practices of various marketing channels and the specific problems related to
them.

Most respectfully,

Robert L. Shannon,

Executive Secretary.

]\Ir. DiXGELL. Tlie Chair will also advise that the record will stay-
open for an appropriate period for other interested persons and or-
ganizations to submit their views.

(Discussion off the record.)

Mr. DiNGELL. The next witness will be Dean Phil C. Xeal of the
University of Chicago Law School and Prof. William K. Jones of
Colnmbia\Tniversity Law School.

Gentlemen, we are certainly happy to welcome yon to the commit-
tee. ^y& are pleased that yoti could be with us today.



100

TESTIMONY OF PHIL C. NEAL, PROFESSOR OP LAW AND DEAN OF
THE LAW SCHOOL OF THE UNIVERSITY OF CHICAGO; ACCOM-
PANIED BY WILLIAM K. JONES, PROFESSOR OF LAW, COLUMBIA
UNIVERSITY

Mr. DiNGELL, Gentlemen, do you have prepared statements ?

Mr. Neal. I have a prepared statement, Mr. Chairman.

Mr. DiNGELL. Dean NeaL

Mr. Neal. Thank you.

Mr. Chairman, my name is Phil C. Neal. I am professor of law and
dean of the law school at the University of Chicago.

As you know, I was chairman of a tack force appointed by Presi-
dent Johnson in November or December of 1967 to consider the anti-
trust laws.

The terms of reference of the task force were very general. We took
our assignment to be that of identifymg the most important areas
in which we thought antitrust policy might be improved or helped.
We were asked not to consider the political acceptability or feasibility
of any recommendation we might make, and I think it is evident
enough that we followed that admonition.

The task force was asked to make a confidential report to the Presi-
dent. The existence of the task force was not announced, and so the
primary purpose was to give the President the candid and impartial
views of this particular group of men.

We were given about 6 months in which to submit our study and in
fact we filed our report about 5 days bej'ond the assigned deadline.
Under those circumstances we didn't undertake any elaborate re-
searches or new investigations or the holding of hearings, although
we had a few outside experts talk to us.

So the report represents primarily the thinking of this particular
group based u})on its own background and experience. Also it does not
purport to be a comprehensive study of antitrust problems. It is lim-
ited to selected matters that seemed to us of quite major importance
and on wliich we were able to reach a rather high level of agreement
among ourselves.

I might comment briefly on the form in which our recommendations
were submitted. We decided early in our discussions that our ideas
could best be tested and would be made more useful if we went through
the exercise of writing them in statutory form. As all of you know,
even better than we, you don't discover the difficulties with ideas tliat
in the abstract may seem good until you get to the business of drafting
the language. And so we tried to do that in the case of most of our
recommendations and we included the results of that exercise in our
report.

So we have supplied statutory language on most of these matters.
We could not and would not claim that these are perfect drafts, even
to our own satisfaction, and we recognize that they would need to be
exposed to critical processes. We do think they represent good starting
points for examining our general recommendations.

The report of the task force was not made public by the Johnson
administration but it was disclosed after the new administration came
into office. This was done with the consent of the members of the task



101

force and in the hope that its recommendations and discussions might
be a useful contribution.

The report speaks for itself and I am here simply in a private ca-
pacity to try to answer any questions the committee has about it. I do
not have any basis for giving any official interpretations or explana-
tions beyond what appear in the report.

Various individual members of the task force took initial respon-
sibility for preparing working papers and drafts, and in connection
with our recommendations, on the Eobinson-Patman Act, Prof. Carl
Fulda of the University of Texas Law School performed that function.
As you know, Professor Jones is here today with me and I think he
may be better able than I to deal with some questions you might have
about the details of our recommendations on that act.

I have in this prepared statement attempted to run briefly over
the main points of our task force report other than the Robinson-Pat-
man one and, if the committee wishes, I will go ahead with that. I
think it might be useful to put our recommendations in context but
on the other hand I will be glad to skip over that or proceed in what-
ever way you would like.

