Coca-Cola, Inc. File No. 681 0015
Industry-Coffee

Violation-Section 2(a) price discrimination; Section 3, Clayton Act
Status: In field

The substance of this investigation revolves around the activities of two coffee divisions of the Coca-Cola Company: Tenco, Inc. and Duncan Foods, both of which were recently acquired by Coca-Cola. The investigation is directed to the anticompetitive effects of allegedly below cost prices on sales by Coca-Cola. The market is apparently characterized by a growing concentration as allegedly seven coffee companies in the relevant market have either gone out of business or trying to liquidate their ventures in order to do so.

The short range goal is to determine if there is a causal link between the primary line injury and growing concentration and the below cost sales.

Another aspect of the case may also have played a significant part in the apparent reduction of competitors. It was alleged that Duncan Foods, through its division Huggins-Young, is involved, in its institutional sales of roasted coffee, in a tying arrangement with Coca-Cola in the sales of its syrup.

The long range goal in this investigation is to protect the viability of the efficient competitor and halt the trend toward increasing competition, resulting from anticompetitive pricing practices. However as a budgetary consideration, it is difficult to forecast any specific estimates as such must necessarily depend upon the results of the field's investigation.

Argus, Inc. File No. 681 0042

Industry-Photographic Equipment and Supplies

Violation-Section 2(a) price discrimination; secondary line
Status: In field

This investigation centers around those engaged in the mail order resale of photographic equipment and supplies purchased from Argus. In addition to the complainant there are six to twelve other such mail order wholesalers. It was alleged that Argus was favoring another category of customer (wholesaler) who are in direct competition with the mail order firms, in that they serve the same customer accounts.

The investigation was initiated to determine if the pricing practices as alleged (price discriminations) had an anticompetitive effect on the mail order wholesalers and to determine if the ability of this class of customer to compete was impaired.

Preliminary reports from the field indicate that there may be a violation of Section 2(d) and (e) regarding promotional allowances and/or services.

It is impossible at this time to estimate any long range goals with relation to this investigation, however. This necessarily is dependent upon the outcome of the field investigation.

Outdoor metal sheds

Arrow Metal Products, File No. 671 0258 is presently being forwarded from the Washington Field Office to the Bureau with a recommendation for complaint. The charges will be violation of Sections 2(a) aud 2(d) of the amended Clayton Act in the sale of outdoor metal sheds.

The proposed respondent has been in business for about 5 years, during which time it has captured 40% of this particular market.

Indications are that this has been accomplished through enticing price advantages being offered to large volume buyers such as Penney's, Giants, AMC and others.

This complaint will also be forwarded to the Commission with recommendation in early FY 1970 and is expected to carry into FY 1971.

MEMORANDUM

JUNE 18, 1969.

Subject: Budget Plan and Program for Fiscal 1971-Response to Commissioner Jones' Memorandum of May 27, 1969.

To: Commission.

From: Division of General Trade Restraints.

Commissioner Jones' memorandum of May 27, 1969, directs this Division to set forth the plans and programs it would undertake if not restrained by the resources barrier mentioned in our budget presentation of April 15, 1969.

The overall objective of this Division, along with that of the Commission's other operating units, is of course to assure the vitality of meaningful competition and thus to minimize the amount and the effect of monopoly in the nation's economy. In general, monopoly (and oligopoly) tend to have three major effects, namely, (1) prices that exceed the level that would have prevailed had competition been effective; (2) lower levels of output than would have prevailed if competition had been effective; and (3) lower levels of technological innovation than would have prevailed if competition had been effective. Economists specializing in the field of antitrust (industrial organization) have estimated that the cost of monopoly and oligopoly to the economy as a whole, measured in terms of lost output (GNP), is now something on the order of $20 billion to $45 billion or more per year and is probably rising. (See, e.g., Dr. David R. Kamerschen, An Estimate of the 'Welfare Losses' from Monopoly in the American Economy (Michigan State University, 1964) (doctoral dissertation), and Dr. William G. Shepherd, "Conglomerate Mergers in Perspective," 2 Antitrust Law & Economics Review 15, 20 (Fall 1968).

