PLANNING, REGULATION, AND COMPETITION 49 2. Will not the planning process itself be most efficient and productive when stimulated by competition rather than being lulled to sleep by monopoly or oligopoly? 3. Is this not one important reason why Mr. Turner's statistics show greater efficiency when corporations are smaller and monopoly or oligopoly does not exist? 4. If there is no competition, why should not the Government do all the planning as well as the regulating-why leave planning to a monopolistic supercorporation whose fealty is not to the public, but the stockholders? 5. Professor Galbraith says: (S. 7112): “*** when a few large firms bargain with a strong union, conflict can be avoided by acceding to union demands. And there is not much incentive to resist. There is a common understanding among the firms that all will raise their prices to compensate for such a settlement thus the familiar upward spiral of wages and prices." Is this not an example of the lulling to sleep of management in the absence of efficient, competitive planning where there is monopoly or oligopoly? 6. Does not this come about by the fact that increasing prices is the easy way out and, in the absence of competition, there is no need for planning that will stop inflation? 7. In this area (inflationary tendencies), where monopoly and oligopoly have failed, can Government regulation really take the place of competition-can it do so without actually taking over the whole planning process where there is monopoly or oligopoly? 8. Is not Government regulation incompatible with, disruptive of, planning by an industrial monopoly or oligopoly, and should not the two be combined under government which has the broader fealty? 9. Why is it that the Government turns over to super-corporations, on a costfee basis the planning on the complex hardware it buys today. 10. Is this not an example of the effect of absence of competition in bureaucracy itself as there is in industrial monopoly and oligopoly-taking the easy way out? 11. Why is it that, when the big corporations get the Government contracts for complex weapons, they, in turn, leave most or much of the work to be done on sub-contracts by smaller companies, mostly in areas of work where there is competition does competition bring lower costs and greater inventiveness than can be matched by the big corporations? 12. Why is it that in oligopoly, as for instance in automobiles, the same thing is done with respect to much of the equipment and parts, even when no Government contract is involved? 13. As to the effect of burgeoning oligopoly in an industry on smaller competitors and employees, should not the regulatory process concern itself with seeing that the oligopoly does not take advantage of size and position in the industry by any process to strangle competition? (Under Sherman Sec. 1 and 2). 14. It was said in U.S. vs. Trans-Missouri Freight Association, 166, US., 290 323, and repeated in U.S. vs. Von's Grocery Company, 384 US., 270, that the Sherman Act was enacted to stop the tendency of business combinations to restrain competition "by driving out of business the small dealers and worthy men whose lives have been spent therein, and who might be unable to readjust themselves in their altered surroundings." The same could be said for the employees of these smaller business men. Is not concern for human beings appropriate in the application of antitrust regulation? 15. It was said in Fibreboard Paper Products Corps., vs. Labor Board, 379 US., 203, 225, and repeated in Woodwork Manufacturers Association vs. Labor Board, US., 18 L. ed., 357, 375: "In this era of automation and onrushing technical change, no problems in the domestic economy are of greater concern than those involving job security and employment stability. Because of the potential cruel impact upon the lives and fortunes of the working men and women of the nation, these problems have understandably engaged the solicitous attention of government, responsible private business, and particularly of organized labor." Is it not appropirate for the regulatory process to see that oligopolistic industry and dominant unions do not turn their back on this problem? 