Mr. DiNGELL. Dean Neal, the committee wants you to have the full
freedom to set out your thoughts in the fashion best suited to your
own wishes and needs. The Chair would hesitate to recommend and
would prefer to leave that kind of judgment to you.

Mr. Neal. Well, with that

Mr. DixGELL. I think, quite frankly, it would be helpful to hear it.

Mr. Neal. All right. I assume that the committee may be familiar
with the report in a general way but as I say, I think it may help to
put our Robinson-Patman views in a proper context if you have in
mind the essentials of the other kinds of reconunendations we made.

The central theme, of course, was to look for ways in which the
competitive effectiveness of the economy might be improved through
the antitrust laws. We didn't concern ourselves with other very im-
portant things that affect the performance of competitive markets —
such as the lowering of tariffs, which would be one example — but
we limited our consideration to the antitrust area and we concentrated
on the so-called unregulated segment of the economy.

Now, the Stigler Task Force report, which has been referred to had
quite a lot to say about the operation of antitrust policy in the regu-
lated industries. And I think I might say that I think most if not all of
the members of our task force would be very sympathetic with the
general recommendations of the Stigler group's recommendations in
this area but we did not get into that area in sufficient detail to deal
with it in our report.

There are four main topics involving new legislation or revision
of legislation that our report dealt with. These are the problems of
concentrated industries, the problem of conglomerate mergers, the
Rolnnson-Patman Act and the ppen licensing of patents.

As to concentrated industries, or so-called oligopolies, the major
point we would make is that the present antitrust laws fail to provide
any satisfactory handle for dealing directly with that problem.

Section 1 of the Sherman Act, of course, reaches collusion, such as
ordinarv cases of price fixing and the like. Section 2 reaches monopoli-



102

zation, which has been commonly understood to be the rather rare
case of the sino:le firm Avith an overwhehning share of the market.
But there are a good many important industries in which a very small
number of firms, two or three or four, account for most of the market.
Much economic theory and opinion suggests that such markets will
or may function in a manner that falls short of the optimum a com-
petitive market would achieve in terms of price.

It is difficult without considerable distortion of legal concepts to
bring these situations within section 2 of the Sherman Act and on
the other hand, collusion, if it exists, may be very hard to detect. As
a matter of fact, many economists would argue that results equivalent
to collusion may come about without collusion in any ordinary sense.
And so the problem is one that tends to fall between the two schools of
section 1 and section 2.

As I say, our principal point is that the antitrust laws should be
strengthened by dealing explicitly with this ))roblem and providing
a definite mandate and basis for remedial action where that is appro-
priate. We suggest that appro]n'iate remedial acti(Mi must ordinarily
take the form of divestitures, to create a larger number of competitors
and reduce the market shares of the leading firms. And we also sug-
gest that the criteria for invoking such remedies must be related pri-
marily to market structure and not, as has occasionally been suggested
in the past, be based on judgments about the performance of the
firms. And so our proposal would give the courts power to order
divestiture in situations where a particular market over many years
has been characterized by a very high degree of roncentration and
where the same group of firms has persistently lield the large market
share.

Our second major recormnendation was addressed to the problem of
conglomerate mergers. Here again one has to sny, I tliink, that there
is a gap in the law, assuming one believes that the law should put any
obstacles in the way of growth by conglomerate merger. The gap
exists because tlie antimerger statute, section 7, is phrased in terms of
adverse effects on competition. A conglomerate merger almost by defi-
nition is one in which adverse effects on competition are either non-
existent or very hard to see. The result of that has been that in the few
cases where an attempt has been made to use section 7 against mergers
of this type, there has been a resort to quite strained and unconvincing
arguments for extending the statute to reach such mergers.

Many of us find the objections that have been advanced on grounds
of competitive injury to be unsound or unpersuasive, and in any
event believe it would be healthier for the development and aministra-
tion of tlie law if section 7 were not made to do work which it Avas not
well designed to do.