The bulk of these losses are said to be concentrated in the manufacturing sector of the economy and, within that sector, in a number of particularly concentrated or essentially noncompetitive industries. In general, approximately 25% of the total output of American manufacturing comes from these highly concentrated industries, the so-called "tight-knit oligopolies" with concentration in the range of 50% or more held by the "4 largest" or, what is roughly the same thing, 70% or more held by the "8 largest." In numbers, most industrial organization points to about 50 manufacturing industries (out of a total of 417) as constituting the heart of the country's monopoly/oligopoly problem. Restoration of effective competition in these industries would be expected to result in a regaining of a substantial part of that $20 billion to $45 billion or more monopoly/oligopoly cost figure. (Appendix A is a list of the approximately 50 industries tentatively identified recently by a group of antitrust economists as "priority industries." i.e., those especially in need of antitrust attention. "Priorities in Antitrust': Some Communications," 1 Antitrust Law & Economics Review 11 et seq. (Spring 1968). A somewhat similar list of industries, 35 in number, is set out in the recent Studies by the Staff of the Cabinet Committee on Price Stability (January 1969), page 93.)

The enforcement problem thus has two major aspects to it, namely, (a) prerenting any further growth in the size of the oligopolized or noncompetitive secter of the economy, i.e., preventing those industries that are now relatively unconcentrated (e.g., 4-firm concentration ratios of 40% or less) from crossing the threshold into the "tight-knit" range (e.g., 4-firm ratios of 50% or more), and thus raising that aggregate annual loss to the consuming public still higher, and (b) reducing the current size of that already-existing oligopolized sector, i.e., lowering the concentration ratios in, and the entry barriers around, some of the already-concentrated industries and thus giving the consuming public some relief from the higher-than-competitive prices and other costs that are currently being imposed on them by those noncompetitive industries.

The responsibility for preventing further increases in concentration and the accompanying social and economic ills associated with it are shared by all of the operating Divisions of this Bureau. The Merger Division and the Division of Discriminatory Practices, by preventing acquisitions and other concentrationincreasing acts and practices, are obviously addressing their resources to this preventive aspect of the problem. The Division of General Trade Restraints shares this responsibility also, under its duty to stop a variety of competitive devices that have an "incipient" potential ratio. It alone, however, carries the Commission's burden of attempting to provide the public with relief from the costs associated with already-existing monopolies and oligopolies in the economy,

of attempting to bring about some much-needed deconcentration and lowering of entry barriers in some of these noncompetitive industries.

Litigation must necessarily play a more significant role here than in some of the other aspects of the Commission's work. The most important single reason, of course, is that, whereas the prospect of a confrontation with the Commission is sometimes enough to persuade a proposed respondent to voluntarily give up a scheme that holds out only the hope of higher-than-competitive prices and profits in the future, there appears to be little evidence that anyone has ever "consented" to give up a genuine monopoly or oligopoly position yielding, as is often the case, long-range profits that are sometimes as much as two or three times (or even more) the norm in competitively-structured industries. Only a litigated order, one suspects, can really be expected to cause a significant drop in the price level maintained by one of these noncompetitive industries. To ask a firm or an industry to "voluntarily" consent to give up an annual harvest of monopoly profits it has enjoyed for decades is to place an undue strain, we feel. on human nature and to make an assumption that has no particularly sound basis in economic analysis.

Secondly, a vigorous program aimed at improving the structure and performance of some of these industries should have some beneficial side-effects on the other half of the Commission's enforcement work, the prevention of further increases in concentration in the as-yet unconcentrated sectors. Whereas a policy of indecision toward existing monoply and oligopoly obviously acts as a powerful incentive for those firms and industries still exposed to the rigors of competition to attempt to better their condition through mergers and the like, thus further fueling the current merger movement, a show of real resolution against the already-concentrated industries should significantly reduce that incentive; the knowledge that there is no "sanctuary" on the other side of the oligopoly fence that all significant positions of real monopoly power are ultimately going to be challenged-could well cast quite a chill on the urge to convert unconcentrated industries and loose oligopolies into tight-knit, noncompetitive ones. Thirdly, a policy that does not include a program that probes deep into the already-concentrated industries misses an opportunity to develop the kind of knowledge and understanding on the part of the Commission and the staff that is vital in all areas of our work, including, for example, our anti-merger work. In all of the "incipiency" cases, for example, the analysis is necessarily theoretical rather than immediately empirical; one has to accept the premise, without actual proof, that if a given act is allowed to occur (e.g., a merger), monopoly and oligopoly will eventually result and that this, in turn, will have undesirable consequences for consumers. In a monopoly or oligopoly (shared monopoly) case itself, however, the actual proof of these matters can be explored, i.e., the situation can be examined in actual quantitative terms to determine how much more the consumer has really been required to pay as a result of the monopoly/oligopoly in question, how it was all accomplished, the real market relationships involved, and the like. A program that includes cases of this character is necessarily, it seems to us, a richer one than would otherwise have been possible.

