The Application of the Federal Antitrust Laws to Some Aspects of Market Structure

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THE APPLICATION OF THE FEDERAL ANTITRUST LAWS ?3r

to m m

ASPECTS of market structure

1A** Edgar Bi Bagley

A dissertation submitted In partial fulfillment of the requirements for the degree Doctor of Philosophy In the Department of Economics In the Graduate College of the State University of Iowa August 1950

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ffi, 0*0 ■t.

ACKNOWLEDGMENTS The writer wishes to express gratitude for the generous assistance and the constant guidance of Ur, Clark C. Bloom*

f 5 tf

ii

PHJ&FAOIS The compass of this study Is demarcated by a distinction between market structure and market behavior* Its concern is with the former*

this dichotomy between the

structural organisation of the market and market behavior Is not entirely valid conceptually, either In law or economies, and admittedly Is somewhat arbitrary. The distinction rests upon the perception of a fundamental difference between interfirm relationships and intrafirm adjustments, both designed to influence the func­ tioning of the market*

Those designed to affect the market

through the agreed-upon actions of two or more firms (at least nominally independent) are subsumed under the heading of market behavior.

Market relations among independent

sellers or buyers and between Independent sellers and buyers, usually referred to as "trade practices,” are treated as “market behavior.” Agreements between Inde­ pendent, unaffiliated firms, relative to the production and distribution of products and services— so-called "loose combinations "— are considered to toe market behavior rather than feature© of market organization.

Thus, for example,

unlesB the dealer and supplier are affiliated, the exclusive ill

dealer arrangement is regarded a® a “trade practice" rather than a true structural form of vertical integration* On the other hand, arrangements which unify the legal control or ownership of formerly independent firms# or which alter the size of an individual firm, are thought of as affecting market structure*

Thus, the acquisition of

voting stock or assets of one firm toy another, or the merger Of two or more firms, 1® treated as an arrangement which alter® the structural characteristic® of the market rather than as an aspect of market behavior* Practical Justification for separation of the two concepts can toe found in the administration of the antitrust laws*

While the underlying purpose of anti-monopoly laws is

generally thought to toe the preservation of a workatoly com­ petitive market structure, the American antitrust laws are in the English common law tradition of proscribing "trad© practices" and for the most part have not been applied to market structure a® such* The boundaries of the study are further delimited by the selection of certain aspects of market structure for analysis*

Singled out for investigation have been certain

factors limiting the number of buyers and sellers in the iv

market place,

First will be discussed the application of

the law to th® increased sis® of firms resulting from growth toy accretion or toy Internal single-firm expansion.

A second

section is devoted to an analysis of the relation of verti­ cal integration to th® antitrust laws.

Although vertical

integration falls logically under the analysis of sis®, a separate treatment of it was thought to to® desirable because of the emphasis which is currently being placed on vertical integration toy antitrust enforcement agencies.

Thirdly, the

relation between the legal monopoly of patents and the anti­ trust laws will be dealt with,

Th® investigation is confined

to these particular structural characteristics of market organization because they are the only ones which have been frequent targets of antitrust action. Not included are structural conditioning factors such as th® characteristics of the product, technical pro­ duction conditions, and geographical distribution of con­ sumption and production, which also have important, if Incidental, effects on the number of firms competing in a market. Application of the antitrust laws to the labor market, to agriculture, and to th© regulated ^public utility” v

Industrie® ha® wot been treated* primarily for the reason that the Federal antitrust law® have rarely been applied to them*

However* a few notable instances In which the "public

utility" Industries have been subjects of antitrust action are Included* No attempt has been made to appraise the effec­ tiveness of the antitrust laws in preserving competitive market structure* or In the accomplishment of any other, goals• Accomplishment of the ends of antitrust laws could be frustrated by Inept framing of the laws* by vitiating court interpretation®, by half-hearted enforcement * or by the Impracticability of the ends themselves.

Adequate

evaluation of the laws would require consideration of all of these factors and perhaps others.

It is the qualita­

tive— not the quantitative— application of th© antitrust laws to market structure which is examined In this study— the applicability rather than the extent of th© application of the law®. Since the object is to ascertain th© meaning of the antitrust laws* the quest leads naturally to court decisions* for* although the courts play a passive role in interpreting the laws, theirs Is th© final word.

Analysis

of court decisions, therefor®, commands the major share of attention herein*

Since the active function is performed

by th© enforcement agencies, their interpretations of the law also must be and are examined.

Interpretations put forth

by enforcement agencies which are not contested by th® accused individuals and business firms are assumed to have th© weight of authority* A word about terminology is in order#

Th© terms

"monopoly," "monopolistic power," '‘monopolistic size," and "bigness" are used frequently throughout the dissertation# They ar® intended to describe market structure in which one or a few firms account for a preponderant share of th© trade in a particular product or service#

They do not refer to

the absolute volume of output or sales, but to th© relative sia© of this volume compared to that of the market of the particular industry.

