Tin Cans and Tin Plate: A Study of Competition in Two Related Markets [Reprint 2014 ed.] 9780674429758, 9780674429741

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TIN CANS AND TIN PLATE A Study of Competition in Two Related Markets

This is the fifth in a series of studies on competition and monopoly in American industry financed by a grant from the Merrill Foundation for the Advancement of Financial Knowledge. The series has been planned to include a number of studies focusing on the effectiveness of competition in particular industrial markets accompanied by certain investigations into the effect on competition of various elements of market structure and business practice common to many industries. Although each volume is an independent study representing only the views of its author, all are expected to contribute to the central objective of the whole project: an evaluation of monopoly policy in the United States.

TIN CANS and TIN PLATE A Study of Competition in Two Related Markets

JAMES W. McKIE

Harvard University Press Cambridge, Massachusetts 1959

© Copyright 1959 by the President and Fellows of Harvard College

Distributed in Great Britain by Oxford University Press, London

Library of Congress Catalog Card Number 59-11513 Printed in the United States of America

TO C A T H E R I N E

Preface The most important factor in the recent far-reaching changes in the metal-container industry is the antitrust decree of 1950. I became interested in the industry at about the time that the San Francisco district court handed down its judgment, but I did not begin my direct investigation of the antitrust case and its consequences for several years. In the meantime I had worked on a doctoral dissertation on bilateral oligopoly in industrial product markets, which analyzed price behavior and the relationships of rivalry and alliance in markets concentrated on both sides. This work included four case studies, one of which was the tinplate market. It became clear to me that the vertical relations between the tin-plate market and the tin-can market have strongly influenced the behavior of the can industry, and that the economic performance of the two industries should be evaluated jointly. I therefore decided to include a survey of the tin-plate market and an analysis of vertical price relations in the present study. Professor Charles H. Hession's earlier study, Competition in the Metal Food Container Industry, 1916-1946, has been very helpful to me, as my numerous references to it may show. The voluminous record in the recent antitrust case was not available to him, and I have tried to avoid needless duplication by relying mainly on that record as a source of historical information and also on reports of events that have occurred since 1946. The methods of analysis and evaluation described in the first chapter follow precedents set down in other industry studies; they stem largely from the work of Professor Edward S. Mason of Harvard University and that of his distinguished students. My own debt to Professor Mason is too great to be expressed. My education in industrial economics began in his seminar at Harvard, and continued in a discussion group which was engaged in a study of monopoly and competition in the American economy, supported by a grant from the Merrill Foundation. At the time I was associated with it, the Merrill Foundation study group consisted of Professors E. S. Mason, Carl Kaysen, Robert Bowie, David F. Cavers, Kingman Brewster, and M. Joseph Peck, all of Harvard University; Robert Bishop and M. A. Adelman, of The Massachusetts Institute of Technology; Kermit Gordon, of Williams College; and other eminent scholars who met with it for shorter periods. The discussions of this group and the work of its individual members did much to shape my thinking in the field of industrial organization and antitrust policy. I am particularly indebted to Professor Carl Kaysen, who has unstintingly supplied me with suggestions, insights, encouragement, and patient editorial assist-

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PREFACE

ance. The responsibility for all the deficiencies of this work is of course entirely my own. I also want to express my obligation to executives of many can companies and steel companies for helpful interviews and much valuable data. My demands on American Can Company, Continental Can Company, and United States Steel Corporation, as the largest firms in the container and tin-plate markets, were particularly heavy. They have graciously met most of my demands without any attempt to influence my views on policy, for which I remain fully answerable. In most cases the executives of these and other companies that I interviewed preferred to remain anonymous. I have not attributed various statements to particular individuals in print, but I shall keep the transcripts of these interviews on file for several years where students of industry may have access to them. This research received financial support from two sources. The Merrill Foundation defrayed my expenses for travel and field investigation and provided a subsidy for publication. A grant by the Rockefeller Foundation to Vanderbilt University for a research project on industrial organization enabled me to spend two summers free of teaching duties on the preparation of the manuscript. I am indebted to George W. Stocking, Professor of Economics at Vanderbilt and Director of its Institute of Research in the Social Sciences, for making this financial assistance from the Rockefeller Foundation available to me, and for assistance and encouragement in completing the work. His suggestions have greatly improved the manuscript at many points. Finally, I wish to acknowledge the helpful work of the secretarial staff of Vanderbilt's Department of Economics and Business Administration, and the assistance of the staff of the Joint University Library at Nashville. My thanks are due to the University of North Carolina Press and to the Editors of the Harvard Law Review for permission to reproduce copyrighted material. J. W . M. Nashville, Tennessee

Contents I. Industrial Analysis and Its Objectives II. Vertical Price Relations A. Successive Market Stages Under Competition and Under Monopoly B. Bilateral Oligopoly

3 10 10 20

III. Market Structure in Tin Plate A. Technology B. Concentration and Industry Development C. The Buyers of Tin Plate D. Entry and Integration

35 35 40 46 50

IV. Price Policy in Tin Plate A. Price Determination B. The Basing-Point System and Its Successor

55 55 66

V. The Manufacturers of Metal Cans A. Concentration: The Development of Duopoly B. Smaller Sellers of Packers' Cans C. Small General-Line Manufacturers D. The Historical Record of Entry

83 83 92 96 99

VI. Integrated Manufacture and the Buyers of Cans A. Integrated Manufacture of Packers' Cans B. Integrated Manufacture of General-Line Cans C. The Buyers of Cans D. The Feasibility of Backward Integration E. The Growth of Demand

102 102 104 105 110 114

VII. Economies of Scale and Substitute Competition in Metal-Can Markets 117 A. Economics of Production 117 B. Uncertainty and the Geographical Interlock in Packers' Cans 124 C. Research and Customer Service 127 D. The "Natural" Barriers to Entry 133 E. Substitute Competition 135 F. Summary: The Structure of the Metal-Can Industry 142 VIII. Market Practices and the Antitrust Decree of 1950 A. Term Requirements Contracts

145 146

χ

CONTENTS

Β. Discrimination and Volume Discounts C. Closing Machinery D. The Antitrust Decree of 1950 IX. Price A. B. C. D.

Behavior Price Leadership and Its Evolution The Limits to Market Control Price Stability Freight Equalization

X. Research and Development A. The Organization of Research B. The Record of Achievement: Food Canning and Can Manufacture C. The Record of Achievement: Tin Plate XI. Changes in Industry Structure and Behavior Since 1950 A. The Effects of the Decree B. Structural Evolution C. Oligopoly and Workable Competition

160 182 197 208 208 219 225 238 246 246 254 268 276 276 288 301

Bibliography

311

Index

317

Tables 1. Tin plate and finished black plate produced and consumed in metal-can production, 1956 35 2. Tin-plate production in the United States, 1926-1956 (net tons) 38 3. Investment costs and monthly capacity of tin-plate production facilities, 1952 40 4. Production of hot-reduced and cold-reduced black plate for tinning and finished black plate, 1938-1944 (short tons) 43 5. Distribution by company of tin-plate capacity in the United States, 1938 and 1954 (percent of total capacity) 44 6. Index of production of steel and of tin plate, 1926-1956 (1926 = 100) 47 7. Percent of total steel shipments used in manufacture of containers, selected years 48 8. Tin-plate and tin-can costs in relation to selling prices of canned vegetables, 1937 and 1954 50 9. Shipments of tin plate from producing districts to consuming states, 1937 (net tons) 70-71 10. Shipments of tin plate from producing districts to consuming states, 1938 (net tons) 72-73 11. Assembly costs for principal raw materials of steel (iron ore, coal, and limestone) at different production centers, 1939 and 1945 (dollars per long ton) 74 12. Percent of total value of materials consumed in manufacture of tin cans and other tinware by region, 1954 75 13. Distribution by district of tin-plate capacity in the United States, 1954 81 14. Net sales for six can companies, metal cans manufactured for sale within the United States, 1939-1947 83 15. Percent of total domestic metal-can production and metal-can sales of leading can manufacturers, 1939, 1946, and 1947 84 16. Ratio of net income after taxes to net worth, four can companies, 1934-1956 93 17. Sales volume of selected general-line manufacturers, 1939 and 1946 97 18. Entry and exit of can-manufacturing firms, 1935-1955 101 19. Consumption of steel in production of metal cans, by type of product packed, 1956 106 20. Buyers purchasing over $2,000,000 worth of metal cans from American Can Company in 1941 107

xii

TABLES

21. Sales by American Can Company to large purchasers, by size class, 1941 22. Index of metal-can production, 1927-1939 (1927 = 100) 23. Index of metal-can production, 1945-1956 (1947 = 100) 24. Cost distribution for packers' cans and square gallon cans, two selected plants, 1951-1953 25. Variability of can requirements 26. Total consumption of fresh, canned, and frozen foods, 1940, 1947, and 1954 (millions of pounds) 27. Quantities of selected canned food products packed in tin and in glass, 1954 (thousand dozen, all sizes) 28. Production of beer containers, 1940-1956 (war years omitted) 29. Index of per capita consumption of fresh, canned, and frozen foods in recent years (1947-1949 = 100) 30. Sales by American Can Company and several competitors to customers buying from more than one source in 1947 31. Sales and service expense (sales and roadmen's) for size classes of packers'-can customers, American Can Company, 1938-1941 32. Volume discount schedules of American Can Company and Continental Can Company under forms of contract current in 1949 33. Closing machine costs and rentals, American Can Company, selected years (dollars) 34. Number of closing machines leased to customers by can manufacturers, 1939 and 1946 35. Number of contract customers of Continental Can Company gained from and lost to American Can Company, 1930-1948 36. Quoted prices of tin plate and tin cans and the fabrication margin, 1926-1956 37. Profit margins and profit rates after taxes, American Can Company and Continental Can Company, 1927-1956 38. Profit margins and profit rates after taxes, United States Steel Corporation, selected years

107 115 115 120 125 137 138 139 141 149 168

170 184 189 212 229 237 239

Figures 1. A vertical price effect of monopoly 2. Bilateral monopoly 3. Location of metal-can factories in the continental United States, American Can Company and Continental Can Company, 1957

13 16 87

Charts 1. Monthly shipments of metal cans, by type, 1952-1956 2. Total production and shipments, Baltimore area —1950, American Can Company 3. Quoted-price indexes for tin plate, tin cans, and canned food, 1927-1956

123 123 235

TIN CANS AND TIN PLATE A Study of Competition in Two Related Markets

Chapter I Industrial Analysis and Its Objectives More than half a century ago the organization of the American Can Company transformed a highly competitive industry into a virtual monopoly. This study surveys the subsequent evolution of the industry. Its present structure can best be understood in the light of its history; for the metal-container industry has evolved through several different forms of organization, and is still in process of change. An industry study combines narrative history with applied principles of economic theory and public policy. The metal-container industry illustrates particular forms of the general laws of economics. Public policy designed to promote the general welfare in a market economy has altered its behavior and influenced its structure from time to time. The common element in our historical, analytical, and prescriptive examination of the metal-container industry is market power, which was originally created by the organization of the Can Trust. The theme of this study is the development of that market power in later years, how the dominant firm used it, how it has become more diffused, how public policy has attempted to reduce it, and what is likely to happen to it in the future. We shall examine the foundations of market power for the individual enterprise and shall show how the competitive and collusive relationships among firms have limited or enhanced it. Almost all industries exhibit some degree of market power. Students of industrial organization have been primarily interested in industries with a high degree of market power, where a firm or group of firms are sufficiently free of external restraints to impose their policies upon the market over a long period and to make it behave differently from the way a competitive market would behave. The origins of power are the elements of market structure; the means are forms of monopolistic conduct; the results are noncompetitive prices, output and investment. Industry studies generally draw conclusions on the degree of market power and offer prescriptions for public policy after surveying the structure, behavior, and economic performance of an industry. We shall follow the same approach in this study.1 1 This approach has ample precedent. It was already almost fully developed by the middle 1930's by Professor E. S. Mason and his students, especially the late D. H. Wallace. See "Price and Production Policies of Large-Scale Enterprise," American Economic Review, 29 (March 1939), Supplement.

4

TIN CANS AND TIN P L A T E ECONOMIC THEORY AND THE STUDY OF INDUSTRIAL ORGANIZATION

In explaining how scarce resources are allocated and combined to satisfy human wants, economic science has constructed a theory of markets. Its pure models of market behavior are useful as norms but not as descriptive categories. The traditional models are polar categories: "pure" monopoly and "pure" competition. These models deal with simple market structures in terms of a few assumptions about the number of sellers (one or many) and about demand and cost curves. The only behavioral assumption they make is that firms maximize profits. On these assumptions the theory of markets can exactly specify the conditions of market equilibrium and the economic performance that will result. But actual markets invariably lie between the polar categories. In some cases the theoretical models lie close enough to the institutional facts to permit their application without significant loss of their descriptive and predictive powers. For other types of markets, notably oligopoly, theoretical analysis may not provide a consistent explanation. Industrial analysis is particularly handicapped by this weakness of theory because oligopoly exists in so many industries. The metal-container industry is one of them. Oligopoly exists when firms in an industry are so few in number that they become dependent on each other's decisions. Thus it is impossible to predict any firm's price or output without first specifying price and output for every other seller in the market. We cannot break down "supply" and "demand" to show how a market equilibrium is reached. Theorists have sought several paths to a general solution of the oligopoly problem. One approach assumes that oligopolists will normally attempt to monopolize the market jointly, either by tacit agreement on a collusive scheme of control or by simple recognition of their mutual interdependence. It then analyzes the various uncertainties and difficulties of policy coordination which will systematically limit the oligopolist's joint profits.2 An opposite approach assumes that oligopolistic firms are in a state of active rivalry. A competitive equilibrium is impossible in oligopoly; this approach determines how oligopolists might reach a market equilibrium by various assumed forms of reaction to each other's actions.3 If our theory were really capable of solving the oligopoly problem it could 3 The joint-profits-maximization approach was developed by Ε. H. Chamberlin, The Theory of Monopolistic Competition (Cambridge, Mass., 1 9 3 3 ) , ch. iii. The most thorough treatment of limitations to joint monopoly, in truth a modern classic on the subject, is William Fellner's Competition Among the Few (New York, 1 9 4 9 ) . 8 This line of approach stems from Cournot. The best-known contemporary treatments are those of Heinrich von Stackelberg, Marktform und Gleichgewicht (Berlin, 1 9 3 4 ) and The Theory of the Market Economy (New York, 1 9 5 2 ) ; and the theory of games in John von Neumann and Oskar Morgenstern, The Theory of Games and Economic Behavior (Princeton, 1 9 4 4 ) .

INDUSTRIAL ANALYSIS AND ITS OBJECTIVES

5

start either with the joint-monopoly assumption or the rivalry assumption and, by specifying the appropriate limitations and conditions, arrive at the same answer. Instead the answers differ widely. Whether they can ever be reconciled remains to be seen; no general theory of oligopolistic markets yet exists. But orderly patterns do exist. When we examine specific markets and industries, we do not find chaos; we find that market behavior is largely shaped by particular elements of market structure which are fairly easy to recognize and codify. We must introduce into our analysis many more institutional facts than the pure theory of markets introduces as postulates. In so doing we lose some generality, since the institutional facts vary so much from industry to industry; but this is compensated by a gain in understanding. Analysis of market structure involves the following elements: the number and relative size of sellers; technology; economies of scale in production and distribution; the proportion of fixed costs in the short run and ease of exit from the industry; the differentiation of the product; the elasticity of demand with respect to price and income; the importance of patents and other legal restrictions on competition; and the number and size distribution of buyers. Obviously these elements are not independent of each other. Nor are they necessarily immutable; but when we speak of "structure" we refer to those elements in the market environment that are relatively constant in the short run. The influences that business policy creates or alters in the short run we call "conduct" or "behavior." The gap between the general and the particular is often wide, and there is some danger of ad hoc theorizing in this approach. In surveying a single industry, as we shall do here, we must distinguish between the accidental or ephemeral influences on an industry's behavior and the systematic patterns that are capable of generalization. STRUCTURE AND PERFORMANCE

The pure theory of markets produces something more than a description of behavior. It provides prescriptions for economic welfare. The criteria of welfare depend on the ultimate values of society, but it is generally agreed in our own society that an ideal organization of the economy should result in efficiency in resource allocation, economic progress, equity in income distribution, and stability. Market analysis concentrates on the first two. They cannot be measured directly. Instead they must be inferred from certain observable constituents of economic performance in the market under consideration, principally: (1) Cost-price relationships. (2) Efficiency in terms of capacity-output relationships, the adjustment of

6

TIN CANS AND TIN

PLATE

capacity to demand in the long run, and the scale and locational pattern of productive facilities. (3) The use of resources in selling activities and product differentiation. (4) Improvement of the product and increase in productive efficiency.4 A general theory of markets would show how economic welfare depends on industry structure, by providing a complete chain of analysis from structure, to conduct, to performance, to economic welfare or results. Institutional market analysis has not been able in many cases to predict performance from structure, though it has done a better job of predicting conduct from structure. A study of a single industry therefore cannot confine itself to a survey of structure alone, but must also examine the conduct and performance of the industry before arriving at a judgment on economic efficiency and welfare. MARKET COMPULSION AND PUBLIC POLICY

What are the criteria by which an industry should be judged? If we apply ideal standards of structure to a concentrated industry we may draw different conclusions than if we apply ideal standards of performance. The purely competitive model provides a standard of allocative efficiency. Suitably modified, it can be used as a means of appraising cost-price relationships, capacity-output relationships, the adjustment of capacity to demand, the scale and locational pattern of production facilities, the use of resources in selling costs and product differentiation. It cannot be used as a standard for appraising progressiveness. Economists have realized for a long time that there may be a conflict between static criteria of allocative efficiency and dynamic criteria of progress. 5 Monopolistic market structures are ordinarily judged more leniently by the second standard than by the first. But "progressiveness" is not an analytical standard; we do not know how it is related to different types of market structures; we cannot even determine in many cases whether one industry is more progressive than another in any meaningful sense. "All that is available is a crude commonsense standard. . . . This standard is filled with ambiguities, and its objectivity is low." 6 In the present study, fortunately, this is not a crucial difficulty. Although the large can-manufacturing firms have as a matter of historical fact been more progressive than the small ones, there is every reason to believe that the rate of 4 This list is a summarized form of that provided by E. S. Mason in "The Current Status of the Monopoly Problem in the United States," Harvard Law Review, 62 (June 1949). I am indebted to the Merrill Foundation study group for further analyses. See also Carl Kaysen, United States v. United Shoe Machinery Corporation (Cambridge, Mass., 1956), pp. 16ff. 5 The outstanding spokesman for this point of view was, of course, the late Professor Joseph A. Schumpeter in Capitalism, Socialism and Democracy, 2 ed. (New York, 1947), chs. vii and viii. " Kaysen, U.S. v. United Shoe, p. 18.

INDUSTRIAL ANALYSIS AND ITS OBJECTIVES

7

progress which the tin-can industry has shown is not uniquely dependent on the industry structure, at least within the range of practical alternatives. Public policy does not encounter an irreconcilable conflict between the structural criteria and the criterion of progressiveness. Research and development are details in a general pattern. We study such patterns to determine how they work, and how well, and whether they might be improved. It is particularly necessary to determine whether and to what extent the firms in the market have the power to control the outcome. A free-market economy works best when the external pressures of the market hold each firm in check. Market compulsion is the best guarantee of good performance and optimum economic results in the long run. Firms possessing great and unchecked market power may for a time show good performance, especially if performance is judged chiefly by the criterion of progressiveness; but the drawbacks of benevolent despotism are too well known to require elaboration. Public policy does not and should not require perfect competition in most markets, but it should seek to establish or encourage market patterns in which adequate performance is compelled by market structure. To these patterns we give the generic name "workable competition." 7 Workable competition is not a legal doctrine — not explicitly, at any rate. Courts trying antitrust cases seldom give much weight to economic performance as evidence of legal liability. Courts do attach some importance to market structure in monopolization cases, loosely construing the elements of structure such as concentration, barriers to entry, and the limits of the market as corroborative but not sufficient evidence.8 But the courts concentrate chiefly on conduct — on business behavior. They do this because the law by its nature is concerned with conduct. The antitrust laws forbid certain kinds of conduct directly; other kinds indirectly. The court must inquire into intent and effect. It must find whether the firm has attempted to monopolize by following practices that artificially exclude competitors; whether it has discriminated in price and terms of sale; whether it has coerced buyers, middlemen, competitors, or suppliers and extorted unfair advantages; whether it has 7 We shall not here review various economists' specific versions of the concept of workable competition; the statement above, though it is not precise, gives what seems to be the common essence of these definitions. See J. M. Clark, "Toward a Concept of Workable Competition," American Economic Review, 30 (June 1940); George J. Stigler, "Extent and Bases of Monopoly," American Economic Review, 32 (June 1942), Supplement; Jesse W. Markham, 'The Concept of Workable Competition: An Alternative Approach," American Economic Review, 40 (June 1950). 8 The weight of structural evidence has changed from time to time. To see how much, we need only compare the decision in United States v. United States Steel Corporation et al., 251 U.S. 417 (1920) with the decision in United States v. Aluminum Company of America, 148 F.2d 416 (2d Cir. 1945).

8

TIN CANS AND TIN PLATE

conspired with rivals, fixed prices, divided markets, disciplined nonconforming firms, or used patents as a vehicle for collusion; whether it has enlarged a sizable share of the market by acquiring existing competitors and new arrivals before they could grow to challenge it. When it judges an industry by these standards, a court in effect is fitting the economic problem of market power and monopoly into the conventional legal categories of good and bad conduct. The fit is not always a good one. But the antitrust statutes generally will not permit anything more direct. By and large, the courts use the types of business conduct mentioned above as indicia of monopoly and market power, while the doctrine of workable competition uses structure and performance as indicia. There need not be any fundamental conflict in these two approaches to specific cases, though there may be differences of detail. Whatever the formal approach of public policy, we can judge its success by the criteria of workable competition. Public policy has long sought to make competition effective in the metal-container industry. We must decide after surveying all the evidence whether the industry exhibits satisfactory economic performance and whether the market compels it, at present and in the foreseeable future. It is more difficult to form such a judgment about an oligopolistic industry like this one than about an industry with a less concentrated structure; this survey may provide a test case of whether workable competition is possible at all in an oligopoly with high concentration of output in a few firms. THE INFLUENCE OF CONTIGUOUS MARKETS

While this study is chiefly about the metal-container industry, that industry cannot be understood in isolation. It is closely linked to another: the tin-plate industry. Tin plate is the raw material of the tin can. Its importance to the can industry is very great. Price policy in the tin-can market is directly related to price policy in the tin-plate market; research and improvement in metal containers go hand in hand with research and innovation in tin plate. The steel industry which produces tin plate is itself oligopolistic; its structure too has changed over time. The state of competition in the tin-plate market, with large and powerful firms ranged on both sides, materially affects the ultimate behavior of the tincan market. On the other side, the markets for canned products intervene between the metal-container market and the ultimate consumer. These markets generally have far more competitive structures than the tin-plate or tincan industries, but here also we find some large sellers who in turn have considerable bargaining power as buyers of metal containers. Our analysis of market relationships in the tin-can industry thus also involves the conduct of large buyers and sellers in the bilaterally oligopolistic market

INDUSTRIAL ANALYSIS AND ITS O B J E C T I V E S

9

for tin plate and the influence of the large buyer of metal containers. W e begin with some general remarks on vertical price relations, bilateral oligopoly, and "countervailing power." 9 ' S e e J. K. Galbraith, American Capitalism (Boston, 1952), chs. ix-xi. Our concern with "countervailing power" in specific industry structures is a good deal narrower than Professor Galbraith's.

Chapter II Vertical Price Relations The formal theory of price is concerned much more with horizontal competitive relationships than with vertical-price relationships. These two problems are not on the same footing, but they are closely connected. Consumer welfare is dependent on the vertical structure of industry as a whole, not alone on the relations of competition and collusion among firms occupying a single stage of an industry. The incidence of monopoly or competition at particular levels may be offset by countervailing influences elsewhere. The structure on the opposite side of a buying or selling relationship will have its effect on an industry's performance, for better or for worse. A.

SUCCESSIVE M A R K E T STAGES U N D E R COMPETITION UNDER

AND

MONOPOLY

The case of pure competition, though it has little practical application, provides a useful ideal type for theoretical analysis. There is no need to recapitulate the well-known theory of equilibrium price in pure competition. The model is not ordinarily extended to take account of successive market stages. The reason for this is that the simple case of firms buying in purely competitive factor markets and selling in competitive product markets is perfectly general, and intermediate competitive markets do not in theory affect the final result. In a series of markets with pure competition on both sides, the price in each market would have the usual parametric function for the firms buying or selling in those markets, and the outcome would be a determinate set of prices for final output and for primary factors of production. Now if a large number of vertically integrated firms absorbed any or all of the intermediate markets while remaining in pure competition in primary factor markets and in ultimate product markets, the prices, outputs, and factor returns would be unaffected unless economies or diseconomies of integration were present. These economies and diseconomies could arise in two ways: if transfer costs through the market were different from transfer costs within the firm, and if production functions themselves were altered by vertical integration. But if there were economies of integration, the intermediate markets would not be theoretically possible in pure competition in the first place, while if diseconomies were present the integrated structure would quickly revert

VERTICAL

PRICE

RELATIONS

11

to a disintegrated one. In the absence of these, both the integrated and disintegrated forms would be organizationally stable. The products of the earlier stages used in the final stage would be produced at minimum average cost whether transferred through a market or not, and the internal accounting "price" would have the same function as a market price. The presence of economies and diseconomies of integration is a question of fact; even so it is obvious that economies of integration must usually be present up to a point. The competitive firm of optimum size is itself bounded by a line within which integrating factors of production in a nonmarket relationship is more efficient than organizing them through the market. If economies of integration were entirely absent there would be no need for firms, since individual factors of production could always be completely coordinated and organized by the market alone.1 Since the firm can coordinate them more efficiently within limits, identification of a "stage" of a vertical productive process is a matter of finding where these economies of integration finally disappear, at which point a market relationship with the next "stage" can intervene.2 Under pure competition it makes no difference whether a market actually does intervene at these points, and therefore vertical-price relations in pure competition have no special interest as a problem of economic theory. MONOPOLY AND SUCCESSIVE MARKET STAGES

When imperfections in competition are present in intermediate markets they will affect prices and resource allocation. There is a wide range of possible cases, and not all of them are relevant to our problem. There may be bilateral monopoly at an intermediate stage. There may be monopoly in the final market with monopolistic competition at one or more intermediate stages; or bilateral oligopoly in an intermediate market and a large number of firms selling differentiated products in the final market; or monopsony in the primary factor markets with bilateral oligopoly in a subsequent market; and so on. In many actual markets a large number of firms buy and sell under a mixture of competitive and monopolistic conditions. One familiar case 1 R. H. Coase, " T h e Nature of the Firm," Economica, N.S., 16 (November 1 9 3 7 ) , 386-405. 'Several successive engineering processes may constitute a single economic stage in this sense. Any productive process from primary factors to final product involves the combination of a large number of variables in a functional relationship. Depending on the form of the general function, subsets of these variables may be separated out and recombined successively to give the same result. For an elegant treatment of the mathematical conditions of separability, applicable to the separation of a combined production function into economic stages, see W . Leontief, "Introduction to a Theory of Internal Structure of Functional Relationships," Econometrica, 15 (October 1 9 4 7 ) , 3 6 1 - 7 3 .

12

TIN CANS AND TIN P L A T E

involves a monopolistically competitive group of firms at the retail level purchasing supplies from an imperfectly competitive distributing organization purchasing in turn from an imperfectly competitive supplying industry. In each market, though the individual firm has a choice of alternative policies, the firms are too numerous to allow them to control the market by tacitly colluding, and newly entering firms may face no substantial barriers. The existence of imperfections on both sides of any market creates an explicit conflict of interests which must be resolved in one way or another. The price at one stage is a cost to the next stage. It is unlikely that the whole vertical structure of firms can divide the available profits by agreement. The market structure is highly complex; the individual firm has limited knowledge and limited power; and firms find it wellnigh impossible to make rational calculations of the reactions of rivals, buyers, and sellers to their own independent policies. Under such circumstances the sellers and buyers alike often seize on some convention or pricing formula which will eliminate the uncertainties of individual action by affording everyone a common basis of calculation. Such a device — markup on standard costs, for instance — will arbitrarily solve the conflict of interest which appears in bilaterally imperfect markets. It may continue in effect for long periods if the solution is reasonably satisfactory to all parties and if the underlying market structure itself does not change very much. Its importance for a vertical series of markets lies in the fact that profits for the chain as a whole will not be maximized in this way. If in a vertical chain of markets there were only one stage containing elements of monopoly, then the firms at that stage could unilaterally maximize their profits subject to conditions of entry and competition among themselves. But when total profits must be divided between two or more stages containing elements of monopoly, simple pricing formulas like markup pricing will reduce the total profit below the maximum obtainable. The reason is that if a firm or group of firms attempts to obtain a share of monopoly profits in a subsequent market by raising prices to buyers who resell in that market, they will change the conditions upon which the buyers have based their calculations, altering their prices and sales. A special case of vertical-market relations is illustrated in Figure 1. A "representative" retailer selling under conditions of local monopoly is assumed to have an individual market demand ARK and average costs AC b . This average cost is the sum of the retailer's own costs of operation and the cost of the purchased commodity. It is assumed that the purchased commodity (for which there are no substitutes) is sold by the manufacturers under pure competition at price P M , which covers the minimum cost of ACM of the manufacturing firms including a "normal"

VERTICAL PRICE RELATIONS

13

competitive profit. Purchases by this retailer in these circumstances are Qo, and his resale price is P R ; purchases by other retailers are not shown. Now if we assume that the manufacturers somehow form a monopoly and attempt to gain a share of monopoly profits by quoting higher prices, PM will move above ACM. But this causes the retailer's costs AC R and MC K to rise vertically by the same distance. The upper limit to the manufacturers' price is P'M, since the retailer's average costs AC R will then be tangent to his demand function and his profits will be zero; the retailer's resale price would then be P' R and his purchases Qi. The curve ANR r represents the retailer's average net revenue from this input, equal to his demand price AR r minus the retailer's own unit costs of operation (the distance between AC R and AC M )· As manufacturers' price PM rises, the retailer's purchases react along D M (marginal to his average net FIGURE I A VERTICAL PRICE EFFECT OF MONOPOLY

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revenue A N R r ) ; hence D M is the manufacturers' demand curve for this segment of the market. Manufacturers will unilaterally maximize their own profit in this segment if they set prices so that their own marginal revenue (marginal to D M ) is equal to marginal cost, here assumed to lie along AC M . (This price is not shown in Figure 1; it lies between P M and P' M -) But at this price the joint profits of the manufacturers and the retailers from this market will be less than the profit earned by the retailer in the original position. With every increase in the manufacturers' price leading to higher profits for manufacturers, the joint profit obtained from this market becomes smaller.3 On the other hand if manufacturers collusively establish a discriminatory pricing system, or if they are able to change the previously existing degree of competition among retailers by policing the retailers' own prices and suppressing differentiation of service, they may well be able to obtain the maximum joint profits of the two stages. But this is a change in the assumptions of the problem. Simple pricing formulas unilaterally applied will not suffice. The above case is merely a special variant of the general bilateral-monopoly case, in which the results of independent pricing and collusion between successive levels can be compared directly. The general case is discussed below. It can be seen here that consumers and producers alike may actually be worse off with independence of stages and vertically independent pricing than they would be if there were vertical integration, since integration would eliminate the inefficiencies of resource use which follow from the attempt to collect monopoly rents at the intermediate levels.4 This result cannot be generalized for all imperfectly competitive intermediate markets, for if vertically integrated firms invariably had a profit advantage over an unintegrated chain we would expect to find no imperfectly competitive intermediate markets in existence. However, firms in a strategic position can sometimes find ways to extend control from one stage of the market to another, and so obtain some or all of the advantages of integration, without a formal integration of ownership. CONDITIONS OF ENTBY

The retailer in Figure 1 was assumed to have a monopoly of his own market, and the effect of entry on this firm's market position was left out 3 See also Joseph J. Spengler, "Vertical Integration and Antitrust Policy," Journal of Political Economy, 58 (August 1950), 347-52. If the retailer is maximizing his profit, the function DM will always be less elastic at the equilibrium output than the retailer's demand function. The manufacturers' profit per unit is the difference between the new and the old levels of ACR. With every increase of MCB, equilibrium output must become smaller, and joint profits (the area between ARR and the original ACR) fall as output moves below Qo. Retailers' profit must fall more than manufacturers' profits rise. 'Ibid., p. 351.

VERTICAL PRICE RELATIONS

15

of account. If the retailer is in competition with a number of close substitutes within a group of sellers, entry of new substitutes into his general market may press his demand close to tangency with his cost curve. Let us assume that initially all firms are selling under these conditions, and that cost and market positions among retailers are symmetrical.5 Entry of new "competitors" will take place as soon as the individual firms' demand curves move above their average costs, and some existing sellers will be forced out whenever demand prices are everywhere below average costs. Under these assumptions, it is no longer true that profits as a whole will be diminished as the manufacturers' price increases. As PM rises, manufacturers' profits increase. At first this will be more than offset by losses at the retail level. But these losses will drive some retailers out of business, and the exit of firms will continue until the remaining firms' demand has again risen to tangency with average cost. Changes in the number of firms maintain group equilibrium. The theoretical maximum from the manufacturers' point of view depends on the elasticity of demand for the retailers' group as a whole. At some point manufacturers will no longer find it profitable to raise prices (and retailers' costs), forcing retailers to make the adjustment to equilibrium by reducing their numbers. Owing to the complexity of demand interrelationships among firms and the equivocal meaning of "demand for the group as a whole," this cannot be shown diagrammatically. Hence if manufacturers can control their numbers and restrict competition among themselves while the retailers cannot restrict entry, the manufacturers can profit from this monopoly power while the profit merely affects the costs of the retail level. The manufacturers will select the best (for themselves) of a number of tangency equilibria for the retail level, which must simply adjust to whatever options they offer it. Consumers may find themselves paying higher prices in the end than if entry were restricted at the retail level, depending on the elasticity of the individual retailer's demand curve at equilibrium in the two situations. The results are in theory no closer to the competitive norm than monopoly with equivalent restriction of entry at a single level. BILATERAL MONOPOLY

The limiting case of a bilaterally imperfect market is bilateral monopoly. As is true for all limiting cases, factual examples are not easy to find. The theoretical model does, however, add a new element to the previous analysis of vertical-market relations: vertical collusion. The standard solution to the theoretical problem of bilateral monopoly 5 Chamberlin, Monopolistic Competition, pp. 81ff. As Chamberlin points out, the assumption is highly artificial.

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FIGURE 2 BILATERAL MONOPOLY

is as follows. In Figure 2, AC represents the seller's long-run average cost of production, and MC his marginal cost. AVP is the average value product of the purchased commodity to the monopsonistic buyer, and MVP is the corresponding marginal-value-product function. 6 AVP is thus a limiting demand curve, derived from the sale of the monopsonist's own product in a subsequent market. If the two firms deal at arm's length, an assumption concerning relative bargaining power must be introduced. One of the firms will independently maximize its own profit if it can force the other back to its demand or supply price. MVP, the marginal-value-product function to the buyer, will be the buyer's demand curve if the seller unilaterally fixes the price. The seller will then set the price that will maximize his own profits. This price is found where the seller's marginal cost MC is equal to his marginal revenue function MMVP, which is derived from his de• AVP is a long-run net-yield function after subtraction of other factor costs.

VERTICAL

PRICE

17

RELATIONS

mand function MVP and bears the same relation to it as MVP does to AVP. Hence output will be Q s and the seller would set the price at P s . Conversely, if the buyer were strong enough to set the price unilaterally, he could force the seller to react along MC, which would then become a supply curve, and hence an average cost curve from the buyer's point of view. The monopsonist would then purchase the amount which would equate the marginal value product MVP of the input with his marginal expenditure on the commodity. The latter would be a curve MMC marginal to the MC curve. The buyer would thus set the price P B and purchase the quantity Q B . 7 However, neither of these positions P s and P B is a genuine maximum. The average curves AVP and AC, not the marginal curves, represent the real limits of the bargain, since one party could push the price up or down to those limits respectively without forcing the other to leave the market. By including in his offer an all-or-nothing quantity clause, a dominant seller could force the buyer to take the quantity Q E , and to pay a sum of money for it which gives the average price P M · 8 If the buyer were dominant he could force the seller back to a no-profit position, paying an average price Pn for the quantity Q E . The quantity which maximizes profits is the same in either case, and it is determined by the intersection of the marginal cost of the seller with the marginal-valueproduct function of the buyer. The price, and the division of the profit, is theoretically indeterminate between P M and P N . Q E is also the quantity that would change hands if the buyer and seller were in complete collusion, since joint profits are maximized at that point. P M P N is an Edgeworthian contract curve.9 BILATERAL MONOPOLY COMPARED WITH

COMPETITION

How does this result compare with the outcome under pure competition? The answer to this question is elusive. It appears at first glance that the intersection of the long-run "supply" curve AC with the long-run "demand" curve AVP gives the competitive equilibrium quantity Qo and the competitive price P c . A simple monopolist (facing competitive 7 The curves in this diagram obviously bear a family resemblance to those in Figure 1. AVP in Figure 2 corresponds to ANRB in Figure 1, and MVP to Dm. Since the manufacturers long-run costs ACm in Figure 1 were assumed constant, the distinction between average and marginal cost was unnecessary. This special assumption was made there to avoid ambiguous comparisons between a competitive supply function and a monopolist's cost function. 8 "Perfect" price discrimination would achieve the same result. " The solution to the problem of output and price equilibrium in bilateral monopoly has been developed by many writers, including A. L. Bowley, "Bilateral Monopoly," Economic Journal, 38 (December 1928), 651ff; J. R. Hicks, "Annual Survey of Economic Theory: The Theory of Monopoly," Econometrica, 3 (January 1935), 16fiE; and William Fellner, "Prices and Wages Under Bilateral Monopoly," Quarterly Journal of Economics, 61 (August 1947), 503ff.

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buyers) would set the price Pm, while a simple monopsonist (facing competitive sellers) would set the price P N , the quantity sold being Q E in either case. Thus bilateral monopoly at best appears to result only in the simple monopoly output, and if no all-or-nothing bargain were concluded the quantity exchanged would be less than Qe· 10 But there are difficulties with this answer, which center on the meaning of the AC and AVP curves. If AC, for instance, represents the longrun cost curve of a single monopolistic firm, it will rise to the right of the least-cost point for the ordinary reason: diseconomies of scale within the enterprise. But in that case it is not comparable to a true competitive-supply curve. If we try to make it comparable by assuming that a large number of small firms are suddenly incorporated into a single selling unit which will monopolize the sale of the commodity but have no effect on costs, a further difficulty appears. In competition, the long-run industry supply curve rises as output increases because of external diseconomies, chiefly a rising level of factor costs as factors are drawn away from increasingly important alternative uses. If the industry uses "scarce factors," 11 therefore, the cost curve of the monopolist will rise, the diseconomies now being internal to the firm; but this gives the seller monopsony power in its own factor markets which firms in the competitive industry did not have. It is now uncertain whether the outcome is due to monopoly in this market or monopsony in factor markets. The analogous problem arises in the interpretation of the AVP curve. It is not a simple demand curve, but a derived one. If the monopsonistic buyer is reselling in a perfectly competitive final market, there appears to be no reason why the curve should have a declining slope unless it represents a falling long-run curve of physical returns to input for the firm; if the latter is true, then AVP is something quite different from a competitive industry's factor-demand function. In short, either the bilateral-monopoly cost and demand functions are not comparable to competitive supply and demand functions; or monopoly must be assumed in other markets as well, which makes comparison of the results with those of competition dubious; or the AVP and AC functions both become perfectly elastic, which is a nugatory solution.12 If monopoly exists in surrounding markets there are additional questions concerning factor rents and price discrimination. If the AC curve 10 Of course if the maximum of AVP were tangent to the minimum of AC so that losses could be avoided only at this output, the solution would be the same for all cases. But this is merely fanciful. See G. Tintner, "Note on the Problem of Bilateral Monopoly," Journal of Political Economy, 47 (April 1939), 268-69. " I . e . , factors in less-than-perfectly-elastic supply to the industry. See J. Robinson, The Economics of Imperfect Competition (London, 1933), ch. viii. 13 This discussion follows that of James N. Morgan, "Bilateral Monopoly and the Competitive Output," Quarterly Journal of Economics, 63 (August 1949), 371-91. A thorough treatment of the problem will be found in Morgan's article.

