13. Administered Prices

do not really compete. They start with an ideal of "pure competition" and they find that the sales man agers in the larger companies fall far short of it. In this imaginary "pure competition," there would have to be a large·number of little companies, all selling just about the same product. Nobody would have any control over the price he could charge. "The market" would be a thing in itself. Producers would simply sell for all they could get, everything they could produce at that price. If the competition in such a market was "pure" enough, nobody would even use salesmen, put out advertising or use brand names. Selling in such a market would be something like selling 80 x 80-count print cloth in the Worth Street market, or even like selling a thousand shares of "Steel" "at the market," or 10,000bushels of March wheat on the Chicago Board of Trade. The political objection, in this ideal, seems to be that any industry that falls short of it can be criticized as practicing "impure" or "imperfect" competition. And that sounds like monopoly-or "monopolistic competi tion." It's illegal. For the opposite, or negative, of competition, is monopoly. But the number of indus99 100 ADMINISTERED PRICES tries which sell by this ideal "pure competition" is almost, if not, totally nonexistent.

Thus, one of the President's three Economic Advisors recently told a Congressional Committee: Where three or four large firms control 70 per cent or 80 per cent of the market, each manager . . . restrains his impulse to grow when business is booming and keeps his expansion within limits which will protect the market price. 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 . . . competitive busi ness. . .. Inherent in [this] administered-price situation is the failure of the forces of competition to work effectively, and the remedy must be found by attacking the structure of the industry .... 1 But the figures don't seelll to bear this out. Ten years ago a government economist made a careful study of 407 separate manufacturing industries, as to price, output, and degree of concentration. 2 He took his figures chiefly from the U. S. Census of Manufactures, for two separate periods: the decline between 1929 and 1933 and the recovery between 1933 and 1937. He did not find that it was so.

"... There appeared," he said, "to be no strongly marked relation between... concentration . . . and . . . quan tity and price behavior; high and low concentration and large and small changes in price and quantity appeared to gether almost as if by chance . . ." 3 A Boston economist has since then gone over the same question. He went the government man one further and looked into sellers' "unit direct costs." His con clusion was 4 ". • • that concentration cannot, as alleged, be considered to exercise a significant influence during depression on either price behavior, production behavior, ADMINISTERED PRICES 101 or price-production behavior for individual industries taken separately. . ." In the middle 1930's an economist in the U. S. Depart ment of Agriculture set a style in Washington economic thinking with a pamphlet which said that the hard times of the 1930's were mostly because industry was getting more concentrated and managers in concentrated indus tries preferred to cut production instead of cutting prices.5 This fast became economic "party-line" in Washington. President Roosevelt used the idea in his 1938 message asking Congress to look into "the concen tration of economic power in American industry." And it is what Dr. Clark·was saying in 1949.

Said Dr. Means, "The basic cause for the failure of a laissez-faire policy is . . . [that the] shift to adminis tration has brought . . . inflexible administered prices which disrupt the workings of the market. . . ." 6 But while Washington economists and politicians promptly bought this idea, N ew York economists quickly swarmed over it. And they soon found what seem to be errors. A well-known economist, Dr. Rufus Tucker, pointed out that Dr. Means had "made no attempt to compare price movements in the present depression with those in previous depressions," and that "if he had . . . he would have found that rigid prices always existed; that to a very large extent they were characteristic of the same articles of which they are now characteristic, and that there is even very strong reason to believe that a hundred years ago, when John Stuart Mill was writing his "Principles of Political Economy," rigid prices were proportionally more numerous and more important to the consumer than now ...7 The fact is that rigid prices have always been important.

102 ADMINISTERED PRICES Were the classical economists aware of that fact? . A study of their texts makes it impossible to· doubt that they were. Adam Smith very plainly stated "that the price of linen and woolen cloth is liable neither to such frequent nor to such great variations as the price of corn [wheat], every man's experience will inform him." ... there is strong reason to believe that competition has more nearly approached the theoretical ideal in recent years than . . . in the time of Smith and Mill. . .. It was . . . common knowledge that wages did not fluctuate with the price of commodities; that manufactured goods and agricultural goods did not move to gether; that the price of bread . .. did not change as much as the price of wheat . . . Naturally, the records show that prices of manufactured goods remain unchanged for months at a time, while prices of farm products vary daily. . .. Manufacturers are com pelled to announce in advance what they expect to charge, frequently before they have any product ready for sale.

They have to inform their salesmen and dealers and in some cases the buying public. They print price lists and adver tisements. Necessarily prices so announced cannot be changed frequently. . . . . . . Whether the discovery by certain economists and politicians of a phenomenon that was common and gener ally known in the eighteenth century is justification for discarding an economic system . . . is a question every economist must answer for himself. In my opinion it is no more important . . . than the discovery by Moliere's bourgeois gentilhomme that he had been speaking prose all his life. Administered prices are perfectly consistent with active competition. They have been common and in fact neces sary in certain types of industry for centuries. Throughout our history some prices have changed rapidly, others at longer intervals. . .. These differences in price-behavior have not been the effect of monopolistic practices or large scale operations, but of differences in the nature of costs.