Obviously, the market influence

wielded depends on many ^factors other than the number of •# firms. A single-firm monopoly of a product for which there *

are many close substitutes wields far less power than the largest grocery chain which may account for no more than 10 per cent of total retail sales of groceries.

And th®

monopsonlstic influence may be of a different order of vll

importance than th® monopolistic Influence in many instances, or the reverse may be true*

The terms are used loosely and

for lack of better word© to -convey the same meanings*

vlll

TABLE OF CONTENTS page Prefaoo* * . . * ................

. *

Introduction

111

1 Fart On©

THE ANTITRUST LAWS AMD MONOPOLIST10 SIZE Chapter I

Th© Economic© of Bigness...............

23

Chapter II

First Phase— 1900-1918— Monopoly vs* Monopolising* . . . . . . . . . . . . . .

44

Th© Railroad Cases--Exceptions to the Rule...................... . . . . . .

73

Second Phase— 1918-1937— The Vindication of “Bigness”, . . . . . . . ...........

85

Chapter V

Section 7 of the Clayton Act* . . . . . .

115

Chapter VI

Third Phase— 1938-1950— The Law Applied to Market Structure * ......... . . . • . 150

Chapter VII

Summary and Conclusions . . . . . . . . .

Chapter III Chapter IV

229

Part Two THE ANTITRUST LAWS AND VERTICAL INTEGRATION Chapter VIII

The Economics of Vertical Integration . .

237

Chapter IX

Vertical Integration and the Law— First Phase— An Incidental Aspect of ........... Monopolizing,

261

Ix

page Chapter X

Chapter XX

Chapter XXX

Vertical Integration and the Law-Second Phase— Inherent Unreasonable Restraint of trade, Vertical Integration and the Law— Third Phase— Disintegration as a Remedy for Abuses,.................. Summary and Goncluaion©...........

286

319

. , 347

Part Three PATENTS AND ANTITRUST LAW Chapter XIII

Two Philosophies— Conflicting or Complementary?...................... . . 356

Chapter XIV

Patent Pooling.........

331

Chapter XV

Restrictions In Sales of Patented Products ..................

414

Chapter XVI

Restrictive Leases and Licenses . , , .

Chapter XVII

Copyrights and Antitrust Law, . . . . . .

Chapter XVIII Summary and. Conclusions on Patents and Antitrust Law ...... Conclusions and Recommendations, * . • • Bibliography...........

, 433 482 501

............. 533 573

x

1 int rodu ction

In th© middle of th® 19301&, coinciding with th© popularization of various theories of Imperfect competition and the collapse of th© National Recovery Act, there began a rejuvenation of "trust busting" in th© United States.

Hot

only was antitrust enforcement revitalized, but it was also slanted in new directions in an effort to cope with the phenomena of oligopolistic markets and Increasing size. Eventually th© courts were exposed to and, it is probably not Incorrect to say, influenced by, the new approach to antitrust policy. The regeneration of antitrust enforcement was fueled by reasonably adequate financial support from Congress and th© Administration*

Appropriations for anti­

trust enforcement were tripled between 1936 and 1941, being Increased from 1435*000 to £1,325,000*

Two hundred new

cases were started by th© Antitrust Division of th© Depart­ ment of Justice during these flv© years, almost half as many as had been initiated in th© preceding forty-six years 1 of the Sherman Act* Th® activities of the Federal Trad© Commission 2 show a similar but less marked expansion. Between 1936

'17 Corwin" P'r^Mwards.1MalntaInina

Comoetition . p . 297.

2, Because the Jurisdiction of the F.T.C. has been confined

2 and 1941 Federal Trade Commission expenditures Increased from #1,900,000 to #2,250,000.

Since the Federal Trade

Commission program is concentrated in th® trad© ethics area, Its activities do not Indicate the shift in antitrust policy as pointedly as the changes in Department of Justice activ­ ity,

The Federal Trad© Commission docket is heavily

weighted with misrepresentation cases which were, if any­ thing, more prevalent in th® depression years than in th© years following.

.

In the number of restraint of trade eases

decided by th© Federal Trad© Commission, however, the Increase in activity was sharp.

The number decided Increased from

nineteen in 1936 to eighty-six In 1941*

The Robinson-Fatman

Act In 1936 and the Wheeler-Lea Act in 1938 added somewhat to the burden of the Federal Trad© Commission, A number of stimuli In the revival of "trust bust­ ing** suggest themselves, 1,

Rejection by th© courts of th© National

Recovery Act sounded th® death knell of the early New Deal experiment in replacing competition with socially oriented cooperation.

It was a signal to revert to the opposite

policy of reliance on rigorous competition as a regulator of th© economy* largelyto niar^K'',b©lSvior rather than maSet ^structure, discussion of th© Commission will be limited to its activ­ ities in administering Section 7 of the Clayton Act.

