The
American
University
Law Review
VOLUME
18
DECEMBER,
1968
NUMBER
1
SOURCES OF MONOPOLY POWER: A
PHENOMENON CALLED 'PRODUCT
DIFFERENTIATION'
Charles E. Mueller*
If you can measure that of which you speak, and can express it by a number, you
know something of your subject. But if you cannot measure it, your knowledge is
meagerand unsatisfactory.
Lord Kelvin
Antitrust is one of those branches of American law with such wide
social, political, and economic significance that it has attracted-and
deservedly so-a quite flattering amount of attention from a host of nonlegal scholars, particularly historians' and economists. The members of
one of these groups, the economists, have indeed long since ceased to be
mere observers or reporters of the antitrust scene and have become
extraordinarily active participants, their empirical findings and
analytical framework now forming the backbone of American antitrust
policy. An entire branch of the economics discipline, "industrial
organization," one numbering some eight hundred practitioners
(approximately 7% of the entire profession), is now engaged solely or
almost solely in antitrust work, teaching it in university economics
departments, studying individual industries as scholars and consultants,
and testing its theoretical constructs against the facts developed in those
industry studies.
* Staff Attorney, Federal Trade Commission. Member of the Illinois Bar. The views expressed
herein are those of the author and not necessarily those of the Commission.
1. See Hofstadter, What Happened to the Antitrust Movement?, in THE PARANOID STYLE IN
AMERICAN POLITICS AND OTHER ESSAYS (1967).
2. See particularly J. BAIN, BARRIERS TO NEW COMPETITION (1956) [hereinafter cited as
BARRIERS]
and
INDUSTRIAL ORGANIZATION (1959) [hereinafter cited as ORGANIZATION].
I
THE AMERICAN UNIVERSITY LA W REVIEW
[Vol. 18
The central core of modern antitrust law rests largely on three major
economic propositions or ideas plus the empirical work designed to test
and measure the various phenomena associated with them, ideas that are
quite essential to any meaningful grasp of the problem of monopoly:
1. There are basically two prices for any product, a "competitive"
price and a "monopoly" price-and the difference between the two is
what all the fighting is about.
2. A product can be "monopolized"-i.e., sold for a supercompetitive
or monopoly price-without having its entire output controlled by a
single seller. There are in fact two types of monopoly, "single-firm
monopoly" and "collective monopoly." Moreover, there are two quite
separate and distinct forms of this latter phenomenon, collective
monopolization. On the one hand, there is the familiar example of
outright collusion on price, the situation in which all the producers of a
product agree among themselves to cease competing and to price their
joint product in the same manner as if they were all under a common
ownership and direction. There is, however, a second and far more subtle
form of collective monopolization, one that does not necessarily involve
any kind of overt collusion or agreement, namely, the so-called
"oligopolistic interdependence" found in the tighter-knit oligopolies of
most modern induistrial societies. That is to say, a certain form of
market structure that bears no particularly striking surface resemblance
to either the single-firm or collusive forms of monopolization-e.g., one
in which, say, the "four largest" sellers account for 75% of the industry's
total sales-can result in a price that is substantially identical to the one
that would have been selected by either the single-firm monopolist or by
a group of price-fixers acting in concert.
3. Monopolization can also be accomplished by means of a
phenomenon called "product differentiation," which is generally
described as the distinguishing of substitute products from one another
(by advertising and the like) and thus the creation, in the minds of buyers
of that product, of a conviction that it is superior to other products of the
same general class, a conviction that permits it to command a
supercompetitive price, one that exceeds the price being charged by other
sellers for products that are in fact of comparable quality.' In other
words, the high concentration that leads to the super-competitive or
3. Or, if there are differences in quality involved, it is the power to command a price differential
that exceedi the quality differential (the latter being measured, as will be discussed more fully below,
by the cost differences encountered, that is, by the difference between the cost of producing and
distributing Brand A versus the cost of producing and distributing the other competing brands.)
MONOPOL Y POWER
1968]
monopoly prices mentioned above is frequently the result of "product
differentiation," a development generally described as the process of first
creating an "illusion" and then selling it for more than it cost,4 the
ultimate, of course, in monopolization techniques.
I.
THE "COSTS" OF MONOPOLY
The first of these ideas, the notion of a dichotomy between a
"competitive" price, on the one hand, and a "monopoly" price, on the
other, dates back to antiquity and was already fairly well developed by
the time Adam Smith wrote the first "economics" book in 1776. "The
price of monopoly is," Smith wrote, "the highest which can be got. The
natural price, or the price of free competition, on the contrary," he
suggested, "is the lowest which can be taken, not upon every occasion
indeed, but for any considerable time together. The one is upon every
occasion the highest which can be squeezed out of the buyers, or which, it
is supposed, they will consent to give: The other is the lowest which the
sellers can afford to take, and at the same time continue their business." 5
It is impossible to exaggerate the importance of this ancient concept in
modern antitrust law, particularly in cases involving mergers and other
acts and practices that are expected to have the "effects" of either
"lessening competition" or "tending to create a monopoly."6 If one
views a merger or acquisition of, say, all the firms in an industry as
simply a transfer of sales volume from the original group of sellers to
some other seller, with no anticipated effect on the unitprice charged the
consumers of that product, then any decision to interfere with that
4. In economic analysis, "cost" is, of course, understood to include not only the traditional
business or accounting expenditures associated with producing and selling a product but a "normal"
or "competitive" profit as.well (e.g., 8% after taxes on the capital invested in the enterprise). Hence
in economic terminology; any price that exceeds "cost" is, by definition, a monopoly price. (This
notion of a "normal" profit was once explained to an early American Congress this way:
When a domestic manufacture has attained to perfection, and has engaged in it a competent
number of persons, it invariably becomes cheaper. . . . The internal competition which takes
place, soon does away with everything like monopoly, [and] by degrees reduces theprice of the
article to the minimum of a reasonableprofit on the capital employed. This accords with the
reason of the thing, and with experience.
A. Hamilton, Report on Manufactures 133, 2d Cong., 1st Sess. (1791) (emphasis added).
5. A. SMITH, THE WEALTH OF NATIONs 61 (Mod. Lib. ed. 1937) (emphasis added).
6. The more recent of the antitrust enactments, most notably the amended Anti-Merger (CellerKefauver) Act of 1950, prohibit the described acts or practices only where their effect may be to
"lessen competition" or to "tend to create a monopoly." 15 U.S.C. §§ 18, 21 (1964). Similar
standards are now being read into most of the other antitrust provisions. See generally the Sherman
Act, 15 U.S.C. §§ 1-7 (1964); the Clayton Act, 15 U.S.C. §§ 12-27 (1964); and, although
technically not an antitrust law, the Federal Trade Commission Act, 15 U.S.C. §§ 41-58 (1964).
THE AMERICA N UNIVERSITY LAW REVIEW
[Vol. 18
consolidation would presumably have to rest on an essentially political
value judgment, namely, the idea that it is more desirable in some
ultimate sense to have a large number of small firms in the country than
a small number of big ones. But a great deal more than a mere transfer
of sales volume is in fact involved in these situations. The purpose of the
acquiring firm is generally not simply to acquire more sales volume at
the same unit price, but to acquire the power to increasethe price itself a
result that is of course injurious to the consuming public regardless of its
effects-or lack of effects, as the case may be-on the competitors that
lost the sales volume in question.
The mechanics of monopoly pricing are illustrated in Figure 1, below.
In this simplified example, the cost of producing the item in question,
including a normal rate. of return on the assets employed by the
enterprise, is by assumption $1 per unit (per pound, per gallon, etc.) and
remains at that figure over a wide volume range. And because, as noted,
a competitive rate of profit is already included in that $1 "cost" figure,
that is also the price at which the firms in an effectively competitive
industry would be willing to sell it. At that price (the competitive price),
consumers of the product, as indicated by the demand curve, D, would
be willing to purchase 10 units each, for a total expenditure of $10 per
customer per period of time (e.g., per month or per year). A monopolist
taking over this industry, on the other hand, would find that its profits
could be increased by raising the price to $1.50 (Pm or the optimum
"monopoly" price). While sales are now only $7.50 per customer (at the
higher price, consumers will buy only 5 units each, and 5.times $1.50
FicuRE 1.
Price
(per unit)
$-.50
1.00
0
HGAC
I
_
I
5
10
I
15
.I
quantity (units)
7. See Buchanan & Tullock, The "Dead Hand" of Monopoly, I ANTITRUST L. & ECON. REV. 85,
88 (Summer 1968).
19681
MONOPOL Y POWER
equals $7.50), costs have dropped still more, to $5 only, leaving a total
monopoly profit (over and above the "normal" return built into the
$1.00 per unit cost figure) of $2.50. (In other words, the consumer now
pays $7.50 for a total of only five units, whereas he was formerly able to
buy, under competitive conditions, 10 units for a total of $ 10.)
Arithmetically, the aggregate loss of the individual consumer in this
case is $3.75, consisting of the $2.50 "transferred" to the monopolist in
the form of monopoly profits (5 units, with a 500 "overcharge" on each
unit) plus another sum, $1.25, represented by the shaded "welfare
triangle" 9 in Figure 1, so-called because it represents decreased
production or lost output to society as whole, not just a "private" loss to
the individual consumer in the form of excess or monopoly profits. Thus
the $2.50 is a mere "transfer" of funds from one of society's members to
another, while the $1.25 is a "leakage" from the economy as a whole,
one that diminishes by that amount its total national income (or, more
generally, its total output of goods and services, or GNP).
This hypothetical illustration has many real-life counterparts, of
course. In a recent Federal Trade Commission case, for example, some
50 bread bakers and a large supermarket chain involved in an alleged
conspiracy to fix the price of bread in Seattle, Washington, and the
surrounding area were ordered to "cease and desist" their prite fixing in
December 1964.10 Later, in an unrelated economic study," the
Commission's Bureau of Economics discovered an extraordinarily
interesting price pattern in that Seattle bread market. As shown in
Figure 212 below, bread prices there had been approximately the same as
consumers of the product, as indicated by the demand curve, D, would
be willing to purchase 10 units each, for a total expenditure of $10 per
customer per period of time (e.g., per month or per year). A monopolist
taking over this industry, on the other hand, would find that its profits
could be increased by raising the price to $1.50 (Pm or the optimum
"monopoly" price). While sales are now only $7.50 per.customer (at the
higher price, consumers will buy only 5 units each, and 5 times $1.50
8. For a fuller description of this kind of figure and its interpretation, see Ranlett & Curry,
Economic Principles:The 'Monopoly,' 'Oligopoly,"and 'Competition' Models, I ANTITRUST L. &
ECON. REv. I n. I (Summer 1968).
9. The "welfare loss" is formally defined as the difference between the competitive and
monpolistic price-quantity combinations, divided by two. Here, $10.00 (10 units, $1.00 each) minus
$7.50 (5 units, $1.50 each), equals $2.50 and that latter figure, divided by two, equals S 1.25.
10. In re Bakers of Washington, Inc., Dkt. 8309 (1964), affd sub nom, Safeway Stores, Inc. v.
FTC, 366 F.2d 795 (9th Cir. 1966), cert. denied, 386 U.S. 932 (1967).
11.FTC, ECONOMIC REPORT ONTHE BAKING INDUSTRY (1967).
