ECONOMIC CONCENTRATION

WEDNESDAY, APRIL 21, 1965

U.S. SENATE,

SUBCOMMITTEE ON ANTITRUST AND MONOPOLY OF THE COMMITTEE ON THE JUDICIARY, Washington, D.C. The subcommittee met, pursuant to recess, at 10:10 a.m., in room 318, Old Senate Office Building, Senator Philip A. Hart (chairman) presiding.

Present: Senator Hart.

Also present: S. Jerry Cohen, staff director and chief counsel; Horace L. Flurry, assistant staff director and chief counsel; Peter N. Chumbris, chief counsel for the minority; James E. Bailey, counsel for the minority; Dr. John M. Blair, chief economist; Kirkley S. Coulter, economist for the minority; Walter S. Measday, economist; Patricia Bario, editorial director; and Gladys E. Montier, clerk.

Senator HART. The committee will be in order. The committee welcomes warmly the Assistant Attorney General in charge of the Antitrust Division. Over the years that we have had an opportunity to observe the performance of the Division, it is our feeling our witness this morning, Mr. Orrick, has demonstrated exceptional ability and perception and effectiveness. I welcome the chance to say that on the record.

Mr. Orrick, you have a statement. As you know, if there is any interpolation or additions you care to make, you are free to do it. STATEMENT OF WILLIAM H. ORRICK, JR., ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE

Mr. ORRICK. Thank you very much, Mr. Chairman, and thank you for that nice introduction.

Mr. Chairman and members of the committee, I appreciate this opportunity of testifying on the subject of corporate concentration, a matter which should be of vital concern to every man, woman, and child in this country. For concentration is not just a matter of dry statistics concerning how many companies produce what percentage of the goods we purchase. Nor is it just a matter of concern to us as consumers in terms of the quality and price of the goods we buy. Much more than that is involved. Concentration of economic power has always been regarded as a threat to our most important social and political institutions.1

1 See 21 Congressional Record 2457, 2460. 2598 (1890); United States v. Aluminum Co. of America, 148 F. 2d 416, 428-29 (2d Cir. 1945). See also material cited at note 3 infra.

As the real objectives of the antitrust laws in combating concentration are often forgotten or concealed in the mysteries of legal technicalities, I suggest that it would be useful to lay on the table just what are the social and political premises of these laws.

Congress and the American people have always been concerned about the dangers to our society presented by the accumulation of economic power in a few hands.2

3

The passage of the antitrust laws-the Sherman Act in 1890, the Clayton Act in 1914, the Celler-Kefauver Act in 1950-reflected Congress fear of the political power that might be wielded by our largest corporations; fear of the inability of the small businessman to survive and prosper in an economy dominated by huge corporate structures; Fear of the absence of shareholder democracy in the big corporations; fear of local concerns being acquired by national companies and operated by absentee management unresponsive to local problems.

5

7

There were other fears behind the actions Congress took: fear of the tendency of big business, as it grows bigger, to produce countervailing bigness in labor organizations and government bureaucracy; fear of the tendency of the very large business units to respond only to mass consumer demand, thus reducing choices available in a society which has traditionally valued diversity; fear of corporate bigness destroying individual initiative and substituting in its stead the motivations of the "organization man"; and fear of the inability, as corporate concentration becomes more pronounced, for the individual American to enter the competitive fray, and the threat this poses to a way of life exemplified by the Horatio Alger story.10

9

Finally, and perhaps most important of all, Congress' dedication to antitrust goals as a means of preserving our way of life has always rested on its recognition that concentration of industrial power may lead to the police state. Can anyone doubt that the prewar experience of Germany, Japan, and Italy have proven the wisdom of this Nation's concern over concentration of economic power? 11

11

Restraints against great concentrations of economic power have continually been urged by our political parties. See, e.g., Porter & Johnson, "National Party Platforms" (1956). See also H. Rept. 1191, 81st Cong., 1st sess., p. 13 (1949).