3 2*

The personality and th® view® of Mr, Thurman

Arnold, appointed to the post-of Assistant Attorney General In charge of the Antitrust Division of the Department of Justice In 1936, was doubtless a factor,

Mr, Arnold was

an indefatigable prosecutor of entrenched economic power wherever he found it,

His.driving energy and determined

purpose were unquestionably important factors In the vitality of th® new campaign, 3*

Th© emphasis by economists on price rigidities

as factors in low levels of output and employment probably 3 exerted, some influence, 4*

‘ Publications appearing In this period which

pointed to th© increasing concentration of control in the 3# The relation of''pric© "rigid ities’"to r,depressio¥nbeeame a disputed question, but the feeling persisted that the extreme fluctuations In Industrial output were aggravated by concentrated economic power. Willard L, Thorp and Walter F* Crowder found the association of industrial concentration and price rigidity not to be appreciable. See "The Structure of Industry, T.N.E.G, Monograph No# 27* For other analyse© of th© relation of price rigidities to monopoly, see Saul Nelson and Walter G, Kelm, "Price Behavior and Business Policy," F.N.E.C* Monograph No* 1; Edward S. Mason, Review of Economic Statistics. Vol. XX, May 1938, pp. 53-6$; J. X,Galbraith, Suaj^erly Journal ofr Economics. Vol. L, May 1936, pp. 4564f5; Don B# Humphrey, Journal of rolltlcal Economy, Vol. XLV, October 1937, p p . o51-S51; Matlonal Resources Committee, The Structure of the American Econcmfi, Ft* I, pp. 122-152, and all ofFt, If.

4 economy also helped revive interest In antitrust enforce4 ment. 5>* Th© hearings of the temporary National Economic Committee, a massive Congressional investigation of economic power, unearthed a vast quantity of information about th© structure of American industry*

Hie voluminous

Hearings and the Monographs have been widely quoted In economic and legal periodicals, and even in court decisions* With th© onset of World War 11 antitrust pressure was temporarily relaxed, only to b© stepped up again with renewed energy at th© close of th© war*

Experiences' of the

government in contracting for production of military equip­ ment and supplies, difficulties encountered by returning veterans in entering business, "bottlenecks” in expanding production to meet post-war shortages, and a sharp increase in merger activity, all contributed to an aroused interest In the "monopoly problem*” Humorous Congressional hearings have probed the threat of encroaching monopoly power and considered th© legislative changes which may be needed to 5 meet it* 4* A* 'A.* "Seri© and Gardiner C T^Meani1' ' study of ’the 'two huh? dred largest non-financial corporations which appeared In i>& Modern t e M l l l M 3 M . H gt e M teOJfttitf. Frank A, Fetter1* ffae Masquerade si miSSmXt Arthur H, Burns S M Ptglth* Si CoaaetitlQn. the National Hesources Coamities's ggg Structure si I M American Economy, were

among th© more influential and important* 5* A partial list would include*

"United States Vs* Economic

5 interest in antitrust enforcement has aleo been stimulated by recent studlee which have suggested that th© trend toward concentration of economic power in th© '6 United States has not abated* Again Congress has responded with added approprla* tions*

Attorney General Tom Clark told the House Monopoly

Committee in 19^9 that th® annual antitrust appropriation of f3,400,GGQ in 1946 and in 1949 was 11,200,000 larger than it 7 had ever been before* Refer© 1934 only six to ten lawyers were assigned to antitrust work; In 1949 over three hun­ dred were active*

Attorney General Clark also reported

that of 98? eases filed by the Department of Justice sine© the passage of th® Sherman Act, 308 were filed in the period 1939-1948«

Fifty-seven new cases were

® "Monopoly Subcommittee of the House Committee on Small Business, Pursuant to H*R* 64, 79th Cong*, 1946; "Economic Conoentration ana World War II," MPSKp M ISfi SiWUgff neats q w a m U s gs to th® Special Committee on Study of th© Problems of "Small Business, Senate Doc. 206, 79th Cong., 2nd Sees., 1946; "Report’on-Monopolistic and Unfair Trade Practice® He.nort 2465 * Committee on Small Business, 80th Cong., 2nd [email protected]©s*, 1948; "Study of Monopoly Power,*' Hearings before the Sub-comm ittee on Study of Monopoly’Power, H*R*, 31st Cong*, 1st Bess., 1949, Serial Ho. 14, Pts* 1, 2-A, 2-B* 6* Federal Trade. Ooaraieelon, Report on Th© Merger Movement * 1948; Federal' Trade 0omisalon,Hepopt m fee Conoentra-

Maa a£

EssiiUMaa. J S 7 W .

