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A Brief History of the FTC’s Bureau of Economics: Reports, Mergers, and Information Regulation

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Abstract

Although there are numerous histories of the Federal Trade Commission (FTC), there has been little focus on sub-organizations of the FTC. While this history of one sub-organization, the Bureau of Economics, is a description of the role of economists in antitrust and consumer protection, it also provides an example of an entity that serves an economic staff function for a larger organization run largely by attorneys. That arrangement is not uncommon in the federal government, since many government agencies utilize economists and only one, the Federal Reserve, is run by economists. Despite this organizational structure, economists at the FTC have had a significant role since its 1914 founding, and in the most recent 40 years, those economists have produced work that not only made the FTC a more efficient and effective regulator, but also enhanced the knowledge of economists generally in areas of FTC specialty.

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Notes

  1. For a detailed description and analysis of the formation of the FTC and its early years, see Winerman (2003) and Winerman and Kovacic (2010, 2011).

  2. The FTC’s first Chief Economist obtained his Ph.D. in 1895 and was a professor at Case Western Reserve University. Prior to his work at the Bureau of Corporations, he conducted research in Europe and published several industry studies including those on the German coal and steel industry (Quarterly Journal of Economics 1905, 1906) and the “Beef Trust” in the US (Economic Journal 1906). Walker came from a long line of top-notch academics: Francis Walker’s father, Francis Amasa Walker (1840–1897), was a brevet brigadier general who served in the Union Army during the Civil War. He was also President of the Massachusetts Institute of Technology, President of the American Statistical Association, and the first President of the American Economic Association. Francis Walker’s grandfather, Amasa Walker (1799–1875), was a New England businessman who also taught at Oberlin and Amherst, and was the outstanding American economist of his time, according to the International Encyclopedia of the Social Sciences, vol. 16, pp. 438–39; and Who’s Who in Economics, p. 389. Also see, The National Cyclopedia of American Biography, pp. 341–42; and Dunbar (1897).

  3. The meaning of the term “economist” changed over time at the FTC. Other than those in leadership positions in the Bureau of Economics, there were few Ph.D. level economists at the FTC prior to the 1960s. Most of those classified as economists in the earlier era would have had little, if any, post-graduate training in economics.

  4. Indeed, investigative economic reporting was the essential function of the FTC’s predecessor agency, the Bureau of Corporations. Reports by that agency had occasionally provided the basis for major regulatory changes in industry. For example, the May 1906 report on The Transportation of Petroleum was a key factor in passage of the Hepburn Act, which regulated rail and pipeline transportation of oil, and that report also served as a basis for the government’s 1911 monopolization case against Standard Oil. Prior to that time, oil pipelines were privately owned and were not common carriers. (Lynch, 9-22-03 communication to Pautler citing to Johnson (1956); also see Bureau of Economics History Roundtable, September 4, 2003, pp. 173–180; hereinafter “BE History Roundtable (2003)”. In 1920, the reporting function comprised 37 % of FTC expenditures, and the discussion of the economic division in the FTC Annual Report took 18 pages, whereas discussion of the legal division consumed less than half a page.

  5. See Boyle (1964, p. 491), Stevens (1925, pp. 628, 643–49), Stevens (1940, p. 559), Scherer (1990) citing Louis Brandeis from 1913; and economist, Jeremiah Jenks, from 1900. Also see Davis (1938), Handler (1928, p. 713); and FTC Annual Report (1951, pp. 29–30), which discuss four 1920s vintage FTC reports that arguably led to substantial price reductions via publicity. In 1933, the FTC’s Chief Counsel, Judge Robert E. Healy, called the FTC’s economic division “a virtual standing investigation committee for the Congress.” (Hearings on H.R. 14458, Subcommittee of the Committee on Appropriations, U.S. Senate, \(72^{\mathrm{nd}}\) Congress, Second Session, February 10, 1933, p. 42).

  6. The Office of Policy Planning (1981a) recounts the impact of early FTC reports, and Appendix E in that report lists over a dozen legislative acts that were influenced by FTC reports.

  7. Stevens (1940, p. 552, 563) indicated that as of 1933 nearly the entire staff of the Economic Division (which at the time would have been more than 84 people) had been immersed in the Utility report or the Chain Store report for several years. While the Utility report has similarities to a legal document, Stevens clearly indicates that it was very largely the work of the Economic Division (p. 563, note 43), and that was confirmed by the Economic Division’s Chief Economist, Francis Walker, in congressional testimony (Hearings on H.R. 14458, Subcommittee of the Committee on Appropriations, U.S. Senate, 72nd Congress, Second Session, February 10, 1933, p. 6). Many of the 1950s vintage Bureau of Economics’ reports also were written by many authors and often utilized the Bureau’s full complement of staffers, although in the latter 1950s the full staff was only 12–14 economists, because the economists who worked on antitrust matters had been transferred to the Bureau of Investigation and worked directly for attorneys. It appears that the full staff participated in the production of the 1958 report on Antibiotics Manufacture and the 1960 Food Marketing report. The post-1975 BE reports, on the other hand, tended to be less detailed, more analytical, and were produced in a shorter time by one or two authors rather than dozens.

  8. The focus on descriptive material made perfect sense given the staff who performed much of the work. At that point, the FTC had relatively few attorneys and very few Ph.D.-level economists. In addition, even academic economic research in the pre-1940 period would have been much more descriptive and less analytical than would be true of economic research in more recent years, so the FTC work was not unusual for its time. A review of some pre-WWII reports indicates that a few (but clearly not most) of the reports had an anti-big-business tone that was not fully consistent with the avowed goal of simply presenting “the facts.” As one example, the TNEC monograph No. 13, “Relative Efficiency of Large, Medium-Sized, and Small Business,” (1940, pp. 101–139) presents a vast amount of cost and rate of return data but evinces an unmistakable large business animus in several sections when the text goes beyond recitation of the data. Perhaps this characteristic of Economic Division reports is what led Jesse Markham, a former Bureau of Economics Director, to note that “If on occasion, the Commission’s economists are overzealous in their conclusions regarding the power of big business, the rising and unchecked tide of monopoly, and the pending doom of small-scale competitive enterprise, the discerning analyst capable of shifting fact from fancy will regard such zeal as a small price to pay for the productivity it inspires.” (Markham (1964, p. 413)).

