Antitrust Policy The antitrust laws are distinctly American contribution to political economy, copies in recent years by some

other countries. They constitute the national policy toward most of industry- one of protecting consumers by enforcing competition rather than relying on government ownership, regulation of prices, or laissez faire (leaving business alone) 207. INDUSTRIAL CONCENTRATION. Has been a strong trend in modern capitalism, but it has not suppressed competition. The much talked-of concentration trend in industry stands for the tendency toward fewer companies making more of the sales (or owning more of the assets) in particular markets or in the whole economy. Karl Marx and others who predicted in the mid-19th century that the ownership and control of industry would become more and more concentrated were right. Greater size of organizations has been a modern trend, though this is not unique to business. Other private organizations, and government, have developed in the same direction. In fact, many critics of business concentration have advocated still greater centralization of economic control- but in the hands of the government. The growth of concentration has reflected the economies of size and the trend of mergers. (1) we have mentioned how the big meat packers could sell for less than local slaughterers (179a). The sizerequired to make, sell and service automobiles is known to all. Few doubt that huge resources are required for an integrated oil or steel company, and for any industry dependent on international raw material resources. Research facilities like those of Du Pont, Monsanto, or Dow Chemical cannot be supported without large sales. In short, the economies of mass production and distribution explain much of the industrial concentration today. (11) the rest is accounted for by the merger movement which began in the 1880s and, with temporary pauses, has continued (62). Many big corporations originated in mergers General Electric in 1892, US Steel in 1901, General Motors in 1908 are examples. Others have continued to expand by the acquisition route- ITT, with $1.5 billion assets in 1963 and $10 billion in 1973, has been only the most famous of many in recent years. It is impossible to prove whether mergers have, on net balance, added to efficiency or not. A very broad impression that the mergers which gave us companies with mass production and distribution capabilities were necessary, but that many of those which added to their size and diversification were not, is just an impression, not provable.

Recent mergers have been conglomerates, adding to total asset concentration rather than to concentration within industries. Under the antimerger law of 1950, acquisitions of competitors, and usually those if customers or suppliers, are illegal. The numerous owners of successful smaller companies seeking to sell out in order to secure a safer investment, the big companies looking for acquisitions to increase their prestige and hopefully their earning power and the brokers or promoters who bring the parties together, have turned to conglomerate mergers. These unite companies in slightly, or entirely, different lines of business. Overall asset concentration keeps increasing, but competition within each industry is not reduced. Firm A formerly competed with B and C with D; after two mergers, the A-C company competes in both lines with B-D.

The future of concentration will be determined by how well companies of different sized cope with the market conditions of the future. As technological and market conditions change, larger corporations, with resources to meet large risks and with the capacity of specialization in both labor and capital, may be needed. Or smaller ones, with their flexibility and the drive that management has when it is working for itself instead of for stockholders, could win out. Factors like these, within the guidelines laid down by the antitrust laws, will determine the structure of tomorrows economy. Most likely, conditions will continue to make it possible for companies of several sizes to coexist in most industries, often performing different functions. Meanwhile four things may be said about todays concentration. (1) It is probably less in the United States than in any other industrial country (2) It has not prevented vigorous competition from continuing in American industry (3) If concentration is, indeed, a technological necessity- some of it is, certainly, but we are not sure how much- we must recognize the regrettable offsets. There would be more opportunities for personal independence if there were a greater number of small enterprises. The case should not be overstated, however: if each of the 500 biggest companies were one-tenth of its present size, it would add only 4,500 to the total number of independent companies. (4) The antitrust laws do not by words prohibit the increase of concentration, even though they forbid several practices if their effect may be substantially to lessen competition or to tend to create monopoly a. The history of concentration 1. In the late 19th century concentration increased sharply, for two reasons: (1) improved transportation (mainly the railroads), and to a lesser degree of communication (telegraph and telephone), made it possible for companies to carry competition into each others local markets. Many local firms b. Concentration abroad 1. Most national economies area so small that they are dependent on fewer sources of goods and services than we are, even after allowing for their greater reliance on imports 2. The German cartels and Japanese Zaibatsu- or big conglomerate enterprises are wellknown. In a country like India, concentration is increased by the government when it limits the number of companies allowed to operate in each line of business. There is a complete concentration in socialist countries. 3. Studies in Canada and Britain have shown higher concentration ratios than in the United States- undoubtedly due to the smaller size of their economies. In Britain, the three largest producers often have about the same market shares as the four largest in the United States. c. Mergers and efficiency. There is dispute, and it is impossible to say which school is right, as to two subjects: How much have earnings and mergers, respectively, contributed to the size of big corporations? Have mergers added to efficiency or subtracted from it?

