the fruit spread case you cited, that discriminations are given to buy
that market and make it yours exclusively in the hope that, once you
gain control, you can go back up on prices and have all or substantial-
ly all of the volume and thereby be more than reimbursed ?
INIr. McDonald. It seems to me it is obvious that you do not go
into a market, even a large corporation like National Dairies, and
throw a million and a half dollars down the drain just for nothing.
Mr. PoTViN. You would agree that they should not operate as an
eleemosynary institution, of course?
Mr. McDonald. I agree. There are many instances of this. I recall
one, a Justice case, I believe. Safeway Stores lost about $6 million in
6 weeks in one of the large cities in Texas some years ago. They were
found guilty of attempting to monopolize the market.
Mr. PoTviN. In the course of your studies, have you made an anal-
ysis of the overall impact on consumers, bearing in mind that in the
short run during the, as you put it, price war, dumping — call it what
224
you will — there are, to be sure, savings to consumers? That cannot be
denied. But taking into effect any aftermath if the operation is suc-
cessful and the insurgent supplier does indeed gain control, either
individually or with his fellow potential oligopolists here, control of
that market, what in effect is the longrun impact on the consumer?
Mr. McDonald. In the long run, I think it is higher prices to the
consumer. I call the committee's attention to a study made by the
Federal Trade Connnission — I think it was 1966 — on bread and^nilk
prices in various cities throughout the United States. During that
period, bread and milk firms increased their prices drastically.
Now, what set off this tremendous increase in consumer
Mr. PoTviN. Pardon me, Mr. McDonald. A moment ago — I want to
be sure I miderstood you correctly. I asked what the longrun impact
on prices would be if these people came in and price-warred, took over
control and controlled a market individually, esj^ecially among the
smaller firms. Did I understand you correctly to say that that would
result m higher prices to the consumer ?
Mr. McDonald, Yes. But coimsel will understand, if I may continue
ior a moment
Mr. PoTViN. I am sorry.
Mr. McDonald. The Commission found in this study that in those
areas where a few firms dominated the market, the price increases
were very great. For example, in Baltimore, as I recall, milk— milk
or bread, I forget which — was increased 5 cents a unit. Now, in cities
where you had competition — this could readily be obtained, this in-
formation — but looking at this study, you find that the price increases
maybe were only 1 cent.
Wliat set off this thing was that the Secretary of Agriculture in-
creased the price to farmers. This was our interest, of course, and he
increased the support price on 100 pounds of milk by a dollar, which
amounts to about a penny a quart. And there was, of course, increase
on wheat involved and commodities or materials that go into a loaf
of bread, and bread companies and the milk companies used that as
an excuse to raise the prices.
Now, I think you will find, if you look in these cities like New York,
like Philadelphia, where you have had National Dairies and several
other firms come in after severe price wars, many examples could be
given in various cities, various commodities throughout the United
States, that once the price war is over, prices go up.
Now, we have had a fairly good situation here in Washington, D.C.,
even though five or six retailers control the market here. But this very
same — in regard to milk, I am saying now. But tliis same corporation,
National Dairies, attempted to invade this market here several years
ago. They brought in large quantities of milk from Philadelphia and
began cutting prices. Now, in Philadelphia, they were charging high
prices and in New York and other areas. But they came into Washing-
ton, D.C., into Montgomery Comity, and dumped large amounts of
milk. They sent letters to every member of the milk cooperative, these
farmers who were producing milk for the area got letters from Na-
tional Dairies, saying : "Do not deal with your cooperative, deal with
us ; we will give you a better deal."
Well, the farmers did not go for that. But National Dairies might
225
have been successful and you would have been paying more for milk
today — certainly then, after the attempt — had they been successful.
Unfortunately, they made the mistake of bringing in bad milk. They
were not very careful there. Congressmen who live in this area are
sensitive to bad milk, because they have children who drink the milk
and several years ago a Congressman's child died because of poisonous
milk, as I recall. So there were newspaper headlines and it came out in
the open and National Dairies then got out. It retreated back to these
markets that they already controlled.
Mr. PoT\^x. In the long run, then, you say prices come up. What I
am asking is, during the price war, consumers save; after the price
war is over, you say prices go up. So in the long run, what's the over-
all impact on the consumer ?
