The Attack on Concentration; Y. Brown

Henry Ford, in his day, was looked upon as an industrial hero. Today, he would be regarded as a monopoliz ing fiend upon whom the antitrust prosecutors should be unleashed. The 1921 Ford Company, with its more than 60 per cent share of the market, would today be called a dominant firm and charged with violating the antitrust laws. Just a few months ago, an antiDr. Brozen Is Professor of Buslne.s Economics, Graduate School of Business, University of Chicago, and Adjunct Scholar, American Enterprise Institute for Public Polley Research. This article Is condensed from an address before the Ashland, Kentucky Economic Club, September 15,1978. 38 trust complaint was served upon Du Pont because it developed a low-cost method for producing titanium dioxide pigments. There was no ob jection to the development of a lower cost method of production, but Du Pont made the fatal error of passing enough of the cost saving on to buyers to win 40 per cent of the market served by domestic produc ers. Not only did it do that but it is going on to enlarge its capacity, building a new plant at De Lisle, Mississippi, in order to serve even more customers (who also would like to obtain domestic titanium dioxide at low cost). Can you imagine that any enterprise would engage in such a nefarious activity? It should, ac cording to the FTC, behave like a monopolist. It should restrict its output, instead "'"of expanding, and charge higher prices (and let the business go to foreign firms).

THE ATTACK ON CONCENTRATION 39 Antitrust Upside Down That is a total perversion of the intent of our antitrust law. If the FTC is not standing antitrust law on its head, then I simply do not under stand what our antitrust law says. The words ~(every contract, combina tion, or conspiracy, in restraint of trade is hereby declared to be il legal" say that it is restraint of out put that is in violation of the law. But the FTC contends that Du Pont is violating the law because it has ((adopted and implemented a plan to expand its domestic production capacity."! That quite plainly says that the FTC regards Du Pont as breaking the law by expanding trade. Is that what the law says is illegal? In whatever way I torture the phrases in the antitrust law, I sim ply cannot get it to say that expand ingtrade is illegal despite the thun der in the FTC complaint. Whenever anyone builds more capacity and uses it to produce more product, more trade must result. I can't be lieve that Du Pont is building a new titanium dioxide plant just because it wants a handsome monument at which to gaze-and neither does the FTC. What the FTC is complaining about is that Du Pont intends to produce titanium dioxide in its new plant and increase its sales-and it is nasty ofDu Pont to have already' built enough plant to take care of 40 per cent of the needs of customers for domestic product. That makes Du Pont ((the nation's dominant pro ducer." There can hardly be any thing more venal than a ((dominant producer ," unless it is a ((shared monopoly."

"Brand Proliferation" through Hypnotic Advertising ((Shared monopoly" sounds like a label for a conspiracy among several firms to monopolize a market and, share the fruits of that monopoly. But that is not what the FTC means by the label. The phrase is FTC code for a few firms winning and holding a large share of the business in some product line. The FTC staff is cur rently prosecuting Kellogg, General Foods, and General Mills for ((shar ing a· monopoly" of ready-to-eat (RTE) cereals. These three firms have managed to produce and dis tribute cereals that taste good enough and cost consumers little enough to win more than three quarters of the RTE business. That is their crime. Did these three firms conspire with each other to somehow force other firms out of the industry and then conspire to reduce supplies and raise prices? The FTC disavows any accusation of any such conspiracy. It says that the crime of which these firms are guilty is ~~brand prolifera tion." The heinous conduct of which it accuses these firms is that of try ing to give consumers what they 40 THE FREEMAN January want. It is now a crime, that is, the FTC is trying to make it a crime, to follow that old merchandising maxim for success, ttgive the lady what she wants."