  9. The FTC could initiate investigations on its own, but it did not tend to do so in the early years. Between 1914 and 1939, 80 % of the economic investigations formally released by the FTC were requested by Congress, the President, or other Federal agencies. This changed in later periods. Of the studies published from the end of WWII to 1964, only four were requested by others, and 29 were initiated by Commission action. See Boyle (1964, p. 500), MacIntyre and Volhard (1970, pp. 754–756), Stevens (1940, pp. 553–54), and Kovacic (1982, p. 625, notes 195, 197). In the mid-1920s, there was a dispute within the Commission about the ability of the Commission to undertake investigations on its own initiative. FTC Chairman William Humphrey argued that such self-initiated studies were illegal, while Commissioner Myers fervently disagreed. See Stevens (1940, p. 547) and memorandum from Commissioner Abram F. Myers, December 12, 1927, re “Investigations undertaken by the FTC on its own initiative relating to (1) the practice of retail price maintenance, (2) bases on which prices are made (basing point pricing), (3) blue-sky operations (securities), and (4) intercorporate relations between DuPont, US Steel, and General Motors Companies.” Myers (pp. 6-7) listed over two dozen inquiries that the FTC had initiated between 1915 and 1926. Most of these inquiries were assigned to the Economic Division, and many resulted in informal reports rather than published volumes. The “internal” Commission debate about the initiation of studies was largely settled when Myers, a Democrat, and the “insurgent” Republican Commissioners voted unanimously, while Chairman Humphrey was out of town, to initiate several studies. Myers later wrote to President Coolidge that requests for studies by Congress led the Economic Division to waste its time and that Commission-initiated projects would be more useful and relevant to the FTC’s law enforcement mission. See letter upon the occasion of his resignation from Abram F. Myers, FTC Commissioner, to President Calvin Coolidge, January 2, 1929, p. 3. This incident is recounted in Winerman and Kovacic (2011, pp. 722–725).

  10. Conversion was done using the GDP chain-type price index for 1933 (7.916) and 2012 (115.382). In 1933 dollars those studies cost $1.6 million and $867,000, respectively. (The annual budget for the entire FTC during this period was in the $900,000 to $1.5 million range). In 1933, Congress earmarked 25 % of the 1934 FTC budget for the Utility report. In contrast, the smaller, one-volume radio industry cross-licensing and patent study (that arguably influenced Congress to form the FCC) reportedly cost only $25,000 in 1923. (For a listing of pre-1933 studies and their costs, see Hearings on Independent Offices Appropriation Bill for 1934, Subcommittee of the House Committee on Appropriations, U.S. Senate, 73rd Congress, First Session, April 21, 1933, pp. 60, 79–87).

  11. The large meat packers contemplated market coordination through the district managers called “general men,” who visited each others’ plants twice a week (Meat Packing Industry, pt. 2, pp. 108–09). Interestingly, the five great packers had a return on equity that was lower than that of the remainder of the industry (13 versus 17 %). Profits as a percent of sales were in the 2–3 % range (Part V, FTC 1918, pp. 15, 94).

  12. Letter to the President of the United States from the Federal Trade Commission, William B. Colver, Chairman, July 3, 1918 (contained in the meat-packing report). As of December 2017, the railroads had been temporarily nationalized by President Wilson as part of the war effort. Nationalization ended in March 1920. During this early period, Economic Division reports at least occasionally advocated government control of assets as a remedy for the behavior found to be disfavored (e.g., grain marketing, meat-packing). The Division’s reports also recommended state milk regulation. See Stevens (1940, pp. 564–66).

  13. The U.S. Chamber of Commerce attacked the Commission, and a New York Times editorialist appeared to agree, arguing on September 3, 1918 that to be useful the FTC “should be cured of its present bolshevist and propagandist tendencies.” Later, on October 20, 1919, Senator Watson of Indiana called for an investigation of the FTC focusing upon the FTC’s Chicago Office which he characterized as “a center of radicalism, a nesting place for socialists, a spawning ground for sovietism.” (The Chicago Office must have played a major role in the investigation and report; but the report itself does not mention organizations within the FTC, although it does mention more than 20 persons who worked on the project). According to Kovacic (1982, pp. 623–625, note 190), the Chicago staff were cleared of wrongdoing, but were fired in any event, presumably to placate Senator Watson.

  14. Stevens (1940, p. 564), Boyle (1964, pp. 496–97), Markham (1964, p. 408, n 17), FTC Annual Reports (1951, p. 29, 1968, p. 77), and Office of Policy Planning (1981b) Appendix E. Stevens, in particular, gives a great deal of the credit for passage of the Robinson-Patman Act to the information that was provided by the Economic Division of the FTC. Adelman (1966, pp. 151–153) might be less willing to give the FTC credit for instigating the law because, he argues, there was a widespread misimpression that the report showed that systematic discrimination was common, when it actually showed that the vast majority of price differences were consistent with cost differences. Perhaps the desire to take credit for fathering the Act reflects the fact that as of 1940, the scholarly criticism of the Act had not been fully formed. Few economic or legal scholars, however, have had good things to say about the Act in the past 60 years. See the 1969 American Bar Association report that criticized the FTC for spending so much time enforcing the statute. Also see Adelman (1966) for a stinging critique of the law in general. For a slightly more recent analysis of Robinson-Patman issues connected to the FTC’s 1930s era salt cases, see Peterman (1995) who argues that the pricing of salt during the 1930s and 1940s was largely cost-based and was not determined by dominance of the largest buyers of salt.

  15. Boyle (1964, p. 498). The monograph showed a wide dispersion of lowest cost firms or plants, with medium sized firms/plants most often appearing to be the most efficient; see TNEC Monograph 13, p. 14.