Mr. McDonald. The cost is billions of dollars which the consumer
pays in unnecessarily high prices because of the lack of competition.
This was proved in the National Tea case, where it involved a number
of cities. National Tea was subsidizing in certain cities, selling at a
loss, where in other cities where they had stores their prices were un-
duly high.
Mr. HuxGATE. Have not there been examples of this — it seems to
me — selective price favoritism on a regional basis, perhaps in the beer
industry, too ?
Mr. McDonald. I do not know anything about the beer industry,
I am sorry.
;Mr. HuNGATE. I know more about milk, of course.
]Mr. Oden. Mr. McDonald, for the last 2 days, we have heard testi-
mony that, in attempting to gain monopolistic or oligopolistic power
by a large concentrated industry, the normal method to gain this power
is by merger and price fixing. We have had statements that price
discrimination is only used in rare and exceptional instances to gain
this type of power. In your experience, do you find this statement to be
true ?
Mr. McDonald. That price discrimination is used to gain market
control or monopolistic control ? Oh, yes.
Mr. Oden. No, this subcommittee has been told that only in rare and
exceptional cases has price discrimination been used to gain monop-
olistic control. We have been told that almost 100 percent of the time
the method used to gain this type of economic power is by merger and
price fixing and that price discrimination is rarely, if ever, used to
gain this type of monopolistic power. I wonder if you have found that
to be true.
Mr. McDonald. The only way a company or an oligopoly, several
companies, can arrive at a situation where they can control the prices,
fix the prices, is by controlling the market. History tells us that, every
instance I know about, they started with elimination of competitors
by price differentials, price discrimination. Sometimes there are other
methods used.
I recall a basic point case. A manufacturer in North Dakota or
South Dakota cut his price and the group said, "Well, you are supposed
to charge so much for your cement." He said, "No, I am going to sell it
tothese'farmers for what I think is a fair price." So they cut the area
price 50 percent so that he was going into bankruptcy and he came
226
back on his knees and agreed that he would come back up to the price
which the group said must be charged.
Mr. Oden. In other words, you are saying tliat rather than price
discrimination being an exception, used only in exceptional cases to
monopolize, you find that it is used to quite a large extent ?
Mr. McDonald. I think in almost every instance, except where you
have acquisitions with the stroke of a pen or the purchase of large
amounts of stock, you caimot have a monopoly. Of course, one com-
pany comes in and buys out the other companies. But the usual way
they do it is by price discrimination, by cutting the price, getting con-
trol, they go into bankruptcy — and let me emphasize again that that
is perfectly good American free enterprise for anybody to sell at as
low prices as he can, based on efficiency.
Mr. Hfxoate. Mr. McDonald, I think this is one of the points that
the witnesses alluded to in the past 2 days. Some of them have made
the point that most of these oligopolistic or monopolistic situations
occur, they said, more through merger than through breaking com-
petition. Would you tliink that is correct or would you think there
are such things as forced mergers^ What would be your comment on
this?
Mr. INIcDoNALD. Well, I think mergers are used now more than ever
before. It may not be that the purpose of the merger is to gain con-
trol of tlie market. There are other motives. Most mergers are prob-
ably perfectly legal, many of them — at least, under the antitrust laws.
But we have had now in this country the greatest wave of mergers
in history. One reason why, I tliink, these companies have resorted
to this ]3ractice is that they cannot be reached — it is very difficult for
me, at least, to interpret the antitrust laws to say that a particular
mei'ger is illegal, a conglomerate merger, I mean to say. Because it
has been pointed out in these phony studies I have referred to that
a merger you see in one line — for example, Gates Rubber Co. has
extended in several directions — one is farm machinery, one is in agri-
cuhnre. You could not say that buying out J. I. Case — I think they
did it for tax purposes, because the loss of the company, you know,
could be subtracted, the taxes, from their income tax returns. But
you could not say that Gates Rubber was promoting a monopoly in
the purchase of this firm.
Or the fact that a great corporation that produces cliickens over
here in Maryland, one of the biggest in tlio United States, which, for
some reason, does not '"ome to my mind, it is so well known ; they
are in the chicken lousiness. Well, farmers are interested in that be-
cause this corporation's net income, many, many millions of dollars,
goes into the chicken business and has little interest in whetlier tliis
business makes a profit or not. It has an integrated business, an in-
terest in feed, and so on.
