Who Should Set Prices?
LEKACHMAN, ROBERT
Who Should Set Prices? Recent antitrust suit against major electrical corporations illustrates weakness of classical theory of supply and demand By Robert Lekachman LAST MONTH, a forthright...
...What remains is the third possibility of publicly regulating oligopoly price policies...
...Our need then is for new institutional machinery designed to keep an eye on these industries...
...Still earlier...
...had vast trouble in understanding...
...The testimonials to their sharpness include not alone the oase of the electrical companies, but also the successful efforts of the Antitrust Division of the Department of Justice to prevent such mergers as the projected marriage of Bethlehem Steel and Youngstown Sheet and Tube, and to compel film companies to choose between film production and film distribution...
...It is contained in the proposition that price competition depends upon the existence of a substantial number of competitors...
...At least three possibilities are worthy of examination: (1) a continuing attempt to enforce existing antitrust legislation...
...Finally, I think that General Electric, Westinghouse, Allis-Chalmers and their co-conspirators will do the nation a service by starting some serious consideration of the publie treatment of the large business corporation...
...The political, social and economic power of the large corporation would be diminished...
...how this sequence of events accorded with price competition...
...Recent antitrust suit against major electrical corporations illustrates weakness of classical theory of supply and demand By Robert Lekachman LAST MONTH, a forthright Federal judge in a Philadelphia courtroom imposed $822,500 in fines on 21 corporations, including General Electric, Westinghouse and AllisChalmers...
...If anyone doubts this fact, he need only recall an educational episode of several years ago when Ford placed its new models on the market slightly in advance of Chevrolet...
...Moreover, a really successful coup by one oligopolist might invite antitrust prosecution...
...The innocent Senator Estes Kefauver (D.-Tenn...
...Even here a great many unanswered questions about the measurement of productivity and the identification of relevant productivity guides leaves much to be clarified...
...The advantages which make the giant companies profitable are financial, advertising, marketing and political rather than technical...
...Industry has told its story too well for its severest critics to stand much chance...
...The reaction of business opinion to such events inevitably reflects disturbance, shock and the search for plausible reassurance...
...This brings us to the second and more radical possibility...
...Advertising enlarges the market for all at the expense of other industries...
...Nationally, we seem to be moving toward wage movements which reflect productivity trends...
...Equally, it has been maintained that the consequences of oligopoly include excess profits, high barriers to the entry of new firms, impediment to the flow of technological innovation and a preference for output curtailment over price reduction in time of economic recession...
...All the same, it is highly doubtful whether many Americans share this taste for so substantial a re-organization of industrial life...
...It has not been helped by the circumstance that until he quit the post two weeks ago, General Electric Chairman Ralph Cordiner also was head of the President's Business Advisory Council, and a frequent defender in speech and print of business ethics...
...Instead, they usually represent the decisions of a few executives in a small number of companies...
...First, though, it must be noted that while the Supreme Court has from time to time wavered about many aspects of monopolistic behavior, it has been entirely consistent in its judgment that collusive price arrangements are illegal...
...Again, no reasonable soul doubted the power of the companies to raise prices generally by amounts much in excess of wage increases...
...But when the Chevrolets did emerge, it turned out that Ford had made a mistake: The new Chevrolets bore somewhat higher price tags than the new Fords...
...There is a strong and wholesome strand in American opinion which prefers to disperse rather than concentrate all types of power...
...But the significance of this case exceeds the simple moralities of crime and punishment...
...Similar rearrangements would be necessary in other industries...
...Until clear criteria of decision emerge from the experience of such an agency, its recommendations should be advisory rather than compulsory...
...Thus it is that a generous sample of American industry— steel, autos, cigarettes, chemicals and oil products among many more— finds it possible to alter prices both infrequently and simultaneously...
...If, in the spirit of Justice Brandeis, we admire the small and distrust the large, the most clean-cut remedy is fragmentation...
...It can be and has been argued that price leadership avoids industrial disorder and promotes economic stability...