See, e.g., congressional debates on Celler-Kefauver amendments to sec. 7 of the Clayton Act, 95 Congressional Record 11486 (statement of Congressman Celler), 11492, 11494 (1949); 96 Congressional Record 16452 (statement of Senator Kefauver), 16503, 16507 (1950).

See FTC. "The Merger Movement: A Summary Report," 59 (1948); Report of House Select Committee on Small Business, H. Rept. 2569, 87th Cong., 2d sess., pp. 19-20 (1963). See also Brown Shoe Co., Inc. v. United States, 370 U.S. 294, 316, 333 (1962).

6 See generally Berle & Means, "The Modern Corporation and Private Property" (1932); Livingston, "The American Shareholder" (1958).

See, eg, 95 Congressional Record 11486, 11489, 11494-495, 11498 (1949); 96 Congressional Record 16444, 16448, 16450, 16452, 16503 (1950). See also Brown Shoe Co., Inc. v. United States, supra note 4 at 316.

796 Congressional Record 16452 (1950); Galbraith, "American Capitalism: The Concept of Countervailing Power" (1952) Adams. "Competition, Monopoly and Countervailing Power," 67 Quarterly Journal of Economics 469 (1953); H. Rept. 1191, supra

note 2.

Berle, "The 20th Century Capitalist Revolution," 39-42, 184 (1954). See also Brown Shoe Co., Inc. v. United States, supra note 4 at 344: Procter & Gamble Co., FTC Docket 6901, CCH Trade Regulations Report, paragraph 16,673 (Nov. 26, 1963).

Berle, id. at 74-76, 182-88; Whyte, "The Organization Man" (1956); Kaysen, "The Corporation: How Much Power? What Scope?", in "The Corporation in Modern Society" (Mason, ed.), 101 (1960).

10 See hearings before Subcommittee No. 3 of the House Judiciary Committee, 81st Cong., 1st sess. ser. 10, pp. 14-15 (1949) (Congressman Celler). See also Adams, supra note 7; Berle, supra note 8 at 27-28.

11 See remarks of Congressman Celler, 95 Congressional Record, 11486 (1949), and report to Secretary of War Royall cited therein.

These, I suggest, are the considerations the Supreme Court had in mind when it said in the Northern Pacific case that the Sherman Act rests on the premise that the competitive enterprise system

will yield the best allocation of our economic resources * while at the same time providing an environment conducive to the preservation of our democratic political and social institution."

I suggest that these are also the factors President Kennedy had in mind when he said that the

free market is not only a more efficient decisionmaker than the wisest central planning body, but even more important, the free market keeps economic power widely dispersed (and) *thus is a vital underpinning of our democratic system."

13

And the annual report of President Johnson's Council of Economic Advisers states:

Decentralization of economic power has long been considered desirable for social and political reasons, as well as for its contribution to an efficient economy."

I suggest, finally, that these are also the factors which led Congress both in 1914 and in 1950 to attempt to arrest rising concentration not only in particular markets and industries, but in the economy as a whole. Thus, the Senate in its report on the Celler-Kefauver Act cited

15

the extent to which the American economy has become concentrated and centralized in the hands of a few giant corporations

pointing to the fact

that in 1946 one-tenth of 1 percent of the total number of all American corporations—the giant firms with assets of $100 million and over-owned 49 percent of the assets (of) all American corporations

16

These and other statistics cited in this connection relate, of course, to overall concentration of economic power rather than to concentration in particular industries and markets.17

Our experience with amended section 7 suggests that the statute is adequate to deal with the problem of merger-created concentration in particular markets, at least where one or the other of the merging firms is a major factor in the market. 18 I have attached as an appendix to this testimony a table of all acquisiitons challenged by the Antitrust Division from 1951 to date. In many cases, however, litigation proved unnecessary; the prospect of a successful government challenge was enough.19 And, I am sure, in numerous other instances, the advice of private counsel dissuaded the merging parties.