So our interest in the conglomerate movement is not only anti-
trust, but the fact that it affects these individual farmers who must
get a fair price for their products if tliey stay in lar^iness.
i^ut what the effect, if I could just continue for a second or two, the
ultimate effect of the conglomerate movement is that you can offset
losses in one company, one kind of activity by profits in another, and
if vou have 100 — this particular com]:)any whose name I cannot
227
think of, they are interested in over a hundred different things, un-
related to each other. If it loses in one, it makes it up in the other.
It gives it great economic power throughout the country.
Mr. HuNGATE. Now, you mentioned problems or violations in in-
dustries such as bakeries, the bread business, the dairy business. The
witnesses that were here seemed to indicate that if you drove some-
one out of the dairy business through low-priced competition or out
of the bakery, bread business, that this was a healthy thing, that the
chief goal is the lowest prices to the consumer, and that, after all,
other people could reenter this field. If you started overpricing, if
you ran your competitor out of the dairy business or bread businass
and then raised your prices up again, my goodness, someone else would
simply reenter the field and compete with you. Do you have any experi-
ence or comment along that line?
Mr. McDonald. The end result, as we have indicated in discussion
with counsel, is one or more, usually several, companies control the
market and it is virtually impossible for a small operator to enter.
Mr. HuxGATE. In other words, what would be your minimum cap-
italization? You mentioned this Columbia, Mo., situation. That is a
city of what, 30,000 ?
Air. McDoxALD. I do not know how large it is. It is small.
Mr, HuNGATE. What would be the minimum capitalization for a
fellow who wanted to go into the dairy business profitably? He would
need maybe a herd of cows, milking machinery, coolers, trucks.
Mr. McDonald. I would say it must be substantial. I am not talk-
ino- about farmers, I am talking about processors of milk. The farm-
er does not process his milk. I would say many millions of dollars
to establish a modern plant.
Air. HuNGATE. In other words, in the instances you cited on pages
7 and 8 and again about the milk and bread, the fact is that the
smaller man did not emerge to reenter the market to compete with
the giants?
Air. AIcDoxALD. Xo, and if he did come back, what do you think
would happen ? They would cut the price again to 6 cents a half gal-
lon of milk.
Air. Hi-n(;ate. Let me ask you a question : Suppose I am on the board
of a large corporation and we decide we need to capture a certain
market and we do so by lowering prices, actually lower them to cost
or below cost, until we get our opponent driven out of business. At
tlie end of that time, I say, this is a great experience, providing the
lowest possible prices to the consumer, and we will continue doing
it, although we have lost money over 6 months or a year driving this
competitor out. Do you think sucli a director miglit be subject to
a stockholder suit for not providing the proper stewardship or stand-
ard of fiduciary relationship to the stockholders of that company?
Air. AIcDoNALD. There have been many stockholder rebellions, but I
do not recall any because of such a situation.
Air. HuNGATE. There has never been any cause of the problem that
they did not raise the prices ?
Air. AIcDoNALD. No. I remember during this Nat'/onal Tea case,
their profit was pretty good to the stockholder. It is true they lost
money, millions of dollars, in several markets — I think it was Chi-
228
cago, but anyway, in several cities, they lost money, and this was
proved. But in Texas and in Denver where a small group controls —
there were about four, I think, companies, four or five — in Denver
they controlled 70 percent of the market — I am speaking of retail
chainstores, grocery stores, now — so they were able to maintain
high prices and come out at the end of the year with a good profit.
Mr. Htjngate. One final question I have. That relates to this testi-
mony on page 11. Actually, was that not the drug case you were
discussing there, and was that not finally prosecuted, as you men-
tioned, I think, under the Sherman antitrust law ?
Mr. McDonald. That is correct.
Mr. HuNGATE. What would you think of the argument that I am
sure our previous witnesses would have made, that therefore you did
not need the Robinson-Patman Act ?
Mr. McDonald. In that instance, yes. If their attention had not
been called to it — I do not know that it was — by this other action.
