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The Federal Trade Commission, Oligopoly, and Shared Monopoly

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Abstract

This paper, written for a centennial commemoration of the Federal Trade Commission’s creation, reviews the history of two major cases—the tetracycline case of the 1950s and 1960s and the suit against four (eventually three) ready-to-eat breakfast cereal manufacturers in the 1970s. Those actions addressed one of the most difficult problems in U.S. antitrust jurisprudence: how to deal with the behavior of oligopolistic firms sufficiently few in number that they refrain from active price competition even without entering into explicit price-fixing agreements.

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Notes

  1. American Tobacco Co. et al. v. U.S., 328 U.S. 781, 809 (1946).

  2. There are many reviews of the cases. For my own, see Scherer and Ross (1990, pp. 339–346).

  3. For texts of the White House (Neal Report) and Hart proposals, see Goldschmid et al. (1974, pp. 444–456). That volume brings together the principal dissenting schools of thought on industrial concentration and its economic consequences.

  4. That Judge Posner continues to hold this view is implied in the decision he wrote in High Fructose Corn Syrup Antitrust Litigation, 295 F. 3rd 651 (2002).

  5. F.T.C. v. Cement Institute et al., 333 U.S. 683 (1948); and Triangle Conduit and Cable Co. et al. v. F.T.C., 168 F. 2d 175 (1948).

  6. E. I. du Pont de Nemours and Co. et al. v. F.T.C., 729 F. 2d 128 (1984).

  7. On the F.T.C.’s “sunlight” function, characterized in a 1914 tract by Louis Brandeis, see Scherer (1990).

  8. Another early drug with therapeutic effects extending beyond penicillin was streptomycin. It had a rather different structure comprising six full and one partial benzene rings. I ignore here still another early broad-spectrum drug—Parke Davis’ chloramphenicol, which had only one closed benzene ring plus two open ones. It was marketed independently but at prices similar to the drugs featured here.

  9. My work on that case and my collaboration with Peck on a 1962 book led me to switch from a doctoral program in business administration to Ph.D. studies in economics at Harvard University.

  10. As I view the case in retrospect, I wonder whether the divergence of theories may have confused the administrative law judge into accepting an inference of price competition subsequently reversed by the full Commission.

  11. The examiner’s 1961 decision does not appear to have been published in the F.T.C. Reports.

  12. In the matter of American Cyanamid Co. et al., 63 F.T.C. 1747 (1963).

  13. I suggest in Scherer (1967, p. 501) that there was focal point coordination of the percentages of order quantities filled through free goods provision as well as in formally quoted pricing.

  14. American Cyanamid Co. et al. v. F.T.C., 363 F. 2nd 757 (1966).

  15. In the matter of American Cyanamid Co. et al., 72 F.T.C. 623 (1972).

  16. 72 F.T.C. 623, 657 (1967).

  17. 72 F.T.C. 623, 691–692.

  18. This account is abbreviated from my discussion of the Justice Department case in the 1980 and 1990 versions of my textbook.

  19. Apparently, commencement of the formal trial was delayed until it appeared that the F.T.C. case was bogged down.

  20. U.S. v. Charles Pfizer & Co. et al., from pp. 6270–6271 of the trial record. The principal published opinion by Judge Frankel was his rejection of defendants’ motion to dismiss at the conclusion of the jury trial. U.S. v. Charles Pfizer & Co. Inc. et al., 281 F. Supp. 837 (1968).

  21. Charles Pfizer and Co. et al. v. U.S., 426 F. 2nd 32, 39–43 (1970).

  22. 404 U.S. 548 (1972).

  23. 367 F. Supp. 91 (1973).

  24. On the F.T.C.’s response to House of Representatives Small Business Committee criticism for laxity in its price discrimination enforcement, see my testimony, reproduced in Scherer (2000, Chapter 12).

  25. On the latter, see Green et al. (1972).

  26. For my analysis of the Xerox case, see Scherer (2008, pp. 1054–1057).

  27. The Department of Justice launched its own shared monopoly case against the leading automobile tire producers.

  28. The original complaint is reproduced in In re Kellogg Company, et al., 99 F.T.C. Reports 8–16 (1982).

  29. Divestiture plus compulsory (patent) licensing were previously sought in complaints against General Electric and AT&T, but only compulsory licensing was ordered in the relevant cases.

  30. 99 F.T.C. 8, 18.

  31. It led inter alia to my analyzing additional economic welfare implications in Scherer (1979).

  32. Louis Rukeyser, “FTC Eating Spiked Cornflakes?” Ottawa, Illinois, Daily Times, April 6, 1978. The column appeared only a few days after the Washington Post named the F.T.C. as “the national nanny” for announcing an effort to declare as an unfair method of competition the intensive advertising of heavily sweetened and otherwise questionably nutritious products on child-oriented television programs. See also Pertschuk (1982, Chapter 3); and for a new version of the space-packing argument, “Corporate Sardines,” The Economist, May 3, 2014, p. 68.

  33. Prosecution exhibit CX-701A. F.T.C. Line of Business program data available only later showed breakfast cereal makers’ pre-tax operating income over the years 1974–1977 to have averaged 39 percent relative to assets—ranking among the top four among 259 manufacturing industries over those years and first in 1977.

  34. From the Federal Trade Commission’s Line of Business surveys for 1974–1977, which shows cereal advertising/sales ratios to be consistently among the top eight among 259 manufacturing industries. Similar but less comparable figures were submitted in evidence.

  35. But see the hint disclosed by the ALJ at 99 F.T.C. 8, 222.

  36. Speech of C. A. Tornebene in December 1966. Exhibit CX-K-549P.

  37. I didn’t know about the flaw when I testified, because under F.T.C. rules, once a witness begins testifying, he is unable to discuss the substance of his testimony with the staff. My normal procedure in such matters is to “do it myself,” but at the time, personal computers with useable regression packages did not exist.

  38. The precis here is my reconstruction from memory, not necessarily true to the original. Markham pursued on multiple occasions a similar routine toward my heretical deviations from his teachings.

  39. Quoted by the administrative law judge in 99 F.T.C. 8, 83. My knowledge of the auto industry was based in part upon the extant industrial organization literature but also on a detailed case study done within Ford Motor Company by Joe Peck and me in 1959. In my May 1976 memorandum urging the Federal Trade Commission to undertake an investigation of the automobile industry, I wrote that “General Motors has traditionally been the price leader, and it sets prices to achieve a target rate of return, no doubt taking into account in recent years the threat of increased imports. The other makers tend to fall into line or even back off when their own price announcements preceded and prove to be inconsistent with GM’s.”

  40. “Cereal Makers’ Agreement May Stem Premium Tide,” Supermarket News, March 11, 1957, p. 4.

  41. For Pertschuk’s own reflection, see Pertschuk (1982, ch. 3).

  42. For his treatment of the in-pack premium evidence, among other things totally ignoring the lead time requisites emphasized in my testimony, see 99 F.T.C. 8, 121–127.

  43. I.e., the ratio of (value added minus payrolls) divided by value of shipments.

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  1. John F. Kennedy School of Government, Harvard University, Cambridge, MA , 02138, USA

    F. M. Scherer

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F. M. Scherer: F.T.C. Bureau of Economics director, 1974–1976.

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Scherer, F.M. The Federal Trade Commission, Oligopoly, and Shared Monopoly. Rev Ind Organ 46, 5–23 (2015). https://doi.org/10.1007/s11151-014-9425-0

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