Economic Analysis and Combines Policy: A Study of Intervention into the Canadian Market for Tires 9781487584412

Citation preview

ECONOMIC ANALYSIS AND COMBINES POLICY

CANADIAN STUDIES IN ECONOMICS

A series of studies, formerly edited by V. W. Bladen and now edited by Wm.

C. Hood, sponsored by the Social Science Research Council of Canada, and

published with financial assistance from the Canada Council

1. International Cycles and Canada's Balance of Payments, 1921-33. By Vernon W. Malach

2. Capital Formation in Canada, 1896-1930. By Kenneth Buckley 3. Natural Resources: The Economics of Conservation. By Anthony Scott

4. The Canadian Nickel Industry. By 0. W. Main 5. Bank of Canada Operations, 1935-54. By E. P. Neufeld 6. State Intervention and Assistance in Collective Bargaining: The Canadian Experience, 1943-1954. By H. A. Logan

1. The Agricultural Implement Industry in Canada: A Study of Competition. By W. C. Phillips 8. Monetary and Fiscal Thought and Policy in Canada, 1919-1939. By Irving Brecher 9. Customs Administration in Canada. By Cordon Blake

10. Inventories and the Business Cycle with Special Reference to Canada. By Clarence L. Barber 11. The Canadian Economy in the Great Depression. By A. E. Safarian 12. Britain's Export Trade with Canada. By C. L. Reuber 13. The Canadian Dollar, 1948-58. By Paul Wonnacott 14. The Employment Forecast Survey. By Douglas C. Hartle 15. The Demand for Canadian Imports, 1926-1955. By Murray C. Kemp 16. The Economics of Highway Planning. By David M. Winch

17. Economic Analysis and Combines Policy: A Study of Intervention into the Canadian Market for Tires. By Stefan Stykolt

ECON OMIC ANALY SIS AND COMB INES POLIC Y A Study of Intervention into the Canadian Market for Tires

STEFAN STYKOLT

University of Toronto Press

© University of Toronto Press 1965

Printed in the Netherlands Reprinted in 2018

ISBN 978-1-4875-7333-1 (paper)

But included among the markets in which collusion may exist are some in which the abrogation of all agreements, existing and imagined, will constitute no progress toward effective competition judged either by standards of market structure or of business performance. And there are others in which, while the abrogation of agreements may improve competition in the first sense, it will not necessarily do so in the second.-EowARD S. MASON

EDITOR'S FOREWORD Tms POSTHUMOUS PUBUCATION of Professor Stykolt's doctoral dissertation has been undertaken because we believe that the views it embodies are important and still relevant to the administration of combines policy in Canada. The reader should remember that the dissertation was completed in February 1958; phrases such as "at the present time" should be interpreted in the light of this fact. It was Professor Stykolt's intention to revise the thesis and bring the analysis of the market for tires to date for publication. It is a great misfortune that he was unable to do this. He left no indication of his plans for revision and accordingly we have published the thesis in substantially the form in which it was presented to Harvard. Apart from minor editorial changes the only change in the manuscript we have made is to correct a slip in the arithmetic that underlies Tables 14A through 14E, and the corresponding textual comment. The sense of the argument is in no way modified by these corrections however. The publication of this volume has been made possible through generous assistance from the Social Science Research Council of Canada. Grateful acknowledgment is also due to Professor H. E. English of Carleton University, Ottawa, for his advice to the Editor. July 1963

Wm.C.H.

PREFACE Tms STUDY is an expression of an interest in problems of anti-trust policy aroused by Professor Edward S. Mason's lectures on industrial organization, which the author attended while a graduate student at Harvard. Its completion is in a large measure due to the encouragement, help and guidance which Professor V. W. Bladen of the University of Toronto gave the author while the work was in progress. The gathering of material would have been impossible without the co-operation of the executives of the several tire manufacturing firms in Canada, of the Secretary of the Rubber Association of Canada, and of the personnel of the Combines Branch, Department of Justice, Ottawa. To all the above, the writer is grateful. Whatever errors of fact and judgment remain are his own. The writer also wishes to thank the Rockefeller Committee of the University of Toronto and the Institute for Economic Research at Queen's University, Kingston, for providing him with time, in the academic year 1955-56 and in the summer of 1956, respectively, to prepare this study.