The cereal companies should have stuck to producing corn flakes. Never mind the demand for a bran cereal, or a high protein cereal, or a vitamin enriched cereal, or a pre sweetened cereal. Anyway ~ says the FTC in its complaint, there are no differences between cereals-except those artificially created in the minds of consumers by hypnotizing them with advertising. 2 Of course, if the new brands offered by the three firms in the 19508 and 1960s had not won a large share of the market, nothing would have been wrong with ttbrand proliferation." But the new brands pleased consumers. They won for the three firms a large share of the market. That, at bot tom, is the crime these firms com mitted. The RTE cereal industry has become ttconcentrated," that is, most of the sales in the industry are made by a few firms. That is a condition which neither the FTC nor the Anti trust Division intends to tolerate.

The FTC staff also has accused the eight major petroleum refiners of engaging in a ttshared monopoly" in the petroleum refining industry. It is asking that these corporations be broken into smaller companies. The major crime of which the Big Eight stand accused is that of maintaining a ttnoncompetitive market struc ture." This phrase is never cogently defined by the FTC staff, but ttcon_ centration" seems to be the nub of it. Complaint counsel says the eight companies ttare all vertically inte grated firms with substantial hori zontal concentration at every level of the industry" (emphasis supplied). 3 Counsel also says the· eight (town and operate refineries accounting for approximately 65 per cent of rated crude oil refining capacity in the relevant market." Even more damning, ttThis figure ... under states concentration ... because [the eight firms] ... utilize more of their refining capacity than other refin ers. Hence [their] share of produc tion of refined petroleum products ...

is higher than their share of rated refinery capacity .... " Again, here is the accusation that these alleged monopolists are not behaving like monopolists. Instead of restricting output and restraining trade, they push their capacity har der than do their competitors and expand output and trade. Appar ently they are unaware of the fact that they are monopolists who can get higher prices by restricting out put. Again, the FTC is displeased by efforts to expand trade and is stand ing antitrust law on its head by saying that the failure to restrict trade is a violation of the law. The FTC even accuses the companies of building pipelines to provide them1979 THE ATTACK ON CONCENTRATION 41 selves with ((cheap transportation." Again, as in titanium dioxide, it is apparen ty illegal to reduce costs and pass enough of these cost savings on to customers to win an appreciable share of the market. (In the petro leum case, we cannot say a ((large"

share of the market has been won since no petroleum refining firm sells as much as ten per cent of the petroleum products sold in the United States.) These three cases are cited to show the current state of antitrust doctrine at the antitrust agencies. The question remains of whether the courts will buy this upside down view of antitrust law in view of its legislative history.4 Antitrust Not Intended to Fragment Industry When federal antitrust policy began, with the signing of the Sherman Act in 1890, it was aimed at benefiting consumers. In the words of Senator Sherman, the act was to outlaw arrangements ((designed, or which tend, to advance the cost to the consumer." It was neither intended to fragment indus try nor to prevent occupancy of a major share of a market by one or a few firms. When Senator George Hoar explained to the Senate the Judiciary Committee's final draft of the bill, he declared that a man who ffgot the whole business because no body could do it as well as he could"

would not be in violation of the Sherman Act. As Professor Bork has pointed out in his examination of Sherman Act legislative history, ((The statute was intended to strike at cartels, horizontal mergers of monopolistic proportions, and pred atory business tactics."5 As the act itself says, ((Every conspiracy in re straint of trade . . . is hereby de clared illegal" (emphasis supplied). Cost and price reductions and product improvements by a firm ex pand the trade of a whole industry. Since firms doing this frequently win a large share of the markets in which they operate, judges in the early days of antitrust litigation did not hold ((concentration" of sales in the hands of a few firms or ((domi nance" by a single firm to be illegal in and of itself. Standard Oil and American Tobacco were broken up in 1911 because they had been built by a very large number of mergers of monopolistic proportions with wrongful intent and had then en gaged in ((acts and dealings wholly inconsistent with the theory that they were made with the single con ception of advancing the develop ment of business . . . by usual methods .... " The defendants failed to show that the intent underlying their mergers and their acts was the normal one of efficiency and expan sion of trade-they failed to show ((countervailing circumstances" in Judge White's phrase. They were, 42 THE FREEMAN January therefore, subjected to antitrust rem edies. The remedies were not applied because of their dominance but because they were formed and maintained by monopolizing acts and intent-that is, by a desire to gain control of the supply of a prod uct and to use that control to charge a monopoly price and thereby restrain trade.

