Anti Trust Part Two

In Part two I will go over such cases as the Alcoa Case, Borden Case, and Californias 2001 energy scare. Read part One HERE

ALCOA CASE (1945)

The Aluminum Company of America was one of the few corporations which successfully attained and held a monopoly on a product. This of course depends on how the market is defined. It is true that because of certain production patents Alcoa owned they were able to become the only producer of ‘primary’ aluminum, this they were able to hold for almost 20 years. In 1888 aluminum had no known uses, although its potential was obvious. The main problem was the extreme expense and the scarcity of the product. In the beginning, it would cost $5 to $8 dollars per pound, and Charles Hall (the man who discovered and patented the first commercial method for making aluminum) was unable to get more than 10 pounds produced a day. Because of this expense aluminum ingots were all but obsolete since it was unable to effectively compete with cheaper substitutes. However, by extremely effective entrepreneurial efforts they were able to produce 50 pounds a day by 1889, and over 1000 pounds a day in 1892, and by 1897 over 8000 pounds a day. Subsequently the price fell from $5 dollars in 1887 all the way to 37 cents by 1910, and by 1941 it fell all the way to 15 cents a pound.[1] Through Alcoa’s own ingenuity they were able to promote several uses for its product including; metal in the wire industry, for surgical instruments and other medical apparatus, and for fabrication into cooking utensils.

Alcoa was also accused of practicing many discriminatory business practices, but once again the facts tell another story. The making of aluminum ingots was very difficult and there are certain natural resources which were, and still are, needed. One claim against Alcoa was that it had monopolized bauxite deposits (used for mining the ore). Another claim was that they had monopolized water power sites, also that they conspired with a foreign cartel of producers.

The first case against Alcoa brought about by the Federal Trade Commission in 1925 was found to be in favor of Alcoa. The FTC examiner proved that Alcoa did not have a monopoly on bauxite deposits “there being sufficient supplies of bauxite in the world, exclusive of respondent’s holdings.” Also that Alcoa did not hold a monopoly on water power as “its holdings now being only a small percent of the available water power in the world.” Lastly it was found that Alcoa “never attempted to control and does not now control the market for foreign aluminum in the U.S”[2]

So this begs the question, why was Alcoa, after already being found innocent of all the claims, suddenly in 1945 convicted of being a monopoly and forced to break apart? Due to the lengthy and complex nature of the lawsuits against Alcoa a special act was passed on June 9th, 1944 which allowed a U.S. Circuit Court of Appeals to hear the case rather than the Supreme Court. The previous court of appeals found that if the market is defined not only by ‘primary’ ingot but also including secondary or ‘scrap’ ingot (also highly used at the time) Alcoa’s market share was a mere 33 percent, hardly a monopoly. The new Judges, headed by Judge Learned Hand, thusly reduced the relevant market to include only virgin ingot, which Alcoa was the sole supplier of in America. Alcoa supplied 90 percent of the virgin ingots in America, 10 percents came from foreign supplies. As Dr. Armentano shows

This broke familiar legal and economic guidelines as to the meaning of
‘monopolize’ and to the ‘relevant’ market under consideration. A relevant market
for a product ‘should include all firms whose production has so immediate and
substantial an effect on the prices and production of the firms in question that
the actions of the one group cannot be explained without direct reference to the
other. One should include in a market all firms whose products are, in fact,
good and directly available substitutes for one another in sales to some
significant group of buyers and exclude all others.[3]

So in essence, Judge Learned Hand had basically changed the way monopolies were discussed at the time, minimized the relevant market share and because of this came to the conclusion that in this skewed view of the market, Alcoa now was a monopoly. Once again the reality showed something different, Alcoa had in fact reduced prices and increased output, Judge Hand was condemning Alcoa for being too efficient and too good. In Judge Hand’s famous indictment of Alcoa he said:

It was not inevitable that it should always anticipate increases in the demand
for ingot and be prepared to supply them. Nothing compelled it to keep doubling
and redoubling its capacity before others entered the field. It insists
that it never excluded competitors; but we can think of no more effective
exclusion than progressively to embrace each new opportunity as it opened, and
to face every newcomer with new capacity already geared into a great
organization… (Emphasis mine)[4]

By condemning our most productive members of society for being too good and too efficient we are distorting the best use of our capital in America, while at the same time endorsing less efficient business practices and condemning the best within us. It is impossible for a businessman to start a business and know ahead of time whether or not he is going to break some arbitrary anti-trust law and go to jail or lose his investment. This brief history illustrates where anti-trusts have come from and two of their most disastrous cases, now it is important to understand the main underlying themes that are regularly attacked by anti-trust legislation.