University of Toronto, 1958

STEFAN STYKOLT

CONTENTS

EDITOR'S FOREWORD PREFACE 1 11

III

vii

ix

Introduction

3

The Tire Market: Structure

8

The Tire Market: Competitive Behaviour

44

rv The Tire Market: The Role and Extent of Collusion

53

v The Tire Market: Detriment to the Public and Proposed Remedies

58

VI

The Tire Market: Course of Combines Policy

66

vn Conclusion

71

APPENDIXES

73

BIBLIOGRAPHY

87

NOTES

93

ECONOMIC ANALYSIS AND COMBINES POLICY

CHAPTER ONE

INTRODUCTION it is not altogether clear whether the work of the economists should be oriented toward the formulation of public policy or toward the analysis of market situations." 1 The thesis put forward in the following pages is that economists must do both. It is argued that a public policy which is based on studies of market structure and behaviour is more effective in removing restraints on competition than a policy which is not. The validity of this argument is tested by the comparison of measures devised without the benefit of such study, and put into effect in order to preserve competition in the Canadian tire market, with measures based on an economic analysis of this market. A "mixture of perceptions and prescientific analysis," which the late Joseph Schumpeter called "the research worker's Vision," is a surer guide to the meaning of competition than an exact definition. 2 The vision of workable competition animates this study. How is the amount of workable competition in a market to be determined? There are serious statistical difficulties in devising measures of the quantifiable attributes either of competitive behaviour or of market structure.3 As E. H . Chamberlin points out: "WITH RESPECT TO THE MONOPOLY PROBLEM

The various indices which can be constructed are limited in their meaning and will always require further interpretation, particularly in relating them to each other. And it does not follow that because they are quantitative themselves they can be averaged or in some way reduced to a single index, either of monopoly power (without reference to an "ideal") or of deviations from a social optimum.4

Nevertheless, judgments about the amount of competition must be made if the relative effectiveness of two types of public policy is to be determined. If preferences as to market structure and market performance are clearly expressed, then it is possible to rank various competitive situations in a general way, according to the degree to which they approximate the desiderata. While there remain grounds for disagreement as to the standards to be chosen, at least the standards themselves are explicit; they can be picked with a specific market in mind, and can be compared to ones used in other investigations of a similar nature. 5 Implied in the argument about the superiority of public policy based on studies of market structure are two propositions, one negative and one positive. The negative one is that policies which are aimed at certain types of market behaviour "in restraint of trade" without regard to the structure of the market in which the "restraint" takes place do not use resources effectively because they often attack practices which are either harmless or unavoidable or, if both avoidable and harmful, not amenable to correction without a serious study of the setting in which they arise.6 The positive proposition holds that policies which are based

4

ECONOMIC ANALYSIS AND COMBINES POLICY

on studies of market structure use resources effectively by selecting for attack restraints which are hannful and avoidable, and by designing corrective measures relevant to particular situations and therefore likely to improve the performance of the markets in question. The assumption which underlies both propositions concerns the relation between market behaviour and market structure. In the short run, in accordance with traditional price theory, the former is a function of the latter; in the long run, both change partly through mutual interaction and partly throu~ the influence of various "exogenous" variables. It follows that a policy which is based on an understanding of this mutual interaction can create pressures to shape both structure and behaviour much more effectively than a policy which all but neglects the former and fails to evaluate the significance of the latter. Aside from the general interest which attaches to the role which economic analysis should play in anti-trust policy, the question has a considerable practical importance for combines policy in Canada.7 The recent amendments to the Combines Investigation Act and to the Criminal Code, the legal bases of combines policy, have increased the power of the weapons which can be used to protect competition in Canada. Section 411 of the Criminal Code (before April l, 1955, when the revised Criminal Code came into effect, the number of this section was 498) and the Combines Investigation Act were both amended in 1952. Among other things, the amendment removed the limits on fines which were, under the Act before amendment, $10,000 for convicted individuals and $25,000 for convicted corporations. However, since most of the convictions were under the Criminal Code, the effective limits were those of Section 498: $4,000 for individuals and $10,000 for corporations. The fines are now "within the discretion of the court." Moreover, the court is now empowered by the amendment to the Combines Investigation Act to ... prohibit the continuation or repetition of the offence or the doing of any act or thing by the person convicted or any other person directed towards the continuation or repetition of the offence and where the conviction is with respect to the formation or operation of a merger, trust or monopoly, direct the person convicted or any other person to do such acts or things as may be necessary to dissolve the merger, trust or monopoly in such a manner as the court directs.s

At the present time the Canadian courts, the Minister of Justice, and the Combines Branch,9 who, among them, give effect to combines policy, do not take into account standards either of market performance or of market structure in their treatment of evidence of a variety of restraints.1° The combination of rigid legal criteria of acceptable competitive behaviour with considerable power to alter market structures makes a thesis which maintains that studies of market structure ought to be the starting point of action especially relevant to the Canadian experience. What makes the Canadian case even more interesting is that Canada is unique in having an administrative tribunal, the Restrictive Trade Practices Commission, charged with the duty of investigating each alleged infraction of the law and of reporting its findings and recommendations to the Attorney General and to the public before the case goes to court. Thus there is considerable practical interest in the demonstration of the value of studies of market

