Mr. Fleming, for many years New York Business Correspondent of the Christian Science Monitor, is a prominent free-lance writer on business and economics.
In the lengthening annals of the antitrust laws, the present decade, their seventh, may well go down as the "era of merger-busting."
The Supreme Court has given the government lawyers an unbroken series of victories over mergers, so decisive that today a brief note from the Antitrust Division is enough to block any merger; no large company would think of buying any but a bankrupt competitor; and the legal prospects for any merger or acquisition by any of the nearly 100 companies with 1966 sales of a billion dollars or over are a hazardous guess.
The basic trouble with mergers is that they make big ones out of little ones, whereas antitrust enthusiasts would rather see a lot of little ones, of what might be called "polyopolies" (many sellers) where there are now what are fashionably called "oligopolies" (few sellers).
Among the more important of this decade’s high court anti-merger decisions was that of last April 12, requiring the big soap-and-detergent company, Procter & Gamble, to disgorge its acquisition, nearly ten years ago, of the Clorox Chemical Company, largest maker of household liquid bleach.
That the opinion was written by Justice Douglas was no surprise. The Justice is strenuously on record as against the "curse of bigness" (Columbia Steel dissent) and the "virulent growth of monopoly" (Standard Stations dissent), and candidly revealed his view of mergers in general three years ago. In reviewing a new biography of Louis D. Brandeis, he wrote that Justice Brandeis had:
proved over and over again the truth about mergers — that economy in operations was a false purpose, that the growth of power and strengthening of monopoly were the real purposes.
New York Times Book Magazine, July 5, 1964
In the face of such ardor, the acquisition by the biggest company, in a big industry, of the biggest company in a small industry, didn’t stand much chance.
However, the decision was not just Douglas speaking. The opinion was 7 to 0. Nor was it just another merger case. This was a major decision in the burgeoning field of "conglomerate" mergers. Habit and history lead the layman to think of mergers as between competitors — that is, "horizontal." This was a "product-extension" merger. And sheer size was an important consideration.
Story of a "Product-Extension" Merger
Liquid household bleach, which is easy to make, sells mostly on advertising. The Clorox people, after building their company up to doing nearly half the nation’s business in this item, proposed a merger to P & G. The latter’s research people figured the acquisition was a natural. Clorox bleach sits on the same grocery shelves with Procter’s goods, and could be economically handled by its marketing people. Even more important, Clorox could be advertised, especially on TV, at the exceedingly low quantity rates enjoyed by P & G as the biggest TV advertiser in the country.
The researchers reported that P & G could invade the bleach market by itself but that acquiring Clorox would make entrance vastly cheaper. In August, 1957, the merger was made. In September, 1957, the Federal Trade Commission issued a complaint against Procter & Gamble, charging that the merger had violated Section 7 of the Clayton Act as amended by Congress in 1950.
The F.T.C.’s final order (Docket No. 6901, November 26, 1963) written by Commissioner Philip Elman, was thorough and scholarly, and in effect "threw the book at" P & G, including the doctrines of oligopoly, incipiency, potential competition, internal expansion, and social purpose.
The opinion spelled out the cost advantages of the merger, particularly in advertising, but then said that these were "offensive to the spirit… of the antitrust laws" because they were "achievable only by firms of very large absolute size," and "more important… there does come a point at which… mass advertising loses its informative aspect and merely entrenches market leaders…."
But the gist of the objection appeared to be that, by such acquisition, a giant company had taken over nearly half a pigmy industry.
The Supreme Court went even further. It ruled that the acquisition was illegal because of P & G’s "huge assets and advertising advantages," and that "possible economies" from the merger "cannot be used as a defense."
(As did the F.T.C., the high court based its finding on the allegedly anticompetitive effect of the merger; it found that it tended to "substantially lessen competition." This is a quirk in antitrust interpretation which may, but shouldn’t, confuse the layman. By it, a big-company action that, it is feared, will aggravate competition, is condemned for threatening to lessen it. This is a dialectic device, built on the "oligopoly" theory, that the fewer and bigger the sellers, the more sluggish the competition.)
The Will of Congress
But whatever one may think of the views expressed in this case by the F.T.C., and the Supreme Court, it would be hard to argue that they stretch the letter or the spirit of the law on mergers since Congress drastically rewrote it in 1950. The debates and reports on the Celler-Kefauver Anti-Merger Act of 1950 made it explicit, not only that all kinds of mergers were affected, but also that relative size was an important Congressional concern.
Thus, for instance, the House Report listed as among the results it wanted to prevent, an "increase in the relative size of the enterprise making the acquisition to such a point that its advantage over its competitors threatens to be decisive."