VERTICAL AND TYING AGREEMENTS

In order to understand some of the damage anti-trust has caused it is important to get a full grasp on a few of the supposed negative consequences of a free and open market. The idea that a company will rise up and eventually gain enough power to discriminate in price and make vertical, and tying agreements is in actuality not a bad thing but in many cases a very effective way to allocate resources to their most efficient uses.

THE BORDEN CASE

Price discrimination is when some firm sells a product, usually homogeneous to different buyers at different prices Dr. Armentano’s case study of The Borden Evaporated Milk Case shows the irrationalities of attempting to enforce laws against price discrimination. In 1958 Borden was indicted for selling their product to different buyers at different prices. They had charged a smaller price for their milk that they had packed and sold to private-label customers than what they had charged for its own Borden brand of milk in retail stores. It is true that the milk sold to both buyers was chemically the same, ‘consumer perception’ of that same milk sold at retail was definitely not the same. “Consumers were willing to pay more for the Borden brand of evaporated milk than for milk packed by Borden but sold under various private labels.”[5] The reason for this is that Borden had at that point established a high reputation for their products. When Borden sold their products to private label companies their responsibility ended when the product left their factories, with their own product they were highly controlled on how they maintained the quality of milk they sold to their retail consumers. As Armentano notes the most important aspect of this case was that no one was injured by the lower prices charged to private-label distributors. Borden’s private-label costumers did not suffer by having a cheaper product, and Borden’s own costumers did not suffer by purchasing a high quality well known brand for slightly higher, especially when they could have switched to a cheaper brand of evaporated milk if they chose, also Borden only maintained an 11 percent market share in the Midwest.

The main complaints came from smaller less efficient Midwest firms who were losing business because of Borden’s efficiency. What had occurred is what happens nearly every time with anti-trust legislation, some smaller company complaining of a larger company that is lowering prices and providing a better product to their costumer’s, which is in turn negatively effecting their business. In fact over 90 percent of all anti-trust lawsuits are brought about by one private company suing another company.[6] Although the case was dismissed in 1967 this began to lead anti-trust legislation in a new direction, that of protecting high-cost rivals against lower-cost and more efficient companies.

CALIFORNIA’S 2001 ENERGY CRISIS

In 2001 there was a great scare that California, specifically the prosperous Silicon Valley, would possibly be shut down. That event could have shut down America’s whole economy. The reasons lauded at the time were the so called deregulation of the energy market in California. A bill was introduced to alleviate the problem, AB 1890. The fact is that bills like AB 1890 did not deregulate but simply shift regulations, and actually added a vast array of new regulations on power generators and distributors. AB 1890 is another attempt to reign in some form of ‘pure competition.’ Under AB 1890 it is not possible for energy companies to combine their generation with their distribution business. Editor of The Intellectual Activist Robert W. Tracinski said in an article,

They were forced to sell off many of their power plants. Any power they still
generated on their own had to be sold on the open market at prevailing prices –
with no special discounts for themselves. The result is that power distributors,
like Pacific Gas and Electric (PG&E) and Southern California Edison, were
made utterly dependant on the prices charged by independent generators. They
couldn’t fall back on their own, less-expensive supply.[7]

The other detrimental aspect of AB 1890 was to restrict long term contracts. This section of the bill would not allow a company to negotiate certain contracts which are vital to their organization. These long term contracts allow for the companies to lock-in a price agreement to protect themselves from sudden price changes in their industry. This however is perceived to give them ‘market power’ so it is not allowed. The last of the important intrusions into the business sector AB 1890 allowed for was to cap the price power distributors could charge. This is because under the anti-trust theory of ‘perfect’ competition, prices will always go down. The end result was that when prices spiked power distributors were unable to raise prices and this caused a shortage in the supply of energy, which resulted in the rolling blackouts and the scaring of the American public with thoughts of their biggest money makers having to ‘shut down.’