Visible antitrust enforcement in terms of its impact in preventing anticompetitive mergers is therefore very much like an iceberg. In

12 Northern Pac. Ry. Co. v. United States, 356 U.S. 1. 4 (1958).

13 Address. White House Conference of Business Editors and Publishers, Sept. 26, 1962, quoted in New York Law Forum, 1–2.

Economic Report of the President, 131 (January 1965).

15 See H.R. Rept. 1191, supra note 2 at pp. 12-13.

16 S. Rept. 1775, 81st Cong.. 2d sess. (1950).

See also H. Rept. 1191. supra note 2 at pp. 2-3.

18 See. e.g.. Brown Shoe Co., Inc. v. United States, supra, note 4; United States v. Philadelphia Nat'l Bank, 374 U.S. 321 (1963); United States v. Aluminum Co. of America, 377 U.S. 271 (1964).

19 In some instances, the parties dropped their merger plans following Government denial of a request for clearance. Such requests are normally held in confidence.

deed, probably the most substantial tribute which can be paid to the effectiveness of the antimerger statutes and the enforcement efforts of the Federal Trade Commission and the Antitrust Division, is that there are not more major mergers attempted today.

I might here interpolate, Mr. Chairman, that last year the Antitrust Division noted some 1,630 mergers as compared to 1,111 the year before, and in the first 3 months of this year we have noted some 503 mergers compared to some 363 mergers for the first quarter of the previous year indicating at least a substantial increase in the number of mergers.

27

30

Mergers of major competitors were rampant in the late 19th and early 20th centuries. Today, however, after the recent Supreme Court decisions in Brown Shoe,20 Philadelphia Bank," Lexington Bank,22 Continental Can,23 Alcoa-Rome,24 and El Paso,25 and our district court successes in Bethlehem Steel,26 Kennecott, Chrysler-Mack, 28 AlcoaCupples,29 and now, Manufacturers-Hanovers, the amalgamation of major competitive factors in a particular industry would be highly unlikely. Therefore, I feel reasonably confident in asserting that the 1950 amendments to section 7 are proving effective in dealing with one aspect of the concentration problem with which Congress was concerned, that is, concentration in particular markets and industries. But the law is only now first developing with respect to merger activity which increases the level of concentration in the economy as a whole, but not in any particular markets or industries. At this time I can only point out that some of the existing court decisions rest on factors which are appropriate to an analysis of the anticompetitive effects of this type of merger activity. These include the elimination of potential competition,31 the implications of reciprocity 32 and the creation of extraordinary competitive advantages.33

I particularly call to your attention the significance of potential competition which was discussed by the Supreme Court in El Paso,34 Penn-Olin 35 and Continental Can 36 and was also involved in the action we took to prevent the merger of the Bethlehem and Youngstown steel

20 Supra, note 4.

21 Supra, note 18.

22 United States v. First Nat'l Bank & Trust Co. of Lexington, 376 U.S. 665 (1964). 23 United States v. Continental Can Co., 378 U.S. 441 (1964).

24 Supra, note 18.

25 United States v. El Paso Natural Gas Co., 376 U.S. 651 (1964).

20 United States v. Bethlehem Steel Corp., 168 F. Supp. 576 (S.D.N.Y. 1958). United States v. Kennecott Copper Corp., 231 F. Supp. 95 (S.D.N.Y. 1964).

28 United States v. Chrysler Corp., 232 F. Supp. 651 (D. N.J. 1964).

29 United States v. Aluminum Co. of America, Civ. No. 61C-147 (E.D. Mo., Dec. 4, 1964).' 30 United States v. Manufacturers Hanover Trust Co., Civ. No. 61C-3194 (S.D.N.Y., Mar. 10, 1965).

31 Potential competition is related both to product markets as well as geographic markets. See Mueller, "The Current Merger Movement and Public Policy," 8 Antitrust Bull. 629, 642 (1963).

