'Dirty Dozen'--Brooke Case

[cmueller@metrolink.net (cmueller)]

          Perhaps I can add some information on the Liggett/Brookes case, the
  Supreme Court's most recent decision on predatory pricing to concentrate
  industries and raise prices.  My journal began reporting on it nearly a
  decade ago, when it was in the trial stage, beginning with the testimony of
  the two opposing economic experts, Professors Kenneth Elzinga (for the
  defendants) and William Burnett (plaintiffs).  Several hundred pages of
  their testimony, along with jury instructions, briefs, and texts of the two
  lower court decisions, were presented in serial form over the course of some
  dozen of my quarterly issues.  (See, e.g., our Vol. 21, No. 4, table of
  contents, below.  All of our quarterly contents pages--back to 1967--can be
  viewed at http://webpages.metrolink.net/~cmueller/iii-f.html).
  
          In understanding the Supreme Court's decision here--its approval of
  the cigarette industry's use of below-cost pricing to stop its smallest
  member, Liggett/ Brooke, from competing on price--it might be helpful to
  keep in mind a couple of general principles that heavily influence the
  decision process:
  
          First, the Court decides cases in the context of the rulings in each
  case by the two lower courts, particularly that of the appellate court it is
  called upon to either affirm or reverse.  It is always advisable, then, to
  read those 2 earlier opinions (along with, where possible, the briefs on
  appeal).
  
          Second, the Supreme Court decides cases in the context of its own
  prior decisions on that same issue, particularly its most recent ones.  In
  other words, the Court wants to develop a coherent body of precedent, one
  that yields the kind of rules it believes will best serve the social and
  economic ends favored by its sitting members.  In the area of monopolization
  via predatory pricing, the Court's most recent pre-Brooke decision was
  Atlantic Richfield v. USA Petroleum (which is also one of my 'Dirty Dozen'
  and can be viewed at http://webpages.metrolink.net/~ cmueller/dirty.html).
  This opinion of the Court--which similarly approved predatory pricing
  against a small discounter--takes on added weight because it was authored by
  the late Justice Brennan, a noted "liberal" and a strong supporter of
  antitrust in his earlier years.  
  
          Third, each of the Justices has 3 or 4 "law clerks," generally
  recent graduates of the more prestigious law schools, and these youngsters
  do the nuts-and-bolts writing of all those lengthy opinions, replete with
  voluminous footnotes aimed often at demonstrating their learning (thanks to
  the pro-monopoly brief, Areeda's textbook, Antitrust, a summation of
  Chicago-school economic theory) in the area at issue.  The Justices read the
  briefs, listen to oral arguments, have a brief conference to cast their
  votes, one is assigned to write the opinion, and one or more of his clerks
  proceeds to draft an opinion that "justifies" the decision of the majority
  (5 votes).  The Justices, focused on their role as makers of national
  policy, understandably don't vote on the footnotes. 
  
          Fourth, the country's highest Court doesn't agree to hear cases in
  order to resolve small points of no policy importance.  It views itself as a
  policymaker, a shaper of important strands of national policy.  In the
  antitrust field--where the basic, fundamental "rules of the game" are laid
  down for the whole of American industry--the Supreme Court gets to set
  "industrial policy" for America.  Up to the 1970's, the Court had accepted
  the judgment of Congress that the wise policy was the prevention of
  "excessive concentration" of U.S. industry.  
  
          Beginning in roughly 1975, the Supreme Court decided that Congress
  had been wrong:  "Consolidation" is a better policy.  Today it echoes Alan
  Greenspan's judgment that Rockefeller's control of "80% of the country's
  refining capacity made considerable economic sense" and that the antitrust
  laws don't:  "In summary, I find that the entire structure of antitrust
  statutes in this country is a jumble of economic irrationality and
  ignorance."  (Alan Greenspan, Barron's, February 5, 1962, p. 8.  Greenspan,
  needless to relate, has never disavowed that firm opinion of antitrust.)
         
          The Liggett/Brookes decision should be read, then, with this
  question in mind: What POLICY message is the Court trying to send?  Its
  audience, in antitrust cases, is composed largely of corporate counsel for
  the Fortune 500.  It tells them what they, in turn, can tell their giant
  corporate clients.  The policy message of this case--laissez faire.  If one
  reads the 'Dirty Dozen,' that answer is even more unmistakeable:  Monopoly
  is "economically" superior to competition, i.e., it's more "efficient,"
  yielding lower unit costs, larger output, and thus higher living standards
  for the American family.  
  
          As an example of how to read these 'Dirty Dozen' antitrust decisions
  of the U.S. Supreme Court, see my introduction (below) to the first of this
  group, the infamous Sylvania case of 1977.
  
          Charles Mueller, Editor
          ANTITRUST LAW & ECONOMICS REVIEW
          http://webpages.metrolink.net/~cmueller        
  
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          In Sylvania the Supreme Court, guided by an economist at the
  University of Maryland, decided that some kinds of "competition" are more
  deserving than others. In fact, said the Court, some forms of competition
  are positively harmful, because they are in conflict with the better kind.
  Specifically, the Court concluded that what is known as "intrabrand"
  competition--rivalry between retailers who sell a single manufacturer's
  branded goods (e.g., 2 Ford dealers in the same town)--is harmful to the
  consuming public. When competition breaks out within the same "family" of
  dealers, said the Court, it will inevitably degenerate into price
  competition--which means the winner will be the most aggressive "discounter"
  who cuts to the bone on quality and service, while "free riding" on the
  brand's good name and on the advertising etc. of the loyal dealers who don't
  cut the price. 
  