1. One type of analysis breaks down increases in corporate size into external growth, or acquisition of other companies, and internal growth or reinvestment of earnings and flotation of new securities. Seventy-four of the biggest corporations, for example, made only one-fourth of their asset gains from about 1900 to 1948 through acquisitions and the rest through internal growth. The opposite school of thought holds that if company A acquires B, future earnings of the B division should be interpreted as due to the merger (62). 2. Statistical studies indicate that recent mergers have not in average improved earnings per share of the acquiring companies (62e). This may be due to diseconomies of scale as management tries to coordinate different lines of business, as compared with previous efficiency of the management of the smaller company working in a narrower field it knows well. Or it may reflect overpayment in terms of shares exchanged for the acquired assets. The results of recent mergers are not necessarily the same as those of the early mergers which created companies big enough to gain production, distribution and research economies. 3. Only a small proportion of recent mergers have been of the pure conglomerate type, united companies in entirely different line of business. ITT, Gulf, and Western, Textron, Ogden Corporation, and a few others are pure conglomerates. Most conglomerate mergers are product extension ones, with the acquiring company adding a subsidiary whose operations are similar to its own (6c3). It stands to reason that two such related operations can be joined more efficiently than two unrelated ones, but neither market experience nor statistical studies have proved this yet. d. The Fortune 500. Fortune magazines annual list of the 500 industrial corporations with the largest sales has gained wide acceptance since its first publication for 1954.

208. CARTELS AND MONOPOLIZATION or suppression of competition by agreement and by dominant power, are the main threats to competition which the antitrust laws seek to prevent. The name cartel was originally given to open and formal agreements among firms in the same industry, designed to reduce or suppress competition. They date back to at least into the 19th century. The word has now been extended to secret agreements as well. Their aims have included, among other things: (1) prevention of price cutting; (11) restriction of output, or of new capital investment; (111) division of customers or sales territories; (iv) agreements on the terms and conditions of sale; (v) cooperative selling arrangements; or (vi) exchange among the participants, on an exclusive basis, of trademarks, patents, or technological secrets. Some of these aims may be reasonable under certain conditions; it is not always clear where the line should be drawn between intelligent cooperation and cartelization. Cartels have frequently resulted from relatively depressed conditions within the industry in question, tempting the competitors to cooperative action in self-protection Cartels and secret agreements to suppress competition generally impose on the public the disadvantages of monopoly- without the offsetting advantages of operating efficiency. In the classic