...The subtle, non-collusive practices, which stem from large-scale enterprise and result in the elimination of price competition and the raising of substantial barriers against the entry of new firms, have not been checked by antitrust prosecutions...
...During several halcyon years, the American public has witnessed an annual or biennial charade played by the steelworkers and the big steel companies...
...It is ridiculous to expect the executives of the Ford Motor Company to find their prices in an impersonal market when they must face the fact that the most important factor in setting auto prices is their largest rival, General Motors...
...If, as has been estimated, the full technical economies of mass production in automobiles are available to the assemblers of 300,000500,000 units, there is no pressing technical reason which supports General Motors' capacity of over four million units...
...They may have demonstrated already that the simple, competitive ethics of American oligopolists are a frail need...
...The sentences, which climaxed one of the biggest antitrust prosecutions in Sherman Act history, followed guilty pleas in December by 19 of the companies and 35 individuals...
...The Addyston Pipe case of 1899, the Trenton Potteries case of 1927 and the Madison Oil case of 1940 are three legal landmarks which make plain the Court's position that neither economic necessity, prior legality nor altruism justifies collusive pricefixing...
...If fragmentation would cost little or nothing in efficiency, much would be gained in other realms...
...WHAT is a sensible attitude toward this discrepancy between assumption and reality...
...They ought also to suggest that even the most vigorous enforcement of the antitrust laws cannot restore old-fashioned price competition...
...The sentences set off a train of repercussions that is still gathering momentum: Aggrieved stockholders have brought suits...
...We need a superior mechanism, possibly a wage and price board initially armed with investigating and recommending authority, empowered to examine critically price and wage decisions in a number of stipulated industries, and charged with the representation of the public interest...
...Probably it has succeeded in identifying itself with progress and rising standards of life...
...It is a story which has profited from the popular, exaggerated confidence in the efficiency of very large-scale operations...
...The public has become so accustomed to these routine displays of business brotherhood that it seldom pauses to consider how far some areas of the economy have moved from really competitive behavior...
...3) an effort to regulate publicly oligopolistic price policies...
...Nobody seems especially astonished that the steel industry has serenely maintained its prices in the face of operating rates during the last year which have varied between one-third and one-half of capacity...
...It is enough to say that if we expect price competition, we shall not get it by applying the antitrust laws...
...The point need not be labored...
...This has the merits of accepting the probable truth that oligopoly is a stable organizational form...
...What the companies and their officials confessed was systematic rigging of government bids on turbines, switchgears, controls and other items of heavy electrical equipment...
...The subject is in its very early stages, but if large companies can evolve pricing criteria, so can a public agency...
...No one expects that the existence of a million unsold new cars will persuade Detroit manufacturers to lower the price of their product...
...Certainly the outside observer must share this business concern about the discrepancy between company ethics and company practices...
...The beginning of wisdom is the recognition openly as well as tacitly that in a number of important industries wage and price decisions constitute matters of public interest...
...General Electric disciplined 48 of its employes, 17 of whom were indicted, by demotions and pay cuts...
...In the language of the law, their crime was, among other things, conspiracy to divide markets, suppress competition and charge artificially high prices...
...Steel announce their prices, lesser auto or steel firms rapidly follow suit...
...Among the criteria which might apply to pricing are the desirability of permitting profits high enough to attract capital into the industry and to encourage internal research...
...The point is not a vindictive one...
...The advantages of fragmentation include substantial diminution in the power of any one corporation...
...that the antitrust laws, which apply most clearly to illegal practices like market division and collusive bidding, can do little to compel price competition...
...Genuine consumer choice might be widened...
...When the outcome of price competition is uncertain, the oligopolist tends to consider its risks too great...
...In a world of large units, a proposal to return to smaller ones has a touch of the Utopian about it...
...Misinterpretation is speedily remedied...
...The prices on these new models had to represent its executives' best guess about the intentions of the price leader, General Motors...
...Robert Lekachman, associate professor of economics at Barnard College, regularly contributes to these pages...
...and that the most sensible way to live with these facts of experience requires surveillance, investigation and publicity rather than prosecution and punishment...