16. Is it not appropirate that antitrust law enforcement concern itself with any sustained course of conduct by oligopoly, combined together with labor or 50 PLANNING, REGULATION, AND COMPETITION any other group, that uses technological change and industrywide rules as a means of depressing smaller competitors and bringing the cruel impact invisioned above not only to the small employer but to his dependent employees and communities? HARVARD UNIVERSITY, CAMBRIDGE, July 6, 1967. Mr. RAYMOND D. WATTS, U.S. Senate, Select Committee on Small Business, DEAR WATTS: The attached are self-explanatory, I think. As you must have gathered, the hearing was much enjoyed from my side. Indeed, as a veteran of such ceremonies, I think it was one of the best I ever attended. Yours faithfully, JOHN KENNETH GALBRAITH. HARVARD UNIVERSITY, CAMBRIDGE, July 6, 1967. Senator HoWARD H. BAKER, Jr., DEAR SENATOR BAKER: The attached is I think self-explanatory. I am sorry not to have done better but my problem is one that a Senator is peculiarly able to understand. It was nice meeting you the other day. Yours faithfully, JOHN KENNETH GALBRAITH. HARVARD UNIVERSITY, CAMBRIDGE, July 6, 1697. Mr. JOHN A. ROWNTREE, Hamilton National Bank Building, DEAR MR. ROWNTREE: I carried away from Washington a copy of your letter and your highly pertinent questions. Unfortunately, however, they reach me at a time when I am simply overwhelmed with commitments so, I am afraid, I cannot give them the time they so deserve. (I am leaving in a day or so for South America.) I am sorry for not all questions are worth answering-and yours are. Yours faithfully, cc: Senator Howard H. Baker, Jr. Mr. Raymond Watts. JOHN KENNETH GALBRAITH. (NOTE-The other witnesses had not accepted the invitation to answer or comment on Mr. Rowntree's questions at the time the hearing went to press, and it was the understanding of the committee staff that they did not intend to do so.) APPENDIX B (Letter and enclosure received subsequent to the hearing, and appended to the record at the direction of Senator Morse, Chairman, Subcommittee on Retailing, Distribution, and Marketing Practices. ) Hon. WAYNE MORSE, U.S. Senate, Washington, D.C. WASHINGTON, D.C., June 30, 1967. MY DEAR SENATOR MORSE: Congratulations to you and to the Senate Small Business Committee for the thoroughly excellent antitrust symposium you presented yesterday morning. PLANNING, REGULATION, AND COMPETITION 51 Professor Galbraith has made it very clear that if antitrust enforcement continues to be ineffective, we will be forced to travel the road to the corporate state. Professor Adams and Professor Mueller have made it very clear that stringent, broadly based antitrust measures can prevent this. Professor Turner has made it very clear that the Administration does not favor such measures. I was especially interested to hear your invitation to Professor Turner calling upon him to furnish the Committee directly with his specific recommendations for supplemental antitrust legislation. Such recommendations are already available to you in terms of Professor Turner's own "Draft Antitrust Law," set forth at pages 265-272 of the Kaysen and Turner book, Antitrust Policy. Although Professor Turner indicated yesterday that he still favors the antitrust enforcement policy advocated by the book, he also indicated that the inhibitions of his present official position and the attitude of his superiors in the Executive Department preclude him from now seeking appropriate legislation to implement it. In these circumstances you would be doing a great national service by proposing the enactment of the Kaysen-Turner "Draft Antitrust Law," Sections 1, 2 and 3, to supplement (but not to supplant) existing antitrust law. Sincerely yours, WORTH ROWLEY. [From Antitrust Policy—An Economic and Legal Analysis, by Carl Kaysen and Donald F. Turner, Cambridge, Harvard University Press, 1965, p. 265 ff.] DRAFT OF A PROPOSED ANTITRUST STATUTE We conclude this chapter, and our general discussions of antitrust policy, with a draft of a proposed antitrust statute incorporating the bulk of our substantive proposals. It does not cover our proposals on price discrimination, which have already been set forth with some precision; nor does it cover, except by passing reference, our proposals on enforcement machinery and other procedures, which have also been dealt with in detail. The draft is more suggestive than definitive. To each section of the draft statute, we have appended short comments. DRAFT ANTITRUST LAW Section 1. Unreasonable Market Power Injurious to Trade and Commerce Possession, by any one or more persons, of unreasonable market power in trade and commerce among the several States or with foreign nations is hereby declared to be injurious to such trade or commerce. Comments. This is simply a declaration of policy, in preface to provisions providing for proceedings against unreasonable market power. Section 2. Market Power Defined. Unreasonable Market Power (a) For the purposes of this Act, market power shall mean the persistent ability of a person, or of a group of persons whether or not acting pursuant to agreement or conspiracy, to restrict output or determine prices without losing a substantial share of the market, or without losing substantial profits or incurring heavier losses, because of the increased output or lower prices of rivals. Evidence of market power may include, but shall not be limited to: (1) persistent failure of prices to reflect substantial declines of demand or costs, or to reflect substantial excess capacity; (2) persistence of profits that are abnormally high, taking into