All Commentary
Tuesday, September 1, 1959

Undue Concentration” In Business

A careful student of oligopoly and monopoly examines the antitrust division’s current activity concerning…

With the current spate of pro­posed antitrust bills, hearings, and lawsuits being reported from Washington, and the current merger movement in business con­tinuing to grow, an ironic contrast is developing between the now pre­dominant legal theories about busi­ness and the way business actually is moving.

Legislators, government law­yers, and federal judges express increasing concern about the “un­due concentration of economic power” in the business community. Congressional hearings are to be held on “administered prices” in the larger industries.

Twenty-nine oil companies are on trial at Tulsa on charges of raising prices after the Suez Canal was closed.

And the judge in the case of the Bethlehem Steel-Youngstown merger case described the steel industry as an “oligopoly,” a dis­paraging term unheard of in law books two decades ago, meaning “few sellers” or “undue concentra­tion.”

At the same time, American business is becoming more compet­itive and less concentrated as technological advance and research have lowered the competitive threshold between industries and almost infinitely widened the areas from which competition can strike.

The essence of the theory of “undue concentration” or “oligop­oly,” which has been introduced into antitrust law in the last 20 years and is being pushed in Con­gress, is that business operates in fixed, comparatively safe, compart­ments or categories.

Steel, oil, chemicals, or railroad­ing, the theory runs, can become the preserve of a few companies administering their own prices more or less as they choose, departing from the supposedly “pure” competition of Victorian days and adopting what critics call “mo­nopolistic competition” and what friends apologetically call “work­able competition.”

This theory was actually put to empiric tests in the country’s first great “merger era” in the early 1900′s. Bankers, following in John D. Rockefeller’s steps, put togeth­er such near monopolies as United States Steel, American Can, Inter­national Harvester, American Woolen, and United Shoe.

Except for the last case, the theory didn’t work, or at least the mergers steadily lost competitive ground. The new corporate crea­tions grew, but not as fast as the industries it was hoped they would “dominate.”

Outsiders kept coming in, and little insiders kept growing faster than the “bigs.” Normal economic forces were largely responsible for the deconcentration.

From Professor to Politician

The theory of “oligopoly” or “undue concentration” appears to have had its start at the turn of the century with Professor Thorstein Veblen. He later described Ameri­can business as having “matured into a community of vested inter­ests whose vested right it is to keep up prices by a short supply in a closed market.”

This viewpoint took on political life in Washington in the 1930′s in such theories as those of “mo­nopolistic competition” and “ad­ministered prices” or “rigid in­dustrial prices.” It was argued that the “Big Threes” and “Big Fours” of industry set their prices with­out proper regard for demand.

“Undue concentration of eco­nomic power” had contributed to, if not actually caused, the Great Depression, it was said, and the Temporary National Economic Committee was set up in 1938 to explore this line of thought. Mean­time, the Antitrust Division of the Department of Justice introduced the concept into antitrust cases and the courts began to accept it.

In 1945, Judge Learned Hand, in the Aluminum Company case, expressed the incidental opinion that for one company to control 90 per cent of an industry was cer­tainly illegal, 64 per cent was doubtful, but 30 per cent was cer­tainly legal.

In this and a number of impor­tant subsequent cases, the federal courts have come to practically full adoption of the oligopoly theory. That is, it now can be a violation of the Sherman Act for a company or companies to control an undue share of a market, regardless of whether they come by that share by hard work or by predatory practices.

This idea also is embodied in the most important revision of the antitrust laws passed by Congress in the past 20 years, namely, the rewriting of the “antimerger” Section 7 of the Clayton Act.

In effect, it now says that no merger is legal that produces a company with too large a share of any market. The law formerly had banned acquisitions which would lessen competition between the two companies involved. The revision would ban mergers by the much broader “undue concentration” test.

The oligopoly economists have succeeded so well in getting their theory embodied into law that nothing now remains to be done, it would seem, except for the United States Department of Justice to get enough lawyers in its budget to go ahead with the attack on “undue concentration.”