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RELATIONS

19

considered as a competitive supply curve contains an element of rent, the monopolist acquiring control of the previously competitive industry may be able to exact the whole of this rent from the factors previously collecting it. The AC curve then becomes a marginal cost function.13 If an analogous opportunity is open to the buyer in his other markets, then AVP likewise becomes a marginal curve, equivalent to a marginal revenue function. AC and AVP then become supply and demand curves respectively if the price is set by the opposing party; and with an all-or-nothing bargain the buyer and seller may indeed reach the "competitive" solution Q c . But the results in original factor markets and ultimate product markets will be widely different from the results of pure competition.14 While monopoly power at one level of the market undoubtedly reacts upon monopoly power at other levels, the foregoing theoretical analysis has not produced any support for the thesis that monopsony offsets monopoly to benefit the ultimate consumer. To recapitulate: when there is pure monopoly at one stage only, the monopolist can maximize his profit without interference, though what he can get will depend on his position in the vertical ladder of markets, on ease of substitution and ease of entry. When monopoly exists in several successive stages, and each stage attempts to get a share of the total profit by pricing its goods independently, the result is higher prices to the consumer and lower profits for any stage than would exist if that stage alone were a monopoly. If bilateral monopoly exists in a product market, theoretical analysis leads us to expect vertical combination to maximize joint profits, though this may be achieved through arm's-length bargaining. The shares of the respective parties in this total depends on relative bargaining power. Consumers and factors of production (depending on the degree of competition among them in their markets) must forego the surplus that is shared by the participants in the intermediate market, whatever their relative shares may be. Rigorous analysis does not permit a comparison between the priceoutput results of "pure" bilateral monopoly and those of pure competition, since it seems to be impossible to isolate the influence of bilateral monopoly in the intermediate market from that of monopoly or monopsony in surrounding markets.15 It appears, however, that approxima13 Robinson, Economics of Imperfect Competition, ch. x. See also W. H. Nicholls, A Theoretical Analysis of Imperfect Competition with Special Application to the Agricultural Industries (Ames, Iowa, 1 9 4 1 ) , p. 169. " Some writers have asserted that QE, the bilateral-monopoly solution, is the competitive output, following the analogy of MC and MVP to true demand and supply curves if the price is "given" to the buyer or seller. See Fellner, Competition Among the Few, pp. 2 4 1 - 4 2 ; also Stackelberg, Theory of Market Economy, p. 188. This formal definition of competition limits the usefulness of the comparison. 16 "Once the output of an industry is controlled, it is impossible to believe that those in charge will not look in both directions." James N. Morgan, " 'Competitive'

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tions to the competitive result are unlikely, and that vertical ladders of bilateral-monopoly market structures (mixed perhaps with simple monopoly and monopsony as well) will in theory produce a progressive distortion compared to the competitive "ideal." Prices, outputs, and the distribution of consumers' and producers' surpluses can hardly be the same. Of course in actual cases where there are large economies of scale and where there is a likelihood of more rapid technological progress under monopoly, the consumer might well be worse off if a purely competitive structure at all stages replaced a monopolistic one. It is possible to find good performance in actual markets which are concentrated on both sides. But a strict analysis of the bilateral-monopoly case affords no independent reason for asserting that this form of market is a "substitute" for competition. The theoretical analysis points to the opposite conclusion. B . BILATERAL OLIGOPOLY

Pure competition and pure bilateral monopoly are extreme cases. Simplified assumptions, which suppress a number of independent institutional determinants of price, produce simplified solutions. Applied theory, on the other hand, must explain behavior in industries where a large number of additional variables are always present. Bilateral oligopoly, unlike bilateral monopoly, is not at all uncommon in fact, though it may occur in many different forms. Bilateral oligopoly exists in a given market when there is mutual interdependence on both sides; that is, when a firm's decisions are affected by the actions of specific rivals and of specific firms on the opposite side of the market. The effect across the market may be direct, as when a firm utilizes the rivalry between two of its suppliers in its own bargaining policy. It may be indirect, as when a firm's behavior toward a rival seller is affected by that rival's bargains with its suppliers. It is the cross-market strategy that distinguishes bilateral oligopoly from simple oligopoly or oligopsony. It adds another element to the usual problem of oligopoly pricing. A general discussion of all the possible variants of bilateral oligopoly would be out of place here. 16 It is convenient however to draw a rough distinction between those markets having high concentration on both sides and those in which the oligopoly structure shows only moderate concentration. When there is moderate or low concentration among sellers — a "loosely" oligopolistic structure — and there are some large Output in Bilateral Monopoly: Reply," Quarterly Journal of Economics, 64 (November 1 9 5 0 ) , 6 5 0 - 5 1 . la A more comprehensive treatment can be found in James W . McKie, "Bilateral Oligopoly in Industrial Product Markets" (unpublished doctoral dissertation, Harvard University, 1 9 5 1 ) .

VERTICAL PRICE RELATIONS

21

buyers, the result is likely to be a pattern of behavior more effectively competitive than if there were atomistic competition on the buying side. This is the type of market which has been extensively described in the writings of Professor M. A. Adelman.17 In such a market the large buyer can do much to forestall a restrictive policy among sellers; he can maintain fluidity in the price structure, and keep it in line with cost levels; he can reduce excessive selling-cost margins and promote better knowledge and foresight among sellers. In Adelmans own words: A limited degree of monopoly ("substantial bargaining power") on one side of the market can be of great service in maintaining competition on the other. A strong, alert buyer, large enough so that the loss of his patronage is not a matter of indifference, constantly on the watch for a break which he can exploit by rolling up the whole price front, able to force concessions first from one and then from all, and followed by other buyers, can collapse a structure of control or keep it from ever coming into existence.18 If the concentration on the buyers' side is also moderately low, they are likely to pass a large part of the gains along to consumers in subsequent markets. Benefits to consumers may in fact be much greater than in less concentrated markets in which all firms tacitly agree to base their prices on a uniform conventional markup. Adelman goes on to say: "A proper blend of competitive and monopolistic elements is needed in any particular market to produce workable competition," and here the blend seems to be mixed in the right proportions. Markets with high concentration19 on both sides present a somewhat different picture. The outcome may be that a different and more complex kind of oligopolistic discipline, rather than more effective competition, will take the place of the discipline of unilateral oligopoly. A general theoretical solution to the problem of equilibrium in such markets, encompassing all the possible variations of rivalry and alliance of each firm with every other on both sides of the market, is beyond our reach. 20 Let us suppose for instance that five large buyers are trading with four large sellers. Many different kinds of formal linkages among the firms are possible. Three of the buyers could each deal separately with one seller, while the other two purchased exclusively from the remaining seller. At the other extreme, each buyer could deal with all sellers, and 1 7 M. A. Adelman, "The Dominant Firm" (unpublished doctoral dissertation, Harvard University, 1948); "The Large Firm and Its Suppliers," Review of Economics and Statistics, 31 (May 1949), 113ff; and elsewhere. ω Μ. A. Adelman, "Effective Competition and the Antitrust Laws," Harvard Law Review, 61 (September 1948), 1300. " A n arbitrary dividing line of 50 percent for the share of industry output controlled by the largest four firms is serviceable, in spite of its obvious shortcomings. 20 The complexities of the problem are well known. See Neumann and Morgenstern, Theory of Games.

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each seller with all buyers. Neither of these extremes is uncommon in fact, and intermediate cases exist also. The formal properties of equilibrium in these arrangements have little interest. We shall instead inquire into the circumstances which give rise to the relationships of alliance and rivalry that we find in such markets, and into their performance as a substitute for competitive markets.21 BILATERAL COLLUSION AND PRICE LEADERSHIP

If elements of rivalry were completely absent from both sides of the market, each side would in effect be a single bargaining unit, and the bilateral-monopoly solution would follow. But it is hardly realistic to expect tacit oligopolistic collusion to produce such a result. In the first place, there are well-known limitations to perfect joint-profits-maximization even in a single-stage oligopoly. Wide disparity in capacity and in costs, unwillingness to surrender sovereignty, uncertainty concerning future changes in relative advantages, mistrust and bad faith, the difficulty of forming consistent estimates when market conditions are very complex or changing rapidly — all these are commonplace. In the second place, the bilateral-monopoly solution requires vertical "collusion" of the two close-knit groups to maximize the profits of the two jointly, which adds still another kind of uncertainty to the oligopoly problem. It is impossible to conceive of buyers and sellers making or accepting allor-nothing quantity offers when nothing more than tacit collusion knits them together. Recognition of mutual interdependence, horizontal and vertical, would not be sufficient; an explicit agreement designating official negotiants and participation quotas would be necessary (and, of course, might conceivably exist in some situations). To circumvent these difficulties the sellers in a bilateral-oligopoly 31 While this book applies the analysis only to the tin-can and tin-plate markets, the following generalizations can be supported with instances from many other industries. A summary review of a number of industry cases was given by the author in "Bilateral Oligopoly in Industrial Product Markets," cited above. See also Adelman, "The Dominant Firm"; John A. Guthrie, The Newsprint Paper Industry (Cambridge, Mass., 1 9 4 1 ) ; Nicholls, Theoretical Analysis of Imperfect Competition, especially chs. iv-xi; Joel B. Dirlam, "The Fluid Milk Industry," and William F. Hellmuth, Jr., "The Motion Picture Industry," The Structure of American Industry, ed. W . Adams (New York, 1 9 5 0 ) ; United States Tariff Commission, Flat Glass and Related Glass Products, Report No. 123, second series (Washington, 1 9 3 7 ) ; Amended Complaint, United States v. Libbey-Owens-Ford Glass Company, et al., CCH 1 9 4 8 - 1 9 4 9 Trade Cas. If 62,323 (N.D. Ohio, 1 9 4 8 ) , and Brief of the United States in Opposition to the Defendants' Motions at Close of the United States' Case-in-Chief; Richard G. Gettell, "Pluralistic Competition: With an Illustrative Case Study of the Rubber Tire Industry" (unpublished doctoral dissertation, University of California, 1 9 4 0 ) ; Thomas D. Kaufmann, "Movie Markets and Monopoly" (unpublished doctoral dissertation, Harvard University, 1 9 4 9 ) ; Lloyd G. Reynolds, "Competition in the Rubber Tire Industry," American Economic Review, 2 8 (September 1 9 3 8 ) .

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23

market may choose to abdicate the price-making function to some one of their number, usually the largest. Even when there are no large buyers, price leadership is usually an imperfect instrument of market control, since it is subject to disturbance through secret price shading by other sellers and disputes over possession of the leadership. Bilateral oligopoly may weaken it further. Several results are possible: (1) Leadership may also emerge on the buying side, focussed in some dominant firm, and the price arrived at in the bargaining between dominant buyer and dominant seller will govern all other buyers and sellers. Prices set by the leading bargain will be lower than the price would be under seller-leadership alone, to the extent that the bargaining power of the larger buyer can pull it down. This is unlike bilateral monopoly because the market unity is not perfect on either side. The buyer uses his own bargaining power to get the best possible price, not the bargaining power he would have if he were the legal purchasing agent for the entire industry. The most that either side can hope for is that other buyers and sellers will observe this price once it is set. The leadership of the leading bargain may be formalized by interlocking contracts: other sellers in their contracts with other buyers stipulate the quoted price of the leading seller, and the other buyers accept this arrangement in the knowledge that the price will be quoted only after negotiation with the leading buyer. If sellers' leadership discipline is weak, other buyers may bring pressure to bear surreptitiously on large sellers to grant secret concessions, and if this becomes general, the whole price structure can crumble, leaving the leader with a spurious leading price which no one follows. (2) Large buyers may act individually to obtain price concessions from leading sellers. No one buyer is recognized as the leader, but changes in the ruling price may be initiated when any large buyer concludes a bargain at a different price with the firm recognized as a price leader among sellers. In this case the buyer's incentive to undercut the leader's price by putting pressure on other large sellers is strong, and leadership may be shifting and uncertain. (3) Leadership may be preserved in form, but actually be followed only among smaller buyers and sellers. The larger buyers may get discriminatory concessions from the leader and from other sellers which do not spread over the market, while the smaller sellers observe the leader's posted prices and the smaller buyers get no concessions from posted prices. Here the practice of leadership merges into the practice of systematic price discrimination. The relative advantage of the two opposing interests depends on (a) the amount of pressure that any leader on the buying side can bring to bear on the leading seller; (b) the ability of buyers to detach sellers

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from a united front. Some generalizations on relative bargaining power are now in order. ASYMMETRY IN MARKET POWER

"Bargaining power" is not a precise concept; the phrase is a way of expressing some conclusion about the totality of market structure. If we try to specify those factors which determine bargaining power, we find that we are merely enumerating and describing all the structural elements of the market.22 Anything which increases competition on one side of the market will increase a monopolist's bargaining power on the other side. It is not possible to say whether entry will typically be more free or firms more numerous on the buying side or on the selling side in bilateral oligopoly. If, however, we assume that concentration is high and entry is highly restricted on both sides of the market, another factor takes on considerable importance: the existence of excess capacity. Excess capacity may be a long-term, chronic condition in an industry. This is largely a matter of freedom of entry and exit relative to the rate of growth in demand. We shall not be concerned here with longrun excess capacity, but rather with the periodic emergence of idle capacity owing to fluctuations in general business. We should expect to find alternating periods of excess capacity and short supply in almost any manufacturing industry. But "idle capacity" is here given a special meaning by the characteristic shape of the short-run cost curve in most lines of mechanical industry. In the short run, marginal costs tend to be constant over a considerable range, and average costs to fall as fixed costs are spread over a greater output, until normal "physical" capacity is reached, when all curves turn sharply upwards. Now "idle" capacity need only mean that firms are operating in the flat region of their marginal cost curves, i.e., in the region of falling short-run average costs. If, as is quite common, industry capacity is adapted to near-peak loads, so that normal operating ratios are less than 100 percent, manufacturers can normally expand output with falling average costs in the short run. When the buyer offers a large order if prices are shaded in his favor, the seller has a powerful inducement to offer lower terms. The large buyer can weaken the discipline of oligopoly by playing off against each other, taking advantage of the effect that his large volume w;ill have on any seller's average costs. Moreover he can use this tactic without colluding with other buyers, tacitly or openly. The condition on the buyers' side that corresponds to excess capacity among sellers is found in just those periods of peak demand when there is excess of demand over supply. (For such a "scarcity" to dis33 See C. E. Lindholm, " 'Bargaining Power' in Price and Wage Determination," Quarterly Journal of Economics, 62 (May 1948), 396-417.

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RELATIONS

25

appear, price adjustments would have to extend quickly into all markets surrounding this one, and oligopolistic price policy usually involves too much friction for rapid and simultaneous changes in a whole chain of markets.) One might suppose that in periods of short supply sellers could use the same tactics that buyers do in a buyers' market. Buyers might try to hold the price line by collusion, and sellers to break up the collusive scheme and exact higher prices by playing buyer off against buyer, holding out the bait of additional supplies of scarce material. However, we do not find that these tactics are used by sellers in anything like the same degree. The periods of peak demand are not usually as long as the periods of operation at less than full capacity. The sellers' psychology is more often than not adapted to a normal condition of idle capacity in the sense explained above. The tendency among manufacturers is to build capacity beyond demand so that in brisk times they can meet a rise in demand largely by increasing output. In times of short supply sellers will usually resist any pressure by large buyers for price concessions, but beyond this they will exercise caution in making changes. They may ration the available supply in a manner acceptable to most buyers; but they will refrain from raising prices until the combination of trends in cost and demand conditions clearly warrants it. Sellers hesitate to give buyers their own medicine at such times, fearing the imminent return of a buyer's market. Thus, there tends to be an asymmetry of bargaining power in bilateral oligopoly, other things being equal.23 PRICE DISCRIMINATION

In a particular industry other things may not be equal; concentration may be much greater and entry much more difficult on the sellers' side of the market. Even so, the large buyer seems to wield disproportionate influence. A highly concentrated oligopoly which would otherwise have little trouble in maintaining monopolistic prices through tacit collusion can be badly shaken by just a few instances of large-buyer pressure, even when the greater part of the buying industry consists of a large number of small firms. It is also possible that the large buyers under these circumstances will obtain discriminatory benefits for themselves alone, the sellers in effect paying them tribute to prevent them from unsettling the whole market. Systematic price discrimination may also arise when the buying side too is highly concentrated, if buyers have unequal bargaining strength. 23 " [ T h e ] scales are fairly strongly tipped in favor of the buyers . . . since each of them can act independently to drive a hard bargain as he seeks supply, whereas to resist this pressure the sellers must have effective collusion on price and maintain it under duress." Joe S. Bain, Pricing, Distribution and Employment ( N e w York,

1948), p. 235.

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Price discrimination in bilateral oligopoly does not necessarily produce maximum profits for sellers, as it would if a single seller sold to competitive buyers in separated markets with differing elasticities of demand. Discrimination is rather a reflection of variations in bargaining power on both sides. A variety of discriminatory price structures can occur, depending on the structure of the two industries and the way in which their respective members pair off, and there is no point in attempting to generalize. A distinction should be made, however, between those situations in which sporadic discrimination is merely the first stage of a general change in prices and those in which a system of discriminatory prices with persisting differentials is established in a market. The former is more likely to occur in markets with a "loose" oligopoly structure on both sides, and changes are more likely to be passed on to ultimate markets. Systematic discrimination is more likely when concentration is high and conditions facilitate secrecy on particular bargains, and the outcome may be simply a redistribution of monopoly rents in favor of the large buyers. PAIRED RELATIONSHIPS AND QUASI INTEGRATION

The large buyer often focusses his bargaining power on a single seller in order to get a lower price. If all buyers do this and each becomes linked to a particular large seller, the vertical parallelism of the market becomes complete. When a buyer trades with a single seller and vice versa the result can be called "quasi integration." It would be surprising to find many instances of market-wide quasi integration. Differences in relative capacity and efficient size on the two sides of the market would inhibit mutually exclusive dealing. We more often find exclusive dealing between plants rather than between firms. A multiplant buyer may find cost advantages in having an exclusive supplier for each plant while the firm itself deals with a number of supply sources; alternatively, the full requirements of a buyer's plant are sometimes supplied from a single plant which the seller has erected for that purpose. The ties that exist between particular buyers and particular sellers in bilateral oligopoly do not commonly result from one side's having the unilateral power to force the other side to relinquish its competitive discretion. A quid pro quo is almost always involved. An oligopolistic buyer wishing to secure a reliable source of supply or a seller wishing to stake out a protected market is generally forced to purchase the privilege of exclusive dealing from its opposite number. And sellers grant price concessions to large buyers in return for the cost benefits of large orders.

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27

The effect of exclusive dealing on the competitive performance of such markets is not clear. Each side may be able to protect itself against exploitation from the other, making exclusive dealing fairly innocuous as far as they are concerned. But this does not make ultimate consumer markets more competitive. There is also a question of the flexibility and functional unity of the market when quasi integration is widespread. If exclusive paired relationships between buyers and sellers partition the market vertically in such a way as to make these relationships virtually impervious to the crosscurrents of competition, then the structure is tantamount to vertical integration, and we would have to look to other markets to assess the force of competition. But available studies of vertical alliances between buyers and sellers in bilateral oligopoly indicate that they do not pinch off competition to this extent. Seldom do we find that insulation from other bargains is wholly effective. Buyers and sellers maintain enough cross-relationships to permit a change originating anywhere to force adjustments in all parts of the market. Even firms having a very stable quasi-integrated relationship, involving for instance a cost-plus contract with guaranteed yearly volume, continue to bargain at arm's length. A whole system of alliances is subject to reconstruction or alteration if there is a change in the fundamental bargaining position of some of the major participants. Complete vertical integration can of course substantially restrict freedom of entry, and quasi integration may also restrict it, though integration by contract is at least periodically subject to the test of the market. Whether quasi integration contributes anything net to the exclusion of newcomers will depend on the combination of entry conditions at both levels of the market. VERTICAL INTEGRATION

Vertical integration may be a response either to a cost opportunity or to a bargaining situation. It is possible that certain private economies of integration will be available to the large firms but not to smaller ones. For instance, the large firm can sometimes realize savings by keeping an integrated division, supplying most of its requirements of some raw material, operating near the optimum level while it displaces the burden of market fluctuations — the costs of idle capacity — onto independent suppliers.24 To realize such private economies the buyer must be sure that he himself will not be caught in a squeeze when he attempts to expand his open-market purchases in times of short supply, and in a bilateral-oligopoly market where power is about equally distributed this may be a dangerous assumption for him to make. 24

Adelman, "The Large Firm and Its Suppliers," p. 116.

28

TIN CANS AND TIN PLATE

The following discussion is confined to the strategy and tactics of integration where cost is not a decisive element. Firms in bilateral oligopoly might undertake it for several reasons. (1) An oligopolist often finds it convenient to have a bridgehead on the opposite side of the market as a check on costs, profit margins, or market conditions. This need not be a substantial operation, but it can always be expanded if large independent suppliers or customers offer terms that are too far out of line, and the suppliers or customers will of course be aware of this. (2) A firm may undertake integration if it is threatened with foreclosure from the other side of the market. If one oligopolist tries to increase his own monopoly power by preempting sources of supply or markets, his rivals will be certain to take vigorous countermeasures, perhaps by invading the opposite side to secure an integrated supply or market subsidiary. (3) Even though it may face no direct threat of foreclosure, a large firm may integrate vertically in response to any circumstance which places it at a disadvantage in its cross-market relations. If oligopolistic suppliers, for instance, maintain strong collusive control over price, the large buyer will generally consider bypassing the dominant sellers and creating a satellite source of supply. It must compare the costs of doing so with the terms that it expects to get from suppliers in the light of the future bargaining situation. In this sense vertical integration may be a substitute for price discrimination. The large firm will probably use forward or backward integration, not as a short-run bargaining tactic, but as a response to more or less permanently unfavorable terms of trade. Once undertaken, the commitment is not easily revoked. The feasibility of backward or forward integration in view of cost conditions, market accessibility, patent restrictions and the like, will presumably be known to sellers and buyers, and they will adapt their policies in the long run to the threshold terms that will induce a large firm on the other side of the market to move in on their own. It may be, of course, that the short-term threat of changing suppliers will be a more potent weapon in the hands of the large buyer than the long-term threat of backward integration, and that short-run bargaining tactics will dominate the sellers' behavior also. But cross-market integration will remain as an ultimate check to joint-profits-maximization by firms on the other side. Vertical integration can take the form of merger of a large existing buyer with an existing seller. This is the probable result when the motive for integration is the avoidance of foreclosure by rivals. When a firm wishes to bypass a monopolistic agreement on the opposite side of the market it is more likely to build up a new unit to replace a

29

VERTICAL PRICE RELATIONS

previously existing market relationship. Vertical integration in bilateral oligopoly thus is likely to mean new entry and expansion of capacity in the industry across the market. One of the most common features of oligopoly is a blockade on the entry of new firms, which involves the partial suppression of one of the vital mechanisms of resource allocation. Now it is usually true that entry into an oligopolistic industry is much easier for a large buyer (or seller) who has dealt with the industry for some time and who has adequate information on costs, technology, know-how and marketing requirements, than for any outsider. Backward or forward integration may be the only way to secure entry into the industry; the threat of integration may help to establish the long-run price results that free movement of resources into the industry would tend to produce. We may conclude, therefore, that the possibility of vertical integration involving the inflow of new resources on one side or the other of a bilateral-oligopoly market can produce more nearly competitive results than if buyers or sellers alone were atomistically competitive. The long-run constraints it will impose on oligopolistic price policy must be studied in the context of particular markets, since the ease of backward or forward integration will obviously vary greatly from industry to industry. THE INFLUENCE OF SURROUNDING MARKETS AND THE TRANSMISSION OF PRICE CHANGES

The foregoing discussion of bilateral oligopoly was confined to a single intermediate market. It is now necessary to consider other parts of the market chain lying "below" it toward the ultimate consumer and "above" it at earlier stages of manufacture. If all other stages were perfectly competitive, the problem for theory would merely be to discover the division of rents, given the monopolistic structure in the intermediate market. In fact other markets are likely to be imperfectly competitive, and may themselves have bilateral-oligopoly structures with a greater or lesser degree of concentration. The problem for empirical analysis is to discover how competition and monopoly in surrounding markets affect behavior in bilateral oligopoly. Specifically, will a greater degree of competition in markets toward the consumer weaken control and promote rivalry in markets further back? It has already been said that pure competition does not offset monopoly. If there is a monopolist at an intermediate position with power to restrict entry, a purely competitive structure at other stages simply means that he can maximize his profits without interference from other firms. Discussion will be facilitated by the following notation: A

) (i) (

BC

) (

DE

) (

F

30

TIN CANS AND TIN P L A T E

If F represents the body of ultimate consumers of a product, the chain of markets lying "above" the consumer market ( 3 ) can be traced backward indefinitely. Ε is the industry selling the final product and D designates these same firms in some market or set of markets ( 2 ) in which they buy. Ε for instance may be a group of oligopolistic firms while these same firms buy a given factor of production in isolated markets as pure monopolists at D. Of course a number of channels will converge on the final product, not just one as shown here, since firms E, C, etc. must purchase a number of different inputs in different markets. The chains of supply may become highly interconnected at upper stages before reaching "primary" factors of production A. To avoid the complexities of general equilibrium analysis we must suppose that pure competition governs all stages of all other channels of supply at points where they do not connect with this one. The profits accruing to a pure monopolist with blockaded entry in an "upstream" market like (1) or (2) will depend on the elasticity of the derived demand for the input. This in turn depends on the importance of the input in the production of the final good sold in the consumer market and on the adequacy of substitutes, either for the input itself in its own market, for semifabricated components in whose production it is used, or for the consumer good in which its cost is ultimately embodied. If the input plays only a minor part in the production of the ultimate commodity the monopolist at a position remote from the consumer may be able to exact a very high rate of profit with only a slight effect on the price of the consumer good. The strategic value of monopoly positions will be affected by the possibility of substitution at various levels. If factor substitution is easy, then single monopoly positions "up" the chain will be weaker; if product substitution is easier, then single monopoly positions closer to the consumer will be weaker. Monopoly of a single factor can also be weakened by product substitution down the line if that factor is not necessary for the production of the substitute products.25 Suppose there is monopoly in some other market of the chain also; does this "offset" the power of the first monopolist? We must distinguish between the effect of intermarket influences on the firms at some one stage, and the effect on the interests of the ultimate consumer. Injury to some buyer or seller does not of course necessarily involve a corresponding benefit to consumers. The case of bilateral monopoly in an intermediate market such as ( 2 ) has already been discussed. It appears 26 This is one reason for distinguishing between "entry" and "substitution" at a given level. If there is free entry but no substitution at a given stage of the market, the market power of a monopolist selling to that stage is enhanced; while if the reverse is true it may be weakened.

VERTICAL PRICE RELATIONS

31

that under our static-equilibrium assumptions the results can be no better than this no matter how many additional stages of pure monopoly may exist. While the position of a monopolist at C is weakened by a monopsony at D so that C will probably have to split part of the gains with D, none of the benefits of this will filter down to consumers at F (so long as the consumer market is purely competitive on the buying side). If there is monopoly at A, competition at Β and C and monopoly again at D, direct bargaining between A and D is prevented. Monopoly equilibrium will be reached only through the effect of each monopolist's price policy on the costs, numbers, and demand conditions of this layer of competitive firms, and since the monopolists can make no all-ornothing offer to each other the output will probably be less and the final price higher than in the pure bilateral-monopoly case. Two contiguous bilateral-monopoly structures will in theory affect the final market in the same way as a single one if the monopolists can maintain vertical collusion perfectly through two stages; otherwise the final price will be higher and the output less. Increasing market power at both ends of the chain leads to a redistribution of gains away from a monopoly in the middle, but it is unlikely under pure monopoly that any of the gains will be repossessed by the consumers at F. 2 e The above conclusions are based on highly artificial models. They can be modified by the following circumstances: ( 1 ) When competition is imperfect rather than perfect, presenting various obstacles to a monopolist who attempts to reach through the imperfectly competitive stage to exploit a final market. (2) When oligopoly rather than monopoly exists in various forms along the chain, so that sellers must reach some kind of accommodation with each other while they are attempting to deal with powerful antagonists across the market. ( 3 ) When uncertainty is pervasive and the interrelations among large rivals, customers, and suppliers are very complex. Under some combinations of these circumstances the results may be much closer to effective competition in any one market than its own structure would lead one to expect. Structural complexity, imperfect knowledge, and change all inhibit the maximization of profits through tacit collusion. It was said above that the structural complexity of a bilateral-oligopoly market itself may weaken monopoly control on either side. All that need be added here is that joint vertical collusion and monopolistic restriction in the intermediate market become more " For an elaborate discussion of the effects of different structures in a chain of markets on factor prices, see John T. Dunlop and Benjamin Higgins, " 'Bargaining Power' and Market Structures," Journal of Political Economy, 50 (February 1942), 1-26.

32

TIN CANS AND TIN

PLATE

difficult to maintain the greater the rivalry among the oligopolistic buyers when they resell in subsequent markets, and this rivalry may be aggravated by large buyers in those markets. Joint vertical collusion is weakened as power is diffused among oligopolists up and down the chain. A large seller must achieve a precarious equilibrium in an environment which threatens him with adverse action from large rivals, customers, and suppliers, and damaging alliances between rival and rival, rival and customer, rival and supplier. If this state of affairs prevails in all markets down to the consumer level the consumer will benefit from the resulting restraints on monopoly power. The distribution of monopoly power in a chain of markets will also affect the way in which price changes originating at one point are transmitted forward and backward. The effects of variations in factors costs and in consumer demand will have to be distributed and absorbed somehow. In pure competition, the various points of the chain will be affected according to their particular elasticities of market demand, the elasticities of substitution among factors of production, the proportion of overhead costs in the short run and the speed with which the number of firms adjusts itself to abnormal profit conditions, and so on. When there is oligopoly at one or more points, on the other hand, various kinds of friction will appear. Oligopoly at any level of the market tends to produce relatively rigid prices, especially where there is little differentiation of the product. Reluctance to change prices is principally due to the uncertainties involved in reaching a new market equilibrium once the old one has been upset by a price change. The same difficulty appears in bilateral oligopoly, enhanced by the presence of large firms across the market who are always ready to prolong any disturbance to equilibrium in their own interests. Devices such as price leadership which reduce uncertainty and promote orderly price movements in oligopoly are found in bilateral oligopoly also, but provide a less effective means of market control. In periods of excess capacity buyers readily exact individual concessions from sellers, which spread rapidly among other large buyers and which may quickly undermine the whole price structure and benefit small buyers as well. Leading sellers are more reluctant than they would be in a simple oligopoly market to raise prices when demand is high, since the risk that other sellers will not follow is greater when they must deal with powerful buyers. Both variations in cost and variations in demand will determine the timing and direction of price changes in a chain of oligopolistic markets. In contrast to price movements in competitive markets, however, prices will change "jerkily." It may appear that prices change only in response

VERTICAL PRICE RELATIONS

33

to changes in factor prices which are themselves "sticky"; but the influence of demand is always present, and indeed the whole market structure may correlate cost changes with demand changes. A group of oligopolistic firms at one stage of the market may find that they can change prices in an orderly fashion by providing for a formal "passthrough" of cost changes in contracts with their buyers. The oligopolists will tend to resist any price increases from their suppliers as long as they have substantial excess capacity. As demand approaches capacity all along the line, however, so that buyers can readily pass on increases in their turn, the factor price increases will be accepted. Price reductions are correspondingly likely when the pressure for them gathers force through several layers of oligopoly suffering from excess capacity. An oligopolist will press for a price reduction from his suppliers, even though the reduction must be passed along to subsequent markets, if he thinks that demand in those markets has become elastic enough to produce a beneficial effect on his own industry's sales if price is reduced. Nevertheless there may be some short-run fluctuations in demand which are uncorrected with cost changes, and these do not as a rule lead to price changes.27 Differences in market power will of course affect the result. The more powerful an oligopoly at one level relative to other stages, the more likely that it will be able to maintain a monopolistic profit margin while cost variations are passed through to later stages or absorbed by earlier ones. It is also possible that reductions in price following the pressure of large buyers will be trapped in "pockets" of price discrimination before reaching the ultimate market. An oligopoly will retain its power to benefit at the expense of a contiguous competitive stage. For instance, if we suppose that sellers in the consumer market are competitive, oligopolistic firms supplying them can set up buffers against variations originating on the side of demand. The prices of the competitive firms will fluctuate, and so will their profits, while oligopolistic suppliers hold their prices steady and take advantage of the relative steadiness of output in the consumer market. It is only when secular movements in demand or changes in cost begin to affect the oligopolistic levels that the intermediate market buffers disappear, and upward or downward movements of the whole price structure become likely. In short, the secular movements of price tend to be negotiated in the bilateral-oligopoly markets following long-term cost changes, and to " Even here there may be a movement of actual transaction prices above or below a fictitiously rigid quoted price, owing to charges for extras, changes in delivery terms, etc. See Richard B. Heflebower, "Full Costs, Cost Changes, and Prices," in Business Concentration and Price Policy (Princeton, 1955), especially pp. 389-90.

34

TIN CANS AND TIN P L A T E

move out from there, the negotiation and diffusion of price changes being influenced by the state of demand. Short-term movements of price owing to fluctuations in demand unassociated with cost changes arise for the most part only in the competitive sectors and tend to be confined to them.

Chapter III Market Structure in Tin Plate Tin plate consists mostly of steel, not tin. It is thin-rolled steel strip lightly coated with tin. The product has a number of uses: it is an important material in the manufacture of hot-air ducts, kitchen utensils, toys and novelties, seals and crown caps. Its principal use is in the manufacture of "tin" cans. The proportion of tin plate and black plate used in the manufacture of tin cans in 1956 was 75 percent (Table 1). The proTABLE 1. Tin plate and finished black plate produced and consumed in metal-can production, 1956 Product

Tin plate Finished black plate Total

Food cans" Nonfood cans' Total

Short tons

Percent of total production

Production 5,443,237 912,972 6,356,209 Consumption 3,011,980 1,773,691

47.3 28.0

4,785,671

75.3

Sources: American Iron and Steel Institute, Annual Statistical Report, 1956; United States Department of Commerce, Bureau of the Census, Facts for Industry, Series M 7 5 D : "Metal Cans — Summary for 1 9 5 6 . " • Includes cans for coffee and soft drinks. b Includes beer cans and pet-food cans, among others.

portion of tin plate alone used by the can industry was higher, since black plate (which is steel of the same gauge uncoated with tin) has more alternative uses. About 11 percent of the total plate was exported, and crown caps used 6 percent. The remaining 10 or 11 percent went into miscellaneous end products.1 A . TECHNOLOGY

The first stages of the technology of tin-plate manufacture are those 1

Estimated by American Iron and Steel Institute, Annual Statistical Report,

1956.

36

UN

CANS AND TIN

PLATE

of the steel industry at large.2 The steel ingots are heated in soaking pits and made into slabs which in the modern process are rolled in continuous hot-rolling mills. These hot-rolling mills are adaptable to a large range of thicknesses or gauges, from heavy plate to very thin hot-rolled strip. The tin-plate gauges occupy a segment of this range, from 0.0239 down to 0.0060 inch thickness. Can-making plate ranges from 0.0141 to 0.0060 (29 gauge to 38 gauge); the base standard is 0.0110 inch, about 31 gauge.3 The strip from which tin plate is made emerges from the hot-strip mill as a continuous coil hundreds of feet long. Each coil is made from a single slab. The strip is then pickled in an acid solution to remove scale, and recoiled. It may at this point be diverted to other uses, but if it is destined for can-making it is cold-reduced in a bank of huge tandem rollers, which lessen its thickness to the desired gauge and give it a smooth finish. The coils, greatly lengthened in the cold-reduction mill, are now cleaned in an alkali bath and then annealed under controlled atmospheric conditions, usually in portable ovens, to remove the stiffness that develops in the cold-rolling process. Thereupon the strip is passed through a temper mill — another cold-rolling operation — which gives it the exact hardness and surface desired. After another pickling, it is ready to be tinned. The cold-reduced strip may be cut into sheets and shipped to canmakers without being tinned. The product at this point is called black plate.4 Some cans, such as those for motor oil, do not require a tin coating. If the black plate is to be tinned it goes to either an electrolytic or a hot-dipping tin line. The two tinning processes are quite different. The hot-dip process imparts a thicker tin coat to the basic metal. Hot-dipped tin plate must be used to make cans in which highly corrosive products are to be 2 The description of tin-plate manufacture in this chapter is based partly on personal observation and interviews at various tin-plate mills and partly on the following: C. A. Ferguson, "Changes in the Processes and Products of the Tin Plate Industry," Yearbook of American Iron and Steel Institute (New York, 1 9 5 2 ) ; D. A. McArthur, Electrolytic Tin Plate (Warren, Ohio, Wean Engineering Company, 1 9 5 2 ) ; J. N. Crombie, "Tin Plate," American Iron and Steel Institute, Technical Committee Activities, 1949, pp. 129-171. 8 Taken from product specifications of Jones & Laughlin Steel Corporation. 4 Tin-plate terminology is riddled with archaisms and ambiguities. "Black" plate is not black but silvery, almost as lustrous as tin plate. The phrase dates from the antiquity of the industry, when the basic plate was made of hand-hammered black iron. Moreover, it is called "plate" only because most of it is plated with tin. It belongs to the genus of steel products called strip. A steel "plate" is a much heavier and thicker rolled product. "Sheets" as a category of steel products are midway between plate and tin plate. Thus sheets of black plate are neither sheet nor plate, nor are they black. Another ambiguity is found in the phrase "cold-reduced." Steel being cold-reduced is as a rule too hot to touch; it is merely cold by comparison to the obsolete hot-reduction process.

MARKET STRUCTURE IN TIN PLATE

37

packed. In this process the coil of black plate is side-trimmed and cut into sheets of requisite size. The sheets are fed mechanically into a bath of molten tin and then through a bath of palm oil, after which rollers even the coating and the sheet is wiped clean of excess oil. A light film of oil remains as protection against moisture. The hot-dip method cannot produce an absolutely uniform tin coating, nor can it produce lighter weight coatings than 1.25 lb per base box.5 The alternative process, electrolytic tinning, is a more recent development. The first successful electrolytic-tinning line was installed by The United States Steel Corporation in 1937 at its Gary Tin Mill. Many years of experimentation by several steel companies preceded the introduction of electrolytic plating. Its advantages were that steel strip could be plated continuously, without having to be cut and run through in separate sheets,® and that much thinner coatings of practically perfect uniformity could be applied. The tin shortage during World War II gave tremendous impetus to the electrolytic method. By 1956 (Table 2) production of electrolytic plate was almost four times as great as production of hot-dipped plate. It is unlikely that hot-dip tinning will disappear completely, since there are some canned products for which it is necessary. Electrolytic plate cannot generally be used for canning even less corrosive foods until a protective lacquer is applied over the tin coating. There are three different electrolytic processes in use. All three are alike in that the strip moves continuously, through the preliminary pickling and then over the conductor rolls which plate the strip with tin. It is possible with electrolytic processes to coat each side of the strip with a different thickness of tin. The interior of tin cans ordinarily requires a thicker coat than the exterior. This has aided efforts to conserve tin. Unlike hot-dipped plate, electrolytic plate has a matte surface. Various methods are used to brighten the surface, and create a tin-iron alloy at the point of bonding, such as radiant heating in the line, electric induction, or electronic (noncontact) induction of an electric current. "Flowbrightening" must be geared to the speed of the line, and at the speed of over 1200 feet per minute that some lines attain it is difficult to manage. The same is true of shearing at the end of the line. Some highspeed lines require that the strip be coiled, removed, and sheared subsequently. Tin plate is customarily shipped to can-makers in sheet form, though there is a growing trend toward shipping electrolytic plate in coils. It 0 This weight is called "common coke" plate — another archaism. For the definition of "base box," see p. 38. " It was found that continuous plating of strip by the hot-dip method was impractical because the coating weights that resulted were very uneven and much too heavy.

TIN CANS AND TIN PLATE

38 TABLE

Year 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941

2. Tin-plate production in the United States, 1926-1956 (net tons) Short ternes* 44,713 41,488 37,607 43,503 23,055 17,451 12,188 21,245 36,941 98,382 142,303 161,610 127,827 181,537 166,023 286,927 Hot-dipped

Tin plate

Total

1,875,240 1,773,389 1,920,789 2,034,170 1,859,564 1,559,294 1,104,563 1,888,125 1,683,268 1,898,578 2,355,531 2,708,373 1,601,679 2,505,636 2,572,558 3,222,472

1,919,953 1,814,877 1,958,396 2,077,673 1,882,619 1,576,745 1,116,751 1,909,370 1,720,209 1,996,960 2,497,834 2,869,983 1,729,506 2,687,173 2,738,581 3,509,399

Year

Short ternes

Tin plate

Electrolytic tin plate

Total

1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956

201,586 142,763 216,591 227,216 81,828 93,397 182,171 81,968 61,020 52,469 56,918 59,324 30,476 34,258 26,178

2,443,067 1,687,375 1,784,135 1,726,797 1,731,500 1,891,656 1,869,778 1,659,933 1,861,253 1,566,199 1,305,997 1,384,119 1,306,898 1,063,249 1,006,668

82,426 329,823 647,252 873,470 896,323 1,772,088 1,956,539 2,060,584 2,718,023 2,874,851 2,746,426 3,397,770 3,514,860 4,059,848 4,436,569

2,727,079 2,159,961 2,647,978 2,827,483 2,709,651 3,757,141 4,008,488 3,802,485 4,640,296 4,493,519 4,109,341 4,841,213 4,852,234 5,157,355 5,469,415

Sources: American Iron and Steel Institute, Annual Statistical Report, 1956; Metal Statistics, 1955. * "Short ternes" are thin terne plate — a product similar to tin plate but coated with a lead-tin alloy. Terne plate is not at present extensively used in can-making. is sold in terms of a unit called the "base box." A base box is an area of 31,360 square inches equivalent to 112 sheets 14 by 2 0 inches in size. If larger sheets are ordered, the 112-sheet unit would contain the equivalent of more than one base box; if the dimensions were 2 0 by 2 8 inches, for example, 112 sheets would be equal to two base boxes. T h e standard weight in terms of which prices are quoted is 100 lb per base box, and the base weight of the tin coating commonly used for price quotation

M A R K E T STRUCTURE IN TIN

PLATE

39

is 1.35 lb hot-dipped.7 The weight of a base box may actually vary between 55 and 135 lb according to the gauge of the steel, and the tin coating may vary from % lb to several pounds per base box. Manufacturers apply differentials to the basic price to take account of varying specifications. Sheets of tin plate now are typically much larger than 14 by 20 inches, and they are shipped in multiple packages of 1,000 to 1,500 sheets weighing a ton or more. Tin plate is ordinarily produced to order. The can companies require different kinds of tin plate for different purposes. In addition to the different weights of tin coatings, the temper specifications, and the various thicknesses of steel, there are five standard types of basic alloy chemistry, involving various proportions of copper and phosphorus. Buyers as a rule order tin plate of particular specifications 45 days in advance of the time it is needed, though this time can be shortened in case of emergency. A large amount of enormously heavy and expensive capital equipment is needed to produce tin plate. The basic mechanical concept is simple — to reduce steel to the requisite thinness and apply a coating of tin to it — and in the early days of tin plate manufacture the concept was simply applied. The complexities have come with the attempt to secure quality control. The steel industry has striven to attain exact thickness, perfect flatness, exact control over tin coatings, minimum waste in trimming, exact control over hardness, temper, and metallurgical qualities, elimination of surface breaks — and above all to do these things at high speed, continuously, and at low cost. The investment required is prodigious (Table 3), quite apart from the investment necessary to produce basic steel ingots and the steel slabs which are the input of the hot-rolling mill. The balancing of processes is difficult. There will be some excess capacity in some facilities when other facilities are running at capacity. The hot-strip mill will produce other steel products besides strip for tinning. If we assume that 40,000 tons of tin plate and black plate per month are produced,8 and allocate 40 percent of the investment in the hot-strip mill, plant, and conveyors, and 80 percent of the investment in power facilities to tin plate, the total investment allocable to tin plate amounts to about $75,000,000. The total outlay necessary for 7 Called 1J& lb because that much tin will be used in the manufacture of 1.35 lb coated plate. It is given the name of "standard coke" plate. A standard price for electrolytic plate with lighter coatings is gradually superseding the older "standard coke" basis. 8 It is not necessary for a tin-plate plant to produce this much to be efficient. If only one low-speed tinning line is installed and part of the capacity of the coldrolling mill is used for cold-rolling sheets, the minimum efficient output would be about 10,000 tons per month. (From industry sources.) Plants almost this small exist. They are under no apparent competitive disadvantages.

