12. Monopolistic Competition

12. MonopolisticCompetition The historian of perhaps 1980 will report, among the intellectual oddities of the 1930's and 1940's, the phrase "monopolistic competition." In a sense, this phrase means nothing at all, like·"loveless love." Monopoly is the absence of competition and competition is the ab sence of monopoly. But in another sense it means a great deal and is heavily charged with emotion. It is, in the last analysis, an epithet hurled against the Big Three's and Four's of American industry. The profes sors, Congressmen, and government officials who use it, though they often profess to be objective about it, seldom "smile when they say it." For it is the verbal epitome of their desire to reorganize American industry. It spearheads their attack on the structure of business as it has developed in this country. It points up the wish, as Omar Khayyam put it: Ah Love! could you and I . . . conspire To grasp this sorry Scheme of Things Entire, Would we not shatter it to bits-and then Re-mould it nearer to the Heart's desire! ...1 Back of the phrase "monopolistic competition" is the idea that when three or four companies do most of the business in an industry, that industry is not likely to be "really" competitive. The men who use this phrase feel that the men who run leading companies use their power to soften competition. And, in such mood, they criti93 94 j\1.0NOPOLISTIC COMPETITION cize the most basic habits of American industrialists.

They are, in fact, so deeply critical that the businessmen who have time to study their criticism sometimes con clude that they, themselves, can "do no right," and that whatever they do, they are "damned if they do and damned if they don't." There are three basic criticisms of American business which go with the phrase "monopolistic competition." They are "identical pricing," "administered prices," and "price leadership.'~ They are all true. The issue is not over the facts, but over their meaning. These criticisms say, in effect, that in certain industries businessmen charge the same prices, do not· change these prices as often as they should, and follow the leaders. This is bad, because it means that these industries are not truly competitive. Businessmen find it hard to deny the charges, but they seldom subscribe to the conclusions. On "identical pricing," a group of New York lawyers recently wrote to the Secretary of Commerce in Wash ington that "From our observation there is no contention that creates greater uncertainty and sense of helpless in security among businessmen than that 'conscious simi larity'· (of pricing) is in itself unlawful. There is nothing that creates more of a question in the mind of the public, whether justified or unjustified, than the prevalence of the phenomena of similarity." 2 Two lower federal courts have made interesting com ments in this connection. Said Judge Major in the Cement case,3 ". • • The charge of combination is little ,more than a pretense to get all the members of the in dustry . . . before the same Court. . .. These two competing mills are faced "\vith a simple business proposi tion. . .. Each can confine its sales to the territory in which it has an advantage or can extend its business into MONOPOLISTIC COMPETITION 95 the territory of the. other. If... the former . . . as the [FTCI would require ... each will have a mo nopoly of its own territory, and competition will be at an end. On the other hand if. . . they go into the terri tory where they are. at a disadvantage freightwise, they necessarily must meet the price which they find there in order to sell . . . cement is sold at all points of destina tion at an identical price and ... bids to the govern ment have oftentime been made in identical amounts. . .

the same result would ensue as the result of any pricing system and whether used individually or in combina• 4 tlon.... ". . . we think it is the inevitable result of any pricing system that cement must be sold at the same place at a uniform price . . . If one producer persists in selling for more than the others, his customers will be lost. If he sells for less, the others will be compelled to lower their price to the same level or forego the business . . ." 5 More recent is the St. Louis milk case.6 The Pevely Dairy Company and the St. Louis Dairy Company did 63 per cent of the fluid milk businessin St. Louis. They were competitors, selling the same kind of milk in the same area and almost always at the same price. Said the Circuit Court, The circumstantial evidence relied upon as sustaining the verdict [against the companies in the lower court] consists. of the uniformity of the prices charged . . . and the prox imity in time of the price changes listed in the indictment and bill of particulars. . . .

. . . F or each of the price changes charged . . . detailed evidence was furnished concerning the economic reasons. . . . and shown to have resulted from economic conditions. . . . The milk . . . was a standardized product. Its cost items being substantially identical for both appellants, uni-· formity in price would result from economic forces. Econ-, 96 MONOPOLISTIC COMPETITION omists called as expert witnesses testified that in a market such as the fluid milk market in St. Louis ... uniformity of price is to be expected . . . In an article entitled "Collusion," appearing in the Decem ber, 1948,issue of Farm Economics, published by the Depart ment of Agriculture Economics of the New York State College of Agriculture, appears the following: "There is nothing peculiar in the fact that a change in the price of wheat or cotton occurs simultaneously in all markets. If the price of No.1 Northern Spring Wheat in Minneapolis rises 5 cents a bushel, it advances 5 cents in Baltimore, 5 cents in Buffalo, 5 cents in Chicago, and 5 cents in all the small towns in Minnesota, North Dakota and Mon tana. These prices not only all advance by the same amount, but ... on the same day. This is as it should be. There is no collusion. Under the free enterprise system, competi tion forces all handlers to pay the same price."