(And, perhaps odd to relate, both the F.T.C. and Justice Douglas may deserve some of the credit [or blame] for this. The Commission’s 1948 "Report on Mergers," which was grist to the legislative mill, said, "There are few greater dangers to small business [sic] than the continued growth of the conglomerate corporation." And the Supreme Court’s 1948 approval, in the Columbia Steel case [334 U.S. 495] of "Big Steel’s" acquisition of a West Coast steel fabricator —including Justice Douglas’ fiery dissent—is widely thought to have added to the steam under the antimerger bill.)
But antibigness, in some form, has built the steam under all the antitrust laws. They were designed to cope with the supposedly dangerous powers of big companies. Thus, Congressman Wright Patman once testified of the 1936 Act that bears his name, "One certain big concern really caused the passage of this Act — the A & P Company." The 1914 debates over the Clayton bill were studded with references to Standard Oil. And of the original 1890 Sherman Act itself, Supreme Court Justice 0. W. Holmes dryly remarked in his 1904 Northern Securities dissent:
There is a natural feeling that somehow or other the statute meant to strike at combinations great enough to cause just anxiety on the part of those who love their country more than money, while it viewed such little ones as I have supposed with just indifference.
This notion, it may be said, somehow breathes from the pores of the Act, although it seems to be contradicted in every way by the words in detail.
Business Morals and Business Size
This size-consciousness causes many of the paradoxes and contradictions in antitrust. For in practice it applies different standards of conduct depending on business size — on the principle, once stated by Justice Brandeis, that "a method of competition fair among equals may be very unfair if applied where there is inequality of resources." To fit this concept into Anglo-Saxon legal traditions is not easy. In previous decades this antitrust double standard has involved all kinds of issues, from "share-of-market" to "predatory pricing," plaguing legislators and the courts with the problem of how to write and interpret laws that will allow some businessmen to do things that others may not do. In the recent Clorox case Justice Harlan, in a long concurring opinion, asked for some standards "for application to mergers that… previously haven’t been considered in depth by this Court."
The perennial problem was put in perhaps its sharpest focus over 50 years ago, in 1914. Speaking for the Conference Report on the Clayton bill, Senator Walsh said:
… it was found no easy task to frame a statute which would reach the case of a plundering monopolist… but not be oppressive to a struggling industry contending for trade against a competitor enjoying a practical monopoly… and supported by unlimited capital.
The problem, in essence, is to determine how far a firm’s competitive success may be due to its sheer size and resources, rather than to its managerial skills, low operating costs, far-sighted planning, and use of ingenuity, imagination, innovation, and improvement. For a reasonable businessman, even after he dismisses from the subject the unrealistic notions, the emotionalism, and the political maneuvers, may yet wonder whether size alone doesn’t somehow give some "unfair" competitive advantage which deserves to be prevented by law.
The Standard Oil Legend
The primal source of such misgivings lies in the legend of the Standard Oil Company. The mythology of that company’s rapid growth from the late 1860′s to the achievement of a near monopoly of refining in the late 1870′s, and of how it held most of that position for over a quarter century in the fiercely competitive oil business, has heavily influenced antitrust thinking for 70 years.
It may seem strange that impressions so misleading could have developed in so few decades. The Rockefeller combination was exhaustively investigated and reported on around 1900. And the hearings and briefs which led to the 1911 dissolution filled 21 volumes of over 12,000 printed pages. Yet the folklore of Standard Oil varies widely from the facts.
The principal item in the legend is that the Rockefeller group rose to power by "predatory" price cutting. The story is that Standard used its "monopoly power" to invade areas it wanted to do business in; that it then cut prices low enough to ruin those already there; and then moved in.
The main facts in the story are as follows. Rockefeller and his early associates aimed at a monopoly in refining. And, in a single decade, the 1870′s, they nearly achieved it. In doing so they took in the heads of most of the larger refineries they acquired, as partners, associates, or fellow shareholders — a policy unlikely to work if preceded by one of forcing them into bankruptcy. Competitors joined Standard partly because they were impressed by the Rockefeller group’s business abilities, and partly because of a general feeling that some such combination was the only escape from the ruinous ups and downs of the oil industry at that time. A large number came in, for instance, in 1875, after the wholesale price of kerosene had dropped 50 per cent between 1872 and 1874.
Standard never tried for a monopoly or anything near it in marketing. Nor, with a near monopoly in refining, would this have made business sense, any more than for a toll-road company to build two toll-houses only a mile apart. Standard Oil, and John D. Rockefeller personally, favored large volume at a narrow margin of profit — just as, 50 years later, the Great Atlantic & Pacific Tea Company, and John Hartford personally, favored large volume at a narrow margin of profit.