12. Id. at 67.
THE AMERICAN UNIVERSITY LAW REIPIEW
[Vol. 18
the national average prior to 1954. Beginning in the middle of that year,
however, the Seattle price had started to climb higher and higher above
the national average, ultimately exceeding it by about 40 per 1-lb. loaf,
or some 20%. Then, a few weeks after the Commission's entry of its final
December 1964 "cease and desist" order, the Seattle price started to fall,
ultimately dropping all the way back to the national average. "Had this
conspiracy been nationwide-that is, had the Seattle price been
successfully established throughout the United States-the nation's
consumers would have spent about $270 million more per year for bread
than they actually spent, or some $2.7 billion more over the decade
involved."' 3
AVERAGE RETAIL PRICES FOR WHITE BREAD,
SEATTLE AND UNITED STATES
1950
1952
1954
1956
1958
1960
1950-]967
1962
1964
1966
*1eceber 1963 ond January 1964 not comparable due to a revIsion in sampling procedure..
Source: Bureau of Labor Statiotics.
How much do American consumers lose each year from monopolistic
pricing? The economists specializing in antitrust have been offering some
increasingly sophisticated insights into not only the sources of monopoly
power in the country but into the sheer magnitude of its "effects" as well.
One economist has recently estimated, for example, that monopoly
13. 1ANTITRUST L. &ECON. REV. 10 n.3 (Spring 1968).
MONOPOL Y POWER
19681
drains the American economy of some 6%of total national income'4 or
roughly $45 billion per year. Measurements of this type" are now
believed to rather seriously understate the true losses from monopoly,
however. Computed largely from published data on monopoly
profits-returns on investment over and above a normal or competitive
return-these estimates necessarily measure only the "gap" between
prices, on the one hand, and a cost-plus-normal-profit figure, on the
other.
The difficulty here, however, is that one of the elements of this latter
figure-the "cost" component-is itself inflated by monopoly, thus
producing an artificially narrow gap, one that seriously understates the
amount by which the ultimate price would be expected to fall if the
14. Kamerschen, An Estimation of the "Welfare Losses" from Monopoly in the American
Economy (unpublished doctoral dissertation, Michigan State Univ. 1964); 1 ANTITRUST L. &
EcON. REV. I n. I (Summer 1968).
15. Even the gains to the public from cases involving only "incipient" monopoly, e.g., merger
cases, sales below cost cases, and the like, are at least conceptually measurable in these or quite
similar terms. Given even crude data on (1) the unit cost of producing and distributing a product
and (2) the elasticity of demand for that product, economists can then determine the potential
"monopoly price," i.e., the price that would be charged by a rational (profit maximizing)
monopolist if the law should fail to act and the current "incipient" tendency toward monopoly be
allowed to develop into full-blown monopolization. Subtracting the known competitive price from
that potential monpoly price gives a rough approximation of the potential loss to the consumers of
that product. As such, of course, it is a presumably fair measure, to those consumers, of the
economic value of a given antitrust proceeding.
With the growing sophistication of economic analysis, such measurements are by no means
impossible now. One of the analysts mentioned above, Dr. David R. Kamerschen, has estimated
both of these essential magnitudes, cost and elasticity of demand, for all the country's major
industries.
The formula for making the monopoly price computation is a fairly simple one:
MC
P =
E
E
Where P refers to the monopoly price, MC to marginal cost, and E to elasticity of demand. For
example, if E=2 (meaning, for example, that a 10% increase in price will cause a 20% drop in sales
volume) and if marginal cost is, say, $5.00, then the profit maximizing monopoly price would be
S 10.00, a "markup" of $5.00 or 100%. Substituting in the formula:
P =
2
$5 '$52
2-
$52
1
-
1
=
$10.
And if elasticity had been, say, 1.1 instead of 2, the price would have been $55.00, a markup of
$50.00 or 1000%. Substituting:
P
$5
1.1
See generally Ranlett &Curry, supra note 8.
=
$55.
THE AMERICAN UNIVERSITY LA W REVIEW
[Vol. 18
market in question were in fact to be made effectively competitive again.
For example, another recent economic study reports that not only do
prices tend to be some 35% higher during price fixing conspiracies, but
that the conspirators tend to inflate their costs (e.g., in higher executive
salaries) so drastically as to virtually invalidate estimates of monopoly
pricing based solely on price-cost (profit) data.'"
Still more recent research suggests further, however, that the annual
costs of monopoly may be even greater than the sum of those two items
mentioned above, i.e., the excess or monopoly profits plus the losses due
to the grosser inefficiencies associated with non-competitive industries.
This third loss-and it may well turn out to be the largest of the three-is
said to stem from the tendency of monopoly to discourageinvention and
innovation. In the 1940's and 1950's, Schumpeter's rather spectacular
hypothesis 7 that monopoly was itself the source of invention and
innovation-i.e., that monopoly supplies both the incentive and the
wherewithal for the building of the kind of giant laboratories that were
supposed to be the producers of 20th century technology-is now widely
conceded to be crumbling before a mounting tide of empirical evidence
that precisely the opposite is the case,'" that monopoly is in fact a
powerful deterrent to the development of the new and the better. Thus a
distinguished economist, Dr. Peter Costello of Smith College, has
recently reported that the drug industry's inventive record during the
past two decades, its success at discovering and marketing significant
new drugs, has corresponded with rather startling precision to the
periods in which the industry was relatively free of conspiracy. Thus in
the five-year period preceding the tetracycline conspiracy studied there.
1948 through 1953, no less than four broad spectrum drugs had been
introduced by three of the firms involved. "For the following 13 years,
on the other hand, these coinciding with the establishment and
maintenance of a monopoly through collusion among the firms in the
industry, only two very minor innovations reached the market." And the
most recent period, Dr. Costello reports, "one marked by the entry of a
number of generic suppliers and the willingness of patent holders to
license at least a select few, further supports the Hamberg hypothesis
(that monopoly power is a deterrent to innovation) by suggesting that
16. Erickson, Price Fixing Under the Sherman Act: Case Studies in Conspiracy (unpublished
doctoral dissertation, Michigan State Univ. 1965); 1 ANTITRUST L. & ECON. REV. I (Summer
1968).
17. J. SCHUMPETER, CAPITALISM, SOCIALISM AND DEMOCRACY (1942).
18. See generally W. Mueller, Comment on Galbraith's"New IndustrialState," I ANTITRUST L.
& ECON. REV. 29, 33-57 (Winter 1967).
MONOPOLY POWER
1968]
the pace of innovation may well be increasing again now.'
9
Indeed, with further empirical research here and, perhaps more
importantly, with further refinement of the tools of measurement used in
this area, it might very well turn out that the so-called "microeconomic"
losses from monopoly will be found to equal orperhapsexceed the rather
grim magnitudes that are said to be drained out of the economy through
a rupture in that other side of the economic coin, a lesion attributed to
the "macroeconomic" problem of insufficient aggregate demand to keep
the country's total resources-particularly its available labor
force-fully employed."
II.
CONCENTRATION AND "OLIGOPOLISTIC INTERDEPENDENCE"
While the notion of a "monopoly price" has been known, as noted, for
hundreds of years, the idea that such a price could emerge in an industry
without either (a) single-firm control of its entire production or (b) a
collusive agreement that bound all of its sellers to behave as a single
entity, is of comparatively recent vintage and is indeed not widely
understood by many presumably expert legal practitioners in the
antitrust field today. The explanation for this comparative neglect
probably lies, at least in large measure, in the fact that the basic principle
involved, "oligopolistic interdependence," like the idea of the monopoly
price, turns on what is in essence a set of mathematical relationships, an
area in which lawyers are not generally thought to be either notably
comfortable or outstandingly proficient.
The concept itself-the principle that price competition tends to be
blunted by a sense of mutual "interdependence" when individual market
shares reach a certain level-was first introduced into the mainstream of
19. Costello, The Tetracycline Conspiracy: Structure, Conduct, and Performance in the Drug
Industry, I ANTITRUST L. & ECON. REv. 13,41 n. 53 (Summer 1968).
20. "Macroeconomic" losses are measured in terms of how much an economy falls short of its
potential aggregate output of goods and services (Gross National Product or GNP), i.e., the
difference between what a nation could have produced if its labor force had been fully employed, on
the one hand, and what it did in fact produce, on the other. Thus, with "full" employment (defined
as an unemployment rate of about 4%), it has been estimated that the American economy fell short
of its potential output by roughly $40 billion in the recession year of 1960, the difference between an
actual GNP of $504 billion in that year and a potential GNP of $544 billion. See SCHULTZE,
NATIONAL INCOME ANALiSIS
112-13 (1964). In the depression decade of 1930 to 1940, this kind of
loss totalled approximately $600 billion, or about $60 billion per year. Id. And even in the much
more prosperous decade just past, these losses have remained appallingly high: "At the trough of the
recession in the first quarter of 1961, the 'gap' between actual and potential GNP amounted to $57
billion (1966 prices). From 1958 to 1965, the cumulative gap totaled $260 billion." ECONOMIC
REPORT OF THE PRESIDENT
42-43 (1967). As indicated in the chart below, this "gap" between the
THE AMERICAN UNIVERSITY LA W REVIEW
[Vol. 18
economic analysis in 1933 by Chamberlin and Robinson." The physical
phenomena involved, that is, the particular "concentration" patterns
that had been emerging in the American economy in the preceding
decades and the conduct and performance characteristics they had given
rise to, is probably due in large measure to the country's early antitrust
policies themselves. Notwithstanding the relatively unexciting level of
enforcement activity during the years immediately following the passage
of the Sherman Act in 1890 (Teddy, Roosevelt's Antitrust Division
nation's ability to produce and its actual output has been continuously narrowed since 1961 and was
closed in 1966:
Gross National Product, Actual and Potential,
and Unemployment Rate
BILLIONS
OF DOLLARS* (ratio scale)
700
GROSS
NATIONAL PRODUCT
IN 1958PRICES
650
600
550
500
450
.I
I
4001
!
I
I
I
I
I
*SEASONALLY
ADJUSTED
ANNUALRATES.
-JTREND LINE OF 34% THROUGH
MIDDLEOF 1955TO 1962IV. 3%%FROM1962IV TO 1965IV, AID 4%FROM1965IV TO 1966IV.
21. E.
CHAMBERLIN, THE
THEORY OF
MONOPOLISTIC
ECONOMICS OF IMPERFECT COMPETITION (1933).
COMPETITION
(1933); J.
ROBINSON,
19681
MONOPOLY POWER
boasted five lawyers and four stenographers at the height of its famous
"trust-busting" career), the courts had made it abundantly clear that, at
least in principle, both single-firm and collusive monopolization were
wholly outside the pale of permissible industrial activity." This judicial
blocking of those two obvious forms of monopolization thus put a
premium on the search for a legally acceptable substitute way of
accomplishing the same end, namely, the avoidance of price competition
without, however, displaying the overt trappings associated with actual
collusion among the firms in an industry or the acquisition, by any one
firm, of a "market share" large enough to attract the hostile scrutiny of
the courts.
The solution, from industry's point of view, probably emerged more
by accident than from any especially precocious insights into the future
developments of economic theory. While the courts were unwilling to
tolerate either a firm with 100% of a market or outright "agreements" to
maintain prices at a monopoly level, they showed no propensity to
"bust" challenged industries down to anything even remotely
approadhing an "atomistic" market structure. Indeed, so lenient were
the courts in this regard that, as recently as 1945, one of the ablest of
American judges could declare that, while 90% of a market did indeed
constitute a "monopoly," it was "doubtful whether 60 or 64% would be
enough; and certainly 33% is not." 3 If it was permissible, however, for a
single firm to hold 33% of a market without fear of successful challenge
by the antitrust enforcement authorities, then little else was really needed
to retain, if not the form, then surely the substance of monopoly in
American industry. And so the goal of industry statesmen today is,
indeed, not to "monopolize" a market, which is illegal, but to
"oligopolize" it, which-at least in so many words-is not. The result,
of course, in terms of the prices paid by the public, can be and frequently
is substantially the same in both cases.