7* Hearing®, "Study of Monopoly Power,'* op. clt., Pt. 1, P* 77*

6 filed In the 1949 fiscal year, and forty*on© oases were won in the courts by the Government in th© same period.

Of 250

consent decrees negotiated In antitrust oases since th© passage of th© Sherman Act 125 were arranged between 19-40 and 1949* While there is a marked trend in the direction of augmented antitrust activity, a consistent policy has not been pursued,

Th© attack on concentrated economic power-*

bigness— has been pressed vigorously, but there have been deviations from th© policy of supporting active market com­ petition*

the "fair trade" laws, passed by the states

during the depression to protect small business, exerted a "softening" Influence on competition, particularly price competition*

In the Miller-Tydings Act and the Robinson-

Patman Act, th© federal Government gave its approval to this trend.

These law© are still on the books, and feeling

is still high that th© antitrust laws should protect the small and th© weak from th© ravages of competition.

Price

differences are denounced as weapons of aggression by the 8 strong while identical prices among competitors are 9 belabored as conspiracies not to compete, $, 0.5,T v *rjfe'w Xork"Great"rA t i ,173 ’ F. 2d ?9 {1949)5 Standard Oil Co. (Indiana) v* P.T.C,, IT3 F. 2d 210 (1949). 9# F.T*0* v# Triangle Conduit & Gable Co*, 168 F* 2d ITS

T In th© conduct of th© new antitrust campaign, th# aggressive and revitalised enforcement agencies revived abandoned legal doctrines and put forward new ones for judicial consideration*

The testing of these new principle®

of antitrust law is coming about through the slow and gradual process of litigation.

It has required several, years for

antitrust proceeding© initiated at the inception of th© new program in the late 1950*s to work up through the court© to final adjudication, th® delay being partly aeorlbabl© to World War II*

But by th® end of the war the courts had

begun to read off antitrust decisions in rapid succession* In these oases the Supreme Court has evidenced a willingness, which had not been apparent for years, to give favorable consideration to th# [email protected],s position on antitrust matters. The new outlook of th© Court was enhanced by a complete turnover in its personnel.

By the end of 1945

only Chief Justice Harlan F, Stone remained of the tribunal which had repulsed th® National Recovery Act, and he was a loyal champion of antitrust enforcement * Flushed with vic­ tories in the courts, the antitrust agencies have redoubled their efforts, and a® fast as novel legal concepts and new -

U94S) s' Pevsiy Dairy Co. V. O.S'.",' Ho'; l3,W"U sM§ ] at 9o""

32* U.S. V# U.S. Steel, 251 U.S. 417 (1920). 33. U.S. v. International Harvester Co., 274 U.S. 693 (192?)• 34. f.t.o., M m S i m

I M Iisms E a m t n i , pp. 22-23.

18 merger loophole It was Impotent anyway*

In the later year©

of the period faith In competition we© shaken by the depres©ion and, for a brief time during the National Recovery Act episode, antitrust activity was completely stayed* With the rejection of market power as a test of Sherman Act violation, there were left the two "old standbys11 as targets for the laws

(I) abuses of monopolistic

power— profiteering from market control, or exclusion of competitorss and (2) practices, agreements, and combinations specifically intended to monopolise* tying restrictions in leases of patented articles were specifically treated by the Olayton Act, and during this period, In private suits and antitrust cases, the ban was extended to tying restriction® In patent licenses* On the whole, however, patent abuse® attracted but little attention in antitrust circles. 3»

the third phase coincides with the revival of

antitrust activity in the late 1930*s.

This phase is remi­

niscent of the first period in the directness with which industrial concentrations were assailed and in the return of dissolution and divestiture as remedies.

With expanded

staffs, a favorable administration, and a friendly Supreme Court, the antitrust agencies enjoyed the most active and successful period in the history of the antitrust laws.

19 35 The sanctuary of th© proas,

36 insurance,

37 professional organizations, and other theretofore exempt 38 organizations m s Invaded, although efforts to restore labor organizations to effective jurisdiction of the anti39 trust laws failed. The renewed emphasis on dissolution remedies testified to an awareness of the Inherent demoralizing effect on competition of concentrated economic might, however Innocently acquired or benevolently exercised. In this period the Government Inveighed against ttbigness per se” and endeavored to persuade the courts to im S s T ’"©t '" a l * a 326 0 . sV l

(1945).^

36, In U.S. v, South-Eastern Underwriters * Association, 322 U.S. 533 {!944), insurance was held to be interstate commerce. But In 1945 Congress passed th© McOarran Act (59 Stat. 33, 34, 15 U.S.C.A. filOll-1015) which exempted insurance rate-fixing from antitrust prose­ cution if regulated by stat© laws. 3T. U.S. v. American Medical Association* 317 U.S. 519 (1943). 38. In U.S. v, National Association of Real Estate Boards, 84 F. Supp. 802 (B.C. Met. Gel,, 1949); reversed by Supreme Ooart May 8, 1950, reported at qi52,5£l, trad© Regulation Reporter, th© Government won out in an attack on fixing of real ©state commissions. In U.S. v. Henry S. Morgan, now pending, the Government is attempt­ ing to break up an alleged conspiracy to monopolize the investment banking business; Olv, No. 43-757 (B.C. B.Y.) reported at 61,088, Trade Regulation Reporter. The Bulwinkl© 3111 (P.L. 662, June 17, 1948) exempted rail­ road rate-fixing agreements from antitrust action under most conditions* 39. U.S. v* Hutcheson, 312 U.S. 219 (1941); Apex Hosiery Go. v. Leader, 310 U.S. 469 (1940).

