6. Do We Really Want Competition?

6. Do We Really Want Competition? Economists have for some time been concerned about the high cost of distribution. Back in 1939 the Twentieth Century Fund made a big study of these costs. In a preliminary release it said, About 59 cents of the consumer's dollar goes for the services involved in distribution. . .. In 1929 some $66 billion was paid by consumers . . . for finished goods, but ... nearly $39 billion was the cost of distributing them.... Only $9 billion was for transportation . . . $1 billion for advertising, instalment selling, and other charges. Some $12.8 billion was for retail distribution, and about $7 billion was the cost of wholesale trade. In the same year the railroads took in less than $5 billion for freight, and the national farm cash income was only around $10.5 billion. In other words, the nation paid more for retail distribution than . . . to all its farmers, and more for wholesale distribu tion than for its rail freight bill . . .

Since then, the figures have at least doubled. Thus the Harvard BusinessReview said editorially in its May 1950issue: It is generally estimated that not less than 50 cents of each dollar of the consumers' $128 billion spent in 1949 at retail was required to cover distribution outlays as distinct from production outlays. Of this it is entirely probable that retailing ... requires on an average at least 25 cents. 43 44 DO WE REALLY W ANT COMPETITION? As a matter of fact, in the case of the consumer's apparel. dollar and household furnishings dollar, something like 33 to 36 cents is today required to cover the retailer's gross margin,. of which incidentally less than 3 cents remains for the retailer's net profit after taxes. These figures will indicate how much is at stake in the' present interpretations of the antitrust laws. They seem to say that the American public spends about $60 billions a year to have the goods it buys moved, financed, displayed, sold., and delivered to it-perhaps $400 per capita or $1200-1600 per family, about evenly divided between retail and wholesale costs.

Untilless than a generation ago, the "high cost of dis tribu~on" was something like the weather. "Everybody talked about it, but nobody did anything about it.'" Within the last 20 years or so, however, an amazing variety of new marketing and distributing operations have been developed, including corporate chains, volun tary chains, super-markets, and so on. A virtual revolu tion began to get under way. In any kind of revolution, even an economic one, somebody is bound to get hurt. And it was natural that some of the people in the line of fire should try to protect themselves by getting laws passed. The amounts at stake are obviously huge. If, for in stance, merchandisers with new methods drive down retail prices by only as much as one per cent, this would mean a total of over $1 ~ billions. This is a painfully large figure to retailers. If their net profit margins are only around 3 per cent, this would clip off a third unless they too could cut their operating costs by a correspond ing amount.

Some industries in this country have been regulated almost from time immemorial, such as railroads, light and DO WE REALLY W ANT COMPETITION? 45 power, and the telephone and telegraph business. Com petition has been replaced with legal monopoly. This was done for the benefit of the consumer. The idea was that he would be better served by the economies of regulated monopoly than by the vigor of free competi tion. Perhaps a classic example was the merger, during the 1930's of Western Union and Postal Telegraph, en forced by Congress. The idea here was that the savings of a single system would outweigh the advantages of the stimulus of competition. Since 1933, however, a new type of regulation has come into vogue, which is for the benefit not of the con sumer but of the producer, that is, of competitors. It began with theNational Industrial Recovery Act of 1933, with which Congress breached the antitrust laws and set up something designed to hold prices up, not down, and to protect competitors against the rigors of com petition.

The NRA was outlawed by the Supreme Court, two years later. But its spirit li~gered on. It appeared in the Guffey Coal Act of 1937, which aimed at "stabiliz ing" the soft-coal industry by limiting production and holding up prices, with the help of a heavy tax on coal sold in excess of quota. It carried a general antitrust waiver for producers who complied with its provisions. It had a statutory little brother in the state-enacted Kane Act for the anthracite industry. In like fashion, the Emergency Transportation Act of 1933 created a railroad "co-ordinator" empowered to force operating economies on the railroads like the joint use of terminals. The Motor Carrier Act of 1935 re quired interstate truckers to get "certificates of necessity" from the Interstate Commerce Commission. And the Jones-Costigan Sugar Act of 1934, since renewed every 46 DO WE REALLY W ANT COMPETITION? three years, imposed quotas on both the import and domestic production of sugar.

All of the above, with the possible exception of the Transportation Act of 1933, were designed to' prevent "ruinous competition" and thus were frankly aimed at protecting competitors from each other rather than at protecting consumers. They were set up on the prin ciple of the cartel, rather than on the. philosophy of the antitrust laws. But, perhaps, the outstanding example of the new economics was in the farm program, includ ing the Agricultural Adjustment Act of 1933 and the Farm Marketing Act of 1938, with acreage allocations and the more drastic marketing quotas eventually applied to cotton, wheat, tobacco, peanuts and rice. It was not surprising, in this political climate, that the distributing industry should push similar proposals. Dis tributors, too, were under heavy competitive pressure, not only from the depression, but from the new mass distributing, cost-cutting methods being introduced into distribution. Backed by retailers' and wholesalers' or ganizations, there came a wave of state minimum mark-up laws, patterned on the old NRA grocers' code. There was another wave of state laws permitting resale price maintenance on trademarked and branded goods, pat terned on the old NRA druggists' code, and topped by the Miller-Tydings Act. This Act was a rather incon gruous amendment to Section One of the Sherman Anti trust Act and it permitted the movement, in interstate commerce, of goods sold under these state resale price maintenance or so-called "fair trading" acts. Punitive taxes on chain stores were also pushed through many state legislatures.