Standard’s low-markup retail policy, nearly a century ago, turned out to be as provocative of political repercussions as A & P’s turned out to be, in recent memory. Half the testimony in the 12,000 printed pages of the 190708 hearings concerned Standard’s marketing.
Genesis and Growth of the Legend
With its 80-odd per cent of the country’s refining capacity, Standard automatically became much the largest buyer of crude oil in the early fields. This was a politically hazardous position in itself. When, for instance, the Bradford (Pennsylvania) field, huge for those days, was brought in, in 1877, the unprecedented flood of oil drowned prices; and Standard became very unpopular in the oil fields.
Thus, by the 1890′s, Standard had highly vocal enemies at both ends of the business — producing and marketing—just as now, though in much milder degree, do the present-day oil-industry "majors."
In 1894 Henry Demarest Lloyd published Wealth Against Commonwealth, and gathered into it every allegation he could find against Standard, observing that "they made oil poor and scarce and dear….The unfittest, economically, survives…."
Standard also fell afoul of the newspapers. This was the dawning age of sensational journalism. In its issue of May 16, 1897, the New York World printed a feature article which said of the company in part:
There has been no outrage too colossal, no petty meanness too contemptible for these freebooters to engage in. From hounding and driving prosperous businessmen to beggary and suicide, to holding up and plundering widows and orphans, the little dealer in the country and the crippled peddler on the highway — all this has entered into the exploits of this organized gang of commercial bandits.
In 1902 Miss Ida M. Tarbell, sister of an executive of the Pure Oil group, one of Standard’s rising competitors, started a serialized history of Standard Oil in McClure’s, the best-known muckraking magazine of the day; the history was published in book form in 1904. It was full of contradictions and errors of omission but tremendously popular. It had a chapter headed "Cutting to Kill," which probably had more effect on public opinion than all the articles written on antitrust before or since.
The Court Decision
The Department of Justice brought suit in November, 1906. Hearings went on for 15 months. The government lawyers contended chiefly that:
1. Standard’s kerosene prices varied widely from one area to another, and were lower where competition was strong and higher where it was weak.
2. Standard sometimes cut prices below cost.
3. In many cases Standard’s methods limited independent marketers’ territories, or even destroyed their businesses, after which prices were promptly raised.
4. By such tactics all over the United States, competition had been substantially destroyed or limited.
To the price-cutting charges the Standard lawyers in most cases replied with evidence that Standard had not cut until competitors did. (If so, this has a parallel in modern gasoline markets. The largest marketer may often move first in a rising market, but seldom, if ever, in a declining one.) They also pointed out that the government lawyers had been able to allege such charges in only 37 towns, while the Standard companies had been selling in 37,000.
On November 20, 1909, a bench of four Federal judges in St. Louis unanimously found Standard guilty, on the uncontroverted fact that in 1899 nineteen competing or potentially competing companies had been put together into the Standard Oil Company of New Jersey. This was combining and conspiring to achieve an unlawful monopoly — an open-and-shut case. As for the thousands of pages of testimony, running back 30 and more years, on unfair competition and predatory practices, the judges simply skipped them, making no specific finding of intent to defraud or to compete unlawfully. Eighteen months later, in May, 1911, the U.S. Supreme Court trod unanimously the same judicial path. Justice White’s opinion showed particular interest in how the combination had been put and held together; and found that the company had both intended and achieved monopoly and restraint of trade. But this opinion also walked right around what it referred to as the "jungle of conflicting testimony covering a period of 40 years."
Some 47 years later, a University of Chicago professor actually did read through the "jungle of conflicting testimony," and summarized his findings in a 30-page article in the Journal of Law and Economics (Vol. 1, 1958: John S. McGee, "Predatory Price Cutting: The Standard Oil [N.J.] Case.")
In marketing, he found less than a dozen small oil dealers whose exit from the business appeared to have had anything to do with local price cutting. In refining, he found "no evidence that predatory price cutting was used to depress asset value of the more than 120 competitive refineries that Standard bought." He concluded:
Anyone who has relied upon price discrimination to explain Standard’s dominance would do well to start looking for something else. The place to start is merger… What this study says is that Standard did not achieve or maintain a monopoly position through price discrimination. The issue of whether the monopoly should have been dissolved is something else.
