although not as high as we asked for. We were
Mr. Conte. Could I interrupt you there? What did you ask?
Mr. Stigler. We in effect said we thought that the punishment
should fit the crime. And unlike Mr. McLaren, who is now asking
that the maximum fine be increased from $50,000 to $r)0().000, we
wanted to play the game of making the fines commensurate with the
damage that had l^een done and the profits that had been secured by the
monopolistic practice. That can of course leave little sums like $500,000
in the rear. The General Electric fines could easily have been of a
magnitude of three or five times or 50 times $500,000. We tliouglU that
it is part of a good deterrence policy under any statute to have punish-
162
ment sufficient so that when a violator is caua'ht he is sorry lie was
caiiffht. The present system allows larcre infractions of the law to be
profitable even after all the penalties are paid.
Mr. HoRTox. Have you found your recommendations were not l)ein,o:
followed by the Justice T)e])artment, particularly the recommendati(ms
where you recommended that they decline to undertake a proo;ram
of action ajifainst cona'lomerate merirers ^
^fr. Stiglkr. Let me say this. I thouirht 1 liaxe noticed some little
decline in enthusiasm in that area in the last month or so, althou^jh
that may have been reenforced by the Dow Jones averag'e. They
certainly have moved in the ooposite direction there. On the other
hand, 1 think they have ])layed an excellent part in representing the
consumer interests in things like the oil import quota controversy
which is now miderway, thino-s like that. So let me just say I would
he very surprised if they accepted all our reconnnendations. Mr.
^Mitchell did not know us. We were not a handpicked connnittee. Mr.
McLaren did not know us, and so he was really <2:ettino' outside and
nn])redictable advice.
Mr. HoRTox. I was not implyin<x that they shoidd. I was just tryin^r
to ascertain whether or not you felt they had moved in one direction
or another with reg-ard to that particular recommendation.
Mr. Stigler. About that recommendation I would say they had
io:nored it.
]Mr. HoRTox^ Also, in your re])ort you include a statement that the
economic threat to competition from reciprocity is either small or
nonexistent. What do you mean by that?
Mr. Stigler. This is one of the touchy questions, and T mio-ht say
that our knowledo-e of reciprocity like our knowled^re of most thino;s
in economics is unsatisfactory. I do not know one really res]:)ectable
first-class study that contains facts on reciprocity. The recii)rocity
literature is full of innuendoes and hints and conjectures but very
little evidence that would persuade a man to chanire his oj^inion. The
reciprocity of course refers to what the trade ('Ui)liemism calls trade
relations. I'll buy it from you if you will buy it from me. It has
become very important in all recent conjzlomerate cases. It is alleoed
that if International Telephone and Telegraph o-ets Hartford Insur-
ance that mutual tradino; will proliferate, and similarly with the others.
My feelinff and that of some of the economists in particular is that
by and larije reciprocity is not an im])ortant form of commercial
dealin.o;. that it is not a very sensible way of usinir any j:)ower you have.
If you have power, you will use it in the most efficient ways. If I can
really get more from you, one way is to charjie you more. Why charge
you less and make you buy something for me at more than a com]ietiti ve
price? That is an inefficient way, if I have power of taking money
from you, of using it. We think that reciprocity's main role is probal)ly
Avhere prices are not free. That is primarily in dealing with monopo-
listic combinations and with regulated industries. There deals can be
made and there recij)rocity seems to be potentially a very im])ortant
phenomenon.
Mr. IIoRTOx. Well, now, is this a projier weapon against conglom-
erate mergers do you feel ?
Mr. Stigler. I would sav, no, that if you had said to the De]:)art-
ment of Justice prove to a jury of competent independent people that
163
there has been a considerable exercise of reciprocity by the past con-
o-lonierates in tliis country, that the}^ could not meet that proof now
and they could not meet that proof 2 years from now after they had
spent a lot of money.
Mr. HoRTON. So you are of the opinion, as 3'ou said in the report,
that tliis reciprocity is kind of a make weight: it is not really that
material in this area.
Mr. Stigler. Let me say, though, that Avhereas in much of this
area. I think I am rei)orting tlie opinion of the economics profession,
in this particular area I suspect there is no consensus.
Mv. PIoRTOx. Well, you mean you are talking here now about the
report that you made, and you are talking about a group position and
not just about your own personal views.