40 TABLE

T I N CANS AND T I N

PLATE

3. Investment costs and monthly capacity of tin plate production facilities, 1952 Approximate cost

Facility Hot-strip mill and pickling line Five-stand cold-rolling mill Cleaning and annealing (noncontinuous) Temper mills ( 2 ) Preparation of tin plate Electrolytic-tinning lines ( 2 ) Shearing lines ( 6 ) Sorting, inspecting, and shipping Plant investment: Building and offices Conveyors Power facilities

$58,500,000 11,500,000 9,600,000 8,000,000 2,000,000 10,000,000 6,000,000 1,500,000

Approximate monthly capacity (short tons) 100,000 45,000 40,000-45,000 40,000 40,000-45,000 38,000 40,000

3,000,000 1,500,000 2,000,000

Source: Figures supplied by three steel companies. Some items are averages of estimates, though the ranges are not wide. The first figure given is for a hot-strip mill 68 inches wide — wider than necessary for tin plate but adaptable to other rolled steel products. The electrolytic-tinning lines are assumed to be high-speed acid process. All of these costs had risen appreciably by 1956.

the entire product line would be upwards of $115,000,000. Clearly the magnitude of this outlay raises a formidable barrier to entry. Moreover, the scale of the tin-plate plant measured by output is very much larger than the input capacity of the typical can plant, where most tin plate is consumed. The output of a tin-plate mill producing 4 million base boxes a year — less than half the capacity of our hypothetical plant above — would be over twice as great as the requirements of the largest can factories, and perhaps ten times as great as the requirements of a small one.9 B.

CONCENTRATION

AND I N D U S T R Y

DEVELOPMENT

Tin plate is the aristocrat of the steel industry. There is no other steel product produced in sizable volume on which so much research and development effort has been lavished in recent times. Few others are subject to so many and such complex manufacturing processes or to such careful quality control. In a sense tin plate always has had a preferred status in the industry. It has one of the highest values per ton of any steel product, and its demand conditions are especially favorable. But it is in the last 25 years or so that the great changes have come, which have transformed the manufacture of tin plate from a pragmatic art to an advanced branch of applied metallurgical science. The transformation of technology has had a far-reaching effect on industry struc" See estimates of can-plate capacities in Chapter VII.

MARKET

STRUCTURE IN TIN

PLATE

41

ture and on the products of industries using tin plate. It has increased concentration in the tin-plate industry and has given the large integrated steel producers almost exclusive possession of the field. Concentration in tin plate has had its ups and downs. Tin-plate production began in the United States about 1890, following passage of the McKinley Tariff Act. Before that almost the whole supply was imported from Wales. 10 In 1898 the American Sheet and Tin Plate Company was formed as a trust to include most of the domestic capacity, and in 1901 this firm was amalgamated with others into the United States Steel Corporation. At that time U.S. Steel controlled about 77 percent of tin-plate capacity in the United States.11 The concentration in terms of the percentage controlled by the largest producer is less now than it was then. The same thing happened to U.S. Steel's share of tin-plate production that happened to its share of steel production in general. Other firms entered tin-plate production under its protective umbrella, notably Weirton Steel in 1905, Jones & Laughlin in 1910, Republic in 1913, and Bethlehem in 1918.12 The share of U.S. Steel in total tin-plate output fell rapidly to about 50 percent in 1913 and later to less than 40 percent. Monopoly was replaced by oligopoly. In the first three decades of this century there were a dozen or so small producers of tin plate, some of them unintegrated. The large integrated steel companies — eight or nine in number — accounted for most of the total output. It was nevertheless not too difficult for a small steel company to enter the production of tin plate, nor for an independent firm to purchase steel from a basic producer and begin the manufacture of tin plate. The technology was simple — almost primitive by contemporary standards. It was a "hand" process, requiring only simple machinery but much skilled labor. Steel bars, which the nonintegrated firms purchased from steel mills, were heated and rolled, doubled, reheated and rolled again, doubled again, and so on until the desired size had been attained. A single stand of rolls was used, and the "hot packs" were wrestled in and out of the mill by hand. Then followed the job of opening the packs and separating the individual sheets. Sometimes they were practically welded together. They had to be separated 10 The sources for the history of the development of the tin-plate industry in this chapter, unless otherwise indicated, are the following: United States Tariff Commission, Iron and Steel, Report No. 128, second series (Washington, 1 9 3 8 ) ; C. H. Hession, Competition in the Metal Food Container Industry, 1916-1946 (Brooklyn, 1 9 4 8 ) ; H. A. Knox, "The Development of the American Tin Plate Industry," (Pittsburgh, 1 9 4 4 ) , reprinted from Iron Age, November 11, November 18, and December 2, 1943. 11 Hession, Competition, p. 99. 12 The Wheeling, Follansbee, and Granite City steel companies were producing tin plate before the United States Steel Corporation was formed and continued to do so.

42

TIN CANS AND TIN

PLATE

by main force, and if the sheets stuck together holes or surface imperfections would result. Following this the sheets were pickled by immersion in baths of pickling solution, then annealed in batch furnaces, rerolled for exact thickness, annealed again at low temperature, and sent to the hot-dip tinning line. The plant investment was not small, since it included continuous tinning lines and powered rolling mills, but it was not at all comparable to that needed for the contemporary process. The transformation was largely a substitution of continuous, highspeed processes with exact and automatic control for the intermittent hand-processing methods. The first segment of the line to attain contemporary standards of automation was the tinning line.13 Small and nonintegrated producers had little difficulty with this. The later changes were more massive. The first successful hot-strip rolling mill was put into operation by American Sheet and Tin Plate Company (U.S. Steel) at Gary in 1927. A year earlier Wheeling Steel Corporation had introduced a continuous pickler for strip widths. At this time the hot strip still had to be cut into lengths, doubled into packs, and finished to tin-plate thicknesses on hand hot-pack mills. The first tandem cold-reduction mill was put into production in 1929, again by Wheeling Steel. Other producers quickly followed. Cold-reduction transformed the product itself as well as the process of manufacturing it. One important effect was to permit the use of lowmetalloid steels. In the hot-pack rolling process it was necessary to use steel having a phosphorus content of 0.07 to 0.10 percent to permit separation of sheets in the pack; a lower phosphorus content would cause the sheets to stick together badly.14 Cold reduction involved no such problems. Low-phosphorus steel is softer, more malleable, and less subject to corrosion. Its use meant greater ductility, better finish, more rapid processing. Moreover, cold-reduction led to greater shearing accuracy, reduction of waste, a much higher degree of flatness, and virtual elimination of "seconds" or "rejects." In addition the temperrolling process which follows cold reduction and annealing introduced for the first time the power to control the hardness of the steel exactly. There are now six temper classifications which can be produced to meet the needs of the final fabricated product. The cold reduction process brought to both the tin-plate and the can industries a "versatility of product not previously imagined," 15 and at a lower unit cost than Hot-dip tinning was more or less completely mechanized by 1922. Crombie, "Tin Plate," p. 17. Phosphorus is the most common metalloid, or at any rate the most troublesome. 15 Ibid., p. 2. Without cold-reduced plate such new developments as the beer can probably would not have been feasible. 13 14

43

MARKET STRUCTURE IN TIN PLATE

could be attained with the hot-rolling process. The latter was clearly marked for extinction. It was during this period that the production of tin plate moved firmly into the hands of the large integrated steel companies. The optimum scale of the tin-plate plant, with its associated hot-rolling mill, increased enormously, and the number of plants was sharply reduced. Most of the small producers could not manage the switch into the new technology. Their difficulties were exacerbated by the great depression following 1929, which severely squeezed the high-cost hot-reduction mills. But the older technology died a lingering death. In 1934 it still accounted for 87 percent of the total output of tin plate; in 1936, 76 percent. 16 However, the large integrated companies were getting into production, completing their new plants, adding automatic auxiliary equipment like automatic shearing lines, temper mills, pickling lines. The changeover was very rapid after 1938 (Table 4 ) and the last hot-pack tin-plate mill TABLE

4. Production of hot-reduced and cold-reduced black plate for tinning and finished black plate, 1938-1944 (short tons)

Year

Hot-reduced

Cold-reduced

Total

Ratio of hotreduced to total (percent)

1938 1939 1940 1941 1942 1943 1944

789,168 785,669 501,260 489,071 239,419 21,098 556

1,256,135 2,409,097 2,768,706 3,862,526 3,094,214 2,669,010 3,379,010

2,045,303 3,194,766 3,269,966 4,351,597 3,333,633 2,690,108 3,379,566

38.6 24.6 15.3 11.2 7.2 0.8 0.0

Source: Metal Statistics, 1955. closed its doors in 1943. 17 Hot-pack black plate for noncanning purposes continued to be produced in small quantities until 1951. 18 Continuous automatic production of hot-strip and cold-reduced plate 18 Knox,

"Development of American Tin Plate Industry," pp. 40-43. Business Week, August 28, 1943, p. 80. A small amount was produced on an obsolete hot-pack mill in 1950. The small 1944 production (Table 4) was not in a tin-plate mill. 18 Two companies actually entered the production of tin plate by the hot-pack method after the technological revolution had begun. Canton Tin Plate Company and Empire Sheet and Tin Plate Company, both of Ohio, began operations in 1930 and 1935, respectively. Their efforts did not last long. Canton in 1936 sold out to Republic, which dismantled the plant; Empire continued only a year or two. One nonintegrated producer, the Crown Cork & Seal Company, installed a tandem cold-reduction mill in 1935. This firm purchases hot-rolled strip from steel companies. Another, Granite City, managed to change over from hot to cold reduction in 1936; this firm is now a fully integrated producer. 17

44

TIN

CANS

AND

TIN

PLATE

stimulated innovation in continuous automatic tin-plating by the electrolytic method. This, however, has been a less revolutionary development. Though electrolytic lines are more costly and more complex than hot-dip lines, the two methods have continued in use side by side. Hot-dip production continues to decline. The small producers lost their position in the market because of the technological revolution, not primarily because of inferior bargaining power. Prior to that revolution the small manufacturers occupied an apparently vulnerable position between the integrated producers and the market. On the one hand, they were dependent on their integrated rivals for supplies of steel from which they could make tin plate. On the other, they sold tin plate to a market which was highly concentrated on the buying side. The can companies had close and durable affiliations with the integrated producers. The unintegrated tin-plate mills could have been forestalled from the market by exclusive purchasing arrangeTABLE 5. Distribution by company of tin-plate capacity in the United States, 1938 and 1954 (percent of total capacity) Company Integrated

1938

1954

84.3

97.1

33.3 12.8 12.2 7.3 6.2 5.9 3.3 3.3 — —

39.6 13.1 13.3 5.6 7.0 4.2 5.0 5.4 2.8 1.1

3.1

0

Granite City* Follansbee Bros.

1.7 1.4

— —

Nonintegrated

12.6

2.9

6.9 5.0 0.7

— — — 2.9

United States Steel National Steel (Weirton) Bethlehem Wheeling Jones & Laughlin Republic Inland Youngston Kaiser Granite City* Semi-integrated

Standard Tin Plate" McKeesport Tin Plate 0 Washington Tin Plate Crown Cork & Seal

d

Sources: "Western Steel Plants and the Tin-Plate Industry," Senate Document no. 95, 79 Cong., 1 sess. (Washington, 1945), p. 5; American Iron and Steel Institute, Iron and Steel Works Directory of the United States and Canada, 1954. * Granite City became a fully integrated producer in 1950. b Subsidiary of Continental Can Company. c Affiliate of National Can Corporation. 4 Not available.

MARKET STRUCTURE IN TIN

PLATE

45

ments or by purchasers favoring their large suppliers when demand was slack. There is no evidence however that this was the source of their difficulties. The concentration of productive capacity has increased appreciably since 1938. (See Table 5. Many nonintegrated producers had already disappeared by 1938.) One new producer has entered the industry— Kaiser Steel Corporation, producing at Fontana, California — and one producer which was semi-integrated in 1938 has now become a primary steel producer. The only nonintegrated producer left is Crown Cork & Seal, which still "rolls its own" by the cold-reduction process. It purchases hot-rolled strip from the integrated mills. The share of U.S. Steel in cold-reduced output has grown rapidly in spite of the handicap of a slow start. In 1938 U.S. Steel, though it had 33.3 percent of the total tin-plate capacity of the country, had only 25 percent of the cold-reduced capacity.19 Its rise to a 40 percent share of cold-reduction capacity in 1954 was due to a strenuous program of expansion and modernization. It built new tin-plate plants at Birmingham in 1938 and at Morrisville, Pennsylvania, on the Delaware River (its new Fairless Works) and in Pittsburg, California, after World War II. The new capacity in California (in the Bay area) replaced an obsolete hot-pack mill which had earlier been operated there by Columbia Steel Company, the local subsidiary of U.S. Steel. It was designed to use hot-rolled strip manufactured at Geneva, Utah, a plant built during the war under Government auspices and acquired by U.S. Steel in 1946. The Government had put some pressure on U.S. Steel to build up tin-plate capacity in the Western states because of the extreme discrepancy between capacity and demand there. 20 The U.S. Steel Corporation also overhauled and expanded its facilities at existing points of production.21 Some large integrated producers, e.g. American Rolling Mill Company, do not produce tin plate. Some others have never installed facilities for cold-reducing steel strip. Doubtless these firms would find it easier to enter the production of tin plate than any outsider. 18 "Western Steel Plants and the Tin-Plate Industry," Senate Document No. 95, 79 Cong., 1 sess. (Washington, 1945), p. 5. 20 In 'Western Steel Plants and the Tin-Plate Industry," the Attorney General was highly critical of "Big Steel" for failing to build more capacity in the west and for maintaining eastern basing points for shipments to that area. He opposed the sale of the Geneva primary steel facilities to U.S. Steel. According to Hession, Competition, p. 142, President Fairless of U.S. Steel promised that Geneva would be made a basing point for whatever products were manufactured there. 11 The steel industry spent several hundred million dollars in the changeover to the cold-reduction method in the five years prior to 1941. In the middle 1930's U.S. Steel alone wrote off $270,000,000 in obsolete equipment, a substantial fraction of which was in tin plate. "Investigation of Concentration of Economic Power," Hearings before the Temporary National Economic Committee, 76 Cong., 2 sess. (Washington, 1940), part 20, pp. 10797-98. (Hereafter cited as TNEC Hearings.)

46

TIN CANS AND TIN PLATE C . T H E BUYERS OF T I N

PLATE

Most tin plate is purchased by the can industry. American Can Company, the largest manufacturer, purchases roughly 40 percent of the tin plate going to the can industry, and Continental, the second largest, buys about 30 percent. Another 10 percent is purchased by three smaller can companies, National, Crown, and Heekin. Fifty or so small manufacturers take another 6 percent; while the remaining 14 percent is accounted for by several dozen canners who manufacture cans for their own use. (These figures take no account of tin-plate buyers outside the can industry.) In the past the concentration on the buying side has been greater than it is now. American Can was organized as a monopoly about the same time that U.S. Steel came into existence. Its share of the can market in the first years of its life was over 90 percent. Although its market position followed a descending curve over time similar to that of U.S. Steel, it has been a somewhat larger factor in the can market than U.S. Steel has been in the tin-plate market. For some years its position as a buyer of steel was unparalleled: it was the largest user in the world. It can no longer claim that distinction, but its enormous requirements have continued to endow it with a bargaining power comparable to that of U.S. Steel on the opposite side of the market. The growth of Continental Can Company from insignificance to a size approaching American's had added a strategic dimension on the buying side of the market, compared to the situation that existed fifty years ago. The growth of rivals of U.S. Steel has added a strategic dimension on the selling side. The market has evolved from near bilateral monopoly to bilateral oligopoly. The tin-plate market is unique in the steel industry. True, other steel products, such as automobile sheets, are sold to large buyers. But the tin-plate market combines this feature with an unequalled technological complexity and rapidity of progress, and relatively stable demand. Tin plate is less vulnerable to the business cycle than steel products in general. The demand for canned food, in which much tin plate ultimately finds its market, is income-inelastic compared to final uses like automobiles, steel-frame buildings, machinery, ships, and oil pipe. The demand for canned food is not postponable. The volume of tin-plate production declines in periods of depression, but probably less than any other major steel product. This causes the relative share of containers in total steel consumption to increase during such periods. (See Tables 6 and 7.) The demand for tin plate is of course more postponable than the demand for canned food, since in a period of falling prices the can producers can deplete their inventories while speculating on the prospect

MARKET STRUCTURE IN TIN P L A T E TABLE

47

6. Index of production of steel and of tin plate, 1926-1956 (1926 = 100) Year

Steel*

Tin plate"

1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956

100 93 107 117 84 54 28 48 54 71 99 105 59 98 124 153 159 164 166 147 123 157 164 144 179 194 172 206 163 216 213

100 95 102 108 98 82 58 99 90 104 130 149 90 140 143 183 142 113 138 147 141 196 209 198 242 234 214 252 253 269 285

Sources: American Iron and Steel Institute, Annual Statistical Report, 1956; Metal Statistics, 1956. • Total production of ingots and steel for castings. b Including short ternes.

of a further fall; but the limits to such a policy are fairly narrow. It was most vividly illustrated in the 1938 recession. (In recent years can plants have maintained inventories of tin plate seldom exceeding 2 months' use at peak production, and have warehoused part of this inventory at the tin-plate mills.) And since the pressure of excess capacity is less, prices of tin plate are less subject to cutthroat competition and demoralizing declines at such times. In the early 1930's, when steel firms were incurring heavy losses on overall business, it was estimated that the U.S. Steel Corporation earned over $10,000,000 annually from its tin-plate operations.22 A former president of U.S. Steel asserted that 22 Hession, Competition on p. 98 cites p. 19 of Standard Statistics Co., American Can Co., November 1931.

48 TABLE

TIN CANS AND TIN PLATE 7. Percent of total steel shipments used in manufacture of containers, selected years Year

Percent

1929 1931 1933 1937 1939 1941 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956

5.0 9.0* 13.5 9.8 8.5 7.2 9.4 8.7 8.5 8.2 8.3 8.4 8.6 7.8 9.7 8.3 8.2

Sources: Metal Statistics, 1943 and 1955; American Iron and Steel Institute, Annual Statistical Report, 1956. The figures include heavy metal containers made from coldrolled sheet — approximately one-quarter of the totals shown. * The physical volume of production of tin plate was 24 percent lower in 1931 than in 1929.

"tin plate has been one of the most profitable lines during the depression," 23 owing to the high ratio of production to capacity. The price has been relatively stable. The long-run demand for canned products has shown a strong upward trend, even in the 1930's, and this trend reflected backward has made for a buoyant and expanding market for tin plate. As a result of all these influences tin plate has been a profitable product24 for those steel producers that could keep abreast of its developing technology. The stability of the market is attractive despite the presence of large and powerful buyers on the other side of the market who may effectively limit the rate of profit that steel producers can earn on tin plate in the long run. Basically the demand for tin plate is inelastic. Strictly speaking there is no demand curve, because most of the output goes to large buyers and the price is set by negotiation. Therefore the sellers of steel are not able to take as much advantage of the inelasticity of demand as they could if buyers were numerous and small. But both buyers and TNEC Hearings, p. 10789. " T i n plate competes with other flat-rolled products for the capacity of the rolling mills. According to several executives of the can and steel industries interviewed, when steel is in short supply the mills tend to favor tin plate at the expense of certain other products because of its desirable performance over the long run. 58

MARKET STRUCTURE IN TIN P L A T E

49

sellers know that under most circumstances a cut in tin-plate prices, even if fully passed along in lower prices of cans and ultimately of canned food, will not result in a large enough increase in demand to compensate for the price cut. There are exceptions to this rule, of course. In periods of decline in general business and a fall in the general price structure, the time will come when a reduction in the tin-plate price will benefit not only the canning and can manufacturing industries but the tin-plate industry itself. At any time, however, the buyers of tin plate in negotiating the price have to fight against the strong conviction of the tin-plate producers that their profits will be sharply reduced by price cuts.23 Tin-plate demand is normally inelastic because it is derived through several layers of markets. Substitution is possible both for tin plate and for tin cans, but substitutes have not put much competitive pressure on either level owing to their higher price. The long-awaited aluminum can may be nearing the point of commercial practicability. In 1957 experimental plants using extrusion and deep-drawing methods were in operation. Aluminum cans were commercially produced in Europe. The cost of the material, however, was still higher than tin plate. The can companies were producing small-volume specialty cans from aluminum; but successful commercialization of mass-produced aluminum cans still depended upon re-use or return, like the bottle-return system in soft drinks. The immediate cause of the aluminum-can development was not a fall in the relative price of aluminum. Aluminum-sheet prices rose roughly 25 percent from 1951 to 1956, while the price of tin plate rose only about 13 percent. But if aluminum can narrow the price gap it may offer a serious threat to the position of steel in light container manufacture. Price policy in the tin-plate market has been insensitive to other substitutes in the past. Glass jars and bottles have been potential competitors for a somewhat longer time in the can market. In some uses this competition is quite sharp; in other segments of the can market it is fairly weak. (See Chapter VII.) The can manufacturers have found that substitute competition from glass has become generally stronger at certain points in movements of the relative price structure, and have then pressed for reduction in tin-plate prices to permit a more competitive can price. Comparison of the prices of some typical canned vegetables, tin-can prices, and unit tin-plate costs (Table 8) shows that the ratio of tinplate cost to wholesale price of the canned product is about one-fifth. 20 "Any reduction in the price of tin plate, even if the consumer of the canned commodity received the full benefit of such price reduction, could affect the final price of the canned commodity only slightly and could have no appreciable effect on the consumption of canned goods." United States Steel Corporation, TNEC Papers, vol. I: Economic and Related Studies (New York, 1940), p. 144.

50 TABLE

T I N CANS AND TIN

PLATE

8. Tin-plate and tin-can costs in relation to selling prices of canned vegetables, 1937 and 1954 Costs

Tomatoes*

Corn*

Peas*

1937 Wholesale price per can (cents) Cost of can (cents) Ratio of can cost to wholesale price (percent) Tin-plate cost per can (cents)" Ratio of tin-plate cost to can cost (percent) Ratio of tin-plate cost to wholesale price (percent)

5.625 1.902 34 1.285 68 23

6.458 1.902 29 1.285 68 20

0.25 1.902 30 1.285 68 21

Tomatoes"

Corn"

Peas"

10.21 2.875 28 2.058 72 20

11.67 2.875 25 2.058 72 18

1954 Wholesale price per can (cents) Cost of can (cents) Ratio of can cost to wholesale price (percent) Tin-plate cost per can (cents)· Ratio of tin-plate cost to can cost (percent) Ratio of tin-plate cost to wholesale price (percent)

15.00 4.019 27 2.953 73 20

Sources: For 1937, TN EC Hearings, Exhibit No. 1402, p. 10989; Metal Statistics, 1955. For 1954, "Price Spreads in the Canning Industry," Senate Committee on Agriculture and Forestry (committee print, 84 Cong., 1 sess., Washington, 1955), pp. 3-4. a No. 2 can. " Calculated by assuming 2.65 base boxes of tin plate used per 1000 No. 2 cans. c No. 2K can. 4 No. 303 can. * Assuming 3.3 base boxes of tin plate per 1000 No. 2)i cans; 2.3 per 1000 No. 303 cans. T h i s r a t i o w o u l d b e less for c a n n e d fruits, a n d of c o u r s e less if t h e retail p r i c e r a t h e r t h a n t h e w h o l e s a l e p r i c e w e r e t h e d e n o m i n a t o r . T h e tin-plate cost

averages

about

70 percent

of t h e

price

of

the packers'

can.26

C l e a r l y t h e p r i c e of tin p l a t e is a vital f a c t o r to t h e m a r k e t levels t h a t lie b e t w e e n it a n d t h e c o n s u m e r . D . ENTRY AND INTEGRATION

T h e prevailing m o v e m e n t after 1 9 3 0 in t h e t i n - p l a t e industry w a s exit, n o t entry. production

The

large integrated

methods

while

the

firms

"entered" the

independent

new

continuous

unintegrated

producers

d r o p p e d out. O n l y o n e p r o d u c e r h a s e n t e r e d since 1 9 3 8 , a n d t h a t w a s 28 The first ratio is quite variable from year to year and even from month to month, as the prices of canned foods fluctuate while the prices of cans and tin plate are relatively stable. In 1938, for instance, the ratio of can cost to wholesale price of these canned foods was nearly 40 percent. The ratio of can cost to price and the ratio of tin-plate cost to can cost are both typically lower for nonfood cans.

MARKET STRUCTURE IN TIN PLATE

51

an integrated producer (Kaiser) whose primary plants were built under the sponsorship of the Federal government during World War II. Entry is inevitably linked with integration. The production of tin plate as it is presently organized is a "thick" industry in which many successive processes are performed by a single firm. Ease of entry depends on the degree of vertical integration that the prospective entrant contemplates. Success of a partially integrated producer would hinge upon the existence of economies of integration and his access to supplies of semiprocessed material. The fact that almost all producers of tin plate are now fully integrated is not conclusive evidence that they must be. It is fairly clear that there are no direct process-economies of vertical integration between some stages. The successive stages in production, to recapitulate, are: 1. 2. 3. 4. 5. 6. 7.

The production of pig iron in blast furnaces. The production of steel in open-hearth furnaces. The production of slabs in a slabbing mill. The hot-rolling of steel strip, with subsequent pickling operations. The cold-rolling of strip, with subsequent cleaning and annealing operations. Temper-rolling. Tinning in electrolytic or hot-dip lines, with preliminary preparation and preliminary or subsequent shearing. In some processes shearing is separable.

Stages 1, 2, and 3 are usually called "primary" steel production. There appear to be substantial enough economies in terms of heat conservation and recycling, operations scheduling, and handling, to make vertical integration economically superior. (If steel scrap exclusively were used to charge the open-hearth process, stage 1 could be eliminated.) There are no apparent process-economies of integration between slab production and hot-rolling. Slabs are not rolled while hot from the roughing mill, but are allowed to cool to permit inspection and surface preparation. It is quite common to ship them some distance to a separate hot-rolling mill.27 Again, it is not necessary to have cold-rolling operations in the same plant with the hot-strip mill. Coils of hot-rolled strip can be shipped elsewhere without incurring processing disadvantages, except perhaps for a small uncertainty in scheduling. They are shipped over 800 miles from Geneva, Utah, to the cold-rolling mill of Columbia Steel for the California market. Stage 6, temper-rolling, is too minor to warrant a separate facility, and will normally be integrated with coldrolling and annealing. The last stage, tinning, is again separable without appreciable loss of efficiency. If a firm plans to enter the production of primary steel, then conditions of entry are determined by the market structure of the steel industry 27 Slabs rolled at the Irwin Works of U.S. Steel come from steel mills several miles away.

52

TIN CANS AND TIN PLATE

in general. Such a firm might well plan to go into the manufacture of other products besides tin plate. A manufacturer already integrated at the earlier stages would find it easiest to enter the production of tin plate. The striking fact however is the absence of semi-integrated and unintegrated producers at the later stages. We have already seen the historical reason for this; but why has there been no regeneration of independent enterprise at those stages in more recent years? Two reasons suggest themselves. One is the continual development of technology, which puts a premium upon size that goes beyond the process-economics of integration. It may be that only the large firms with well-developed research organizations and with a foothold in all stages can keep abreast of the rapid advances in processing and the competitive innovations that result. These innovations are likely to impinge at any point, and result in changes which will affect later or earlier stages by changing the product or process requirements. The other difficulty is access to supplies. If the primary stages of the industry were liberally sprinkled with merchant blast furnaces, independent steel producers, and rolling mills offering steel for sale on the open market, then an independent tin-plate manufacturer could enter with confidence that he could secure hot strip or cold-rolled strip from the market on a regular basis. As it is, the supply of "independent" steel is limited, and the postwar stringency in steel supply conditions has not been inviting to the independent fabricator. If he wants to procure the raw material for tin-plate manufacture in large quantities, he must procure it from his integrated competitor. It is doubtful whether independent fabricators could secure it at all in the requisite quantities, and if they did they would be vulnerable to a classic "integration squeeze." Fear of a squeeze from integrated competitor-suppliers might not be a major deterrent to a prospective entrant. After all, in the days when tin plate was hot-rolled from sheet bars, a number of independent tin-plate producers were able to operate on supplies secured from the market. But the dominant position now is the continuous hot-rolling mill, which did not exist then. If the entering firm decides not to build a hot-rolling mill, it will be dependent upon about ten sources of hot strip, most of which produce tin plate themselves. The existence of independent sources of ingot or slabs would be of no value to such a producer. If it did decide to build a hot-strip mill, it would be committed to an investment of $100,000,000 or more, and would in all probability produce sheets, plate, and a variety of other products; and might in truth find it imperative to secure a supply of ingot by integrating backwards. These are gigantic commitments, far beyond the ability of the sort of independent tin-plate producer which used to exist. The same considerations apply to backward integration by can pro-

MARKET STRUCTURE IN TIN PLATE

53

ducers. One would expect that can manufacturers, especially the large ones, could offer an effective threat of backward integration to hold the tin-plate producers in check. In the past they have actually undertaken it. Continental Can, for instance, acquired a tin-plate mill in 1909 which it operated for many years. In 1927 it built a new tinning plant in Illinois with a capacity of about 2,000,000 base boxes of tin per annum. For a decade or so the plant produced some 50 percent of Continental's requirements. It purchased black plate for tinning from steel manufacturers. This subsidiary was called Standard Tin Plate Company. Another can manufacturer, the National Can Company, was formerly affiliated with the McKeesport Tin Plate Company, also a nonintegrated producer. Neither tin-plate firm survived the revolution. National sold McKeesport Tin Plate to Jones & Laughlin in 1939, at the same time signing a contract with Jones & Laughlin for 90 percent of its tin-plate requirements for ten years. Standard's plant was sold to U.S. Steel in 1940. Both plants were dismantled. 28 The only can manufacturer with tin-plate production facilities at the present time is Crown Cork & Seal. It produces crown caps and tin cans, in both of which tin plate is used, but it began to produce tin plate before entering the manufacture of cans. Crown early perceived the value of cold-reduced plate, and when it was unable to purchase or contract for all it wanted went into production itself. It installed a tandem cold reduction mill in 1935. Before adopting the cold-rolling process Crown experimented with various improvements in hot-strip production, and tried to work out a method for casting steel directly into the hot-strip mill which would have eliminated several steps in the process. It was not successful, and in the end Crown confined itself to cold-rolling and tinning only. It is easy to understand why other can producers have not been eager to follow Crown. There would have to be a long-term distortion in the price relations at final stages of tin-plate production, or some opportunity for improvement which the steel companies failed to seize, before the can companies could gain by integrating backward one or two stages. Otherwise, if they chose to begin the tinning of plate for themselves, they would be confronted by the same sellers that confront them now in the tin-plate market. If they decided to integrate further into cold-reduction, they would have to purchase hot-rolled strip largely from the same sellers. They could obtain no bargaining advantage this way. Only by building hot-strip mills could they gain access to broader sources of supply, and an investment so large and complex would cause even American Can Company to hesitate. 29 38

"There can be little doubt that what was purchased in both cases was customers rather than plant facilities." "Western Steel Plants and The Tin-Plate Industry," p. 8. M Geographical concentration adds to the difficulty. Even if a can company could

54

TIN CANS AND TIN PLATE

This is not to say, however, that backward integration by the can companies is a negligible threat. They certainly possess the ability to integrate backward through cold-rolling, and would do so if the fabrication margins at final stages became too high. The steel mills cannot be indifferent to the possibility that large buyers would build their own facilities and refuse to buy anything but hot-rolled strip henceforth, thus idling some of the steel producers' own finishing capacity. This threat helps to keep sequential price relationships in line. 30 take the entire output of an integrated hot-strip and tin-plate mill, it might find it more economical to buy from several mills at different sites owing to dispersion of its own factories. 30 In early June 1956, American Can announced that it intended to invest 27 million dollars in facilities for processing its own tin plate, using coils purchased from the same source as previously. (Business Week, June 16, 1956, p. 36.) This is not integration into any of the major stages listed above, but will cover only the end processing: inspection, chemical treating, and shearing. American also announced that it would push the use of cans made from tinless black plate. These decisions were occasioned by the eighth successive increase in tin-plate prices since World War II, announced March 8, 1956. (Iron Age, June 21, 1956, p. 61.)

Chapter IV Price Policy in Tin Plate The market for tin plate is oligopolistic on both sides. It is one of a chain of markets which exhibit different mixtures of monopoly and competition. The producers of tin plate have monopsony power in the market for tin, which is sold by an industry that is normally cartellized. The buyers of tin plate in turn form an oligopoly in the sale of tin cans, but face influential purchasers among canners, and canners in their turn sell in a market which is monopolistically competitive on both sides. The price of tin plate has a substantial effect upon the whole chain, from top to bottom.1 The tin-plate market is of special interest because both the buying and the selling side are highly concentrated. A . PRICE DETERMINATION

The practice of price leadership in the steel industry is well known. It is not a perfectly disciplined leadership. U.S. Steel possesses great authority as the price leader, but not the same degree of power to set prices that a pure monopolist would have. The limits to price control through tacit collusion have been demonstrated many times during depressions when the price leader has been unable to prevent price-cutting by other steel firms.2 Whatever the limitations in steel markets at large, price leadership in the tin-plate market is further circumscribed by the existence of oligopsony on the buying side. Price leadership is bilateral. The consequence is a process of price determination very different from what occurs in ordinary price leadership. The orientation of the price leader's decisions is not only lateral but vertical. The leader must take account not only of what other sellers will do in response to its moves but also of what individual buyers will do, and the latter question inevitably focusses on the largest buyer: American Can. The dominant importance of the cross-market relationship between leading buyer and leading seller is partly a heritage of the day when rivals of each were not as important as they are now. At no time was there simple bilateral monopoly. There were always alternative sources of tin plate and other 1 Judge Rose, who presided at the 1916 antitrust suit against American Can Company, speculated on the effect of this ladder of market power without reaching any conclusion concerning its impact on monopoly power in the sale of tin cans. United States v. American Can Company et al, 2 3 0 F . 859, 8 8 5 ( D . Md. 1 9 1 6 ) . 2 See testimony in TNEC Hearings, part 19, especially pp. 1 0 5 0 5 - 1 0 .

56

TIN CANS AND TIN PLATE

buyers of it. Before about 1910, however, the position of the two leaders was so large relative to their respective industries that they could set prices without stopping to consider the reactions of particular rivals.3 It was only in the 1920's that a full-fledged oligopoly emerged on both sides. The growing rivals continued to look to the largest firms to set the price. U.S. Steel could not act for the sellers collectively; that is to say, it could not enforce the price finally negotiated upon any other manufacturer of tin plate nor itself deny supplies to any buyer of tin plate refusing to accept the price. It could not threaten American Can with total withdrawal of supplies. American likewise could not act for the buyers collectively. The negotiations rather had to achieve a delicate balance of complex forces. Both leading buyer and leading seller would negotiate primarily with regard to their own interests; but the seller had to keep in mind the limitations to its leadership, the points beyond which its rivals would not follow it, the possibility that other sellers would break away and conclude bargains with other buyers at a different price. The leading buyer had to take into account not only the conduct of buyers and sellers in the tin-plate market but the transmission of changes to the can market and the limits to its leadership there. In addition each negotiant had to beware the possibility that the other would switch to some rival — that the seller would favor another can company at a higher price in time of tin-plate shortages, or that the buyer would switch a large part of its requirements to some other seller who offered lower prices when there was excess capacity, and use these concessions as a weapon against its opposite number. This was the element of oligopoly. Considering the complexity of market structure, the results were probably different from those that would have occurred in pure bilateral monopoly, and different from the results of unilateral oligopoly. The limits imposed by the elements of rivalry were of course fairly wide, and most of the time the leading negotiants stayed within them, so that other buyers and other sellers were content to accept the leading bargain. 4 3 In the days immediately following the formation of the can trust and the steel trust, American Can used its bargaining power to exact discriminatory concessions for itself, amounting to about 20 percent of the purchase price. American may have intended to cut off its competition and potential competition from supplies of tin plate, though it did not succeed. American's preferential contract was ended in 1913. U.S. v. American Can, 230 F. 859, 885. 4 In the words of Mr. Fairless: "I don't believe that a more fair price for tin plate could be hoped to be arrived at than through the process of negotiations between the largest purchaser of a product and the largest producer of a product. . . . I have been associated with smaller companies, and in one of my earlier associations I was in the tin-plate business, and I was always very happy to have the price of tin plate negotiated for me by the United States Steel Corporation with the American Can Company. That seemed to me . . . a perfectly logical turn of business." TNEC Hearings, p. 10796.

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The price negotiated between American Can Company and the United States Steel Corporation set a ceiling. 5 The capacity of U.S. Steel was so large that no producer could hope to get more except during a steel famine. Witness the president of Bethlehem Steel: M B . F E L L E R . . . . As I understand it, your company has a contract with the American Can Company under which it sells tin plate on the basis of the officially announced price of Carnegie-Illinois. It that correct? MR. GRACE. Yes. . . . That in our judgment sets the competitive price for us for tin plate. . . . That is the competitive situation which we accept and must sell at no higher price than that price to get the business. MR. F E L L E R . . . . when you speak of the competitive price, are you thinking of a price which is arrived at by competition between a seller and a buyer? Certainly it doesn't sound to me like a price arrived at by competiticn between sellers. MR. GRACE. I mean that is the price we have to meet. We consider that to be the competitive situation there, when the American Can Company and United States Steel Corporation have announced the official price for tin plate we immediately adopt that price and endeavor to sell our product against it. 6

T h e ceiling formerly held good for an entire year. After 1952 tin-plate contracts provided for semiannual price changes, and beginning in 1958 for changes on 35-days' notice. Until recently other buyers and sellers commonly included in their contracts a provision to the effect that the price announced by U.S. Steel (Carnegie-Illinois) after negotiation with American Can would b e the price applicable to their contracts. American's contracts with its other tin-plate suppliers contained such a provision, and so did contracts of tin-plate producers with other can makers. 7 Although this appeared to be an abdication of the price-making function by other buyers and sellers, it was merely an explicit recognition of the objective facts of the market as outlined above, and did not eliminate the oligopolistic rivalry that existed on both sides. Moreover, the ceiling was not a floor. T h e leadership clause notwithstanding, the sellers and buyers could and did agree on prices below the one agreed on initially by the leaders. Needless to say, American itself would usually participate in any such reduction. The actual process of price-setting has been completely different from the institutional process of price determination under competition. The price has been set (as a rule) by direct negotiation between one buyer 5 Originally through its subsidiary, American Sheet and Tin Plate Company; later through its subsidiary Carnegie-Illinois Steel Corporation, with which American Sheet and Tin Plate was merged in 1936. 5 Τ Ν EC Hearings, pp. 1 0 6 2 5 - 2 6 . ' Ibid., pp. 10625, 1 0 6 8 3 - 8 4 . The outstanding exception was Weirton Steel Company which as a rule did not bind itself to observe Carnegie-Illinois prices.

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and one seller.8 The competitive elements are largely implicit. They are the forces playing on the minds of the leading negotiators, forces which will become explicit and break into open competition if the leaders make a wrong decision. If there were only one buyer and one seller the theory of bilateral monopoly would tell us what to expect. Whether or not the leading bargain in a context of bilateral oligopoly is an adequate substitute for competition depends on the strength of those competitive forces. There is only sketchy and imperfect evidence on this point. The relation between competition at one market level and competition at the others is necessarily involved. But one piece of evidence we do have is the competitive impact of discrimination and price concessions in periods of depression. DISCRIMINATION AND COMPETITION

Price discrimination is chronic in bilateral oligopoly. It may contribute to monopoly or it may create competition. If discrimination is systematic, it may enhance monopoly at the buyer's level by giving large purchasers a cost advantage in the markets in which they resell. If it is sporadic, it may simply be the initial stage of a price reduction, or the visible sign of competition enforced among sellers by the large buyers as they play one seller off against another. The sequence of events is what must be evaluated. Do discriminatory advantages persist, or do they soon disappear in a general movement of the price up or down to a new level? The rebates that American Can received from U.S. Steel before 1913 are of no interest now. Since the tin-plate market assumed roughly its present structure, the episodes of price-cutting in the 1930s are the most illuminating evidence of the effect of discrimination upon the level of prices. The Robinson-Patman Act, passed in 1936, has virtually eliminated the possibility that systematic discrimination will be reestablished 8 The bargaining process leading up to the determination of the 1 9 3 9 price was described by Mr. Fairless of U.S. Steel in the TNEC Hearings. "After several conferences, as I have stated, at least three or more, in respect to what the price might be, with Dr. Baker, Mr. Hughes, Mr. Pfeltz [of the American Can Company] and myself present I believe in each of them, discussing all the factors having to do with the price of tin plate, market conditions, costs, our best thoughts in respect to what the price of pig tin might be for the year and the possibilities of labor costs, the possibilities of infringements in respect to other types of containers, . . . we finally reached the last day of the negotiations — and I am only bringing this up to disabuse the minds of anyone of this committee as to any group meetings [of tin-plate producers] setting the price of tin plate." The steel representatives asked for a continuation of the 1938 price of $ 5 . 1 0 per base box, while American Can gave many reasons why this was too high, and demanded a price of $4.90. "After a long discussion lasting several hours" a price of $5.00 was finally agreed on. ( T N E C Hearings, pp. 1 0 7 9 2 - 3 . ) According to a former president of American Can Company, the negotiations have often lasted for several months. Stenographic Record, p. Θ666, United States v. American Can Company, 87 F . Supp. 18 (N.D. Cal. 1 9 4 9 ) . (Hereafter cited as Record.)