A host of empirical studies by economists has fairly well established
that, when a given market reaches a certain "concentration" stage-the
boundary is generally placed at the point where the "four-largest" firms
in the industry have roughly 50% or more of its total sales or, what is
about the same thing, where the "eight-largest" have 70% or more 4-a
mechanism tends to be triggered that causes the price to start climbing,
22. Standard Oil Co. v. United States, 221 U.S. 1 (1911); United States v. Addyston Pipe &Steel
Co., 85 F. 271 (6th Cir. 1898).
23. United States v. Aluminum Co. of America, 148 F.2d 416,424 (2d Cir. 1945).
24. See the studies cited in C. Mueller, The New Antitrust: A "Structural" Approach, 1
ANTITRUST L. & ECON. REv. 87,92 n. 11, 117 n. 46 (Winter 1967).
THE AMERICAN UNIVERSITY LA W REVIEW
[Vol. 18
as in Figure 1, above, up from the "competitive floor" ($1.00 in that
example) and toward the "monopoly ceiling" ($1.50 there).
This mechanism itself, the phenomenon of "oligopolistic
interdependence," stems simply, as noted, from a set of numerical
relationships. Other things being equal, one can-and generally
should-expect a quite radically different price to emerge in an industry
where, say, there are 100 firms with 1% of the market each and one
where there are only four firms, each with 25% of the market. In general,
a firm with only 1% of the market is so small a factor in it that virtually
no price movement it could rationally make would have any noticeable
effect on any of the other 99 members of the industry. If it lowered its
price sufficiently to double its own market share, for example-from,
say, 1% to 2%-the extra volume gained at the expense of its rivals would
be so small (a loss of only about 1% of its total sales by each of those 99
other firms) that none of them would be expected to take any notice of it.
In effect, then, the individual firm in such an "atomistic" industry is free
to, and does in fact, price with a sense of complete "independence," this
being based on a quite reasonable conviction that its rivals will pay no
attention to its price changes and thus will not respond by lowering their
own prices. Pricing here is thus an entirely individual affair; a price
increase or decrease by the individual firm is just that and no more, as
contrasted with the situation in the highly concentrated industries where
a price change by the individual firm must necessarily be a price change
for the industry as a whole.
Consider, for example, an industry where there are only four firms,
each with 25% of the market. To double its market share-from 25% to
50%-the individual firm would have to gain an additional 25 percentage
points from its three rivals, or just over eight percentage points from
each of them. A loss of one-third of its entire market (1/3 of the 25%
held by each of the three) obviously could not and would not be tolerated
by any of those other firms and they would thus be compelled to reply
with a matching price cut of their own. This would of course nullify the
price advantage of the initiating firm and, with the market shares
presumably settling back down to their former pattern again, each of the
four firms would once more hold about 25% of the industry's total sales.
But now they would all presumably be operating at a lower profit level.
Unless the industry as a whole had previously (and irrationally) been
pricing above the optimum monopoly price itself ($1.50 in Figure 1,
above), whatever extra volume consumers could be expected to purchase
at the lower industry price would not be sufficient to offset the losses due
to the lower unit price itself In short, each of the four firms now has the
1968]
MONOPOL Y POWER
same share of the total "pie" as before (25%), but the size of thepie itself
has now "shrunk." In time, this mistake will be recognized by the four
firms and rectified. One of them (presumably the "price leader") will,
tentatively advance its own price toward the optimum monopoly level
25
(e.g., toward the $1.50 price in Figure 1), and the others, recognizing
that their own profits can be increased only by an increase in the
industrywide price, will go along with that price hike, thus "validating,"
as the terminology goes, the "price leader's" leadership.
The point, of course, is that the consuming public will be paying a
supercompetitive or monopoly price for the product involved here (one
somewhere between the competitive price of $1.00 in Figure 1 and the
"optimum" monopoly price of $1.50) and that this undesirable result
has been caused by nothing more exciting than a particular group of
numerical relationships or "set of numbers." There has been no
"monopolization" of the market in the grand tradition of the America's
19th century "robber barons," the single-firm acquisition of 100% of a
market .by below-cost pricing, corruption of legislatures, or other such
spectacular techniques. There has been no "conspiracy," no "contact"
between the four firms, no "meeting by twilight of sinister persons with
pointed hats close together, no collusion of any kind. There has been,
in short, nothing to which an antitrust statute-or at least one
interpreted as prohibiting only collusion, single-firm monopolization,
'and the general paraphernalia associated with those two
phenomena-can apply. And understandably so, since an entirely
different problem is involved here, one that has nothing to do with either
of those two practices. Thus a price-fixing order in such a case, one
directing those four firms holding 25% of the market each to stop
engaging in "conscious parallelism"-to stop "matching" each other's
prices-would be roughly tantamount to commanding water to flow
uphill. It is hardly surprising that such orders, commanding, as they do,
patently irrational behavior on the part of the firms involved, have not
25. There is of course a large element of "trial and error" in oligopolistic pricing. But the same
force is at work on the "upward" as well as on the "downward" side of these price movements. Ifthe
leader advances his own price and one or more of the others fails to follow, he must rescind his own
price increase immediately, on pain of suffering a crushing loss of volume. The others know
this-that he must come back down if they do not go up-and hence understand that there is no
advantage to be gained in refusing to follow. On the contrary, they understand very clearly that, by
refusing to go along, they are deliberately foregoing increased profits, an action that is plainly
irrational and not to be expected with any great frequency.
26. Hamilton & Till, Antitrust in Action, in TEMPORARY NATIONAL EcONOMIC COMMITTEE,
MONOGRAPH
No. 16 (1940).
THE AMERICAN UNIVERSITY LA W REVIEW
[Vol. 18
been notably successful in bringing competitive pricing to industries of
this character."
III.
CONCENTRATION AND "PRODUCT DIFFERENTIATION"
The various contributing "causes" of concentration are of course
many and complex. In general, however, they can be divided into two
broad categories, (a) those associated with "efficiency" considerations
(scale economies in production, distribution, or both) and (b) those
associated with deliberate efforts on the part of the firms in specific
industries to monopolize (or "oligopolize") them through certain
"concentration increasing" acts or practices, techniques designed to
artificially "bunch" the industry's total sales in the hands of one or more
of its larger members and impose disadvantages ("entry barriers") on
potential entrants from the outside. These artificial devices include, for
example, "non-efficiency" mergers, vertical integration, patent control,
product differentiation, and the like, a host of other strategic moves
that business firms can take to reduce the competitive pressure in their
industry and acquire the power to charge a supercompetitive price.
There are, however, a number of opposing or offsetting forces at work
in the economy, "concentration-deterring" forces that exert a constant
pressure toward less concentration, rather than more. Professor Bain
considers the three most significant of these to be (1) the antitrust laws;
(2) the natural or "psychological" desire of most businessmen to
maintain their individual "sovereignty," a very human character or
personality trait that makes most businessmen extremely reluctant to
surrender their personal decision-making prerogative to the collective
will inherent in, for example, collusive arrangements and mergers; and
(3) the steady growth of the American economy as a whole, with its
accompanying enlargement of the individual industries in it, a
phenomenon that generally encourages new entry and thus reduces the
percentage "share" of the larger, more firmly established
organizations.5
The critical issue here, of course, centers on the question of whether
concentration is currently increasing or decreasing in the American
27. One of the economists mentioned above, Dr. Walter B. Erickson, is said to have reported that
"itructural forces (particularly the number of firms) are of overriding importance in making
conspiracy possible and that the legal remedies selected in the past have been generally ineffective in
stopping the price fixing, largely because (a) the fines and other sanctions imposed have invariably
been smaller than the profits earned during the conspiracies and (b) the orders and decrees issued
have failed to attack the industry structures that made the conspiracies possible in the first place."
ANTITRUST L. & ECON. REV., supra note 16.
28. J.
BAIN, ORGANIZATION
182-84 (1959).
19681
MONOPOLY
POWER
economy-i.e., whether the "monopoly losses" discussed above are
becoming more or less burdensome to the public-and, if there is such a
growth of that burden, of identifying the particular forces that are
causing that unacceptable result. To anticipate the empirical findings
reported below, approximately 25% of American manufacturing (or
roughly 10% or so of the country's total economic activity) has been
effectively "oligopolized"-reduced into so few hands that price
habitually and persistently exceeds the competitive level. That is to say,
"tight-knit oligopoly," the kind of market structure that, empirically, is
found to be most commonly associated with supercompetitive pricing
(generally, as noted, those displaying four-firm concentration ratios of
50% or more), and thus most of the losses associated with monopoly (or
oligopoly) in America, stem largely from the activities of a relatively
small but critically important sector of the economy, a group of
generally very large manufacturing firms that, while they control only
about 10% of the nation's economic activity, exercise a significantly
disproportionate share of its aggregate pricing power.
While the "oligopolized" sector of the economy is not currently
growing at the expense of the competitive sector, to put the situation in
these terms can be misleading. The fact is that concentration is
decreasing in one sector of American manufacturing and increasing in
another, with the apparently coincidental result that, overall, there has
been no significant change in recent years in the share controlled by the
tight-knit oligopolies as a group. More significantly, however, a failure
to consider these two manufacturing sectors separately conceals the
causal forces at work in both of them, the forces that are causing
concentration to fall in one and rise in the other. Recent empirical
studies indicate that concentration is falling in the country's "'producer
goods" sector (so-called "heavy" manufacturing) and is increasingin its
"consumer goods" sector (so-called "light" manufacturing). As
discussed below, the former is occurring largely because (1) the growth
rate of most heavy American manufacturing industries has significantly
outpaced both the growth capacity of the larger established firms in
those industries and the requirements of "scale" in them, if any, i.e., the
increased size of most such industries and the "technological
developments" they've enjoyed in recent years have generally combined
to reduce rather than enlarge the "share" needed by the individual firm
in America's heavy manufacturing industries -in order to produce at
optimum "efficiency" (minimum per-unit cost), and because (2) a fairly
effective anti-merger policy, particularly in the area of "horizontal" and
"vertical" mergers, has prevented the dominant established firms from
THE AMERICAN UNIVERSITY LAW REVIEW
[Vol. 18
using that acquisition technique to retain their earlier market shares.
In the consumer goods sector of American manufacturing, on the
other hand-the sector where the "scale economies" supposedly
produced by 20th century technology are considered relatively
unimportant-concentration has been increasing through the workings
of a phenomenon called "product differentiation," particularly the use
of (1) elaborate networks of "exclusive dealing" retail outlets and (2)
vast promotional expenditures that act as barriers to prevent the kind of
steady entry that has successfully eroded such a significant part of the
market power formerly enjoyed by some of the dominant firms in the
heavy manufacturing sector.