Mr. S'noi.ER. That is right, although the main discussion or reci-
procity in the report was mine and there was a supplementary working
paper that was not part of the report which I wrote on the subjects
Mr. HoRTOX. I think that is helpful. In other words, the report
does reflect your views, and this is not a case of you having dilferent
views from what was contained in the report.
jVIr. Stigler. Xo. That is correct.
Mr. HoRTOX. Professor, I do want to also commend you and
Professor Posner for the very informative statements you made here
today and the contributions you have made in this area.
Mr. Smith. In response to a question from Mr. Horton, Mr. Posner,
concerning small businessmen, you referred to it not being desirable to
prevent smaM b.usinessmen from going out of business when there is a
superior method of distribution, and then you gave as an example
buggywhip manufacturing. I don't think you really meant to use that
Icind of example, did vouf I mean it was not because there was a better
method of distribution tliat sellers of buggy whips went out of business,
l)ut rather because their product v,as no longer salable whether they
were large or small.
Mr. Posner. Eight. Yes; I only meant
Mr. Smith. Do you have someotlier better example to use for that?
Mr. Stigler. Blacksmiths.
Mr. Smith. Same thing.
Mr, Hfxgate. I have some.
iVIr. PosxER. There is the decline of the general store. I suspect that
dejiartment stores have displaced a good many specialty stores that
once flourished. One form of distribution that has obviously declined is
tlie fruit and veo-etable dealer, the butclier, the fishmonger, if that is
the correct Avord. Those trades have virtually disappeared as a result
of the irrowth of grocery stores and supermarkets where the housewife
can l)uv a^l her grocery needs in one place.
]Mr. Sorrni. You mean as a separate store they have disappeared but
thev are in the chainstore now.
Mr. PosNER. Yes; that is right. The function is being carried on but
a group of tradesmen have disappeared, have left those businesses.
^Ir. Odex. ]Mr. Posner, just to set the record straight, we were ni-
formed last week by the Department of Census that in fact specialty
stores are not on the decline but for the last 5 years have been on the
increase, that small butchershops and small specialty stores are increas-
ing rather than decreasing.
164
Mr. PosNER. It is quite possible that in the last 5 years, or other
recent period, there has been an upsurge. I am reasonably confident
that in the last 20, 30 years, since whenever the grocery store became
common, these independent food trades like butchers and vegetable
stands must have— their share of the retail food business must have
declined substantially.
JSir. Smith. Mr. Hungate.
Mr. Hungate. Yes, I would like to ask Professor Stigler, m your
statement, No. 1, you say :
The act defines price discrimmation improperly, and in particular identifies it
with price differences, so it attacks desirable price structures as well as un-
desirable ones.
Could you give me an example of that ?
Mr. Stigler. Well, a very simple example would be where my cost
of dealing with one class of customers was considerably different than
that for another. It might be as simple as wholesale vereus retail or it
might be lot size.
Mr. Hungate. Would you — if you please, can you take me into a
business like shoes or pies' or anything and give me an example ?
Mr. Stigler. Sure. I am not a businessman so I cannot give you a
realistic example.
Mr. Hungate. That is what I am looking for.
]Mr. Stigler. Well
Mr. PIungate. Does it make an exception for that? Go ahead, I am
Sony, finish.
Mr. Stigler. I don't mind being specific on a hypothetical situation
if you wish.
Mr. Hungate. I thought ]>erhaps there would have been a case under
the act, Robinson-Patman, where this had happened.
Mr. Stigler. Certainly one of the Honeywell Robinson-Patman Act
cases, for example, had" price discrimination charges as I remember
the facts, but I have not looked at it for sometime. The cost defense was
successful in something like 25 out of 28 products although there was
at that time an exorbitant cost defense standard imposed by the Fed-
eral Trade Commission. The company did not quite meet the require-
ments of the cost defense on all cases and as a result they were found
guiltv, although I think any outside reading would have said two
Fhinss. One is that the basic price structure did reflect cost diiferences,
and two, it is a regrettable part of public policy if such expensive
cost studies, should fail because they did not quite cover every detail.
Mr. Hungate. All right. Novr, give it to uie— I am sorry— the wa};
von started to, as a hypothetical. Give me th.is example please again.^
Mr. Stigler. The hypothetical example was going to be one in which
there were cost differences in dealing with people— cost differences,
however, of a sort that frequently are revy clifRcuH to quantify. For
example, customer one i« going to be more I'eliable in payment.