As to what the policy ought to be, we felt handicapped as T think
eA'eryone is by lack of very good knowledge of the causes and effects
of conglomerate mergers. We also found it very difficult to identify
any criteria which might be used for setting some absolute size limit
to the growth of firms by merger. And so we felt that any policy that
might be adopted on conglomerate mergers should be a cautious and
moderate one and addressed to improving the competitive structure
of markets rathei* than considerations of size per se.



103

The option that seemed attractive to us was to take adA'antage of
the forces that seem to be producing conglomerate mergers, whatever
they may be, and turn them into an instrument for improving the
competitive structure of concentrated markets. We Avould do that by
an outright prohibition of a merger between a very large firm, as
defined in a statute, and a leading firm — regardless of its absolute
size — in an already concentrated industry.

In this way a very large firm which wanted to enter another indus-
try by merger would be forced to look for its opportunities among
the smaller finns in that industry rather than among the leading firms.
And if its entry into the new industry were successful, and the
acquired firm prospered under its control, the result would be to im-
prove the competitive situation in that industry rather than making
it worse.

Third, we made a proposal as to patents. It was intended to increase
the likelihood that fields covered by patents will be open to competi-
tion in the exploitation of the patent and decrease the likelihood that
weak or doubtful patents v>'ill be used as devices for cartel arrange-
ments among a faA^ored group of manufacturers. The essence of the
jjroposal is that once a patentee chooses to exploit his patent by
licensing others to manufacture under it, he is required to offer an
equivalent license to any other qualified applicants. This doesn't mean
he is required to license it in the first place. He may decide to exploit
it himself. The requirement that licenses be generally available if they
are granted at all does not diminish the legitimate reward the patent
owner is entitled to by reason of his invention. That reward can be
secured by setting appropriate royalty rates. In general that reward
will be maximized if the patented article is produced under conditions
of competition, so that arrangements which limit the practice of
jDatents to a small group are in general open to the suspicion that re-
wards other than those attributable to the value of the patent itself
are being sought.

Now, I must say I don't know and we had no evidence before us
concerning the extent to which unavailability of licenses on signifi-
cant patents may be of special significance to small businesses. It does
occur to me that this might be a subject of special interest to this sub-
committee and one on which it might be worthwhile obtaining further
information.

Coming, then, to the Robinson-Patman Act, which I know is of
primar}' interest to this committee, our group concluded, as have
similar studies before and since, that a rational and consistent anti-
trust policy requires major overhaul of the Robinson-Patman Act.
Perverse and bizarre results of the act such as the recent Utah Pie
case, to take one of the more notorious examples, have given rise to a
constant stream of legal a]id economic criticism throughout most of the
history of the act.

From the standpoint of the purposes of the antitrust laws, two
objections to the act are fundamental. One is that the act is really a
regulatory statute, at least a sizable step in the direction of strict
Government regulation of price structures, and thus is at war with the
basic philosophy of the Sherman Act which aims to maximize freedom
of enterprise under the impersonal regulation of conjpetJtion.



104

The other objection is that under the guise of preventing discrimi-
nation the act is essentially a measure aimed at price cutting. It thus
inhibits one of the most important processes by which price levels
respond to competitive conditions and tends to deprive consumers of
the benefits of efficient distribution and vigorous competition.

Now, in theory the act recognizes this, these problems^ and gives
some recognition to the need for flexibility in the competitive process.
But as the act is written and as it has been interpreted, the requisite
injury to competition is so easily established and the cost justification
and so-called meeting competition defense are so grudgingly allowed
that the act significantly impedes price competition.

I would like to say a word about the economic justification for the
statute which appears to be quite weak. Discrimination in an economic
sense, that is, price differences that are unrelated to cost, can occur
systematically only if some degree of monopoly is present or if there
is collusion among sellers or among buyers.