20 overthrow the United States Steel and International .Harvester precedents* For Judicial support# the railroad oases were exhmaed and cited by the Opvemaent In- Its efforts to bring the Sherman Act Into closer contact with market power#

In

some of the later decisions of the period# particularly the 40 41 Aluminum Company of America* .. .American Tobacco# and motion 42 picture cases* the courts appear to have come very close to declaring that to have a monopoly Is to monopolise within the meaning of the Sherman Act*

the legal# or behavioristic*

concept and the economic, or market control# concept were apparently merging# » -• . the courts have moved a substantial distance in the direction of accepting the pres­ ence or absence of market conditions associated with the notion of workable competition as appro­ priate tests* On all four of the important desiderata, number of firms, share of the mar­ ket, collusion, and the conditions of entry# previous doctrine has been altered or e x t e n d e d . 43 A large-scale campaign to weaken monopoly power based on patents was launched about th© time of the Temporary Sational Economic Committee Investigation of 40.U.S* v * Aluminum Co#'"of Auerica, 148 FY 2d "416'’(1945)* 41* American Tobacco Co. v# U.S., 328 U*S* 781 (1946) * 42* See particularly U*S. v. Paramount Pictures* 334 U.S. 131 (1948). 43* Edward S. Mason, Harvard Law Review* Vol. 62, p. 1272.

21

eeottouie power*

fhi& campaign has not been limited to

antitrust activity, although it has been carried out with 44 perseverance and outstanding success In this area* 'Over­ haul of the patent system itself has been pushed* 45 changes in the law have already been enacted*

Some

Mlg| A Examination and appraisal of certain of these developments is the major purpose of this study*

Th# recent

interpretations of th® law which strike at the sinews of economic power— monopolistic market structure— represent the greatest deviations from the traditional antitrust approach*

They are, moreover, by the point of their impact,

th® most significant developments, and for that reason the spotlight of this analysis Is focused on them*

Attention

will be directed at answering th© following questions: 1,

What is th© status under the antitrust laws

of preponderant size, i.e., market power per se? 2.

What constitutes market control or monopolistic

power under th® law? a.

How Is the market defined?

b*

What are the standards for measuring

market power? %4* " f p f T'Part" "Three7 45* 2 n l m > pp* 517-518.

22

3*

What 1® th® status of vertical integration

under th® antitrust laws? 4*

How have the monopolies conferred by patents

been reconciled with the antitrust laws? of th® patent monopoly?

What is the ©cope

23 i3MU&...'Q£NI

fHg AmifBJBf LAWS A W HO10ImXBTXO &XZE Chapter X t m SOOZIOMSQS OF BiafflBS ftlBWttMM A

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MaMttWI

From th© point of view of econcralc policy, competition is supposedly desirable, not as an end In itself, but for the results that ar© expected to follow front it# These expected results zaav be paraphrased as efficient us© of resources.^6 Th© above statement by one of the outstanding students of th© monopoly problem expresses clearly a point which it is well to bear in mind in appraising the organiza­ tional structure of American industry. Competition may be viewed in terms of results, as in the above quotation, or it may be thought of in terms of the system of market conditions— th© organizational frame­ work of the market place— which is calculated to produce th© desired results.

At the bottom, economic competition is

human behavior.

Th© apparently universal tendency to com­

pete is conditioned, however, by the market environment. M r""ldw ard S» Mason. B astard 'Xffiw"SvTew 7T o l . 6 2 . pp. I 2 M -

1267; see also a* S. Miriam, Harvard Business Bevlew. Vol. XXVIII, pp. 109^126, for a similar view.

Certain market structures virtually preclude effective competition; other market structures are conducive to the development of non-competitive attitudes, and still others ar© reasonably certain to insure competition. In describing th® workings of a fro® enterprise economy, economists traditionally have postulated a market structure which Is supposed inevitably to guarantee th© presence of a competitive frame of mind among th© partici­ pants and to channel it in directions which result in "economy."

As is well known, this "purely competitive*

market, so-called, is an Idealistic abstraction, not only rarely found but practically unattainable.