The lesson here is that anti-trust legislation doesn’t always have to be specifically used in order to affect all types of industries. It is the ideologies behind anti-trust legislation which need to be refuted.[8]

MICROSOFT AND MARKET SHARE

In the majority of anti-trust cases a few terms are used loosely, such as what constitutes a monopoly and what a company’s market share really is. For example in the Microsoft case at the turn of the century Microsoft’s market was defined as “that for computer operating systems for stand-alone personal computers using microchips of the kind manufactured by Intel.”[9] This narrowly defined market share completely left out any relevant competitors such as the operating systems used by Apple as well as other operating system competitors produced by; Sun Microsystems or the Linux system for stand-alone computers. The companies who have effectively defined Microsoft’s market share this way were able to prove that Microsoft had a dominant market share and thusly a monopoly power. In order to fully understand the Microsoft case it’s vital to know the history of the governments ‘assault on Microsoft.’

Beginning in 1990 the Federal Trade Commission began to investigate Microsoft, but did not file any charges. Because the FTC is charged with ‘policing’ so-called unfair practices this investigation helped lead to the subsequent anti-trust laws Microsoft had to deal with in later years. It was later found by the Justice Department that because Microsoft ‘per processor licensing fee had a 2 year lease on it this discouraged the manufacturers of PC’s from installing competitive software, which lead to the ‘unfair’ harm on rival software companies. Instead of dealing with a long legal debate Microsoft decided to shorten its 2 year leases to 1 year.

Almost immediately thereafter Microsoft was under new anti-trust litigation for tying its products. Microsoft was not accused of increasing prices or for reducing output, they were explicitly accused of the exact opposite.

The anti-trust lawsuit, however, did not accuse Microsoft of jacking up prices
unconscionably, in the classic manner of monopoly theory. Rather, Microsoft had
added an Internet browser to its Windows operating system free of charge,
undermining rival browser producer Netscape.[10]

Yet somehow the anti-trust enthusiasts claimed this harmed consumers because it harmed competition. The fact is, what Microsoft had done was succeed at beating out its rivals and was therefore condemned for their actions. Competition can be defined as “the effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms”[11] Microsoft was not engaging in any evil business practices by offering their customers to purchase their product which would include a free internet browser on top of their other services; the only ones harmed would be internet browser companies such as Netscape, who helped initiate the suit. The Microsoft lawsuit was a blatant protectionist attempt. In 1998 however, the lawsuit was found in favor of Microsoft. Afterwards, the Department of Justice and twenty states filed an anti-trust suit against Microsoft. The reason for their lawsuit was that the ‘aggrieved’ claimed Microsoft had an unfair monopoly in operating systems. Again, this unfair monopoly was using the loose and narrowly defined market for Microsoft, and a loose definition of monopoly. To determine whether or not Microsoft actually had any real monopoly it is necessary to properly define what a monopoly is. In reality a perfect monopoly would have a complete control of all supply of a product in a well defined market which had strong legal barriers to entry.[12]

A couple facts, even in their narrowly defined market Microsoft only had 90 percent of the operating system licensing for PC’s. There were also no legal barriers to entry and there were several rather large operating system competitors. The problem is, many proponents of anti-trust claim that a monopoly is any company that has a 70 percent market share; again this depends on how the market is defined. In an article by Professor Thomas Sowell he showed the ‘economic’ reality of market share. Explaining that during the time of the trial the city of Munich had ‘replaced Microsoft Windows with a Linux operating system in 14,000 of its computers.”[13] This showed that Microsoft was most definitely under pressure from competitors and did not have any relevant monopoly.

The use of these ‘murky’ and ever shifting definitions are where anti-trust legislation gets most of its power. Under the Sherman Act a ‘monopoly’ is not illegal per se, it is ‘monopolization that is made illegal. So even if a company is producing a superior product, is cutting costs, reducing prices, and increasing output they can be prosecuting under anti-trust legislation. What needs to be found out is whether or not the company achieved their monopoly through free enterprise ingenuity and business foresight, or through scrupulous business practices such as receiving special government franchises, patents, and subsidies. When looking at Microsoft it is apparent that the company achieved its market share through aggressive innovation and by promoting their standardized operating system that included various other applications. These applications included; file sharing, fax utilities, network support and more. These applications were previously purchased separately, which cost consumers more. Microsoft had effectively integrated all of these services into a ‘bundle’ package which consumers obviously enjoyed. This was the real source of any of Microsoft’s power, and did not exclude others from coming into the market and innovating their own operating systems, which is what now is occurring.