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in this industry. It did exist before that. American Can, under its contract drawn up in 1927 with American Sheet and Tin Plate (U.S. Steel), received certain discounts from the base price in consideration for its very large volume of purchases.9 In its 1931 contract with the same supplier, American negotiated a discount of 7/2 percent of the current price. The record does not indicate whether or not U.S. Steel extended the same discount immediately to Continental, nor whether the smaller suppliers of American gave it similar concessions, but at any rate the trade soon became aware that American was getting tin plate at less than the published price. In 1933 the National Recovery Administration was established. Under the Steel Code the contract prices had to be published.10 All the sellers then extended to all buyers the effective (discounted) price that American Can had been paying — but still in the form of a ΨΑ percent discount, not by reducing the posted price by 7/2 percent. 11 A controversy then arose between American and U.S. Steel concerning the interpretation of the discount clause. The can company asserted that this meant TA percent below the price the tin-plate seller quoted to others, and since other buyers were getting the discount, American was entitled to an additional 7% percent. U.S. Steel naturally resisted this interpretation. Negotiations ensued covering a period of about eighteen months, and finally, in 1936, American Can filed suit against Carnegie-Illinois (which by then had absorbed American Sheet and Tin Plate). A letter written by a vice-president of U.S. Steel to the president is so revealing of the adroit bargaining maneuvers of American Can at that time that it deserves extensive quotation: As a result of the meeting on April 21st, 1936, between Messrs. Taylor, Irvin and Phelps [of American Can], you instructed me to make up a schedule of additional discounts for tin plate taken by the American Can Company provided they would increase the proportion of their business placed with us from 75% to over 90%. Your instructions further were to provide liberal discounts for larger quantities. I made up such a schedule starting with an additional discount of 1 5 / per box for the 9th and 10th million boxes ranging up to an additional discount of 5 0 / per box for the 17th and 18th million boxes. This latter figure would bring the price down very close to cost and it would show a saving to the American Can Company over the present contract of about three million dollars annually. . . . [On May 21st, 1936, American Can filed its suit.] Sometime in the interim and without further conference with us they made TNEC Hearings p. 10758. Ibid., pp. 10768, 10777. u It would have made a great deal of difference to the leading can companies if the quoted price had been adjusted instead. Under their contracts with can buyers the price of cans had to be changed with every change in the price of tin plate. As it was, the price of cans was not directly affected by the Ί)ί percent discount. See Chapter IX. 9

10

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use of our proposal of additional discounts as a club to conclude contracts with Bethlehem, J. & L., Republic and Youngstown. W e understand that these contracts cover a five year period and obligate the American Can Company to take from each of these four companies 400,000 boxes annually at our published price less 7¥2%. However, these same contracts further obligate these four companies to supply up to a million boxes each. If required by the American Can Company, at a reduction of 25/ per box beyond the 7/2% discount. This additional discount of 25/ a box applies also to the 400,000 boxes minimum provided the American Can Company takes the full million boxes. There is no doubt in our mind that they intend to do so as it means an additional million dollars a year to the American Can Company. These contracts completely change the situation. It would seem to leave us with but two courses of action: ( 1 ) to stand on our present contract and fight the case in the courts if they dare to go there. The danger to us in this course lies not so much in the possible result of the case in the courts as in the damage that the American Can Company would be able to do us during the period of probably two years before the case could get into court. They could offer us cold reduced plate far beyond our capacity to supply and thus reduce substantially the corresponding amount of tonnage due us under the contract. They could be unreasonable in their rejections of plates and claims for damages. They could refuse to cooperate in the scheduling of tonnage at our various plants and could hurt our mill people and make it costly for them in a number of ways. ( 2 ) To revise immediately our contract with them giving them an additional 25/ per box beyond the 7%% discount on all the plate they make. This would cost us about two and one-half million dollars per year. It would meet the contracts already concluded with Bethlehem, J. & L., Republic and Youngstown. In following the second course the seriousness of the situation price-wise in the tin plate market is pronounced. All four companies who have made contracts with American would have to give Continental the same price — in fact one at least has already done so. The news would spread within 24 hours, concessions would be made by all not only to Continental and American but to all other can makers. Wheeling, McKeesport and Weirton would not stand on present prices for a minute. They could not do so and keep their can producing customers in business. The practical result would be that the net price of tin plate to everybody would be reduced from $4.66 per box to $4.41 per base box. While there might be a temporary gain by the can makers in profit equivalent to approximately 25/ per box it is my opinion that eventually nothing would be gained by the can makers either. The price of cans would decline in the same proportion as 25/ per box on tin plate. . . . At present therefore is 49/ fiction in our published price and it is to our published price that the can companies generally tie their selling price of cans. This spread is already too much. The addition of another 25/ discount would increase the fiction in our published price from 49/ to 74/ per box. A situation which must inevitably be aired by the can user or somebody else. It is to be noted that the Corporation is the only tin plate producer on the

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spot in this connection. The others do not publish tin plate prices in the first instance and their names are not used in contracts for the sale of cans, as is ours. 12

It is clear that the leading seller did not have much control over the market price at this stage. It finally settled the controversy out of court, paying a sum of $2,250,000 to American Can. 13 The concession of 25 cents per base box that the other steel firms mentioned in the letter had made to American and Continental were in the form of volume discounts, and technically were available to any other buyer who purchased equivalent quantities. There were not many, of course. There was no attempt to justify these discounts on the basis of cost, and so the contracts collided with the Robinson-Patman Act. They had originally been drawn up for a term of ten years, but they obviously had to be cancelled. American settled for payments of about 30 percent of the prospective value of the concessions for the remainder of the term. In the aggregate it received about $750,000. At the same time the various concessions and discounts that had worked into the price structure were shaken out and the quoted price was set equal to the actual price in the market. Not all of the gain from discriminatory concessions was retained by the large can companies. It is true that the published prices of tin cans were based on a tin-plate price that had become a fiction, but the can companies had their own large buyers to contend with. Competition for the business of large can buyers had produced a lopsided discount structure for cans. Discounts allowed by American Can at this time ran as high as 13 percent. 14 The gains of monopsony power were very unequally distributed. Small canners usually paid list prices. Some large ones not only received large discounts on cans but also had tin-plate purchase agreements with American, under which the suppliers purchased tin plate for their special accounts and passed along in full any discount received from the steel companies. The Robinson-Patman Act put a stop to all this. American and Continental were obliged to buy their large customers out of their discriminatory contracts just as they themselves had been bought out of theirs by the steel producers. The capitalized value of future gains was distributed among the buyers in the two markets according to their bargaining power, and the price structures in both were reorganized and linked together anew. The position of leader is not without its difficulties. It occasionally happened that U.S. Steel and American Can were hampered by their agreements. Other firms could negotiate price decreases or increases TNEC Hearings, Exhibit No. 1404, pp. 10989-90. Ibid., p. 10779. 14 See Chapter VIII for a description of discount structures before and after the Robinson-Patman Act. 12 13

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without responsibility for the industry at large, leaving it to the leaders to decide whether or not to change the posted price accordingly. If the posted price of tin plate were changed, the price of cans would change too, since there was an escalator clause in can contracts. Moreover, the size and prominence of the leaders made it much more difficult for them to conceal their actions. U.S. Steel by announcing the "official" price for the year was more or less obliged to keep it official until someone else forced it to recognize that the price was inappropriate. 15 American Can likewise occasionally found that other tin plate buyers and sellers failed to respect the leading price that it had negotiated. A letter written in March 1938, to the President of American Can Company by the vicepresident in charge of purchasing said, in part: I was quite certain throughout 1937 that Campbell [Campbell Soup Company, which manufactures its own cans in large volume] had bought under the market, as Carnegie-Illinois had been promised an opportunity to quote and they did not have this opportunity. I therefore on several visits paid me by the Vice President in Charge of Sales of the Inland Steel Company asked him as to whether or not they had sold Campbell and on each occasion he informed me that they had sold Campbell "on the line." I did not believe this statement. . . . Mr. Block [of Inland Steel], in order to square away 1937, now wants to send us a check representing the difference between what we paid and what Campbell paid . . . I then asked how he was able to name a price lower than named by the American Can Company and still conform with the Robinson-Patman Act and he stated their lawyers informed them they could meet competition. I then asked if he gave us a check or credit, if the same would be done for Continental and he definitely said "no." The same situation which confronted them in 1937 again confronted them in 1938, and regardless as to the promise made by Mr. Grace [of Bethlehem] . . . Bethlehem again named a price below the official, and as Inland was, like others, badly in need of tonnage, they found it necessary to meet the situation. This they could have done. . . . There is no doubt in my mind but that Crown and Continental are both buying from Bethlehem at prices lower than we are paying, and the same is undoubtedly true with respect to their purchases from Weirton. I do know of one instance where a lower than official price was named by Weirton, i.e. Carnation, and the sales manager for Carnegie-Illinois was told by Mr. Cross of Carnation that they would have to name a lower price for their Wisconsin tonnage or they would lose the business, which they have had for 25 years or more. They were told the reduction would have to be 25/ but that they would get but a 15% increase over what they are at present getting in tonnage . . . I also understand Pet and Nestle are buying at a price below

""mr, fairless. No: it would be contrary to our policy to take the initiative in selling below our announced prices of any product, tin plate or otherwise." TNEC Hearings, p. 10772.

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the official, and the same is also true of Borden. . . . I do not think that Carnegie should lose this business and that we should grant them permission to meet the situation without the same conflicting with our contract. A reduction in the official price at this time would be expensive to us and I do not believe it would solve the problem.1® The depressed conditions of those times have not recurred. During most of the period from 1940 to 1957, demand has been strong enough to keep tin-plate production close to capacity. There has been no evidence of systematic price discrimination, and little even of sporadic. With continuing high demand, output of tin plate fell off hardly at all as the steel industry entered the 1957-58 recession. The minor recessions of 1949 and 1954 did not lead to general price cutting. The leading bargain between U.S. Steel and American Can has set the market price. In some of the years since World War II steel has been in short supply. There has been an acute shortage of capacity at the hot-rolling stage, as booming automobile demand has competed with tin cans and other users of hot-rolled strip for the output of flat-rolled products. Though expansion of flat-rolling facilities has been rapid, more rapid in fact in most other steel products, demand has outrun it. It is surprising that there has been no breakdown of leadership on the buying side, with other buyers offering higher prices than American in the scramble for limited supplies and sellers playing buyer off against buyer in a reversal of depression tactics. There is no evidence that this has happened. Perhaps this shows that there is a fundamental asymmetry of bargaining power; perhaps the viewpoint of the steel producers is oriented to a normal condition of excess capacity, causing them to refrain from exploiting their short-run advantage. On the whole the steel producers have been willing to follow the leadership of U.S. Steel. There have been one or two minor instances of independent action by other tin-plate producers. For example, in 1948 Republic Steel announced a price 10 cents per base box higher than the Pittsburgh mills, which caused them to lose so much business that they had to come down to the leader's price within three weeks. In 1952, Weirton announced an increase of 30 cents for the ensuing contract period (1953 season) only to have U.S. Steel announce a 25-cent increase, which it was forced to meet. In 1955 U.S. Steel in making across-the-board price increases announced a price increase of $14 per ton for cold-rolled strip. The other producers refused to advance their prices more than $10, and U.S. Steel had to come down again to meet this price.17 The capacity of the U.S. Steel Corporation and those who willingly follow it makes it improbable that any "maverick" could enforce a higher price than the leader's unless the circum16 17

Ibid., Exhibit No. 1407, pp. 10992-93. Italics added. Business Week, July 23, 1955, p. 18.

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stances were most exceptional. Of course prices have regularly increased since 1946. The other steel companies merely have to wait until the leader forms its judgment of what the market will bear in the light of cost changes and the state of demand. Getting prices down again in depression is a much more painful process, of which the relative indiscipline of the market may be a symptom. VERTICAL MARKET TIES

In bilateral-oligopoly markets the choice of customers or of suppliers is limited. Strong alliances between particular sellers and particular buyers may develop which partition the market and interfere with the free play of such competitive forces as originate on either side. At the extreme these alliances may take the form of quasi integration, which reduces the market to insignificance. Under such circumstances there could not be price "discrimination." We have already seen that a certain unity was preserved in the tin-plate market by a system of interlocking contracts, which quickly spread any negotiated change in the official price into its farthest reaches. Yet the relationship between large buyer and large seller was stable and lasting. It was to be expected in the light of history that American Can would have a close relationship with the United States Steel Corporation; for many years it had no real alternatives. Only in 1921 did it begin to purchase tin plate from Bethlehem Steel. Nevertheless, up to recently American Can did not distribute its purchases among all sellers in proportion to their capacities to produce. It disproportionally favored U.S. Steel. The other producers, therefore, have depended more heavily on other buyers. In the past Weirton was known as the closest ally of Continental among the steel companies. It formerly was also the chief supplier of Campbell Soup Company and of Pacific Can. Jones & Laughlin, as previously mentioned, supplied 90 percent of National Can's requirements for a long period. Bethlehem has been Crown's chief source of supply. The small can companies also tended to look to particular steel companies as their dominant source of supply. None of these arrangements was exclusive. American did purchase tin plate from practically all suppliers, as did most of the large buyers; and all producers have been able to find a market. But it was not the kind of buyer-seller alignment that would be found in an actively and vigorously competitive market. Typically buyers procured tin plate under long-term contracts. In a few cases these were requirements contracts; more often, contracts for a percentage of requirements. The terms ran for as long as 10 years. In the middle 1930's American procured 75 percent of its requirements from U.S. Steel.18 No doubt its large volume 18

Cf. TNEC Hearings, Exhibit No. 1404, quoted above.

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discounts had something to do with the concentration of its purchases. But the concentration continued long after large volume discounts were abolished, and even after the lawsuit involving their settlement. As late as 1949 American was purchasing tin plate from U.S. Steel under a five-year term contract for 60 to 70 percent of its requirements. The seller still allowed it quantity discounts and special concessions, amounting to less than one percent of the price. 19 Of course the remaining fraction of its purchases, allotted to other producers, was large enough to endow American with considerable bargaining power in dealing with them; and even the gap between its minimum and its maximum obligation under its contract with U.S. Steel left it with plenty of room to maneuver. Nevertheless, the fact that such a large proportion of the market was tied up for such a long period of time necessarily limited the competitive opportunities of rivals and potential rivals. If it did not impede the competitive forces bearing on price in the short run, it did inhibit a massive realignment of trade and switching of large blocks of business from one firm to another (or the threat of this), which would help to enforce competition in a bilateral-oligopoly market. Following 1950 there were major changes in vertical market relations. By 1952, American Can was purchasing tin plate from all suppliers roughly in proportion to their capacity with one exception.20 U.S. Steel accounted for only 30 to 40 percent. The U.S. Steel capacity thus released has been reallocated to other buyers, who have also changed the proportion that they secure from specific suppliers. Continental now procures about 50 percent of its requirements from U.S. Steel, and at present seems to have no closer relations with Weirton than with any other supplier. 21 The long-term contract between Jones & Laughlin and National Can has expired. Those can producers like Crown in the territory where Bethlehem had a great freight cost advantage can now look to U.S. Steel, newly established at Morrisville, Pennsylvania. Kaiser has established a new alternative source on the Pacific Coast.23 Although some small buyers still remain dependent upon one or two sources of tin plate, the days of intimate relations between particular 19 Record, pp. 6672-6674. The same discounts and concessions were available to all buyers, based on the quantity they purchased. 20 Interview with officials of American Can Company. 21 Interviews with Continental Can Company and several producers of tin plate. Weirton still does not supply as large a fraction of American's requirements as its proportion of industry capacity would lead one to expect. 22 Kaiser insisted on long-term commitments from American Can and other buyers before it would install tin-plate facilities — commitments which the buyers were glad to give, since it is a deficit supply area. This indicates one of the problems that weigh on the mind of a new supplier when most of the demand can be tied up in large blocks for extended periods.

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large buyers and particular large sellers, tending to exclude rivals, seem to be gone. The term of tin-plate contracts has become shorter. It is probable that competition has been improved as a result. B . T H E B A S I N G - P O I N T S Y S T E M AND I T S

SUCCESSOR

Few aspects of price policy have been more extensively analyzed and debated than basing-point pricing. Only its impact on the tin-plate market can be taken up here. The geographical factors underlying it are plain enough. The enormous growth of steel-manufacturing capacity in the Pittsburgh area during the last decades of the nineteenth century made Pittsburgh the focus of the national supply. Steel is a resourceoriented industry; its capacity is localized mainly by weight-losing fuel; the economies of scale of an efficient steel plant are so great that the output is usually greater than local industry can consume; freight is an important element in delivered cost. These characteristics are wellknown determinants of geographical pricing. If only one production point exists, the geographical price structure will reflect the costs of transportation from mill to destination in a relatively simple way. 23 If there are several, and markets are more dispersed than production points, the structure will depend on a complex interrelationship of distance, capacity, and demand. A basing-point system is likely to result if firms are few in number, if they normally have excess capacity, and if marginal costs are low relative to total costs of production. Overhead costs provide a margin for freight absorption, permitting the oligopolists to penetrate each other's markets. The form that the basing-point system takes will depend on several other factors — on the number of producers; on whether several or only one are located at the important production nodes; on whether each firm can penetrate only the trade territory of its immediately surrounding rivals or can reach beyond them to every market in the country. But the most important determinant of the form is the relation of capacity to demand in each market area. "Deficit" and "surplus" areas, when production is sharply localized by resource factors, may be defined as follows. To the marginal cost of production of each mill at design capacity we add the freight cost per unit of product to all market destinations. The natural trade territory of a mill is that area within which the resulting figure is lower than for any other mill. If the sum of demand within this area at a price equal to average costs at capacity, plus a normal profit, plus freight cost to each user is less than the capacity of the mill, the area is a surplus 23 It may of course involve more than this. If there are several mills at the point of production they may collusively base delivered prices on all rail freight even when water transportation is used, to simplify the price structure and suppress uncertainty. We are not at this point concerned with the collusive aspect.

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area; if greater, it is a deficit area. (If two or more mills are located at the same point, their capacities must be summed, and the rim of the market area defined in terms of the low-cost producer.) 2 4 When the production of tin plate began on a large scale in the United States after 1890, the whole country was effectively on Pittsburgh-plus. Pittsburgh was the huge surplus area; its mills had outstripped the older plants on the eastern seaboard, 25 and the southern and western mills were still in the development stage. All other market areas had large deficits, and had to draw their marginal supplies from Pittsburgh. The marginal supply as usual determined the price. Steel producers in other areas simply met the Pittsburgh price plus freight, and found that they could dispose of all they produced. They had no motive to establish basing points of their own. The Pittsburgh mills shipped into other areas to the extent necessary to dispose of their surplus; meeting no price competition from any other area, they were able to reach any market in the country. The producers in other areas of course found it agreeable to avoid price competition with Pittsburgh and among themselves by accepting a single basis of price quotation. "Pittsburgh's dominance made it the logical base for systematic delivered pricing by rival sellers anxious to stabilize markets." 2 6 Tin-plate capacity was just as heavily concentrated in the Pittsburgh area as primary steel. The only other points of production at the turn of the century were Baltimore (which at that time was the center of the canning industry), Philadelphia, St. Louis, Cincinnati, and northwest Indiana. None of these points compared with Pittsburgh as a production center. When the American Tin Plate Company, the "tin-plate trust," was formed in 1898, it combined 38 companies, including tin-plate plants at 24 This definition would be useless for an industry whose plants were not resourceoriented and localized but instead were numerous and dispersed, for in that case the demarcation of deficit and surplus areas would not be sharp enough to determine the geographical price structure, and the building of new plants at new production points would tend to eliminate any "deficit" soon after it appeared. This difficulty exists even for the steel industry, since the producers in the Pittsburgh area are not all at the same point. Jones & Laughlin, for instance, is surrounded by other large producers. Its "natural" market area is only a few miles wide, but its neighbors also occupy "surplus" market areas. This problem is best handled by lumping all these surplus areas into the single surplus area of Pittsburgh-West Virginia-East Ohio, and calling it the "Pittsburgh area." This follows industry practice. In any event, for destinations more than a short distance away the railroads themselves commonly quote the same rate for transporting given products from all these points of origin in the "Pittsburgh area." * According to Judge Gary, Philadelphia had been the basing point for steel in the 1870's; the base was moved to Pittsburgh when it became the principal point of production. Iron Age, July 31, 1924, quoted in George W . Stocking, Basing Point Pricing and Regional Development (Chapel Hill, North Carolina, 1 9 5 4 ) , p. 49. The shift to Pittsburgh had been completed by 1884 as far as rolled products were concerned. TNEC Hearings, Exhibit No. 1418, p. 14630. M Stocking, Basing Point Pricing, p. 50.

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all the locations mentioned above. Over half were in the Pittsburgh area. Soon thereafter the combine explicitly adopted Pittsburgh-plus pricing, which continued the previous industry practice. American Tin Plate, having brought all the important capacity at the nonbase points under a single control, now found it easy to use the basing-point system to control price competition. The policy continued after American Tin Plate was absorbed by the newly organized United States Steel Corporation in 1901. 27 FURTHER EVOLUTION OF THE BASING-POINT SYSTEM

Collection of phantom freight by tin-plate mills outside the Pittsburgh area would make expansion in those areas relatively profitable if costs of production were not so much higher as to eliminate the advantage, and provided further that the vested interests of the Pittsburgh area did not artificially restrict expansion elsewhere. Some areas with large deficits were exceedingly slow to respond. Others built up capacity more quickly. The Chicago area was the first to approach balance between demand and supply. 28 However, it remained a nonbase area until 1924, when the Federal Trade Commission ordered the United States Steel Corporation to abandon Pittsburg-plus pricing. 29 U.S. Steel was itself the largest factor in the Chicago market as well as in Pittsburgh. Following the Federal Trade Commission order, U.S. Steel made its mill at Gary, Indiana, in the Chicago district, a basing point for tin plate, with a 10 cents differential per base box over the Pittsburgh price. (This differential was less than the rail freight from Pittsburgh to Chicago; we do not know whether costs of production at that time were higher at Chicago than at Pittsburgh.) The industry established no other major basing point for tin plate for over 20 years. Hardly any other important steel product had so few. At this time production of tin plate was still concentrated in the Pittsburgh and Chicago-Gary districts. The most important plant outside these districts was the large mill which Bethlehem Steel had built at Sparrows Point, Maryland, in 1917. Large as it was, its natural trade 27 Ibid., p. 51. There had been a period of "cutthroat competition" from 1 8 9 4 1897, during which certain producers at points outside the Pittsburgh area had independently cut prices below Pittsburgh Plus, "despite a national demand for tin plate far in excess of production capacity. Certain individuals lost sight of this fact and permitted their desire for particular orders or outlets to overrule their better judgment. . . ." Knox, "Development of American Tin Plate Industry," p. 17. 28 " B y 1908 the Chicago mills had grown to such extent that they were definitely shipping outside their local market territory." F o r a brief period in 1 9 1 0 - 1 2 Chicago became a basing point for bars, plates, and shapes, though apparently not for tin plate. TNEC Hearings, Exhibit No. 1418, p. 14630. This occurred again in 1921. ™ In the matter of United States Steel Corporation et al, 8 F T C 1 ( 1 9 2 4 ) .

P R I C E P O L I C Y IN TIN

PLATE

69

territory was so vast that it remained a deficit mill for several decades, and probably is still so today. Until Birmingham, Columbia Steel in California, and the Fairless Works began production it had an absolute market advantage over all other producers on the entire eastern seaboard, in the southern states, and on the west coast, which it could reach by water. Yet competitive capacity on the eastern seaboard did not develop, and notwithstanding rapid expansion of its plant Bethlehem sold at Pittsburgh-delivered prices until 1945. There was a small mill at Granite City, Illinois, opposite St. Louis, which installed cold-rolling equipment in 1936. Soon thereafter it began to quote prices based on Granite City, 10 cents per base box above the Pittsburgh price. The next year (1938), U.S. Steel abolished its previous differentials between its basing points and put Gary on the same base as Pittsburgh. 30 From then until 1945 there were two basing points on a common price and a third, the minor one at Granite City, with a 10 cent differential. Granite City's output for the most part was absorbed locally, in Missouri and Illinois, where it was forced to meet the competition of the Chicago mills (Tables 9 and 10). A major development was the construction of a tin-plate mill by U.S. Steel at its works at Birmingham, Alabama, in 1937. It did not make this mill a basing point. On the west coast, a small mill had been put into operation in 1928 by Columbia Steel Company, which was acquired by U.S. Steel in 1929. No other capacity was installed west of the Mississippi River during all this long period, in spite of the fact that demand for tin plate was very much greater than western capacity. 31 Later even the Columbia mill was shut down; it had not been converted from hot-pack to the new cold-rolling technology. The western states drew their supplies mostly from Pittsburgh and Chicago, though Bethlehem at Baltimore had the greatest freight advantage in shipping there. In 1945-46 the basing-point system for tin plate was completely changed. First, Birmingham became a base for tin-plate prices. Next, Bethlehem announced that Sparrows Point would henceforth be a basing point. Finally, U.S. Steel promised that the tin-plate mill which it was planning to build at Columbia Steel in California would be a basing point. By the time that the Columbia works actually began production in 1949, U.S. Steel had abandoned systematic basing-point pricing, and it set a simple f.o.b. price there 75 cents per base box above the Gary TNEC Hearings, p. 14195 and Exhibit No. 1418, p. 14632. The Columbia plant when installed had a capacity of 31,000 tons per annum. By 1930 the consumption of tin plate in the eleven Western states was already over 300,000 tons per annum, and had risen to about 450,000 tons in 1937. "Western Steel Plants and the Tin Plate Industry," p. 16. 30 31

70

TIN

CANS

AND

TIN

PLATE

TABLE 9. Shipments of tin plate from producing districts to consuming states, 1937 (net tons) Producing districts

Consuming states Total

Total

Chicago

1,998,239

439,071

Northeastern Maine New Hampshire Vermont Massachusetts Rhode Island Connecticut New York New Jersey Pennsylvania

30,316 116 45 10,064 4,028 2,919 177,639 151,257 177,285

5,519 40 439 8 366 13,510 4,127 1,454

North Central Ohio Indiana Illinois Michigan Wisconsin Minnesota

74,647 87,120 373,433 11,872 68,842 7,041

6,098 46,950 199,931 2,808 23,690 5,415

West Central Iowa Missouri North Dakota South Dakota Nebraska Kansas

646 34,008 46 10 730 46

374 5,060

Southeastern Delaware Maryland District of Columbia Virginia West Virginia North Carolina South Carolina Georgia Florida Southern & Southwestern Kentucky Tennessee Alabama Mississippi

884 205,473 585 4,955 35,490 2,087 279 6,095 11,085

19,166 10,994 31 4

—

Pittsburgh, Youngstown, St. North Ohio River Louis 29,833 — — —

—

— — —

492 — —

—

1,098 13,278 —

2,719 217 —

11,653 45

—

11 4 —

— —

—

—

— —

—

—

—

—

22 3,208

122

— —

—

65

— —

—

—

—

63,555 37,522 150,565 8,465 41,491 1,315 272 17,085 1 10 688 42

585 4,500 33,319 2,087 279 2,880 435

—

10 1,211

23,945 76 42 9,154 1,698 2,315 143,230 73,720 134,303

884 94,149

—

9,802

1,176,718

18,994 10,782 31 4

Baltimore

West Coast

Canton, Mansfield

297,990

37,297

17,300

569 —

3 436 2,322 231 14,978 73,271 40,186 291 542 7,535 58 942 —

—

283

—

—

—

—

—

—

_ — — — —

— — — — —

35 —

5,429 139 1,342 4,703 1,098 2,124 541 —

94

—

—

—

—

—

.—.

—

—

100

110

31 —

—

101,484 445 960 3,193 7,442

50 21 —

38

—

— —

—

—

—

126 —

PRICE POLICY IN TIN PLATE

71

Table 9 (cont.) Producing districts

Consuming states Total Arkansas Louisiana Oklahoma Texas Mountain & Western Montana Idaho Wyoming Colorado New Mexico Arizona Utah Nevada Washington Oregon California

111 39,334 116 49,131

2 1 45 742 42 —

17,178 —

60,591 38,099 283,616

Chicago

Pittsburgh, Youngstown, North Ohio St. River Louis

9,134 —

3 —

4,838

—

—

—

—

—

1 253 10 —

4,799 —

6,763 14,091 69,093

111 28,082 116 34,728

2 —

— — —

263 — — — —

2,115 —

8,380

—

West Coast

—

—

Canton, Mansfield

—

—

—

1,185

—

—

—

1

—

44 489 32

—

Baltimore

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

12,115 —

48,252 22,584 151,740

5,362 389 26,654

214 1,035 36,046

— —

83

Source: George W. Stocking, Basing Point Pricing and Regional Development (Chapel Hill, North Carolina, 1954), Appendix, p. 263. Data compiled from a TNEC questionnaire on the distribution of selected carbon steel products. and Pittsburgh prices. 3 2 Sparrows Point and Birmingham both sold tin plate at a mill price 10 cents per base box higher than Pittsburgh or Gary. T h e three new basing points, therefore, eliminated some of the phantom freight and led to a reduction in the local price, though the Columbia price at the California mill was well above the Pittsburgh price. ABANDONMENT OF THE BASING-POINT SYSTEM

In July 1948, following the decision of the Supreme Court in the Cement Institute Case, 3 3 the steel industry abandoned the systematic use of basing-point pricing, and began to quote prices on an f.o.b. mill basis. T h e result was an immediate rise in mill nets on steel products in general. Steel was in short supply. Freight absorption had been greater in toto than phantom freight. 3 4 T h e new f.o.b. prices were based on the " In 1945 the price in California was governed by the combined rail-water rate from Pittsburgh, which was $14.60 per ton, or 73 cents per 100 lb, the standard weight of a base box. The all-rail freight from Chicago was $15.40, or 77 cents per 100 lb. The all-water freight from Sparrows Point to west coast ports was $8.60, or 43 cents per 100 lb. Ibid., p. 20. By 1949 all these rates had risen substantially. "Federal Trade Commission v. Cement Institute, 333 U.S. 683 (1948). "According to Clair Wilcox, Public Policies Toward Business (Chicago, 1955), p. 230, freight had been absorbed on as much as 70 percent of the volume sold.

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198

TIN CANS AND TIN PLATE

opinion of the Antitrust Division concerning the relative importance of structure and specific practices. The Division was well aware of the significance of the concentrated market structure.124 But it is always simpler under the antitrust laws to deal with a specific practice than with the fundamental structure of an industry. Furthermore, the Antitrust Division did not necessarily regard the practices as mere manifestations, but rather as buttresses of monopoly power. The future may well prove that this view was correct; elimination of certain practices may under some circumstances lead to alteration of structure. Perhaps the most important reason for its strategy, however, was that the legal basis for dissolution did not exist; or more exactly, had been eliminated by the decision in the antitrust case of 1916. It cannot reasonably be doubted that the original Can Trust of 1901 was organized to monopolize can-making — an objective it temporarily did achieve. In its first few years it had attempted to exclude rivals, had made unduly discriminatory price concessions, had received rebates from suppliers, had dismantled much of the industry's capacity, had coerced customers, etc.125 In the light of the decisions in the Standard Oil and American Tobacco cases of 1911, its liability under Section 2 of the Sherman Act was plain as day. American had acquired monopoly with illegal intent and had tried to maintain it with illegal practices. But the experiment had failed; new competitors had rushed in; American's market share had drastically fallen by 1916, it had abandoned its attempts to crush competitors; the judge was confronted with a reformed, almost a transfigured, offender. Judge Rose found himself in a dilemma. On the one hand the Antitrust Act was designed to prevent just the sort of concentration which American Can had created in the can industry. "Size and power," said the judge, "are themselves facts some of whose consequences do not depend upon the way in which they were created or in which they are used. It is easy to conceive that they might be acquired honestly and used . . . fairly . . . and for all that constitute a public danger, or at all events give rise to difficult social, industrial and political problems."128 On the other hand the structure of the industry seemed to be changing in the direction of greater competition. American's performance had been good of late, as many cannercustomers testified.127 Its prices brought no complaint, its service was rapid and excellent, and its pioneering research in canning problems had done much to advance the welfare of the industry and public alike. 124 Brief for the United States of America, pp. 19-29, Ibid.; Record, pp. 1939-40; "Report of the Antitrust Division," pp. 37, 64-65. 126 U.S. v. American Can, 230 F. 859, 861-76. See also Hession, Competition, pp.

10-12. 126

U.S. v. American Can, 230 F. 859, 901. "" Ibid., 896-97.

MARKET PRACTICES AND ANTITRUST DECREE OF 1 9 5 0

199

"I am frankly reluctant to destroy so finely adjusted an industrial machine as the record shows defendant to be," said the judge. The drift of events in the can industry had made dissolution a questionable remedy. In most of the cases in which dissolution has been decreed, the defendants had, not long before proceedings before them were instituted, done things which evidenced their continued intent to dominate and restrain trade by the use of methods which interfered more or less seriously with the reasonable freedom of their customers or their competitors . . . defendant for a number of years past has done nothing of the sort. 128

While dissolution had been the fate of these earlier offenders, . . the consuming public has not as yet greatly profited by their dissolution." Judge Rose preferred the evolutionary remedy of growth of competition in the market. The court reserved the right to order dissolution if American should in the future do anything which would make it necessary. "It is to be hoped that, before an occasion to act upon the power reserved shall arise, Congress will substitute some other method than dissolution for dealing with the problems which arise when a single corporation absorbs a large part of the country's productive capacity in any one line.129 Upon pressure from the Government to enter a decree of dissolution, Judge Rose affirmed his earlier stand. If . . . jurisdiction over the case is retained, the assurance that the defendant will not resort to unfair practices will be well-nigh absolute . . . [It] appears probable that all potential restraints upon free competition now imposed by the size and power of defendant will pass away as speedily without as with dissolution, and that dissolution will cause far more loss and business disturbance than will attend the gradual re-establishment of competitive conditions by the play of economic forces . . . It is, of course, possible that these forecasts of the future may not be realized. In that event, the retention of jurisdiction will enable the government promptly and cheaply to compel a dissolution whenever anything which may hereafter happen makes such action necessary or expedient. 130

The Government appealed. But in 1920 the Supreme Court in deciding the United States Steel case held that "the law does not make mere size an offense, or the existence of unexerted power an offense," and refused to order dissolution.131 The parallel with the American Can case was only too clear. In 1921 the Government dismissed its appeal.132 We have already seen what Judge Rose's forecast came to. Competition was not soon restored by the "play of economic forces"; on the other 902. ™Ibid., 904. 130 U.S. υ. American Can, 234 F. 1019, 1021. 131 U.S. v. U.S. Steel Corporation, 251 U.S. 417, 451. 132 Untied States v. American Can, 256 U.S. 706. 128 Ibid.,

200

TIN CANS AND TIN

PLATE

hand the industry did not revert to monopoly either. A revitalized American Can Company was able to hold on to its then existing share of the market and to maintain a dominant position until Continental rose to challenge it. The wording of the 1916 decree indicates that the court retained jurisdiction indefinitely, and if a movement back toward single-firm monopoly had occurred, or if the predatory practices of the earlier years had been revived, a dissolution proceeding would have been feasible. But the monopoly power of American had been weakened, not strengthened, in the following three decades. The presence of a second large firm introduced an entirely new factor in the market situation. The practices followed by the large firms were not of the sort that Judge Rose had condemned. Dissolution appeared unpromising. Instead of reviving the old charges, the government took a different approach. It was based on the fact that the policy of tying the lease of closing machinery to the sale of cans fell within the purview of the Clayton Antitrust Act. In the usual contemporary fashion the complaint consisted of a broadside charge of violation of both the Sherman and Clayton antitrust acts. It charged that both the closing machine leases and the requirements contracts violated Section 3 of the Clayton Act. 133 This was the foundation of the case. The discounts, rebates, freight equalizations, undue credit allowances, and the like were not cited as discriminatory practices under the Robinson-Patman Act (Section 2 of the Clayton Act). The complaint held instead that they were inducements to customers to enter into total requirements contracts, and hence contributed to the offenses of exclusive dealing and of tying machinery to cans. 134 The nominal rentals and "free" service were similarly cited as improper inducements. But, since the effect of the contracts and leases was to "restrain trade unreasonably," the complaint charged American with an offense against Section 1 of the Sherman Act; and also with an offense against Section 2, since American had "attempted to monopolize" and had "effectually monopolized" various parts of trade and commerce. 135 These latter charges came to much the same thing as the 183 "It shall be unlawful for any person engaged in commerce . . . to lease or make a sale or contract for sale of goods . . . or fix a price charged therefor, or discount from, or rebate upon, such price, on condition, agreement or understanding that the lessee or purchaser thereof shall not use or deal in the goods, wares, merchandise, machinery, supplies or other commodities of a competitor or competitors of the lessor or seller, where the effect of such lease, sale, or contract . . . may be to substantially lessen competition or tend to create a monopoly in any line of commerce." 38 Stat. 731, 1914; 15 U.S.C.A. 914. 134 The Government admitted that quantity discounts standing alone could not be made an issue in the case. But when connected with a total requirements contract they became "discounts on condition that the customer shall not deal in the goods of a competitor." Record, pp. 1149-54. 136 Amended Complaint, May 25, 1948, U.S. v. American Can, 87 F. Supp. 18.

MARKET PRACTICES AND ANTITRUST DECREE OF 1 9 5 0

201

Clayton Act charge. Probably the Government did not expect to make good its charge that the requirements contracts as such violated the Clayton Act, but wanted to bring the joint monopolistic effects of the tying practices, requirements contracts, and discounts under the more elastic provisions of the Sherman Act, and also to ask for broader relief than the Clayton Act would allow. The issue of conspiracy to restrain trade between American and Continental was not squarely presented in the case against American Can. There had been the usual forerunner of the civil suit. A federal grand jury had indicted both American and Continental in June 1946, on a criminal charge of conspiracy to fix prices in violation of Section 1 of the Sherman Act.186 In January 1947, the defendants entered pleas of nolo contendere and paid fines. Yet the subsequent civil cases against American and Continental were filed separately. The complaint against American did not charge it with conspiring with Continental in violation of Section 1 of the Sherman Act. Instead conspiracy was included by implication in the broadside charge against exclusive dealing. The Government alleged that American agreed with its largest rival to maintain the same prices and business policies in order to deny its customers adequate alternatives and hence to strengthen their inducements to purchase exclusively from it. The agreements were evidence of American's intent to monopolize.137 In May 1948, the court denied a Government motion to consolidate the cases against American and Continental.138 The Government then had to proceed against American alone, and as a result some important elements in the relations between American and Continental never became issues in the case. The separate case against Continental Can did not come to trial, since Continental agreed in advance to accept any decree entered against American, provided the court did not order divestiture. Judge Harris handed down his opinion in November 1949. After summarizing the facts of industry structure and pointing out that the high degree of industry concentration must inevitably have conferred substantial market power upon American Can, the judge addressed himself to the central issue of closing-machine leasing practices. American (and Continental, which offered customers no real option in this respect) had a dominant position in the closing-machine field and had used this position, fortified by rentals below costs and ancillary inducements, to restrain trade and maintain a monopolistic position in the can market.139 Cr. 30323-S, in the District Court for the Northern District of California. Brief for the United States of America, pp. 9-11, Appendix, pp. 25-26, U.S. v. American Can, 87 F. Supp. 18. 138 Commerce Clearing House, The Federal Anti-trust Laws (1949), p. 336. 139 U.S. v. American Can, 87 F. Supp. 18, 25-29. The judge applied the precedent laid down in the "Standard Stations" case. United States v. Standard Oil Company of 136

137

202

TIN CANS AND TIN PLATE

The closing-machine tying policy therefore violated both the Clayton and Sherman Acts. The requirements contracts, on the other hand, were not in themselves unreasonable agreements not to deal in the goods of others, and in many ways seemed to be vitally necessary both to sellers and buyers. Judge Harris rejected the Government's contention that requirements contracts should be adjudged illegal per se,uo and held that the contracts did not come within either the language or intent of Section 3 of the Clayton Act. Nevertheless, they had restrained trade and promoted monopoly, and so came within the language and intent of the Sherman Act. It was the five-year term that was at fault. The judge found that long-term requirements contract restrained trade unreasonably, but that a one-year contract would be reasonable.141 The opinion made no distinction between the need for requirements contracts in packers' cans and in general-line cans. The Government itself had made none in its pleadings and briefs, and the difference in the economics of the two fields of use had not been clearly brought out in the trial. The Clayton Act is supposed to arrest monopoly in its infancy, and to provide a finer instrument than the Sherman Act for preventing specific practices that might tend to create a monopoly. It might be difficult at first glance therefore to see how a practice like the use of requirements contracts could violate the Sherman Act if it did not violate the Clayton Act. What the judge apparently had in mind was the confluence of practices. Considered separately, the discounts, the claim settlements, the purchase of equipment, the use of long-term contracts, would have had only slight individual effects on competition. Considered together, against the background of high concentration of the industry, and reinforced by the tying practices, they jointly created a pattern of behavior that clearly offended against the Sherman Antitrust Act. The effect of the "inducements" which supported the central violation — unlawful tying practices under Section 3 of the Clayton Act — was thus brought into perspective. The judge was especially sharp in condemning the special inducements granted to large buyers. "[These transactions] set a pattern of operations evidencing the extremes defendant saw fit to go in perpetuating the contractual relationship between defendant and customer-user . . . [The] inducements referred to, California et al, 78 F. Supp. 850 (S.D. Calif. 1948); Standard Oil Company of California et al. v. United States, 337 U.S. 293 (1949). 140 U.S. υ. American Can, 87 F. Supp. 18, 29-32. 141 "[A] contract for a period of one year would permit competitive influences to operate at the expiration of said period of time, and the vice which is now present in the five year requirements contracts, would be removed. Under a contract limited to one year, the user-consumer would be guaranteed an assured supply and protected by a definite obligation on the part of American to meet the totality of needs of the canner, while he, in turn, would have a fixed obligation to purchase his seasonal needs from American, thus making for mutuality of contract and obligation." Ibid., 31.

MARKET PRACTICES AND ANTITRUST DECREE OF 1 9 5 0

203

in many instances, formed an important and vital part in the renewal or renegotiation of requirements contracts." 142 The judge also found ample support for the Government's contention that Continental's policies were practically identical in all respects with those of American. "Apart from any claimed conspiracy, there is abundant evidence with respect to the agreement or agreements on the part of the officers of Continental and American to fix prices. This evidence goes far beyond that referred to by Judge Rose in 1916 . . . The pattern of evidence herein suggests more than a following on the part of Continental of the prices fixed and established by American. 143 In the legal circumstances the Court could not deal with this matter directly. THE DECREE

The Government in its prayer for relief had asked that the court grant the following: ( 1 ) To judge all the contracts between American and its customers illegal, and to order American to cancel all its leases and requirements contracts. ( 2 ) To enjoin American from entering into any new contracts with the requirement that the lessee or purchaser buy all of its containers from American, or leases requiring that the lessee buy any containers, and to enjoin it from imposing any condition or understanding that a lessee or purchaser would not use or deal in the containers of a competitor of American. ( 3 ) To order divestiture of the closing machine part of American's business, or: ( 4 ) To direct American to sell or lease its closing machines to any applicant on nondiscriminatory terms and conditions and to provide service for the machines to all lessees on the same terms and conditions.144 American claimed that the equitable remedies proposed by the Government were drastic and unjustified. After hearing arguments on the question from both parties Judge Harris entered a decree in June 1950, granting most of what the Government asked but denying its request for divestiture. (Continental accepted the same judgment in a consent decree.) The following were its principal provisions: ( 1 ) The decree enjoined American Can Company from leasing or selling any closing machinery or other equipment on any condition or understanding that the lessee or purchaser would not purchase contain27-28. 33. 141 Amended Complaint, pp. 9-10; Brief for the United States of America, Appendix, pp. 10-11, U.S. v. American Can, 87 F. Supp. 18. 142 Ibid., iaIbid.,

204

T I N CANS AND T I N

PLATE

ers from anyone else for use in connection with such equipment; or that the lessee or purchaser would buy any container from American. It also enjoined American from selling cans or granting discounts on can prices on condition that they not be closed on machinery sold or rented by competitors. 145 Other provisions were designed to ensure that the tie between machinery and containers would never be renewed, by any subterfuge. ( 2 ) The decree prohibited American from entering into any requirements contract after January 1, 1951 of more than one year's duration. Furthermore, for five years after that date the company could make no sales contract of any description of more than one year's duration. The decree also enjoined American from renewing any contract more than 90 days before expiration. ( 3 ) It required American to draw up separate can contracts with each individual plant of a multiplant buyer. The buyer could still place all his contracts with American if he chose. Nothing in the decree discouraged the inclusion within a single requirements contract of all the types and varieties used in a single plant. ( 4 ) The decree laid certain injunctions on American concerning pricing and discriminatory inducements: a. It permitted freight absorption to meet competition, but the seller had to allow the buyer to buy f.o.b. the actual place of manufacture if he wished and to choose the means of transportation, paying the actual transportation costs. (This required no change in existing practice.) b. It prohibited American from granting to any customer buying under a requirements contract more favorable terms of sale than to any other customer, or to refuse supplies to any customer because of his refusal to enter into any particular contract arrangement. c. For a period of five years after January 1, 1951, it prohibited American from granting any discount based on aggregate annual volume of purchases. Price differences had to be based on demonstrable differences in cost of raw materials, manufacture, or transportation. After January 1, 1956, American could grant "any lawful aggregate quantity discount." d. American could grant no rebates nor make any payments to any customer except for bona fide damage claims, actual savings on tin-plate purchases refunded to customers on a proportionally equal basis, cash discounts, bona fide rentals for customer-owned property actually necessary to American's operations, and cancellation of a customer's indebtedness in case of genuine financial distress. After January 1, 1956, American would be permitted to buy used machinery from customers if the price did not exceed the open market sale value thereof. e. American could not make loans to nor guarantee credit of its container customers, again excepting cases of genuine financial distress. 14C This of course had never been a problem; the tie had been from machines to cans, not the reverse.

