- Capitalism and Alternatives -


Posted by: Gee ( si ) on March 31, 1999 at 16:07:59:

In Reply to: This ought to provoke something posted by Samuel Day Fassbinder on March 31, 1999 at 12:35:44:

It is an interesting article, and Anti-trust is an area of mass confusion. I have already discussed the political purpose of anti-trust in an earlier message (/5702.html) So now I may as well delve into some examples, starting with a conclusion!

The actual history of antitrust enforcement has never warranted the widespread academic and political support it gets.

There is little in the classic antitrust cases to convince anyone that monopoly power is a free-market problem, or that the firms indicted (and convicted) under the antitrust laws were damaging the public interest. Indeed, the cases often demonstrate that the firms involved were reducing costs and prices and engaging in an intensely competitive process, and that the antitrust laws, whatever their alleged intent, were employed to restrict and restrain the competition process.

Standard Oil (1911). For example, in the classic Standard Oil case (1911), it is still widely believed that Standard of New Jersey was convicted because it had restricted production, raised prices, and engaged in ruthless predatory practices to destroy competition. Yet none of this was ever proven at court. Standard lost the decision in 1911 because
a lower court in 1909 had determined that the formation of its holding company in 1899 was prima facie illegal since it
ended the potentiality of competition between the (now) merged firms. The Supreme Court, while announcing a rule of reason, simply reaffirmed the unanalyticaI decision of that lower court.

The petroleum industry between 1859 and 1911 reveals that Standard did not plunder consumers or competitors. The price of kerosene the industry's major product -- dropped from over 50 cents a gallon in the early 1860s to less than six cents in the late 1890s. While Standard always did a large share of the industry's business, they always had competition. When they were dissolved in 1911 for monopolizing in restraint of trade, there were at least 147 independent petroleum refining companies selling products in competition with the Standard Oil Company. The industry was not monopolized.

American Tobacco (1911). The American Tobacco Company (the Tobacco Trust) was ordered dissolved by the Supreme
Court in 1911. Again, legend has it that American Tobacco ruthlessly raised cigarette prices, drove down the price of
leaf tobacco, engaged in "predatory" wars with rivals, and generally acted like the abusive monopoly of antitrust theory.

The legend is sheer fantasy; none of this was ever proven. The Supreme Court did not rule specifically on these charges, and the lower court, which had discussed the charges in some detail, concluded that they did not occur. Even a casual reading of the lower court decision would reveal that the prices of tobacco products were not arbitrarily increased (cigarette prices fell between 1895 and 1907), that leaf tobacco prices rose substantially, and that American Tobacco
did not "dragoon" competitors into bankruptcy or merger with itself. There were hundreds of companies selling cigarettes
in the market, and many thousands more selling smoking tobacco, plug, snuff, and cigars. The American Tobacco Company was large and had a high percentage share in some tobacco markets, but it had not obtained a coercive monopoly position in the tobacco industry.

U.S. Steel (1920). The United States Steel Company, the largest corporation in the country when it was formed as a
holding company in 1901, was indicted by the Department of Justice in 1911. The corporation, however, was found inno-
cent of monopolizing in 1915 and again in 1920. With the Supreme Court's newly enunciated rule of reason actually in
effect, U.S. Steel demonstrated to a majority of judges and justices that it did have active competition, that the compe-
titors were growing faster than the U.S. Steel Company, that essential raw materials were not being monopolized, and that
the prices of steel products had fallen on average between 1901 and 1911. Although U.S. Steel was of impressive size, the Supreme Court declared that "its power over price was not and is not commensurate with its power to produce." Since its economic conduct and performance were judged reasonable, and since mere size was not to be a legal offense, U.S. Steel (and many other large corporations in very similar trials) was declared innocent of any economic wrongdoing.

Alcoa (1945). The 1945 Alcoa decision reversed the rule of reason approach and again made high market share a legal offense. Alcoa was convicted of monopolizing an artificially defined relevant market: primary ingot aluminum. Even though the special Court of Appeals admitted that secondary aluminum (scrap) competed pound for pound with primary ingot, they steadfastly refused to include it when measuring Alcoa's share of the market. Without scrap, Alcoa was doing almost 90 percent of the aluminum ingot business, and that in and of itself was enough to constitute a monopoly and a violation of the law. Alcoa may have been a "good trust," but the Congress had not meant to condone good trusts, said the court in 1945.

Alcoa was, indeed, a good trust, as the lower court decision of 1939 had clearly demonstrated. District Court Judge Caffey had found Alcoa innocent of more than 140 separate government charges. Caffey had laboriously determined that Alcoa had not monopolized bauxite, water power sites, aluminum ingot, castings, pistons, or many other items as the government had charged in its long-winded indictment. In addition, Alcoa had not illegally excluded competition, engaged in conspiracy, and charged "exorbitant" prices, or earned an "exorbitant" rate of return. Aluminum ingot prices had fallen from over $2.00 a pound in the 1890s to less than 22 cents a pound at the time of the trial, and Alcoa's average rate of return for 50 years was just over 10 percent on invested capital. Yet all of this was suddenly irrelevant in 1945. To maintain a high market share for a long period of time, an extraordinary achievement, was to monopolize in violation of the antitrust law.

Actually Alcoa's efficient performance was legally worse than irrelevant and immaterial; it helped convict the company. Circuit Court Judge Learned Hand explained that it was Alcoa's "skill, energy, and initiative" that "excluded" competitors in aluminum production. If Alcoa had been less efficient there would have been "more competition" and no violation of the antitrust law. In one of the most outrageous statements in antitrust history, Alcoa's industrial virtues were condemned as an illegal restraint of trade.

It was not inevitable that Alcoa should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel.

The more recently concluded antitrust case against AT&T provides an excellent illustration of the continuing confusion over monopoly theory. AT&T held monopoly power in precisely those areas where entry and competition were restricted by state public utility authorities and the Federal Communications Commission. In addition, and ironically, a 1956 consent decree had legally frozen AT&T out of certain markets. Government regulation, not vertical integration, was the problem in the telecommunications industry, and deregulation, not divestiture, should have been the appropriate public policy
remedy. Divestiture of the local telephone companies will leave the real source of monopoly power unaffected, and will
create the mistaken impression that Bell's corporate size or the likelihood of cross-subsidization somehow restricted com-
petition. Further, as has already been widely admitted, the breakup of AT&T will tend to increase the cost of local tele-
phoning, and these increased costs will be passed along, under utility regulation, to residential users. Antitrust will
have served, again, to obscure the issue of monopoly power in the economy.

Its also interesting to read about antitrusts effects on the movie industry.

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