  16. Shortly after the establishment of the Commission, the US entry into the Great War (now called World War I) helped define this “cost-finding” role for the FTC. Seventyone studies were conducted during WWI for the War Industries Board; 40 were written for the War Department; 39 were prepared for the Navy Department; and several others were written for various other agencies. Accounting functions were paramount in these reports, as the FTC prepared cost accounting reports with respect to several industries as part of the war-time price determination process (FTC Annual Report 1951, p. 18). One recurrent theme from the early days of the Commission was the argument that businessmen did not really know what their costs were and that the FTC cost accounting efforts would, therefore, be a boon to business in setting a standard for industry to follow. See Stevens (1940, p. 572). During these early years, certain industries reportedly asked the FTC to prepare accounting systems for them. Perhaps in response to these requests, the FTC published pamphlets describing a system of accounts for manufacturing in 1916 and an accounting system for retail merchants in 1920. See Scherer (1990, p. 469) for a description of the FTC’s early accounting efforts. Some of those accounting efforts were undertaken in conjunction with a group of experts from the American Association of Public Accountants. See FTC Annual Report 1916, p. 16).

  17. Among other things, this new law plugged a loophole that existed in Section 7 of the Clayton Act. The new law made asset acquisitions, as well as stock sales, subject to the law’s restrictions. The previous deficiency (failing to cover asset transfers) had made the Clayton Act largely ineffective as a merger deterrent. For over 25 years, the FTC continuously sought to have the law amended to close the loophole and to have asset transfers covered. See Boyle (1964, pp. 499–504) and many FTC Annual Reports from 1925–1950.

  18. The FTC reported that from 1940 to 1947, 2,450 manufacturing and mining firms disappeared through mergers and acquisitions; those firms had owned 5.5 % of industrial assets (about 0.7 % asset “disappearance” per year based on the mergers reported to the Commission. See FTC Annual Report 1948, pp. 16–22). Scherer (1990, p. 470) indicates that the FTC data may have misled Congress into thinking that a merger problem existed when it did not. By way of comparison, U.S. merger activity in 2012 alone involved nearly 9,600 transactions, with a value of about $780 BN or 5 % of U.S. GDP. (FactSet Mergerstat). Maksimovic and Phillips (2001) indicate that from 1974 through 1992, 6.2 % of manufacturing plants were involved in M&A and asset sales annually during expansion years.

  19. Auerbach (1964, p. 397) citing the First Hoover Commission Task Force Report, 123 (1949).

  20. Although Congress requested relatively few economic reports after 1938, there were still occasional report requests from various Congressional sources. For example, in 1950 the House published an FTC report on interlocking directorates that examined the relationships that existed among the directors of the 1,000 largest manufacturing corporations. In 1952, at the request of the Senate Select Committee on Small Business, the FTC studied the effects of certain monopolistic practices on small business. The same Committee requested reports on food marketing in 1958 (Senator Hubert Humphrey, Hearings before the Senate Subcommittee of the Select Committee on Small Business, June 22, 1960, p. 1). During the 1970s, Congress requested economic studies of various concentrated industries. This request may have been the original genesis for a series of market studies begun by BE Director Michael Mann in the early 1970s that tried to move beyond market structure and examine particular market institutions or characteristics. Those reports appeared in the 1970s and early 1980s. Congress also passed laws that required studies of energy markets in the 1970s, and several such studies were undertaken. Much later, in 1985, Congressional concern over the insurance industry resulted in requests for studies that led to the publication of three reports by the FTC’s Bureau of Economics. Members of Congress also requested studies or investigations of the Japanese keiretsu system as it operated in the automobile industry in 1990 (FTC Annual Report 1991, pp. 17–18), and the financial effects of the proposed tobacco industry settlement in 1997. In summer 1999, the President and certain members of Congress requested an FTC report on the marketing of violent material to youth by the motion picture, music, and video game industries. The first report in that series, which was produced under the leadership of attorneys in the FTC’s Bureau of Consumer Protection, was released in September 2000. Over the past two decades, Congressmen also requested studies of pharmaceutical firm practices regarding patents, electricity retailing, slotting allowances in the grocery industry, and the spillover effects of alcohol marketing on minors. Many of these studies were led by attorneys, with economic inputs. In addition, Congress or the President requested several reports on oil industry issues in the 2000s, as well as reports on the accuracy of credit reports and the effect of credit scores on the price and availability of auto and homeowner’s insurance. During the past 30 years, the FTC received numerous other requests for information from Members of Congress, but most requests were typically handled with brief response letters rather than by extensive investigations or reports.

  21. Boyle (1964, pp. 498–500) also noted that if Congressmen had their own staffs produce the reports, they could more readily control the scope and direction of the studies. Boylan (1998) documents the exponential growth of Congressional staff from 1940 to 1980 even relative to the growth of government in general. In addition, after WWII Congresspersons might have been able to call upon the resources of the General Accounting Office (since mid-2004 the Government Accountability Office) which improved its ability to provide analytical research around that time. Currently, the Congressional Research Service might also fulfill a Congressional research role, but it did not upgrade its capacity to perform studies until about 1970. The other major Congressional study organization, the Congressional Budget Office, was not formed until 1974. See the brief histories of each agency on their Web sites www.gao.gov, www.lcweb.loc.gov, and www.cbo.gov. For a discussion of the reasons that Congress might have requested less reports from the FTC, see BE History Roundtable (2003, Lynch and Mueller, pp. 171–180). Lynch favored a theory of competition among alternative report-writing agencies as a reason for the reduction, while Mueller favored a theory based on the power of big business to deter unfavorable reports.

  22. The War effort and the reduced demand from Congress for reports resulted in a slowdown in general investigations and report writing that was noted by the 1949 Hoover Commission Task Force Report on Independent Regulatory Commissions which indicated that “The Commission’s economic work—instead of being the backbone of its activities - has been largely allowed to dwindle to almost none.” U.S. Commission on the Organization of the Executive Branch, Report 125, (1949) (“Hoover Commission”) quoted in Blair (1964, p. 525). For other discussion of the de-emphasis of the investigation/reporting function in the 1940s and 1950s, see Auerbach (1964, pp. 397–398).

  23. This data collection work was carried on independently from the day-to-day activities of the rest of the Bureau. The data collection period at the FTC extended from 1939 to 1984. At various times during that period, the FTC collected financial information from many industries, particularly in its Quarterly Financial Report program. In addition, during the latter 1970s, the Agency collected data from 256 large corporations broken down by their lines of business. In the early 1980s, some of the data gathering activities were transferred to the Census Bureau; others were discontinued. For a discussion of the data collection activities, see Scherer (1990), and the BE History Roundtable (2003, pp. 122–123 and 205–221).