M A R K E T PRACTICES AND ANTITRUST D E C R E E O F

1950

205

f. American had to make technical service equally available to all customers.

( 5 ) The decree forbade American to acquire the assets of or control over any other concern manufacturing containers for sale in the United States, except after an affirmative showing to the court that the effect of the acquisition would not be substantially to lessen competition.146 The same prohibition applied to acquisition of other machinery manufacturers. (6) The court ordered American to use its maximum efforts to promote the sale of closing machinery and equipment owned by it on January 1, 1951, and to afford to all customers every available economic incentive to purchase those it manufactured after that date. a. For 10 years after the effective date of the judgment American had to sell to any applicant any closing machine or related equipment it owned on that date or might afterward acquire. b. The court appointed a master to evaluate the sale of machines and to report on the available market for them, so that the court could determine the proper percentage of closing machines which it should require American to sell in the next five years. 147 c. For the machines and equipment owned on January 1, 1951, the court set the maximum price at 10 times the rental that was in effect in 1950 for the machine in question, unless the weighted average depreciated cost of the particular model was higher. (Machines sold had to be in first class operating condition, and could be overhauled at American's expense if necessary to bring it to this condition, or else an adjustment could be made in the price.) Full notice was to be given to all lessees of the availability of machines and their prices. The existing lessee was to have absolute priority in the purchase of a machine.

( 7 ) The decree required American for a period of 5 years to lease to any user of containers (whether its own customer or not) any machinery or equipment which it was then leasing to anyone. The can company would have to manufacture for compulsory leasing additional equipment up to a value of $2,000,000 per annum for this period, provided there was sufficient demand and provided its manufacturing capacity would permit. Lease rentals and terms had to be uniform and nondiscriminatory as long as leasing continued. ( 8 ) The judgment required American by January 1, 1954 to establish for every type of closing machine that it continued to lease a rental which would be not less than compensatory, covering full costs including service and a reasonable return on investment in machinery. 148 By placing the entire burden of proof on the defendant this provision went somewhat beyond the Celler Amendment to Section 7 of the Clayton Act, which was passed by Congress at about the same time as this decree was issued. 147 The master appointed by the court died before he could render his report; but the percentage actually sold turned out to be so large that this provision proved to be unnecessary.

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(9) No lease was to terminate within three months after the termination date of the can contract with the same lessee for the same plant. (10) The decree required American, so long as it continued to manufacture, sell, or lease any machine, to sell repair parts to the owners or lessees, and to provide service at a reasonable and nondiscriminatory charge on any machine it had sold so long as it continued to manufacture and lease the same model. (11) It directed American to allow the employees of any applicant to attend, without charge, the service schools that the firm maintained for training its customers' employees in the operation and repair of closing machines and related equipment, on the same basis as its customers' employees. The service schools were to continue for at least five years. (12) The decree ordered American to grant to any applicant a royaltyfree, nonexclusive license to make, use or sell any closing machines or related equipment under all applicable patents that it owned or controlled at the time of the decree. (It could charge reasonable royalties on fibre-container closing machinery patents.) Any machine patent acquired or applied for during the next five years had to be licensed at a reasonable and nondiscriminatory royalty to any applicant. The court retained jurisdiction over the reasonableness of all royalties, placing the burden of proof on the defendant. American could not dispose of any of these patents if the result would be to deprive applicants of the right to obtain licenses on the above basis. (13) The decree required American for a period of five years to furnish technical information and know-how to any applicant desiring to manufacture closing machinery in the United States. This information was to include working drawings, prescribed production methods, assembly blueprints, and the like; and if this should prove inadequate, the applicant would have the privilege of visiting American's machine shops and consulting with its technical personnel. (American could charge the applicant for the actual cost of furnishing this information.) (14) For a period of 10 years, American had to keep records available on its containers and closing-machine business, and representatives of the Department of Justice could have access to any material relating to the decree. At any time after January 1, 1956, the Government could petition the court for further relief relating to closing machines and equipment if there were grounds for holding that the decree had not operated to restore competition or to remove the effects of the violations of the law that had occurred. To summarize: the decree broke the tie between cans and closing machines; forbade discriminatory inducements; prohibited quantity dis-

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207

counts for 5 years; limited requirements contracts to one year, and required that they be written for individual canneries only; directed American to sell its closing machines at reasonable prices to anyone who wanted to buy them, and to lease machines and service them at fully compensatory rentals that were uniform and nondiscriminatory; required American to license patents (many without royalty), to make available technical information and know-how, and to train cannery personnel in its machine service schools. The remedies were drastic and far-reaching even though they fell short of divestiture or dissolution. The express purpose of the court was to restore competition to the industry. Judge Harris chose, as Judge Rose had chosen in 1916, to depend on the gradual reestablishment of competition by evolutionary forces, though unlike Judge Rose he tried to impart a greater momentum to evolution by clearing away some of the obstacles that had slowed it down. The contours of competition, the goal of the evolutionary process, were left unspecified. The judge could hardly have anticipated quick reversion to a competitive structure consisting of many small producers of cans. "Workable" competition, without radical change of the concentrated industry structure in the near future, was all that could be expected. Whether the court had any better ground for expecting workable competition than Judge Rose had in 1916 remains to be seen.

Chapter IX Price Behavior The use of tying clauses and requirements contracts, which formerly dominated the conduct of the can industry, grew out of particular elements of its environment. Price policy, on the other hand, is related to the general market structure which has changed from monopoly to oligopoly during the last half-century. A . PRICE LEADERSHIP AND ITS EVOLUTION

Price leadership has evolved with the market structure. American Can's power to fix monopoly prices has been progressively limited, while Continental has played a steadily more important role in industry price policy. Not since the very earliest days of the Can Trust has American possessed the sort of market position which would enable it to set market prices autonomously, like a pure monopolist. Indeed it was its attempt to do so which led to the rapid break-up of monopoly. American at that time apparently followed a short-run policy of profit maximization. It subtracted from the market demand the supply that the remaining small independent firms would offer at any given price, and fixed the market price that would maximize its net revenue from the 90 percent or so that was left for itself. Unfortunately American had no means of restricting entry, and the result was a rapid increase of the "independent" supply and a rapid decline in American's market share. The price "leadership" designed to secure monopoly profits actually was an umbrella under which competition could grow. In a few years this policy was bankrupt. After 1910 or so American Can could no longer ignore the constraints of competition, both actual and potential. During the following decade its policy altogether changed. It was still the leader, but its leadership now was a dynamic leadership. American was soon offering a package of product and service which no other producer could then duplicate. It followed an aggressive policy of market expansion. The cross-elasticity of demand between itself and the group of small manufacturers declined appreciably. Meanwhile however Continental was growing to a position of rivalry, against which American's policy of differentiation and development worked with diminishing effectiveness. Eventually a pattern of oligopolistic price leadership began to emerge.

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209

CONTINENTAL AS A PRICE FOLLOWER

The price policy was simplicity itself. American announced the prices and Continental adopted them. Identity of list prices by itself means nothing in particular, save that the products and services offered by both leading firms were not differentiated enough to make a price differential possible or necessary. 1 What is significant is that up to the middle 1940's Continental did not attempt to establish a general policy of its own nor to act before American did. This is demonstrated by abundant evidence. 2 It should be explained that Continental had to go to some trouble to find out what American's prices were because there is no public posting of can prices. The prices of the standard varieties of packers' cans would of course be generally known, but other sellers would have to ascertain the prices for off-sizes and for the multitudinous varieties of general-line cans by examining the contract of a customer who bought from American or else by direct application to American. 3 Hence the need to "confer." This does not mean that there was overt collusion in fixing list prices. Continental invariably found out and followed the price after it had been announced by American, and did not confer nor agree with its rival in advance. One episode which illustrates the leadership-followership relation beGeographical differentiation was neutralized by freight equalization. See below. Record, pp. 1884-93. A former district sales manager of Continental testified that on several occasions in 1937 he conferred with the district sales manager of American to find out what American's prices were and "conform Continental's prices to them." The former Vice President in Charge of Sales of Continental testified that he always instructed all his salesmen to obtain the same price for Continental products that American got for its products. Ibid., pp. 3044-48. A salesman notified him on one occasion that he had "conferred with [American] and asked for the correct price." Exhibit 1241. The Continental sales officers in Seattle and Los Angeles were instructed in the late 1930's to find out American's prices and follow them. Exhibits 1244, 1245, 1334. Continental always followed American's prices on coffee cans. Ibid., pp. 4134-41. The sales personnel of Continental often conferred with American's sales offices to find the "correct" price. On the other hand the then Vice-President in Charge of Sales of Continental testified that while Continental always reduced prices if American did, when American raised prices Continental might or might not follow depending upon the cost situation for the particular container. Ibid., pp. 4137-41. There is, however, no evidence that Continental hesitated to follow any list prices up for standard varieties before the late 1940's, and the hypothesis that American faced a 'Tanked" oligopoly demand curve does not seem to be warranted before then. 3 If an order for a nonstandard can came in to Continental's sales department, it would be referred to the cost department. The cost department would tentatively set a price and check it against the price of the nearest similar size or variety on the established price list. If it were a large order or if Continental were otherwise concerned about it, the sales department could call American to find if they made such a size and what their price was. There was seldom any occasion for discussing the price of standard cans. Ibid., pp. 3186-9, 6874-7. A few specialty items were occasionally sold by Continental at lower prices than American's. Ibid., pp. 4140-41. 1

2

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tween American and Continental that formerly prevailed was the cancellation and renegotiation of contracts following the passage of the Robinson-Patman Act. Continental was attempting to work out a basis for settlement of the contracts, which were now illegally discriminatory, and was naturally concerned with what American was going to do. It made no agreement with American in advance of the settlements, and undertook no direct discussion. In fact Continental for a long time could not even find out what American's plan of settlement and its new discount policy would be. Then an executive of Continental got this information from a personal friend who dealt with American, and Continental adopted American's policy of settlement (but not its new contract discount policy). Even then there were difficulties. Continental worked out settlements for its general-line contracts on the basis of what it thought was American's policy, only to discover that American had made different retroactive adjustments on the West Coast from those it allowed in the eastern territories. Continental then had to readjust the allowances made to some national general-line accounts to meet this difference.4 PERIPHERAL COMPETITION

Continental's frank acceptance before 1950 of its role as a price follower did not mean that it abandoned all initiative. The leaders were rivals, not conspirators. As is common in oligopoly, rivalry was deflected into other, safer, areas of business policy. These symptoms of oligopolistic competition are here called "peripheral," rather than nonprice competition, since this peripheral rivalry did affect price in certain ways. The facts of the business situation must have seemed obvious to the management of Continental. Being a smaller firm than American, and with a somewhat less advanced technology and somewhat higher costs,5 'Ibid., pp. 3 0 1 7 - 3 1 . The following excerpt (Exhibit 1 2 9 4 ) is from a letter from the New York office to the San Francisco office of Continental Can Company in February 1937: " I am sorry you feel it will be necessary to adjust to the same prices as those our principal competitor is using, principally because we have already issued the adjustment check to Sears, Roebuck, which included the cans shipped to the Pacific Paint & Varnish Company. W e allowed them a straight 5% . . . W e are adjusting to all customers on this same basis. . . . [We] have learned that our competitors are doing likewise at all points with the exception of the Pacific Coast. The reason for their making a larger adjustment in your territory is unknown to me, but I am inclined to think that they have had lower prices in effect with certain customers prior to January 1, 1937, than we knew of, or than they regularly quoted. They are probably adjusting to these. . . . I think it well worth while to make an attempt to get away with a 5% retroactive adjustment. If upon doing so you find that we are running into trouble and that your good accounts, who know of American's adjustment basis, are expecting the same consideration from us, you can change to their figures." 5 These are inferences from certain facts which were discussed in Chapters VII and VIII.

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it did not dare to offer a direct price challenge to American across the whole front of the can market. To do so would be to precipitate a price war, which in view of the known inelasticity of demand would involve heavy losses for both parties and endanger the survival of Continental. Its optimum policy was rather to grow under whatever shelter the price policy of American afforded. American's response to the growing rivalry was to attempt to maintain the gap between itself and Continental as long as possible. It pushed its development efforts even harder; it tried to hold on to what it had and to capture what it had lost; but it did not fight a pitched price battle with Continental. Since American was the leader it would have had to take the initiative in cutting prices below Continental's cost. This regimen of rivalry without price competition was reflected in many aspects of market behavior. One was the fierce competition in product improvement and service. It is obvious that the concentrated effort of both major can companies to improve their products and bring out innovations, to improve closing machinery and to surpass each other in the rapidity and excellence of service, was an important element in the competitive environment. There is no evidence of restriction or agreement affecting innovation. An incident like Continental's coup in developing the can for oil and capturing a large part of the market before American could retaliate, or American's innovation in key-opening cans for shortening, or the vacuum-packing of coffee, or the beer can, shows how much the competitive energy of the leaders was directed toward this arena of rivalry. Major changes came along frequently, and any one could have had as powerful an effect on their relative positions as the most vigorous kind of price competition. The buyers of cans, and ultimately the consumers, would of course benefit differently from rivalry in innovation and service than from competition in price, but innovation by itself could hardly have affected them adversely. American and Continental actively solicited each other's customers, and succeeded every year in inducing a certain number to change suppliers (Table 35). While the number changing in any one year was small compared to the total number of customers of each supplier, the volume of sales thus accounted for was frequently considerable. The list includes such large customers as Procter and Gamble, Ballantine, Pittsburgh Plate Glass (for paint cans), Folger Coffee, Standard Oil of California, Glidden Paints, and Sun Oil.6 Continental originally got most of its large customers from among those who had been customers of American, though American succeeded in recapturing some of them. In 1947 Continental sold $20,915,395 worth of containers to these 299 customers gained from American. Not included in this figure is the volume 'Exhibit SSS-2.

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TABLE 35. Number of contract customers of Continental Can Company gained from and lost to American Can Company, 1930-1948 Year 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 Total

Gained

Lost

6 5 14 15 11 16 11 28 7 17 20 21 17 12 6 16 22 19 36

5 7 1 3 5 2 4 2 9 7 14 10 10 12 15 12 22 6 5

299

151

Source: Exhibit SSS-2.

of sales by Continental to Minnesota Valley Canning Company (now Green Giant) which Continental captured before 1930 and which by 1947 was its third largest customer, purchasing several million dollars' worth of containers per year.7 Since the large can manufacturers avoided open price competition, they could induce buyers to switch only by offering them superior products or service, or by offering them discriminatory concessions. The benefits on the first eventually were spread over the market. The second was strictly selective. Actual prices were not identical in all cases. Continental followed its own policy in determining discounts. Before 1936 large discounts were tailored to the bargaining power of the particular customer receiving the concession. American and Continental engaged in an often bitter struggle for particular large buyers. Continental offered larger special discounts to large buyers than American did.8 In 1936 the two leaders published discounts on a definite quantity basis applicable to all buyers. With the abolition of secrecy the discount struggle became more decorous — in truth it too became subject to a certain measure of oligopolistic discipline — but the net price announcements of American 7 8

Record, pp. 4177-78; Exhibits SSS and SSS-2. Record, pp. 2883-84.

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and Continental to large buyers remained different. These differences did afford a limited means of price competition between the two leaders. One may infer from the discount schedules (Table 32) that the very largest customers tended to favor American at that time, and that to hold on to its own large buyers Continental had to offer somewhat lower prices for a given volume of sales. The elasticity of its own demand was somewhat greater. OVERT COLLUSION

Insofar as there was any "collusion" involved in price leadership and similar discount policies, it was in the form of tacit agreement based on mutual recognition of objective facts. This is so notwithstanding the need for Continental to communicate with American to find out what its policies were. There were however a few instances in which communication between the leaders went beyond the mere announcement of a unilateral decision. They did not amount to much but they may be supplementary evidence of the existence of monopoly. It was brought out in the antitrust proceedings that several meetings had taken place among top executives of American and Continental. The first of these was in March 1935, at a canner's convention in California. "The serious effect of the prolonged depression upon the canning industry was a matter of grave concern to those attending the convention. . . ." 9 The effect upon the can industry was also a matter of grave concern, especially the struggle for business that had resulted from the depression and the consequent danger of uncontrolled price competition. The meeting was attended by the President of American and a Vice President of Continental. 10 One subject they discussed was Continental's acquisition of the business of Curtice Brothers Company of Rochester, which had long been a customer of American. It had been the practice of one of the sales executives of Continental to offer special concessions to buyers that were then customers of competing suppliers — concessions which were not offered to customers of Continental, and which were arranged by collateral agreements that were not part of the contract nor disclosed to other officers of Continental. 11 American protested this violation of Continental's price structure on the ground that it was unfair and unlawful under the rules of the NIRA which was then still operating. Continental had already taken action to eliminate the secret concessions given by this salesman, "Brief for Defendant After Trial, Appendix, p. 66, U.S. v. American Can, 87 F. Supp. 18. 10 Respectively, Dr. Baker and Mr. Steele. The NIRA, which encouraged meetings among competitors, was then still in effect. 11 Record, pp. 2877-78, 3094-97, 3109-11.

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and apparently no formal agreement on the subject was reached. 12 Other subjects were discussed at this same meeting. Two food canners had proposed that their purchases be combined so that they could obtain the 10 percent discount which Continental was then allowing on purchases over $1,000,000. One of the canners was a customer of American. Continental had already informed these buyers that they could not combine purchases to get a higher discount in the absence of a controlling ownership interest.13 Discount policy was also discussed in a general way; it was only at this meeting that the Continental executive found out what American's larger discounts actually were, and later recommended reduction of Continental's discounts to bring them in line with American's.14 A more important matter was Continental's discounts on the West Coast. (American gave none to buyers generally in that area before 1936.) American's President, Dr. Baker, asked whether these discounts could not be eliminated, and suggested that Continental write new contracts without discounts but make instead a cash payment where necessary to retain the customer's business — i.e., a secret rebate which, by inference, would not lead American's customers to press it for similar discounts and would help to keep price competition within bounds. The Continental executive refused to consider such a policy, and said that American would eventually have to start granting discounts on the West Coast.15 Continental advanced a proposal to help small canners in distress by giving them discounts on rentals of closing machines, the discounts to depend on the volume of can purchases. American showed no interest, partly because of the volume feature, but partly because, as the Continental representative stated in a letter to the Home Office: "Our competitors evidently cannot figure out any way to do this on account of two or three big customers who they know will demand just as much of an increase in discount added to theirs as is allowed to the smaller one." 1 6 All this took place a long time ago, and it is not necessarily indicative of the state of competition in the more recent past. There is no evidence of direct conspiracy to fix prices or terms of sale, to allocate customers, u Certainly the firms did not agree to refrain from soliciting each other's customers nor to refrain from offering open and uniform concessions. (Ibid., pp. 3110-11, 3129; Exhibit 1224.) Continental has continued to supply Curtice Brothers. u Record, pp. 2880-83. "This recommendation may have been somewhat naive. In any case Continental made no reduction. Ibid., pp. 2883-85, 2888-89, 3121-22. " Ibid., pp. 2892—93. American's suggestion here contrasts oddly with its virtuous policing of Continental's practice of offering special discounts to American's customers in the East. Continental had begun offering discounts on the West Coast, even though American gave none, in order to "buy its way" into an established market of American around 1930. Ibid., p. 2896. "Exhibit 1224; Record, pp. 2889-91.

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215

or to divide markets, even at that time. Yet the range of topics and the manner of their discussion is very revealing. Oligopolistic interdependence evidently weighed heavily on the minds of both parties. While they could depend, by and large, on tacit observance of the rules of oligopolistic rivalry to maintain order in the market, there were some danger points, created by the depression, by the pressure of large buyers, and by Continental's competitive challenge. There is no evidence of anything more than a meeting of minds on some of these points. Nor in truth was anything more necessary. Obviously there were certain lines which Continental could not step over in its push toward parity, but on the other hand Continental was going to continue its campaign and was not going to defer to American's leadership on every point. Other discussions took place between personnel of the two leading companies from time to time. In 1939 they met in the New York offices of the American Can Company to discuss the activities of one of Continental's salesmen.17 Again Continental had extended concessions to certain favored buyers, primarily those whom it was trying to induce to switch from American. (One such buyer was the Rio Grande Valley Citrus Exchange.) These concessions were not made equally available to all buyers, and so were prima facie illegal under the Robinson-Patman Act. American protested that Continental's violation of the law had injured it. Apparently it preferred to deliver a direct rebuke rather than to refer the whole matter to Federal Trade Commission, which was the body legally authorized to deal with it. However, the law was on its side, and Continental desisted. Both Continental and American (as well as Crown) continued to supply cans to the Rio Grande Valley, the area where the supposed violations had taken place.18 17 The same executive who had earlier allowed secret concessions to buyers. See above. Ibid., pp. 3 0 9 7 - 3 1 0 5 . 18 Another conference was held in New York in 1940 at the suggestion of the Chairman of Continental, mainly for the purpose of smoothing over the bad feeling entertained toward some Continental executives by officers of American. The subjects discussed were the activities of Continental which had given rise to this ill will. One instance was its allowance (in 1936) to the Harold H. Clapp Company of a quantity discount based on combined purchase of packers' and general-line cans, which was a privilege it had not extended to any other customer at that time. Ibid., pp. 6 6 0 1 - 4 . A Continental executive testified that "it was agreed that these were not the days to take one another's business nor to cut one another's throats, but that they should keep what they had and we should keep what we had. . . ." Ibid., p. 2523. This "agreement" was flatly denied by American executives who had been present. However, it was understood that the companies could maintain amiable relations by endeavoring to understand each others' problems. American has claimed that "of course, the antitrust laws do not enjoin that competition must be sanguinary or that competitors shall not be on speaking terms." Brief for Defendant After Trial, Appendix, p. 79, U.S. v. American Can, 87 F. Supp. 18. The record shows that in one instance district managers of the two companies had conferred on a price that had not yet gone into effect. The incident was trivial. Record, pp. 4 0 5 4 - 6 , 6 5 0 4 - 5 ; Exhibit AAA as cited in Brief for Defendant After Trial, Appendix, p. 84, U.S. v. American Can, 87 F . Supp. 18.

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PRICE LEADERSHIP AND THE SMALLER CAN MANUFACTURERS

While the great powers in the can industry were engaged in this genteel struggle they also had to maintain relations, hostile or amicable as they might be, with the outlying territories occupied by the smaller can manufacturers. It has previously been pointed out that the vulnerability of the major can manufacturers to competition from smaller firms varies greatly from one type of container to another. We can here distinguish two broad areas of competition with minor manufacturers: in the packers'-can market, where only four or five smaller competitors existed, and in the fringes of the general-line markets, where competitors were numerous. (Some general-line types, such as the beer can, were more nearly like packers' cans, and in a few the two major producers faced no competition at all from smaller producers.) While the major sellers were less vulnerable to competition from smaller producers of packers' cans than to competition from each other, they were by no means insensitive to it. The cross-elasticity of demand between Continental and American was very high. The positions of the minor sellers on the other hand were differentiated from American's to some degree. Being much smaller and regionally specialized, they had somewhat more leeway for an independent price policy. When dealing with an already established clientele, especially those located near its own plants, or with small food packers who were interested chiefly in price, the smaller seller of packers' cans had a fairly promising prospect, though the long-term contracts and tying practices of the larger sellers hindered it. When competing for the business of buyers who were chiefly interested in service and research, or who were located at a considerable distance from its plants, or who operated on a nationwide scale and could get larger discounts from the major sellers, the disadvantages of the small manufacturer of packers' cans might become prohibitive. Unfortunately the small sellers had to struggle with each other as well as with American and Continental. American was of course continually aware of the possibility of competition developing in any of its markets from the smaller producers. It maintained an alert watch on its frontiers. 19 In the eastern part of the 19 In 1940 a memorandum from the Atlantic Division of American made a careful assessment of the competition offered by the smaller packers' can producers there. It stated that while Crown had gained in the last two years in the Baltimore area, National had lost some customers. National Can was American's outstanding competitor in the Boston area, but Crown was threatening to break in on a large scale. In New York, some small competitors had gained, but principally at the expense of other small competitors. Exhibit 497. Again in 1940, American estimated that it had lost the following volume of business to various small competitors in that year; to Crown, $106,300 in general-line and $163,300 in packers' cans; to National Can, $213,000 in general-line and $26,500 in packers' cans; to Owens-Illinois (afterward acquired by Continental), $142,000 in general-line and $250,000 in packers' cans. Exhibit 499. Whether there were offsetting gains by American is not stated.

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217

country Crown Can offered more vigorous competition than either National or Heekin in the late 1930's and 40's. It was attempting to carve out new marketing territories at the expense of the major firms, while National and Heekin competed in a more passive manner. During those years Crown set up several new factories in attempting to enter new regional markets. Apparently its solicitation of Americans customers disturbed the larger firms on several occasions. American felt that Crown was attempting to induce these customers to break their contracts. A memorandum from the Sales Manager of American's Atlantic Division in 1942 suggested that Crown be discouraged from soliciting business from American's customers in Florida, or even discussing can requirements with them, since they were all under contract and not free to change suppliers, and this solicitation would create an "unwholesome atmosphere." 20 In the same year Crown got into difficulties with American because of its solicitation of certain contract customers in Wisconsin. These customers were dissatisfied with American, and the Crown representative told them that they could cancel their contracts at the end of the year and switch to Crown. Needless to say American Can refused to countenance this breach of contract, and bitter words passed between the two can companies. 21 It was only the long-term contract which prevented an immediate competitive effect. And in other cases Crown did succeed in capturing certain buyers whose contracts with American were expiring. Between 1937 and 1947, 21 customers switched from American to Crown and these 21 purchased over $3,500,000 worth of cans in 1947.22 During its early promotional period Crown offered substantially lower prices. In 1943, during World War II, it moved much closer to American's prices,23 but has frequently sold under American's list since then. Of course it sought other methods of competition as well, such as faster delivery, improved lithographing, shorter contract periods, and the like, but the main factor in its growth was the price difference. 24 National Can too has normally offered prices somewhat under the leader's. According to Hession, National quoted prices during 193620

Exhibit 501. Exhibits 505-21. 22 Record, p. 7055; Exhibit TTT. Crown also sold $5,140,000 worth in 1947 to customers who were at that time also purchasing cans from American. (Table 30, Record, pp. 4513-16.) These latter were mostly general-line cans. 23 Ibid., pp. 4506-9. 24 According to its vice-president in charge of sales (Ibid., p. 4509). Hession states that it was the intention of the founder of Crown Can, the late C. E. McManus, to have a "one-price" policy, with no quantity discounts, in packers' cans. Crown did, however, begin to offer discounts to customers soon after it started. During the early 1940's American was quoting a price of $19.00 per thousand for No. 2 packers' cans. Crown offered a price of $18.32 less 2 percent for cash, or $17.95 net. Before 1940, he adds, Crown was selling No. 2 cans for $2 or $3 less than American. Competition, p. 204; Record, pp. 4504-5. 21

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1946 about 2 percent under American's.25 By 1949 the differential had narrowed to about 1 percent.26 Even with these differentials National's volume had not expanded as rapidly as that of the other rivals of American. Doubtless a larger differential would have helped, but the extent to which National could undercut American's prices was of course limited by its costs. By all odds the most troublesome of the smaller packers'-can competitors was Pacific Can. From the first it was less respectful of the overwhelming size of American and Continental and more willing to offer genuine price competition than its counterparts in eastern markets. The economic climate was more favorable to this policy; in a rapidly expanding market the smaller firm can take a bigger chunk of the business through price competition without provoking retaliation from the large firms whose markets are also expanding. Oligopolistic discipline is more tolerant of the nonconformist under such circumstances. The contracts of Pacific Can Company in the late 1930s stipulated that its packers'-can prices would be 6 percent below the published price of American Can Company.27 In the postwar years the differential narrowed to 1% percent, but the provision tying the price to American's still remained in Pacific's contracts at the time it merged with National. Pacific has also used aggressive selling tactics. A few examples will suffice. In 1940, Pacific Can offered to Hovden Food Products Company, a fish packer which had long been a customer of American, the same discounts that American had been giving it, plus an allowance of 15 cents per base box of tin plate on all cans purchased, plus $1.00 per thousand discount on all general-line oval cans.28 Again, in 1944, Pacific made a determined effort to get the business of San Jose Canning Company, offering as an inducement to build a warehouse at San Jose and to furnish the canner with a new model pressure cooker at low rental. San Jose actually signed a contract with Pacific three years before it could become effective (its contract with American did not expire until 1947) in order to get immediate use of the cooker. San Jose called on a number of Pacific's customers before signing with it, and found that these customers expressed high satisfaction with Pacific's service and machinery.29 As a result of Pacific's concessions to obtain business * In 1946 National's term contract for packers' cans quoted a base price of $18.62 per thousand for No. 2 cans, or 2 percent under American's price of $19.00. In that same year Crown was selling at the identical price — $18.62 per thousand. Hession, Competition, pp. 203—4. 20 Record, p. 4643. " Hession, Competition, pp. 204-5. x Exhibit 630. American was fearful that if Hovden did go over to Pacific, American would have "tough sledding" with the rest of the fish packers in Monterey. Hovden did not accept. It was heavily in debt to American at the time. M Exhibits 852, 856-7.

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219

American's customers expressed the usual complaint that a lot of "poorly financed competition" would begin which would injure them financially.30 It is clear that American found the competition of Pacific to be more than a minor nuisance.31 On several occasions Pacific threatened to move across the mountains into the Idaho, Utah, and Colorado territories of American, but was unable to get enough business to do so because of the long-term commitments of canners in that region to American. 32 Within the heterogeneous field of general-line cans, American faced the competition not only of the other full-line producers but also of smaller firms. Where the container was an item of standard design the other firms may well have "followed" American's price announcements. This was more likely to be true for cans produced by high-speed methods where American's productive superiority was perceptible. 33 But in specialty items of the sort produced by several dozen small competitors, "price leadership" has had little meaning. Prices have depended on the circumstances of the individual case. 34 B . T H E LIMITS TO MARKET CONTROL

There are two related questions concerning the degree of monopoly. What was the extent of monopoly power in the hands of American Can? And, did oligopolistic discipline in the relations between American and Continental result in joint monopoly? THE POWER TO EXCLUDE

It has been shown that potential entry places a limit on monopoly power in the can industry. The large sellers must take into account the long-run effects of new competition. The fear of entry and the reluctance Exhibit 892. In 1940 American's San Francisco District estimated that Pacific was selling $1,177,000 in general-line cans in that district of the West Coast alone. Three-fourths of this was in beer cans. 32 Exhibits 733, 887. 83 Cans, Inc., for instance, followed American's prices in selling beer cans. Record, pp. 4 7 7 1 - 7 2 . 84 An interesting sidelight on the relations of American with one general-line competitor was brought out during the recent antitrust case. Sherwin-Williams Company sold paints and varnishes to American, but also sold paint cans in competition with it. In 1940 the paint-can competition seemed to be getting troublesome, American having lost some accounts to Sherwin-Williams. An assistant district sales manager of American suggested to the home office that it take steps to halt this competition. "[With] low prices being quoted, we will again be embarrassed by some of these prices getting into the hands of our good contract customers, . . . and we feel in all justice due to ourselves as can manufacturers, and in turn purchasers of materials from Sherwin-Williams, that we should be protected against such activity." In reply the home office promised that "Mr. Figgis [a vice-president of the company] is going to follow this matter through. . . ." Exhibit 949. 80

81

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to allow competition to grow under a price umbrella has led American since the early days to follow a policy that is based on a long-run view of the market. "Maximization" of profits in the long run is an ambiguous principle. When there are discontinuous changes in product and in production functions that cannot be fully known in advance it becomes virtually meaningless. Even if American had had a complete monopoly of can production free of potential competition during the entire period up to the present it would have been confronted with choices among alternative policies of expansion. It could only have guessed at the elasticity of its investment-return function in the long run.35 It would have had to choose among different policies of research expenditure and innovation. The optimum conditions for price and investment policy would have been hidden in a fog of uncertainty. The threat of potential competition would narrow the can monopoly's range of choice. The demand curves for most kinds of containers would move irregularly to the right over time. The rate of movement would depend on the price, among other things. Potential competition would create "kinks" in these demand curves as visualized by the monopolistic seller. The location of these kinks would depend on the market differentiation of each type and on whether the newly entering firms would accept the price leadership of the dominant firm — that is to say, they would become market-share curves whose shape would vary with different specific conditions of market competition. If there were no artificial barriers to entry and little differentiation of the product, the demand curves above the kink would be highly elastic. Then the maintenance of monopoly would depend on the location of the monopoly's cost curve relative to the long-run cost curves of its potential competitors, and upon the presence or absence of diseconomies of scale. If its long-run cost curve were lower than that of any potential competitors, its "monopoly profits" would simply be efficiency-rents. If diseconomies of scale set in as the market expanded beyond a certain point, competitors would enter as soon as its long-run average-cost curve rose enough to push the profit-maximizing price above the "kink" in the demand curve. In such a case the dominant firm would be endowed with natural monopoly up to that point, but its "power to exclude" would be merely the power to keep prices below the minimum costs of potential competitors. 35 In the actual course of events American has been very reluctant to resort to the outside capital market for investment funds, and has depended primarily upon retained earnings. Its internal rate of return has been consistently higher than the market rate. It seems to have gone to the capital market only when internal funds generation has been insufficient to enable it to expand at a rate that would maintain its share of the market.

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This hypothetical discussion may illuminate the actual choice of policy by American Can in the years following the collapse of its monopoly. Basically, the policy consisted of the following. First, to reduce the elasticity of its individual demand function in the face of actual and potential competition by offering a differentiated package of product and service. Second, to pioneer new markets by maintaining an active policy of product innovation. This would yield temporary "monopoly" gains of innovation and would also assure it of a large share of those markets before potential competition could enter, thus increasing its rate of growth. Third, to take maximum advantage of the economies of scale that existed in certain of its markets by expanding the scale of its operations, and to reduce its long-run costs through an active search for process innovations. Fourth, to create barriers to competition and establish a firm hold on its markets by tying the lease of machinery to the sale of cans, using long-term requirements contracts, and making discriminatory concessions to large buyers. In the long run, American could reasonably expect success in maintaining or expanding its market share with a satisfactory rate of profit and without involving itself in direct price competition with other firms. The first three kinds of policy enumerated above were "exclusionist" only to the extent that smaller firms and potential entrants had difficulty in meeting the standards of efficiency and rapidity of development set by American. The fourth group, however, were exclusionist policies in that they raised artificial barriers to competition. The record of entry and relative growth indicates that these policies were only partially effective. THE EFFECTIVENESS OF TACIT COLLUSION

After the emergence of Continental as its peer, American could not follow any policy, exclusionist or not, without taking into account the probable reactions of Continental. If open price competition broke out, the market-share demand functions to which American was trying to adapt an optimum price policy would simply have dissolved in the wreck of oligopolistic warfare. The same considerations must have appealed to Continental. It was not necessary, to be sure, to have identical policies. Oligopolistic discipline would not be shattered by every independent move nor every change in relative position of the two large sellers. Nor was it necessary that there be absolute identity of price. But it was necessary that changes take place slowly in the established markets, and that price differences not produce rapid gains by the one at the expense of the other. Did the coordination of policies between American and Continental result in an approximation to joint monopoly? W e cannot measure the degree of joint monopoly. W e can, however, look for certain symptoms

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of policy coordination which will give us an idea of the limits to joint profits maximization. Let us turn to a standard authority on the matter, Professor Fellners' Competition Among the Few. Some general remarks on tacit collusion are of interest: Under quasi-agreements, the tendency toward joint-profit maximization is in many cases counteracted by the circumstance that . . . it may be impossible to accomplish an acceptable distribution of the joint profit at the values of the relevant variables which would maximize joint profits, while some pattern of distribution relating to a smaller joint profit may prove acceptable to all parties concerned. Agreements or quasi-agreements do not usually handle all economic variables entering into the determination of aggregate gains . . . [This] is largely a consequence . . . of uncertainty due to which various persons and organizations discount their own future possibilities in different ways and are unable to find a mutually acceptable method of discounting these possibilities. The greater the number of firms involved in the oligopoly relation, the more likely is this to be the case. . . . Economic behavior under fewness is imperfectly coordinated; it remains competitive in a limited sense. The competitive element stays significant; it applies mainly to the dynamic aspects of the problem which are connected with ingenuity and inventiveness and on the discounting of which it is difficult to reach agreement.36 To be specific, the limitations to joint-profits-maximization through quasi-agreement among oligopolists are as follows: 3 7 (1) Unwillingness of oligopolistic firms to pool resources and earnings and to agree on interfirm compensations, in order to maximize profits, when their respective average costs are nonconstant and different from each other. (2) Unwillingness to pool resources in the presence of product differentiation or spatial differentiation. (3) Incompleteness of coordination concerning future changes in advertising, product quality, and technology. (4) The difficulty of testing and establishing new patterns of adjustment when fundamental cost and demand conditions change, owing to the fear of cut-throat competition. (5) Conservatism and the wish to have safety margins in that the firms may give a disproportionally heavy weight to the possibility of unfavorable surprise, when they make decisions.38 These market limitations supplement the limitations on a single monopolistic firm: the problem of choosing between short-run profits maximization and maximization of the present value of the enterprise, " Fellner, Competition Among the Few, pp. 34-35. 37 This list is slightly paraphrased and rearranged from that given by Fellner, ibid.,

pp. 198-99.

38 "The adverse consequences of business losses tend to become cumulative at a rate which usually has no equivalent counterpart on the favorable side," Ibid., pp. 148-49.

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m

the possibility of complementarity between present price and future demand, the possibility of conflicts of interest among groups of owners, and so on. But the market limitations are more important. It is clear that they interfered with maximization of joint profits in the can industry. The leading can firms coordinated some of their market policies only imperfectly; other kinds not at all. This remains true today. Oligopolistic discipline has been more or less confined to price and to those ancillary practices of market control that were formerly followed in common by the two leading firms. But there is a wide gap between perfect joint monopoly and effective competition. If American had maintained complete authority over price, it could have obtained noncompetitive prices and profits for itself and other sellers, even though it could not control nonprice rivalry nor innovation. With such authority it could have maintained leadership equilibrium in the industry, setting prices that would maximize its own profits after discounting the factors it could not directly control, and changing the whole industry price structure whenever it chose. To exercise such authority it would have not only had to be the dominant firm but also to have the lowest costs of any large firm, or else to retain a net advantage over its rivals when the market balanced quality of product against cost.39 American perhaps was never quite this powerful, but its price leadership seems to have been unchallenged in all markets except the general-line "fringe" as late as the 1920's. As time went on it deteriorated. In the 1930's and 1940's, while Continental always adopted identical price lists and showed no inclination to make a bid for price leadership itself, it did occasionally follow a different discount policy. Its thrusts into American's markets and its competitive innovation program nibbled away at American's dominant position. And the smaller 89 This kind of price leadership occupies an intermediate position between "dominant-firm" price leadership on the one hand and barometric price leadership on the other. "Dominant-firm" leadership refers to a situation where there are several small firms and one large one; the latter sets the price which the former treat as a ruling price. The large firm "allows the minor firms to sell what they wish at this price (subject perhaps to non-price competition) and supplies the remainder of the quantity demanded." George J. Stigler, "The Kinky Oligopoly Demand Curve and Rigid Prices," Journal of Political Economy, 5 5 (October 1 9 4 7 ) , p. 444. The oligopoly element is absent in this case. It corresponds to the policy followed by American during the first decade after its founding. When the oligopoly element is present and costs and capacities are different, a conflict in price policy will arise. In this case if an oligopolist having an appreciably larger capacity than its rivals also has the lowest costs, it can impose its price policy on the rest of the industry. For a theoretical model of this see Kenneth E . Boulding, Economic Analysis, rev. ed. (New York, 1948), pp. 5 8 3 - 5 . See also Jesse W . Markham, "The Nature and Significance of Price Leadership," American Economic Review, 41 (December 1 9 5 1 ) , pp. 891ff. These basic conditions appear to correspond to those prevailing in the can industry from about 1920-1950, but there were other conditions also which complicated matters.