Analysis of the empirical data on "concentration" requires a brief
mention of several preliminary definitional concepts. First, the term
"concentration" itself refers, in general, to both the number and the size
distributionof the firms present in some given economic arena, that is, to
the "share" -or percentage of all sales in some area held by some
relatively small number of firms, e.g., by the 4-largest, the 8-largest, the
50-largest, or the 200-largest. Secondly, however, there are two rather
widely differing but equally valid concepts of "concentration" that turn
on the breadth of the economic "universe" in which the measurement in
question is to take place. One of these, called "market concentration,"
refers to the share held by the 4-largest or 8-largest firms in a particular
industry or market; the other, "aggregate concentration," refers to the
share of sales of the economy as a whole held by the 50-largest or 200largest firms in the nation. There are two basic reasons, of course, for
sharply differentiating these two ideas. First, the distinction is necessary
in order to answer the basic question mentioned above, "Is
'concentration' increasing in the United States?" By the first
measure-"market concentration"-there has been no general-increase
in the past two decades; by the second measure-"aggregate
concentration"-there has been a quite significant increase, one due
largely to increasing "'conglomeration," a process that reduces the
number of firms in the economy as a whole without causing a
corresponding reduction in the number of firms in any particular
industry. 9 Secondly, these two measures are relevant, as suggested
above, to two entirely different substantive questions. The first one, the
share held by the 4-largest or 8-largest firms in a specific industry or
29. If Behemoth Industries, Inc. acquires twenty smaller firms, each in an industry with ten
sellers, the total number of firms in the nation will have been reduced by 20, but each of the affected
industries will still have 10 sellers in them, the conglomerate acquirer simply having been substituted
for each of the acquired firms in each of the host industries.
MONOPOLY POWER
1968]
"market" is a measure of the intensity or effectiveness of the competitive
rivalry in that industry and is thus relevant to the traditional economic
questions of monopoly and competition. The other one, the shares of the
nation's total, economywide sales or assets held by the 50-largest or 200largest firms, on the other hand, does not speak directly to the state of
competition in the economy but measures primarily, instead, a politicosocial phenomenon, the "distribution of power" within the society in
question.3 0
"Aggregate" or economywide concentration has indeed been
increasing at a fairly rapid rate in the past two decades. As indicated in
Table 1, below, the share of the country's total manufacturing assets3
held by the 200-largest manufacturing corporations increased from
46.7% in 1950 to 55.4% in 1965, an increase of 8.7 percentage points:
Table 1
Concentration of Total Manufacturing Assets, 1950 and 196532
Percent of Total Assets
Corporate Size Group
5
10
20
50
100
200
largest
largest
largest
largest
largest
largest
1950
1965
9.6%
14.5
20.7
30.2
38.6
46.7
11.8%
18.0
24.6
35.2
45.4
55.4
30. For example, there is no theoretical reason to suppose that the effectiveness of competition in
any single industry would in any way be lessened if the "aggregate" share of the country's economic
activity accounted for by the 200 largest corporations should increase from its present 55.4% (based
on 1965 data) to, say, a full 100%. Assuming an even distribution of sales among those 200 largest
within each industry, the result would be, for each such industry, 200 competing sellers, each with
1/2 of 1% of the market-a "perfectly competitive" market structure by any standard, one that
would presumably result in an ideal or optimum performance in all particulars, including prices,
costs, and technological improvement rates.
In practice, of course, there is rarely any such "even" distribution of market shares throughout
any broad economic area. Firms engaged in extensive "conglomeration" tend to operate not merely
in many different industries but to be "leaders" in all or virtually all of them, i.e.. to hold, if not the
single largest market share in each, one that at least places them among the "four largest" in those
various product markets.
There are some commentators who believe that the sheer size generally associated with the larger
conglomerates tends to generate its own form of "market power,". one that permits them to engage
in a host of anticompetitive practices-price discrimination, tying arrangements, reciprocity,
subsidized expansion, "lobbying" and the like-without regard to their possession of a significant
share of the total sales in any particular market. See, e.g., Edwards, ConglomerateBigness as a
Source of Power, in NATIONAL BUR. OF ECON. RESCH., BusINESS CONCENTRATION AND PRICE
POLICY 331 (1955).
31. Both the term "manufacturing" and the term "assets" require a brief note of explanation.
THE AMERICAN UNIVERSITY LA W REVIEW
[Vol. IS
Concentration data at the industry or "market" level is not as readily
available for the earlier years and hence does not permit the sharp yearto-year comparisons for all of the country's 417 manufacturing
industries33 that are possible when dealing with only the 200 or less of the
nation's largest corporations. Some idea of what is involved can be
gotten from some relatively recent and complete 1963 data, however. As
indicated in Table 2, below, some 27% of United States manufacturing
output was produced by "tight oligopolies" in that year, i.e., by
industries in which the 4-largest firms accounted for 50% or more of
the industry's total sales. 4
Table 2
Distribution of 417 Manufacturing Industries by 4-Firm
Concentration-Radio Quartiles, 196335
Concentration
Quartile
75%-100%
50%- 74%
25%- 49%
0%- 24%
Industries
Number
Percent
29
83
165
140
7%
20%
39%
34%
Shipments
Value
Percent
(Billions)
$ 29
$ 70
$132
$127
7%
20%
27%
36%
A study of 215 essentially comparable manufacturing industries (total
sales of $181.5 billion in 1963) suggests that there has been no significant
Concentration data is available in a reasonably complete form for only the manufacturing sector
of the economy, rarely for the others. However, it is the largest of the major sectors (accounting for
somewhat less than half of the nation's total economic activity) and, because it strongly influences
most of the others, is generally considered the most important of them.
One can get slightly different aggregate concentration figures by measuring them not in terms of
manufacturing "assets" but in terms of either "value added" (sales less cost of inputs bought from
other industries) or "profits." The figures used here are the most commonly used and are generally
considered reasonably good measures of the economic phenomenon in question.
32. Statement by Dr. Willard F. Mueller, Hearings on the Status and Future of Small Business in the American Economy, Before the Sen. Comm. on Small Business, 90th Cong., 1st Sess.,
pt. 2 at 468 (Comm. Print 1967).
33. Those 417 industries (4-digit SIC or Standard Industrial Classification industries) cover
roughly 185,000 manufacturing corporations and another 230,000 non-corporate manufacturing
firms.
34. Empirical studies suggest that this particular concentration ratio, a 4-firm share of 50% or
more, marks something of a "threshold," a point on a spectrum above which the industry's
members are able to charge prices significantly above a competitive level, below which they are not.
See C. Mueller, supra note 24.
35. W. Mueller, supra note 32, at 474.
MONOPOLY POWER
19681
upward trend in concentration at the industry or "market" level since
1947, i.e., that the number of industries classified as "tight oligopolies,"
those that make up the core of what we call the "monopoly problem" in
the United States, appears to have remained fairly stable. More
specifically, there have been increases in concentration in some
industries, but this has been at least offset by decreases in others, with the
net result being,' overall, a virtual "no change" situation. This is
illustrated in Table 3, below.
Table 3
Number of Industries and Value of Shipments by Changes
in 4-Firm Concentration Ratios, 1947-1963 3
Industries in which
4-firm concentration
ratio:
Increased by 3 percentage
Number of
Industries
Percent Distribution
of Shipments
points or more
81
33%
Remained unchanged37
46
19%
Decreasedby 3 percentage
points or more
88
48%
The critical finding emerging from this study of concentration
patterns over time, however, is the fact that this apparently static
situation conceals some enormously significant changes in the two major
sectors of American manufacturing, the "producer goods" sector and
the "consumer goods" component. In brief, concentration has been
declining in the former and increasing in the latter, the two changes
roughly cancelling, each other out and thus producing a misleading
surface picture of an "unchanging" or static market situation. In
addition, within the "consumer goods" group itself, the increases in
concentration are bunched primarily in those industries that sell "highly
differentiated" products (as contrasted with "undifferentiated" and
"moderately differentiated" products)."
Thus in the study of the 215 comparable manufacturing industries
mentioned above, 56 of the producer goods industries (accounting for
58% of the total shipments of that group) showed a decrease of 3% or
36. Id. at 479.
37. Changed less than 3 percentage points. Id.
38. In terms of the two primary classifications-by number of industries and dollar volume of
[Vol. 18
THE AMERICAN UNIVERSITY LA W REVIEW
more in the share held by the 4-largest firms, while only 32 of the
consumer goods industries (35% of that group's sales) showed such a
decrease in concentration. And when the consumer goods group itself is
broken down according to the degree of "product differentiation" found
in the particular industry, 19 of the "undifferentiated" industries (67% of
that group's sales) showed a similar drop of 3% or more in the share of
the top 4, while among the "highly differentiated" group, only 3
industries (23% of the group's sales) showed such a fall in
concentration.39 (Two of the others showed no significant change and 10,
those enjoying 63% of the group's total shipments, posted an increase of
3 percentage points or more.)
Table 4.
Number of Industries and Value of Shipments by Changes in
4-Firm Concentration Ratios, 1947-6340
Industries in Which
4-Firm Concentration
Ratio:
Consumer Goods
Producer Goods
No. of
Industries
Percent
of
Shipments
No. of
Industries
Percent
of
Shipments
points or more
34
20%
47
50%
Remained unchanged
30
22%
16
16%
Decreased by 3 percentage
points or more
56
58%
32
35%
Increasedby 3 percentage
sales-the 215 industries are broken down as follows:
Type of Industry
Producer Goods
Consumer Goods
Undifferentiated
Moderately Differentiated
Highly Differentiated
No. of Industries
Industry Shipments
120
$100,196,000,000
95
41
39
15
81,333,000,000
20,101,000,000
30,819,000,000
30,413,000,000
39. These are apparently accounted for by special circumstances in these particular industries,
e.g., by a broadening of the "industry" itself due to the development and introduction of new
products into the general product class in question.
40. W. Mueller, supra note 32, at 479.
19681
MONOPOLY POWER
Table 5.
Number of Industries and Percentage of Shipments by Changes in
Concentration, 1947-6341
Industries in Which
4-Firm Concentration
Consumer Goods Industries
Ratio:
Undifferentiated
Moderately
Differ.
No. of Percent No. of Percent
Dist.
Ind.
Dist.
Ind.
Highly
Differ.
No. of
Ind.
%
Dist.
Increasedby 3 percentage
points or more
13
17%
24
57%
10
63%
Remained unchanged
9
16%
5
17%
2
13%
Decreasedby 3 percentage
points or more
19
67%
10
26%
3
23%
In summary, the finding here is that the phenomenon of increasing
concentration at the industry or "market" level is prinarily one
associated with "consumer goods" industries first and, within that
relatively broad category, with "moderately differentiated" and "highly
differentiated" products. "Almost two and a half times as many
moderately differentiated consumer goods industries experienced
concentration increases as experienced decreases, and over three times as
many highly differentiated consumer goods industries experienced
increases as decreases.""2
This data bears out, then, the earlier findings on this point by the
pioneer in the field, Dr. Joe S. Bain of Berkeley." After an intensive
study of 20 major manufacturing industries, he assessed the relative
importance of the three types of entry barriers ("scale economy"
disadvantages, "absolute cost" disadvantages, and "product
differentiation" disadvantages) as follows. First, he concluded that
"scale economies appear to be a fairly pervasive source of rather mild
41. Id.
42. Id. at 482 (emphasis added). Changes in the number of firms in these industries were also
found to be closely associated with the degree of product differentiation present. "The highly
differentiated industries experienced a 19 percent decline in the number of companies, whereas the
undifferentiated product industries experienced an increaseof6 percent." Id. (emphasis added).
43. J.
BAIN, BARRIERS; ORGANIZATION.
THE AMERICAN UNIVERSITY LA W REVIEW
[Vol. 18
barriers to entry" in most industries but only a "relatively infrequent
source of high barriers to entry, having this influence in probably no
more than 15 or 20 per cent of all manufacturing industries."" And
" 'absolute-cost' advantages of established firms, aside possibly from
those connected with large capital requirements, do not appear (from the
industries sampled) to be a frequent source of important barriers to
entry. In most industries," he found, "entrants would be at a nominal or
transitory disadvantage in acquiring talented management personnel,
production know-how, and perhaps other essential ingredients of an
efficient productive operation, but in almost no case did these
disadvantagesappearto impose more than a slight barrierto entry."I'
The "product differentiation advantages" of the established firms, on
the other hand, were found to be not only a somewhat more frequent
source of at least moderate barriers but "a much more important source
of great or high barriers to entry. In all but three of thirteen consumergoods industries (or industry segments) which were examined, productdifferentiation barriers were adjudged to be either moderate or high
... I46 Of the six industries in which Bain found "very high" entry
barriers (those that confer on established firms the ability to raise their
prices an estimated 10% or more above the competitive level without
inducing entry by newcomers), "product differentiation" was either
the dominant factor or a strong contributing factor. 7
In short, the important cases of monopoly power, those in which the
power to price above the competitive level is present in genuinely
significant amounts, arise primarily out of a phenomenon called
"product differentiation."