M-'\ Hungate. In the same store, same Imsiness you are talking
about?
Mr. Stigler. Same bu«iness.
IVfr. Hi'NGVTE. All ri'jht.
Mv. Stigler. He is going to be more reliable in dealing wit^i me. He
is going to pay more promptly and do less damaging of the goods.
165
and less frequently send the goods back, and so forth. These are facts
which cannot be measured precisely. I make my best estimate, and I try
to get and keep good customers and expand their patronage and re-
duce my poorer customers. I give them different prices. I think this is
perfecth^ sensible from the social viewpoint and from my viewpoint.
I)Ut if vou now sav come along and ask to have the certified accountant
show tliat he can defend in detail these estimates of the probable be-
havior and costs of dealing with these two customers, I may not be able
to do that to meet your standards. Cost accounting is not that refined
and elegant a field.
I\[r. HuNGATE. Could either of you gentlemen give me an idea, of the
volume of cases processed annually mider the Robinson-Patman Act?
Mr. PosNER. You mean including private suits as well as those by
the
Mr. HuNGATE. Well, I would like both and then broken down if
I could.
Mr. PosxER (continuing). Federal Trade Commission? I am chiefly
familiar with tlie Federal Trade Commission. The Department of
Justice, although it has jurisdiction to enforce the Robinson-Patman
Act, brings virtually no cases, so the average Justice Department
Ivobinson-Patman output per year would be close to zero.
Mr. HuNGATE. Certainly less than a hundred.
Mr. PosNER. I think they have only brought two in the Avhole his-
tory of the act. The Federal Trade Commission has had a very variable
output. In the last year for which there are printed FTC decision
volumes, there were about 200 — perhaps somewhat over 200 — â–
Eobinson-Patman orders. But my impression is that in recent years
the number of formal proceedings has dwindled markedly. Private
treble damage suits under the Robinson-Patman Act are a very variable
total and I don't know what recent
Mr. HuNGATE. "Well, give me kind of a ball park figure. Would you
think 50 a year or 500 a year or what would be generally a reasonable
figure t
Mr. PosNER. I think closer to the lower one.
Mr. HuNGATE. Closer to 50, but it is hard — I can see it could be
extremely variable each year. I suppose in a year around general that
would trigger a lot of them and then other years there won't be many
perhaps.
Professor Stigler, noAv you also state that the act fosters collusive
and anticompetetive practices and protects obsolete and inefficient types
of business.
Give me an example of that, if you will.
Mr. Stigler. The example on the competitive side is if I have a
rival who bothers me by being competitive and going after business
on an aggressive scale, one of the freest hunting licenses I can have
to harass him and perhaps to keep him from going after my customers
by aggressive competitive tactics is by bringing a complaint to the
Federal Trade Commission. And they say, look, you are going after
his customers. Give us a complete cost justification or a complete meet-
ing-competition-in-good-faith defense. And unless he is prepared to
give a verv- costly and highly legalistic defense that may not meet the
economic realities of the market, he will back away from going after
166
my customers. The Utah Pie case, for example, reads like an ordinary
attempt to enter a new market, by cutting prices somewhat so cus-
tomers will come in and overcome their inertia and find out what
the new firm has to offer.
Mr. HuNGATE. Let me follow through on that. I have been enjoying
Utah Pie since yesterday. Is it fair to state that Utah Pie. the local
company, came into a field, 1 think, and took over, what, some two-
thirds of the market through competitive pricing?
Mr. Stigler. It may have been a leader. All I know about the case,
by the way, is the Supreme Court decision. I have not read the trial
court decision or any of the briefs.
Mr. HuNGATE. Well, my grasp of it from what testimony we had
yesterday was that the local Utah Pie Co. came into a field where
there were some tliree giants — I forget their names — and took over
some two-thirds of the market in Utah. We are talking about Utah.
Xow, whereupon the three giants did not like this — and all the time
the Utah Pie Co. made money. I think there was only 1 year in which
they did not make money so they are doing it ]:)r()fitably. The three
giants at a figure that was below their cost in Utah, competed at a
figure below their cost until they reduced the Utah Pie Co.'s share of
the market to 45 percent or something like that and then this case
came on. And I suppose they were told to quit doing it. Is that gen-
erally the outcome of it ?