INTRODUCTION

5

structure since there exists an administrative body ideally suited to undertake them and to use them both in selecting cases for prosecution and in suggesting remedies in the event of conviction. There is a further point of practical interest. If the new powerful weapons of combines policy are wielded in too haphazard a fashion, they may become dangerous to those who use them as well as to those against whom they are used. Vigorous enforcement always produces demands for emasculation of combines policy. Those who voice the demands may yet get a hearing if they can show that the current application of the policy offers instances of imaginary remedies being prescribed, at great cost and with much anguish, for imaginary ailments. A study of the application of the policy to a single market suffices to establish the soundness of the thesis, since it concerns the remarkably invariant nwdus operandi of an administrative tribunal, and of courts of law bound by the doctrine of stare decisis and not the frequency of incidence, within a defined range, of a phenomenon capable of wide variations. The tire market was selected for this study because it is supplied by the rubber products industry, the first to be successfully prosecuted under the amended legislation. In particular, the tire case is one of the earliest in which the remedy of a prohibitory order has been applied. Moreover, the application of combines policy to this market reveals the problems created by an exclusive preoccupation, at the stage of administrative investigation, with the apparatus of collusive action, because, as will be shown below, this apparatus has relatively little significance in the tire market. Finally, the industry itself is of considerable interest. A multiproduct oligopoly in which the market orientation of the several firms is by no means uniform, it presents to the student of industrial organization a number of intriguing facets. One is the gradual evolution of the pattern of oligopolistic competition under the impact of changing conditions of production and demand; another is the situation created by the close ties which exist between Canadian and American industry; another still is the conflict between the requirements of performance and those of structure. Such conflicts must be faced by combines policy in the relatively small Canadian market more directly than by the anti-trust policy in the United States. The tire industry is part of the rubber products industry which supplies a number of markets. The important ones are those for tires and tubes, mechanical rubber goods, rubber footwear, accessories and repair material, heels and soles, and vulcanized rubber clothing. Collusive behaviour in the first four was investigated and prosecuted successfully by the Crown. Only the first, however, constitutes the subject-matter of this study. This choice was dictated primarily by the importance of this market for the whole industry (see Table 1). Tires and tubes account for well over half the total gross value of products of the industry, with the exception of the depression of 1921, the ten years of stagnation (193039), and the one year of worst wartime shortage (1943). 11 Their importance has not declined, in fact in 1954 they were a bit more important than in 1920. Tire manufacturers are also the chief suppliers of mechanical rubber goods, 12 the next most important group of products, and two of them play an important role in the market for rubber footwear. 13 Neither mechanical rubber goods nor rubber footwear are the principal lines of products of tire manufacturers.

6

ECONOMIC ANALYSIS AND COMBINES POLICY

TABLE 1 RUBBER PRODUCTS INDUSTRY, SEGMENTS,

CANADA,

1920-54

Percentage of gross value accounted for by

1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954t

Tires & tubes

Footwear

Mechanical goods

51.0 47.2 50.6 50.5 49.7 53.8 55.6 55.3 51.1 53.0 49.6 49.7 39.0 43.3 49.1 48.9 47.0 48.7 47.2 45.0 50.1 53.7 54.7 49.7 50.0 53.8 53.6 57.5 55.2 54.2 56.8 56.6 53.9 53.8 53.2

30.1 36.3 32.6 32.7 34.7 31.8 28.4 30.2 33.3 30.7 32.2 30.7 40.7 35.7 31.2 28.6 31.1 28.3 29.0 31.7 23.5 18.3 16.2 11.1 12.6 15.6 19.1 18.3 18.9 16.7 14.1 14.0 13.6 12.4 11.5

10.2 7.9 7.6 8.5 7.1 6.1 7.1 5.5 6.2 6.2 6.2 7.0 7.0 7.6 7.9 9.2 9.6 10.5 10.2 9.7 11.9 11.3 8.9 7.3 7.5 8.3 11.5 11.9 12.8 12.2 12.8 13.2 12.1 11.6 11.9

Other products"

8.7 8.6 9.2 8.3 8.5 8.3 8.9 9.0 9.4 10.1 12.0 12.6 13.3 13.4 11.8 13.3 12.3 12.5 13.6 13.6 14.5 16.7 20.2 31.9 29.9 22.3 15.8 12.3 13.1 16.9 16.3 16.2 20.4 22.2 23.4

Total

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Soles and heels: rubber clothing; not otherwise specified. t Percentages refer to the value of factory shipments and not to the gross value of production. SouRCES: DBS, Rubber Products Industry; Dept of Justice, Rubber Products, pp. 194-95. 0