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producers did violate price leadership, sporadically and for short periods. The existence of a price differential was not itself a violation, since some differential was commonly necessary to compensate for product and service differentiation.40 But on occasion the differential widened enough to constitute real price competition (cf. the policy of Pacific Can Company). American's best assurance of orderly conditions was to keep its costs low and its service better, and not to allow prices to rise too far above costs of competitors. The trend, in other words, was toward barometric price leadership, in which the price leader has the responsibility of recognizing changes in cost and demand conditions and translating them into price changes, but no real power to maintain monopoly prices. Ideally under barometric leadership market power is attenuated to the point where any excess profits are only efficiencyrents. American Can was far from being a purely barometric leader as late as 1950; its monopolistic market practices which buttressed its market power made this clear. But it had lost much of its authority as a price leader since 1920.41 Price policy also encountered a formidable obstacle in the bargaining power of large buyers. American and Continental engaged in keen, often bitter, rivalry for the business of three or four dozen large buyers by offering better service, higher discounts, plants built to meet the buyers' convenience, and the like. Countervailing power at first tended to limit monopoly gains by redistributing them in part to certain buyers, not by eliminating them. This was particularly true before 1930, when there was no real check on the degree and variety of discrimination that was permissible. After the Ladoga case, however, and even more after the RobinsonPatman Act, discrimination metamorphosed and hardened into a system "According to the Executive Vice-President of American Can, the company was well aware that there were definite limits to the premium that it could obtain for superior service and quality. If a smaller competitor were 2 percent or so below American's prices, he said, American would not expect to lose much business to them; a larger differential might be troublesome. Record, pp. 6 5 4 3 - 4 . 41 To specify the position that the can industry occupied at any time in this spectrum between dominant-firm oligopoly and barometric oligopoly, we would need a better theory of oligopoly than we have. (Cf. Chapter I.) The theory of markets cannot deduce the price and output conditions in oligopoly from knowledge of the number of firms, their relative size, and the costs of existing firms and prospective entrants. Stackelberg's models of joint-maximization, intersection-point equilibria, and leadership equilibria are tempting analogues to the historical results; but we simply do not have enough information about the way in which the can firms formulated their price and output policies to apply Stackelbergian analysis. See Fellner, Competition Among the Few, pp. 98ff. With the aid of imagination we might perceive in Continental's history a gradual shift from passive price followership to an active bid for quantity leadership as it became stronger, which involved a transition from stable equilibrium to an unstable rivalry. But this is only a fanciful analogy. (Ibid., pp. 1 1 1 - 1 3 . )

225

PRICE BEHAVIOR

of volume discounts. The volume of purchases of the large buyers continued to be a crucially important factor in the market. The rivalry of American and Continental for these customers was keen. Attempts to maintain monopolistic prices for large buyers in the face of their bargaining power would have put too much strain on the discipline of price leadership; and the sellers had to keep the possibility of backward integration in mind. Under the law, the price charged smaller buyers had to bear a reasonable relation to these key prices. It is legitimate to infer that the power of large buyers kept the whole structure of can prices lower than it would have been if the buying side of the market had consisted only of small firms, even though these large buyers did not succeed in promoting open-price cutting by playing one large seller off against the other. The narrowing of the differentials in the discount structure after 1936 supports the inference that the benefits of countervailing power were diffused among buyers at large as time went on; and the more diffused they became, the more likely they were to reach the ultimate consumer. To summarize, monopoly in the can industry was limited in many ways. The market practices followed by the major firms restricted entry of competitors, but so did service differentiation and a rapid pace of development. With the emergence of Continental as a major rival American shifted from a dominant-firm pattern of industry leadership to an oligopolistic pattern. Direct collusion between the two leaders was negligible. Tacit coordination of policies did not restrict development, process improvement, and the expansion of capacity; instead, oligopolistic rivalry stimulated them. Tacit collusion is reflected in price leadership and common selling practices. Price leadership fell short of maximization of joint profits (though we do not know how far short) because of dynamic rivalry and because of imperfect coordination of policy in many other ways. The leaders avoided open price competition, but price leadership was limited by the peripheral competition of smaller firms and the countervailing power of large buyers. The degree of monopoly that did exist was due in large part to market practices which had an exclusionist effect. But some part of what might appear to be monopoly gains was probably the result of superior performance. C . PRICE STABILITY

The price structure of metal cans over time has been characteristically rigid, for all the usual reasons in oligopoly and some special ones also. On the whole the can industry has been remarkably free from episodes of disorderly competition and collapse of leadership discipline. In the past American Can has borne most of the responsibility for decisions concerning the magnitude and timing of price changes.

226

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Oligopolistic firms usually find it best not to test the market discipline too often by making frequent and haphazard price changes.42 In initiating price changes American Can tried to confine them to an orderly pattern. It changed prices only at a customary time and based them upon clearly recognizable factors which, in its judgment, all sellers would be willing to accept. The pattern of change in the can industry reflected the practice of seasonal price stabilization in food cans, and it tied changes in can prices to changes in the price of tin plate. SEASONAL PRICE STABILITY

Price stabilization over the canning season may affect the level of can prices as well as their time-pattern. But whatever the average price, the buyer of food cans finds it highly desirable to have stable container prices, announced and guaranteed in advance. Variations in can prices under day-to-day spot pricing would create more uncertainty than the average canner could reasonably bear. Many canners make acreage contracts in advance for raw produce, at a definite price but in indefinite quantity.43 To do so they must be able to predict their can costs within a narrow range. This has been particularly important for smaller canners because it has enabled them to hypothecate their pack, or even to sell futures, to secure short-term financing.44 Before 1906, when American began to guarantee stable prices during the canning season, can prices often changed considerably from week to week.45 The guaranteed maximum price followed shortly after the universal adoption of the requirements contract, and was its natural complement. To obtain the advantage of price ceilings during periods of unusually large demand for cans the canner must forego the benefit of depressed can prices in periods of deficient demand. There is ample evidence that canners prefer the can supplier to bear this form of uncertainty. American, and the other firms that followed its policy, had to maintain sufficient capacity to meet their probable maximum obligation under a price fixed in advance, since they did not change prices to ration supply from week to week. This meant in turn that they would normally have "excess" capacity in the short run and would set prices above marginal 42 J . K. Galbraith, " M o n o p o l y and the Concentration of E c o n o m i c P o w e r , " A Survey of Contemporary Economics, ed. H o w a r d S. Ellis (Philadelphia, 1 9 4 8 ) , p. 113, n. 35. 43 Record, p p . 5 3 9 1 - 9 2 , 5 4 5 3 - 5 5 , 5471, 5 5 1 4 , 5 6 4 6 , 5 8 7 3 - 7 6 , 6012, 7 0 1 1 - 1 4 . ulbid., p p . 5 4 4 5 - 6 , 5534. According to can c o m p a n y executives interviewed, the practice of selling futures on the p a c k is less w i d e s p r e a d than it used to be. A s canners are b e c o m i n g financially m o r e stable a n d reliant u p o n internal sources of worki n g capital they are reverting more to a spot basis of sales. B u t there are still m a n y canners who do sell f u t u r e packs, and practically all still r e g a r d a relatively stable can price as indispensable. This is confirmed b y canners' testimony in Ibid., passim. " Ibid., p p . 2 6 3 7 - 3 8 .

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227

cost at average operating levels. The excess was in part an insurance premium. But it may have been more; for the monopoly structure that brought the benefits of price stability also carried the danger of stabilization at excessively high levels. Stability of price during the season is related to the broader question of rigidity of the cost-price structure. Even seasonal stability could not be maintained if direct unit costs of production were subject to excessive short-term fluctuation. Monopolistic elements in factor supply markets have stabilized seasonal costs. Wages accounting for 5 to 10 percent of total units costs have been relatively inflexible in the short run, especially since the can manufacturers were unionized in the middle 1930's. But the largest component of can costs, 60 percent or more, is the cost of tin plate. If the price of tin plate is not stable the price of cans cannot be either. Before 1952 the tin-plate price was fixed for a whole year. In this respect tin plate was different from other steel products, whose prices have been announced at intervals of 90 days at most. Tin-can makers, led by American, negotiated the policy of seasonal stabilization of tinplate prices with the tin-plate industry, because they had to have a tin-plate price ceiling to set a can-price ceiling. The tin-plate producers found it expedient to adopt this policy. But in later years, as steel prices began to rise at frequent intervals, the producers became restive. From 1952 to 1957 their contracts provided for more frequent price changes, but still guaranteed a maximum during the canning season. Then in 1958 they began to quote tin-plate prices subject to a month's notice of change. The can producers were forced to adopt the same policy in their can contracts. Even under the new pricing policy, can prices will be quite stable during the season. The can producer will not change prices merely because the demand for cans changes. The steel producers will not change tinplate prices every month. When they do, they must give a month's notice. Because such price changes usually follow changes in labor compensation, users can often predict changes in steel prices more than a month in advance by examining labor contracts in the steel industry. And the relative magnitude of each individual tin-plate price change is likely to be small. This is a far cry from the variability of spot prices. CYCLICAL PRICE STABILIZATION AND THE ESCALATOR CLAUSE

The need of food canners for short-term stability in container prices has no particular bearing on the long run. The uncertainties of the business cycle and of the long-term trend are entirely different from crop-year uncertainties. But the factors which have tended to produce seasonal price stability nevertheless have had a long-run influence. The regular timing of price announcements tended to prevent haphazard

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price changes; the whole industry would wait for American's price announcements which it knew would be forthcoming at the end of the year and would hold good for the entire year following. Furthermore, if the leader changed prices it would almost always relate the price change to a cost change, specifically to the price of tin plate, which American itself negotiated. The elements of cost in tin-can manufacture were rigid over the business cycle. There were not, and are not, many elements in the cost-price structure which can change rapidly and spontaneously; changes are negotiated among buyers and sellers having monopoly power. Labor costs in the iron ore, coal mining, steel, and can industries are fixed by collective bargaining. Capital equipment costs are inflexible. The rigidification of the cost structure is a condition which has strongly affected the behavior of can prices over time.46 The quoted price of tin cans has moved roughly parallel to the quoted price of tin plate, and both series have been quite "sticky" over the business cycle (Table 36). This however does not answer all questions about price changes. Quoted prices are not necessarily the actual prices. What relation do actual prices have to quoted prices? How do cyclical movements in demand affect them? How are changes in quoted or in actual prices transmitted through the cost-price structure? Early in the century American Can began to use a formal escalator for relating the quoted price of cans to the quoted price of tin plate. Without such a formal device, changes in can prices following a change in the leading price of tin plate might have been haphazard and disorderly. The escalator clause in the can contracts of the price leader eliminated uncertainty. When the posted price for tin plate changed (the price leader for cans being the leading buyer of tin plate) the whole price structure for cans would change at once.47 " The major exception is the price of tin, which is much more flexible than other cost elements. For example, in November 1926, the price of tin was 71 cents per lb.; in 1927, 59 cents, in December 1949, it was 78 cents, in November 1950, $1.39. Tin cost averages about 15 to 20 per cent of the price of tin plate if 1/2 lb. per base box is used. In recent years the average weight of tin coatings has been markedly below this standard. Metal Statistics, 1955; TNEC Hearings, p. 10755. " T h e following schedule of differentials was used for packers' cans: For each change of 10 cents or more per base box in the price of tin plate officially announced by United States Steel Corporation (Carnegie-Illinois), the following adjustments were to be made in the prices of packers' cans: Can Size No. No. No. No. No.

1 2 2% 3 10

Differential per 1000 cans 18 26 33 38 74

cents cents cents cents cents

These differentials approximately measured the amount of tin plate actually used in each size. Exhibit 791.

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BEHAVIOR

TABLE 36. Quoted prices of tin plate and tin cans and the fabrication margin, 19261956 Quoted prices

Year 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956'

Tin plate, per base box, f.o.b. Pittsburgh* $5.50 5.50 5.25 5.35 5.25 5.00 4.75 4.25 5.25 5.25 5.25 4.85 c 5.104 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.75 6.80 7.75 7.50 8.70 8.70 8.95« 8.95 9.05 9.85

Fabrication of No. 2 cans

No. 2 sanitary cans, per 1000, contract basisb $21.32 21.32 20.66 20.92 20.66 19.99 19.32 17.97 20.67 20.67 20.67 19.02 19.65' 19.41' 19.41' 19.00' 19.00 19.00 19.00 19.00 19.00 21.63 24.61 27.29 26.75 30.88 30.62 31.95" 32.36 32.36 34.90

Cost of tin plate Nominal (quoted price per fabrication base box X 2.65) margin, per 1000 $14.58 14.58 13.91 14.18 13.91 13.25 12.59 11.26 13.91 13.91 13.91 12.85 13.52 13.25 13.25 13.25 13.25 13.25 13.25 13.25 13.25 15.24 18.02 20.54 19.88 23.06 23.06 23.72 23.72 23.98 26.10

$6.74 6.74 6.75 6.74 6.75 6.74 6.73 6.71 6.76 6.76 6.76 6.17 6.13 6.16 5.75 5.75 5.75 5.75 5.75 5.75 5.75 6.39 6.59 6.75 6.87 7.82 7.56 8.23 8.54 8.28 8.79

* Price exclusive of discounts quoted by U.S. Steel for 100-lb, hot-dipped plate with 1% lb coating. Prices given are contract prices in effect during normal canning season; since 1952 prices have not always been constant during the entire year. Source: Metal Statistics, 1956.

b Price quoted by American Can to contract customers, exclusive of discounts, f.o.b. factory, east of Rocky Mountains, for plain standard coke sanitary cans. Sources: For 1931—40, Exhibit 1437; other years calculated by interpolating standard contract differentials, or reproduced from Metal Statistics, 1955. c Prior years' prices subject to 7& percent volume discount. Price raised to $5.35 on April 6, 1937, for noncontract purchases. a Retroactive price, published November 10, 1938. * Retroactive price to contract customers. ' Less 2 percent discount to all customers. ' Effective August 19, 1952. h Price raised to $31.98, September 16, 1952; reduced to $31.95 November 25, 1952. 1 Prices in effect after May 1, 1956. On October 1, 1955 the tin-plate price had been raised to $9.45 and the can price rose to $33.86 on November 1.

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TIN CANS AND TIN PLATE

Nothing in the escalator clauses prevented American or its rivals from changing can prices for any other reason when contracts were renewed. The escalator clause, however, enabled the can manufacturer to pass along a change in the quoted price of tin plate during the contract term without cancelling the long-term contractual obligation. The escalator was based on posted prices of tin plate, not on actual prices. No discounts had to be passed along to buyers at large unless and until the posted price changed. The posted price has been quite "sticky," like the price of cans. This has been true in both periods of depression and periods of inflation. But there are certain differences. In upward movements of price, once full employment of resources has been reached, changes in costs have quickly passed through into price changes, the rigidity appearing in the form of a step-like movement as inflationary pressures have periodically overcome stickiness in both costs and prices. The quoted price has been a fairly accurate index of the actual price. This has not proved to be true in periods of acute or extended depression. In the depressed period of the 1930's excess capacity tended to press prices downward, but the sellers held the price line in the can market until an accumulation of deflationary forces brought down the quoted price of tin plate. In the tin-plate market, down-trends proceeded for extended periods without bringing down the quoted price to the extent necessary to reflect actual price conditions. Extra charges disappeared, special discounts were granted and spread into industry-wide discounts. The quoted price often was not affected at all; in the early 1930's several years elapsed before the quoted price was reestablished on a realistic basis. Stability in the quoted price was due in part to the desire of steel producers to avoid open price warfare; but it was also directly tied to stable can prices. The canning industry cannot stabilize its prices to reflect stability in the price it must pay for cans. Since it is an industry with a competitive structure, depression affects its prices immediately. This effect is felt also in the markets for raw produce but for a time rebounds ineffectively from the rigid barrier of can prices. The output of both raw produce and canned food falls more slowly than prices, which prevents an immediate transmission of the full effect of the depression backward to the can industry. If can prices are maintained while prices of canned products are falling there is an intensified squeeze upon the profits of the canning industry. Canneries are driven out of the market in abnormally large numbers. Soon the resulting reduction in output is reflected in the markets for cans, and the pressure for a price reduction grows. It is a question of when the pressure overcomes the resistance. Can manufacturers ordinarily resist price cuts with the onset of de-

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pression because their demand is normally inelastic.48 The can makers have nevertheless pressed for reductions in the price of tin plate and when tin-plate producers have granted them discounts they have not always passed on the benefits at once. Changes in the quoted tin-plate price, and hence the quoted can price, have been negotiated when the price leader thought that conditions were right for it, taking into account the changing elasticity of demand for cans, the threat of substitute competition, the threat of backward integration of large buyers, the rate of disappearance of canning firms, the resentment of buyers who discovered that the quoted tin-plate price was a fiction, and the dangers of governmental action. As a result the nominal fabrication margin for tin cans has been highly stable (Table 36). 49 The actual margin has varied with market conditions. In 1935, for instance, the posted price of No. 2 packers' cans was $20.67 per 1000 to contract customers; the posted price of tin plate was $5.25 per base box. It takes approximately 2.65 base boxes of tin plate to manufacture 1000 No. 2 cans.50 The nominal tin-plate cost was therefore $13.91 per 1000 No. 2 cans, yielding a gross fabrication margin of $6.76. The actual price American Can paid to U.S. Steel for tin plate involved a discount of 1% percent, making the net price $4.86 per base box. The gross fabrication margin for 1000 cans sold at list prices was thus $7.79.51 But some large buyers received discounts of as much as 13 percent. The net price of No. 2 cans at this discount was $17.98, yielding a gross fabrication margin over the discounted tinplate price of $5.10. The difference between the $7.79 margin for small buyers of cans and the $5.10 margin for large buyers (one-third less) is not a true measure of the degree of discrimination, because the cost of 48 Even if can prices amounted to as much as 40 percent of the price of the canned good—and there are few products in which the ratio is this large — a reduction of 10 percent in the price of cans, if fully passed along, would mean only a 4 percent reduction in the price of canned good. The resulting increase in volume would not under ordinary circumstances compensate for the fall in can prices. "According to the testimony of the Executive Vice-President of American Can, there were only two autonomous changes in the list prices in 20 years; the 8 percent reduction in 1937 after the Robinson-Patman Act, and another reduction in 1940. Record, p. 6494. The data in Tables 36 and 37 indicate that other autonomous price changes may have taken place, but only very minor ones. Most changes were due to operation of the escalator clauses. 60 In 1934 it took 2.66 base boxes, according to a clause included in the contracts. Exhibit 791. There is reason to believe that the ratio has been improved slightly since then owing to more precise trimming and shearing in manufacture. 81 The price paid the steel producer was also subject to a multiple-packaging discount of 10 cents per base box, representing a cost saving in shipping that had been passed on to American Can. It is difficult to determine whether or not this cost saving had earlier been reflected in the quoted price of cans. At any rate it did not come under the escalator clause. TNEC Hearings, Exhibit No, 1404, p. 10990,

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serving large buyers was less; but it does illustrate the unequal transmission to buyers of the lower realized price of tin plate. The transmission of an equivalently lower quoted price under the escalator clause would have been quite different. The benefits of cost-price reduction before 1936 were irregularly diffused through discounts. Since then the actual price has moved more closely with changes in factor prices. The oligopolistic structure has produced frictions and differential restraints upon cost and price movements. The 1938 recession provides an example of correlation of costs and prices under depressed conditions after the reform of the discount structure. The price of cans for 1938 was fixed on the basis of the tin-plate price that had been announced in December 1937. However, the 1937 depression was gathering headway, and price concessions were beginning to break out in the steel industry. By April American Can had decided that the price structure could and should be deflated and announced that it would grant a 2 percent retroactive discount in price to contract customers at the end of the year. It undertook to negotiate a decrease in the contract price of tin plate with Carnegie-Illinois Steel Corporation. In November 1938 the Corporation reduced the tin-plate price 25 cents per base box, retroactive to January 1, officially recognizing the effect that price-cutting during the year had produced and validating the can price decrease. American's rivals followed in reducing can prices.52 In 1939 American decided to change the base of its can prices from the posted price of tin plate to the average price that it actually paid.53 It continued the 2 percent discount in 1940 and 1941. By 1942 the pressures of rising demand had apparently caused the effective price of tin plate to rise to the posted price (which was by then under price control), and the discount was eliminated. The postwar cost-price problem has been inflationary. The price leader soon had to work out a new policy. Up to then it had regarded the tinplate-escalator clause as sufficient to protect it against cost changes under its long-term contracts. However, the upward march of other 53 Record, pp. 6539-41; TNEC Hearings, p. 10776. The fact that the reduction was offered only to contract customers caused some buyers to sign term contracts. This led the Government to assert that the reduction was a "sales tool." It may indeed have been so, but only in part. 68 The official posted price of Carnegie-Illinois Steel Corporation, f.o.b. Pittsburgh, as announced prior to each canning season, was to be the upper limit. The actual basis could be lower. Continental on the other hand continued to use the posted price of Carnegie-Illinois as the basis of its escalator. However, after 1941, the actual price of tin plate was seldom if ever below the posted price. Record, pp. 2349-50; Exhibit 3013; TNEC Hearings, pp. 10764-71. Hession states that the change in contract policy was chiefly due to public complaints by canners and to investigations by the Department of Justice. Competition, p. 133.

PRICE BEHAVIOR

233

costs, especially labor costs, appeared ominously likely to continue for a long time. The adjustment of the price on the basis of the tin-plate price alone would be insufficient. Yet American wanted to continue to use long-term contracts, which it was now standardizing on a 5-year term. So it decided to add a labor-escalator clause to the contract.54 This escalator factor was not based on American's own labor costs at all, but on a general index of factor-price inflation. It was a means by which American could raise its own prices to parallel general money-wage increases without giving the buyer the right to cancel the contract. A general improvement in labor productivity shared by American Can would yield an increasing difference between labor costs and prices, out of which American doubtless expected to cover increased costs of other items not included under escalator clauses, such as transportation charges on tin plate. 55 The new contract basis lasted only four years, when it was superseded by the one-year contract ordered by the court in the 1950 antitrust case. Since then the prices of both cans and tin plate have been changing more often than they formerly did. The price of tin plate can now change during the canning season, and the can price may escalate with it; and so the seasonal stabilization of can prices which lasted for 50 years is now gone. THE LONG RUN: THE DISTRIBUTION OF GAINS

The prices of canned foods "float" on the cost of tin cans. The costs of raw produce are flexible. The price of cans is rigid. It may move up relative to the price of canned goods; in this case the profit margin of canneries is squeezed, and some firms must disappear. It may move down relative to the price of canned goods; in this case profits of canneries will increase, and new enterprises will flock into the industry. Long-run changes in the relative can price will cause changes in the number of canning enterprises and in the volume of canned-food output. The profits of the canning stage will tend toward a competitive norm in the long " T h e basis was to be the published Labor Cost Index of the U.S. Department of Labor. The base was the 1941 "index" of $0,708 per hour. For each change of $0,025 in the index the price of cans would change by a differential appropriate to the type of can. 55 Continental on the other hand did not add a labor-escalator clause. Instead, it reserved the right to change prices during the life of the contract. Tin plate remained under the usual escalator clause. If Continental changed the price for any reason other than a change in tin-plate prices, the customer had the right to cancel the contract. Continental's contracts on the average ran for only three years. Record, pp. 4164-6. Prices of some smaller manufacturers were even more flexible. Crown, for instance, reserved the right to make price changes quarterly, and has shown a dislike for the escalator clause formula. Ibid., pp. 4516-7. National likewise could change prices for any reason with customers retaining rights of cancellation. Ibid., p. 4635.

234

TIN CANS AND TIN

PLATE

run owing to relatively free entry and exit. We have seen the cyclical consequences of this vertical relationship of prices. The question now to be considered is the long-run result. Is the price level for metal cans structurally rigid in the long run also, or is the margin between the cost of tin plate and the price of cans responsive to changes in fabrication cost? There is obviously a difference in the vertical structure of the cannedfoods industry and that of many industries using general-line cans. The former is structurally competitive, with a slight tincture of monopoly. The larger canning firms do not possess any appreciable power to control the price level of canned foods, though their successful product differentiation has made them more stable and profitable over the long run than the multitude of small canning enterprises. These two attributes of their position — large size and favored position in final markets — has endowed them with some degree of bargaining power in can markets. The structure of the market from this point on seems to ensure that any gains of monopsonistic bargaining-power that are not absorbed in the costs of product differentiation will not inflate profit margins but will be passed on to ultimate consumers. The buying power of the large grocery chains, their ability to integrate backward and to offer private-brand competition, and the admittedly vigorous price competition at both the canning stage and the retail stage support this conclusion.56 Products packed in general-line cans are produced by industries which may have a quite different vertical structure from the food-canning industry. The largest buyers of general-line cans buy no more cans than the largest food packers do, and probably possess no more monopsony power. But they may not purchase or sell the product they pack in a competitive market; the canned product may be much more costly relative to the can cost than is true for canned food; they may find it easier to substitute some other type of container. It is not possible to generalize. A change in can prices is likely to affect consumer prices of some general-line products, such as shortening or motor oil, less than it will affect canned food products. No general-line product is likely to be more competitive at the final levels of the market than canned food, though some (such as beer, spices, paint) may approach the same conditions. Because general-line products are so diverse, we cannot observe the price behavior of this category of containers from any price series. Each general-line can is different, each has a distinct fabrication process and is separately priced, and prices are rarely published. The price relation58 Cf. National Canners Association, "Some Phases of the Canning Industry," pp. 5-6; M. S. Adelman, "The A & Ρ Case: A Study in Applied Economic Theory," Quarterly Journal of Economics, 63 (May 1949), 238-57.

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ships involved in packers' cans and canned foods must serve as our guide. (See Chart 3) 57 Canned-food prices are highly flexible, especially in contrast to the rigid prices of cans. The margin between the two expands and contracts with the business cycle, but competition among canners tends to keep consumer prices in line with costs over the long run. 58 The price of cans has been decreasing relative to the price of tin plate in the long run. This could result from two intermingled causes. First, the relative cost of tin-can fabrication may have decreased over time and the can manufacturers may have passed part of the savings along to buyers in lower fabrication margins. Second, the bargaining power of steel producers in the tin-plate market may have increased relative to that of can producers. 59 Probably both have influenced the price relation. Excess capacity in the steel industry, which greatly weakened the bargaining position of the tin-plate manufacturers in the 1930's, was not an important factor in the decade after World War II. Excess capacity resulted in discounts from the published price in the 1930's, which are not shown in the quoted-price series in Chart 3. The return to capacity operations has forced the can manufacturers to relinquish the discounts and concessions that they formerly obtained from the steel producers, and insofar as they had passed these discounts along in lower prices, the buyers of cans too have lost the benefit. But the appearance and disappearance of discounts is a cyclical phenomenon. The fabrication margin for packers' cans has narrowed in the long run relative to the price of tin plate. This is at least partly due to a reduction of their real fabrication cost, which manufacturers have passed along to consumers. The price series alone do not tell us whether tin plate has enlarged its share of the total profit. Another way of looking at the long-term trend of can prices is in terms of profit margins. Profits (net of taxes) as a percentage of net 57 The price indexes are based on the single series shown in Table 36 and on a sample of prices of canned and frozen foods. Frozen foods were not introduced into the BLS series until 1947. The index is based on wholesale prices of several varieties of standard canned fruits and vegetables. 68 The peculiar convergence of the canned food and can prices for the year 1948 only is due to the fact that the base period happened to be one in which can prices were catching up with a very substantial lead that the prices of canned foods had built up during the war and immediately after. The relationship between the two price series from 1942 to 1948 was abnormal. This illustrates the relative disadvantage of oligopolistic industries under government price control compared to competitive ones which can more easily evade control. It also demonstrates the tendency of oligopolistic prices to be "sticky" in upward movements as well as downward. Since 1948 there has been a trend back toward the normal relationship. 58 Another possibility, that the impact of general inflation has simply been greater on tin-plate production than on fabrication of cans, may be discounted because most factor price elements are common to both industries. They even deal with the same union.

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PRICE BEHAVIOR

TABLE 37. Profit margins and profit rates after taxes, American Can Company and Continental Can Company, 1 9 2 7 - 1 9 5 6

American Can Company Year

Percent of net sales

1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956

10.1 13.9 14.6 14.5 12.4 11.2 13.7 15.0 11.5 10.1 9.6 8.1 9.7 8.8 7.1 5.9 7.0 5.9 5.5 3.4 5.7 5.6 5.9 6.2 5.3 4.4 4.7 4.7 5.0 4.5

Percent of total assets 7.8 10.8 11.9 11.5 8.0 5.7 7.6 9.4 8.3 8.2 10.1* 7.8 9.6 8.8 8.3 5.5 5.8 5.6 5.8 3.9 7.7 8.3 9.4 10.3 7.7 6.3 7.1 6.7 7.4 7.0

Continental Can Company Percent of net sales b b b b b b

14.1 15.7 13.9 9.9 9.5 8.3 9.4 8.9 5.5 4.1 4.1 3.5 2.8 2.9 4.8 4.6 3.6 3.7 3.3 3.0 2.8 3.4 3.6 4.3C

Percent of total assets 9.9 10.0 10.8 10.6 6.9 6.5 9.3 12.0 11.9 8.6 6.6 5.8 6.8 6.9 5.3 3.6 3.4 3.8 3.2 3.4 6.2 6.7 4.8 5.8 5.1 4.8 4.9 5.6 6.3 6.8C

Source: Moody's Industrials. Figures for net sales from 1926 to 1934 estimated from bar charts in "Fifty Years of American Can Company," pamphlet published by American Can Company. Total assets are book values as presented in balance sheets. Profits are net of U.S. and Canadian income taxes and bond interest, and include nonrecurring income items such as currency adjustments and losses on sale of assets. * The increase in profit rate from 1936 to 1937 is largely due to a write-off of approximately $40,000,000 in intangibles, charged to surplus. b Not available. c Consolidated with new acquisitions. sales may be compared to profits as a percentage of total assets (Table 3 7 ) . While the measures are very rough, 60 the comparison for the leading 60 Book values are notoriously imperfect measures of economic value. The netincome figures used in calculating profits include many irregular and haphazard items, and hence are not good measures of year-to-year variations in profits. The product mix changes; accounting procedures change; the proportion of bond to equity financing changes; all these create distortions in the book profit over time compared to an economic standard of profit.

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firm shows that the profit margin — profits (after taxes) as a percent of sales — has declined markedly from the late twenties and early thirties to the present, while profits (after taxes) as a percent of total assets have declined much less. The profit margin fell from a range of 10-15 percent to about 5 percent. Continental's profit rate also has declined much less than its profit margin. Both firms, in other words, have substantially increased the ratio of sales to total assets. This has not been due to any major change in the capital "depth" of the companies by disintegration of stages. Nor does any revolutionary change in processing technology account for it. Can prices have fallen relative to can costs, without a large reduction in the return on capital, because of continuously improved productivity, the benefits of which the can companies have shared with later stages of production and ultimately with consumers.61 The steel producers have also increased the ratio of sales to total assets. A comparison of the profit margins and profit rates for the industry leader, however, does not show a similar reduction of prices relative to costs (Table 38). Profit margins fluctuate much more in steel than in tin cans, but it appears that U.S. Steel has been able to retain a greater share of the gains in productivity to increase its rate of profit in the long run. This comparison relates to total steel output, not to tin plate alone. There is no way to make such a comparison for tin plate, but the behavior of U.S. Steel's profits reinforce the impression that the market power of the steel companies has increased relative to that of the can companies in the long run. D . FREIGHT EQUALIZATION

Virtually all manufacturers of metal cans follow a policy of freight equalization.62 It is an ordinary competitive practice; that is, "competitive" within the framework of oligopoly and geographical differentiation. The circumstances which have given rise to this practice are as follows: Although can plants are geographically dispersed, they are not as dispersed as canneries. Owing to economies of scale, can plants are fewer in number. Canneries usually locate near their sources of produce, at varying distances from the can plant.68 β1 The ratio of can prices to canned-food prices has become less favorable to the latter since 1950, and has nearly reestablished the relationship that existed in the 1920's in spite of the lower fabrication margin on cans. This has probably been due to the relatively greater inflation of factor prices in both the tin-plate and can industries than in the canning industry. e 2 T h e few exceptions are exclusively in the general-line field. 03 Whenever canneries are unusually large, of course, they exercise a strong gravitational pull upon can-manufacturing plants. At the extreme a can plant may become an appendage of a single cannery.

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239

TABLE 38. Profit margins and profit rates after taxes, United States Steel Corporation, selected years Year

Percent of net sales

Percent of total assets

1927 1928 1929

9.2 11.3 18.0

3.6 4.7 8.6

1937 1938 1939 1940 1941

9.2 Da 4.9 9.5 7.2

4.9 Da 2.3 5.5 5.7

1952 1953 1954 1955 1956

4.6 5.8 6.0 9.0 8.2

4.8 6.8 5.8 10.2 9.1

Sources: Robert C. Tyson, "The Cost Facts of U.S. Steel," testimony before the subcommittee on Anti-trust and Monopoly of the Senate Committee on the Judiciary, 1957 (published in pamphlet form by The United States Steel Corporation); Moody's Industrials. * D = loss or deficit. U.S. Steel incurred operating losses during the years 19311934 running as high as 25 percent of sales. The freight-cost factor, large in relation to production costs, tends to scatter can factories among canning districts and to prevent the market area of any one from becoming very extensive. 64 A point is reached in the expansion of any plant where the firm finds it more economical to start another plant some distance away, and if it does not seize the opportunity its competitors will. In packers'-can production a factory's trade territory is limited also by the need for speed in delivery, 68 which leads to dispersion of competing factories in search of delivery advantages rather than their concentration at a common position. M No more than an approximate indication of freight costs can be provided in view of the multiplicity of forms of transportation, rate territories, special rates and the like. The following are rough proportions: in the middle 1940s the railroad freight rate for hauling No. 2 packers' cans about 250 miles varied from 4 to 6 percent of the f.o.b. factory price, depending on the point of origin and destination. For a haul of 1000 miles the freight cost was approximately 15 to 20 percent of the selling price at the factory. Some rates may have fallen outside these limits. The percentage of freight cost has moved above and below these levels depending on the timing of can-price increases and freight-rate increases in the postwar era, but the general relationship is now not widely different. (From railroad-rate tariffs and published can prices.) " For instance, Idaho Canning Company purchased its cans from American's factory at Ogden, Utah, rather than from Continental at Walla Walla, Washington, which was 125 miles closer than American's plant but 10 hours farther in terms of rail service. Record, pp. 5808, 5835.

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Markets which are geographically very dense may overcome this dispersive tendency and cause competing can manufacturers to locate at the same place. 66 The existing geographical distribution represents a changing equilibrium between the economies of concentrated production and the forces tending to push production sites apart. Much the same considerations apply to general-line can production, except that the market area is likely to be wider because speed in delivery is less important and because the relatively higher value of most general-line cans may permit a larger absorption of freight. The gradient of delivered prices moves upward with distance away from the can factory until it intersects the freight-cost gradient of another factory. Even when both factories are operated by the same firm it may ship cans across this boundary in considerable volume because of the seasonal and cyclical imbalances between production and demand that may occur within any factory's natural trade territory. In such an event the firm absorbs freight internally. If the factories are operated by competing firms, they will normally interpenetrate each other's territory because they ordinarily have some excess capacity in the short run which they can profitably utilize at a lower factory price (after subtraction of absorbed freight charges). In the long run, the number and location of competing plants change. A competitor may find it profitable to build a new plant a short distance away from an existing plant, within the rim of its previous trade territory but having a different, overlapping, circumference. The new plant, in order to obtain customers and utilize its potential economies of scale, will absorb freight toward the old plant; the old one to maintain its position will absorb freight toward the new one. Thus freight equalization may spontaneously arise as each plant endeavors to meet the objective circumstances. Interpenetration will be limited by the rapid accumulation of freight charges and by the time factor in transportation. The geographical price structure of tin cans floats on the geographical price structure of tin plate. Can manufacture is not a resourceoriented industry. Tin plate tends to locate near primary steel production, which is strongly resource-oriented. The geographic pricing of the two industries showed marked difference even in the days when tin plate was subject to basing-point pricing. Because economies of scale are so great in tin-plate production, the number of tin-plate plants has been relatively small. The tin-plate plant is relatively much larger in scale than a can plant and its market area a great deal more extensive. The " I n a few places — New York City, for instance — both producers and consumers are closely clustered. For a long time the can manufacturers allowed "free delivery," including the cost of delivery in the f.o.b. price. On January 1, 1959, American Can Company, as part of a general revision in price policy, instituted a differential delivery charge in such areas. Delivery in New York City is usually made by local truck. The business is preponderantly general-line cans.

241

PRICE BEHAVIOR

higher ratio of fixed to variable cost in tin plate makes freight absorption possible over a longer distance. Tin-plate capacity has shifted only slowly, by comparison to can-manufacturing capacity, in response to geographical shifts of demand. The surplus capacity in the Pittsburgh area has remained the dominant factor in the distribution of supply and the key to the whole geographical price structure. In other words, up to recently tin plate was on a true nationwide basing-point system. It was possible for mills in areas of surplus capacity to ship to almost any point in the country, absorbing freight outside their own market territory up to and beyond the gates of a distant mill. The price gradients radiated out in an orderly pattern from the few basing points that existed. In cans, on the other hand, every production point has been a basing point from the beginning, and the freight equalization has remained a local and almost an incidental matter. If the can industry had been perfectly competitive, its geographical price structure would have simply reflected the delivered price structure of tin plate and local fabrication costs. Can prices, f.o.b. factory, would have risen uniformly with distance from a tin-plate basing point, if freight rates and all local fabrication costs were uniform. 67 Delivered can costs to the buyers would in turn have risen with distance from the can factory. The major can producers actually followed a system of factoryprice zones. The delivered price of the can to the buyer did rise with distance from the nearest can factory, but all factories in a large area would charge the same factory price instead of basing each on the differential delivered cost of tin plate. Instead of a distance-gradient in factory prices there has been a series of platforms, which is a form of internal price discrimination designed to put all factories in a given canning region on the same footing. The west coast platform was of course the highest since it was in the deficit tin-plate area most distant from Pittsburgh. The differences among zone prices did not fully compensate for the average freight cost on tin plate. The following were the prices for No. 2 cans prevailing in the various pricing regions in 1935 and 1940:68 Prices

East of Rockies, except Southern Territory Southern Territory Ogden, Utah Pacific Coast Territory 07

1935

1940

$20.67 20.94 22.26

$19.00 19.00 20.55

22.26

20.62

The change from a basing-point system to f.o.b. pricing of tin plate might make a difference in the distribution of supply and the pairing of customers and suppliers, but no difference to the geographical price structure if nonbase tin-plate mills established their f.o.b. prices equal to the former price of the nearest basing point plus freight to the mill. Cf. Chapter IV. 68 Exhibit 1437. Prices are f.o.b. factory within each region for 1000 standard coke No. 2 cans.

242

T I N CANS AND T I N

PLATE

Regional pricing was reorganized from time to time. For several years before 1959 there were only two price regions: east of the Rockies, and west of the Rockies. On January 1, 1959, American put into effect a new price policy. Henceforth each factory was to have its own f.o.b. price, reflecting the freight costs on tin plate to the can factory. The zone-price system was abolished. BASIC CHARACTERISTICS

Was freight equalization in metal cans an instrument of market control? Did it enhance the degree of monopoly, to the injury of consumers? Delivered-price systems appear in many varieties. Some are powerfully monopolistic; others need not restrain competition significantly. There are certain signs by which the former variety can be recognized. The existence of phantom freight is one. Another is the systematic use of an allrail-freight basis for delivered prices, which denies the customer the economies of water transportation (or motor-truck transport for short distances). Associated with this is denial to the buyer of the option to buy f.o.b. mill and use his own means of transport, or of taking delivery at any point but his own factory. The case is even stronger when sellers police the customers' use, deny them the right to re-ship, and coerce other sellers who do not observe the basing-point system of delivered pricing. The following were, and still are, the basic characteristics of the delivered-price system in tin cans. ( 1 ) Every factory is a basing point. Freight equalization is universal; there is not and never has been phantom freight in the delivered price of cans, apart from the phantom freight that may have existed in the delivered price of tin plate included in the regional can-price basis. ( 2 ) The buyer is allowed to choose his own method of transportation from those available, and to pay only the actual costs incurred. ( 3 ) The buyer has the option of taking delivery at factory gate at the announced f.o.b. price, using his own transportation facilities. The actual transportation cost thus never exceeds the lowest of the alternatives that are available to the buyer.69 " I n 1 9 4 5 American Can described its equalization policy as follows: shipments of cans would go forward freight collect, or else customers would use their own trucks. If the rail freight from a competitor's factory or another factory of American were less than the rail freight from the point of shipment, the difference would be deducted from the invoice total. The equalization allowance was based on railfreight rates regardless of the method of transport used, but this, of course, did not prevent a buyer from getting the benefit of lower-cost transportation, if such were available. In a few instances freight was prepaid by the seller, who would then deduct freight equalization from the freight billed to the consumer. In the Pacific Coast District it had been the practice to rebate the equalization payments to the customer upon presentation of paid freight bills, instead of deducting the amount from invoices; in 1 9 4 5 this practice was changed to make it conform to the other districts.

PRICE

BEHAVIOR

243

THE EFFECT ON COMPETITION

The practice of freight equalization should be evaluated in connection with several other market practices. The most important is price leadership. In some industries basing-point pricing seems to have strengthened price leadership because it has vastly simplified the task of price quotation, tending to bring it more firmly under the discipline of oligopoly. When the steel industry followed a basing-point system, for instance, it was often attacked on the ground that the system virtually eliminated uncertainty from pricing, making it unlikely that any seller would be unaware of exactly what the price for any steel product should be in any market.70 Price quotation for the hundreds of products at hundreds of destinations was reduced to three simple steps: looking up the prices in the price book of the price leader; looking up the extra charge in the extra book of the price leader; looking up the freight rate from the leader's nearest basing point. Now it is true that price leadership has also simplified the quotation of prices for tin cans. But the practice of freight equalization did not add much to its effectiveness.71 The zone system for f.o.b. prices, which put all factories in a canning region on the same f.o.b. basis, contributed as much to price stability as freight equalization did, while the basing-point system in tin plate may have contributed even more; in any event, the leading can producers did not have to fear any local coalitions between cut-rate tin-plate producers and independent can manufacturers. The zone prices averaged the delivered costs of tin plate in each region. Undoubtedly the 1959 change of price policy, which put each factory on its own f.o.b. price basis, was an improvement. It eliminated the artificial identity of base prices among competitors, as well as some internal price discrimination. Though base prices would still show an orderly pattern reflecting transportation-cost gradients of tin plate, the pattern would (Exhibit 8 6 9 . ) As long as all competing factories in a price zone charged the same f.o.b. price, it was not necessary to adjust the "equalization" for differences in base prices. Of course in "equalizing freight" a firm really intends to meet its competitor's delivered price. Under the new price system instituted in 1959, an equalization formula must also reflect differences in f.o.b. prices at competing factories. '"This point has been made forcefully by Stocking, among others, Basing Point Pricing, chs. i and iii. See also Fritz Machlup, The Basing-Point System (Philadelphia, 1 9 4 9 ) . 71 Some economists have held that the rigidity of price leadership can be weakened under circumstances like these if a system of f.o.b. pricing with sporadic price discrimination is used in place of a delivered price system. In the former the sellers would "maintain no announced prices, but deal with each customer as best they can." Kaysen, "Basing Point Pricing," p. 293. Abolition of a pricing formula might indeed conduce to greater flexibility. This system would probably give better results than strict f.o.b. mill pricing (p. 2 9 6 ) .

