Cartels: Conspiracies in Restraint of Trade
DECEMBER 01, 1976 by BRIAN SUMMERS
Mr. Summers is a member of the staff of the Foundation for Economic Education.
After losing money for 17 straight years, in 1976 California orange grower Jacques Giddens finally sent a bumper crop to market. He was immediately hauled into court, charged with shipping too many oranges.
Giddens had exceeded a marketing quota set by the Navel Orange Administration Committee and enforced by the federal government. When Giddens exceeded his quota—less than 66 per cent of his crop—he was breaking the law.
"Right now I’ve got 13 acres of unpicked oranges sitting out there," Giddens said, "but I won’t get anything for them because they’re beginning to freeze. I can’t pick them because I’ve already filled my quota, and there’s no way to store oranges except leave them on the trees. In three more weeks they’ll be junk.
"The law is crazy. I’m growing perfectly good food in a hungry world and throwing it away so some fat cats in Los Angeles can make a housewife pay more for her oranges in the supermarket."¹
Jacques Giddens has to throw away perfectly good oranges because the orange industry is controlled by a cartel of merchandisers who act as middlemen between the farmer and the supermarket. The cartel decides how many oranges will be shipped to the fresh fruit market, and the federal government enforces the cartel’s quotas.
Cartels—conspiracies to limit competition in order to charge monopoly prices—control large portions of the American economy. Before considering further examples, let us see how cartels are formed.
In a free market, it is extremely difficult to form an effective cartel—one that restricts competition to the point that the participants gain more from selling at monopoly prices than they would from selling more goods at competitive (lower) prices. The difficulties are:
1. Competition from substitute goods and services. A cartel that restricted the output of, say, aluminum would find its customers turning to steel, brass, plastics, and other substitutes. The losses of sales to these substitute products could more than offset the cartel’s monopoly gains.
2. Agreeing on a monopoly price. Higher prices are more advantageous to high-cost, low-output firms than to low-cost, high-output firms. Deciding on a single monopoly price might not be easy.
3. Cheating. A cartel member who secretly lowers his price—say by kickbacks—can reap large gains through increased sales. In addition, a cartel member can try to undercut the other members by altering his product’s quality or improving his credit, delivery, trial, or refund procedures.
4. Competitors who refuse to join the cartel. A producer who doesn’t join can undersell the cartel, grow in size, and thus take more and more customers away from the cartel.
5. Potential competitors. The cartel’s monopoly gains will attract new competitors who may refuse to join the cartel, and proceed to undersell its members.
These are some of the obstacles to forming an effective cartel in a free market—a market in which the government’s powers are limited to protecting people from fraud and coercion. In a free market, a cartel has no legal means to force producers to join the cartel and to charge the cartel’s monopoly price.
A cartel can impose its will on producers only when the government fails to protect producers from the cartel or, even worse, when the government itself enforces the cartel’s edicts. The latter is the case in the United States today.
The dairy industry is an example of government-created cartels. When private attempts to cartelize the industry fell apart in the early 1930′s, the government stepped in, as described by Michael McMenamin:
Faced with the free market’s reassertion of competition in the face of private attempts to cartelize the raw milk industry, the Federal government resorted to direct intervention, i.e., the policy of government coercion to direct a market in a manner different from that dictated by supply and demand. First under the Agricultural Adjustment Act of ¹933, and subsequently under the Agriculture Marketing Agreement Act of 1937, the Federal government moved to "stabilize" prices in fluid milk markets throughout the country…. In practice, what the government created was the framework for establishing local and regional milk cartels.
McMenamin concludes that "government price fixing, combined with monopoly power, has raised the price of a gallon of milk some 20 cents higher than if competitive conditions prevailed."²
The peanut cartel is another example. Since 1940 the cultivation of peanuts has been restricted by the federal government to 1.6 million acres. To further restrict supplies—and thus drive up prices—peanuts are subject to strict import controls. To make the cartel airtight, the federal government guarantees a minimum support price. In 1975 this price was $394.50 a ton, about $150 a ton over the world price. This artificially high price encourages intensive cultivation of the allotted 1.6 million acres, resulting in a waste of resources (such as fertilizers) and a surplus of peanuts. In 1975 the government bought some 600,000 tons of peanuts—about a third the nation’s crop—at the $394.50 support price. Every year the peanut cartel costs the American public hundreds of millions of dollars in terms of taxes, higher prices, and the misuse of land, labor, and capital.³
Jacques Giddens can’t sell all his oranges because the orange cartel’s quotas are converted into marketing orders by the U.S. Department of Agriculture and enforced by the Justice Department. There are, in fact, 109 Federal marketing orders in effect in 25 states for fruits, vegetables, nuts, and dairy products. In 1972, for example, growers left 14,000 tons of cherries to rot in orchards because of a Federal marketing order.