  24. Boyle (1964, pp. 500–01) notes that the FTC produced four reports regarding generalized or specific industrial concentration between 1949 and 1957. Congress, however, in 1963 explicitly stated that no funds could be spent for the study of intercorporate relationships among the 1,000 largest U.S. corporations (e.g., interlocking directorates and joint venture activity).

  25. Markham (BE History Roundtable 2003, pp. 20–22) indicated that the coffee report was initiated when the price of coffee rose markedly, making a “ten-cent cup of coffee” an oddity (the price of a unit of green beans rose from 58 to 96 cents over a period of five months ending in April 1954.) To complete the study, two economists moved to New York to study coffee futures and the Coffee and Sugar Exchange. The resulting report was nominated for an American Marketing Association prize. For some description of the study, see the 1954 FTC Annual Report, pp. 68–71.

  26. Scherer (1990, p. 470, note 45); and BE History Roundtable (2003, Mueller, pp. 183-185). That report used two separate requests under section 6(b) of the FTC Act to gather information from all producers and distributors of antibiotics. It was mainly descriptive, providing a wealth of information about the industry history, patents, cross-licenses, pricing, and profitability. It also detailed some suspicious price patterns in a few bidding situations, which later proved to be a basis for FTC lawsuits. Mueller (BE History Roundtable 2003, p. 183) noted that the attorney staff attempted to have the study rewritten to make it more useful for litigation. The Bureau Director at the time, Simon Whitney, resisted those efforts, although a new conclusion was penned for the report.

  27. The investigation resulted in a 900-page report and was perhaps touched with international intrigue: A key investigator was found dead of mysterious causes, and the publication of the report was held up for a year by the Truman White House at the behest of the State Department. The release of an expurgated version (378 pages) of the report in August 1952 by the Senate Select Committee on Small Business led to an attack on the FTC by the petroleum industry (Office of Policy Planning, Section 6 Working Group, April 9, 1981, p. 7 and Appendix F, pp. 41–45). There were dueling claims of authorship by economists Roy Prewitt and John Blair. Sampson (1975, p. 123) credits Blair, “a radical economist,” as the author; but Mack Folsom (BE History Roundtable 2003, pp. 180–182) indicated that Prewitt was surely the main author, in part, because his widow retained a copy of the full-length original report. Mueller (2009, p. 42) also credits Prewitt as the lead author. Authorship was unclear because, as with many economic reports prior to the 1960s, the report did not list the authors. The report was reportedly used as the blueprint for a follow-on Department of Justice antitrust case that targeted the industry. See Blair (1978, pp. 71–73).

  28. Stevens (1925, p. 638). Many of the FTC’s early legal cases would have involved what today would be considered consumer protection issues (misrepresentation and false advertising) and resale price maintenance. Cases that involved pricing practices of various types, including delivered pricing cases, were also a focus of FTC attention. See Winerman and Kovacic (2010).

  29. FTC Annual Report (1924, p. 3). Records do not exist that describe economist activities during this period, only occasional mentions in various annual reports. While it is clear that economists worked on major studies and reports, the extent of their work on case generation or litigation is much less transparent.

  30. FTC Annual Report (1938, p. 16). Ballinger also oversaw production of various FTC reports for the Temporary National Economic Committee (TNEC).

  31. The FTC Annual Reports begin to discuss the economists’ role in non-Robinson-Patman case and trial work in 1943. See FTC Annual Reports 1943, p. 7 and 1947, p. 5. In discussing the role of the Economic Division of the FTC, Stevens (1940, p. 568–71) never mentions any day-to-day antitrust casework by the Division, but indicates that information in some of the Division’s reports was used in antitrust probes in several industries (petroleum transportation, farm implements, newsprint, furniture, refrigerators, and meat-packing) and that the Division may have had some hand in supplementing that information for use in the cases.

  32. Various documents imply that on the merger front a change toward an examination of actual economic effects occurred in the early 1950s. See, for example, FTC Annual Report 1954, pp. 1–4; and OMB Budget Justification book, FY 1956, pp. 2, 108. Chairman Howrey, in 1953, may have intended to accomplish this change, but he also clearly wanted it accomplished with economists working under the direction of attorneys. (See Howrey speeches, June 18, 1953, p. 4; June 17, 1954, p. 3; and August 19, 1954, p. 3; and BE History Roundtable (2003, Markham, pp. 17; 75–77). Despite Howrey’s efforts, Jesse Markham (1964), BE’s Bureau Director from 1953 to 1955, indicates that the FTC’s antitrust enforcement was still based almost completely on rules rather than economic analysis, even after the 1953–1954 attempt to incorporate such analysis more fully.

  33. In an interesting indication of the tenor of the times, the 1951 FTC Annual Report (p. 5) indicates that the Celler-Kefauver amendments were passed in December 1950 to “stem the destructive tide of the merger movement among industrial and commercial corporations....”

  34. This period predated the 1969 start of the merger pre-notification program that applied to the 450 largest U.S. firms. Thus, merger screening would have been a much more difficult activity than in the 1970s and beyond (see BE History Roundtable 2003; Markham, p. 19). The FTC Annual Report (1950, pp. 9–10) implies that BE had a role in all phases of investigations, including case selection and evaluation. Various FTC annual reports during the period imply an expanded role for economists in the FTC’s investigations as the Agency tried (unsuccessfully perhaps) to shift away from small cases (e.g., Robinson-Patman) toward larger monopolization cases. See FTC Annual Report (1954, pp. 2–4, 61–62). Also see, letter from FTC Chairman Earl Kintner to Senator Hubert Humphrey, July 28, 1960 (reprinted in hearings before a U.S. Senate Subcommittee of the Select Committee on Small Business, Food Marketing, June 22, 1960, pp. 36–38). Mr. Kintner indicated that from 1950 to 1954 economists had been in charge of choosing merger cases and that only one case had been initiated. This story is also recounted in Bureau of the Budget (1960, pp. 119). The story, however, is misleading. At least by 1954, the Bureau of Economics was in charge of screening mergers via business press reports (FTC Annual Report 1954, pp. 62–63; Congressional Hearings before the House Small Business Committee July 1955, pp. 455). Prior to that time, the Bureau had been tracking merger reports and had uncovered thousands of mergers. Over 600 initial investigations had been started by the Bureau of Investigation as a result (FTC Annual Report 1953, p. 17). By 1955, five large mergers were in administrative litigation. It appears that BE had uncovered many mergers and reported hundreds to the Bureau of Investigation (BE History Roundtable 2003, Markham, pp. 19–20.) Of those, few resulted in formal actions. It may be that the newness of the Clayton Act amendments caused the FTC to be somewhat careful in its choice of cases in the early 1950s. Despite any carefulness, the Agencies brought 81 merger complaints in the 1950s under amended Section 7. See Mueller (2009, pp. 161–163). Mueller forcefully disputes the notion that merger enforcement was tepid during that period, and the key economists in BE at the time—Corwin Edwards and John Blair—would have been considered activist anti-merger enforcers by any current standard. Blair had been instrumental in drafting the 1950 Celler-Kefauver (anti-merger) Act amendments to the Clayton Act. For discussions of the evolution of economic thinking and the law that includes the 1940 and 1950s, see Hovenkamp (2009), White (2010), and Kovacic and Shapiro (2000).

