The Purposes of Antitrust
APRIL 01, 1967 by HAROLD M. FLEMING
Mr. Fleming, for many years New York Business Correspondent of the Christian Science Monitor, is a prominent free-lance writer on business and economics.
The basic purposes involved in the enforcement of the antitrust laws of the United States — like those behind many other activities of the U.S. government — are obscure and in some cases contradictory.
These regulatory activities of "the Government," might be expected to reflect an emotionally integrated Higher Personality, at peace with itself and without serious inner conflict. But certainly in the antitrust activities, this is not so. The aims of the two enforcement agencies—the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice — are palpably confused. So are the laws. So is Congress. And so are businessmen.
There are broad reasons for looking into those purposes. The Sherman Antitrust Act has been called a part of the American "economic constitution." The enforcement agencies and the courts have vastly enlarged its meaning from the fairly simple and brief act of 1890 whose drafters were chiefly concerned with federalizing the common law about conspiracies and monopolies. So unambitious seemed the original concept that the House of Representatives passed the final version unanimously, 270 to 0; for some years after 1890 "the Sherman Act" meant the ill-fated Silver-Purchase Act of 1890; the original drafters of the Antitrust Act seemed unconcerned when it remained virtually a dead letter through the speculative merger-mania of 1901; and the present antitrust laws, as interpreted, would horrify Senator Sherman. For the genealogy of today’s antitrust (as interpreted) runs back, not to Senator Sherman, but to Ida Tarbell, Teddy Roosevelt, Woodrow Wilson, Louis Brandeis, Wright Pat-man, and Thurman Arnold, not to mention Edward Bellamy and Thorstein Veblen. And many of their purposes were confused, conflicting, and confusing.
Today, the man-in-the-street may still think that "the Sherman Act" consisted of marching through Georgia, but not the businessman. The law, as interpreted, now touches almost every nerve of American business. It is a thicket, an obstacle race, a slalom, a mined field through which a corporation’s lawyers must guide it. It is hard to tell what business transaction next may be found illicit.
One reason for this is the vagueness of the law today, as interpreted. Here is an example, as the Supreme Court sees it:
A merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms in that market, is so inherently likely to lessen competition substantially that it must be enjoined…. (italics added)
U. S. v. Philadelphia National Bank, 374 U. S. 321 (1963)
The underlined words have no precise meaning; nor can anyone define them legally except the Supreme Court.
The "Relevant Market"
The definition of the relevant market is a particular teaser. Whether one is charged with conspiring, monopolizing, excluding, foreclosing, or illegally merging, the question automatically comes up, "in relation to what market?"
In the important Cellophane case (U. S. v. du Pont, 351 U. S. 377,  ) the du Pont lawyers, rebutting a charge of monopolizing, argued that the relevant market was not cellophane, of which du Pont sold 75 per cent, but "flexible packaging materials" in general, of which du Pont sold less than 20 per cent. And the Supreme Court majority agreed.
But three Justices (Warren, Black, and Douglas) dissented, saying that cellophane was the relevant market and condemning the formulas both of "reasonable interchangeability" and of "interindustry competition." Had they been a majority, this would have made du Pont guilty of monopolizing.
However, eight years later they were part of a Court majority which said that "we must recognize meaningful competition where it is found to exist…. Where the area of effective competition cut across industry lines, so must the relevant line of commerce…." (U. S. v. Continental Can Co. et al., 378 U. S. 441,  ) This decision broke up the merger of a large metal container maker and a large glass container maker.
The "Incipiency" Doctrine
Perhaps the broadest hunting license the antitrust laws give the enforcement agencies is the so-called "incipiency" doctrine. It consists in the two little words "may be," well known in courtship and politics. The Clayton Act of 1914 was written to "nip monopolies in the bud," that is, in their incipiency. So it banned quantity discounts, tying clauses, and the buying of competitors’ stock "where the effect may be to substantially lessen competition." The legal meaning of "substantially" has in the last 30 years been whittled to almost nothing, but the "may be" has proved a little giant. It has even been compounded, in the current antimerger drives, to "incipient incipiency," proscribing acts the effect of which "may be" to produce results the effects of which "may be…," and so on.
To "incipiency" the antitrust enforcers imaginatively have added a "potential competition" concept. The idea is that if, for instance, two firms join in a new venture, they substantially lessen competition because one might have gone in and the other have stayed out and so constituted potential competition. Thus said the Supreme Court in 1964:
… a finding should have been made (by the trial court) as to the reasonable probability that either one of the corporations would have entered the market by building a plant, while the other would have remained a significant potential competitor…. (italics added)
U. S. v. Penn-Olin Chemical Co., 378 U. S. 158 (1964)
Promotion of Competition?