A word should be said about the limitations of the material on which this study is based. In the first place, materials for market studies are less plentiful in Canada than they are, say, in the United States. A parliamentary, as distinguished from a congressional, form of government appears to have fewer committees interested in investigating business behaviour; there are fewer regulatory commissions in Canada than in the United States; and Canadian corporations are more reluctant to divulge information than are their counterparts in the United

INTRODUCTION

7

States. This last difference is probably the result of the fact that in most markets the number of firms is smaller in Canada than in the United States, a circumstance which makes each of them more cautious, and that among them are usually wholly owned subsidiaries of United States corporations, which are not required to publish reports under Canadian company law. Both observations apply to the tire industry. Most of the material used to describe the structure of the tire market and the competitive behaviour of the tire companies consists of evidence, written and oral, gathered by the Combines Investigation Commissioner. The written evidence comprises documents (letters, minutes, etc.) seized from the files of the tire companies and of their association. The oral evidence consists of the transcript of replies given to counsel for the Commissioner by officials of the tire companies. The questions were not necessarily the most appropriate ones for the purpose of a study such as this, and the answers were given, of course primarily with the object of self-defence. Nevertheless, they were given under oath, in response to skilful questioning by counsel experienced in criminal practice. This material was supplemented by visits by the writer to all the tire plants in the country and by interviews with officials of all the tire companies. It is hoped that the description of the market based on these data is a faithful one, and that this study may result in the collection of information by more adequate techniques in the future.

CHAPTER TWO

THE TIRE MARKET: STRUCTURE ORIGINS

THE DEVELOPMENT OF manufacture of tires in Canada has its origins in the tariff imposed on rubber tires in 1906. The rates of duty provided by the tariff revision of that year were: British Preferential, 22½ per cent; Intermediate, 30 per cent; and General, 35 per cent. 1 American Dunlop Tire Company, a predecessor of Dunlop Canada Limited, was founded in Toronto as early as 1894 2 to manufacture pneumatic tires for bicycles under licence from the Dunlop Pneumatic Tyre Co. Ltd. of Dublin, Ireland, the company which was exploiting commercially J. B. Dunlop's pneumatic tire patent.3 However, it was the protection given to manufacturers of tires which resulted in the channelling of the demand for tires toward domestic sources of supply. 4 This demand was growing rapidly, partly as a result of the great expansion of the Canadian economy in the years 1900-13, and partly owing to the development of the Canadian automobile industry, which began with the incorporation of Ford Motor Company of Canada in 1905.5 In 1907, the United States Rubber Company, with head office in New York, acquired a controlling interest in a holding company, the Canadian Consolidated Rubber Company Limited, which had been formed in 1906 and had taken over six Canadian rubber manufacturers. 6 Thus Consolidated Rubber, which changed its name to Dominion Rubber Company Limited in 1926, became the first Canadian subsidiary of one of the American big four. 7 The Goodyear Tire and Rubber Company of Canada, Limited, became the second such subsidiary. The Company was incorporated in 1910 "by certain of the principal interests connected with The Goodyear Tire and Rubber Company of Akron, Ohio, for the purpose of handling the Canadian business of that Company." 8 In the early twenties the two remaining members of the American big four established subsidiaries in Canada. Firestone Tire and Rubber Company of Canada Limited, a wholly owned subsidiary of Firestone Tire and Rubber Company of Akron, Ohio, was incorporated in 1919 and commenced production three years later.9 The last of the big four entered the Canadian market in the following manner: "In 1923 the B. F. Goodrich Company acquired an interest in the Ames-Holden Tire and Rubber Company, [of Kitchener, Ontario]. Two years afterwards it acquired over 99 per cent of the stock and changed the name to Canadian Goodrich Company Ltd." 10 In 1927 the Seiberling Rubber Company of Akron, Ohio, incorporated a wholly owned Canadian subsidiary, the Seiberling Rubber Company of Canada, Limited, and this subsidiary acquired first control, in 1928, and then the assets, in 1933, of the K. and S. Rubber Company of Toronto, Ontario. 11 The Mansfield Rubber (Canada) Ltd., partly owned by the Mansfield Tire and

STRUCTURE

9

Rubber Co. of Warren, Ohio, and the Westminster Tire Co. of New York City, began operations in 1955, and thus became the last of the foreign owned tire companies still to manufacture in Canada. 12 THE PRODUCT

"A pneumatic tyre is a hollow, resilient tyre which carries its load and absorbs shocks mainly by compressed air. At the present

~1 "'.e-

i:Q~ ii, .....

en...,.

:!~"'

1~

~t:: o .....

::>

0

"'CII

~