244

TIN CANS AND TIN PLATE

be less inflexible, more responsive to local competitive opportunities and local variations in cost. The freight-equalization system in the can industry allowed buyers the full benefit of the lowest cost of transportation available including their own carriers if they wished to use them. Every change in the location of can factories affected the delivered price structure. Though the can factories did ship into each other's territories, thus incurring the wastes of cross-hauling, they were able to offer a service option to buyers who might have been imprisoned within the natural trade territory of a single factory under strict f.o.b. pricing. On the whole the practice of freight equalization, while not a vehicle for active competition, does not seem to have added any restrictive or collusive pricing elements to those that already existed. Unfortunately the record is blemished by an associated practice which may have had a mildly restrictive effect: The maintenance of false equalization points.72 The difficulty was not that basing points were too few, but that they were too many. If each factory producing a given size or type were a point of equalization for that size or type, and no more, the discrimination in factory net prices that is inherent in any form of basing-point system would not necessarily have enhanced monopoly at any level of the market. It would merely have represented the irreducible facts of location. As it was, the major sellers often "equalized" freight with production points that did not produce the size or type in question, or even with warehouses at points not having production facilities.73 One other effect of transportation costs should be mentioned. The smaller can producers often discovered that they were confined rather closely by the cost of shipping cans. A firm with only one or two production points would soon run into a boundary of freight absorption, whereas the firm with many could reach through and around the territory of the smaller firm. This was an advantage in dealing with buyers whose requirements ran beyond the boundary of the smaller firm's market area. The large firm also could build new plants more readily, perhaps cutting off the edges of a smaller firm's plant territory by forcing it to absorb freight toward the new plant. When a small firm built a new factory in a promising territory, it would immediately become a point of equalization for the factories near it, and might find itself fenced in by surrounding factories of large firms while the latter retained all their own customers in the market area of the new plant. These advantages were rooted in the economics of location; the large firm was simply in a better position to seize them. Heekin, National, Pacific and Crown have all attested to the locational disadvantage of smallness.74 Crown has had See Chapter VIII. Exhibit 869. 71 Record, pp. 4378, 4510, 4518, 4627, 4876-77.

72

73

PRICE BEHAVIOR

245

a particularly unfortunate series of experiences with new plants which it has built in an attempt to secure better geographical coverage. It has abandoned a half-dozen or so because of freight costs and freight equalization. Its new Fort Wayne plant, for instance, was surrounded by plants of National, Heekin, American, and Continental. It could not find a large enough market without absorbing so much freight as to make it unprofitable to continue. It abandoned the plant in 1948. "Blanketing" of wide geographical areas under a regimen of freight equalization is one of the market advantages of scale.

Chapter Χ Research and Development The tin can is not a spectacular article. The consuming public, long accustomed to the homely food can, has been largely unconscious of the substantial and often brilliant progress in can manufacture, canning, and tin-plate production. Nevertheless the benefits of progress have steadily accrued to consumers. The tin can and the canning art scarcely resemble those of half a century ago. What began as simple artisanship has become a field of applied science, however little the changes meet the eye.1 We have already touched on the advantages that research and customer service confer upon the large firm, as well as their importance as a means of oligopolistic competition. The historical record of achievement, which is necessarily unique, does not tell us whether some alternative industrial arrangement would have done these things faster or better. It shows only that the large firm has been prominent in research and development. In these circumstances it is competition among oligopolists that has forced the pace of advance. A . T H E ORGANIZATION OF RESEARCH

Research is carried forward at all levels. Some is very pragmatic and short-range; some is more fundamental. Very little is "basic" research in the scientific sense — that is, research with an infinite time horizon or without the necessity of practical application. The larger firms have gradually moved into more fundamental research which may not bear any fruit for years to come; but like almost all business organizations doing research they expect it to pay off in due time and to apply it within the industrial areas that they have staked out as their own. For the most part they leave basic research to the universities and the scientific institutes. Even the large firms spend most of their "research" budget on service and trouble-shooting — on problems that arise on the production line or in customers' plants and which require quick solution. The smaller firms spend practically all their effort on problems of this nature. The biggest canning firms also are equipped to do research on their 1 The information upon which this chapter is based comes from company publications and from interviews with company executives and research and development personnel.

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own production problems, overlapping the research areas of the can manufacturers. Occasionally they too undertake longer-range investigation. The laboratories of the National Canners Association, of universities and government organizations also do research in food canning. All of these efforts produce a slow accretion of knowledge. While these other organizations account for a large part of the mass of research work, when we look for the important innovations, the revolutionary technological advances, the discoveries of most far-reaching importance, we find them coming from the laboratories and shops of American Can, Continental Can, and several of the integrated steel producers. There are a few exceptions, of course. In the can industry, the major manufacturers' large-scale and continuous contact with canning operations provides a broad foundation for research. The organization of research is complex. Continental Can will serve as an illustration. It recently established a Central Research and Engineering Division to carry on research and engineering work "of a longer range and more fundamental nature on radically new materials, packages, products, and methods. . . . It conducts such research and engineering for all product divisions, and, in addition, in profitable fields where the company does not presently have product divisions and where a new product may result." 2 The Central Division comprises four departments: chemistry, metallurgy, engineering, and physics. The engineering department has its own machine shop for pilot equipment and plant prototypes. The Central Division employs about 70 scientists and other technical personnel. Below this apex other research organizations are attached to several divisions of Continental Can Company. The Central Division acts as "consultant" to these divisions. Within the Metal Division a large research department, numbering some 265 technical personnel, works on container and equipment development and technical services to the users of metal cans. It has a somewhat shorter time horizon than the Central Division. It designs new containers and works on plate specification, enamels, and sealing materials. It designs and improves machinery. It studies efficiency of particular operations of can-making, and hence is tied in with operations management. This division also has an experimental machine shop. It works closely with the operating plants on improvements of equipment. It prepares and distributes research bulletins and operating manuals. It operates its chemical and physical laboratories for service to other research and development groups, primarily the customer-research field offices which are directly in contact with canner customers. The field offices are staffed with yet another group of technicians, experts in all phases of canning and packaging. Research projects originate up the line when 2

Continental Can Company, "Fact Sheet E," October 1955.

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solutions to canning problems cannot be produced by the field offices, of which there are 19 in the United States and 3 in Canada. Other divisions of Continental Can also have research departments. Laboratories, engineers, and customer-service technicians are associated with the Crown and Cork Division and the divisions producing polyethylene plastics, laminates, flexible packaging materials, and fibre drums and paper containers. Only the last is likely to have much direct bearing on research activity in tin cans, though the diversification of the company might facilitate packaging substitutions between metal cans and other types of containers. The total expenditure by Continental on all types of research in 1952, before some of the present divisions were added, was upwards of $5,000,000 3 — a little over one percent of sales revenues. The scale of research carried on by American Can is comparable. Both companies have built up their research organizations gradually over a period of years. American set up its first laboratory in 1906, to investigate means of recovery of tin from scrap. After the introduction of the sanitary double-seamed can American began to branch out into container and canning research. Continental started its research in 1910 by hiring a chemist and putting him to work in a corner of the company's tin-plate mill. Soon thereafter, the can companies set up their laboratory organizations to render direct assistance to the canning industry and launched a systematic program of container development. The great research achievements then began to appear. In the steel industry the organization of research in the large firm is similar. United States Steel Corporation, the largest, has both a center for fundamental research and one for operating research and service, like Continental Can. Both laboratories are located at Monroeville, Pennsylvania, near Pittsburgh. Together they employ about 900 technically trained people, though the fundamental-research division is considerably smaller than the other. The fundamental-research laboratory works on basic problems of metallurgical science, physical chemistry, theory and technology of measurement in metal processing. Both divisions of course do research on steel problems in general, not solely on tin plate; but tin plate accounts for a large percentage of the research budget. It is the most complex of all standard steel products. There are also laboratories at the steel plants to deal with day-to-day complaints and minor service to customers. One difference between the steel-makers and the can-makers, however, is that the steel companies do not have to "service" thousands of small customers who are unable to maintain 3 Annual Report, 1952. In 1954 Continental spent $8,500,000 on research, of which about $6,000,000 was in the metal-container division, allocated about equally between equipment and container development. Fortune, April 1955, p. 210.

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even the simplest research or technical staffs, as do the can companies. Hence, the steel producers do not have to maintain an elaborate system of field laboratories nor to be ready to come to the rescue whenever something goes wrong in their tin-plate customers' plants. Instead, their research relations with their customers, especially the large ones, is likely to take the form of a cooperative attack on common problems. COOPERATIVE RESEARCH AND THE DIFFUSION OF INFORMATION

Bilateral oligopoly in the tin-plate market has given a peculiar temper to research by the large buyers and sellers. The often-apparent hostility in the commercial dealings between large sellers and large buyers seems to be almost entirely absent in the research field. Competition in research between firms at the same level of the market, on the other hand, is less restrained than competition in price. The large firms struggle for priority in new fields of container development, for better methods of production and superior products in both cans and steel, and for superior service to customers. Yet few specific discoveries or developments actually accrue to the sole advantage of the firm that brings them out. There are so many cross-relationships among firms, their suppliers, and their customers, that they find it practically impossible to withhold innovations from the rest of the trade. (The principal exception is in machinery development.) The can companies' field laboratories, when they discover anything new, usually incorporate it into ordinary service practice which is available to all.4 The cooperative research on more basic problems between the large can manufacturers and their large canner-customers such as Libby or California Packing Corporation is likely to be less public, at least while in progress. Both major can companies have a settled policy that any development that they work out in cooperative research with a large canner shall be open to other customers as well, insofar as it involves the container itself and associated equipment, but they find it is a ticklish problem to do this and still preserve the canner's own ideas and prior developments which he wishes to withhold. 5 Because of the great difficulty of keeping part of a development secret when another part is known, cooperative research has probably resulted in a more rapid diffusion of knowledge than there would have been if ' T h e research of the National Canners Association, to which the can companies usually contribute financially, is of course freely available to the industry, as are the findings of government laboratories which themselves may consult the can producers on certain problems. 6 For example, if the development were the canning of rice, the can company might disclose everything pertaining to the container, enamel, filling pressure, corrosion tests and the like, but not the method of preliminary processing of the rice to prevent it from agglutinating, if the canner had previously discovered it.

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the canners had not entered into such relationships. The laboratory memoranda which the can manufacturers prepare for individual customers are a means of service competition, and they do not publish them. But if several canners have similar problems the solutions will inevitably become public property in a short time, and the can manufacturer will recognize this fact by publishing a research bulletin on the subject. Container development is disclosed by the simple fact of commercial introduction. Any discovery which is disclosed to customers generally will of course be taken up instantly by other container manufacturers who can benefit commercially from it. It sometimes happens that after one manufacturer has undertaken lengthy experimental development, its rivals, knowing success is within reach, will make some quick final tests and put the development on the market before the real innovator is ready with its own version. Only when the development work has created processing know-how and the like can one firm hope to retain an advantage over its large rivals for any length of time. Cooperation in research between the large steel producers and the can companies is even closer than cooperation between the can producers and their large canner-customers. Again the vertical contacts are individual; no industry-wide research committee in tin plate meets continuously with an industry-wide can-manufacturing research committee.6 Cooperative research contacts with tin-plate buyers are probably closer than in any other division of the steel industry. For a long time the large steel firms even left it up to the can manufacturers to do almost all the evaluation of new tin-plate development, knowing that the buyers were as well or better equipped to determine how the development could be used and how it could be improved. And, since only two can companies had the necessary resources to enter into cooperative projects and to evaluate innovations, a tin-plate producer found it much easier to work directly with them on research and development than to follow a research project to final fruition privately and then announce it to buyers. Steel producers formerly published little on tin-plate research, since the users were already involved in the research projects themselves; in later years the lack of published records on tin-plate research has sometimes led to futile duplication of effort. This has changed somewhat in the last decade or so. The steel companies now do not rely quite so much on the can producers for evaluation and research into applica" The only exception is the industry-wide effort at both stages to conserve tin and work out methods of tinless canning. This is a national defense program, and a semipermanent industry committee exists to push it along. It does not concern itself with other research problems. In any event most of the actual research into tin conservation follows the usual pattern of parallel and independent investigation, though with less rivalry between manufacturers.

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tion. For instance, the U.S. Steel Research and Development Division now manufactures tin cans to test its tin plate; and more, actually packs them with canned food to determine corrosion factors and related problems. Also, more of the research work is now recorded and distributed, often by publication in trade journals. At no time have the large steel companies followed a policy of restricting improvements or information on research results to a single user or favored group. They have made all developments available to all buyers. Even though the large buyers often participated directly in the developmental work, they have offered no objection to general diffusion of the results. The volume of cooperative research in tin plate is as great as ever. Besides the strictly cooperative projects, involving joint use of personnel and facilities and joint financing, the steel firms and can manufacturers exchange data on a number of parallel testing programs carried on at both levels. There is close contact between the metallurgical, research, and sales personnel of a tin-plate producer and their opposite numbers in the can company. The steel firms keep service metallurgists permanently stationed at some of the can plants as well as at the research laboratories of the can companies. Some tin-plate research technicians and scientists have been recruited from can companies, and vice versa. The steel companies' employment of metallurgists skilled in canning problems has been extremely important in the development of a sympathetic and cooperative attitude between customer and supplier in research problems. In the early days of the industry the can producers often had to "browbeat" the steel companies into undertaking the developments that they wanted them to follow. If the fields of tin plate, can manufacture, and canning processes were highly eligible for patents of course there might be a different story to tell. It has been previously stated that little if any patent protection exists in can manufacturing or canning unless machinery is involved. Both the can manufacturers and tin-plate producers do, however, take out a large number of patents on many other developments besides those on machine design. As mentioned earlier, American Can took out or acquired 845 patents between 1939 and 1955. If any patent should prove to be really exclusive and impregnable, doubtless the firm holding it would not be reluctant to exact its full revenues under the patent from customers and licensees, but in the can and tin-plate industries there do not seem to be any "dominant" patents of this kind. Nor are there any past cases on record. Patenting in both industries is primarily defensive. Its purpose is to guard against foreclosure by rivals. Even when a patent does cover a development that rivals have not yet been able to match or circumvent, the firms in many cases have been willing to license all applicants at reasonable royalties. All observers agree that

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machine patents are the only ones that have conferred any appreciable power on the large firm, and even these have not enabled any firm to monopolize machinery technology.7 There have been several efforts to patent various new types of metal container, but little seems to have come of them.8 The can companies can usually circumvent each other's processing patents easily, and for this reason they seldom attempt to use their own to exclude others.9 Even machinery patents can be circumvented in time. A small competitor may not have the resources or the organization to search for alternative ways of doing things which are covered by patents, but a large rival almost certainly will. This has regularly occurred both in tin-can machinery and in tin-plate machinery. For instance, three separate and independently developed machine processes are in actual use for manufacturing electroplated tin plate. By the time several competing processes are on the scene the original innovator can hardly use his own to exclude all competition, and may in truth find that his own is somewhat inferior. There are many similar instances in can-manufacturing and can-closing machinery. Though the machinery produced by the American Can Company was generally somewhat superior to other machinery for many years, every particular innovation that it was able to patent fell to the competition of its rivals in usually much less time than the 17 years of the patent grant. For example, the high-speed beercan closing machine was a new departure in can closing which American patented; within a short time, however, several rivals had invented their way around it and beer canners could take their choice of competing machines.10 American's most effective patent protection was on the original method of vacuum packing. The patent covering its revolving7 Patent control and patent licensing were not even major issues in the 1 9 4 8 - 1 9 5 0 antitrust suit against American Can, though the court granted compulsory licensing of machine patents as one of the remedial measures. 8 For instance, American once patented the key-opening coffee can; the patent covered the herringbone score, but did not prevent anyone else from manufacturing a key-opening can which would be virtually the same in all respects. A worthless patent was once issued on the beer-can opener, and another on the oil-can opener. American's fibre milk container, on the other hand, is covered by a valid patent, but faces stiff competition from a fibre milk container of somewhat different design. (Record, pp. 2794, 2 7 9 6 - 7 , 2 7 9 9 - 2 8 0 1 . ) It is not clear whether patents on aerosol containers include the container itself or the method of holding gas in solution. The author has been unable to obtain information on patents which may cover some very recent container developments. " A production manager of American Can once suggested that the patented Blair pea process be licensed without royalty to American's canner-customers first and to others later, thus giving customers a head start in using it. His suggestion was rejected. Even this official did not go so far as to suggest that the process be withheld from all but American's customers. Ibid., pp. 6 2 4 6 - 5 0 ; Exhibit 3102. 10 Record, pp. 4 8 1 2 - 1 4 . Pacific Can would even sell as well as lease its own version to brewers.

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door valve to preserve a vacuum in the closing machine was perhaps the most formidable patent ever issued on closing machinery; it took Continental 8 or 9 years to bring out an alternative method that was as good or better. Of course even short-term patent protection might enable a can producer to sew up a large fraction of a new market, just as a producer who maintained a moderate superiority of product over his rivals without any patent protection would gain a market advantage over them. The same would be true in the tin-plate market or in canned foods. That is not the issue here. What has been brought out above simply indicates that no firm monopolizes the technology in any of these fields. American and Continental came closest to establishing a decisive patent advantage over their smaller rivals in closing machinery, though they continued to compete with each other in developing alternative processes. It was their tying policy that focussed this superiority on the container market. The court's order to abandon the tying policy and license freely all the machinery patents they held in 1950 has eliminated much of the advantage that they had earlier acquired in closing machinery. Apart from this, the usufruct of developing technology has been widely distributed. The market structure appears to push the large container manufacturers into active innovation even though they cannot hope to secure a tight monopoly over their innovations. Of course these innovations have not been enormously costly. The market advantage which they may secure seems to be enough to induce them to take the moderate risks. Even though neither American nor Continental can gain a substantial advantage over the other by innovation, they may hope to keep somewhat ahead of their smaller rivals and ahead of potential competition. BILATERAL OLIGOPOLY AND THE PERFORMANCE STANDARD

Oligopolistic industries selling to unorganized consumers and buying from competitive suppliers, if they are not dominated by patents held by a single firm, often show a high rate of technological progress under the stimulus of rivalry for markets. The well-known reluctance of oligopolistic firms to engage in price competition tends to deflect rivalry into the somewhat safer area of dynamic development. But it is a single stimulus, depending on the horizontal structure of a single market stage. Oligopolistic rivalry may be quite enough to produce maximum performance under such conditions. Consumers, however, are passive bystanders while technological advances mature in the forcing-bed of oligopolistic rivalry; their role is merely to evaluate the result. There is no way for them to participate in the process. New developments merely appear on their horizon, and they cannot direct the sellers to pursue certain lines of development nor press them as a group to develop faster. If they could

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do so there would be a double stimulus, and it is this extra stimulus that bilateral oligopoly provides. In a single-stage oligopoly the large sellers might occasionally tacitly agree to refrain from entering certain new areas of technology that would completely revolutionize existing technology or raise the danger of uncontrollable obsolescence. They might bring along a new development more slowly than necessary to avoid upsetting established lines of trade. They might be cautious about too great an improvement in quality if the new standard would commit all sellers to rapid overhaul of facilities and very large outlays for new equipment. A large and powerful buyer on the other hand may allow them no option. Large buyers can threaten and browbeat, or undertake part of the development themselves, or subsidize new competition at the sellers' level if established sellers will not meet the standards of performance that they set. By so doing they can press the sellers closer to the maximum attainable rate of dynamic performance. The large-scale cooperative research effort merely recognizes this as a permanent state of affairs. Though the ultimate consumer of canned foods remains unorganized and passive, he is likely to benefit, by and large, as technology advances at a forced pace in several industries up the ladder of markets. The countervailing power of the large buyer in research and development is thus similar to countervailing power in price policy, and may be even more powerful in the long run. B. THE RECORD OF ACHIEVEMENT: FOOD CANNING AND CAN MANUFACTURE

The practical art of canning is a century and a half old.11 It was discovered long before the scientific principle on which it is based was understood. Until research developed the scientific foundations of food preserving, advances in the canning art and in containers had to be by trial and error. The superiority of the tin-coated container was discovered early in the nineteenth century, and during the following decades many individual experimenters found ways to can food that had not been successfully preserved before. Others discovered processing improvements, such as the use of calcium chloride in canning which made higher temperatures and shorter processing times possible, and the pressure cooker which permitted accurate temperature control. But the real advances came after certain biologists pioneered the application of the bacteriological science of Louis Pasteur to the preservation of food. This was near the end of the nineteenth century, not long before u Unlike many "inventions," the discovery that food can be preserved when hermetically sealed in the container was made by one individual, Nicolas Appert, in 1809. His work, stimulated by a 12,000 franc prize offered by the French Government, occupied him for 15 years. National Canners Association, The Canning Industry, pp. 5ff.

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the organization of the American Can Company. Within a few years American was picking up the threads of canning technique and bacteriological science and combining them with research into the properties of the container itself. The introduction of the sanitary can, whose top was sealed on by pressure instead of soldered, marked the beginning of scientific research into the combined problems of canning and can manufacture. American did not introduce the sanitary can, but after acquiring the firm that did introduce it American was quick to make the most of its superior qualities. American's was not the only organization doing research on canning technology. This branch of its own research grew slowly, and there were some areas, such as food-processing machinery, into which it never did venture. But American soon became paramount in research into any canning problem which also involved the container. Its primacy in this critical area, lasting for two or three decades, gave it a preeminent position in container development and all the canning developments that were related to the container. Its research in the one industry complemented its research in the other. The first notable advance was in the container. The can companies when they began offering sanitary cans to the trade had to take responsibility for an adequate seal. At first sanitary cans were poorly sealed because of imperfect closing machinery and inadequate sealing compounds. American began work on the problem in 1908, and soon developed a new sealing compound which made the hermetic seal reliable.12 The development of enamels for coating the inside of the can also followed shortly after the introduction of the sanitary can. Up to that time the industry had not been able to can the highly-colored fruits and vegetables successfully. Though the canned product was nutritious and palatable, the color was so completely bleached in ordinary cans that it was not marketable. American was not the pioneer in can-enamel research. About 1903 a large canner began experimenting with baked varnishes on the inside of the can, and discovered that the enamel almost completely eliminated bleaching. Can manufacturers thereupon began experiments with enamels. The early enamels usually produced a strong "off-flavor" in the canned products, however, and they were not very resistant to high temperatures. American's contribution was to develop tough lacquers that would not affect the taste of the canned food. Its experimentation and testing proceeded for years before it could lay down exact specifications for enamels. This work has continued up to the present.13 Record, p. 5950. American's competitors soon adopted the new compound. American Can Company, "The Development of Can Enamels," Research Bulletin No. 5, April 1946. 12 13

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It soon became apparent that enamels could profitably be used for products which had hitherto been preserved in plain cans. One canning problem which appeared soon after the open-top sanitary can came into use was the development of "corn black" in canned corn. Particles of iron sulphide would appear in the corn after canning, caused by chemical combination of the corn with the steel base of the can. The zinc-chloride flux used in soldering the old hole-and-top can had inhibited corn black, but the new sanitary can used a different type of flux. The attention of American's research department turned to the tin coating of the steel. In 1915 American Can, U.S. Steel, and the National Canners Association launched a four-year investigation to determine the effect of the weight and continuity of the tin coating on the development of corn black. It was a failure in one sense, since it established that the best possible control of the tin coating could not eliminate corn black, but it brought to light many new facts about the relation of the tin coating to corrosion. American later solved the problem of corn black by developing a new enamel ("C" enamel) which contained zinc oxide. The tin-plate investigation and the work on enamels led the can manufacturers to begin producing cans with different types of tin plate and coatings according to the nature of the food to be packed. Concurrently with the enamels project American began work on the problem of can closure, which led it into systematic development of closing machinery. It set up a small canning factory in 1919 and closed a quarter of a million cans of food; the tests laid the foundation for the basic closing-machine design that it followed for the next 25 years. VACUUM PACKING

The concept of preserving food by excluding air from the container was born in the bacteriological research of the late 19th century. Edwin Norton, one of the founders of the American Can Company, obtained a patent in 1898 on the vacuum-packing of food. By 1900 the process was in use, but it was highly imperfect. It was necessary to develop machinery which would maintain an effective vacuum during packing and a can which could be easily processed in such a machine. Hills Brothers, a west-coast firm, had begun systematic research in the vacuum-packing of coffee. After the first World War American began to push its own development work. American soon introduced the key-opening collar can, which solved the container problem, and eventually worked out a superior process for vacuum-packing utilizing the revolving-door valve. With Hills Brothers it pioneered the commercial introduction of the improved vacuum process for coffee, and eventually gathered in the bulk of the coffee can business. American's experimental demonstrations of the excellence of its new process eventually persuaded General Foods, the

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largest packer of coffee at that time, to abandon manufacture of its own coffee cans. General Foods became an exclusive customer of American in 1930,14 and most of the remaining coffee packers followed suit. Application of vacuum-packing to dry-pack products like coffee, nuts, and spices was obvious enough. What followed was another technological breakthrough. After 1920 the American Can laboratories experimented with vacuum-packing of vegetables. It found that vegetables looked and tasted virtually "fresh" if canned with little or no liquid under high vacuum. The food could be cold when packed, and subsequently lost less of its water-soluble vitamins and minerals. The process quickly came into wide use in the canning of whole-kernel corn, sweet potatoes, peas and other vegetables.15 Later the American technologists found ways to speed sterilization during processing and increase the efficiency of vacuum-packing still further.16 THE BEER CAN

The beer can was a bold advance in the canning art. As the era of Prohibition drew to a close, the sales executives of American Can began to push the idea. No can manufacturer had ever tried canning beer, and no brewer had experimented with it before Prohibition. Brewers in the early 1930s were by no means enthusiastic about putting beer in cans, and American itself was not certain it could develop a successful container and a usable canning process. American hazarded the costs of development to leap into a new phase of canning technology. After 18 months of intermittent work beginning in 1931, American set up a full-fledged development project for the beer can. It had to overcome many problems. The first was container strength. The ordinary food can will resist the pressures of sterilization with an adequate margin of safety. Beer, however, contains carbonic gas, and when it is pasteurized after sealing the internal pressures may rise to ten times the pressure in food cans. The beer can had to be designed to contain pressures of 100 lb per square inch, while the cans previously in use would burst or leak at the seams under pressures over 35 lb per square inch. The 14 Record, pp. 2 4 0 3 - 6 . The old-style slip-cover cans which General Foods had been using for its Maxwell House brand cost it about $ 2 0 per thousand to manufacture; the new key-opening collar can cost $ 5 2 . 2 0 per thousand. Product improvement more than made up for the difference. " A m e r i c a n Can Company, "Improved Quality Vacuum Packed Vegetables," Research Bulletin No. 8, January 1947. The vacuum-packing process for vegetables was also patented by American. But the first large user was a customer of Continental Can, and remained a customer of Continental after adopting the process. 18 The difficulty with sterilization of vacuum-packed foods is that heat transfer is very slow in the absence of liquid. In a series of elaborate tests of heat transfer American found that agitation of the can during heat-treating could reduce the necessary time for sterilization by half to two-thirds. Ibid.

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failure of the can was due to slippage of the solder in the side seam, which permitted it to unfold gradually. American's scientists discovered that solder flowed into only two of the three folds in the side seam in the manufacturing line; expanding gases in the solder flux prevented a full bond. This discovery led them to synthesize new fluxes, and finally they developed one that was satisfactory. At the same time the engineers worked out a process for "venting" the side seam to permit the escape of flux gases without piercing the container itself. The resulting side seam met the tests of resistance to beer-canning pressures. Next the laboratories had to find ways of strengthening the can ends; this they did by redesigning the profile of the cover to obtain maximum resistance to buckling, and by increasing the weight of the tin plate. 17 The company was reluctant to use heavier plate in any part of the can, since it increased the cost of production and shipping, and this led to an investigation of ways of increasing hardness of tin plate without increasing its weight. The beer-can development soon forced the pace of innovation in the steel industry. The next problem was to prevent contamination. In the first experiments, the beer put in plain cans quickly turned into a milky brown fluid. Spectrographic analysis showed that the beer had reacted with the tin. An extremely small quantity of tin would produce this condition, smaller even than the traces of tin in food that had been packed in cans enamelled with the best coatings then available.18 Thus a new search for enamels began. Not only did the enamel have to be improved but a method of applying it to an already-formed can would have to be found. The enamel could not be baked to a hard finish on the formed can, as ordinary enamels were when applied to the flat tin plate, because the temperatures necessary would melt the solder in the can seams. The technologists were unable to synthesize a single enamel with all the necessary properties. Therefore, they recommended a double coat: the first with properties of ductility and adhesion to the tin plate, to be applied on flat tin plate and baked in the usual manner; and the second, an absolutely inert synthetic resin, to be sprayed on the can after forming. The second would not adhere well to bare tin plate, but it adhered excellently to the first enamel and covered all the scratches and abrasions that resulted from forming the can. It could also be cured at relatively low temperatures. Since the first coat did not cover the side seam, a heavy stripe of enamel had to be applied on the inside of the seam before spraying. Together with the De Vilbiss Company American designed 17 American Can Company, "The Story of the Beer Can," Research Bulletin No. 12, April 1948. It was also necessary to design the ends so that they would trap as little air as possible in the closing process. ls Ibid. Very minute scratches were always present in the enamel.

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equipment that would perform these operations at the high speed of the can-production line. It is noteworthy that the linings on the beer can today are the same as they were in 1935, no improvement having been found. Having created a usable beer can, the company now had to find satisfactory methods of filling and closing it. Beer-bottle fillers provided a point of departure for development of a beer-can filler, but the laboratories had to find a way to reduce the amount of air in the experimental packs. Air contaminates the canned beer to some extent. Designing the lid to reduce trapped air was of some help, but the great improvement was the gas-flow closing machine. American had already developed these for use in canning shortening, and now adapted these to beer canning. These machines expel the air from the can by blowing a stream of inert carbon dioxide over the surface of the beer just before the can is closed. The Research Division also developed a simple portable gas-analysis device which brewers could use to test the amount of air remaining in the can.1® In the later stages of these experiments American had cooperated with the laboratories of Pabst Brewing Company, which was the pioneer in commercial introduction of canned beer. Pabst spent large sums on promotion and advertising. 20 The gamble was successful; customers soon accepted the beer can, and many other brewers adopted it; and the container created a large expansion of American's business. Within a year both Continental and National Can had introduced their own versions of the beer can. Continental gambled on a cone-top container, closed with a cap, that could be filled and closed on the brewers' bottleprocessing equipment. This variety turned out to be commercially inferior to the flat-top can, and for five years or so until it could develop its own flat-top beer can Continental could pick up only fringe ends of the beer-canning business. By the post-war years, however, American's relative advantage had disappeared. OTHER INNOVATIONS IN CANNING AND CONTAINERS

The can manufacturers have contributed innumerable small discoveries and improvements in canning practice and in containers, as well as the ones which are worth special notice. By the middle 1930's the noteworthy innovations were no longer exclusively American's, though it still remained the dominant firm in research. If Continental's original contributions were still few, it nevertheless was able to keep almost abreast of American in developing what had been discovered. 19

Ibid. The brewer customarily owns his filling machines; before 1950 he usually leased the closing machines. 20 Record, pp. 5845-47. Krueger Brewing Company, another American Can customer, was also a pioneer.

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The American laboratories in the early 1930s solved the long-troublesome problem of flat sour spoilage in canned tomato juice. The great commercial expansion of canned tomato juice followed this discovery. As it happened the cause had nothing to do with the tin plate, the closure, or the can construction. American nevertheless continued work until it found how the condition could be eliminated in processing tomato juice, and made the results freely available to all canners. 21 The key-opening shortening can, developed around 1930, was a natural outgrowth of the work on key-opening coffee cans and the vacuumpacking of coffee. American had to develop a special hinge and a collar designed to prevent rust, so that the can could be recovered and used to store shortening in the kitchen over a period of days or weeks. Continental is still the only other producer of this type of can, and its version came out several years after American's. In the canning of motor oil, on the other hand, Continental was first into the field. The stimulus for this innovation actually came from the oil companies, who asked the can manufacturers to develop it so that they could prevent service stations from substituting inferior oil for their own products. 22 Sinclair Oil Company introduced it to the consumer market. In its development of this container Continental worked out the first successful method of cementing the side seam of the can in place of soldering it. Can manufacturers have since put the cemented side-seam to use in a number of other types of nonfood cans. Its virtue, besides the saving of solder, is that its entire surface can be lithographed; there is no gap at the soldered-seam lap. Moreover, it is difficult to solder tinless black plate, and cementing facilitates the use of black plate for canning oil or other products which do not require the protection of a tin coating. Of course American began to supply comparable cans in a very short time, and captured its proportional share of the market. 23 American developed several other significant innovations during the 1930's. One was the canning of orange juice. In this field its efforts met with only limited success. By synthesizing new enamels that would resist flaking and would not cause flavor changes in the product, the company promoted a sizable increase in the market for orange-juice cans. But the product made slow headway in competing against juice from fresh oranges, and the really great expansion in canned citrus-fruit juices did not come until frozen orange-juice concentrate appeared after World a

lbid., p. 6242. As previously mentioned in Chapter VIII the company paid Stokely's claim of $65,000 for flat sour spoilage in 1938 even though the spoilage could not have resulted from defects in the can. 22 "Profits in Cans," Fortune, April 1934, pp. 78, 138. 23 Continental Can Company, Annual Report, 1953; American Can Company, "The Decoration of Metal Containers," Research Bulletin No. 13, July 1948. American can also justly claim innovations in cemented side seams.

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War II. (Frozen-concentrate cans are a different product from juice cans, and the canning problems are also different.) Another was the Blair process for canning peas. After four years of laboratory experiments the American Can scientists developed a method for preserving the true color of peas in the canned product and improving the flavor. The problem was the destruction of chlorophyll by heat and acid during processing. Previous attempts to create alkaline conditions during canning had resulted in mushy texture and off-flavor. The Blair process was a method of preserving the true chlorophyll green, without artificial coloring, by combining alkaline processing solutions with rapid sterilization at high temperatures. American patented the Blair process in 1939 but offered royalty-free licenses to canners without discrimination.24 CAN MANUFACTURING AND CAN CLOSING MACHINERY

Automatic can-making machinery antedates the American Can Company. The Norton brothers, founders of both American and Continental, had developed a complete system of automatic machinery before 1900, for the all-soldered hole-and-cap can then in use. The sanitary can with a soldered lock-and-lap side seam and a double-seamed end required a new manufacturing system and added much more complicated doubleseamers (closing machines) to the process.25 Canners also began to use the double-seamers to close cans after filling. Improvement in can-manufacturing machinery has been continuous, but without revolutionary changes in form. Bodymakers and other key machines have been made bigger and faster. Speeds of manufacture have more than quadrupled since 1900. American Can introduced the rollformer bodymaker in 1922, which alone doubled the rate of output, and also introduced the air-pressure machine for automatic testing. It later developed automatic electric controls on the manufacturing lines which reduced the number of necessary workers from about 20 to 3 per line. Many economies have been effected in the use of tin plate, solder, and other materials. Lithographing processes have been greatly improved. In can-manufacturing continuous engineering research has led to continuous process improvement and real cost reduction, though there is nothing we can point to as a major innovation. In closing machinery also the basic technology has been relatively static. The fundamental design did not change much for decades after the ordinary double-seamer was first introduced, though individual machines were made faster and more reliable. Here however some special 24 American Can Company, "Green Canned Peas — The Blair Process," Research Bulletin No. 6, September 1946. 26 H. S. Van Fleet, "Engineering the Tin Can," Mechanical Engineering, April 1948, p. 315.

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types have been developed alongside the basic ones. Some of these innovations were designed for use with container innovations. An example is the vacuum-closing machine with revolving-door valve previously mentioned, which appeared with the key-opening coffee can. Another is the inert-gas closing process. A more recent closing-machine innovation, which effected a major change in the older closing technology, is the steam-flow closure. Formerly food canners used exhaust boxes as standard equipment for creating the necessary partial vacuum in the can. (This is to be distinguished from vacuum-packing of special products like coffee or whole-kernel corn without liquid.) The open can containing the raw food would pass through a long exhaust box where steam or hot water would expand the food and expel the air in the headspace. After the can was sealed and processed, condensation of water in the headspace and contraction of the contents during cooling would create a vacuum. In the new steamflow process, the closing machine blows steam into the headspace of the can while it is applying and sealing the cover. When the steam condenses, a vacuum results. The vacuum is more effective than in the exhaust-box method. Elimination of exhaust boxes saves considerable space in the cannery, and speed of production is increased. The principle of steam condensation has been known for three hundred years; the innovation was in engineering. Canners had begun to use steam-flow closure in packing of vegetables and specialty items when World War II interrupted its development. After the war it was further refined for packing fruit in syrup. 26 For several decades American Can was the unquestioned leader both in improvement of existing types of machinery and in development of new types, especially closing machines. It now has more formidable rivals. In closing-machine development Continental has been as progressive as American in recent years. Continental claims to have pioneered the commercial introduction of steam-flow closure for metal containers, in 1939.27 In any event its work on steam-flow engineering paralleled American's. In the late 1930's Continental also brought out several advanced types of auxiliary fillers which other manufacturers had to duplicate. Both American and Continental developed processes for collapsing and reforming cans, which made it economical to ship cans manufactured in the States to Alaskan fish canneries, and they share this business between them. Continental has also pushed the improvement of closing machine efficiency and speed. Like American it has developed the old single2,1 American Can Company, "Steam Flow Closure," Research Bulletin No. 16, April 1950. " Continental Can Company, "Methods of Producing Vacuums in Cans," Research Bulletin No. 18, 1949.

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spindle closing machine into a multiple-spindle machine to increase its capacity; it has developed vacuum and gas-flow machines, and special types for irregularly shaped cans; it has pushed speeds up past 400, 500, and 800 per minute for various types. Recently it introduced a machine which closes cans at the fantastic rate of 1200 per minute, or 20 per second.28 Continental has also introduced a high-speed filling machine for packing luncheon meat in oblong cans, and a vacuum-closing machine for large ham cans. Independent manufacturers and smaller can companies that produce machinery have also increased the tempo of their research. RECENT DEVELOPMENTS IN CANNING AND CONTAINER RESEARCH

Since World War II research and development have moved forward on many lines at once. Can manufacturers have continued their work on canning quality control and canning of new foods, as before. Some of it has been cooperative. In 1945 the Can Manufacturers Institute and the National Canners Association launched a joint program of research into the nutritive value of canned foods. In the next few years some 50 scientific papers based on this work were published. They added knowledge of the effect of heat treating upon nutritive value, vitamin loss during storage, effect of oxygen retained in the canned product, and so on.29 Since this research was cooperative and freely published it has no competitive significance. The can companies' own competitive research effort in canning problems has not resulted in any single spectacular advance except in connection with container development. There is one older discovery which can manufacturers have endeavored to use in new fields: the "high-short" or flash sterilization of food. Unlike the conventional heat-processing method, the flash method sterilizes canned food before sealing by heating it to very high temperatures for a very short time — from a few seconds to several minutes. The advantage of this method is that it produces less "cooking" and hence less flavor change and vitamin loss in the product. It has long been used in the rapid pasteurization of milk. After World War II the method was adapted to the canning of fruit juices.30 It is not yet adaptable to canning of solid foods. For a time the application of flash sterilization to canned fresh milk appeared very promising. This was a different product from the familiar evaporated canned milk, and more like bottled fresh milk in flavor. If the 28 "So great is the precision with which this machine is constructed that a coin will remain balanced on top of the main frame while the machine is operating at full speed." Continental Can Company, Annual Report, 1954. "American Can Company, "Canned Foods and Nutrition," Research Bulletin No. 20, December 1951. "American Can Company, The Canned Food Reference Manual, 3 ed. (New York, 1949), pp. 83-84.

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can companies had been able to provide a cheaper substitute for dairydistributed milk without changing the milk itself the increase in their business would have been enormous. Continental Can Company did development work in fresh-milk containers for several years, while International Milk Company attempted to pioneer the canning process and introduce it commercially. However, they did not succeed. International Milk abandoned commercial development in 1953. An outstanding reason for the failure was the rigidity of state milk-inspection laws and the other restrictions which hedge the distribution of milk.31 There have been small improvements in container technology as well as development of some important new types. Among the improvements worthy of mention is progress in enameling. The two-coat method of enameling is now used for many corrosive foods, notably fruit juices. Manufacturers have also reduced corrosion by enameling the inside seam of packers' cans after forming, like the seam of the beer can. New phenolic resin enamels have been discovered which are taste-free and resistant to various corrosive products. The can manufacturers have found new ways to strengthen cans to resist internal pressure and internal vacuum. They have developed new types of sealing compounds made of synthetic rubber. Apparently all can companies with research departments have participated in the general improvement of cans, though American and Continental have accounted for most of it. The cemented side seam has been in use since the early 1930's, notably for motor-oil cans. In the postwar era the major can companies have tried to extend its use. Although it is not yet suitable for vegetable and fruit containers, it has been perfected for some other canned products Continental claims priority in developing the solderless can for frozen concentrated juices, which it introduced in 1954. All can companies are anxious to find some substitute for solder in seaming cans, for two reasons: to save tin, and to enable them to bake can enamels on the formed can at higher temperatures. Large-scale elimination of tin in cans and the substitution of enamel to protect the steel depends on this. Both American and Continental have been experimenting with highspeed welding as still another alternative to solder. So far no welding process has been commercially introduced. A smaller company, Crown Can (now consolidated with Crown Cork and Seal Company) was responsible for a remarkable container innovation after World War II: the lightweight pressure-propulsion can. Crown had been experimenting for some years with extruded cans, which were die-drawn and seamless rather than formed and side-seamed like the 81 In the long run frozen milk-concentrate, similar to frozen citrus-concentrate, may prove to be a more successful innovation. The value of preserved fresh milk for areas which do not have access to bottled milk, and for the military services, is obvious.

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ordinary type. At one time Crown attempted to popularize the extruded can for beer. Although established container users did not convert to the extruded can to any great extent, it turned out to be just what was needed for pressure-propulsion. Crown introduced its "Spra-tainer" soon after the war. It has a die-formed body, tapered at the top to hold a small valve, and a seamed-on bottom, curved inward to hold the contents under low or medium pressure. When the valve is released the dissolved gas causes the product to foam or spray out. Development of this container depended on improved methods of mixing soluble inert gases with liquid or semisolid contents, which were worked out by Du Pont and other chemical companies. Pressure propulsion or aerosol packaging has been widely adopted. Other can companies brought out versions of their own, and plastic aerosol containers are also in use. American Can Company's laboratories in the postwar era experimented with "galvanic" protection of containers against discoloration. Certain chopped meat products had been difficult to preserve because reaction with iron would cause surface discoloration. Enamels could not give perfect protection. The outcome of the research was the aluminized can. In the conventional meat can electrochemical forces tend to draw iron into solution in minute amounts. If aluminum is present, however, it enters solution in place of the iron.32 Aluminum compounds do not cause discoloration. After trying several methods the American technicians decided that a small square of sheet aluminum welded to the inside of the can end would give the most effective protection. Aluminized cans were introduced commercially in 1952. They are perhaps only a stopgap until the development of aluminum-clad plate or commercial aluminum cans. The following year metal containers invaded the soft-drink field. Several companies have claimed priority in this development, and undoubtedly they were all working on it at the same time. Continental seems to have pioneered the canning of soft drinks, but in a cone-top can. Pacific Can was the first to introduce the flat-top soft-drink can commercially. The can companies found two problems: to control the extreme corrosiveness of many soft drinks, and to design a can that would hold the extreme pressures. Both of these problems were far more difficult than those involved in the development of beer canning two decades earlier. Continental turned to the cone-top can at first because the cone top was better able to withstand high pressures. Cantrell & Cochrane Company was the first soft-drink company to use them. But as in beer 32 "The system is, in reality, a small battery in which the aluminum becomes the negative pole, and the tin plate of the container, the positive pole. The juices of the meat serve as the electrolyte." American Can Company, Research Bulletin No. 22, July 1952.