account such factors as risks and excess capacity; or (3) failure of new rivals to enter the market during prolonged periods of abnormally high profits or of persistent or recurring rationing. Comments. The core of market power is the possession of a substantial range of price and output choices, not decisively affected by the response of rivals or would-be rivals. It may be held by a single corporation, or it may be held by several corporations who are able to, or sometimes economically compelled to, behave jointly in such a way as to enhance their profits and/or positions over what would be attained if they competed against each other or if others were able to compete effectively against them. The draft definition specifically states that proof of agreement or conspiracy is not an essential ingredient of "group power." Indeed, the principal purpose of the statute is to cover oligopolistic industries in which effective "shared" market power exists without the ingredient of agreement essential to a Sherman Act charge. The definition technically covers the large-numbers 52 PLANNING, REGULATION, AND COMPETITION cartel case as well, and in this respect is somewhat redundant. However, we think the coverage is desirable in order to eliminate the possibility that defendants could evade the statute by pointing to minor agreements of one sort or another and arguing that the statute covered wholly noncollusive market power only. Market power is defined as the ability to restrict output or to determine prices either without losing a substantial share of the market or without losing profits or incurring heavier losses. This reflects the fact that sellers with market power usually have a choice between earning high unit profits on a small volume of sales, or lower unit profits on a higher volume of sales. Thus, the mere fact that defendants cannot raise prices without losing a substantial share of the market does not disprove the existence of substantial market power. The categories of evidence are not exclusive, but probably indicate the most common indicia of substantial market power. The term "abnormally high profits" is admittedly imprecise, but we believe that it is workably determinable in most specific instances. It is often possible to say that profits are abnormally high without determining precisely what normal profits would be. Some cases would be clear, as, for example, a firm or group of firms persistently earning positive profits of any amount during a prolonged period of excess capacity. (b) Market power, as defined in Section 2(a), shall be conclusively presumed where, for five years or more, one company has accounted for 50 percent or more of annual sales in the market, or four or fewer companies have accounted for 80 percent of sales. Comments. We have discussed the pros and cons of this provision in Chapter III. We think it highly likely that this arbitrary definition would cover some situations in which substantial market power did not in fact exist, most likely in declining industries. However, we are inclined to favor it on the ground that it would simplify proof in a large number of cases where fuller study would substantiate the conclusion that these percentage figures would suggest; and on the ground that the enforcement agency, particularly with inevitably limited resources, would have the common sense to avoid inappropriate proceedings. (c) Market power shall be deemed unreasonable unless shown by defendant or defendants to have been created and maintained, entirely or almost entirely, by one or more of the following: (1) such economies as are dependent upon size in relation to the market; (2) ownership of valid patents, lawfully acquired and lawfully used; provided that, on a showing that market power has been created and maintained by patents, the government shall have the burden of showing invalidity, unlawful acquisition, or unlawful use; (3) low prices or superior products attributable to the introduction of new processes, product improvements or marketing methods, or to extraordinary efficiency of a single firm in comparison with that of other firms having a substantial share of the market. Comments. The "justifications" of market power, which defendants have the burden of establishing, closely resemble those suggested by Judge Wyzanski in United Shoe. The first and second are fairly obvious. The third deserves some elaboration. We believe that some defense of this kind is essential in order to protect the kind of behavior that competition is thought to foster. On the other hand, we have incorporated some limitations. Low prices or superior products are a justification only if attributable to factors specified. The efficiency justification is available only to a firm having substantial competitors in its market; in other cases, there is no satisfactory standard of comparison. Section 3. Jurisdiction of Economic Court. Division and