But just as the “oligopoly” theory has become crystallized in law, its utter incongruity with the essential facts of modern business competition is beginning to show up.

What Market? What Share?

Two questions now face the courts in interpreting the law: “What actually constitutes a mar­ket?” and “What constitutes an `undue’ share of a market?”

Lawyers already have given legal names to these issues. They are the matter of the “relevant market,” and that of “quantitative substantiality.”

The courts must decide what are the “relevant markets” in which the degree of industrial “concen­tration” is to be measured—as well as how much concentration becomes “undue” concentration.

The last half century has seen a vast deconcentration of Ameri­can industry. It has grown too fast to be held in as few hands as it was then. Fifty years ago, the typical leader’s share was 80 per cent. Today, it rarely exceeds 30 per cent. The classic case of de-concentration has been in the pe­troleum industry, of which the leader did 85 per cent of the busi­ness in 1910 and today does 11 per cent; it now takes a “Big Thirty” to get up to two-thirds of the in­dustry’s sales, and 20,000 jobbers share the other third.

The record does not support the assumption that fewer sellers mean less competition. On balance, the facts run the other way. As clear a case of “oligopoly” as there is—the automobile industry—is highly competitive.

General Motors does over half the business. GM, Ford, and Chrysler do 90 per cent. And the mergers of Kaiser and Willys ­Overland, of Hudson and Nash, and of Studebaker and Packard, increased the “oligopoly” but also increased the competition.

This question of “relevant mar­ket” has led lawyers on both sides to the shrewd conclusion, “Pick your market to suit your case.” Thus the du Pont lawyers argued successfully that the relevant mar­ket for cellophane was not just cellophane, but flexible wrapping materials in general.

A Delicate Decision

However, this choice of relevant market, for argument’s sake, has to be done carefully, whether in a merger case or a Sherman Act case. Thus, if two shoe companies wanted to merge, and they could persuade the court that the rele­vant market was “all shoes,” the merger might result in a single company doing only 6 per cent of the business (legal).

But the Department of Justice might argue that the relevant mar­ket was “dress shoes”—in which case the resulting company might do 54 per cent of the business (illegal). But the shoe company lawyers might argue that the rele­vant market was “men’s dress shoes” and, since one company was in men’s dress shoes and the other in women’s dress shoes, there would be no lessening of competi­tion from the merger (legal).

This type of question is likely to baffle federal judges increas­ingly—with the present trend of American business managements to diversify their product lines and, in doing so, to “buy time” by merging rather than by building.

But of the judicial problem “what share of what market,” the question of “what share” is illegal is just as difficult as the question of “what market,” and equally un­established. Judge Learned Hand’s dictum in the Alcoa case, that 90 per cent was certainly illegal, 30 per cent certainly legal, and 64 per cent questionable, dismayed the government lawyers, who seem to be aiming at 15 per cent, but settled nothing.

In the Columbia Steel case, the Supreme Court majority said, “We do not undertake to prescribe any set of percentage figures by which to measure the reasonableness of a corporation’s enlargement of its activities by the purchase of the assets of a competitor.” And that is about where the matter seems to rest.

The two questions, as to “what market” and “what share” consti­tutes lawbreaking, are either so undecided or have been so diverse­ly decided as to leave the outcome of each future merger or monopoly case to the shrewdness and plausi­bility of the contending lawyers and the predilections of the court.

Thus, in the Bethlehem-Youngs­town case, the judge was in effect presented with the following intel­lectual teaser. Merger of the two companies would, of course, elimi­nate competition between them. Also, it would shrink the number of big steel companies. But it would bring Bethlehem‘s financial power into the Chicago district and thus give “Big Steel” a harder run for its money. So, would or would not the net effect of the merger be to “substantially lessen competition”?

While the courts are trying to decide such problems, plastic com­panies are invading the steel com­panies’ markets. Chemical com­panies are going into plastics. Rubber companies are going into chemicals. Oil companies are going into rubber. A submarine company recently bought an airplane com­pany and went into rockets.