3 See, eg, reference to the criterion of reciprocity in United States v. Ingersoll-Rand Co., 218 F. Supp. 530, 522 (W.D. Pa. 1963), affirmed 320 F. 2d 509, 524 (3d Cir. 1963); United States v. Koppers Co., Inc., 202 F. Supp. 437, 455 (W.D. Pa. 1962), appeal dismissed 371 U.S. 856 (1962); United States v. General Dynamics Corp., 62 Civ. 36S6 (S.D. N.Y., Nov. 8, 1962, complaint filed). Currently, there is a merger case pending before the U.S. Supreme Court in which reciprocity is the basic issue. Consolidated Foods Corp. v. F.T.C., 329 F. 2d 623 (7th Cir. 1964), cert. granted 379 U.S. 912 (1964).

33 The most significant recent application of this factor in a merger case appeared in Reynolds Metals Co. v. F.T.C., 309 F. 2d 223 (D.C. Cir. 1962). See also Procter & Gamble Co., supra, note 8.

34 Supra note 25.

35 United States v. Penn-Olin Chemical Co., 378 U.S. 158 (1964).

a Supra note 23.

companies 37 and the acquisition by Standard of New Jersey of the west coast facilities of Tidewater Oil Co.38

These are situations in which the public generally may be unaware of the contribution which antitrust law enforcement makes to this country's real economic growth. And by real economic growth I mean not the growth in size of particular companies, but the growth of our overall productive capacity, job opportunities for our workers, and competitive choices for our consumers. For example, our action in the Jersey Standard-Tidewater case was largely predicated on our belief that its subsidiary, Humble, if prevented from acquiring the existing facilities of a competitor, would probably build its own refinery facilities in California to service its growing retail operation in that area. Recently, following the Department's successful action to block Humble's acquisition of the Tidewater facilities, Humble announced that it "is currently studying installation" of a multimillion dollar refinery facility at a site it has purchased in Monterey, Calif. Again, in the Bethlehem-Youngstown case, our action was largely predicated on a belief that Bethlehem would probably construct new facilities near Chicago if it was prevented from buying the competitive facilities which Youngstown already had in the area. Bethlehem Steel has since built on the Indiana dunes a vast steel complex, one of the world's most modern and most important steel producing facilities.

39

At this point I should like to put this question to the economists. What degree of overall concentration of economic power should the antitrust laws, as presently written, prohibit? I have already pointed out that one of the matters that has concerned the Congress for the past 75 years is a threatened concentration of control of this country's economy by a handful of large corporations. But neither the CellerKefauver amendment to section 7 of the Clayton Act in 1950 nor any other antitrust statute clearly defines the degree of concentration of economic power that Congress regards as intolerable.

My own view is that the absence of any such definition does not permit this Division or the courts to disregard the power-concentrating impact of any merger. The fact that section 7 defines the mergers it prohibits by reference to anticompetitive effects in any section of the country in any line of commerce ought not to blind us to the fact that some mergers which have a comparatively slight anticompetitive effect in any single business or location may at the same time diminish nationwide competition that might otherwise exist. I particularly have in mind mergers involving the largest private economic units that presently exist, which economists, for lack of a meaningful definition, usually lump together under the catchall term "conglomerate." 40 They do not fit the conventional descriptions of horizontal or vertical because the companies are not presently competing with or dealing with each other. Yet these units may have all the economic and technical resources needed to engage in competition with smaller units

Supra note 26.

United States v. Standard Oil Co., Civ. No. 64-490-SW (S.D. Cal., Apr. 14, 1964). See Wall Street Journal, p. 12 (Feb. 16, 1965).

40 Among the various definitions of the term "conglomerate," see, e.g., Blair, "The Conglomerate Merger in Economics and Law," 46 Geo. L.J. 672 (1958); Mueller, supra note 31 at 641; H. Rept. No. 1191, supra note 2 at 11. It is clear that the "conglomerate' merger is within the purview of sec. 7. See, e.g., H. Rept. No. 1191; Procter & Gamble Co., supra note 8 at p. 21567.