"Cutting to Kill"
No one in 1911 seemed to notice the high Court’s studied disregard of the market strong-arming charges against Standard. They had already passed into legend. In 1912 a prominent economist, John Bates Clark, in a book, The Control of Trusts, listed some of the alleged obnoxious practices of large firms, including "… the familiar (sic) practice of cutting prices locally… (or) the cutting of the price of some one variety of goods which a rival makes, in order to ruin him." He said that "the suppression of these policies would go far toward rescuing competition, protecting the public, and insuring to it a large share of the benefit that comes from economy in production."
Congress tried it. The overwhelming part of the 1914 Congressional debate on the Clayton bill concerned "predatory price cutting," and resulted in Section 2, making it unlawful to discriminate in price between customers "where the effect may be to substantially lessen competition."
But in the next 24 years, that is, until Section 2 was rewritten by the Patman Act, the number of such cases brought under Section 2 was negligible.
Price cutting, for any purpose, costs money. To consider its profitability, apart from its morals, the simplest way is to look at it as though through a banker’s eyes. How much will it cost? and just how are you going to profit from it?
Like a military war, no one knows how severe a commercial price war may become. But one thing is pretty certain; while it lasts, the big company on the offensive will be losing more money than the little one on the defense. Meantime, the small competitor, instead of scaring, may close down for a while and let Mr. Big go on losing money. And even if the small firm goes broke, there’s only a slim chance that the big one can take over its business for nickels. If the big firm is shooting for a monopoly, somebody may buy up the bankrupt property for its scarcity value; but if the big competitor is just one of many, it may shoot its deer but then see one of its competitors get the carcass.
But just suppose the big competitor does win. Then how does he recoup his losses? By raising prices to a normal level? That will take a long time. By raising them to abnormal, above-market levels? That is an invitation to outsiders to come and join the fun.
Of price wars today, the most conspicuous and colorful are those in gasoline. They do not fit the predatory-pricing legend at all. They are started by sellers of all sizes, whose calculations have but one thing in common — a belief that they have some advantage, innovation, improvement, or low-cost supply source that will enable them to come out ahead. Of the predatory-pricing notion, a gasoline marketer some years ago made the classic comment:
One of the fallacies often advanced is that so-called leading marketers reduce prices to drive out competition so that they may later enjoy a monopoly.
That is like trying to sweep back the ocean to get a dry place to sit down. Competition is impelled by impersonal forces that never scare, and never hesitate for long, and would move in immediately when prices were restored — offering little opportunity for a single marketer to recoup his losses.
As a practical matter, selling below cost to drive out a competitor is a sure road to bankruptcy.
The notion of long-time gains to be made by short-time price raids in geographic markets has numerous variations in other kinds of markets. One was quoted above —"the cutting of the price of some one variety of goods which a rival makes, in order to ruin him." There are many others. Any company making diversified goods, selling to diversified customers, or having some vertical diversification, may be charged, at some point in its business, with using its "power" to sell at "unfairly low" prices with competitive malice aforethought.
Such allegations are frequently compounded with the even more fanciful notion that losses in one product line, customer category, market division, or vertical stage of a business may or will be indefinitely "subsidized" from the others. The preposterous findings against A & P in the 1940′s were a striking instance; but such thinking now permeates the F.T.C.’s antimerger cases (though not present in the Clorox case).
The fact is that no well-run profit-seeking management maintains any marketing operation, product line, customer classification, or vertical stage of output any longer than it holds out a reasonable prospect of yielding a worthwhile profit.
In sum, the "unfair" or "uneconomic" advantages of size in business have been greatly overrated. Antitrust is sometimes called a form of "social engineering." If so, its theories about big-versus little competition are in much need of clarification.
A Thank-You Note
To all businessmen, much maligned for your exploitation, my thanks for the exploiting you have done to me. Without you I would still be doing my laundry in the stream and drying my clothes on a rock. Without you I would still be walking, or traveling astride a horse at best. I would still be weaving my own clothes, and never dreaming of "wash and wear." I would have to cook over an open fire in shells or some other natural substance.
Thank you for making possible the hospitals that have saved my life; the operating rooms and the anesthetic that make surgery possible.
Thank you for so many things: my television, my radio, my lawn mower, and the ability to own a house because you gave me a job. I sit here at the typewriter you made available and look around me at all the things that would be missing if you had not been motivated by profits or a problem to solve; my lights, gas, and indoor plumbing; my electric blanket, waffle iron, and dishwasher; my electric toothbrush, watch, and vacuum cleaner. Thank you advertising men for telling me of all the new products available.
Dear businessmen, I thank you from the bottom of my heart for making my life easier and giving me the time to write notes like this. I could not have done all this alone; bless you for doing it. The books I read, my piano, my tape recorder were priced low enough because you were able to mass-produce them. The money you have made, my friends, you earned.
PATRICIA CARNEY, a free-lance writer in California