Market fences are falling apart, alert managements are trying by­product diversification to make themselves independent of particu­lar markets, and the question of “undue concentration” is becoming a living for lawyers but a hobble for business.

Management Spurns Monopoly

While the “oligopoly” theory now written into antitrust law as­sumes that businessmen tend to concentrate on exploiting particu­lar markets, top business manage­ment policy is just the opposite—to avoid at all costs dependence on any particular market, and to use all possible means, particularly research and mergers, to achieve corporate independence of any one product or any one market.

A classic case in point was the steam locomotive business 30 years ago. At the end of the 1920′s, three companies not only “dominated” this business, but did it all—American Locomotive, Baldwin, and Lima, with ALO doing more than 50 per cent.

Had the antitrust laws been stretched in meaning as far as they have today, this would have been an egregious violation of the law against undue concentration of economic power. But the late “Boss” Kettering, with his two-cycle Diesel, obliterated this “oli­gopoly,” and one of the chief goals of modern business management is not to get caught making steamers in a Diesel age.

Characteristic of modern busi­ness competition is that within the established categories of industry there has been intensified develop­ment of new products, and of better quality for the existing products.

In the country’s largest and fastest-growing industry, chemi­cals, the bulk of the business is in products developed chiefly after World War II. And quality has been steadily raised, as with gasoline, tires, steels, textiles, and cars.

Even more characteristic of postwar competition has been the development of inter-industry market competition. The walls be­tween industry have been knocked down, and the thresholds of com­petition lowered by research and technological advance.

A typical result has been the battle for the domestic heating market, between middle distillate oils, interstate pipeline gas, and coal.

In the container business, com­petition has developed between tin cans, glass bottles, and paper car­tons.

Building equipment material is made by firms, in different indus­tries, who never heard of each other until they took a chance in the new product diversification.

Synthetics upset the textile in­dustry.

Breakdown of conventional busi­ness compartments is dramatically shown in the case of two legal mo­nopolies—the railroads and West­ern Union.

Street car systems, though a legal monopoly, have largely gone. Automobiles, buses, and airplanes have taken most of the railroads’ legal “monopoly” of interstate pas­senger business.

Western Union‘s marriage with Postal Telegraph only solved its intra-industry competition prob­lems, but the merger left it as de­pendent as ever on alert manage­ment to cope with the competition of airmail and other communica­tion means.

Whether industrial research started the new inter-industry competition or is a result of it will remain a good subject for debate. But research has become a pri­mary tool for the new manage­ment policy of getting out from under dependence on any single line of products.

New Products Through Research

A corollary of this trend toward diversifying products has been a rapid decrease in straight-out price competition. Rather than continue producing the same thing and selling it for the best price, many companies would rather think up something new, add some new quality to the line, or invade somebody else’s market. Since the oligopoly theory is almost solely concerned with price, it misses this new trend.

This business game of “musical chairs” is the basis of the new competition. Everyone raids some­body else’s field.

One way is through research. New products are bound to com­pete with somebody’s established products. A second way is through capital outlay. The fastest way is through merger-acquisition, and this is the reason why the merger movement has accelerated since the Clayton Act was amended in 1950 to curb mergers.

Growth of research and mergers may be called either a cause or a result of the new inter-industry competition. It is both. When some companies and industries start causing competitive troubles, others must follow suit or lose out.

In the last analysis, foresighted management must take account of existing competition within its in­dustry and threatened competition from other industries, as well as potential future competition from undeveloped and undiscovered products and processes.

This is something judges sitting in antitrust cases considering ques­tions of the “relevant market” are not called on to anticipate. They need only consider the possible and the probable, while alert man­agements must consider the im­probable and the seemingly im­possible competitive threat.

The present law’s appraisal of business conduct on grounds of “undue concentration of industry” requires a battery of lawyers to tell business if it may be violating some recently thought up rule. They are in the position of the boy who asked his mother, “How did I do on my valedictory speech?” and received the answer, “Your tie was crooked.”

  • Mr. Fleming, for many years New York Busi­ness Correspondent of the Christian Science Monitor, is a prominent free-lance writer on business and economics.