With all this weaponry available, what are the purposes of the antitrust laws?
The first sentence of the Report of the Attorney General’s National Committee to Study the Antitrust Laws had an answer:
The general objective of the antitrust laws is promotion of competition in open markets.
This Report, dated March 31, 1955, is the last word in an ambitious effort to appraise, review, and make recommendations on the antitrust laws. There has been nothing since of the sort. Sixty members, chosen from the leaders of the antitrust bar and aided by the heads of Antitrust and the FTC, worked nearly two years on the report, "to prepare the way for modernizing and strengthening our (antitrust) laws," as the President wrote at the time.
Strange to say, perhaps, the word "competition" is not in the Sherman Act of 1890. Supreme Court Justice Holmes so noted in his Northern Securities (1904) dissent:
The court below argued as if competition were the expressed object of the act. The act says nothing about competition. I stick to the exact words used….
And if, by "competition," as in the Attorney-General’s Report, is meant "hard competition," there is probably good reason for the word’s absence from the Sherman Act. In those days many people considered competition an almost unmitigated evil, to be coped with by price agreements, pools, trusts, mergers, combinations — and laws. Thousands of firms were put out of business by the industrial transformation brought by rail and wrought by steel. Edward Bellamy, perhaps the most influential writer of his day, in his Looking Backward, remarked that
… competition, which is the instinct of selfishness, is another word for dissipation of energy, while combination is the secret of efficient production.
Senator Hoar, a year after helping draft the Sherman Act, opined that a common sales agency could quite legally maintain a reasonable price if its object was "merely saving the parties from destructive competition with each other."
The Clayton Act (1914), urged by President Wilson along with the Federal Trade Commission Act, certainly wasn’t written to enforce hard competition; and the Robinson-Patman Anti-Price Discrimination Act of 1936, aimed at the new grocery chains, all but outspokenly was intended to soften competition and has been so used. The trend since then was neatly summed up a few years ago by an astute British observer who noted that "there is an element of underdoggery in the (American) antitrust laws…." (A. D. Neale, The Antitrust Laws of the U.S.A., Cambridge University Press, 1962. p. 461)
A Handicapping Process
Evidence of the law’s being used for the purpose of blunting competition is increasing in the 1960′s. Inherently, it is a process of handicapping larger competitors in favor of smaller ones. It appears, for instance, in the FTC’s newly fashionable "deep pocket" theory, which frowns on the entrance (by merger or acquisition) of a large firm into an industry carried on by small firms. It appears in discussion of the touchy subject of whether the law should prevent injury to competition or injury to competitors — a subtle difference in theory but a big one in practice, since the injured competitors are always seen as smaller ones.
Perhaps the most striking instance in this decade was in the aftermath of the electrical equipment conspiracy. After the sentencing of several of the conspirators to jail, the Department of Justice presented the companies involved with a consent decree for their signature, in which they were to promise not to sell at unreasonably low prices — on pain of contempt of court. (This would protect the weaker competitors from such stronger ones as GE and Westinghouse). This was in broad principle what their employees had just been jailed for.
Whether Competitors Are to Be Preferred Over Competition
Many people are confused, and many volumes have been written, because principle and practice are so at odds. An interesting straddle was made by the Chief Justice of the Supreme Court in a 1962 decision where a shoe manufacturer’s purchase of a retail shoe chain was condemned because it might lead to concentration which might lead to a "substantial lessening of competition." Said Chief Justice Warren:
Of course, some of the results of large integrated or chain operations are beneficial to consumers. Their expansion is not rendered unlawful by the mere fact that small independent stores may be adversely affected. It is competition, not competitors, which the Act protects.
But we cannot fail to recognise Congress’ desire to promote competition through the protection of viable, small, locally-owned businesses. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets. It resolved these competing considerations in favor of decentralization. We must give effect to that decision.
Brown Shoe Co., v. U. S., 370 U. S. 294 (1962)
Commenting on this much-quoted tour de force, a Yale professor of law said:
No matter how many times you read it, this passage states: Although mergers are not unlawful merely because small independent stores may be adversely affected, we must recognize that mergers are unlawful when small independent stores may be adversely affected.