Dominant Firms Do Not Control Supply and Price There is a distinction between controlling the supply of a product and producing or selling most of the supply of a product. HDominant" producers who sell a major portion of a product's supply usually have no control over the supply. They have no power to set any lower level of industry output and a higher price than that which would prevail in a market with many suppliers and no dominant firm. Usually, a dominant producer is the most efficient firm in the industry. Its large output is the result of its efficiency in supplying the market. The market price is as low as it would be with many pro ducers-frequently lower. Any at tempt by a dominant firm to restrict its own supply and increase price after reaching a ttdominant" position simply results in the expansion of output by other firms, the entry of additional firms, and loss of its dominance. A dominant firm can keep its dominance only by behaving competitively. The fact that there is a dominant firm, or small group of firms, in an industry is evidence of competitive behavior-not of mo nopolization.

The lack of ability of a dominant firm (or group of firms) to control supply and price simply because it produces a major part of the supply of a product is illustrated by the experience of the automobile indus try in 1927. From 1921\ to 1925 the Ford Motor Company supplied more automobiles than all other firms combined. The Ford Company was a dominant firm. It completely shut off its supply to the market for nearly the entire year in 1927 when it closed down to retool for the change from the Model T to the Model A. If the fact that a firm supplies the majority of a market gives it any power to control supply and price, then the complete with drawal of that firm's supply should certainly cause a rise in price. Yet the prices of automobiles failed to rise when Ford shut down despite its having been the dominant producer. Other manufacturers increased their output and prices fell by mid-1927 despite the complete withdrawal of the Ford supply of newly manufactured cars from the market. 6 The fact that a dominant producer has, at most, a very short-lived abil ity to influence the price ofa product can be ill ustra ted by numerous 1979 THE ATTACK ON CONCENTRATION 43 anecdotes. The American Sugar Re fining Company merged 98 per cent of the capacity for refining sugar east of the Rockies in 1891 and 1892.

By cutting production it managed to raise refining margins by 40 per cent in 1893 (which raised the price of sugar by 8 per cent). Expansion of output in other firms cut sugar re fining margins in 1894 to a level little higher than the 1891 margins despite further reductions in output by American Sugar. By 1894, the entry of additional capacity had forced margins back nearly to 1891 levels and had cut American's share of the sugar business by one quarter. American was still a domi nant firm by today's FTC definition, but it had lost all influence over price and output despite its 85 per cent share of capacity.7 In 1901, American Can merged 90 percent of all capacity in the can business. It raised prices by one quarter and lost one-third of its share of market in short order de spite additional buying up of com petitors and their output. Prices re turned to the pre-merger level in a very short time.

These are the most successful monopolizing cases I can find aside from the Air Line Pilots Association, the Teamsters, and similar labor unions. 8 What they demonstrate is that a dominant firm quickly ceases to have any influence in the market if it charges a supracompetitive price. In some cases a dominant firm willing to restrict output greatly has no ability to obtain a supracompeti tive price even in the short-run. Shifting Market Shares Dominant firms, that is, firms which sell a major part of all product sold, remain dominant only if they charge the competitive price and are more efficient than other firms in their industries. If they are less effi cient, they soon find their market share dwindling despite selling at competitive prices. The Big Four in the meat packing industry, for example, has seen its share of the market dwindle from 56 per cent in 1935 (and from an even higher share in earlier years) to 47 per cent in 1947 to 38 per cent in 1956 to 22 per cent in 1972.9 The relative ineffi ciency of the Big Four showed in the 1920s when their rates of return on investment ran at one-third the rate earned by smaller companies. 10 That situation continued up to at least 1972, and market share of these inefficient firms fell.