. . . if costs consist largely of payments for materials and hired labor the extent to which they can be reduced is limited by forces usually beyond the seller's control. But ADMINISTERED ·PRICES 103 if they consist largely of overhead or other deferrable items, or payments for the producers' own services, as in farming, prices can be reduced, and in some cases the reduction may have enough effect on demand to remove the necessity of cutting down output. . . . Thus the people· who use what might be called the "Mexican jumping bean" theory of industrial prices are hardly being fair to businessmen. They seem to expect businessmen to produce price "jiggles" in all directions. at all times. It is an impatient view. These critics seem to feel that because businessmen do not compete like tennis-players (which they seldom do) but like chess players (which they usually do) they are not "really"

competing. The critics are in a hurry for action. But it takes some time to see the moves in the game of business competition, as in the game of chess. Moves, however, there are and, over "the long term," the patient observer will often find them dramatic. But this brings up another point at which the critics complain. It is the point where someone in an industry, usually one of its most successful companies, takes "price leadership" and makes one of these important occasional moves. Said a federal Circuit Court judge in a recent case, "Price leadership is implicit in any pricing system. It inevitably exists where one or more members of an industry occupy a commanding position because of their strength and magnitude.... 8 An interesting example of how price changes happen is the following story as related by the capable petroleum editor of the New York Journal of Comnlerce, Wanda Jablonski.9 Price developmentsin the oil industry on the East coast in the past few weeks serve to illustrate once again one of those economic ideas that sound fine in theory but don't always hold much water in practice.

104 ADMINISTERED PRICES The Federal Trade Commission and some economists have been advancing the theory that parallel price action by a group of companies-especially upward-constitutes proof per se of monopolistic behavior. . .. Closer observation, however . . . in actual practice-rather than in theory indicates quite a different explanation. At the beginning of August Esso Standard raised heavy fuel prices 10 cents along the seaboard. . .. Within a short time Socony-Vacuum and other suppliers followed the rise. "Collusion," according to some theories. Later that month Socony advanced light fuel oils. Some days later Esso also increased light fuels, but by amounts smaller than the Socony rise at most points. Within a few days Socony was forced to cut back its price to the Esso level. Collusion? Last week Socony once more advanced light fuels. After studying the market a week Esso yesterday also announced an advance-but again by smaller amounts. . .. Again Socony will have to readjust back. . .. Collusion?

When an important competitor raises his price, the reasons for following ... can easily be traced to what might be termed competitive horse sense. . . . In the first place, a company does not usually announce a price rise until it is convinced that market conditions . . . warrant an advance and that the same factors are affecting . . . its competitors. With experience and first-hand knowl edge of the market, it is more often apt to guess right than to guess wrong. Secondly-and this is the crux-most sellers are naturally interested in making profits, and therefore usually have an incentive to follow a price rise announced by a strong com petitor-unless this is offset by a competitive advantage to be gained by not raising. However, sellers know from years of experience that the competitor which initiates a price rise watches market reaction like a ha\vk, and has no intention of letting others swipe his customers by offer of the lower price . . . the moment the initiating company finds its competitors trying to do so it will rescind its increase-and do so retroactively if need be to hold the customer . . .

ADMINISTERED PRICES 105 A leading oil man has said: The so-called price leadership in the petroleum industry boils down to the fact that some company in each territory most of the time bears the onus of 'formally recognizing current conditions.'. .. [But] the executives of the lead ing marketer . . . are always in danger of taking a step with which competitors will not agree, with the penalty for misjudgment a sharp reduction in profits unless the mis judgment is rectified at once. In short, unless the so-called price leader accurately inter prets basic and local conditions, it soon will not be the lead ing marketer .... 10 "Those who claim," said a cabinet officer recently, "that competition does not exist between giant firms do not know what they are talking about. The competi tion which goes on between large business organizations is as real as the struggle between contending armies in war. The very size of some units may give the im pression that they are not struggling-are carried along by their own momentum. But if any concern ceases to compete, or isn't continually on its toes, the result in sales shows up promptly .... " 11 "A genuine monopoly," said an economist recently, "is very much more difficult to establish, let alone to maintain, than we used to be told . . . one can no longer assume that the business man is driven by his own self interest into monopolistic behavior. On the contrary, his self-interest must lie in maintaining, if not expanding, his share of the total consumer purchasing power-an aim which will tend to deter him from restricting production and raising prices, as the traditional theory of monopoly insisted he would do." 12 But perhaps theW all Street Journal hit the nail on the head even more succinctly as to the reason why American businessmen compete, when it said editorially "we think 106 ADMINISTERED PRICES that the best safeguard against monopoly is that Ameri cans are not monopoly-minded. They will compete [even] ",hen there is nothing to compete against." 13 An odd aspect of the "administered price" story has appeared since V-J Day in the spread between mill prices and "gray market" prices. Mill-men in steel, paper and pulp; automobile, chemical, and other manufacturers have been selling at what they considered "fair" prices rather than at "market" prices. Steel has been selling in "gray markets" at as much as three times these mill or producers' prices. These gray market prices are the result of "pure competition." They are "the market" that results from the balance between what buyers will pay and holders can hold out for. The mill prices are strictly "ad ministered prices." They are lower.