Mr. Stigler. I don't know what happened after it was remanded
to the local courts.
Mr. Wertiieimer. I believe it was not below cost.
Mr. Pcnix. Unreasonably low cost.
Mr. HuNGATE. Unreasonably low cost. I see.
Mr. Stigler. But another interpretation of the case with which the
record is not inconsistent is that liere is the local company having a
great thing, doing very well, having very high prices. Along comes
some other people who say. we would like to share that business and
then start cutting prices. The new price structure was 40 or 50 per-
cent below what it was before, and maybe, the lower price is the one
at which you can make boysenberry pies.
Mr. Hungate. Well, I thought from the evidence they were not
making money at that figure. Pet Milk was losing I understand every
year at it, and what I am looking — it seems to me it may be how you
look at the market. Xow, if you look at the market as the United
States you may want to encourage anyone at a local level that could
come in profitably and offer you a lower price. Xow, I think — would
it seem reasonable that perhaps if they come in and sell below cost —
what would you tliink would happen once Utah Pie was forced out
of the market ? What would prevent tliem from forcing them out of
the mai'ket ?
Mr. Stigler. They miglit be able a break Utah Pie. It depends on
the facts of the financial resources.
Mr. Hungate. Yes, sii'.
Mr. SnoLER. I tliink that there are almost no documented cases of
successful ])redator action. And the reason is not that you coukl not
do it once but you would have to do it again tomorrow and the day
after that. There is not much of a trick to go into the pie business or
167
into the «i-iis()line retail business. There is an nnliniited number of
l)otential rivals you would have to bankrupt. The evidence I ha\e seen
lias been that it is always cheaper to merge with your rivals, buy them
out rather than kill them. So that, you see I assign a very minor role
to predatory practices.
Mr. PoTvix. Wasn't one of the great lessons of the Standard Oil
case that it is frequently cheaper to ruin an opponent before you merge
with him, or at least partially I'uin him before you ac([uire him '.
Mr. SxiciLKR. No, it is just the o])i)osite. That case has l)een examined
ill a very famous article by John McGee, and he found that the e\i-
deiice for predatory j)ractice was negligible and that John D. Eocke-
feller found it much clieaper to buy out his rivals at attracti\e prices
to get his monopoly than it was to run them into the ground.
Mr. PoTvix. I am, of course, familiar with the McGee article and
that was indeed the gentleman's conclusion, but does it not rather W\
in the face of the fact that Standard Gil itself said but, Mr. Judge,
one of the things we ha^•e been using is perfectly legal. We have been
using price discrimination.
I don't think they have e\'er satisfactorily answered that, at least
to my satisfaction.
Mr. Stigler. I am not sure — I don't know what they said. But I
paid more attention to the evidence than to the dependent's counsel's
{presentation. In fact, one of the interesting things in this area is how
often the counsel in effect pleads guilty where T doii't think the ]')arty
was guilty.
JNIr. PoTvix. I think you have established at least this much, and
I would agree, sir, there is a dichotomy within the intellectual com-
muniry as to what the lesson in Standard Oil was. But I think you
will concede that there was a conventional wisdom in antitrust that
down through the years it has been that the lesson inlierent in Stand-
ard Oil was that it sometimes is cheaper to cut them up before you
acquire them.
>[r. Stkjler. Eight. And I don't consider the subject closed. Even
if you accept the McGee article at complete face value, and I find it
(juite ])ersuasive, that is one episode and I would like to see the famous
episodes of National Cash Register reviewed and so forth. I don't
consider the subject empty. I just say at the present time I place a
low probability on predatory competition as a commercially attractive
device even if the law allowed it.
Mr. PoTvix. Well, are there not two pertinent facts here about Ttah
l^ie, though. First, this was not a case prosecuted by the FTC. It was
a private treble damage action. And it is indeed a monument to the
somewhat unique skills of the practitionei', who did w tremendous jol>
trvino- it. Secondly, that one very real ditlerence between I'tah Pie
and its larger national rivals is that Utah Pie charged the same prices
wall-to-wall so to speak. Its larger rivals were serving other markets
and, perforce, those consumers in Cincinnati were, in a sense, subsi-
dizing the nmcli lower sales to the consumers in Salt Lake City ?