These economic principles must of necessity be recognized by the courts. Thus, in Cement Manufacturers' Protective Association v. United States, 268 U.S. 58'8, 45 S.Ct. 586,592, 69 L.Ed. 1104 ... Justice Stone, speaking for the [Su preme] Court . . . said . . . "the fact is that any change in quotation of price to dealers, promptly becomes well known in the trade through reports of salesmen, agents, and dealers of various manufacturers. . .. A great volume of testimony was . . . given by distinguished economists in support of the thesis that in the case of a standardized prod uct sold wholesale to fully informed professional buyers ... uniformity of price will inevitably result from active, free and unrestrained competition .... " And so the Court concluded, in the Pevely case, that it was "clear that mere uniformity of prices in the sale of a standardized commodity such as milk is not in itself evidence of a violation of the Sherman Antitrust Act."

The Supreme Court refused the Antitrust Division's re quest that it review this case. The constant refrain of the Federal Trade Commission lawyers about the allegedly sinister meaning of identical MONOPOLISTIC COMPETITION 97 or matched prices produced the following comment from a New York economist: Two contradictory truisms seem to have run through the debates of the last few months . . . (1) Prices are matched in every market. llo"W could it be anything but collusion? That seems to be the refrain of the Commission . . . (2 ) We are dealing with an identical and widely used product. How could it ever be sold at any but an identi cal price? Who would pay more? . .. When could col lusion not be inferred? Would an industry be saved by a little deviation in price of terms? Economically, this would be of no significance. Would it be saved by a major devi ation? Such deviation would be met, I believe, and com pletely. There might be a sparring period, but it would be met ...7 And the Secretary of Commerce said on this subject that "Mere similarity or so-called 'parallelism' of action should not be penalized unless. . . based upon collusion.

Parallelism is likely, in a normal competitive situation, to result from informed competition. Similar condi tions result in similar action if there is adequate knowl edge.... " 8 An outsider, however, may think prices consistently identical, but this isn't always true. Thus, for in stance, the sales manager of the United States Steel Corporation recently said, ". . . Published [steel] prices always have and still do differ to a marked extent between competing producers.... Actual prices... fre quently vary from published steel prices. Quality, avail ability, and service,· as well as price, are decisive factors ..." And he added the unpleasant, but understand able, remark that "Those who apply such terms [as 'olig opoly,' 'price leadership,' and 'administered prices'] simply are not conversant with the facts. . .. The steel business is highly competitive. . .. The disagreement 98 MONOPOLISTIC COMPETITION between the practical men of businessand those who rely on theories about competition largely arises from a differ ence in information and of interpretation, based on knowledge in the first instance and superficial misin- .

formation in the second. . . ." 9 A touch of humor has been tossed into the "identical pricing" picture by the perennially ironical Federal Trade Commissioner Lowell B. Mason. He said: Be sure you don't know your competitors' prices.... This is difficult. What happens when one of your salesmen walks into a store and offers a retailer one of your 1948 models of rubber-mounted shaving mugs at $13.75the dozen? The first thing the purchasing agent says is, "Why, you poor so-and-so, Glutz is selling his mugs for $12.95." This means the jig is up. For... if you come down to $12.95,you are matching competitors' prices, and that. . . if carried out systematically, results in a conscious paral lelism which ... is tantamount to a conspiracy. There is, however, a way of getting around this difficulty. Equip all your salesman with earmuffs . . . my apparent flippancy is but the cry of a man who sees in these cases the seed of internal decay for our distribution system ...10 "Price," said a well-known N ew York financial writer recently, "is but one of countless forms in which com petition expresses itself, and in many cases one of the least consequential." 11 And a Washington antitrust lawyer recently remarked on this "underlying economic theory . . . that price alone determines selling. Perhaps this is always true But . . . if it is, a great deal of liquor has been poured by salesmen to no good purpose . . ." 12 13-AdministeredPrices The critics of the larger American companies com plain that these companies, in "concentrated industries,"