The Big Four meat packers (The Big Five in the 1917 FTC investiga tion) originally achieved a large market share in meat packing by their efficiency-by instituting as sembly line methods with complete utilization of all byproducts. They became known for using everything ((but the squeal." Also, their de velopment of refrigerated packing 44 THE FREEMAN January houses, cold storage, the refrigerator car, and an efficient distribution system created enlarged markets for meat supplied from cheaper live stock sources. They grew large by being innovative. Once their inno vations were imitated by other pack ers, the decline of the Big Four began, accelerating with the spread of highways and the rise of trucking. The Hdominance" of the Big Four did not give them any power to restrict output or to control price. If anything, the rise of the Big Four decreased the dominance of local markets by local butchers who had to compete with fresh meat brought in by train by the Big Four, 11 espe cially after state laws prohibiting the sale of Hforeign"meat were ruled unconstitutional. Nevertheless, the FTC filed one of its earliest ((shared monopoly" suits in September 1948 against Armour, Cudahy, Swift, and Wilson, accusing them of uconduct ing ... operations ... along parallel noncompetitive lines." They had served consumers too well, thus in curring the hostility of local butch ers in the late nineteenth century and the first quarter of this century.

Long after local packers began out competing the Big Four, in the sec ond quarter of the century, the FTC, in a flagrantly anti-consumer ac tion, rode to rescue the fair maidens who by. now had grown mustaches and larger biceps than the Big Four. The FTC demanded that Armour and Swift each be broken into five companies and that Cudahy and Wilson each be broken into two firms. The FTC reluctantly dropped the suit in March 1954, nearly six years and millions in legal costs after it was brought, but only be cause the court ruled that pre-1930 behavior was irrelevant in a 1950s proceeding. Why Are Dominant Firms Being Attacked? The attacks on concentration, whether in the form of an attack on a ((dominant" firm or a ~~shared monopoly," seem to be fairly episodic. The question to be asked is why large firms with a large share of the market are left undisturbed for long periods and then turned on at other times. It is not purely coin cidental that the nation suffered a severe deflation from 1882 to 1890, prices dropping by 25 per cent in that interval, and the Sherman Act was passed in 1890. At that time, the declining prices were blamed on ((cutthroat" and ~~predatory"

competition-and this was also a time in which economies of scale in manufacturing, combined with a rapidly declining cost of transporta tion' led to centralization of produc tion in enlarged facilities. From 1867 to 1887, for example, sugar production doubled, from one-half to one million tons annu ally, and the number of refineries 1979 THE ATTACK ON CONCENTRATION 45 decreased from 60 to 27. In the same period, railroad freight rates fell by 60 per cent. I2 The economies of cen tralized production together with reduced transport costs led to larger plants supplying more distant mar kets at lower prices than the smaller plants resident in those markets. So the myth of ((cutthroat" competition and ~~predatory" pricing was born in this and many other industries. An titrust cases were brought against dominant firms such as American Sugar, Standard Oil, American To bacco, and others.

Another deflation in which prices again dropped by 25 per cent, from 1929 to 1933, again led to animus against ~~Big Business" and espe cially against that rising innovation in marketing, the chain store. The investigations of the Temporary Na tional Economic Committee once again directed the country's ire to ward dominant firms and industrial concentration. Antitrust cases were brought against dominant firms such as Alcoa and A & P and against ~~shared monopolies" as in the Mother Hubbard case against the petroleum companies, the proceed ing against the major cigarette com panies, and the FTC case against the Big Four in meat packing. Currently, we are trying to find scapegoats for inflation. I3 So we have brought cases against ~~domi nant" firms such as IBM, AT&T, and Du Pont and against the (~shared monopolies" already de scribed. When we are troubled by deflation or by inflation, both brought on by the government's ineptness in operating our monetary and fiscal policy, the politicians export the blame to somebody else. Mr. Carter tells us in his speeches that the government is not at fault for our inflation-it is up to business and labor to bring inflation to a halt.