Mr. Stigler. I don't think it is useful to add that last sentence. T
assume that these people in Cincinnati were being charged whatever
the market allowed to be charged, which I hojie was only a competitive
price.
168
Mr. PoTviN. But it was nonetheless more then their countcr])art
consumer in Salt Lake City would pay. So whetlier it was discrimina-
tion it was at least an inequality.
]\Ir. HuxGATE. Mr. Chairman.
^[r. Smith. Yes, go ahead.
Mr. HrxGATE. Professor, now you mentioned in some of these cases
you find the counsel confessing guilt when the record would not sus-
tain it. Well, I am rather sure Professor Posner as a lawyer would
agree frequently counsel knows a good bit that ne^-er gets in that
record when he pleads guilty.
Mr. Posner. Sure.
Mr. HuNGATE. Now, on this statement about the ease with which
you can go into the pie l)usiness, if they know that there was nothing
to restrain the larger conq)etitors from forcing them out through dis-
criminatory price features, what would be the incentive to go into the
pie business ? Would that not be discouraging ^
Mr. Stigler, Would you repeat you question. I am not sure
Mi\ IIuxGATE. You say i! is very easy for a new competitor to come
into the pie field, so why protect })eople that are in tlieir, the Utah situ-
ation. But if the new man coming in knew^ that the old man could just
force him out through price discrimination, would that not be dis-
couraging him from coming in tlie pie business ^
Mr. Stigler. He will be discouraged basically by one thing and that
is the knowledge that he cannot oi)erate at a long run efficient level
compared to the other people in the industry because he is too sniall
or something like that. If there are iKJt substantial advantages to being-
bigger, if it is a perfectly viable area in the presence of fair competi-
tion, whate^•er that means, for small people as well as big, in the long
run no large firm is going to be operating at least, for at lower prices
he would be engaged in a charity toward the local consumers at a
cost to himself. And as long as I know that
Mr. HuNGATE. Pardon me. I agree wdtli that princi})le but I wonder
if he reduces his competition to none, what then prevents him from
coming up and getting away from charity 'i
Mr. Stigler. Xothing except the quick reappearance of that comjie-
tition. I think that the evidence in the cases that I have seen — and I
won't ])rerend that, for example, the pie business has been studied or
if it is that I know anything about it, but the evidence is general that
there are a large number of businessmen eager to go into business,
ready to take some risks and that if I were trying to drive anybody
out of business I wouldn't pick an ai'ea where they could come in.
Mr. Hungate. All right. Now, let me take another approach. I think
you referred to the most efficient use of power being beneficial.
Mr. Stigler. Not necessarily. Being more profitable.
Mr. Hungate. Being more profitable. But you would agree that it
is not always in the public interest, the most efficient use of power.
Mr. Stigler. No ; I agree.
Mr. Smith. Before you leave that point, let's take something that
we have seen quite a bit of. Suppose an independent dairyman is run
out by low prices by a large national dairy. After the independent
quits, the National Dairy quits their preferential pricing and their gim-
micks and the price goes back up so the independent looks at the mar-
ket and says, "I can now make a profit."
169
Do you think he is going to go back in there and establish another
dairy Wlien he knows that if he does that the national chain \Yill come
back in with lower prices again?
Mr. Stigler. Let me reverse the question, and that is basically my
answer.
Do you think that Borden will do that if they think that as soon as
they knock him out, he will come back in ? You see, it goes both ways.
Mr. Smith. Well, I think that they will do it because they kno\y that
he knows that if he comes back into the market that they will drastically
cut prices again. And they have been doing that for several years.
Mr. Stigler. I think that what you propose is a perfectly logical
possibility. I think what I propose is a logical possibility. And I think
the way you have to choose between those logical possibilities is by
looking at the evidence.
Now, you have said, and others have said that demonstrated cases of
predatory practices are in the books and on the record. To my knowl-
edge, they are not. They may meet a judge's criterion of predatory
practice ; they do not meet the economist's. I know of no system or no
body of evidence to demonstrate any amount of imi^ortan't predatory
policy, and that is an important issue and one that ought to be settled
along the line.
Mr. HuNGATE. Will the gentleman yield ?
Mr. Smith. Yes.
Mr. HuNGATE. On that we were discussing realistic examples, and
I think what we must work on is realistic examples. And I think the
chairman has given a realistic example. T do not have the figures now.