Divestiture (a) The Economic Court is invested with jurisdiction to prevent and restrain injuries to trade or commerce resulting from the possession of unreasonable market power; and it shall be the duty of the Industrial Reorganization Commission to institute proceedings in equity before said court to prevent and restrain such injuries. Pending determination of the case, the court may at any time make such temporary restraining order or prohibition as shall be deemed appropriate in the circumstances. (b) On a judgment that defendant or defendants possess unreasonable market power, the court shall, to the extent that such relief is feasible, order the division or divestiture of assets of defendant or defendants, and, whether or not division or divestiture of assets is ordered, the court may grant such other or further relief as shall be deemed appropriate in the circumstances; provided that: PLANNING, REGULATION, AND COMPETITION 53 (1) the court shall not approve a plan involving division of the assets of a single plant; (2) in determining the feasibility of division or divestiture of assets, the court shall take into account any probable permanent loss of substantial economies intrinsic to the defendant company or companies as currently constituted; (3) the court shall not order division or divestiture of assets where defendants show that such relief would not materially improve the competitive conditions which other relief, proposed by defendants, would achieve; and (4) the court shall not approve a proposed plan of divestiture or division of assets where defendants show that one or more companies resulting from the plan would lack reasonable prospects for survival under the competitive conditions likely to prevail. Comments. Structural reorganization of one or more firms, and creation of new independent companies, would be the usual and normal remedy for unreasonable market power, rather than a last resort. Defendants have the burden of showing that structural reorganization is inappropriate, or that any proposed plan is not feasible, except in the "single plant" case. Whenever it is apparent from evidence received on market power that some reorganization is feasible-which is likely to be the usual case-the court should not allow defendants to pursue the purely negative role of objecting to specific plans proposed by the enforcement agency, but should direct defendants to submit a specific plan or plans of their own. APPENDIX C (Material received from Dr. Adams subsequent to the hearings) (Walter Adams and Joel B. Dirlam) Introduction: the "Schumpeterian" hypothesis, 167.-I. Oxygen The view attributed to Schumpeter, that large firms with substantial market power have both greater incentives and more ample resources for research and innovation, has become part of popular mythology and an article of faith among many economists as well. Ostensibly, Schumpeter felt "that firms had to be protected by some degree of monopoly-to have some room to maneuver ***" in order to bring about massive innovations. Presumably, he implied "that more concentration would increase innovation and progress." Though Schumpeter never stated it without careful qualification, this idea has been widely used to explain why some industries, like textiles, are "backward," and others, like petroleum, are not. Galbraith, for example, argues that "a benign Providence ✶ ✶✶ has made the modern industry of a few large firms an almost perfect instrument for inducing technical change. It is admirably equipped for financing technical development. Its organization provides strong incentives for undertaking development and for putting it into use. The competition of a competitive model, by contrast, almost completely precludes technical 1 Richard Caves, American Industry: Structure, Conduct, Performance (New York: Prentice Hall, 1964), p. 98. 2 Schumpeter qualified his hypothesis more carefully than did his disciples. To be sure. he argued that " largest-scale plans could in many cases not materialize at all if it were not known from the outset that competition will be discouraged by heavy capital requirements or lack of experience, or that means are available to discourage or checkmate it so as to gain the time and space for further developments*"; but he also observed that "it is certainly as conceivable that an all-pervading cartel system might sabotage all progress as it is that it might realize, with smaller social and private costs, all that perfect competition is supposed to realize." Capitalism, Socialism, and Democracy (New York: Harper, 1942), pp. 89-91. For a balanced restatement of the Schumpeter hypothesis, see Edward S. Mason, Economic Concentration and the Monopoly Problem (Cambridge: Harvard University Press, 1957), pp. 91-101, and Jesse W. Markham, "Market Structure, Business Conduct, and Innovation," American Economic Review, Papers and Proceedings, LV (May 1965), 323-32. |