In this modern day, we are no longer subject to the kind of superstitions that led the early colonists to hang witches when they were troubled by forces they did not understand. Instead, in this en lightened age, when we seek to rid ourselves of the causes of inflation and other mysterious ailments, we pillory dominant firms or the Big Fours in concentrated, and not so concentrated, industries. The Potential Losses from Deconcentration This absurd behavior by our politicians and its acceptance by the electorate as being something more than a hunt by politicians for witches to blame for their own mis takes might be tolerable if it were nothing more than expensive enter tainment of voters. But it is some thing more. It is counterproductive in terms of the ends we seek-less inflation, higher rates of growth, and improved levels of living.

46 THE FREEMAN Prices have gone up less rapidly in our most concentrated industries than in others and productivity has grown more rapidly. From 1967 to 1973, prices in our most concen trated industries rose less than half as rapidly as prices in all manufac turing. 14 From 1958 to 1965, prices in our most concentrated manufac turing industries actually fell while prices in other manufacturing in dustries rose. Yet it is our concen trated industries with a superior rec ord for moderating inflation and a superb record for increasing produc tivity that are being cast in the role of economic villains. 15 If this witch-hunt continues, the result will be economic disaster. If we deconcentrate all our manufac turing industries in which four firms produce and sell more than 50 per cent of the product, the result will be a 20 per cent rise in costs and a 10 to 15 per cent rise in prices. 16 If we want to hasten our decline to the status of a banana republic, the at tack on concentration will contribute to that end. ® -FOOTNOTESIFTC News Summary, April 14, 1978, p. 1.

Emphasis supplied. 2FrC Docket No. 8883, April 26, 1972. 3Complaint Counsel's Prediscovery State ment, In the Matter of Exxon Corporation, et aI., Docket No. 8934, pp. 7-10. 4The Court did accept this upside down view in reversing the lower court in the Alcoa case. Y. Brozen, ttAntitrust Out of Hand," The Con ference Board Record, vol. 11, no. 3 (March 1974). 5Robert Bork, The Antitrust Paradox (1978), p. 20. 6Federal Trade Commission, Report on Motor Vehicle Industry (Washington: U.S. Government Printing Office, 1939). 7Richard Zerbe, ~~The American Sugar Re finery Company, 1887-1914; The Story of Monopoly," Journal of Law & Economics, vol. 12 (1969), pp. 353-357. sY. Brozen, ttThe Consequences of Economic Regulation," New Guard, vol. 15 (June 1975). 9The 1956 and subsequent figures overstate the share of market retained by the original Big Four since Cudahy was displaced by Hormel.

l°Ralph C. Epstein, Industrial Profits in the United States (New York: National Bureau of Economic Research, 1934), reports that twenty-three leading meat packers earned 1.9 per cent on equity in 1928 while forty-six minor meat packers earned 10.0 per cent. In 1964, leading packers earned 3.7 per cent while small packers earned 13.6 per cent. llAmbrose Winston, uThe Chimera of Monopoly," The Atlantic Monthly (1924), re printed in The Freeman (Sept. 1960). 12The average rail rate fell from 19 mills per ton-mile to 7.5 mills. 13J. Cotlin, ttIncreased Corporation Anti trust Suits Prompt Industry Fears of New Federal Policy," National Journal Reports, Sept. 15, 1973, p. 1371. 14Steven Lustgarten, Industrial Concentra tion and Inflation (Washington: American En terprise Institute for Public Policy Research, 1975), Table 2. 15Shirley Scheibla, uMonopoly the Villain," Barron's, Nov. 4,1974, pp. 9, 18-20; uEconomic Concentration: The Perennial Fall Guy," First National City Bank Monthly Economic Letter, April 1972.

16Sam Peltzman, uThe Gains and Losses from Industrial Concentration," Journal of Law & Economics, vol. 20 (Oct. 1977).