form of cartel, with prices fixed and production controlled centrally, the market situation differs little from that which would exist with a single monopoly firm. There would be none of the compensating advantages from economies of large-scale production. Historically, excess resources have been attracted into cartelized industries. Firms which mutually decided to operate at only 80 percent of capacity in order to maintain a high price may find themselves operating at only 70 percent, because new competitors are attracted by the price. Fortunately for consumers, cartel agreements are frequently violated. Hoping its rivals will respect the cartel agreement, a participating firm does some secret price cutting to expand its sales; this spreads, and the cartel finally breaks down. Our antitrust policy seeks to prevent or eliminate cartelization, rather than wait for the possible breakdown. Whereas cartels suppress competition by mutual agreement, monopolization is the suppression by one company (or perhaps more than one) of the competition offered by others. Monopolization differs from mere monopoly. The latter may result from a limited supply of some resource, more often from the fact that one firm can be big enough to supply an entire market, or from superior efficiency or successful innovation in any kind of market. Monopolization, on the other hand, carries the connotation of deliberate action. There is what the courts call intent to monopolize- it is hard to prove, but the antitrust law tries to stop it. Although both monopoly and monopolization are normally thought of in terms of one company, there is increasing talk today of shared monopolies in the major industries. For this phrase to be correct, the oligopolists in these industries must not be competing. This is an issue that requires factual study in each case and an agreement on what competing means. Mergers with competing companies and unfair tactics to drive out competitors are the principal means of monopolization. Both have been employed in the past. The rare anticompetitive mergers which occur today do so only because they slip past the antitrust enforcement agencies. What tactics are unfair is for the courts to decide, and many cases have dealt with the question. Obvious cases of unfairnessrefusal of a big company to deal with a customer who also patronizes a competitor has been a leading example- are now much rarer. In their place, the courts determine today how far they will let the biggest companies use methods of aggressive competition which are commendable in the case of their smaller rivals. Success in these could make monopolists of the big ones, but only equal competitors of the small ones. a. Cartels in foreign countries 1. Germany has been the classic home of the cartel. In the past cartels were usually unregulated, often even officially encouraged. In recent years they have been under guidelines set by government. Cartels ought in theory to injure efficiency by suppressing competition. How, then, does one explain Germanys remarkable commercial and industrial progress in periods like 1900-14, 1924-29 and 1933-39? Probably the answer is in the hard work, industrial discipline, saving and application of science to industry, which have been characteristic of the Germans. The renewed industrial progress of the last quarter century, with cartel activity muted but not eliminated, indicates that it is not the presence or absence of cartels which matters, but the presence or absence of these more basic elements of economic progress which Germany does possess. Japan is a second country with numerous cartels, but with tremendous progress based on work and saving.

2. Cartels, often with the blessing of government, have been active in a number of countries. Less has been heard of them in recent years, however. Three reasons are: the industrial prosperity of the 1950s and 1960s, which removed much of the incentive of business to restore to protective cartels; the establishment of the European Common Market, which has shaken up previous cartels within countries and itself adopted an antitrust program; and the increasing intervention of governments in economic affairs, taking over some of the functions formerly in the hands of private corporations. b. U.S. cartels 1. Open cartels are nonexistent, because illegal. Secret cartels are numerous, if one may judge by Department of Justice announcements every few weeks that proceedings are being taken against a price-fixing conspiracy which has been uncovered. If the defendants decide not to contest the case, they sign a consent decree. Many agreements have been found in what might be called local service trades- though the Department of Justice intervenes only when interstate commerce is affected. Others are among corporations, small or large. 2. By far the best known modern cartel, of the secret kind, was that which had long existed in several branches of the electrical equipment industry before its discovery in 1959. The chief sales officers of the companies producing heavy equipment for sale to public utilities agreed on prices and division of markets at private meetings. This appears to have been one of the cases in which damage to the public was not as great as theory would have suggested. (i) the conspirators sometimes violated their agreements. Much equipment was sold during a few price-cutting white sales. (ii) there was rapid improvement in some types of equipment, since the companies, having identical prices, found they could best compete by improving their product. During the 1950s, for example, the price of electric power to the public decreased about 7 percent (all wholesale prices were increasing 16 percent), and a major reason was the efficiency of the new equipment being bought. The profit record of the companies in the conspiracy did not reflect successful price fixing.

209. THE ANTITRUST LAWS 210. THE IMPACT OF ANTITRUST 211. ANTITRUST EXEMPTIONS 212. WORKABLE COMPETITION