The trucking industry is also controlled by cartels. Brooks Jackson and Evans Witt describe how these cartels collude with the Interstate Commerce Commission:
The ICC tells truckers precisely what kinds of goods they can carry, precisely what highways they can use and what they can charge.
The ICC also limits competition by denying thousands of applications each year by truckers desiring to offer new services.
The major trucking firms band together in "rate bureaus" that decide what to charge for hauling. These cartels, exempt from antitrust prosecution, then challenge any attempts to have lower rates approved by the ICC.
This keeps shipping prices higher than they could be.
An Agriculture Department study found that shipping rates for frozen fruits and vegetables dropped 18 per cent when the courts ruled those products exempt from ICC oversight. Another Agriculture study showed rates for dressed poultry plummeted 33 per cent when ICC regulation was lifted!!
The waste wrought by ICC regulations is enormous:
For example, a Department of Transportation study discovered that a big manufacturer of building materials in New Jersey ships three truckloads of goods a week from its main plant to Tampa, Florida. The trucks make the return trip empty.
This company has a subsidiary in southern Florida that sends three truckloads of goods a week to eastern Pennsylvania. But the subsidiary’s trucks make the return trip south empty—because the ICC will not let a subsidiary’s trucks carry goods for the parent company or vice versa.
The DOT study, which did not name the firm, concluded that this one company could save 360,000 miles of useless travel and 90,000 gallons of fuel a year just by running trucks in a circuit from New Jersey to Tampa to southern Florida to eastern Pennsylvania.5
According to a report co-authored by Robert Fellmeth and members of the Ralph Nader research staff, regulated truckers travel empty an estimated 30 per cent of their miles—three times the percentage for unregulated truckers. Empty trucks, ICC-mandated roundabout routes, and artificially high rates cost the American public tens of millions of gallons of fuel and billions of dollars every year.6
The airline cartel is also costing the public immense sums of money. It is about the same distance from Chicago to Minneapolis as it is from Los Angeles to San Francisco, yet the air fare from Chicago to Minneapolis is almost twice as much. Why? The California route is intrastate and thus exempt from Civil Aeronautics Board regulation. The CAB, created in 1938, assigned all interstate routes to a cartel of 16 airlines. Six of the original carriers have since disappeared, but the CAB has assigned all their routes to the ten surviving members. Not a single new carrier has been permitted to operate on these routes.7
Jackson and Witt report:
The Civil Aeronautics Board refused to allow a British firm, Laker Airways, to fly regular New York-to-London flights for $270 round trip. Existing airlines fly the same route for $626 for a roundtrip economy-class tickets
Government-created cartels control large segments of the American economy. And their influence will extend if the advocates of National Economic Planning have their way. Consider this statement from the Initiative Committee for National Economic Planning (The Case for Planning). The Planning Office "would indicate the number of cars, the number of generators, and the quantity of frozen foods we are
8 "Regulators Have Stranglehold on Lives," El Cajon Californian, March ¹5, ¹976.likely to require in, say, five years, and it would try to induce the relevant industries to act accordingly."
Thus, under National Economic Planning, the government would "induce" the production of a given number of automobiles and other products. The only way to produce a given number of automobiles (no more, no less) is to assign quotas to the producers and exclude all potential producers from the market. That is, the only way to meet the goals of National Economic Planning is for the government to create even more cartels. wr
¹ "Orange Grower Hits Waste of Food in Quota System," Los Angeles Times, April ²5, 1976.
² Michael McMenamin, "Milk, Money and Monopoly," Reason, March ¹976.
³ Wall Street Journal, June ³, ¹976.
4 "Washington’s Reach: Inflated Prices, Waste, Delay—Americans Paying for Regulation," El Cajon Californian, March ¹7, ¹976.
6 Mark Frazier, "Highway Robbery—Via the ICC," Reader’s Digest, January ¹975.
7 James Nathan Miller, "Government Airline Regulations—Needless Risk at High Rates," Reader’s Digest, June ¹975.
The Chimera of Monopoly
WITH and because of the growth of capitalism, competition has in our day become intense and swift and sure beyond all previous human experience.
What do we mean by competition? We ought to mean the ready movement of the factors of production — labor or productive instruments — toward those employments in which prices are exceptionally high and profits large. That is, competition is substantially "mobility?’ Two things are necessary for this mobility: (a) knowledge, among persons outside of the high-priced employment, that it is profitable; (b) the possibility of increasing the use of capital and productive energy in employments whose superior attractiveness has become known. In both respects the tendency of recent industrial evolution has been toward making competition more prompt.
AMBROSE PARÉ WINSTON, from an article in Atlantic Monthly, November 1924.