment and purchasing power. The Chairman of this Committee, Representative Emanuel Celler of Brooklyn, New York, said a few Illonths later: There is a gro\ving tendency for a Big Three or Big Four to dominate an industry and throttle competition. . . . Where you have these companies that are large, there may be a semblance of competition~ but actually there is very little, because the Big Three or Big Four or Big Five or Six don't have to meet in a smoke-filled room to fix prices and production. One sets a rrice and the others follow. The effect of a conspiracy 0 administered price is present but there may be no actual agreement or evidence of a violation of the Clayton or Sherman Act.1 And shortly afterward, the head of the Antitrust Di vision told a Congressional committee: Monopoly power in this nation seldom shows up in the form of one huge corporation dominating an entire industry.

Instead it is to be found in those industries controlled by a 74 OLIGOPOLY 7S few large companies-the Big Threes or the Big Fours following policies and practices which avoid any real com petition among themselves and which at the same time enable them to maintain their dominant positions.2 These are representative expressions of .a type of criticism aimed at some industries in the last decade. One must note that this is a quite different attack from the one discussedin the previous chapter, on the "virulent growth" of monopoly power. It is not, here, a claim that industry is getting more concentrated; it is a claim that (whether it is getting more so or not) it is already too concentrated. The two criticisms are often ex pressed together and thus tend to get confused in peo ple's minds. But they must be distinguished carefully and considered separately. For it is conceivable that even if American industry is not getting more concen trated, it is nevertheless too concentrated. The differ ence is like the difference between whether a man looking at a Great Dane should say, "That dog is growing too fast" or "That dog is too large anyway."

The favorite source book of the people who say in dustry is already too concentrated in too few companies is the brochure put out by the Federal Trade Commission in 1949, already mentioned.3 The FTC found "extreme" concentration in aluminum; tin cans; linoleum; copper smelting and refining; cigarette manufacture; distilled liquors; plumbing equipment and supplies; rubber tires and tubes; motor vehicles; biscuits, crackers and pretzels; farm machinery; and meat-packing. It listed primary steel as an .example of "high though not extreme con centration," with the largest company owning about 29 per cent of the assets, the largest two 42 per cent and the largest ~ix about 63 ~ per cent. These \vho say that American industry is "too" con76 OLIGOPOLY centrated generally base this criticism on two grounds. Their idiom centers around two phrases: "identical ac tion" and "administered prices." Both of these are unquestionably commonplace characteristics of those American industries where a few companies do a large share of the business. Hardly anybody argues over the facts. The argument is over whether they are bad or not. For most industrialists who follow the soundtrack of this argument feel.that the "concentrated" industries are on trial for their virtues, not their vices.

"Identical action" is our old friend matched prices. Most businessmen charge the same price for the same goods at the same time and, when they change, they change en masse. More than that, they generally quote prices on the same basis or from the same place, and offer the same discounts and charge the same premiums. When anybody in the business,who is important, either cuts or raises prices, then, either the rest follow along, or else the company that made the change gets back into line. A company that charges more than its com petitors for the same goods will make money (for a time) but lose business, while a company that charges less will gain business but lose profits. The attack on business for quoting the same prices seems to have started in the early 1930's. The then Secretary of the Interior, Harold Ickes, wanted to build a dam and asked for bids from the cement companies. When the bids were opened, they were identical down to the penny and decimal point. To most businessmen this could mean severe competition. It also, however, looks like collusion. To Mr. Ickes it looked like col lusion or conspiracy. Resaid so quite loudly.

"Administered prices" take perhaps a little more ex plaining. In the stock market the price of United States OLIGOPOLY 77 Steel or General lVIotors varies from hour to hour and often from minute to minute. The specialists on the floor of the New York Stock Exchange who "keep the book" on these stocks vary their quotations instantly with the ebb and flow of incoming orders to buy or sell. This is an "auction market," and its prices might be called the opposite of "administered prices." The same is true of the prices of cotton futures on the N ~w York or New Orleans Cotton Exchanges or of grain futures on the Chicago Board of Trade. On the other hand, the price of automobiles does not vary from minute to minute or even from week to week. It is set by the makers,often before the first car of the new model comes off the assembly line, after they have carefully figured such things as cost, volume, competition, demand, and so on. When they have set it, they don't change it if they can help it. This is an "administered price."

Probably more prices are determined this way than on the auction basis. Railroad fares and electric power bills are computed ·on the same basis until and unless strong forces change them. Wage rates are fixed for a year or more. The governnlent itself, at Congress' behest, holds the support price or loan value of farm products at fairly steady levels. Criticizing "administered prices," Mr. John D. Clark, one of the three members of the President's Council of Economic Advisors, told a Congressional committee, Where three or four large firms control 70 per cent or 80 per cent of the market, each manager knows that market price will be materiallyaffected by his decision about the volume of his production, and he knows that each of the others has the same understanding. Each restrains his im pulse to grow when business is booming and keeps his ex pansion within limits which will protect the market price.