IV.
MEASUREMENTS OF "PRODUCT DIFFERENTIATION"
As noted above, "product differentiation" refers to the distinguishing
or setting apart of substitute products from each other in the minds of
buyers. If there are, say, 10 producers in the "widget" industry, and if
there is no "product differentiation" present-i.e., if it is a homogeneous
44. J. BAIN, ORGANIZATION, supra note 2 at 249 (emphasis added).
45. Id. at 250 (emphasis added). Patents and resource control (deposits of natural resources)
rasied significant barriers to entry in only three of the twenty industries sampled. Id. One other entry
deterrent of the "absolute cost" type, "capital requirements" (higher interests costs that new
entrants are generally expected to face), was considered significant in about half the cases, but its
magnitude has remained largely unmeasurable.
46. Id. at 249 (emphasis added). The industries named were: automobiles, cigarettes, quality
fountain pens, distilled liquor, rubber tires, soap, high quality men's shoes, petroleum products,
consumer brand flour and canned specialty goods. Id.
47. Id.at 247, 262.
1968]
MONOPOLY
POWER
product, one with well-known qualities that remain substantially the
same whether produced by Firm A or Firm B-then consumers of the
product will be relatively indifferent as to whose widgets they purchase.
This indifference, in turn, tends to have a very significant effect on
another critical factor, "concentration." It means, in short, that
consumers of the product, having no pre-determined "preference
patterns" programmed into them, will tend to distribute their patronage
among the 10 competing producers on an essentially random or chance
basis, one that, over the long run, would tend to produce a fairly even
division of the market between them, e.g., to distribute roughly 10% of it
to each of the 10 producers. For example, if a given supermarket displays
on its shelves 10 "brands" of a completely undifferentiatedproduct (and
if those 10 "brands" are sufficiently rotated in their respective "shelf
positions" from time to time to avoid giving one or more of them the
preferential "eye level" spots where the housewife is known to do a
disproportionate amount of her buying), the long-term result would
predictably be, in accordance with well-known principles of probability,
a quite equal division of the store's total sales of that product among the
10 competing firms.
It is the function of "product differentiation" to disrupt this
"randominzation" of the consumer's choices, to build into the shopper's
consciousness a "bias" that will unerringly lead her-other things being
equal-to "prefer" the version of the product made by Firm A over the
version of it made by Firm B and the others, to make a pre-determined
"knee-jerk" or reflex choice by reaching for the one and avoiding the
others.
The qualifying clause, "other things being equal," is important here,
however, and leads to the vital concept of measurement in this area.
Once "product differentiation" has been introduced into an industry,
consumers of the product are no longer indifferent as to which of the
several competing versions of the product they will buy. In the
supermarket experiment just mentioned, for example, the analyst might
learn that, say, so long as the price of all 10 of the brands remained the
same, 50% of all consumers were persistently buying Brand A, with the
other 50% being divided in varying proportions among the other nine
competitors-a highly "skewed" or unequal distribution of the market,
one with a high degree of "concentration" in the hands of one firm. It
might be further found, however, that, with, say, a 10% increase in the
price of Brand A-and with no corresponding increase in the prices of
the other nine competing brands-Brand A's share would fall to, say,
only 35%. And, with a still further increase in price-to, say, 25% above
THE AMERICAN UNIVERSITY LA W REVIEW
[Vol. 18
that of its rivals-Brand A's share might fall all the way down to its
"normal" or random share of 10%.
It is from this latter point that measurements of "product
differentiation" are in practice made. Thus the height of a firm's
"product differentiation" advantage over its competitors is measured by
the extent to which it can raise its prices over theirs without losing
market share to them. Put another way, it is a measure of the firm's
power to command a "premium" price-one higher than those of its
existing competitors-for a product of comparable quality.48 In the
example given, where Brand A was able to charge a 25% "premium"
price and still hold its initial or "even" 10% market share against the
encroachments of its nine competitors, the analyst would say that it has
a "25% product differentiation advantage" over those competitors. In
short, it has succeeded in convincing consumers that they should be
willing to pay 25% more for a product of comparable quality, over and
above what they would have been required to pay those other, competing
sellers for the same product.
A comparable measurement concept-and indeed the more familiar
one in economic analysis-is one that measures the height of the
"product differentiation" advantage not in terms of the leading firm's
advantage over its smaller- existing competitors but in terms of its
advantage in this respect over potential competitors. If an industry has
"easy" entry conditions-i.e., if a newcomer could produce and
distribute at as low a cost and sell at as high a price as all of the
established firms in the industry4 9-then any attempt on the part of its
established firms to charge a price that exceeds the "competitive floor"
(minimum cost, plus a normal or competitive rate of return on the
invested capital) would simply induce new firms to enter the industry,
expand its output, and beat the price back down again. If, however, there
are barriers around the industry to handicap such potential
newcomers-to impose on them higher costs or require them to accept
lower prices-then this constraint is pro tanto removed from the
shoulders of the established firms and they can, to that extent, proceed to
raise their prices above that "competitive floor" without fear of
triggering that self-correcting, "entry" mechanism. Thus if Brand A
48. Or, as noted, if there are differences in quality to be considered, it is the power to command a
price differential that exceeds the quality difference (the latter being measured by the cost difference
involved, that is, by the difference between the cost of producing and distributing Brand A versus the
cost of producing and distributing the other nine brands).
49. For a detailed discussion of entry barriers and the other structural concepts employed in this
area, see C. Mueller, supra'note24.
19681
MONOPOLY POWER
here is found to have not only (a) the power to get 25% more than its
existing competitors can get for the same product without enabling and
inducing them to expand aid encroach on its market share but also (b)
the power to charge a price that exceeds the minimum or "competitive"
level (as defined above) without inducing new firms to enter the industry
from the outside, then it would besaid that this producer enjoys a "25%
product differentiation entry barrier." Such a firm is of course doubly
blessed: it is, to that extent, freed from competition not only from within
the industry but from without as well.
It is here that the competitive significance of "product differentiation"
appears in its clearest form. It has, as mentioned, two competitionrestraining roles, one as a damper on the effectiveness of established
competitors in restraining its pricing policy, the other as an entry barrier
restraining potential competitors. Had there been no "product
differentiation" present in this example, Firm A's first price increase
would thus have triggered not one but two self-correcting mechanisms.
First, as its price rose above that of its existing competitors, the
product's consumers, being indifferent as to which seller they patronized,
would have promptly started abandoning Firm A and shifting their
patronage over to the other nine firms selling the product, thus
decreasing the former's market share and increasing the shares of the
latter. Secondly, as the price of Brand A passed the "competitive"
level,s" the point where more than a normal or competitive profit was
being earned on the capital used to produce and distribute the product,
potential entrants from outside the industry would have started entering
and building new capacity, eventually transferring market share away
from Firm A and over to themselves. In either case, the price increase
would have been removed and the price eventually restored to its former
level. "Product differentiation" interfered here, however, giving Firm A
the power to charge a monopoly price, one that exceeded the competitive
level by 25%, and to do so with impunity, with no fear of having that
price beat back down either by existing or potential rivals.
This latter concept-the idea of the "product differentiation"
advantage as a rather direct measurement of the "overcharge" (above
50. The price level that will induce the expansion of existing firms and the entry of new ones is not
necessarily the same. For example, the nine existing firms could be, conceptually at least, so
inefficient that they would not find it profitable to expand until the price reached a level well above
that which would induce an unusually efficient and progressive newcomer from, say, another
industry, to come into this one. Thus the existing firms might be operating relatively old machinery
(but which it is not yet economical to scrap), whereas the newcomer, saddled with no such outdated
equipment, might be able to enter with equipment that would give him a unit cost that was
substantially lower than that of any established firm.
THE AMERICAN UNIVERSITY LAW REVIEW
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the competitive price) to the consumer and thus as a quite accurate
measurement of the intensity or effectiveness of competition in an
industry-is of course particularly significant. With it, the "public
interest" in a particular antitrust proceeding can often be determined
within some fairly wide but nonetheless quite acceptable margin of error.
For example, consider these two separate but parallel measures of the
"product differentiation" advantages enjoyed by the largest firms in a
certain hypothetical market. First, assume that a representative of each
of the manufacturers is questioned as to how much, in his expert opinion,
his firm would be required to lower its prices below those of the leading
seller in orderto successfully enter a given metropolitanareafor the first
time, "successful" entry being defined generally as the securing of
sufficient volume to operate efficiently. Secondly, assume that each of
those producer representatives is also questioned as to (a) the size of the
differential between his "private label" price, on the one hand, and his
"manufacturer'sbrand"price,on the other, and (b) thepercentageof his
sales dollarthat he spends on "brand"promotion.
In regard to the first question-the size of the price concession
required of a newcomer in order to overcome an established competitor's
locally-entrenched "brand" name and thus get enough of that local
market to begin an efficient operation-suppose that the answers
received vary from something on the order of 10% to as high as 50%. In
other words, assume it is the fairly unanimous view that, in this industry,
the newcomer would have to undercut his largest competitor'sprice by at
least 10% (the products of all the competing sellers being admittedly
identical in quality) in order to ever get enough business to operate
profitably; at any lower level of output (or absent a correspondingly
higher level of promotional expenditures), the attempted entry would be
doomed to failure from the start. (Instances are related, however, in
which newcomers have been unsuccessful in entering certain new
geographical markets for the first time even when they gave price
concessions as high as 50%, that is, in which their products failed to
"move off the shelves" even when they sold to the retailer at 50% less
than competing manufacturers were charging for a physically identical
product, a price concession that was then "passed on" to the consumer
in the form of 50% lower retail "'shelf" prices).
The magnitude of the price concession required to "detach" the
consumer from his "brand" preferences in this industry is found to be
similarly large, let us suppose, where the measurement is made in terms
of the second factor mentioned above, namely, the difference between the
leading manufacturers' "private brand" price, on the one hand, and their
1968]
MONOPOLY POWER
own "manufacturer's brand," on the other. Thus one producer might
explain that, whereas a price of, say, 170 per unit was available to the
very largest "private brand" customers (e.g., the largest chain store
customers buying under their own private brand), those same customers
would pay perhaps 21.250 for the same product when it is sold to them
under the manufacturer's "advertised" brand or label, for a differential
of 4.250 per unit or approximately 20%. Since the product involved is
physically the same, and since the customers themselves and the
quantitiesinvolved in the purchases are also the same, that differential is
presumably a fair measure of the strength of the "consumer preference"
enjoyed by the "branded" over the "non-branded" product. It is also a
presumably fair approximation of the degree of monopoly power
exercised in the "branded" or major segment of the market in question:
assuming the "private brand" price of 170 is not itself a below-cost
price-that it covers all business costs, plus at least a competitive rate of
profit on that portion of the firm's capital that is devoted to that segment
of its output-then the higher 21.250 price charged for the "branded"
product is, by definition, a supercompetitive or monopoly price.