But the outstanding piece of legislation was the Robin son-Patman Act of 1936, amending the Clayton Act of DO WE REALLY W ANT COMPETITION? 47 1914, originally sponsored in Congress by the United States Wholesale ·Grocers Association and the National Association of Retail Grocers. The sponsors of the bill were perfectly frank in saying that it was aimed at the chains; the latter retorted that it was a featherbedding device for wholesalers, jobbers, and retailers. It took a number of years for the implications of the Act, which like the Clayton Act is administered by the Federal Trade Commission, to become evident. The Commission lawyers have stuck to the spirit of the Act, and, going even further, have pursued the spirit of the original bill, which was much modified in its passage through Congress. The purpose of the sponsors, and the evident goal of the FTC lawyers, has been to tighten up the price-discrimination features of the original Clayton Act, broadening the circumstances in which it is illegal to cut prices to one customer below another's and nar rowing the circumstances (quantity discounts, "good faith" meeting of competitors' prices) in which it is legal.

With a sympathetic federal court interested almost solely in the "struggling competitor" rather than the public, the FTC has achieved phenomenal legal success,in the Mor ton Salt case (quantity discounts), the Cement case (freight absorption), and the Detroit gasoline case ("good faith" price reductions). An amusing angle of the situation appears in the efforts of the lawyers of the big chains and other mass distribut ing agencies to find ways to get around the law. In Chapter 3 it was reported how various government of ficials and Congressmen wanted the antitrust laws to remain "fluid" lest New York antitrust lawyers find ways to get around them. The implication was that these corporate attorneys were ceaselessly on the search for ways to restrain trade and raise prices. Thus the Chair48 DO WE REALLY W ANT COMPETITION? man of the House Judiciary Committee-" ... I would vigorously oppose any antitrust laws that attempted to particularize violations. . .. Otherwise... the proc...

ess would become a rat-race between the monopolist seizing upon omissions and the Congress trying to fill them into the law. . . ." The facts run the opposite way. For although high-powered batteries of corporate lawyers do ceaselesslysearch for ways to get around the law, what they are looking for are ways to release trade and cut prices to the consumer, without incurring a viola tion. For as the law is now written, interpreted, and en forced, almost all price reductions skirt the narrow edge of legality and verge on being bootleg. This is an odd and unfortunate thing to have to say about the antitrust laws. Some antitrust * lawyers are now minded to recom mend three important changes in corporate selling policy that would, to some degree, release the sales departments of the more aggressivecompanies from the new restraints imposed by these recent laws and interpretations. It has become' potentially embarrassing, under the rul ing of the Detroit gasoline case, to sell to both wholesalers and retailers in the same area. A company that does this may, like Indiana Standard, incur the unpleasant choice of violating the Sherman Act by insisting that its wholesale customers maintain resale prices, or of violat ing the Robinson-Patman Act by letting them cut as they will. There is no such problem for a company that sells only to wholesalers or only to retailers.

• For purposes of brevity, the phrase "antitrust lawyers" will be used occasionally in the text to refer to privately employed lawyers who specialize in the antitrust laws, and the phrase "Antitrust lawyers," when occasionally used, will refer to the government lawyers of the Antitrust Division of the Department of Justice.

DO rVE REALLY WANT COMPETITION? 49 Secondly, since the Morton Salt case, embarrassment Inay result if a company sells in both small and large quantities. The discount for the larger quantities may not please the FTC. There is no such problem for a company that sells only in small or in large quantities. And thirdly, following the Cement case, a company may invite legal action if it sells cement, steel, sugar, or other bulky standard commodities both at a distance and near the mill. If it absorbs freight to get into a distant market, its action may come to the FTC's atten tion as violating the FTC's idea of different "mill-net" receipts as being a geographical price-discrimination againstnearby customers. The simplestsolution a company can embrace, to avoid these problems, is to "integrate," that is, to buy or build its own equivalent of the wholesaler and the retailer, so that it is a complete and single corporate unit from the factory to the consumer. Thus it could ~ypass not only the costs but the legal hazards of dealing with the middle man or the retailer. In the case of freight absorption, the answer would be "horizontal integration"-the pur chase of mills in distant markets. But the government lawyers and the people who framed the Robinson-Pat man Act have foreseen this kind of evasion. As related in Chapter 14, integration of production and distribu tion is, also, frowned upon.

The ultimate consumer has had little representation in this long political struggle. He has seen it first face-to face in the publicity fight of the A&P. But in the last analysis, it may be the consumer who will answer the question, "What kind of competition do we want-hard competition or soft competition?"