  35. Mueller (8-20-03 memoir segment, pp. 2–4; August 13, 2003 e-mail, “re: BE History Questions on 1950–60,” and 2009, p. 159–161); and Markham, BE History Roundtable (2003, pp. 17–18). Markham’s view is likely more consistent with current-day US merger policy than is the Edwards/Blair/Mueller view, but in the 1950s Markham’s views were not mainstream. This “rules versus discretion” debate would be replayed years later in early 1982 when the structural criteria to be included in the Horizontal Merger Guidelines were debated. Chief Economist John Peterman would argue for a high, but binding structural threshold, while the Bureau of Competition Director, Tom Campbell, would argue for tighter (or no) thresholds, but more discretion. See Memorandum from John L. Peterman to Chairman Miller, February 19, 1982. Indeed, versions of the “rules versus discretion” policy debate arose repeatedly in trying to coordinate international competition policy during 1995 to 2012. Some nations were more interested in using easy-to-define rules for competition enforcement than were others.

  36. For a discussion of the benefits and costs associated with various forms of economic organization in a competition agency, see Froeb et al. (2009). Those authors note that there are numerous tradeoffs to be made and that the optimal structure will depend upon the outcome that the decision-maker desires. If the goal is to develop and maintain a high quality economics staff that can be innovative and aid in case evaluation and litigation, then reaching that goal may require giving the economists more independence than some decision-makers might prefer. If the goal is better short-term integration of economics into case development, then having economists work directly for attorneys (as they typically do on litigation teams) is likely optimal. The long-term maintenance of high-quality economic analysis inside the agency likely reduces the cohesiveness of the case investigation teams and leads to some friction if both attorney staff and economics staff present their own “independent” views to the decision-makers.

  37. Auerbach (1964, pp. 401) citing the Chief of the Bureau of Restraint of Trade’s Merger Division. In 1962, the Bureau of Restraint of Trade had three equally-sized investigation divisions: one specialized in merger work, a second handled Robinson-Patman cases, and the third focused on non-merger antitrust. Steve Nelson (5-12-00) and Mack Folsom (10-23-00), both longtime BE economists, confirmed that as of the late 1960s, the Bureau of Economics had some influence in the merger area (Nelson personally did some merger cases involving automotive parts and Mack Folsom had a seat on the Merger Screening Committee), a little influence in the Robinson-Patman area (occasional work in producing evidence for cases in litigation, but no one asked BE’s opinion of most R-P cases—everyone already knew by the late 1960s because it was uniformly unfavorable), and no influence at all in the non-merger antitrust area. This last situation would change in 1969 when Caspar Weinberger became the head of the FTC. For a description of economists’ more recent activity in antitrust enforcement, see Pautler (2014).

  38. Williamson (2002, p. 7).

  39. The main force behind the 1968 Guides, Donald Turner, was a “structuralist,” according to Hovenkamp (2009, pp. 355–57, 362), as were the vast majority of industrial organization economists in the 1960s. Also see Mueller (2009, p. 172) and Schmalensee (2012). As mentioned previously, the top Ph.D. economists at the FTC in that era disagreed over the importance of simple structural rules versus extensive analysis in merger enforcement.

  40. The 1982 Guidelines were released as a DOJ product, although both antitrust agencies had numerous attorneys and economists working on their development over the course of 2 years. Some at the FTC thought they were intended to be a joint output. Several published papers flowed out of those efforts, including Fisher and Lande (1983), Pautler (1983a, b). In 1981, BE Deputy Director John Peterman surveyed several leading industrial organization economists to get their impressions regarding appropriate structural thresholds for antitrust merger challenges. That survey produced widely diverging opinions, with answers often in the 2000–3000 Herfindahl-Hirschman Index market concentration range. (See BE History Roundtable 2003, Peterman, pp. 92–93 and memorandum from Deputy Director John L. Peterman to Chairman James C. Miller III, February 19, 1982.) Regardless of what the academics thought, the DOJ ultimately decided to include relatively low numerical thresholds that described the market shares of the merging firms and the level of market concentration that would trigger a merger challenge. Simultaneously with the release of the DOJ Guidelines in both 1982 and 1984, the FTC provided a Horizontal Merger Statement that explained the FTC’s analytical approach to mergers. The Statement did not include numerical triggers for merger enforcement. Perhaps because it lacked a numerical standard, or because it was released by the FTC and not the DOJ, the statement almost immediately became a vestigial appendage to the DOJ Guidelines. The statement represented the FTC’s (and especially Chairman Miller’s) preferred approach in providing guidance. For a description of the FTC Statement, see Miller (1989, pp. 50–53).

  41. For the argument that the 1982 Guidelines were a major advance in analytical rigor and that successive versions of the Guidelines took a more explicitly economic approach to merger enforcement, see Scheffman (1993, pp. 173–74), Langenfeld and Scheffman (1990, pp. 85–87), and Tollison (1983, pp. 211–215). As these authors noted, the 1982 Guidelines did not substantially loosen the numerical thresholds for merger enforcement that were included in the 1968 Guides. For an overview of the changes in the structural thresholds in the Merger Guides from 1968 to 1982, see Pautler (1983b).