Robert H. Bork, speech before National Industrial Conference Board, March 3, 1966
The "Social-Purpose" Theory
A hearts-and-flowers accompaniment to the use of antitrust as a safety net for small business has come into fashion since World War II. It is generally attributed to Judge Learned Hand in the Alcoa case:
Throughout the history of these statutes it has been constantly assumed that one of their purposes was to perpetuate and preserve, for its own sake and in spite of possible cost, an organization of industry in small units which can effectively compete with one another. (italics added)
U. S. v. Aluminum Company of America, 148 F.2nd 416 (1945)
The Supreme Court liked this decision so much that it quoted much of it shortly afterward in the Tobacco case; but some people said Judge Hand invented the above theory. He didn’t. Fifty-three years earlier the Supreme Court of Ohio, in ordering the breakup of the Standard Oil trust in that state, gave as one reason:
A society in which a few men are the employers and a great body are merely employees or servants is not the most desirable in a republic; and it should be as much the policy of the laws to multiply the numbers engaged in independent pursuits… as to cheapen the price to the consumer.
State v. Standard Oil Co., 49 Ohio 137 (1892)
And this has pretty much become antitrust dogma; so much so that Supreme Court Justice Harlan, dissenting from a recent anti-merger decision (all high-court merger decisions are antimerger) remarked that it amounted to
a presumption that in the antitrust field good things come usually, if not always, in small packages.
U. S. v. First National Bank & Trust Co. of Lexington, 84 S.Ct. 1033 (1964)
Though this "social-purpose" doctrine might have seemed compatible with the principles of economics prevailing in 1892, it is hard to take seriously now, 75 years later, except as one more argument to reinforce the case for antitrust protectionism in general. It is unhappily reminiscent of New Delhi’s economic restrictions in favor of cottage industry. It certainly would imply a forcible and disastrous transformation of the American economy — whether backward to horseand-buggy days or forward to some utopia as yet without form and void, is quite unclear.
More Fun! More Skulls Crushed!
These implications of the social-purpose doctrine throw a pin point of light on one of the key purposes to which, certainly for the last 30 years, the antitrust laws have been turned, namely, social and economic destruction.
The Antitrust Division, after winning the breakup of Standard Oil, the Duke tobacco combine, the du Pont powder trust, and a few other combines, failed in 1916 to break up the American Can Company, in 1920 U. S. Steel, and in 1927 International Harvester.
A lull followed; but in the 1930′s, during and after the T. N. E. C. hearings, there was new talk about "fragmentation" and "atomization" of American industry, and a hurricane of cases followed.
Among the first was an attack on over 300 oil companies, seeking so many changes that the industry called it the "Mother Hubbard" case (like a large loose gown). One plea was for a breakup of the industry into its four major components, production, transport, refining, and marketing.
This case was postponed at the request of the defense authorities and was dropped in 1948 as entirely too unwieldy, but was succeeded by the "West Coast" case, where divorce of marketing, among other forms of industrial mayhem, was asked — and refused by the court.
Meantime, the Antitrust Division attacked and sought the breakup of Alcoa and of the Great Atlantic & Pacific Tea Company, and in 1948 it sought the breakup of the four then largest meatpackers into 14 companies. The courts refused breakup of the first two, and the Division dropped the meatpacker case when the court refused to hear testimony going back more than 20 years.
But in 1947 the Division brought a civil suit against 17 investment banking firms — a business which had already been under regulation by the Securities and Exchange Commission since the Securities Act of 1933. The case eventually ran to a court record of over 100,000 pages, cost the defendants over $4 million, and resulted in a 417-page verdict by Judge Harold Medina dismissing the case and commenting that the Justice Department had been led astray "by a fundamental, factual misconception of the way investment bankers in general function."
The Division also had sought to unlimb American Telephone of its manufacturing subsidiary, Western Electric, finally settling for a consent decree merely requiring Telephone to give away ("dedicate to the public") 8,600 patents. Then the Division, having obtained a Sherman-Act conviction of United Shoe Machinery Corporation for monopolizing, asked for its breakup into three companies, though it had only one plant. Judge Wyzanski refused.
In the fall of 1952 the Division brought charges of criminal conspiracy against the five major oil companies doing business in the Middle East, while a civil case was brought against them for overcharging the Marshall Plan agency by $67 million for oil. The overcharge case was scathingly dismissed by both trial and appeals court; and the inflammatory "international petroleum cartel" case, after scandalizing the companies’ names in the Middle East, was quietly settled with three of them, and the other two cases are still, in 1967, dragging on "in discovery."