...5109,000 in fines on 36 omcers of these companies...
...This is only a way of saying that in the United States manufacturing prices seldom reflect the vigorous action of supply and demand in the free markets contemplated by the classical theorists of competition...
...Ford logically divides into three automotive divisions...
...From one standpoint, the case is an extreme and illegal instance of a general tendency of American manufacturing to diminish the extent and discomfort (to businessmen) of price competition...
...How reasonable is such a proposal...
...Sixty major cities, led by Chicago Corporation Counsel John C. Melanipy, are contemplating a single consolidated damage suit against the major electrical manufacturers...
...Seldom indeed are the prices which are set in this way altered during the ensuing 12 months...
...Nevertheless, when the most that can be reasonably said for the antitrust laws is admitted, it is clear that they have failed as real weapons against the pervasive oligopoly of American manufacturing...
...The ad hoc intervention of the President or his Secretary of Labor into especially strategic negotiations is both wasteful and chancy...
...At the very least, it seems to me that since present policies will not serve some new ones are needed...
...and 30day jail terms on a General Electric vice-president and six other executives...
...Most economists agree that in oligopolistic industries, i.e., those dominated by a few large companies, leaders seek and find formal or informal ways of confining rivalry to advertising, service, quality and styling, and of adjusting prices in concert rather than in competition...
...Rapidly responding to its embarrassment, Ford promptly raised its prices...
...When General Motors or U.S...
...Scene I, performed during contract renewal periods, resulted in substantial wage increases...
...General Motors' automotive divisions alone might yield five smaller companies...
...2) a more radical adventure into corporate fragmentation...
...By custom, a single firm assumes the task in each industry of announcing its prices first...
...What makes this institutional custom possible and sensible is the large size and small numbers of the units in question, their close interdependence, the large fixed investments which are at stake and the resulting mutual recognition that price competition is irresponsible...
...Since this latest case of price-fixing was particularly flagrant, involved very high-ranking officials and covered a substantial volume of business, Judge James Cullen Ganey was clearly justified in imposing comparatively severe punishments...
...A flood of questions about the pervasiveness and quality of price-fixing arrangements, the institutional conditions which surround these violations, and the available public remedies also come to mind...
...Fragmentation is in close consonance with this honorable tradition...
...Scene II, directly afterward, resulted in industry-wide advances in prices...
...These industries, of which steel and autos are the best examples, set patterns which are widely imitated...
...In the tangled field of patent control, consent decrees over the last decade have had the effect of somewhat loosening monopoly controls over the utilization of technological novelties...
...And some of them are contrary to the public interest, at least as it is conceived in a competitive environment...
...James Carey, president of the International Union of Electrical Workers, has demanded and General Electric has agreed that stockholders should decide whether those convicted of violating the antitrust laws should be retained in the company's employ...
...By now the large corporation has secured a substantial grip on the American imagination...
...There have been occasions when unions and management cooperated in raising wages and prices for entire industries at one time...
...The tendency of trade unions and government to extend their own controls would be checked when its major cause vanished...
...Our larger companies have long since exceeded the scale of technological economy...
...Whatever the relative merits of the two sides of the argument, it is clear that oligopoly departs very far in organization and operation from the competitive assumptions which are part both of American legend and American law...
...From a technical standpoint probably little would be lost, although the answer might varv somewhat from industry to industry...
...Using the principles of size and function as guides, we might divide our largest organizations into five or more parts, as the 1911 Supreme Court decision divided Standard Oil into successor organizations...
...No collusion is necessary...
...Indeed, the rather considerable amount of decentralization of decision and managerial autonomy which that company and others extend to their subordinate units and divisions suggests that the largest corporations have to pretend to be confederations of smaller ones to avoid strangulation by their own bureaucracies...
...The control of inflation is another objective...
...Sympathy for the fallen is misdirected—and if the very top officials of General Electric really knew nothing of their subordinates' conspiracies, they come perilously close to confessing incompetent management...
...Now there is less doubt than there used to be that the antitrust laws possess teeth...
Vol. 44 • March 1961 • No. 11