It is true that the jurisdiction of the two agencies overlap and it is
so recognized. They do work together to a great extent. I do not
think the Department of Justice has ever handled a Robinson-
Patman Act case.
Mr. HuNGATE. Are there any further questions ?
(No response.)
Mr. HuNGATE. Thank you very much, Mr. McDonald, for your con-
tributions to these hearings. We appreciate your being here.
Mr. McDonald. Thank you.
Mr. HuNGATE. The next witness is Mr. IMiles W. Kirkpatrick, chair-
man of the antitrust section of the American Bar Association ; along
with Mr. Robert Pitof sky.
Gentlemen, will you please come forward ?
TESTIMONY OP MILES W. KIRKPATEICK, CHAIRMAN, ANTITRUST
SECTION, AMERICAN BAR ASSOCIATION; CHAIRMAN, AMERICAN
BAR ASSOCIATION COMMISSION TO STUDY THE FEDERAL TRADE
COMMISSION; AND ROBERT PITOESKY, COUNSEL TO AMERICAN
BAR ASSOCIATION COMMISSION TO STUDY THE FEDERAL TRADE
COMMISSION
Mr. Kirkpatrick. We have here five extra copies of our report,
which I think we shall be dealing with in part here. When I sent them
over to you originally, they were in short supply, so if I might hand
these up, it might be helpful to the course of the hearing.
Mr. HuNGATE. Thank you.
Mr. PoTviN. Mr. Chairman.
Mr. Kirkpatrick, Chairman Dingell has asked me to extend his deep
regrets to you at not being present at your arrival.
Mr. Kirkpatrick. We had the good fortune to see him in the hall-
way as we were coming in and I appreciate the difficulty he is under.
Mr. HuNGATE. Without objection, the report of the ABA commis-
sion to study the Federal Trade Commission will be received and made
part of the record of the hearings.
Are there objections?
(No response.)
229
JNIr. HuNGATE. The Chair hears none. It is so ordered.
(The report above referred to appears in the appendix at p. 335.)
Mr. KiRKPATRiCK. Mr. Chairman, members of the subcommittee, as
you know, I appear here in response to the invitation of Chairman
DingelL ]\Iy invitation came as a consequence of my being chairman of
the commission of the American Bar Association which was desig-
nated by the president of the American Bar Association pursuant to
the request of the President of the United States.
In Chairman DingelFs letter to me of September 17, he invited me
"to appear and testify concerning this report and its application to
current antitrust policy, particularly the enforcement of the Robinson-
Patman Act." Accompanying me, also at the invitation of Chairman
Dingell, is Prof. Robert Pitofslcy, the able and hard-working counsel
of the ABA commission.
With your permission, I would like to make a very brief statement
concerning the ABA commission, its membership, its objectives, and
its report.
On April 18 of this year President Nixon wrote to Mr. Gossett, pres-
ident of the American Bar Association, asking that the ABA "under-
take a professional appraisal of the present efforts of the Federal
Trade Commission in the field of consumer protection, in its enforce-
ment of the antitrust laws, and of the allocation of its resources be-
tween these two areas.''
The President of the United States also stated his hope "that such
a study would make recommendations for the future activities and
organization of the commission." President Nixon asked that the re-
port be made available to him by September 15.
President Gossett replied to President Nixon that he would prompt-
ly appoint a working study group for the purposes of formulating
the report requested by President Nixon.
President Gossett shortly thereafter announced the appointment of
the 16-member ABA commission. Because, I assume, I was chairman of
the ABA section of antitrust law, I was appointed chairman of the
commission. The balance of the commission was made up of two econo-
mists, five professors, and eight lawyers. I would like, if I may, to
identify the members of the commission and, very briefly, as set out
at pages 88 and 89 of our prmted report, comment on their creden-
tials.
