(b) Regulation of prices and investment.-This policy would be difficult to apply to the steel industry and, again, requires continuous Government action. The proposal that information should be collected as to the operations of the industry is highly desirable, more especially as congressional investigations have not elicited the information necessary for independent appraisal of the industry. But caution is necessary to avoid placing excessive burdens on industry and Government to obtain information that may not always be usable. Furthermore, there is no reason for collecting such information from the steel industry and not from other industries in which production is concentrated in a relatively few firms.

The proposal that notices of proposed price increases be filed and made the subject of public hearings appears to be more doubtful. Public pressure so applied may not be well enough informed to produce desirable results and it may be ineffective. Furthermore, failure to reduce prices at some times is as important as proposals to raise them at other times.

(c) Decentralization of control over the industry appears to be the most promising policy. It would involve replacing the larger companies with a number of smaller ones, each operating a mill that is fairly well integrated. This policy requires less continuous intervention by Government. It seems unlikely to raise costs very much. If it increases competitive pressures it may ultimately lower costs. To what extent it will in fact increase price competi tion is not easy to forecast, although it can hardly fail to operate in that direction.

This policy may also reduce the necessity for dealing directly with vertical integration in the industry. Vertical integration is not necessarily harmful. But if it is combined with a degree of monopoly or control over the market it may be the means of spreading these undesirable conditions over a larger part of the economy.

Mr. McCULLOCH. Mr. Burns, do you recommend legislation implementing any one or all of these proposed remedies?

Mr. BURNS. As to whether it is a matter of legislation, sir, that is more difficult, because it is possible that the third remedy does not need legislation, but I am recommending.

The CHAIRMAN. You state the third does not need legislation? Mr. BURNS. I say, I am not lawyer enough to say whether or not it needs legislation.

The CHAIRMAN. You prefer the third as being less difficult?

Mr. BURNS. Less difficult and also leaving far greater freedom to industry.

The CHAIRMAN. Then it is the least interference to the operation or management of the company.

Mr. BURNS. Yes. That is my objective, to give as much freedom of enterprise as possible.

Mr. MCCULLOCH. Could I ask what you mean, and I perhaps will put it crudely, but could I ask if what you mean by "c," is the breaking up of some of the larger steel companies into smaller units?

Mr. BURNS. Yes, sir; broadly speaking.

Mr. McCULLOCH. Doing that mandatorily by rule, regulation, or law, whatever is necessary to accomplish that end?

Mr. BURNS. Yes, because the situation, as at present developed, has been the kind that the industry has drifted into; it is the kind of development that can be reversed only, I think, by Government action, but the kind of Government action that is a sort of a one shot and then leaves the industry free to work out its future.

Mr. McCULLOCH. Do you think it would be difficult if not well nigh impossible to provide a yardstick of what was too large and what was only large enough?

Mr. BURNS. Well, that is why I said that I wasn't sure that I wanted to recommend a law, because a law would have to be stated in gen

eral terms applicable to all industry, and then you would have to define these terms that you are using.

Mr. McCULLOCH. Thank you.

(Parts A, B, C, and D of Mr. Burns' statement are as follows:)

A. Methods of price making

The principal immediate influence on steel prices has been leadership, which consists in the general practice on the part of an industry of following the price made by a leader.

It is evident, however, that this practice has not achieved perfection because(a) While the United States Steel Corp. is the acknowledged leader, other steel makers have on occasion made price changes before the corporation announced its changes.

(b) At times firms whose announced prices are the same as, or related to, those of the corporation in fact secretly depart from these prices. In times of steel shortage some have secretly charged "premium" prices and in times of unused capacity they have charged lower prices.

But, in general, the prices charged by the United States Steel Corp. have been the most powerful single and immediate influence on prices.

Steel makers are doubtless not always in agreement on all matters, but there has been considerable uniformity of behavior on important aspects of sales policy. Whether these uniformities have been due to collusion is legally important, but from the economic point of view it is the nature and consequences of price policy that are significant.

B. Reasons for price-making methods

Something like a price leadership procedure is likely to appear where there are relatively few sellers and one is considerably larger than the remainder. The lesser firms find it difficult to charge prices higher than the larger firm for fear of losing business to it. If the large firm's capacity is in full use this fear is removed, and the lesser may charge "premium prices," but such prices generate customer ill will. If the lesser firms charge lower prices than the large firm, it is likely to respond with a similar price reduction, and the price cutter's advantage from price differences disappears unless the lesser firms again reduce prices. In industries with heavy investments, prices could thus be reduced to a level at which they yielded little or nothing on overhead. Consequently there is a general fear of the losses from such price wars and a general desire to avoid them. Price leadership is a handy solution to this problem.

The fact that steel production is scattered in a number of locations throughout the country, and that steel is costly to transport, gives each mill a territory in which it has a transport cost advantage. In the past mills have competed for territory. The basing-point method of selling permitted this competition but prevented it from being price competition.