  42. For a discussion of the hypothetical monopolist test and the advent of the 1982 Guidelines from a DOJ perspective, see Werden (2003).

  43. A major reason for the 1984 revision was to include some positive discussion of potential merger efficiencies, a factor that was downplayed in the 1982 Guides. A DOJ challenge to a steel industry merger case in the early 1980s—a merger that was said to be highly efficient by allowing capacity rationalization—was almost surely an important factor precipitating this revision.

  44. United States v. Syufy Enterprises, 903 F.2d 659 (1990).

  45. United States v. Baker Hughes Inc., 908 F.2d 981(1990).

  46. Conversation with John L. Peterman (2-3-05), former BE Director, regarding the advent of the Guides and the process of producing joint agency documents. The guide revision was initiated by DOJ. Peterman had been tasked by Chairman Steiger to be the FTC leader on the project. According to Peterman, the four-person, multi-month FTC/DOJ drafting process went quite smoothly—much more smoothly than the internal review process at the FTC.

  47. The rationale for many of the concepts that would eventually find their way into the 1992 Guidelines was presented by the key proponent of the changes at a 1991 Brookings Institution conference. See Willig (1991). Scheffman (1993), a previous BE Director, was not particularly happy with the 1992 revision, thinking that the new Guides were not properly focused on long-term effects and because they gave no weight to the fact that firms’ typical marketing plans indicated an intention to “grow” almost every product and market. One of the FTC Commissioners, Mary Azcuenaga, disliked the new guides sufficiently to pen a dissent.

  48. In connection with the 1992 Guidelines revision, an effort was made by BE economists to raise the numerical enforcement thresholds, but that effort was unsuccessful. (BE History Roundtable 2003, Peterman, p. 93). Modification of the structural standards would have to await the 2010 Guides.

  49. Some mention of merger efficiencies existed in all the versions of the Guidelines; but in 1968 and 1982 the mention was mainly to indicate that efficiencies would be given little, if any, weight.

  50. See footnote 1 of the 2010 Guidelines for praise of the Commentary.

  51. Carl Shapiro (2010), then Chief Economist at DOJ, provides some history of the Guidelines and discusses the 2010 version in detail. He and Joseph Farrell, BE Director at the FTC, were the two key proponents of this round of revisions. After circulating a paper for a couple of years on the concept of Upward Pricing Pressure (UPP), they published their thoughts on the UPP concept in Farrell and Shapiro (2010), and Later, Farrell (2011) corrected some misimpressions about the new Guides in his published work. Other members of the Guidelines writing team included Howard Shelanski, Richard Feinstein, Molly Boast, and Phillip Wiser.

  52. After a few initial efforts at enforcement, neither agency adhered to enforcement at the structural levels stated in the 1982 Guidelines. Rather, markets typically had to be more concentrated than were indicated in the Guidelines before a merger was challenged. See Coate (2000, pp. 335–337; and FTC 2013) for evidence on this point as it applies to the FTC. Werden (2001, pp. 15–16) notes that in his experience (at the DOJ) many mergers in the highly concentrated range were not challenged and very few government challenges occurred in markets unless the Herfindahl index changed by more than 500 points. Also see the charts in William Kolasky’s (DOJ’s Deputy Assistant Attorney General) April 24, 2002 speech to the American Bar Association, Antitrust Section on “Coordinated Effects in Merger Review: From Dead Frenchman to Beautiful Minds and Mavericks.”

  53. Much of the evidence from research on the outcomes from mergers is recounted in Pautler (2003).

  54. See Ravenscraft and Scherer (1985a, b, 1986a, b, 1987).

  55. See Schumann (1987). This study assessed the shareholder consequences of a 1985 New York state statute that substantially increased the costs of a takeover of New York corporations. Far from benefitting shareholders as proponents of the law predicted, the equity value of New York firms fell by an average of nearly 1 % or $1.2 billion in total immediately following the passage of the law. The results of the study provided a basis for a number of FTC staff consumer advocacy filings to state authorities.

  56. See Saltzman et al. (1999).

  57. See the August 2, 1988 Washington Post op-ed challenge by Daniel Oliver. “The FTC is No Joke, Gov. Dukakis”

  58. Schumann et al. (1992).

  59. Other than the 1990 reviews mentioned above, uncontrolled retrospective examinations were conducted for the 1998 Butterworth/Blodgett hospital merger in Poplar Bluff, MO, the 1995 Union Pacific/Southern Pacific merger in railroads, and the attempted merger of Gerber and Heinz in baby food in 2000.

  60. Mergers in many more markets were examined by researchers outside the FTC. Markets that received considerable attention beyond oil and hospitals included airlines, banking, telecommunications, newspapers, railroads, journal publishing, and pharmaceuticals. A session at the FTC’s 3rd Annual Microeconomics Conference in November 2010 focused on the extant retrospective work. The various presenters had located between 50 and 75 retrospective studies of mergers or joint ventures across a variety of industries. Consistent with the substantial FTC research results so far, well over half of those studies found post-merger price increases. See Kwoka (2013), who surveyed 46 merger cases and found that prices on average rose by 7.3  % following the mergers and prices rose in 76 % of the horizontal transactions surveyed. Also see http://www.ftc.gov/be/workshops/microeconomics/2010/index.shtm

  61. See Ashenfelter et al. (2013a) on the Whirlpool-Maytag merger using other “white goods” that were unaffected by the merger as a control product market. They find a significant 7–8 % price increase for two of the four products that were affected by the merger, and market shares fell for all four categories of products following the combination. Also see Hosken et al. (2012) who examine the after-effects of grocery mergers. Ashenfelter et al. (2013b) examine the outcome of the 2008 Miller/Coors merger. The authors find initial price increases followed by price decreases as distribution efficiencies took hold and were passed on to consumers. For discussions of retrospective results in several industries, see Farrell et al. (2009) and OECD (2011).