Measurements of these kinds can bring, of course, a highly desirable
form of rationality into the antitrust decision-making process. While the
height of "entry barriers" is hardly one of the routine business facts
collected by the Bureau of Labor Statistics (BLS) and thus conveniently
available in handy government publications,5 ' it is a measurement that
can be made with a reasonable amount of investigative effort, 2 probably
with a great deal less effort than is involved in some of the more
traditional non-structural or "conduct" types of investigation. 3 And
51. Data on one of the three "structural" factors, "concentration," is compiled by BLS and
published by the Senate Antitrust and Monopoly, Subcommittee. See Staff of the Bureau of the
Census, Report on Concentration Ratios in Manufacturing Industry 1963, for the Subcomm. on
Antitrust and Monopoly of the Sen. Comm. on the Judiciary, 89th Cong., 2d Sess., pt 1 (1966).
52. Dr. Bain made quite detailed and apparently highly accurate estimates of the height of the
entry barriers surrounding no less than 20 of the country's major industries, including automobiles,
petroleum refining, steel, and the like. J. BAIN, BARRIERS, supra note 2.
53. Bain notes, for example, that the present "prolongation and expense of antimonopoly actions
results in large part from the fact that establishment of conduct offenses generally requires almost
endless exploration of the minutiae of the business practices and policies of the defendants, and
endless arguments about what can be inferred from these practices and policies." He notes that "five
or ten years from initiation to conclusion of a monopoly case is not unusual. In effect, a conduct
offense is much more difficult to establish than a structural offense would be." J. BAIN,
ORGANIZATION, supra note 2 at 535. Further, he notes that litigated cases "centering on the details
of market conduct, as monopolization cases at present must, are intrinsically lengthy and expensive,
as innumerable details of conduct must he explored, defended and attacked, and ultimately
evaluated . . . . Enforcement is [thus] hampered by the very high cost of each individual
enforcement action." Id. at 607-08. He would favor a focusing of attention on the three "structural"
THE AMERICAN UNIVERSITY LA W REVIEW
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once made, it provides, in combination with the "concentration" data
more commonly presented in antitrust cases, the key to a truly
meaningful estimate of the public interest at stake in a given antitrust
proceeding. Once it has been determined, for example, that the prices
actually being charged in an industry are, say, 20% above the
competitive level, the one that would have prevailed in the absence of the
challenged acts of monopolization (as in the example described above), it
is a simple matter of arithmetic to determine the total number of dollars
the monopolists in question are "redistributing" away from the
consumers of their product and to themselves. Thus when Bain reports
that a certain industry is not only highly concentrated but has a "very
high" barrier to entry (defined as one that permits a price 10% or more
above the competitive level without inducing new entry), and that this
industry has annual sales of, say, $30 billion, he is saying, in substance,
that an additional $3 billion (10% of $30 billion) in monopoly
"overcharges" are being exacted from the consumers of that industry's
product each year. A similar measurement for each of the country's
highly concentrated industries, those in which the market shares of the
few largest firms are big enough to permit them to exploit whatever
entry barriers they may have been able to erect, would permit a complete tabulation of the "redistribution of income" monopoly produces
each year in the economy as a whole.
V.
SOURCES OF "PRODUCT DIFFERENTIATION"
Not all products lend themselves to successful "product
differentiation." First of all, one must eliminate, as emphasized above,
virtually the whole category of products called "producer goods," those
sold not to the consuming public but to other businessmen who use them
in the production of their own goods, e.g., steel, copper, and the various
other primary metals. Goods of this type are bought under conditions
that make it virtually impossible to develop a really significant degree of
"product differentiation." For example, the purchasers here-generally
manufacturing firms of quite substantial size themselves-tend to buy in
relatively large quantities, through skilled purchasing agents, men who
are thoroughly familiar with the technical properties of the goods in
question (frequently buying according to specifications of their own
selection) and thus not subject to the kind of non-rational arguments
elements-concentration, product differentiation and entry barriers-and a corresponding "shift
away from the maze of acts, practices, and policies" that "are so much emphasized under the
present law." Id. at 610.
1968]
MONOPOLY
POWER
that are frequently more effective with consumers than presentations of
purely technical data. In short, *the businessman himself is an exacting
"shopper," one who employs highly skilled professionals, men with
sharp pencils who insist upon knowing all of the relevant facts about the
product in question and awarding their patronage strictly on the basis of
price and performance. No purchaser of steel, for example, has yet been
persuaded that the steel bars of Firm A are "worth" a penny more per
pound than those of any other steel producer.
The principal source of "product differentiation," then, is what Bain
calls "buyer ignorance."54 In general, the susceptibility of consumers to
successful "product differentiation" is in direct proportion to their lack
of factual information about the qualities and characteristics of the
goods they are purchasing and their lack of an adequate opportunity to
acquire such information. Thus the bulk of the highly "differentiated"
products falls into one or more of the following categories:
1. They are bought by consumers, rather than producers;
2. They are fairly durable in character and are thus purchased
infrequently (a factor that tends to prevent the consumer from
"experimenting" and thus becoming familiar with all or most of the
competing brands);
3. They are complex in design or composition, thus making it
impractical for the consumer to attempt to acquire the technical
khiowledge that would be needed in order to make an informed choice
between the various brand offerings."
As Bain puts it: "[w]ith respect to the meat, canned vegetables, bread,
stockings, and similar goods purchased repeatedly at short intervals, a
housewife is likely to acquire a reasonably good knowledge of the quality
and other characteristics of competing outputs, and to arrive at a
reasoned and informed choice among alternatives. With respect to
automobiles, major electrical appliances, home-movie cameras, and the
like," however, goods that are complex in design and very infrequently
purchased, "the average consumer is likely to have only the sketchiest
notion of the relative performance, reliability, and other essential
characteristics of competing brands, and is in effect ignorant or
uninformed. In this situation," Bain suggests, "the buyer is likely to rely
on the 'reputations' of the various products or their sellers; on popular
lore concerning the performance and reliability of past outputs of a
seller, on whether or not the seller has successfully remained in business
54. See, e.g., Id. at 214; J. BAIN, BARRIERS, supra note 2 at 124.
55. J. BAIN, ORGANIZATION, supra note 2, at 214.
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for a long time, and so forth. This reliance on seller or product
reputationsby ignorantconsumers," he believes, is thus one of the major
sources of the kinds of "preference" patterns 6 that breed high
concentration and the other undesirable consequences of inordinately
high degrees of "product differentiation."
This lack of reliable factual information on the part of the consumer
plays a still further role in the story, however. Most importantly of all,
perhaps, it makes her susceptible to what Bain calls the "persuasive salespromotion activities of sellers," 57 particularly advertising of a certain
kind:
Inextricably interconnected with brands, trademarks, or company names,
advertising and other sales promotion may of course be primarily
'informational'in its impact (thus tending to build a product differentiation
based on a knowledge of the relative designs, qualities, and prices of
competing outputs), but in our experience it is, instead, primarily
'persuasive.' It is aimed at creating product preferences through generally
phrasedpraises of the attributesof various outputs (Winstons taste good,
like a cigarette should), or simply through dinninginto thepotential buyer's
mind an awareness of the product through endless repetition. Thus an
important category of product differentiation is built primarily on a
nonrationalor emotional basis,through the efforts of the 'ad-man. "8
Not all of the "nonrational" basis for "product differentiation" is the
work of the "ad-man," however. One of the most important sources of
this phenomenon is the use of large and elaborate "distributive and
service facilities," 59 e.g., the chains of "exclusive" retail dealers used in
such industries as automobiles and petroleum. By saturating an area
with dealers handling their own respective products exclusively, the three
or four sellers with the best-known brands can effectively deny their
smaller existing and potential competitors access to the best sites and
most efficient retailers, thus raising the per-unit sales and distribution
costs of those actual and potential competitors while entrenching still
further their own "brand" names in the minds of local consumers
through the "advertising effect" of the elaborate local dealer
establishments, organizations that control many thousands of square
miles of gleaming floor space and flashing neon signs.60 In other words,
56. Id. at 215 (emphasis added).
57. Id.
58. Id.
59. Id. at 220.
60. Many of the costs incurred by automobile manufacturers and gasoline refiners in building
and/or maintaining their nationwide dealership chains are more properly attributable to the
advertising or sales promotion function than to distribution. Id. at 387-88.
1968]
MONOPOLY POWER
these exclusive dealerships or, as they are sometimes called, these
"vertical-integrations-by-contract," are themselves a form of
advertising, one that pre-empts the choicest media for itself, thus forcing
any existing or would-be competitor to incur the sometimes prohibitive
cost of developing its own separate chains of dealer outlets,
establishments that will, by definition, be placed on less desirable sites
and manned by less experienced operators, 6 thus raising that
competitor's per-unit costs and, by keeping his product on the "back
shelves," so to speak, lowering its acceptability in the eyes of consumers
and thus the per-unit price it is able to command.
This latter aspect of the problem is sharply illustrated by a recent
private action, one involving the outboard motor industry." The plaintiff
in that case, a marine dealer located near Annapolis, Maryland, alleged
that it had handled the defendant's "Johnson" motors on an "exclusive"
basis for some years but had recently been "cut off"-that is, denied the
right to continue buying and selling the defendant's engines-for
violating an unwritten "understanding" the latter allegedly has with its
approximately 8,700 dealers across the country and taking on, in
addition to the defendant's "Johnson" motor, a competing engine, the
"Mercury" motor manufactured by the second largest producer in the
industry. According to the plaintiff,6 3 there are some 12,000 to 15,000
marine dealers in the United States and hence the defendant's exclusive
arrangements with approximately 8,700 of them thus constituted a
foreclosure of some 58% to 72% of the total available retail outlets for
outboard motors in the country. It was alleged further that this preemption of the bulk of the country's available marine outlets,
particularly of the larger, more efficient outlets, served to further
"differentiate" the defendant's engines from those of its competitors and
thus increase the already high degree of concentration existing in the
industry.
Alleging that the defendant Outboard Marine, owner of the nation's
two leading "brands" of outboard motors, the "Johnson" and the
"Evinrude," holds roughly 60% of the industry's total sales volume
(there are 11 other firms in the industry, but only three of them make a
full line, the other eight producing only specialty engines), the plaintiff
61. In economic analysis, the most productive resources are always put into use first, the
"marginal" resources being used only when the supplies of the more efficient have been exhausted.
62.. Amplex of Maryland, Inc. v. Outboard Marine Corp., 3.N F.2d 112 (4th Cir. 1967), cert.
denied, 389 U.S. 1036 (1968).
63. See Plaintiff's Petition for Certiorari at 11, Amplex of Maryland, Inc. v. Outboard Marine,
Corp., 380 F.2d 112 (4th Cir. 1967), cert. denied, 389 U.S. 1036 (1968).
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contended that the defendant's two brand names have acquired such
widespread consumer acceptance (largely through the cumulative effect
of their "exclusive" pre-emption of the better marine-dealer showrooms
over the years) that dealers handling the outboard motors of competing
manufacturers find it extremely difficult if not impossible to secure
enough business to operate on an efficient scale of distribution, thus
putting the competing manufacturers and their dealers at both a cost and
price disadvantage vis-a-vis the defendant and its dealers.
The plaintiff attempted to measure the height of the defendant's
"product differentiation" advantage and thus the extent of its power to
charge a supercompetitive price for its products by comparing the price
charged for that manufacturer's "branded" motors (the "Johnson" and
the "Evinrude"), on the one hand, with the price it charged for its
comparable "private brand" engine, on the other. This engine, called the
"Gale," was produced exclusively for a single large customer,
Montgomery Ward, and was sold to that customer at approximately
15% less than the defendant's dealers paid for its two "branded" motors.