The price announced at each base mill was followed by other mills selling in the sales territory governed by that price. Price leadership therefore operated not only the major firms but also among the firms in each sales territory. This practice minimized local price wars but at the expense of unnecessary freight costs, the amount of which is very difficult to measure.

The abandonment of the basing-point practice might remove some of this damping effect on price competition. To find out whether this is so we would need to retain present methods of pricing until there is more unused capacity than at present. But as methods of producing steel, and particularly the extent of overhead investment, have not been substantially changed, the general recognition of the danger of price wars will presumably also remain. The typical mill is likely to hesitate before reducing its mill price to extend the territory in which it can sell without discrimination in mill nets, if neighboring mills are likely to respond.

C. The resulting prices

In the past there has been substantial uniformity in the prices of different sellers of steel at each delivery point (although premium and concession prices from time to time have prevented uniformity). Complete uniformity is, however, as likely if not more likely to occur under monopoly as under fairly active competition. But, insofar as the products of different sellers of steel are believed by buyers to be fairly uniform, large price differences are not to be expected. If buyers did not transfer their custom to the cheaper source of supply

(and thus eliminate price differences) it would be necessary to look for noncompetitive elements in the market preventing such changes.

Steel products have in general been in the class of products whose prices have been relatively stable over cycles of business. In times of depression, prices have generally remained stable for some time and if they have been reduced it has been by a smaller percentage than, say, typical raw material prices. It has been argued that price reductions at such times bring out little additional demand. While this view cannot be proved or disproved, it must be remembered:

(a) That the price of steel affects the price of many manufactured goods, both because many such goods contain steel, and because the United States Steel Corp. is something of a general business leader. If manufactured goods in general declined some response from buyers is likely. Such a response would help to stimulate economic activity.

(b) When steel prices have been reduced the reduction may have been too small, and sufficed only to arouse hopes of a further decline and thus encourage postponement of purchases.

(c) The argument that price reductions would merely "spoil the market” by shifting demand forward in time improperly assumes away the desirability of such shifts in demand.

This stabilization of prices, however, has two sides. In times of active business, notably in the last few years, prices have been below those that would have been set by the forces of supply and demand. The rationing of supplies of steel and the existence of a "gray market" is evidence of this state of affairs. This condition may have been due to unwillingness to pay higher wages which may later be difficult to reduce, or to a desire to minimize public criticism. In the main this cyclical pattern of prices is more likely to destabilize than to stabilize business.

The level of prices over longer periods of time is difficult to appraise. Steel makers state that their profits have not been adequate. I agree with them that high profits in one or a few years are no indication of excessive profits in general. But over longer periods the attractiveness of the industry is indicated by the expansion of investment therein. The capacity of the industry increased roughly 33 percent between 1930 and 1949. The industry implies that there would have been more investment if profits had been higher, and critics of the industry contend that investment has been too low because competitive forces have been shackled. In fact it is difficult to decide whether the industry should have been larger. Wartime apart, a larger industry might have permitted bigger booms and more protracted periods of recovery. Because the longer term average extent of unused capacity might have been greater, costs might have been higher. On the other hand, larger unused capacity might have caused greater pressure to reduce prices.

Profits depend on costs as well as prices. Information about costs is inadequate, and, in any event, requires technical interpretation. Progressiveness in technology would also require a downward trend in costs. There have been reductions, but we have no standard by which to appraise them and say whether they have been as fast as we could expect.

D. Nonprice competition

The steel industry properly emphasizes that there has been, and is, competition to improve quality and service. It is claimed that quality competition has brought improvements over long periods, but at most times the quality of the products of different sellers is very similar, if not identical. Both statements seem to be true. They raise the questions whether all changes in quality have been worth to the buyer what he pays for them, and whether quality changes have been as great as we could expect from a progressive industry. The answers to these questions are not clear.

Competition in service is probably one of the main explanations of the way buyers choose their sources of supply when the plant in the industry is not fully occupied. Where there are few differences in price, sellers look for other advantages. There is little doubt, on the one hand, that steel makers often provide considerable useful service, but on the other hand, that not all service is useful. Again it is difficult to decide whether these services have been worth what they have cost buyers. Had there been more price competition buyers might have been able to balance differences in service against differences in price.

(The remaining part, pt. "E," of Mr. Burns' prepared statement was orally presented and is transcribed hereinabove.)

The CHAIRMAN. Are there any further questions?

If not, we will recess now to meet tomorrow morning, when we shall hear Mr. Clyde B. Aitchison, of the Interstate Commerce Commission, and our distinguished colleague from Minnesota, Representative John A. Blatnik. We will adjourn to 10 o'clock tomorrow morning.

(Whereupon, at 5:50 o'clock p. m., the committee adjourned to reconvene at 10 o'clock a. m., Friday, May 5, 1950.)