The most difficult part of any rational enforcement program is, of course, the case-selection process itself. (See my memorandum to the Executive Director of March 25, 1969, on Planning New Investigations, and my memorandum to the Commission of June 4, 1969, Request for Authorization of Investigation of Breakfast Cereal Industry, attached hereto as Appendix D.) The appropriate procedure is to look out over the economy as a whole, identify those of our 417 manufacturing industries that are noncompetitive in character, and then select, from that noncompetitive group those in which the return on our investigative resources would be the highest. To select the wrong ones is to fail the "Opportunity cost" test; bringing a case that return $2 (in terms of lower consumer prices and the like) for every $1 spent when there is available another case on which the return is not $2 but $10 is, by definition, to misallocate our resources and to give the consuming public less for its total number of enforcement dollars than we could have given it.

The basic method for estimating the amount of public interest in a given Commission case is to determine:

(a) The total sales volume of the industry;

(b). The monopoly price currently being charged for the product (or, if it is the threat of future monopoly that is involved, the price that is reasonably to be expected if it should in fact become monopolized); and

(c) The competitive price that would reasonably be expected to prevail if the industry should be made effectively competitive.

1

Subtracting the competitive price, (c), from the monopoly price, (b), gives the amount of the monopoly "overcharge" (actual or potential, as the case may be) in percentage terms. Multiplying this percentage figure times the dollar sales volume of the industry, (a), gives the total dollar amount of the actual or potential monopoly overcharge and thus at least some kind of rough approximation of the actual or potential public interest in a proceeding aimed at restoring effective competition in that industry. (While there are of course other values associated with competitive markets, including optimum output rates, innovative progress, free entry, maximum opportunity for small business and the like, we consider price a reasonably good "proxy" or index figure for the entire aggregate of competitive values, since, other things being equal), improvements in any of these other areas (e.g., new entry, growth of the smaller firms in the market, new innovations, etc.) should be reflected in a drop in the price level.)

There are of course many difficulties in attempting to make estimates of the potential benefits to the public from an antitrust action, particularly at the preliminary or pre-investigation stage. In litigated cases, it can be done through the testimony of experts witnesses, basing the estimates of the "competitive" price on such benchmarks as (a) the Census Bureau's nationwide "averages," (b) the price level in some other area that is known to be particularly competitive, (c) the price level in the market in question itself prior to the monopolization complained of, (d) the price level in that market after the collusion or monopoly was eliminated, (e) the price being charged for physically identical products sold under different "brands" (e.g., the lesser known brands of the smaller firms in the industry in question, the "private brands" of the integrated retailers, and the "secondary" labels of the major manufacturers themselves), (f) the known costs of production and distribution of the product in question, including a competitive rate of profit on the capital employed, by plants and firms of reasonably efficient size (as established by prior litigated cases, industry studies published by university scholars, etc.), and, in some cases, (g) the known heights of the entry barriers around some of the concentrated industries (a 10% entry barrier around a highly concentrated industry implies, other things being equal, that a price 10% above the competitive level can be charged without inducing new entry and a beating of the price back to the competitive level).

The more of this kind of data one has at the pre-investigation stage, the more confident one can be of the preliminary estimate of the potential gains to the public from an action aimed at restoring effective competition in the industry in question. We have therefore recently recommended that a systematic program of data collection be instituted at the Commission, one designed to create, in time, a fairly complete "economic dossier" on each of our 417 manufacturing industries, particularly the 50 or so most highly concentrated ones. (See my memorandum of June 10, 1969, Proposed Upgrading of ADP Systems, attached hereto as Appendix B.)