So in the end by defining the market share so narrowly and having such a shifty definition of monopoly we have allowed one of America’s most innovative companies to be greatly harmed. The effective allocation of resources was once again forced to flow to less efficient venues. Instead of allowing Microsoft to offer a superior, cheaper product through free trade, anti-trust laws have forced consumers to continue to purchase their web browsers separately, in effect costing them not only cash but resources which could have shifted to more useful avenues.

CONCLUSION

If our goal as an economy is the most efficient allocation of scarce resources which have alternative uses, then the only way to allow for such efficiency is to ensure that those in our economy who are risking their capital, time, and energy are free to do whatsoever they can to increase productivity, reduce costs, reduce prices and also increase output which will moreover allow these companies to effectively compete in an open and free market. As long as there is no interference into the marketplace from the government, and the only thing the government is allowed to do is protect individual rights, through ensuring fraud is punished and patents are protected. Then if this is our goal it is important to not only refute anti-trust legislation but the ideology behind them.

Business practices such as; price collusion, price discrimination, mergers, tying and others allows for companies to stay on the ‘competitive’ edge. It does not lead to some coercive monopoly where a company is able to ‘force’ out other companies and ensure there are no new entrants into their market. The only organization which has a monopoly on force is the government, and only through government power are monopolies ever possible.

By allowing anti-trust legislation to continue we condemn business men to being guilty for the mere fact that they are in business. As philosopher Ayn Rand summarized:

Under the [U.S.] antitrust laws, a man becomes a criminal from the moment he
goes into business… if he charges prices some bureaucrats judge as too high, he
can be prosecuted for… ‘intent to monopolize’; if he charges prices [too low],
he can be prosecuted for ‘unfair competition’ or ‘restraint of trade’; and if he
charges the same price as his competitors he can be prosecuted for ‘collusion’
or ‘conspiracy’[14]

Any corporation that is allowed to produce freely will inevitably act in their own best interest, and their best interest will be the best interest of their customers. Since a company can only offer products better and cheaper than the competition there can be no way to force any individuals to purchase their product and help continue them on the way to monopoly prices. The shoulders’ on which all our lives depend, the producers, are under constant attack and we must as free people protect these individuals who give us so many life enhancing and life saving products and services. The Henry Fords, John D. Rockefellers, Andrew Carnegies, Bill Gates’ and more are not to be lauded as evil greedy businessmen, but to be rewarded and applauded for their business ingenuity and innovativeness.

ENDNOTES

[1] Armentano Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure [Book]. - New York : John Wiley & Sons, Inc, 1982. Pgs 100-103

[2] Armentano Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. Pg 104

[3] Armentano Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. Pg 111

[4] Greenspan Alan Antitrust pg 72

[5] Armentano Dominick T. Antitrust: The Case for Repeal. Pg 72

[6] Paul Ron and Armentano Dominick Anti-Trust and monopoly [Interview]. - Jul 13, 1983.
[7] Tracinski Robert W. Capitalism Magazine [Online] // Capitalism Magazine. - Jan 22nd, 2001. - Oct 14th, 2008. - http://www.capmag.com/article.asp?ID=159.
[8] Cunha Mark Da Capitalism Magazine [Online]. - June 10th, 2001. - Oct 14th, 2008. http://www.capmag.com/article.asp?ID=922
[9] Sowell Thomas Basic Economics: a Common Sense Guide to the Economy 3rd edition [Book]. - New York : Basic Books, 2007. Pg 156
[10] Sowell Thomas Basic Economics: a Common Sense Guide to the Economy 3rd edition Pg 156

[11] Armentano Dominick T. Antitrust and Monopoly: Anatomy of a Policy Failure. Pg 14

[12] Armentano Dominick T. Antitrust: The Case for Repeal

[13] Sowell Thomas Capitalism Magazine [Online] // Capitalism Magazine. - June 28th, 2003. - Dec 13th, 2007. - http://www.capmag.com/article.asp?ID=2892.
[14] Rand Ayn America's Persecuted Minorty: Big Business [Book Section] // Capitalism: The Unknown Ideal. - New York : Signet, 1961