Expose of th®

Illusion of pure competition has not, however, necessitated the abandonment of all hop© of utilizing competition as a regulator of th© economy, nor has it diverted economists in their attempts to explain competitive behavior in terms of market conditions.

Attention has been turned to answering

the following questions: 1*

How doe© competition function in the imper­

fectly competitive markets of th® world of reality? 2*

Can th© Important desirable results of pur©

competition, and the competitive frame of mind, b© attained in markets which do not contain all of the conditions of pur® competition?

25 3#

If th® answer to th© second question is wy©s,M

©an. th© market conditions essential to "workable competition" he definitely ascertained? 4.

Do th© market structures essential to "work­

able competition" actually prevail, and If not* are they practical goals of economic policy? A number of definitions of "workable competition'1 haw© been suggested, and a number of descriptions of th® market conditions essential to workable competition have been essayed#

Professor John M, Clark offers the following*

Competition is rivalry In selling goods, in which each selling unit normally seeks maximum net revenue, under conditions such that the price or prices each seller can charge are effectively limited by the free option of the buyer to buy from a rival seller or sellers of what we think of as "the same" product, necessitating an effort by each seller to equal or exceed th® .attractiveness of the others* offerings to a sufficient number of buyer® to accomplish the end In view.^7 fhis rambling definition embraces both market conditions and seller®* attitude®.

It is stipulated that sellers seek

maximum profit by striving to beat each other*s offers.

If

the sellers do not react competitively or rationally, the hopsH*foro results will not be realised.

WTMSTU.

The "free option"

dlark, American Economic Review. Vol. XXX, Ho. 2, ?&rt’lf p, 243.

26

of the buyers is a fiction if the terms offered by all sellers are alike*

Market structure alone may not insure

competition# unless defined so broadly and In such detail as to include all of the factors which determine the psycho­ logical propensities of the buyers and sellers# If what Is needed In a definition of workable competition is a blueprint of the market organization which will Insure that sellers compete In the manner Professor Clark has described, his definition falls short*

However, he

elaborates on the definition by. listing factors which influence th© manner in which competition functions: Cl) characteristics of th© product (standardized or unstandardized); (2) the number, size, and distribution of sellers and buyers; (3) th© general method of price making (supplygoverned# or quoted prices); (4) the general methods of selling (use of middlemen, etc*); (5) the character of and means of communicating market Information; (6) the geographic distribution of consumption and production; (7) the degree of current control of output (length of production process, seasonal factors); (8) the behavior of costs with respect to the size of the plant; (9) the behavior of costs with respect to fluctuations In output; (10) the flexibility of productIon capao1ty*

27 Professor Stlgler gets at th® ©am© point® In more precis© fashion* Ah Industry Is workably competitive when (1} there are a considerable number of firms selling closely related product© in each impor­ tant market area, (2) these firms are not in collusion, and (3) the long-run average cost curve for a new firm is not materially higher than for an established first. this definition also stipulates th© competitive attitude in addition to th® market features of numerous sellers, and add© eofit conditions which will guarantee relatively free and easy entry to the industry.

The likelihood of collusion is

reduced and its harmful result® mitigated by the presence of the third condition. Mr* Corwin Edwards lists several Hstructural character1sties’* of work&bly competitive markets?

(1) an

appreciable number of buyers and sellers; (2) no dominant trader; (3) traders primarily motivated by pecuniary motives; (A) no collusion; (5) n® restriction to entry ’’other than that which 1© automatically created by th© fact that others are already well established there”; ($} communication between buyers and sellers limited only by natural frictions such a© distance or incomplete knowl49 edge; and (7) no preferential status for any traders. It 4&." fflB>

pp.

1506-1507 in

n 71 i l w r -ahd inoonclusiv®.

Increases w#r® ©harp in some

instances, notably textiles and distilled liquors, but on tbs whole there was no significant increase In concentra­ tion between the two years* On the other side, Professor Clair Wilcox notes the estimate that if the relative rate of growth of small and large concerns between 1909 and 1929 were to continue, the two hundred largest corporations by 1950 would own TO per cent of the total corporate assets In the United 72 States* Already noted, were the Increases found toy the 73 National Resources Committee. In general, th© studies made toy Government agencies indioat© increased concentration * In all probability, World War II aggravated con­ centration , in spite of ostentatious efforts on the part of the Government to prevent it.

It was reported to Congress

in 1945 that 75 per cent of all prim® war oontraots were fj'7^itu^^^llonopofy #ow©r^' hearings, op." clt.'. Ft. 2-1'."'“' p* 1456. 72* T.N.E.C* Monograph No* 21, p. 299* Clearly this rat© of growth has not been maintained. See P.7.C.. Report on

'£&& 8flB«iafccfcUftB al gcmftmiAA,y. Lasilltlss. i££Z» gaasa. p. 3«. 73* 'National Hesources Gousiittee, Structure. of the American Soonoay♦ Pt. I, p. 107.