78 OLIGOPOLY When prices weaken, each reduces his production and em ployment rather than his price, confident that each of the others will do likewise. That may be prudent and it may be good business, . . . but it is not the practice of a competitive business . . . . . . there need be no collusion. Inherent in the adminis tered-price situation is the failure of the forces of competi tion to work effectively, and the remedy must be found by attacking the structure of the industry . . . 4 "Price leadership," also under attack, is a term easily understood. When an industry is under pressure either to lower or to raise prices, some leading firm takes the plunge and makes the cut or the increase. It isn't always followed. Usually it is and the rest of the industry goes along. Sonletimes a second-string company will make the first move. This, too, may be followed, or may not be. There have been dramatic cases, throughout the last,. decade, in such major industries as petroleum and steel, in which two astute managements have differed in judgment on major questions,when the pay-off was price.

Thus, for example, a few years ago, two leading oil com panies took different views of the prospective supply and demand for crude oil. One raised its posted price, the other lowered it. Within a few months one proved very right, the other very wrong. The gist of what the critics 'of the Big Three's and Big Four's claim is that these big companies don't really compete with each other, that most of the time they charge the same prices, that they do not always cut prices to follo,v down a shrinking market, and that they play "follow the leader." The Supreme Court has greatly eased the way for this idea. It has done this by greatly widening its idea of "conspiracy" as this appliesto the'Sherman Antitrust Act.

OLIGOPOLY 79 Section One of the Sherman Act forbids "Every con tract, combination in the form of trust or otherwise. . . or conspiracy, in restraint of trade or commerce ..." And Section Two says that nobody" ... shall ... com bine or conspire with any other person . .. to monopo lize." The Act was thus aimed at "any planned course of common action, understanding, agreement, combina tion, or conspiracy" in restraint of trade, as the Federal Trade Commissionhas recently worded it. It was originally aimed at the "trusts," as its title in dicates. When people said "trust" in those days it was no mere figure of speech or epithet as it usually is today. The "trust" was a legal device of the 1880's,as fashionable then as handlebar mustaches (but now as obsolete). - Men who owned stock in competing companies would tum the voting. rights in that stock over to a small group of "trustees." These trustees could then dictate the poli ciesof a whole industry, the usual aim being to hold prices steady and choke off ambitious price-cutting competitors.

These "trusts" were outlawed by the Sherman Anti trust Act, and in a decade or two went the way of the buffalo and the dodo. For a time, however, they were replaced by' such things as the "Gary dinners," at which Judge Gary, of the United States Steel Corporation, would announce what "Big Steel's" price policy would be. The repre sentatives of other steel companies present understood that that was to be their policy also-"or else-." " The Supreme Court long ago ruled. out such trans parent (though fragile) forms of conspiracy, in a number of cases such as that of "Trenton Potteries," 5 in which the competitors agreed to stick to "fair prices." But' it still considered legal the common practice in many in dustries in which some company usually has "price 80 OLIGOPOLY leadership" and competitors generally (though not in variably) follow the leader for obvious and above-board competitive reasons. For example, in the early 1920's the Department of Justice, under Attorney General Daugherty, claimed that if competitors charged the same prices or used the san1e methods of quoting prices, this was against the Sherman Act; but the Supreme Court said no, it wasn't.6 But the "new Supreme Court" soon began to show quite different feelings. It did so in two ways: by broadening its ideas of "conspiracy" and by taking the historic brakes off the use of "circumstantial evidence."

The dictionary defines "conspire" as "1. To make an agreement, esp. a secret agreement, to do some act, as to commit treason or a crime, or to do some unlawful deed; to plot together. . .. 2. To concur to work to one end..... " 7 As for the rule on "circumstantial evidence," it is known to every reader of murder mystery stories. It comes do",'n from centuries of Anglo-Saxon common law. It is the rule that evidence, to prove guilt, can have only one possible interpretation: guilt. It cannot have an alternative interpretation: innocence. The hero detective must, when he adds up the evidence in the last chapter, show not only that it proves a certain person guilty, but that the evidence cannot be added up or interpreted in any other way. There must be "no two ways about it." And that a man is "innocent unless proved guilty" of a crime is a commonplace and is common law, in English and American courts.