Since the three were identical in quality6 4 the plaintiff argued that the
lower price on the "private brand" engine represented the normal or
"competitive" price level (the one that would have prevailed on all the
motors, both "branded" and "unbranded," in the absence of the
"product differentiation" disadvantages that faced both existing and
potential competitors) and hence that the 15% higher price being charged
for the "Johnson" and "Evinrude" was necessarily a monopoly price,
one that overcharged the consumer by the amount of that differential,
namely, 15%.
The plaintiff drew a similar inference from the defendant's
extraordinary profit record over a long period of years. Thus in the 10
year period 1952-1961, Outboard Marine had net (after tax) yearly
earnings ranging from a low of 12.4% on stockholders' equity (excluding
the recession year of 1961, when only 5.5% was earned) to a high of
27.3% in 1955. "The ten year average was 17.4%, a monopoly return by
any standard. ' 65 In dollars, the 10 year total was $84 million, or some
$8.4 million per year.
64. Id. at 11-12 n. 12. The testimony revealed the only differences to be in the paint job and
the cover.
65. Id. at 15 n. 17. "For the private sector of the economy the range of 5 to 6 per cent would
seem about appropriate. This, then, is the opportunity cost of equity capital, the minimum normal
rate of profit, based on what it could earn in other uses." R. CAVES, AMERICAN INDUSTRY:
STRUCTURE, CONDUCT, PERFORMANCE 103 (1964). See also C. KAYSEN & D. TURNER, ANTITRUST
POLICY 63 (1959): "If normal profits are of the magnitude of say, 6 to 8 percent on invested capital,
an average profit rate of 9 percent over ten years could not be identified as supernormal with any
confidence, but one of 12 percent could."
19681
MONOPOLY POWER
At a competitive rate of return (e.g., 8%) rather than the 17.4% it has in
fact averaged, its aggregate dollar earnings over that period would have
been just under half that total, some $40 million (or $4 million per year).
Therefore, even ignoring the inflated costs that monopoly generally
produces and doubtless has produced here as well (e.g., the small scale
production and inefficient dealer-distribution systems defendant has
imposed on the industry), at least $4 million per year in monopoly profits
are readily identifiable here, money wrongfully extracted from the dealers in
the first instance and, ultimately, from the consuming public."
In the plaintiffs view, the "product differentiation" advantage that
permitted this monopoly pricing "is a creature of defendant's exclusive
dealing.policy." "There is no serious dispute here," it argued, "that this
exclusive dealing policy has the straight-forward effect of enhancing the
sales volume (and market share) of the defendant and shrinking that of
its competitors. If a Johnson dealer takes on Mercury engines as a
second line," the plaintiff maintained, "his sales of Mercury engines
increases and his sale of Johnson engines falls. Repeated across the
nation, this would mean a sharp re-aligning of market shares in the
industry. If this plaintiff and the defendant's other 8,700 marine dealers
throughout the country were permitted," the argument ran, "to display
competing engines-the Mercury, the Scott, the West Bend, and
others-in their larger, more attractive, higher-traffic showrooms,
defendant's 'product differentiation' advantage and its present 60% share
of the national market in outboard motors would obviously start to
dwindle and that of its competitors (both individually and collectively)
would correspondingly start to increase. ' 61 The alleged net result would
be lower costs, 6 intensified competition, and eventually lower prices to
the consuming public. "Thus a 15% reduction in the price of the average
outboard motor ($458, in 196 1) would be approximately $69 per engine,
or a total saving to the American consumer of some $23 million on the
66. Petition for Certiorari, supra note 63, at 15 n.17.
67. Id. at 12-13.
68. Id. at 13:"With their fixed costs spread over larger volumes of production and distribution,
per-unit costs of those competing manufacturers would be expected to fall
and, with more nearly
equal market shares among the industry's 12 already established manufacturers in 1961, plus
potential entry by newcomers that could be expected to find the industry more attractive in this
improved climate, the vigor of competition at the manufacturing level should be enhanced." And
"lower costs and enhanced competition would be expected to lowerthe price from the manufacturer
to the dealer, eventually eliminating most, if not all, of the 15% 'premium' price defendant is now
able to charge for the Johnson and Evinrude brands. Competitidn should also be enhanced at the
dealer level, thus assuring the passing on to the consumer of those lower manufacturing costs and
prices."
THE AMERICAN UNIVERSITY LAW REVIEW
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$155 million 'worth' of outboard motors bought by the consuming
public in 196 1.'69
This potential landmark case, alas, was never heard by the Supreme
Court, not so much, one suspects, because of analytical problems, but
because of problems of proof on the substantive "legal" question of
whether the plaintiff had carried its burden .of proving the unlawful
exclusive dealing "condition" required under Section 3 of the Clayton
Act and apparently read into the Sherman Act in cases of this
character. 0
Economists continue to lament the Court's lack of action in this area
of exclusive dealing," pointedly noting that "product differentiation" is
at the heart of the country's monopoly problem and that, in a number of
industries where the advertising in question is accomplished not through
the use of a large "ad budget," as such, but through the maintenance of a
tight grip on an elaborate dealer structure that constitutes the only
access to the consumer's subjective "preference" patterns," an enormous
potential for improvement in competitive performance remains almost
wholly unexplored. Bain concludes, for example, that Section 3 of the
Clayton Act, the exclusive dealing provisions, "could provide a broad
basis for removing or averting the exclusionary effects of exclusivedealing contracts between manufacturers and distributors in numerous
industries,""' suggesting that vigorous action here, "by opening
previously closed distributive channels to new entrants and small firms,
might significantly increase the force of both actual and potential
competition." 4 It hardly takes a great dealof insight into the intricacies
69. Id.
70. The district court had dismissed the plaintiffs case after hearing only five of its 42 witnesses,
the testimony of the others having been presented in somewhat truncated form, as a proffer of proof.
Id. at 23.
71. See, e.g., Mann, 'Prioritiesin Antitrust'; Some Communications, I ANTITRUST L. & ECON.
REv. 20, 21 (Spring 1968), observing that "the Supreme Court had a good opportunity to
undermine exclusive franchising in the automobile industry in the General Motors case, decided in
May, 1966."
72. BAIN, ORGANIZATION, supra note 2, at 391. Neither the automobile nor the outboard motor
industry spends an exceptionally large percentage of its total sales dollar on advertising. Inclusion of
the "advertising component" in the cost of maintaining their respective dealer organizations,
however, would doubtless produce an advertising/sales ratio in the "very high" range, that is, one
well into the "over 5%" category considered suspect by Bain. Id.
73. Id. at 615.
74. Id. at 616. He believes that "in cases like those of the automobile, farm machine, and
petroleum refining industries, the elimination of integration and quasi-integration through
contractual exclusive-dealing arrangements, would tend to reduce the over-all advantages of large
scale at the manufacturing level and to lower the barriers to entry perceptibly." J.
BAIN, BARRIERS,
supra note 2 at 213. "Where product differentiation advantages of established firms rest heavily on
19681
MONOPOLY POWER
of economic theory to predict with some modest degree of confidence
that the market share of, say, American Motors, would start to climb
significantly if it should suddenly find the way cleared for its
"Ramblers" to be displayed on the floor of the country's many
thousands of "Chevrolet" dealers.75
While the appropriate policy solution in the case of "product
differentiation" entry barriers created by "exclusive dealing" would
probably be one of outright prohibition (with, however, an exception
where it could be persuasively demonstrated that there were substantial
efficiencies to be gained from such "quasi-integration," that these could
be achieved in no other way, and that they could in fact be expected to
inure to the benefit of the consuming public), a more delicate problem is
presentedby the work of the "ad-man." A great deal of advertising is of
course highly beneficial to the public interest, particularly the factual,
"informational" kind that makes up the bulk of that appearing in, say,
newspapers, and much of the magazine or periodical advertising.
Conceptually, at least, it is easy enough to separate the
"procompetitive" and the "anticompetitive" forms of advertising. As
Bain puts it, "a certain modicum of selling activity and cost devoted to
informational purposes are functionally justified, or essential to the
effective working of a market system. It is necessary and useful to
inform potential buyers of the availability of goods, of their
specifications and qualities, of their prices." But "selling activity and
cost with a persuasive orientation are not similarly justified from the
standpoint of aggregate economic welfare, since they reflect, in large
part at least, a diversion to sales promotion of productive resources
which would otherwise be devoted to producing and distributing a larger
volume of useful goods and services.17 6 In his view, much of American
advertising falls into the latter category, rather than the former, i.e., "a
large proportion of observed promotional activities and costs have, to all
distributive integration, either through ownership or through contractual arrangement,
disintegration and-prohibition of further integration would tend to reduce [such] product
differentiation barriers to entry" and would be highly desirable from the public's point of view. Id.
at 217, 219.
75. Dealers handling the major brands generally find it quite profitable to take on additional
"lines" of the product, the addition to revenues generally exceeding by a substantial margin the
additions to cost. This is evidenced, of course, by the lengths to which the dominant manufacturers
in these industries obviously go in order to keep their dealers "persuaded" of the virtues of an
exclusive dealing policy, an effort that would hardly be necessary if the proffered policy was in fact
consistent with those retailers' own self-interest. In other words, exclusive dealing is primarily in the
interests of the manufacturers, not the dealers.
76. J. BAIN, ORGANIZATION, supra note 2, at 389.
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appearances, a dominantly persuasive orientation, and this relative
emphasis is generally greater as selling costs are larger in proportion to
sales. Therefore, a substantial portion of all sales-promotion costs
probably are socially wasteful in character, and this wastefulness is
probably acute in industries in which selling costs are relatively high in
proportion to sales revenue.""
In his own study of 20 major American industries, Bain found that a
fifth of them had an advertising/sales ratio of 5% or more and that
"practically all industries with very high advertising costs (costs equal to
5 percent or more of sales revenue) are industries producing consumer
goods. It is common to these industries that they have high or very high
seller concentration, and that they have a strong product differentiation
that is largely created by advertising, the opportunities for physical
product differentiation (in design or quality) being rather limited." 8 He
concluded that "all or most of the industries with relatively high
advertising costs are seriously suspect of undesirable or 'unworkable'
performance in the matter of selling costs, in the sense that wasteful
promotional costs have exceeded the 'limit of tolerance' or 'margin for
error' which should probably be allowed in making normative
evaluations of the social desirability of market performance.""
There are said to be a number of reasons why the antitrust laws either
could not or should not be directed to the problem of monopoly pricing
that flows from this kind of promotional effort, including the following:
(1) advertising, both "informational" and "persuasive," is allegedly
essential to the maintenance of full employment in the American
economy and hence any legal restrictions aimed at reducing anticompetitive product differentiation would thus pose the danger of
throwing the nation into a recession or depression; (2) both kinds of sales
promotion are said to enjoy an absolute immunity under the first
amendment's free speech guarantees and hence any action against the
"ad-man" would be unconstitutional; (3) both kinds of sales promotion
are allegedly essential to the maintenance of "free consumer choice" or
"consumer sovereignty" and hence any legal action against either of
them would necessarily have the effect of restricting the variety of
products available to the consumer, of producing a drab uniformity of
design and the like, not to mention the generally lower quality that could
be expected to follow if "brand-name" rivalry were curtailed; and (4) it
would allegedly be practicallyimpossible to distinguish, for purposes of
77. Id.
78. Id. at 391.
79. Id.
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MONOPOLY POWER
antitrust case work, the desirable or pro-competitive forms of
"informational" advertising from the undesirable, anticompetitive
forms of "persuasive" advertising.