  62. Production of the written reports from the hospital merger project began in mid-2008, and working papers reporting the results appeared in 2009. A summary of the results is contained in Farrell et al. (2009). The hospital analyses themselves, focusing on hospital pricing and quality changes that occurred as a result of the mergers, were published (along with other retrospective studies and critiques of those studies) in a special hospital merger retrospective issue of the International Journal of the Economics of Business. See Haas-Wilson and Vita (2010).

  63. In one instance (Poplar Bluff), the data were sufficiently odd and unreliable that the economists could not pursue the empirical work to completion. In addition, the number of payors was so small that they could not be made anonymous.

  64. On October 16, 2007, a group of seven health economists led by David Dranove wrote to the Commission, criticizing the proposed remedy because it did not require a divestiture. Despite the critique by the economists, the proposed remedy became final on April 28, 2008. See Brief Amicus Curiae of Economics Professors and Opinion of the Commission on Remedy, each in the matter of Evanston Northwestern Health Care Corporation, Docket No. 9135.

  65. Data released by the FTC on its merger decisions may help to explain the lack of a systematic price-increasing effect from mergers in the oil industry. Merger enforcement occurs at lower concentration levels in the petroleum industry than in other industries. See FTC (2013) and compare tables 3.1 with 3.1a.

  66. For a paper that cites much of the behavioral economics literature that is used to support this position in the context of financial markets, see Campbell et al. (2011). With regard to pricing policies, see Huck and Wallace (2010). For general and favorable commentary on the basis for behavioral economics, see DellaVigna (2009) and Shleifer (2012). Resistance to this approach exists because the behavioral evidence is relatively new and originated largely from laboratory experiments using college students as subjects. It is uncertain whether such results carry over to the commercial world following consumer learning and market responses, or whether the government choices would produce better outcomes. For some commentary by those who are more skeptical about the application of behavioral economics to markets, see various comments at the Bureau of Economics/FTC Conference on Behavioral Economics and Consumer Policy, April 20, 2007; List and Millimet (2008), Wright (2006), and Elliehausen (2010).

  67. Schmalensee (2012).

  68. For examples, see Vickers (2003), Inderst and Ottaviani (2012), Armstrong (2011), or Armstrong and Vickers (2012).

  69. For an argument, by previous Directors of the Bureau of Consumer Protection (BCP), that economics is a key to consumer protection enforcement, see MacLeod et al. (2005) and Beales (2005, pp. 1062–63). Beales argues that economics was a necessary precursor to the production of the FTC’s policy statements on deception and unfairness.

  70. The FTC Annual Report 1935, p. 101 indicates that extensive examination of newspaper, magazine, and broadcast advertising began in 1929 with the formation of a three-person team to focus on that area. According to various histories of the FTC, many of the Agency’s advertising cases (and antitrust cases) were generated by complaints from firms, who disliked their rivals’ aggressive business practices and advertising. See especially, Stone (1977, pp. 64–73).

  71. FTC Annual Report 1938, pp. 2–4. The Wheeler-Lea amendments broadened the FTC’s authority by adding “deceptive acts or practices” to the “unfair methods of competition” that the FTC could attack. Several more specific labeling and credit laws were subsequently passed and vigorously enforced by the FTC: e.g., wool labeling (1939), fur labeling (1951), textile labeling (1958), truth-in-lending (1968), fair credit reporting (1970), fair debt collection (1978), etc.

  72. According to Murphy (5-19-00), the land fraud cases quickly became a quagmire for both the economists and attorneys. Some of the pre-1974 consumer protection work by economists would have included some general “brainstorming” with staff of the FTC’s Office of Policy Planning and Evaluation with regard to directions for consumer protection efforts, and work on occasional Magnuson-Moss rule cases that were handled through BE’s Economic Evidence office. In addition, in 1972, the Director of BCP, Robert Pitofsky, asked the BE Director to assign economists to help out part-time in four consumer protection areas: debt collection (creditor remedies), affirmative disclosures, warranties, and insurance. See memo from Robert Pitofsky to H. Michael Mann, “Economic Support for Consumer Protection Projects,” July 20, 1972 and a reply from Mann on September 11, 1972 that designated the economists who had been assigned.

  73. Mueller (2004, pp. 101–102); and BE History Roundtable (2003, Mueller and Folsom, pp. 143–150). In the 1960s, economist involvement in what today would be considered consumer protection matters almost always began with competition issues. For example, the light bulb rule analysis was pursued in large part because GE at the time had a virtual monopoly on light bulb sales. Similarly, economists considered octane disclosure requirements because they were an off-shoot of on-going work on the competitiveness of gasoline retailing.

  74. Mueller (2-2-03 memoir, p. 13) was not happy with the cigarette disclosures that were ultimately required by Congress, thinking that much more significant additional regulation needed to be applied to cigarette marketing. The remedies in each of these matters (cigarettes, gasoline octane, and light bulb life and light output) involved mandated disclosures that would have allowed consumers to make more informed choices. Rules regarding these matters were championed by FTC Commissioner Mary Gardiner Jones in 1969. Disclosure remedies were consistent with the efforts to obtain disclosures for home mortgages and other loans, which were underway in the 1960s as Chicago economist and Senator, Paul H. Douglas, pushed for loan disclosures in his draft of what would later become the Truth in Lending Act in 1968.

  75. Murphy (5-24-00, 10-10-00, 8-12-03, 10-27-05, and Scherer correspondence 7-31-03, p. 5; letter to Pautler, October 17, 2005; and 10-25-05 e-mail to Pautler). Murphy indicated that Commissioner Thompson’s interest related particularly to consumer protection cases that were generated by the FTC’s Regional Offices. Clarkson and Muris (1981, p. 305) argue that economists got into the consumer protection area, in part, because of legal requirements in the rule-making process. The Magnuson-Moss Warranty/FTC Improvements Act (1974) specified certain evidentiary standards for FTC rulemaking. This led to the expanded involvement of economists and to the production of various reports in the 1970s and 1980s by BE and both legal Bureaus. See Office of Policy Planning (Appendix F, April 1981, pp. 67–71).