39

74 handled by- Oil© hundred corporations.

Th® federal Trade

Oommiaeion' has dissevered a new merger movement in the war and pft*i«trar period, which is in part attributed to high 75 profits' and accumulated wording capital* Stimulated by demobilisation, post-war shortages, and government assletanoe to veterans, the number of new firms, mostly small, Increased' tremendously, but the failure 'casualties have been high, and many have also been swallowed up by larger firms. it Is not argued that these -figures on concentra­ tion Indicate that coApetlt'toh' ha© declined in effectiveness. Even If concentration has increased, it 1© possible for competition among fewer, larger firms to be active*

Inter-

product rivalry is an Increasingly potent source of 76 competition. Th© extent of local monopoly Is often overlooked in studies of monopoly. Actually, the individual consumer in thousands of small CQmaunities has no real price alterna­ tives in the purchase of many commodities and services*

On©

observervfiot©© that! rtiajj^euse "lufli'clary 'ffiommft-'" 15i779th-Oong*, 1st dess., 1945; see also Smaller War Plants Corporation, "Economic Concentration and World War 21,M Senate Doc,* 206, 79th Cong., 2nd 3ess., 1946. 75. F.7.S., itapxfe m

I M assess I mat ak* pp. 20-21 .

76. Clair Wlloox, American Boonoalo Review. Vol. XL, pp. 6773.

40

Of tli© 143*7 billion dollars of personal consumption expenditures in 1946, considerably over 5Q percent was expended on euoh item® as rent,, laundry, dry cleaning, local produce, inaur&ne®, recreation, local transportation, medical care, death expenses, auto repairs, and' similar commodities and services— virtually all of which are produced beyond the reach of the federal antitrust laws* And In spite of the fact that there are literally thousands of entre­ preneurs engaged In producing each of these commodities and services, dozens of which are located in each fairly large city, the writer has observed little evidence of vigorous competi­ tion among them* Demand for most of these com­ modities and services cannot be conveniently shifted from one local market to another; and within each local market the consumer has no real "alternative" sources of supply*#/ The above statement may be a somewhat exaggerated statement, but it does point up a too often neglected defect of competition*

It is obvious that, given the same product

characteristics, a local monopoly, or collusion in fixing local rates and prices, is of less consequence than national or regional monopoly• The advent of the automobile has weakened the force of local monopolies*

The mail order

houses and chain stores have also stimulated local competition. W 7 Jesse" W*'r~Marldmm'^ American EQonom.io ‘i©.vliw7^ol71a^ Comment, p. 169*

~

41 y&mTL,

JfiBBBBfcl

g£ Monopoly

In the drafting and administration of antitrust lairsv preservation of competition has been approached from the standpoint of » £ M & M t e i t e rather than m m \

*&m~

tofts. As Professor E* S.* Mason, in a classic exposition, has noted, the concepts of monopoly In law and In economic® have, been quit© different and have tended to diverge through the years of experience with the American antitrust laws. the antithesis of the legal conception of monopoly la free competition understood to be a situation in which the freedom of any individual or firm to engage in legitimate economic activity is not restrained by the state, toy agreements between competitor© or toy the predatory practice® of a rival* But free competition thus understood is quit© compatible with the presence of monopoly elements In the economic sense of the word monopoly* For the antithesis of the economic conception of monopoly is not free but our© competition, understood to be a situation in which no seller or buyer has any control over the price of his product* Restriction of com­ petition Is the legal content of monopoly} control of the market is its economic substance.7“ fhe judicial essence of restriction of competition is exclu­ sion of competitors* By monopoly, the courts did not mean control of the market, tout restriction of competition. While a contract between competitors designed to limit competition carries the evidence on Its face of an attempt to monopolise, a merger between com­ petitors does not, so that the courts had perforce to inquire, (1) into the intentions of the merging fsr'iiiiSM'iSr "jfeion*'

rw i iro,,w »"

Interests, and (2) Into such mot© of the merger m .might indicate reetrlo'tien of outside ©amp©tItton,79 $h© historical origin© of Hi© 1m

against monopoly

are ’found' in English ©oomon law which censured practices Intended i© have the offoot of ©mating market control 00 rather than market control Itself, Because the law waa directed at "monopolising" rather than "monopoly," the underlying philosophy that monopoly itself is undesirable is often forgotten*

therefore, emphasis on the overt

attempts-, by either collusive or Independent methods, to control the market should not be Interpreted as approval of monopoly itself if acquired by other means. the pinch of the law- to non-competitive and ant

Limiting competitive

trad© practices merely indicated faith in the ultimate effectiveness of this method of avoiding monopoly*

In the

small-scale, unspecialised economic Ilf© of medieval England, such trust may have been safely rested. the wording of the Sherman Act, which declares against combinations to restrain trade and against monopo­ lising or attempting to monopolize, reveal® the debt to ?9.‘ lbia:, P. 43