Few reputable, informed economists harbor any of these fairly
primitive notions. Consider, for example, the rather spectacular
hypothesis implicit in the first one, the notion that the nearly $900billion-per-year American economy is kept on a full-employment course
not by the constant, painstaking adjustments in fiscal and monetary
policy made by the nation's duly authorized officials at the Federal
Reserve Board, the Treasury Department, and the Council of Economic
Advisers but by the unsolicited, purely private efforts of an unsupervised
advertising industry's $20 billion budget. Bain gives the idea an
unflattering two sentences, simply noting his "rejection of the oft-made
but unsupported assertion that persuasive sales promotion is really
needed to stimulate an expenditure of available purchasing power
sufficient to sustain full employment and production in our enterprise
economy. We deny, that is, the idea that we must have persuasive sales
promotion to induce people to buy all the goods and services we are able
to, or optimally should, produce." 0 In fact, consumer spending habits
are not the problem at all in maintaining full employment (Americans
consume approximately 93% of their income year-after-year, with quite
reliable constancy); business spending for new plant and equipment is the
really volatile factor in the employment equation, a factor that turns on
the subjective "optimism" or lack of it of thousands of individual
managers throughout the country and thus produces the wide "swings"
in total expenditures from year-to-year that have to be offset or
compensated for by fiscal and monetary expansion or contraction.'
The second argument mentioned above, the idea that the first
amendment gives an absolute immunity to advertising designed to
persuade consumers that a product is "better" or "superior" to other
products when this is not a fact-or that its "superiority" is greater than
is the fact-is not likely to find wide currency among constitutional
lawyers. Hundreds of "deceptive advertising" cases eloquently attest to
the readiness of the courts to draw a sharp line indeed at the point where
advertising becomes "unfair" to either the consuming public or to
competing businessmen. Given the long line of cases sustaining the
Federal Trade Commission's authority to stop advertising that amounts
to an "unfair method of competition" 8 -that unfairly disadvantages
80. Id. at 389.
81. See generally, E. SHAPIRO, MACROECONOMIC ANALYSIS 262 (1966).
82. See, e.g., Federal Trade Commission v. Winsted Hosiery Co., 258 U.S. 483 (1922).
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(Vol. 18
competing firms-the constitutional protection available to an
advertising or promotional effort that can be shown to have caused a
"substantial lessening of competition" or a "tendency to create a
monopoly" (the tests under, for example, the anti-merger statute) would
seem to be something less than impregnable.
The notion that "product differentiation" is essential to the
maintenance of a viable "consumer sovereignty" and "variety" of
product is a particularly stubborn myth, one that is evidently nurtured
with considerable diligence by some of monopoly's more articulate
apologists. No proponent of a free market economy denies, of course,
that the ultimate test of a product's "worth" is indeed the value placed
on it by a fully-informed consuming public, one exercising an
unrestrained "free choice." The truth of the matter is, however, that
"product differentiation" restricts the consumer's choices, not enlarges
them, that it produces less product "variety," not more. The same kind
of "oligopolistic interdependence" that leads to the avoidance of price
competition between rival oligopolists tends to produce, as noted above,
a parallel policy in the area ofproduct competition. To be sure, members
of the tight-knit oligopolies regularly turn out a profusion of seemingly
different designs and qualities. In fact, however, those so-called
differences are often a great deal more apparent than real, generally little
more than surface variations in design or style that conceal a
monotonous sameness in real performance characteristics. Bain
comments, for example, that in a number of industries, including "the
automobile industry, the highly imitative product policies of rival
oligopolists seem to lead to substantialuniformity of available products
and to a suppression of the potential variety in products which might be
made available to buyers." 3 Meaningful product variety, like the other
elements of desirable economic performance, stems from an effectively
competitive market structure, not from industries that have been
monopolized or-in the second half of the 20th century-oligopolized.
To say, in short, that the consumer "chooses" Brand A over a lowerpriced but physically identical product is to engage in verbal judo, not
serious analysis, since the necessary pre-condition for such a "choice" on
the consumer's part is his or her unawareness of the physical identity of
the two products; once that essential condition for successful product
differentiation is gone, a new-and obviously more genuine-consumer
choice appears, one that promptly reallocates that consumer's patronage
away from the higher-priced product. As Turner puts it, "the consumer
83. J.
BAIN, ORGANIZATION,
supra note 2 at 401.
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MONOPOLY POWER
is likely never to have been confronted with the real alternatives involved,
and/or likely to be unaware of the long run consequences of the choices
he makes at any particular time. The point can be made most clearly,"
he suggests, "by using the example of a completely standardizedproduct
such as aspirin or chlorine bleach, where promotional expenditures have
been heavily resorted to with evident success. In both instances
consumers will pay a substantialpremium for heavily advertised brands.
This of course reflects a consumer choice among the alternatives actually
offered," but those consumers "were never given the opportunity to
decide whether they wanted to be subjected to advertising expenditures or
not." For example, suppose that, "before any producer of aspirin had
undertaken promotional expenditures beyond the purely informational
variety, consumers had been asked the following question: Which of the
following alternatives would you prefer: (a) no advertising expenditures
at all, so that every aspirin will in the long run continue to cost no more
than one dollar per thousand; or (b) heavy advertising expenditures that
will succeed in convincing you that you should pay three dollars per
thousand for aspirin that is in fact exactly the same?"8 To ask the
question is to answer it.
The fourth argument mentioned above-that it would be impossible,
in practice, to distinguish the "informational" and "persuasive" forms
of advertising-is similarly somewhat less than overwhelming in the
force of its logic. If the courts are competent to weigh and decide such
genuinely heroic economic issues as whether a given merger is likely to
have the future effect of "lessening competition" or "tending to create a
monopoly"-and there seems to be considerable agreement among the
informed professionals that the courts are in fact doing a quite creditable
job in the merger areas8 -it is hardly an obvious proposition that they
are incompetent to decide, with the help of expert economic testimony,
whether a television advertising campaign spread on the record before
them is likely to have the effect of "informing" its viewers of certain
provable price and performance characteristics of the product in
question or of "persuading" them of various non-provable claims that
give it an imaginary "differentiation" and a higher price tag than the one
carried by a number of physically identical products. Deciding whether a
television commercial conveys information or noninformation is not
likely to be regarded by professional economists, either now or in the
84. Turner, Conglomerate Mergers and Section 7 of the Clayton Act, 78 HARv. L. REv. 1313,
1334 (1965) (emphasis added).
85. See generally Mann, supra note 71.
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foreseeable future, as particularly taxing intellectual work.
This is not to say, however, that there would be no difficult evidentiary
problems involved in implementing a meaningful program against some
of the more highly concentrated industries that owe their noncompetitive market structures to the "product differentiation" entry
barriers produced by such non-informative advertising. The problems
involved, however, would be the traditional ones of proving the "effects"
alleged in the proceedings, particularly in detailing the "relevant
market" involved; the "shares" held by the leading firms (individually
and in the aggregate); the causal connection between the promotional
expenditures challenged as "unfair," on the one hand, and the noncompetitive industry structure described by those market shares
(particularly the height of the product differentiation barrier erected
around them), on the other; and any number-of other equally challenging
factual propositions.
The question remains, of course, as to whether this particular kind of
non-informational advertising, notwithstanding its proven capacity for
creating highly concentrated markets and blunting or eliminating the
more desirable forms of price and product competition, should
nonetheless be permitted as a legitimate form of monopolization, one
exempted under, say, the exception in favor of those who find monopoly
"thrust upon" them, who "unwittingly find themselves in possession of a
monopoly," who have survived by reason of "superior skill, foresight
and industry" and who "do not seek, but cannot avoid, the control of a
market.""6 Put another way, the question might be phrased as whether
this kind of "competition"-and there can be no doubt that rivalry in
promotional effort is indeed a form of competition-is within the range
of those varieties the courts have, at least up until the present time,
sustained even when they have had the paradoxical effect of lessening or
eliminating "competition" itself.87 Certainly it can be demonstrated
that this particular variety of noninformative promotion can
produce-and has in fact produced-supercompetitive or monopoly
prices (as in Figure 1, above) in many industries, a result that one would
suppose is "unfair" to the consuming public, this latter conclusion
resting, as it were, on a value judgment no more novel than the
86. United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945).
87. Under the price discrimination statute, for example, the Court has held that the "meeting
competition" defense is available to the Price discriminator even in a case where it has been
affirmatively established that the discriminatory price has, in fact, had the effect of lessening
competition or creating a monopoly. Standard Oil Co. v. Federal Trade Commission, 340 U.S. 231
(1950).
1968]
MONOPOLY POWER
proposition that competition is preferable to monopoly or that there is
no particular virtue in encouraging or permitting a non-functional
"transfer" of income from the relatively poor (consumers) to the
relatively rich (stockholders). Secondly, it can also be demonstrated
rather profusely that this particular practice promotes "undue
concentration," erects entry barriers, and otherwise excludes other
businessmen, both actual and potential, from an "opportunity to
compete" on the basis of economic efficiency, rather than on the size of
the advertising budget or other species of "war chest"-again a
presumably "unfair" competitive technique, one that is injurious to all
of the values associated with, for example, small business, economic
efficiency, and democratic pluralism.
VI.
CONCLUSION
The devices for building "product differentiation" quite clearly could
not survive a strictly economic test for measuring the social desirability
of the several types of "competition." A practice that inflates the costs of
consumer goods in so many ways-by producing large expenditures on
non-informational, mutually-cancelling advertising, by acquiring and
then exercising the power to add a supercompetitive profit "mark-up"
on top of those inflated promotional costs, and by imposing on the
smaller firms in the affected industries the higher production and
distribution costs associated with inefficiently small volumes-is not
likely to get high marks for social performance in the kind of tests used
here. The major economic criterion for evaluating a particular variety of
competitive rivalry turns on its relative contribution to the ultimate
economic objective of providing the consumer with the maximum
quantity of the goods most urgently desired at the lowest possible longrum prices (consistent with their continuing production). Price
competition ranks first, of course, since it, by definition, assures that, in
Professor Machlup's penetrating phrase, "the buyers gain all that the
sellers give up.""5 A modified form of price competition, say one in
which the sellers spend 2¢ for a trading stamp that entitles the consumer
to perhaps 10 worth of gift merchandise, would rank second in social
desirability, since it at least gives the buyers a part of "what the sellers
give up." Other varieties of promotional expenditure, particularly those
that cost the sellers themselves large sums of money but confer no
discernible benefits on the buyers, are considered not merely "lacking in
88. Machlup, Oligopoly and the Free Society, I ANTITRUST L. & ECON. REV. 11, 18 (JulyAugust 1967) (emphasis added).
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any redeeming virtue" and thus valueless as a form of "competition,"
but a negative influence, one that puts the consumer and the economy as
a whole in a worse position than the one they would have been in if
there had been no competition at all in the industry.
It may well be sound public policy to ignore noninformative
promotions so long as they cause no clear and direct harm to the
competitive mechanism itself. But where they have demonstrably
"lessened competition" or set in motion an unmistakable tendency
toward the high concentration ratios (tight-knit oligopolies) Congress
was concerned about in the anti-merger and other statutes, they
endanger not merely the nation's economic interests in a more abundant
material welfare, but one of our more abiding democratic values as well,
access to a genuinely free marketplace, one that is equally open to all,
not just to a privileged few. A society struggling to meet a vast array of
particularly pressing social needs, to bind up the wounds of its less
advantaged members and win their abiding conviction of the essential
justice of its central institutions, can ill afford the appearance of any new
devices for monopolizing industrial markets, for "transferring" from the
relatively poor to the relatively affluent each year a sum of money many
times that required to make a meaningful beginning on the road toward
the first great victory against man's most ancient enemy, the curse of
poverty.