'Dirty Dozen'--Brooke Case -Reply

[John Jacobs <JJACOBS@FTC.GOV>]

  In response to Charles Mueller's comments (set forth at the
  end of my message) on the Supreme Court's position on
  interbrand vs. intraband competition:
  
  One argument I've heard (not necessarily my own) in support
  of keeping antitrust enforcement out of intrabrand
  competition (at least as long as the brand does not have
  monopoly power), and one to which I invite responses:
  
  If a manufacturer has independent distributors it has
  decided it is more efficient to distribute by contract rather
  than vertical integration, because the manufacturer always
  has the right to distribute the goods (and set retail prices)
  itself.  Interference with its decision to contract for
  distribution will raise the costs of contract distribution and
  encourage the manufacturer to distribute the product itself,
  thereby raising the cost of distribution.  And the
  manufacturer, if it faces competition from other brands, has
  incentive to maintain among its dealers the most competitive
  price/quality of service to ensure it doesn't lose sales to its
  competitors.  So, the argument goes, why not just let the
  manufacturer worry about whether its distributors compete
  among each other, at least if the manufacturer faces
  interbrand competition?  No distributor could, in any event,
  raise the market price above the price the manufacturer
  could charge if it handled its own distribution.  Thus,
  regulating intrabrand competition can increase the cost of
  distribution, and restriction of competition among dealers
  cannot increase the price the manufacturer would be able to
  charge if it were to distribute the product itself.  
  --John Jacobs
  
  >>> cmueller <cmueller@metrolink.net> 08/02/97
  03:05pm >>>
          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        
  
                                                 ***********************
  
          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 
  
                                             ************************
  
  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 
  
                                               ************************