Obviously, the appointments were made so as to bring to bear, in the
short time available to us, the maximum of experience and expertise
in the fields of our study. The 15 members of the commission are the
following :
Frederick M. Rowe, Washington, D.C., vice chairman of the ABA
antitrust section at that time, now chairman of the council on antitrust
and trade regulation of the Federal Bar Association ;
Jack Greenberg, New York, director-counsel for the legal defense
and education fund of the National Association for the Advancement
of Colored People ;
Thomas E. Harris, Washington, D.C., associate general counsel of
the AFL-CIO, and former special assistant in the office of the Solicitor
General ;
Richard A. Posner, Stanford University Law School professor,
230
fonner leo;al assistant on the staff of FTC and in 1967-68 oreneral
counsel of the President's Task Force on Communications Policy :
Mrs. Ellen Ash Peters, Yale Law School professor of contracts
and commercial law;
Paul G. Bower, Los Angeles attorney and former consumer counsel
of the Justice Department ;
Allen C. Holmes, Cleveland, Ohio, attorney who has long been
active in the ABA antitrust section ;
Ira M. Millstein, New York attorney, former special assistant to
the Attorney General, antitrust division : former chairman of the New
York Bar Association section of antitrust law ;
John D. French, Minneapolis attorney and former legal assistant
on the FTC staff.
Carl A. Auerbach, professor at the X^niversity of Minnesota Law
School, and former staff' director of the Committee on Internal Or-
ganization of the Administrative Conference of the United States;
Carl H. Fulda, University of Texas Law School professor, whose
subjects include administrative and antitrust law ;
Jesse W. Markham, professor of the Harvard University Graduate
School of Business Administration, and former chief economist of
FTC— 1953-55 ;
Dr. Bett}' Bock, New York, National Industrial Conference Board,
Inc.. former economic adviser to the FTC ;
Charles E. Stewart, Jr., New York attorney, chairman of the FTC
committee of the ABA antitrust section: past chairman of the trade
regulation committee of the Bar Association of the City of New York:
Harlan M. Blake. Columbia I^niversity Law School professor of
trade regulation and antiti'ust director, European Common Market
antitrust law project.
I woukl like to note that 15 of the 16 members of the ABA commis-
sion sul)scribed to and joined in our report.
In the approximate 4 months tliat were available to us over the sum-
mer, the full ABA commission met five times. In addition, working
grou]")S of the commission met upon many occasions on a variety of
separate aspects of our work.
Mr. Smith. Perha])s we should put in the record the name of the
member who did not subscribe to the report ?
Mr. KiRKPATRiCK. Yes; it was Richard A. Posner, wlio appeared be-
fore you yesterday.
Mr. Smith. I thought maybe we should have it in the record, since
he v^^as here j'-esterday.
Mr. KiRKPATRicK. Yes, sir.
We interviewed each of the five FTC commissioners collectively and
individually; a group of us met with many of the senior staff of tlie
FTC. In addition, many persons knowledgeable in the fields of our
inquiry were separately interviewed, and requests for conunents and
viewpoints were solicited from scores of public officials and private
citizens known to have special expertise in FTC and consumer pro-
tection matters.
I think that it would be helpful to this subcommittee in addressing
its questions that I assume 3'ou will address to me and Professor Pitof-
sky if I were to make three general propositions quite clear.
231
First, my commission was absolutely without any political procliv-
ity, orientation, or predisposition. The President requested and received
a "professional appraisal." Our commission's deliberations and studies
were conducted in a thorouirhly professional manner, drawing on the
experience and skills of our commission's members and staff. Needless
to say, as our report notes, "The members of the commission and of its
staff did not perform their duties as representatives of any oro^aniza-
tion or other group but as individuals. The contribution of the mem-
bers and the staff of the commission to this report is a reflection of their
own independent, personal views."
Second, there has been a good deal of press connnent on our report.
At times, the press has picked out for quotation and particularization
some of the more colorful aspects of our work.
I want to onphasize that our report was intended as a thoroughly
constructive document. We did not recommend the dismantling of the
Federal Trade Commission. We did not recommend its withdrawal
from antitrust enforcement or from the field of consumer protection.
Our recommendations were made in the belief that the FTC can and
should be a great and imaginative force in the fields of antitrust and
consumer protection.
We recognize, of course, as many connnentators have before us, that
tlie FTC has some grave deficiencies, but we were at pains to make
recommendations to expand and to add strength and effectiveness to
the Commission's operations.
Some of tlie statements in our report that were highlighted by the
press related to the staff' of the FTC. It would appear from some of
the commentary that we were uniformly critical. That is not so, and
I would like to set that matter straight and in proper pers]:>ective. In
the time and with the procedures available to us it was clear to us,