The appropriate remedy is to attack the monopoly or collusion di-
rectly. This can be done under the Sherman Act. In fact, however, and
this is somewhat strange, the Robinson-Patman Act has most often
been invoked in industries such as the food industry which appear to
be highly competitive and where there is little ground for believing
that the conditions essential to genuine discrimination are present. The
common justification advanced, of course, is the protection of small
firms against the so-called superior buying power of larger rivals, and
that is usually designated as "unfair" buying power as well. But it is
not at all clear how larger buyers can be supposed to be able persist-
ently to extract price advantages from their suppliers that are unre-
lated to lower corts of doing business with them. The natural assump-
tion would be that some of the sellers would fuid it advantageous to
acquire the business of the smaller firms that are paying higher prices
and thus price would find its proper competitive level.

Thus it is plausible to assumxe that the persistence of lower prices to
particular customers or classes of customers is to be explained by dif-
ferences in costs, although such differences may be very difficult to
establish in a judicial or administrative proceeding under the Robin-
son-Patman Act.

For these reasons there are many, I believe, includmg some members
of our task force who would in principle favor outright repeal of the
Robinson-Patman Act. The task force recommendations do not go that
far. Instead they propose a series of modifications in the act that would
make it less rigid and provide more leeway for the adjustment of price
to changing competitive conditions and different methods of sale and
distribution.

I think I might enumerate briefly the principal changes proposed
and I am sure that Professor Jones will amplify this description.

First, the specific subsections dealing with brokerage and with pro-
motional services and allowances, sections 2(d), (d) and (e), would
be eliminated. These are the most complex and in principle the least
defensible provisions of the act because they are absolute, per se pro-
visions that do not even recognize the rather difficult defenses avail-
able under the general prohibition in 2(a). Insofar as the practices
reached by these subsections are objectionable, they ought to be dealt



105

-with through the general prohibition of discrimination in section 2(a)
which woukl make them subject to the test of adverse effect on com-
petition and to the defenses of cost justification and meeting
competition.

Secondly, the test of adverse effect on competition in section 2(a)
Tt^ould be modified to bring the Robinson-Patman Act into line with
the other provisions of the Clayton Act ; those dealing with mergers
and exclusive dealing contracts. This requires elimination of the
language which has been peculiar to the Robinson-Patman Act under
which a discrimination is unlaw^ful if it tends "to injure, destroy, or
prevent competition with any person granting or receiving the lower
price.'' That language has had the unfortunate effect of focusing atten-
tion on harm to individual competitors rather than on possible harm
to competition in the market as a whole.

As a further corrective of the present acts excessive concern with
effects on individual competitors as distinguished fror.; effects on the
market as a whole, we propose a new subsection that would spell out
in some detail the circumstances in which price discrimination could
be found to have a tendency to lessen competition in the market as
a whole.

Third, we would relax the cost justification defense to make it more
readily available without the need for excessive exactitude in proving
cost differences. The language that we propose would enable a seller
to defend a price differential on the basis of approximate cost dif-
ferences, reasonable estimates of cost differences, and reasonable classi-
fications of transactions and customers based on differences in the costs
of doing business with them.

There are a number of other proposed changes of a somewhat more
technical character that we can discuss if the committee wishes.

I think this covers the most important points both as to the act
and as to our task force report as a whole. I think Professor Jones may
wish to supplement this statement and with his help I will be glad to
tr}' to answer any questions.

Mr. DiNGELL. Dean Xeal, we thank you for a very fine statement.

Professor Jones, the Chair would like to raise a question here at
this point. The Chair notes that we have a vote going on over at the
floor. I am well satisfied that members of the committee will have a
significant number of questions here. We should leave right now.

Would it be convenient for you gentlemen both to wait for the
return of the committee? We should be back within a matter of about
15 or 20 minutes. We will have to spend most of that time hi travel
to and from.