But in the Interstate Circuit case of 1939, involving an alleged Sherman Act violation, the Supreme Court said, "It is elementary that an unlawful conspiracy may be and often is formed without simultaneous action or OLIGOPOLY 81 agreement on the part of the conspirators." (This prompted three dissenting Justices to say that this "went far beyond anything this Court has ever decided.") 8 Says aNew York antitrust lawyer, ". . . similarity of action of competitors has never, standing alone, been sufficient to sustain a charge of conspiracy. Within the past decade, however, the Court has moved more and more in the direction of holding conspiratorial any com mon action engaged in by competitors in the same field. In the recent Gypsum case this was carried to an ex treme when the Supreme Court held that the .mere fact that several companies accepted similar license agree ments from a patentee, knowing that other companies had accepted licenses containing price control provisions under the same patents was . . . prima facie evidence of conspiracy . . . if applied to antitrust cases generally this rule of 'parallel action' would make the finding of conspiracy a matter of rote." 9 But it was in the .Tobacco case10 that the Supreme Court really gave the works to the Big Three's and Big Four's of American industry. Since then it is not merely the first or leading corporation in an industry, or an enterprising monopoly like the Aluminum Company of America, which can have the legal rug pulled out from under it by the new Sherman-Act interpretations. In any given industry not only the first but also the second, third, and perhaps (lawyers are not sure) even the tenth or twentieth biggest company can now, it seems likely, be caught in the drag-net of a "monopoly-power" charge.

The Tobacco case was in some sensesa confusing one. The three biggest cigarette companies, American T 0 bacco (Lucky Strike), Liggett &Myers (Chesterfield), and R. J. Reynolds (Camel),·were indicted in Kentucky in the tobacco-farming country, where a jury found 82 OLIGOPOLY them guilty, under the Sherman Act, of conspiring to restrain trade. The case did not go up to the Supreme Court on the conspiracy charge at all. It went up on the single question, already discussed in Chapter 8 of \vhether the possession of power to exclude competitors was enough to violate the Sherman Act. But the Su preme Court, as some antitrust .lawyers in New York put it, apparently "went out of its way" to discuss also the conspiracy charge, and to give the jury-finding its blessing. The Court stated, "This particular conspiracy may well have derived specialvitality in the eyes of the jury, from the fact that its existence was established not through . . . a formal written agreement, but through the evidence of widespread and effective conduct on the part of (the com panies) in relation to their existing or potential competitors · . . entirely from circumstantial evidence, the jury found · . . a combination or conspiracy. . .. No formal agree ment is necessary to constitute an unlawful conspiracy! . . .

The essential . . . violation of the Sherman Act may be found in a course of dealingsor other circumstancesas well as in an exchange of words. . . " And then the Court added: "With this background of substantialmonopoly [italics added], amounting to over two thirds of the entire domestic field of cigarettes · . . and with the opposition confined to several small competitors, the jury could have found from the actual operation of the [companies] that there existed a com bination or conspiracy among them not only in restraint of trade but to monopolize a part of the tobacco indus try ..." Friends and foes of business seemed to agree on what the Supreme Court meant in this case. Said a critic of American business, as it is now or ganized, "With revolutionary speed . . . the doctrine of the Sherman Act has lately been transformed. . . . When three companies produce so large a percentage of OLIGOPOLY 83 market supply, that fact alone is almost sufficient evi dence that the statute is violated. Ruthless. and preda tory behavior need not be shown. The actual elimina tion of small competitors is unnecessary. The big tobacco companies, in the final analysis, pursued a policy which increased the number of their independent com petitors and on balance strengthened [these competi tors'] positions. [But] parallel action, price leadership . . . and, above all, size-these are now key points to be proved . . . the content of an antitrust case has been enormously limited and simplified. . .. Pain staking search for scraps of evidence with a conspiratorial atmosphere are no longer necessary. . .. The immedi ate question is whether competitive reorganization . . .

can now be required for the numerous industries which, like the tobacco industry, are dominated by a small num ber of large units. Steel, automobiles, petroleum, non ferrous metals, chemicals, motion pictures, electrical equipment-most of the basic areas of the economy are organized along .lines which broadly resemble the pattern disapproved in the Tobacco case..." 11 Or in other words, as a corporation'lawyer in New York put it, this interpretation would mean "the wreck ing and rebuilding of the economic pattern in from one-third to three-fourths of our entire industrial econ omy ..." 12 There has to be a word for everything. If there isn't, someone invents one. Washington lawyers and econo mists have invented one for the situation of Big Three's, Big Four's, and so on, which goes in most American in dustry. They call it "oligopoly." It comes from the Greek roots OALYO~ meaning "few," as in "oligarchy,"

meaning "rule of the few"; and 1COAEW meaning "sell," as in "rnonopoly"-single seller. "Oligopoly" means "a few sellers."