Assuming that one has estimated with reasonable accuracy the annual cost, in dollars, of a particular monopoly/oligopoly situation in an industry, and thus the potential benefits to the public from a restoration of effective competition in it, there still remains the always difficult problem of devising an appropriate remedy, one that will in fact realize all of that potential rather than giving the public only half-a-loaf (or less). In order to perform this task adequately, one must know, of course, the precise market relationships involved; if the diagnosis is unsound, the certainty of the cure is obviously reduced. Unless one knows

1 A figure somewhat comparable to this can be developed in the deceptive-practices area as well. Deception implies, by definition, that the consumer has been persuaded (a) to buy a product he would not have bought at all if he had known the truth about it, or (b) to pay more for a product than he would have paid if he had known the truth about it. (In more technical terms, deception creates a form of "product differentiation," a variety of monopolization discussed below and in Appendix D.) In the first case, the one where the product is worthless to the consumer, the loss is total, i.e., the "overcharge" is 100% of the price paid for the product. In the second situation, where the consumer was deceived into paying more than he would have knowingly paid for the product, the real loss is the difference between (1) the price paid, and (1) the fair market value of the item in question, e.g., what comparable products are selling for in reputable establishments in the community. Multiplying that difference (say, 30%) times the dollar volume of a respondent's sales gives the total cost of the scheme to the public and, by the same token, the potential value to the consuming public of a Commission action aimed at eliminating the deception in question.

rather precisely how prices are being maintained at a noncompetitive level, for example, the chances of devising an order that will cause them to fall by more than a token amount are clearly impaired.

A great deal of knowledge about market relationships in monopoly and oligopoly situations have already been collected by the antitrust economists in the country, particularly the approximately 800 members of the Industrial Organization (Antitrust) section of the American Economic Association. In general, the overwhelming bulk of the annual monopoly/oligopoly cost figure mentioned above is ultimately attributable to distortions in the structures of these noncompetitive industries, i.e., to their (a) high concentration ratios, (b) high degrees of product differentiation, and (c) high barriers to entry. Price fixing, for example, is so closely associated with a certain kind of industry structure that it is possible for a skilled analyst to go down the list of our 417 manufacturing industries and pick out with considerable confidence those in which collusion is virtually inevitable. (See Appendix B.) Price discrimination is similarly a creature of industry structure, particularly of high entry barriers (the "high" price varies according to the height of the entry barriers sealing the disadvantaged buyers off from access to competitive-priced sellers). Resale price maintenance depends for its existence on "product differentiation," (Cabinet Committee on Price Stability, supra, 88) as do most of the various vertical restraints antitrust is concerned with, particularly exclusive dealing and territorial restrictions. It follows, of course, that a Commission order, if it is to be genuinely effective in restoring competition in an industry characterized by these anticompetitive symptoms, must deal with those underlying structural features of those industries. Again, the most meaningful compliance report, at least to the consuming public, is a decrease in market shares and, what is generally the same thing, a decrease in the price level in the industry in question.

It is against this general background that the Division of General Trade Restraints is currently attempting to develop an improved system of case priorities, one aimed at maximizing its effectiveness in those areas of most concern to the consuming public, particularly in the concentrated industries. Specifically, we have (a) reevaluated our current, pending cases, (b) recommended a number of new investigations to the Commission that would involve a direct challenge to the market power of some of the country's most important oligopolies on charges of oligopolization or shared-monopoly, (c) begun a limited program of developing the kind of data necessary to a more comprehensive case-selection process along these lines, and (d) recommended a number of other programs that we consider essential to the Division's maximum effectiveness.

The programs we would undertake if not constrained by resource barriers are as follows:

I. ECONOMIC CONSULTANTS

A basic part of our overall program would be one of consultation with economic experts (generally industrial organization economists from the universities) in the various sectors of the aggregate monopoly/oligopoly problem and the development of a systematic program designed to maximize the Division's impact on the price level in those industries that are currently believed to be imposing the most significant losses on the consuming public. We would especially want to consult with, and have our enforcement program designed in part by, experts we would select in the areas of (a) price fixing, (b) oligopoly in the producer goods industries, (c) product differentiation, and (d) vertically restricted distribution systems (resale price fixing, exclusive dealing, and territorial restrictions). My staff has already had some preliminary conferences with an economic expert specializing in one of these areas, as discussed below. Preliminary estimates are that, overall, we would need the equivalent of two (2) consultants for a year, although the tenure of any one of them probably would not exceed three (3) months. One attorney would be needed to coordinate the program here, plus several of the others described below.

II. DATA COLLECTION

In order to make the kind of analysis that would permit the Division to systematically array its cases according to their significance to the consuming public, it is necessary, as discussed above, to have a certain minimum amount of data on the structure-conduct-performance characteristics of each of the industries in question. The kind of data needed is described in some detail in Appendix C.