The "29-Company" Oil Case
In the spring of 1958, following the American oil industry’s million-barrel-a-day emergency oil lift to Europe during the Suez crisis, the Antitrust Division, under Congressional pressure, obtained a bare-majority Grand Jury criminal indictment of a selected group of oil companies for allegedly conspiring to raise crude-oil and gasoline prices. After 18 months of pawing over a million or more company documents, the Division presented a case which in eight days broke down into courtroom absurdities, and the companies were acquitted without being required even to present their defense. Cost to the government, $2,500,000; cost to the companies, an estimated $7,500,000. The Federal Trade Commission over most of the 1950′s was quixotically trying (perhaps) to cure the gasoline business of its price wars with a confusing series of economically absurd price discrimination charges in Jacksonville, Birmingham, suburban Atlanta, and Norfolk, Virginia. Finally it gave up, dismissed the charges, held a big hearing, and promised to publish some "guidelines," which, however, have not yet been published.
All this time the Antitrust Division was intermittently trying to "export the Sherman Act," in the process hampering American business abroad, annoying the State Department, and riling foreign courts.
What would have happened if Antitrust and F. T. C. had won the above-mentioned cases, is anybody’s guess — the agencies had no proposals. There is an inkling in a remark of Judge Carter in the West Coast oil case when he refused to order the companies to sell off their marketing operations:
You cannot unring a bell. I am convinced that the dislocations that would occur would be of such nature that I don’t think we can fully imagine or comprehend with any accuracy what would be the result.
At present the F. T. C. and the Antitrust Division are quietly obstructing the modernization of the structure of the banking, dairy product, beer, cement, shoe manufacturing, and other industries, and the growth of the new multiple-market and multiple-product diversified companies.*
Political Instead of Economic Power
It is hard to see how such a course of conduct, of which the above is only an abbreviated sketch, can add up to any major purpose except that of destruction and obstruction in the use of the antitrust laws. And to cap it all, the enforcement agencies have for decades been saying in effect that though the heavens and earth shall pass away, the antitrust laws (as interpreted) must be enforced. Said a chief of the Antitrust Division in 1964:
… the view that the antitrust laws may hamper the growth of the economy may or may not be valid, but it is irrelevant under our present laws.
William Orrick, Jr., Dun’s Review and Modern Industry, June, 1964
John Jewkes observed in Ordeal by Planning that,
The normal procedure is for the planners first to seize power, and only later to consider what should be done with that power.
A major concern of the antitrust authorities is the alleged economic power held by large private companies. It is often called "monopoly power," and has, theoretically, a sort of free-floating existence, intently discussed in antitrust literature but curiously unreal to businessmen.
The following, though penned by a minority member of the Attorney-General’s Committee, expresses one of the major purposes in present official antitrust policy. He said that Antitrust
… performs the function of keeping governing power in the hands of politically responsible persons. Power to exclude someone from trade, to regulate prices, to determine what shall be produced, is governing power…. In a democracy, such powers are entrusted only to elected representatives of the governed.
Louis B. Schwartz, quoted on page 2, Attorney General’s Report.
Supreme Court Justice William O. Douglas wrapped it up in his dissent in the Columbia Steel case:
Industrial power should be decentralized. It should be scattered into many hands, so that the fortunes of the people will not be dependent on the whim or caprice, the political prejudices, the emotional stability of a few self-appointed men.
334 U. S. 495 (1948)
(He was talking about the executives of U.S. Steel Corporation, but, except for the penultimate two words, some people might read it to be about the Supreme Court itself.)
But the "scattering" of power "into many hands" is not what is happening — nor what the Supreme Court is doing. The power it is taking, or trying to take from the larger private companies, it is giving to the enforcement agencies.
Said former Attorney General Nicholas deB. Katzenbach a year ago, commenting on the Antitrust Division’s perfect score in its recent antimerger cases:
We have had so many Supreme Court decisions in the merger area that it has been hard for us to digest them…. It may be thatwe have, from the point of view of business, more power than is necessary or essential to the carrying out of an intelligent merger policy.
I am inclined to believe that we may be able to block more mergers than it makes economic sense to block.
The current rapid accrual of economic power to the antitrust enforcement agencies, barely sketched above, was perhaps anticipated by Lowell B. Mason, former chairman of the F. T. C., in his Language of Dissent, when he wrote:
In this country no one need fear the belted, booted, and uniformed outfit…. The man to watch is the man in the brown tweed suit. Mild, courteous, and scholarly, he has no badge, no boots, no gun, no warrant. All he has is a little identification card in a cellophane holder, issued by an institution that is investigator, grand jury, prosecutor, petit jury, and judge—all for one and one for all.
*Britain has long had but six banks, while the United States has perhaps 10,000; but the Antitrust Division says that to merge some of these would do harm that would "clearly outweigh in the public interest" the prospective benefits to the "convenience and needs of the community" (Bank Merger Act of 1966) but it objects to having to prove this.
The Invisible Hand
By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain…. He is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention…. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
ADAM SMITH, The Wealth of Nations