          All this "intrabrand" price competition among a manufacturer's
  dealers will thus lower that manufacturer's quality/service to the public,
  says the Court, and ultimately cause a drop in its market share, lessening
  its viability as an "interbrand" competitor--as an effective rival to the
  manufacturers of competing brands of the same good. This kind of rivalry
  ("interbrand"), holds the Court in Sylvania, is the truly important kind of
  economic competition and to nourish IT is the real and abiding purpose of
  the U.S. antitrust laws. Anything that hurts "interbrand" competition
  necessarily harms the consuming public; "intrabrand" (price) competition
  among dealers does this, so it is bad for the consumer. 
  
          Hence the ideal system, according to Sylvania, is one in which each
  manufacturer is given the maximum control over its distributors and dealers,
  protecting them from each other's competition. There is no need to worry
  about a rise in consumer prices, says the Court, because we can depend upon
  the competing MANUFACTURERS ("interbrand" competition) to keep
  consumer prices at the competitive level.
  
          The Sylvania case of 1977, then, authorized U.S. manufacturers to
  eliminate competition at all levels of distribution, save their own
  (factory-level).  Distribution (wholesaling and retailing), I need not
  remind this group, exceeds manufacturing in yearly dollar volume.
  Several hundred U.S. law professors are today busily teaching their
  students, even as we speak, that this decision is "good economic science."
  And our 1,000 U.S. judges are similarly occupied, this very day, in killing
  antitrust cases brought by dealers who have been cut off for the evil
  practice of "discounting"--selling below the price set by their
  manufacturers--or for selling into the "territory" of a nearby competitor.
  
  Charles Mueller, Editor
  ANTITRUST LAW & ECONOMICS REVIEW
  http://webpages.metrolink.net/~cmueller
  
                                             *****************************        
  
  Antitrust Law & Economics Review 
  
  Vol. 21, No. 4 (1989) 
  
       FOREWORD.....Editors.....1 
       Comment On Rose Acre Case.....Dr. William L. Baldwin, Dr. Stephen A.
       Rhoades, Dr. Ralph W. Anspach, Dr. Anthony J. Greco, Dr. Pauline H.
       Fox, Prof. Louis B. Schwartz.....13 
       Scherer-Ross 'Encyclopedia of Choice'.....Dr. William G. Shepherd.....23 
       Shepherd Apology to Review.....Editors.....27 
       PREDATORY PRICING AND CONGRESSIONAL INTENT: REJECTING
       THE 'ECONOMIC ASSUMPTIONS' OF THE AREEDA-TURNER AVC
       RULE.....Judge Seybourn H. Lynne et al.....33 
       ENTRY, RECOUPMENT, AND HIGHER PRICES: IRRELEVANCE OF
       HIGH MARKET SHARES IN PREDATORY PRICING (II).....Dr. John
       Robert Umbeck.....47 
       PREDATORY PRICING WITH A 12% MARKET SHARE: RECOUPMENT
       VIA TACIT COLLUSION IN THE CIGARETTE OLIOGOPOLY.....William
       B. Burnett.....59 
       PREDATORY PRICING REQUIRES 60% MARKET SHARE: NO
       'OLIOGOPOLY' RECOUPMENT WITHOUT FIRM 'MARKET
       POWER'.....Dr. Kenneth G. Elzinga.....85 
       DEFENDANT'S PROPOSED JURY INSTRUCTIONS: PREDATION
       REQUIRES AT LEAST 28% MARKET SHARE.....Martin London et
       al.....99 
  
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  Antitrust Law & Economics Review 
  
  Vol. 21, No. 3 (1989) 
  
       PREDATORY 'RECOUPMENT' CASES IN 3 U.S. CIRCUITS: JURY
       FINDINGS VERSUS JUDICIAL 'ECONOMIC'
       THEORIZING.....Editors.....1 
       THE THRESHOLD OF MARKET POWER IN ECONOMICS: 4-FIRM
       SHARE OF 40% TO 50%.....Dr. Willard F. Mueller.....11 
       COURT'S FINAL INSTRUCTIONS TO THE ROSE ACRE JURY:
       CRITERIA FOR COMPETITIVE INJURY.....Judge James E. Noland.....23 
       ROSE ACRE'S LONG-TERM PREDATORY PRICE DISCRIMINATION:
       'PICKED OFF ONE AT A TIME'.....Warren S. Radler.....51 
       INNOVATION, LOWER COSTS, AND HARD PRICE COMPETITION:
       ROSE ACRE'S AMERICAN SUCCESS STORY.....Robert P.
       Johnstone.....63 
       THE ROSE ACRE DECISION AND BELOW-COST PRICE
       DISCRIMINATION: SPOILED ECONOMIC EGGS IN THE 7TH
       CIRCUIT (II).....Dr. Willard F. Mueller.....77 
       ENTRY, RECOUPMENT, AND HIGHER PRICES: IRRELEVANCE OF
       HIGH MARKET SHARES IN PREDATORY PRICING.....Dr. John Robert
       Umbeck.....89 
  
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