Very well, then, the committee will stand adjourned at the call of the
Chair, which is anticipated to take place in approximately 20 minutes.
[Recess.]

Mr. DiNGELL. The subcommittee will come to order.

Mr. Jones, the counsel informs me you have a prepared statement.
We will recognize you at this time for purpose of reading it.

Mr. Jones. My iiame is William K. Jones. I am a professor of law
at Columbia University. My statement is very brief.

I was served on Friday and did not therefore have a great deal of
time for preparation.



106

From conversations with the committee staff, I gather that the
reason I was snbpenaed to appear before this subcommittee is the role
I played in fornnilatinof the Eobinson-Patman Act recommendations
of President Johnson's task force on antitrust policy, dated July 5,
1968. It is true that I was the principal draftsman of the recommended
revised statute wliich appears as api)endix C of the task force report.

But it sliould be emphasized that all of the Robinson-Patman Act
recommendations were discussed by the entire task force; that my
initial proposals were modified by the group in a number of respects:
and that every member of the task force but one endorsed the final
recommendations — Professor Brock of Yale Law School preferred
outright repeal of the Robinson-Patman Act,

Also, the subcommittee should recognize the important contribution
of Professor Carl Fulda of the I^niversity of Texas Law School, who
initiated our reconsideration of the RolDinson-Patman Act by per-
suasively urging the repeal of sections 2 (c), (d), and (e) and section
3 of the act.

In dealing with a statute like the Robinson-Patman Act, a basic
choice has to be made. Shall we seek to encourage competition, with
a view to lower prices and improved products for all consumers ? Or
shall we seek to protect a privileged group of selected small businesses
against the rigors of the competitive market ? For me. the answer
is clear. Small businessmen should not be the recipients of special pro-
tection at the expense of the consuming public.

The answer should be doubly clear today when great efforts are be-
ing made to combat inflation and hold prices down: when mounting
concern is expressed for the large mimbers of poor in our society —
who are, after all, an impoi-tant part of the consuming public — and
when more and more Americans are becoming mistrustful of Govern-
ment, and of Congress in particular, as the guardian of the privileged
few — always ready to protect existing privileges at the expense of
the general public.

Why should the Government concern itself about price discrimina-
tions which may injure one or more small businessmen? I am aware
of three possible answers :

1. Injury of small businessmen may impair competition in the
marketplace, to the ultimate detriment of the consuming public : lower
prices in the short run may ])e replaced by higher prices in the long
run, after the market has become monopolized.

To the extent that such a situation may occur — and it does not
occur very often — ^the statute proposed by the task force provides
am]ile protection. Its provisions are tailored to meet this precise
problem. The real objection to the task force reconnnendations, in my
judarment, is that ))rice discrimination actually leads to lessened com-
petition only very infrequently, so small businessmen can expect
only limited protection from the terms of the proposed revision.

2. The small businessman is entitled to equality of treatment at
the hands of his suppliers. But in a business environment ch.aracter-
ized by hard bargaining between buyers and sellers, by constantly
changing charnrtoristics in the operations of the businesses of each,
and l\v vigorous competitive struggles among rivals — in short, the
American economj' at its best — this ethical standard is simply unten-
able.



107

■ Attemi^ts to apply the standard have tended to require that persons
in unexjiial situations be treated equally — a perfect formula for insur-
inir high prices and inefficient methods of production and distribution.
It is no coincidence that some provisions of the Robinson-Patman Act
had their g-enesis in the so-called codes of fair competition of the
NRA, which were designed to protect businesses ngainst price declines
in a period of general depression and deflation. The depression ended
30 years ago; the Robinson-Patman Act should catch up with the
times.

3. The small businessman makes a distinctive contribution to
American democracy and thus, for social and political reasons, he
ought to be preser\^ed; even at some cost in economic efficiency.

This, to me, is the worst reason of all. There is no indication that
small business is on the decline. Year by vear the number of small
businesses nicreases. But, more nnportantly, I take issue with the