  76. Murphy was the main BE input on consumer protection issues from 1974 to 1976.

  77. Early papers by Stigler (1961) and Nelson (1970) on information/search economics were important pillars for the development of consumer protection economics. For the analysis of rules, simply providing a conceptual benefit-cost analysis would have been an advance. For a compendium of first-generation consumer protection papers that were authored by economists and attorneys with an economics bent, see Craswell and Poole (1981). For a discussion of the early thinking about consumer protection economics, see BE History Roundtable (2003, Bond 135–143, esp. 139–140). For a bibliography of the literature that formed much of the basis of consumer protection economics, see Ippolito (1986).

  78. Economists apparently participated in a newly formed consumer protection case evaluation committee beginning in March 1976. See FTC Annual Report 1976, p. 21. For additional discussion of early economist activity in consumer protection, see MacLeod and Rogowsky in Meiners and Yandle (1989, pp. 75–77). One economist located in the Office of Policy Planning and Evaluation provided input into consumer protection rules (retail unavailability, and the franchise rule) in the 1976–1978 period. (Peterman outline prepared for BE History Roundtable 2003; 9-3-03.)

  79. Gerard R. Butters 5-00 interview. Also see, MacLeod and Rogowsky (1989, pp. 84–85) for a similar observation.

  80. For discussion of BE work in various consumer protection realms, particularly calculations of injury, and optimal deterrence, see Baker (1997, pp. 870–71).

  81. The initial work done by economists at the FTC in the health advertising area did not focus on foods, but rather examined the potential benefits of direct to consumer advertising for drugs. Such advertising has the potential to encourage better matches of consumers with useful drug therapies. See Masson and Rubin (1985).

  82. The study was cited widely in the Food and Drug Administration’s food labeling rule-making process in December 1989 because it provided the only empirical evidence that was available on the effects of health claims. The report (and follow-on advocacy work) likely had some influence upon the FDA’s implementation of the 1990 Nutrition Labeling and Education Act (NLEA).

  83. Calfee and Pappalardo (1989). This policy report was frequently cited by advocates of a less restrictive approach to food advertising regulation. For discussion of this paper and other BE-related consumer protection research, see Sprott and Miyazaki (2002). Those authors report that the FTC was the leading institution in Journal of Public Policy and Marketing publication from 1982 through 2001.

  84. Ippolito and Mathios (1996). Also see Pappalardo and Ringold (2000), who conducted research on health claims in print advertising for margarine and oils from 1950 to 1989. They examined claims in both the medical journals and in the popular press. Their work revealed that regulation deterred heart-health claims for better forms of oil and margarine from the 1960s to the mid-1980s. Nutrition content claims (such as “lower cholesterol”) were less affected than were claims that mentioned the heart-health consequences of dietary changes.

  85. Murphy et al. (1998), Murphy (2005). Murphy’s follow-up work on the qualification of claims was presented by Pauline Ippolito at a November 2005 FDA conference and perhaps helped slow the movement of the FDA toward further restrictions on health claims. See Katia Fowler, “Qualified Health Claim Testing May Draw on FTC Findings,” The Tan Sheet, December 12, 2005, p. 4.

  86. For a discussion of the importance of this line of health claims research, see BE History Roundtable (2003, Bond, pp. 192–194; and Gramm, pp. 158–159).

  87. For products that are potentially unsafe for consumers, such as prescription drugs, or for products that are purchased solely for their health effects, the tradeoff of type I and type II error costs clearly could be quite different.

  88. For a more detailed description of 20 years of the health claims regulatory changes that began in 1984 with a BCP Director’s speech and was influenced by the work of economists, see Froeb, Hosken, and Pappalardo (2004, pp. 355–361). As of 2012, the FDA allows about 35 claims regarding the healthfulness of foods. While many of the allowed claims are so weak and confusing that marketers would likely not use them, 35 is an impressive number when one considers that essentially no claims were allowed in 1980. Congress, the courts, and economic researchers have had some good effect in inducing the FDA to alter its very restrictive stance on health claims.

  89. The 2004 study about mandated disclosure of mortgage broker yield spread premiums was perhaps influential in re-orienting the course of various HUD mortgage settlement system “reforms,” some of which were off-course. See Paul Muolo and Brian Collins, “HUD’s RESPA Reform is Back at Square One,” National Mortgage News, 28, no. 27, p. 1, March 29, 2004. The revised forms that eventually emerged from HUD in 2007 and 2008 were much improved, in part, due to the BE efforts.

  90. For example see, Australian Productivity Commission “Review of Australia’s Consumer Policy Framework,” Canberra, 2007, p. 207–209; Rick Brooks and Ruth Simon, “Subprime Debacle Traps Even Very Credit Worthy,” Wall Street Journal, December 3, 2007, A-1; and “Disclosure Debate Reheats in Wake of FTC Report,” RESPA News Monthly, June 2007.

  91. Among the dozen reports on consumer protection topics, two others stand out: The report on the life insurance industry, by detailing the low rates of return on whole life insurance, was instrumental in fostering the growth of term life insurance. The eyeglasses report was also important in providing market-based evidence from a “mystery shopper” experiment that compared the price and quality of eyeglasses and exams in those states that allowed and banned advertising. See Lynch et al. (1979), and Bond et al. (1980).

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Acknowledgments

The views expressed are those of the author. They do not necessarily reflect the views of the Federal Trade Commission, any individual Commissioner, or any FTC sub-organization. Many persons over the years have provided input into this abbreviated history of the Bureau of Economics at the FTC. I would like to thank them all without implicating any of them in the outcome, and some of them might disagree with my views on certain points. A partial list of contributors includes: Pauline Ippolito, Keith Anderson, Jon Baker, Ron Bond, Denis Breen, Bob Brogan, Liz Callison, Mack Folsom, Phil Jaynes, Jim Lacko, Mike Lynch, Jim Miller, Fritz Mueller, Dennis Murphy, Steve Nelson, Mike Scherer, Lou Silversin, Mike Vita, Marc Winerman, and everyone who participated in a September 2003 FTC Conference on the History of the Bureau of Economics. Finally, able research assistance was provided by Sara Harkavy, Kata Mihaly, Marie Tansioco, and Scott Syms.

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Federal Trade Commission (former Deputy Director of the Bureau of Economics).

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Pautler, P.A. A Brief History of the FTC’s Bureau of Economics: Reports, Mergers, and Information Regulation. Rev Ind Organ 46, 59–94 (2015). https://doi.org/10.1007/s11151-014-9430-3

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