1

1

1

80. The English law was oomaonly directed against "engrossi««r the market which meant preempting the supplies, "regrating,"■whioh referred to buying up-.' supplies-for the purpose of later sal® at higher price®, and "fore­ stalling, " which referred to intercepting supplies- on ■the way to the market.

m English common law*

Eternal wrangling in the courts over

the meaning of the Sherman Act has resulted In prolonged controversy regarding the intentions of Congress in passing the law*

The Congressional debates have been reviewed in

minute detail, and other evidences of the spirit of the times scrutinised, but the results have been inconclusive, and the meaning of the Act remains In a state of 81 uncertainty• &1* See 'early''’Supreme decisions "in Merman Act "cases for contrasting views* V«£t, v* Trans-Missouri Freight Association, 186 U.S. 290 (1897)? Standard Oil Co« v. U*S.» 221 U*S. 1 (1911)* See also Eugene V. Kostow, m x n m im w . pp* 745-793, ana m m v a a. Johnston and John >♦ Steven®, Illinois Law Review, Vol. 44, pp. 269-297*

44 Oluipter IX t x anr

?$♦ N o n o p o L x z m

■ In the first important phase of antitrust enforce* sent, there were actually two Hoes of cases dealing with the'question of market control*

Xn one category were a

number of railroad cases, combinations in every instance, and usually holding companies*

Xn the other were certain

Industrial combinations considered by the courts somewhat apart from the railroad cases*

In the railroad oases market

control was consistently a pertinent and even determining factor, although intent to monopolise was always charged. In the industrial cases, intent to monopolize and the abusive exercise of economic power were th© primary criteria of violation; the stand of the courts on "bigness per

bqh

was

never clearly stated* The reasons for this difference in treatment are not hard to find.

The courts were impressed by the great

strides which had been made and were being mad® in mass production techniques in industry generally.

These develop­

ments appeared to require Increasing size and integration; and the companies, of course, vehemently denied any other purpose in their expansion*

This attitude toward large-scale

business enterprise resembled aw® and respect and was quite

45 fissoral*

It u»do$it®&ly was conducive to the development

of the apparent •‘double standard11 of legal lty~«*o?i® standard for industrials, th© other for railroad©# On the other hand* the railroad industry had' already reached a relatively mature technological level, and production economies were not seriously urged a© justi~ fixation for the merger®#

In addition, the natural monopoly

aspects of railroad transportation may have been partly responsible for assigning greater importance to market control in the railroad oases, and the fact of such monopoly wo© usually noted by the court in condemning railroad 82 mergers. Even though— after the passage of the Transportation Act of 1920— -antitrust activity against the railroad® practically ceased, and despite their unique character, the railroad eases will be discussed because, in the current flurry of antitrust activity, they have been revived to add authority to the contention that the censure of economic power Is not a novel approach#

These eases will furnish th©

subject matter of Chapter III, while the material which follows in the present chapter is limited to cases involving Industrials. ! $ ♦ ''"Northern S e c u ritie s g o I’"v r,,-0 7 S r 7 ^ i^

m % m ttwswaft M l sets By WI.3T standard, the grmat,atatsdard Oil and b m r i a m Tobacco combine® ware flagrant transgressions of the antitrust law*

they ware built by combinations! among

competing concerns, with deliherai® Intention® of monopoliz­ ing*. Evidence was abundant that substantial monopoly power bad actually boon achieved and of th® employment of unfair, coercive and suppressive tactics in gaining and maintaining It*

In these ease® there was actually little reason for

the court® to make a comprehensive examination of th® legal 83 status of the monopoly power Itself. Nevertheless, some of the judge© in both trial and appeal courts perceived the significance of the matter and frequently commented on it even though disregarding it a® a relevant issue.

Chief

Justice White wrote a long, searching opinion in the Standard Oil case discoursing on the origin and meaning Of the Sherman Act and the nature of violations tnereunder. Sidelong glances were cast in the direction of the question of monopoly power a© such, but it was not directly dealt with, and the courts1 view® on the question are not 84 conclusive* iSfr^rofessor IdwardM*' £©vi cofS'ents," ,1H"lt"is probably unfortunate that the Standard Oil and American Tobacco cases were Such good prosecution cases. Th© presence of enor­ mous abuses In both made it unnecessary for the court to make up its mind about th® basis of the Sherman Act.H M ix * si MAshot te a figsAss, v o l. i * . p. 158. 84. Standard Oil Company (N.J.) 7. U.S., 221 U.S. 1 (1911).

The history of th® Standard Oil Company from th® date of it® formation In 18?0 until the dissolution of th® Hew heresy holding company In 1911 1® th® record of a fan­ tastically successful and profitable attempt to monopolise the booming oil Industry*

During this time