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canning the flat-top can had some advantages. Continental followed Pacific in introducing a flat-top can early in 1954. American all the while held back on commercial production. About a year later it finally introduced its own version of the flat-top can, which used a double-locked side seam formed by notching and overlapping the edges. American has recently put two other important can innovations on the market. One is the quart beer container. Not only will it hold the heavier pressures of the larger volume, but it has a cap opening. A capopening can is more pleasing to the consumer than one which has to be opened with a pointed tool, if it can be stacked and cased like ordinary cans. The old cone-top beer can could not be. The quart beer can is designed with a very shallow top dome and a concave bottom, so that it can be stacked, and the cap does not protrude enough to interfere with packaging. The other is the spout-pouring can, used principally for liquid detergents. It involved no revolutionary idea: the only problem was to fix a spout of metal or plastic firmly into the metal top at low enough cost to permit commercial use. The advantages of the "no-drip" spout over conventional openings for cans containing liquid that is used slowly in small amounts are obvious. American's liquid-detergent can was followed by others, including Crown's. THE TIN-CONSERVATION PROGRAM

Tin conservation is a measure of defense and possibly of survival for the can industry in a world divided by cold war. All the major can companies have worked on it, collectively as well as individually, and so have producers of tin plate. We have not surveyed the excellent record of wartime production and defense research of the large can companies because they lie outside the normal market activity of can manufacturers.33 The tin-conservation program, however, is also changing the civilian product. The contemporary phase of tin conservation actually began with the development of cold-rolling of tin plate by the steel industry in the 1930's. Cold-rolled steel could be satisfactorily plated by electrolytic methods. Since electroplated steel gives a uniform coating of much lighter weight than hot-dipped plate, considerable savings in tin resulted wherever electrolytic plate could be used. The tin-saving program has gone much farther in the same direction. The industry has attempted to use still lighter coatings and to substitute enamels for thicker tin weights whenever possible. It has successfully introduced black-plate containers 83 F o r a summary of the wartime activities of the tin-can industry, see Hession, Competition, pp. 3 3 - 3 6 .

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in many fields formerly using tin cans. By further developing cemented side seams for black-plate containers the industry has saved tin both in the solder and in the plate. Even where solder is still used — as it must be for most containers — the tin content of the solder has been reduced from a normal 37 percent before World War II to less than 5 percent today for the same uses.34 In cooperation with the steel industry the leading can producers have experimented with and put into use differentially-coated tin plate — electrolytic plate with lighter coatings on the outside than on the inside of the can. In many cases foods which twenty-five years ago required "standard coke" — 1% lb of tin per base box on hot-pack base stock — now can preserved successfully with % lb coatings on the body stock and )i lb coating on the end stock. (Enamels are frequently necessary to supplement the tin.) Cans for some standard products like corn and peas now use only 15 percent of the tin (per can) that they used in 1940. The average weight of tin per base box of tin plate fell from 1 % lb in 1935 to about 0.7 lb in 1952.35 Total consumption of primary tin in tin-plate production decreased 14 percent from 1939 to 1954, while total output of tin plate rose about 90 percent. During the Korean War improvement of chemical-treatment methods for steel accelerated the substitution of black plate and very thinly tinned steel for thicker coats. A very promising development, worked out between 1951 and 1957 by the Heintz Manufacturing Company of Philadelphia in cooperation with American Can and Bethlehem Steel Companies, coats the steel continuously with an inorganic solution of chromium compounds. The new process, called "Hinac," does not involve plating or molten metal. When enameled it appears to perform as well as tin plate in many uses.36 Substitution of enamels for tin economizes a scarce resource regardless of its bearing on defense. American Can has stated that in the future the industry will probably use black plate and chemicallytreated steel, enameled perhaps but untinned, for over half its total volume of container production. Another 16 percent will probably use electrolytic plate with )i lb coating per base box, especially in can-end stock. Only 5 percent of American's own steel requirements cannot be reduced below IM lb hot-dipped coatings.37 If one firm alone reduced tin coatings on some products it might suffer competitive injury, since the appearance of the container is often less attractive. Hence the emphasis on cooperative conservation. 34 R. R. Hartwell, "Trends in the Use of Tin in the Container Industry," American Can Company, Technical Paper T-23, June 1952. 35 Ibid. 36 Iron Age, June 6, 1957, p. 106. 87 American Can Company, "Tin Conservation" (company publication), March 1952.

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C . T H E RECORD OF ACHIEVEMENT: T I N PLATE

We have already seen (Chapter I I I ) how the introduction of cold rolling revolutionized the technology of the tin-plate industry and transformed its structure. This was not the first scientific advance in tin-plate production, but it grew out of a development which marked the beginning of systematic and continuous research.38 American Can Company played an important role in this development. In 1929 and 1930 it suddenly encountered heavy loss in the California canned-peach pack owing to "hydrogen springers" — early and excessive formation of hydrogen in the can. The American laboratories checked every possible cause. Nothing appeared to be at fault in the preparation of the fruit, the can seam, or the sealing compound. American found that most of the plate used in the defective cans had come from one tin-plate mill. When chemists and metallurgists analyzed the difference between the defective cans and normal ones they found that excess silicon was present in the steel. This caused intergranular fracture at drawn sections of the can such as the side seam, where the tin plate would rupture and acids in the fruit could attack the steel. As a result of this research the industry awoke to the importance of the chemical composition of the base steel in corrosion resistance. American Can determined that tin plate would have to be manufactured to definite specifications. At its behest the steel producers produced many experimental lots of tin plate with varied and controlled chemical specifications. Cans made from these lots were packed with foods and tested to determine rate of failure over time. The data it thus obtained enabled Americans to classify foods in three degrees of corrosiveness. For Class I, the most corrosive, the tin plate could contain no more than specified amounts of silicon, phosphorus, and other metalloids. Class II allowed a somewhat greater amount of phosphorus, and Class III plate could contain more of several metalloids. This confined most of the plate then being produced to Class III, for the least corrosive products. Testing tin plate for corrosion resistance had always involved a difficulty: the length of time necessary for natural corrosion to work. Up to the early 1930's the only reliable way known was to make cans from the plate, pack these with food, let them sit for months or years under con38 Tin plate of course shared in the general advance of steel technology before 1930, such as the substitution of open hearth production for the Bessemer process. There were also major improvements in mechanization of the hot-pack process, and a quite advanced development of hot-dip tinning lines. The investigation of 1 9 1 5 - 1 9 previously mentioned promoted better understanding of the effect of various weights of tin coating. But the crucial problem, corrosion resistance of the plate, had been only intermittently attacked. American Can Company, "Progress Toward Better Tinplate," Research Bulletin No. 2, October 1945.

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trolled conditions, and plot the rate of failure along a time-curve. This meant that no continuous testing of batches of production plate before use was possible. As a result of the hydrogen-springer episode American technologists developed a rapid test for corrosion resistance, called the hydrogen-evolution test. (A specimen of plate is exposed to dilute hydrochloric acid under controlled conditions, and the time required to evolve 5 milliliters of hydrogen is measured.) Although its application is limited, the accelerated test was a useful improvement. At first the American laboratories carried out the tests, but in 1936 the tin-plate producers began to test plate in the mill. Corrosion-rate standards were written into the specifications for tin plate. The slow "natural" corrosion testing continued as before. 39 COLD REDUCTION AND ITS CONSEQUENCES

As long as the hot-pack method of producing tin plate was dominant the steel industry could not substantially increase the corrosion resistance of the plate. It was the change to cold-rolling that made production of low-metalloid tin plate possible. The development of cold-rolling was not primarily due to the discovery of the controlling factors in corrosion resistance a short time earlier; it was largely a fortuitous coincidence. Cold-rolling was preferred for its ductility in other rolled-steel products where corrosion resistance was not an important factor. The can companies also benefited from the superior ductility of cold-reduced plate and immediately began to use it for drawn or stamped container parts. After its introduction the can companies tested it for corrosion resistance and found that low-metalloid cold-reduced plate was far superior to anything that had previously been available. United States Steel Corporation, though it had been the first to introduce a hot-strip rolling mill,40 was not the leader in cold-rolling technology. (Cold-rolling reduces the product of the hot-strip mill to tinplate or sheet gauge; see Chapter III.) That distinction belongs to Wheeling Steel. The second steel producer to introduce continuous cold-reduction was Inland Steel. At this time U.S. Steel was just beginning to emerge from the semiparalysis which had overtaken it in the 1920s. At first its attitude toward cold-rolling was negative. As a result it lagged behind its rivals for several years in converting its plants. As late as 1938, though U.S. Steel had 33 percent of the country's total 30 Ibid. See also Crombie, "Tin Plate." The rate of corrosion failure for some canned foods is extremely slow. If a laboratory packs two 10,000-can batches of canned peas in tin plate of different specifications, and six years later finds that five cans in the first batch have spoiled and only three cans in the second, it cannot yet separate chance factors from systematic differences in corrosion resistance. 40 Weirton claims that it was the first to introduce a fully continuous hot-strip mill, both roughing and finishing.

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tin-plate production capacity, it had only 25 percent of the capacity for cold-reduced tin plate.41 But the turning point in U.S. Steel's attitude had come in the early 1930s. Thenceforth it worked cooperatively with the large can companies to improve tin-plate technology, as did the other tin-plate producers. Both American and Continental initiated long-range programs of research into tin plate. They began to undertake cooperative research with the staffs of the steel companies' research divisions. Metallurgists trained at the steel mills were employed by the can companies; the can producers' tin-plate and container experts moved into positions with the steel firms. And tin-plate producers also hired biologists and food technologists. The outcome has been a remarkable harmonizing of research between the can companies and their tin-plate suppliers, along vertical lines. After working out a set of "ideal" specifications for tin plate for various purposes American largely left it up to the steel producers to meet them. Its activities and those of Continental subsequently were confined for the most part to testing, evaluating, and making further suggestions. The temper specifications supplied by American Can stimulated improvement. The first cold-reduced tin plate was too soft to be satisfactory for can-making. It resulted in lower resistance to buckling, and could be used only for small-size cans. Occasionally thicker plate had to be used. After long research with the steel companies American laid down six temper classifications, to specify the hardness needed for every part of different cans. (It is possible to substitute metalloids for tempering to give hardness to steel when corrosion resistance does not have to be high; this substantially reduced the overall cost of the tempering operation.) Plate is now tempered to a high degree of hardness for large cans, and left soft for deep-drawn containers. By standardizing the product in simple classes the temper classification replaced a jumble of standards that the individual mills had followed, and so benefited the producer and the tin-plate user alike.42 The tin-plate program brought early and spectacular results. Within 10 years the shelf-life of most canned-food products had doubled or more. Even the most corrosive fruits and pickles would last over a year in the can by 1944, while the less corrosive vegetables like corn and peas would not cause perceptible corrosion for eight years or more after canning. ELECTROLYTIC TIN PLATE

Methods for producing electrolytic tin plate were worked out among the steel companies, chemical companies, and producers of industrial "Western Steel Plants and the Tin Plate Industry," p. 29. American Can Company, "Progress Toward Better Tinplate, Continued," search Bulletin No. 3, November 1945. 41

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machinery. The can companies meanwhile sought optimum ways of using it. This was a development which the steel producers originally pushed on the can companies, not vice versa. The impetus to development of electrolytic plating was the prior development of hot-strip and coldrolling methods of producing black-plate, which made fully continuous production and plating of strip possible. Here U.S. Steel was a leader (along with Crucible Steel Company, which later abandoned tin plating). 43 U.S. Steel constructed its first pilot electrolytic line at the Gary mill in 1937, and shortly thereafter introduced to commerce electrolytic plate bearing a half-pound tin coating per base box, which was first used for coffee-can ends.44 The can companies found that electrolytic plate used for food cans would normally have to be enameled. Electrolytic coatings turned out to be actually less resistant to corrosion than hot-dipped coatings of the same thickness. But the performance of enameled coatings was quite promising. Electrolytic plate proved quite adaptable to the new synthetic phenolic enamels recently developed; but in the late 1930's adding enamel to electrolytic plate pushed its cost above hot-dipped plate. Besides, baking the enamel tended to oxidize the plate to an unattractive yellowish color. Electrolytic plate also proved difficult to solder, especially when enameled and baked. This led the can producers and steel companies into cooperative research to improve solderability and to improve the solders themselves. Another difficulty was to get the proper surface qualities. U.S. Steel worked out a method of brightening mattesurface plate with wire brushes, and later a technique for melting the electrolytic coating to make it more dense.45 Electrolytic technology really matured in the forcing-bed of World War II, when industry-wide cooperation fostered by the government more or less superseded individual technological development. U.S. Steel put a full-scale line into operation in 1941. Every tin-plate producer in the country installed electrolytic lines in the year following Pearl Harbor. ALTERNATIVE ELECTROLYTIC METHODS

Three different electrolytic methods developed by different firms ripened for commercial introduction at about the same time. The theory and practice of electroplating of course had long been known. The alkaline-bath method was in use by 1850. Only about 1930 did the steel technologists begin to realize that smooth coats of tin could be electroa Crucible used a reversing mill for cold-rolling, not a continuous tandem mill of the modern type. "Crombie, "Tin Plate"; K. W. Brighton, "Electrolytic Tin Plate from the Can Makers' Point of View," American Metal Market, October 29-30, 1943. K Brighton, Ibid.; McArthur, Electrolytic Tin Plate, p. 5.

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plated on steel; previously, minute quantities of stannite in the tin would cause a spongy deposit. Various methods for insuring oxidation of stannites in the alkaline tin baths were soon worked out. The basic patents were granted to Du Pont in 1933.46 Acid-bath plating is more recent, but was the first to be turned to commercial production of can-making tin plate. Many firms both within and without the steel industry made discoveries that were later incorporated into the acid process. The fundamental work had been done in Germany. U.S. Steel drew the strands together in the United States. In cooperation with Wean Engineering Company it applied electrotinning to full-width strip in a continuous process at high speed. At this stage the problems were chiefly problems of economical engineering, not electrochemical theory: how to run the strip through the bath at constant high speed and constant distance from the anodes, how to maintain absolutely constant voltages with high current densities, and the like. All these factors must be rigidly controlled.47 The United States Steel Corporation took out some basic patents on this system and acquired other basic patents from other firms. It then offered to license anyone who wanted to use it. Wheeling Steel Corporation took out licenses and installed a line in 1942, and a second in 1951. The only other licensee is Kaiser Steel Corporation which began to use the process in 1952.48 The alkaline process, which uses entirely different equipment, was commercially developed not by a steel producer but by Crown Cork & Seal Company. Crown's president at that time. C. E. McManus, had boldly experimented with production and refinement of tin plate. Crown had installed a continuous cold-reduction mill a few years earlier. Crown's achievement in tin-plating in spite of its lack of a basic foundation in steel technology is striking. It put its first line into commercial operation in 1941. Within a few months five steel companies had applied for and received licenses — Jones & Laughlin, Inland, Youngstown, Bethlehem, and Granite City Steel. The third method is called the halogen process or horizontal-acid process. It also uses an acid electrolyte but the method is different from the "Ferrostan" (U.S. Steel) acid process. The steel company that pioneered introduction of the halogen process was Weirton. United Engineering & Foundry Company worked with Weirton on the engineering of " T. W. Lippert, "Food in Cans," Iron Age, April 30, 1942, p. 38. Du Pont has never asserted its rights under these patents. " Ibid. The Crucible line did not use standard full-width strip as did the U.S. Steel line. Crucible's method was to use alkaline and acid-plating baths in succession. Its production remained largely on an experimental basis. 48 McArthur, Electrolytic Tin Plate, p. 10. No information is available on the royalties asked by U.S. Steel on its "Ferrostan" process.

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the line, and Du Pont on the chemical problems.49 Weirton put in a pilot line for 6-inch strip early in 1942, and operated it for six months with Du Pont supervising the electrochemical processes. Under the pressures of war the pilot-testing program lasted only 6 months, during which time United Engineering designed a full-scale line that began production in 1943. A few months later Republic also took out licenses and started a line using the halogen process. Since that time Jones & Laughlin, which previously had been committed to the alkaline process, has installed a halogen line also.50 In the alkaline process the equipment does not have to be made of expensive corrosion-resistant materials, while in the acid process it does. Both the acid and halogen methods require thorough preliminary cleaning of the steel strip, while in the alkaline process the strip can be much "dirtier" because the electrolyte itself is a cleaner. The alkaline process uses much more electric current than the acid or halogen process, but the plating rolls on the acid process, since they are fewer in number, must carry much higher current densities, and hence are more expensive to design and to control. The acid process has better plating efficiencies. It uses much smaller tin anodes than the alkaline method, in which the anodes are huge masses of tin weighing over a ton each that cannot be replaced without shutting down the line for a day or two. The halogen process permits the highest speeds of operation but has a very high threshold for economical operation: some experts claim that it requires a minimum production of 250,000 tons a year. (Weirton Steel Company, the pioneer user, has always favored high-speed, largecapacity units.) This means that a firm wanting to install a smaller and more flexible unit might turn to one of the other processes.51 The halogen process seems to be the most economical for production of differentially coated tin plate, which is coming into wide use. Du Pont also claims that plate made by the halogen process shows the best resistance to discoloration under subsequent baking of enamels. In recent years steel producers making new installations have tended to favor the acid and halogen types over the alkaline. The halogen process seems to be gaining most rapidly. But Bethlehem Steel installed an alkaline line as late as 10 Lippert, "Food in Cans," p. 44. Hanson-Van Winkle-Munning Company was associated with United Engineering on the engineering work. Du Pont had begun laboratory investigation on the chemical problems in the late 1930's, and had developed an electrolyte with excellent properties. 60 Letter from Electrochemicals Department, Ε . I. du Pont de Nemours & Co., 1953. 5 1 A Ferrostan unit can be economically designed with a capacity of 100,000 tons a year, and alkaline units with still smaller capacities. McArthur, Electrolytic Tin Plate.

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1951. The close competition among the three methods with different technological antecedents and different innovators has been remarkable. OTHER IMPROVEMENTS IN TIN PLATE

The steel producers have continued to make refinements in tin plate and to improve quality control. Electrolytic plate has a somewhat more porous tin coating than does hot-dipped plate. As previously mentioned, U.S. Steel adopted a method (originated by Westinghouse Electric Company) of fusing the tin coating by momentarily remelting it. The tin is melted by flash electrical-resistance treatment in which an electrical current is passed by contact through the steel strip. Other producers have developed alternative methods. Crucible had earlier used a hot-oilbath technique for melting the surface. Crown Cork & Seal and Inland Steel have developed a method of "flow-brightening" in a gas-fired radiant-tube furnace. A more recent innovation is electronic flow-brightening, which induces high-frequency currents in the strip without physical contact. The equipment cost of this last method is quite high, but it is the most practical one for very high-speed lines operating in excess of 1200 feet per minute.52 Several companies notably U.S. Steel, have also developed methods for chemical treatment and protection of the plate after flow-brightening. One phase of tin-plate production that has long resisted continuous production methods is annealing. The "line" is interrupted by an intermittent process of box annealing in individual ovens. The steel companies have searched for methods of annealing the cold-rolled strip continuously and in line. Crucible Steel was the first to try it on a large scale, but its electrical method did not prove successful. More recently U.S. Steel installed experimental continuous annealing at its Fairless and Gary works, in 1951-52. Weirton put a continuous annealing process into commercial use in 1957. In the meantime Weirton also contributed an improved technique for controlling atmospheres in the annealing process in order to affect the metallurgical characteristics of the final product. U.S. Steel, Weirton, and Bethlehem have all made notable advances in control techniques and the development of control instruments. Instrument producers such as Bendix have also taken part. The industry has introduced spectrographic methods of analysis of the base steel, electric-eye devices for testing imperfections, and at least two methods of instantaneous spot-testing of the thickness of the tin coating on the plate. Instrument technology seems to be widely diffused. An apparently trivial problem which has given the steel producers a great deal of trouble is oiling electrolytic plate. If there is too much oil, enamels will not adhere properly; if the surface is unoiled, it will 52

Lippert, "Food in Cans," p. 40; McArthur, Electrolytic Tin Plate.

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rust or "age" in transit and will not handle well on can-making equipment. (Aging also interferes with enamel adhesion.) Hot-dip plate is oiled by passage of the sheets through a palm-oil bath, after which the excess oil is removed by wiping with bran. At first the makers of electrolytic plate tried to impart an oil film by wiping it on with bran at the final stages. But this method would not work satisfactorily for continuous high-speed production. Again various producers developed alternative methods. Some manufacturers tried out mechanical oil applicators. U.S. Steel introduced an emulsion oiling machine using homogenizers like those used in dairies. Weirton developed the electrostatic method, in which oil is atomized and sprayed into an enclosed atmosphere and deposited evenly on the strip of tin plate by a high-voltage electrostatic field. Recently U.S. Steel has been experimenting with methods of applying oil films that are only one molecule in thickness, and with extremely delicate techniques for testing unimolecular layers. For some time the can companies have been considering the possibility of buying electrolytic tin plate in coil form and lacquering it before cutting it up. Several including Crown and American, have recently begun to purchase coils, expecting economies to result from continuous processing. This development runs directly counter to the effort of the steel producers to find economical ways of shearing the coils in the production line. If the plate can be sheared in line it means a considerable saving in labor costs, but shearing cannot be done at extremely high speeds. Therefore, the halogen lines do not shear in line. The alkaline lines as a rule do not shear in line either, not because of the speed difficulty but because of the danger of stoppages at the shearing end; if a strip stops in an alkaline bath it may quickly be ruined. Hitherto the ability to shear in line has been deemed one of the advantages of the Ferrostan (acid) process. Now, however, users of the other processes may possibly cease trying to find ways to cut up the plate in line and leave it to the can producers. It is clear that tin-plate technology has not been monopolized by any one firm. While the United States Steel and Weirton Corporation Steel Company have apparently been the leading innovators in the recent past, other firms like Inland, Bethlehem, and Crown Cork & Seal have also been very active in research and development. Any producer can select from alternative methods of performing practically any operation, and competitive innovation has not put any integrated producer out of the race.

Chapter XI Changes in Industry Structure and Behavior Since 1950 Certain changes have taken place in the structure and performance of the metal-can industry since the antitrust decree went into effect in January 1951. While some were a direct consequence of the decree, some were evolutionary changes that doubtless would have occurred in any case. The present situation is itself partly transitional. We can only hazard guesses on the probable future development of the competitive pattern. A. THE

E F F E C T S OF THE

DECBEE

The decree did not make any major changes in industry structure. The court sought to improve the opportunity for competition by eliminating certain types of conduct which had restrained it. Meanwhile industry behavior appears to have become more competitive, even in the short run. BUYERS' INDEPENDENCE AND SPLIT

BUSINESS

According to industry sources there has been a marked decrease in exclusive purchasing. Can buyers were previously tied to their suppliers by the closing-machine leasing policy and the requirements contracts fortified by volume discounts. Some buyers were always restive under this regime. General-line can buyers as a rule found no particular advantage in buying on requirements contract at all. Packers'-can buyers preferred them for individual canneries, but multiplant canners often would have developed secondary sources of supply for some plants, or even for different varieties within the plant, if the volume discounts had not induced them to concentrate their purchases. The substantial increase of container procurement from multiple sources (split business) demonstrates that the tying policy and price inducements did interfere with competitive allocation of purchases. Almost all single-food canneries still buy all their containers from a single source. Multiple-plant buyers of packers' cans on the other hand now commonly purchase cans for different plants from different suppliers, though each individual plant may have a requirements contract. 1 1 The decree restricted any one requirements contract to a single plant, but did not prevent the multiplant buyer from placing all his requirements contracts with a single seller if he chose to do so.

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A great many large buyers of general-line cans have abandoned the requirements contracts altogether, and purchase specific types of containers for use within the plant from different suppliers. Many purchase under specific quantity contracts; others under contracts specifying that they will purchase a certain percentage of their requirements from the suppliers. It is impossible for sellers to "police" a partial requirements contract in the way that they used to police total requirements contracts. When buyers have split their purchases they have frequently done nothing more than to add Continental or American to their sources of supply instead of buying exclusively from one of the big two. But the smaller companies have broken into many markets from which they were formerly excluded.2 Pacific Can in particular has been quite aggressive in the west; while Heekin in the middle west and Crown in Florida have also been able to obtain part of the business of many multiplant packers. The shortened term of the present contract gives all buyers more frequent opportunities to switch suppliers or add new sources.3 Even when a single-plant buyer decides to purchase from a single source, therefore, he has more frequent access to alternatives. While only a small number may switch in any year, the mere opportunity is enough to increase the competitive pressure markedly. Open-order buying has also increased, especially among general-line buyers. Even packers'-can buyers, however, sometimes operate without a contract, merely relying on the can manufacturer to supply their needs without any formal obligation. Since no requirements contract can be renewed more than 90 days before expiration, buyers and sellers may devote three months out of the year to negotiation and bargaining, and settle down to a contractual relationship only for the other nine months. Packers have occasionally held their contracts through the whole year without formally executing them. The frequent renegotiations, the growth in open-order buying, the practice of splitting business, the substitution of fixed-quantity or partial requirements contracts, all point to a significant qualitative change in 2 There is no available statistical or documentary evidence of supply switching, and split business other than the questionnaire referred to below. The investigator must rely on word-of-mouth information and the opinions of experienced observers within the industry on what is currently going on. Most of the information presented in this section was obtained in interviews with officials of can-manufacturing companies. 3 Mr. Simon Whitney, formerly of the Twentieth Century Fund, has very kindly made available to me the results of a Twentieth Century Fund questionnaire sent out to a number of canners in 1956. Forty-four questionnaires were returned. Of this number one-fourth said that the canning firm had added new sources of supply or had changed suppliers since 1950. About half of these were single-plant canners, half multiplant.

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the buyer-seller relationship. There used to be a very close association, almost a sense of wardship. A buyer was "somebody's customer." The can manufacturers were selling cans for an end use, guaranteed for that end use, and the canner more often than not depended entirely on the judgment and planning of his can supplier for the control of a vital part of his own operations. Now buyers and sellers tend to deal at arm's length under the immediate pressure of alternatives. The contract is merely a short-term convenience for establishing mutual obligation and allocating risks, not the long-term oath of exclusive allegiance that it formerly was. Canners are exercising their own judgment and control over container procurement more than they used to. The contract provisions of the decree appear to have promoted much more fluidity and competitive freedom on the buying side of the market, which has made competition on the selling side more sensitive and direct. PRICE BEHAVIOR

Closely allied with the change in contract practices is the change in price behavior. The court prohibited the two leading sellers from giving any volume discounts for a period of five years ending December 31, 1955. It did not prohibit the smaller sellers from offering discounts. The smaller packers'-can manufacturers have apparently not taken advantage of this freedom to any large extent, though they have occasionally offered volume discounts to induce buyers to split their purchases. But even without offering discounts they have been in a position to compete on more equal terms than formerly. The large buyer no longer has any price motive to concentrate all his purchases on a single supplier. The smaller packers' can-maker is now able to take advantage of a multiplant food packer's wish to have alternative sources of supply. Small general-line manufacturers can more easily pick up bits and pieces of general-line user's business. Equally important, American and Continental can more easily raid each other. Because the can-makers must make separate charges for machinery and service, the price of cans is now unmixed with other inducements. Competitive tension in the market has increased throughout the complex market structure as a result. Buyers' switches among suppliers and splitting of purchases are symptomatic. Contract price provisions are more flexible than before the decree. American's old contracts provided for a ceiling that held good for an entire year. Soon after the 1950 decree, American introduced a new pricing provision under which it could change its contract prices on April 1 and October 1 if the price of tin plate should change. It could also change prices on May 1 or November 1 for any reason it chose, but

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the buyer then had the right to cancel the contract.4 Then, late in 1957, the steel companies announced that they would no longer guarantee the price of tin plate during the canning season, but would henceforth quote prices subject to a month's notice of change. The can companies perforce added the same provision to their can contracts under the escalator clause. Though the can companies could still hold contract prices relatively stable, for the first time in 50 years they could not guarantee container prices during the canning season. This change further undercut the contract system which the decree had already weakened. By continuing to escalate can prices on tin-plate price changes the large can manufacturers simplified changes in the price structure for different varieties of containers. But tin-plate price escalators did not solve all the problems. Eventually American decided to abandon uniform percentage changes in price, whether occasioned by changes in tinplate cost or by other factors. In 1959 it began to determine separate prices for each type and style of can when making changes. Price geography has also been troublesome. American for years used two price regions, east of the Rockies and west of the Rockies, while some of its competitors used several pricing zones or based prices on individual can factories. American has encountered some difficult problems of freight equalization. In Florida, for instance, the rapid increase in canning of citrus-concentrate and the frequent changes in the structure of production and consumption finally made freight equalization so complicated that American in 1953 began to quote its prices on a uniform delivered basis. At the time it had to incur extra costs under this policy, but decided that it was worth the cost to clean up the disorderly pattern of cross-equalization that had developed. Later American changed its regional-pricing policy to make can prices everywhere better reflect actual freight costs for tin plate. After studying the matter for some time the company decided in 1959 to adopt a formula which would make each factory's price depend on that factory's delivered cost of tin plate.5 A change to individual factory prices based on distance from the tin-plate supply points would transfer some freight absorption from tin plate to cans. The change could be expected to 4 Other manufacturers adopted much the same schedule of changes. It was thus possible for prices to change 5 times a year, including the January 1 date for signing new contracts. 5 In interviews, representatives of American Can Company complained that tinplate mills are not "logically" located with reference to the can market. By locating "logically" with reference to basic material factors they do undoubtedly create geographical pricing difficulties for tin cans. See Chapter IX. As pointed out there, the spatial organization of tin-plate production changes much more slowly in response to demand shifts than does tin-can production.

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alter the geographical price structure for tin cans, and produce a multitude of shifts in market areas and competitive relationships among canners. Some of American's own factory supply areas would become lopsided, with the market boundaries moving closer to the plant on one side and farther away on the other. More important than the geographical effect is the abandonment of a common zone basis for price leadership. Like the change in price policy mentioned above, this change would tend to make prices more flexible and less subject to tacit agreement. The weakening in American's power to dominate prices is not immediately obvious. American and Continental still charge identical prices. Price warfare has not broken out. Prices have continued to edge upwards: the industry leaders posted price increases in September 1952; in October 1954; in November 1955; in May 1956; and again in November 1956. Most of these increases were due to operation of the tin-plateescalator clause. The total increase over the prices prevailing in 1951 amounted to about 17 percent. In the meantime the price of tin plate had advanced a little less than 15 percent. In 1957 the price of tin plate advanced again relative to can prices. W e do not know how much other cost factors may have increased, but the can companies have suffered little contraction of their profit margins since the decree. The differences from the leadership of 20 or 30 years ago lie beneath the surface. Then, American announced the prices and others followed. The leader was obliged to take account of the implicit competitive factors in deciding what prices to announce, but had no fear that its largest rival would show much initiative. It had only to suffer the occasional annoyance of price cutting by much smaller sellers. Now, there is a protracted interval of great uncertainty at the time of price announcements. No longer is there a five-year period during which the tin-plate price can smoothly escalate the can price up and down. The customer may review his commitment at least once a year in the light of the newly-announced prices. The rivalry among the can sellers constantly pervades the atmosphere. They must maneuver cautiously and continually to find prices that will finally meet everyone's minimum terms for accommodation and cause the market to settle down for another year or so. American cannot count on being followed by any other seller; it cannot be sure that its original price announcements will stand; it is sometimes not even the first to post its prices. Continental is no longer a "follower" in any meaningful sense of the word. For example, American Can in the fall of 1952 had decided to announce a general price increase in all containers. Continental, however, posted its new prices first, and its prices for packers' cans were lower than American had planned to announce. American dropped its packers'-

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can prices to meet Continental's. Since then each firm has hurried to beat the other in posting its yearly prices. In late 1953, American Can announced a rise averaging 3.7 percent in can prices. At this time a strike of American's and Continental's employees was impending. Continental announced a price increase of 1.5 percent plus any increase in labor cost that would result from the strike. American retreated to a price increase of 1.9 percent. Continental met these quotations for everything except beer cans east of the Rocky Mountains. In February 1954, American lowered its western prices 1% percent and Continental followed. Meanwhile Continental had unexpectedly settled with the Steelworkers and ended its strike 13 days before American. This caused many buyers to switch to Continental because American could not deliver under its contract. Lack of policy coordination here sharpened their rivalry in price. The smaller packers'-can manufacturers do not continually undercut the prices of the two leaders. All have occasionally done so since 1950, but probably less than they used to. Until its merger with National Can in 1955, Pacific Can allowed 1.5 percent discount in its contract prices below the prices of its "leading competitor," but this was a smaller differential than it had formerly allowed. Possibly the increased competition between American and Continental has left less room for the smaller firms to cut under their prices; possibly the elimination of restrictive trade practices has made it easier for the smaller firms to compete without cutting prices. In inflationary times like the present we cannot tell how sensitive the price structure might be to the pricecutting proclivities of smaller firms. In any event they do not seem to be more inclined to follow price discipline than they formerly did. Late in 1954, for instance, American and Continental maneuvered to set new prices in the manner that has now become usual. American made a preliminary announcement raising many prices, then Continental announced its prices, some of which were higher than American's, some lower. After some negotiation with customers American dropped its prices in all cases where Continental's offer was lower; Continental met all lower offerings by American. Prices for many containers continued on the former level instead of rising. But then early in 1955 National Can offered an attractive preseason storage arrangement to customers who would sign contracts. American had to meet National's terms to hold some wavering customers, and Continental subsequently did the same. This amounted to a small general price reduction. A little later Pacific announced a lower price for beer cans on the Pacific Coast, which its large competitors had to meet.® Because of the weakening of ' This cut was primarily due to large-buyer pressure. The large national brewers are expanding into the Pacific Coast market, and are demanding the same can prices

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PLATE

nonprice ties between seller and buyer the market seems to have become somewhat more sensitive to small differences in price. Differences of 5 cents per thousand (0.7 percent) in beer-can prices have swung large contracts from one seller to another. Prices on particular types may be reduced or renegotiated several times during a year to eliminate price differences of less than one percent and to arbitrate tiny differences in geographical advantage. The small firms have greater power to disrupt the price structure whenever they choose not to follow the big two. In the light of all these developments we can conclude that price leadership is no longer a very reliable instrument of oligopolistic control. The term "barometric" price leadership is commonly used to designate a situation where one firm merely has the responsibility for recognizing changes in cost and demand conditions and translating them into price changes. True barometric leadership, however, probably requires an industry structure with fairly low concentration, having at least ten or a dozen firms of similar size and without any dominant subgroups. In such a structure barometric leadership provides machinery to solve the problem of pricing in oligopoly without necessarily conferring upon the leader any monopoly power unless some other form of collusion is present. The structure of the metal container industry is still too concentrated to permit such an inference. Price behavior at present does indicate, however, that American no longer has much discretionary control over the price: its rivals will not follow it outside a narrow range, and sometimes will not even wait for it to lead. While American and Continental must continue to recognize their mutual interdependence, policy coordination amounts to little more than mutual avoidance of price warfare.7 SALE OF CLOSING MACHINERY

The court required American and Continental to sell their closing machines at bargain prices to any canner who wanted to buy them, and to facilitate the purchase by every possible means. Tying practices rethere as they m u s t p a y in the m i d d l e west a n d eastern region, or at any rate lower prices than previously existed in the west. It is noteworthy that large buyers pers u a d e d Pacific to give way first, rather than American or Continental. ' Indeed, they h a v e not even b e e n able to avoid w a r f a r e at all times. Something closely resembling a price war broke out toward the end of 1958. American announced a 6 percent price increase on all can lines. W h e n Continental announced an increase of only 3 percent, American retaliated with price cuts. D u r i n g the next six months prices were cut on all lines at least twice, and beer can prices w e r e cut as m a n y as six times. Rivalry a m o n g the can producers has been supplemented a n d intensified b y the continuing a n d increasing threat of self-manufacture b y all classes of buyers, including l a r g e brewers. Business Week, F e b r u a r y 14, 1959, p p . 5 4 - 6 3 ; The Wall Street Journal, April 8, 1959.

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lating to closing machines were the key issue in the antitrust case. It is uncertain whether the court expected that sale of closing machinery would itself lead to a permanent change in industry practice, or a temporary interruption to the normal practice of leasing during which the industry could take its bearings in the new regime, in which the machinery rentals and can prices would be completely independent. Forced sale was not primarily a punitive measure, but was rather part of a Draconian remedial code, which the court hoped would promote more competition. The can companies have complied entirely with the letter and spirit of the decree. Canners began buying closing machines in large volume immediately when the can manufacturers offered them for sale. In the first year after the decree went into effect American sold 22 percent of the machines it had on lease. In four years it had sold 83 percent, and Continental had sold 75 percent of its machines. Both companies also sold large numbers of machines manufactured after the effective date of the decree.8 The period of forced sale under the decree continues until 1961, but there are few of the original machines still available for sale. The large volume of sales came as something of a surprise to the major can companies. Leasing had been the standard practice for so long that they assumed canners would be reluctant to buy machines. But the structure of inducements that the decree created made purchase so attractive that canners could not afford to pass up the opportunity. Prices had to be no more than 10 times the 1950 rentals, which were artificially low, or the depreciated book value of the machines, most of which had been built before the postwar inflation. Canners were permitted to buy machines on the installment plan. In a few instances the price computed according to the terms of the judgment was zero. (In one case the price of a machine was calculated to be $80.00 and the canner bought it on a 10-year installment arrangement.) In most cases the machines remained where they were in the plant of the lessee, who bought them by converting his low annual rental into a low purchase price on an easy payment plan.9 The former lessor was obliged to continue to render service at fair and nondiscriminatory rates, so the canner ran no risk of being caught without sufficient technical know-how to maintain the machines he bought. At the same time leasing became distinctly disadvantageous. The decree required the can companies to establish fully compensatory 8 Information provided by officials of American and Continental Can Companies, and from findings of the court, United States v. Continental Can Company, 128 F. Supp. 932, 937 (N.D. Cal. 1955). "American Can actually took no loss on the book value of its machines when it sold them. Loss on current value was considerable.

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rentals by the end of 1953.10 Rentals climbed spectacularly. For the first time the can companies were obliged to allocate costs properly. They now withdrew all of the hidden costs of machine supply buried in other accounts and reallocated them to machinery, and added a charge to cover the full average cost of machine service. One thing that made the sum of these charges very high was the manufacturers' inability to deflate overhead costs fast enough. In the massive change from a lease basis to a sales basis the can companies were left with a large and complicated organization geared to leasing. They now had to charge this overhead to a greatly diminished lease volume. Both majors deflated it as fast as they could — American Can, for instance, reduced the number of its machine overhaul stations from 17 to 3 in four years — but average costs nevertheless tended to skyrocket. Expecting a revival of the lease market in future years, the can companies were reluctant to destroy their lease organization completely only to rebuild it later. Canners themselves have had mixed reactions to the new privilege of buying machines. A great many of them had never had the slightest idea what it cost the can companies to provide machines and service. Many doubtless used to think that the low rentals covered the full cost. These would not regard the low purchase price as any special benefit. Since the decree went into effect canners have often expressed the opinion that they were "forced" to buy machines by the increase in lease rentals. A great many small canners thus feel ill-used rather than better off. The difficulty is that small canners are as a rule terribly undercapitalized. Having little access to sources of capital they wish to avoid using funds to purchase machinery and prefer to rent facilities even though it makes their machinery costs higher in the long run when capitalized at market rates of interest. In these circumstances the small canner with only 10 This seems to be the only antitrust decree even issued which required the defendant to make a profit — "a reasonable return on the current investment after depreciation" in the closing machines it leased. Continental Can found that fully compensatory rentals would require an increase of 250 percent by 1955 compared to 1950 rentals. By 1953 its rentals had already increased 105 percent, and it petitioned the court for a modification of the compensatory rental provision. The Government objected that any modification of this provision would create instability and unrest in the industry, particularly for those canners who had purchased machines in good faith. The court decided to grant Continental's petition, saying that it had not intended the decree to compel packers to buy rather than to rent closing machines. Continental's costs on rented machinery appeared to be higher than American's (which had not petitioned for modification) because the two firms followed different accounting practices in allocating costs to leased equipment. The court declared that it was not a public utility commission regulating accounting procedures, rental values, and rates of return. It substituted new rental provisions: ( 1 ) base rentals should not be less than the 1953-54 rentals; ( 2 ) rentals should not create an undue advantage in leasing rather than purchasing; ( 3 ) rentals could be based on units of machine use to benefit seasonal or occasional packers. U.S. v. Continental Can, 128 F. Supp. 932.

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one or two closing machines is particularly vulnerable to the threat of obsolescence. In 1954 the government circulated a questionnaire among canners. There were 127 replies. Small canners who replied repeatedly voiced grievances on the purchase and rental provisions of the decree. They had been forced to drop lines of production where receipts did not support the increases in machinery rentals. They thought the service charges on purchased machines, for canners unable to employ their own experts, were too high. Purchase of machines was a drain on their limited capital resources.11 The purchase of closing machinery may be a transitory consequence of the decree. It is too early to tell whether canneries will eventually want to return to a lease basis, for while they are reluctant to buy the machines they are also reluctant to pay fully compensatory rentals and service fees. The can companies believe that most buyers will eventually return to leasing. On the whole the substitution of ownership for leasing appears to be less significant in the developing pattern of competition than the changes in contract practices and price behavior described above. But one or two associated effects are important. One is that both canners and can suppliers are becoming accustomed to the widespread ownership of machines by canners. Canners are becoming more familiar with costs and operating problems of closing machines. Can manufacturers must often sell to canners who own machines they formerly leased from several can suppliers, and who may run cans from different suppliers through the machines indiscriminately. Consequently the can-makers try to make their can parts fully interchangeable, and capable of being closed on any standard make of closing machines without major adjustments. Better knowledge and more standardization of commodities will probably make the market more fluid. Another associated effect is that independent manufacturers of closing machinery may have a better chance to sell new types of machines to canners who are willing to own rather than lease machinery. They are no longer restricted to small can companies but may develop a market in the canning industry in competition with the large can manufacturers without being handicapped by artificially low rentals.12 11 Ibid., 934, η. 2. Of the canners responding to the Twentieth Century F u n d questionnaire, over half thought that the machine-purchase provisions of the decree had been harmful to them. Most said that the decree had " f o r c e d " them to buy machines, by raising rentals. They felt that the capital investment required was a burden to small canners. They expressed preference for the " l o w " rentals of the past, though without saying whether they preferred to pay higher prices for cans to cover the balance of cost. Very f e w thought that ownership of machines had benefited them by giving them more independence, and not many more expressed the opinion that the machines were a good bargain at the prices set by the court. 12 See below, Part B.

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The former tie between machine-leasing and can procurement cannot be revived. Since the lease contract is now independent and the rentals fully reflect the economic cost of machinery, canners can choose between leasing and owning machines without reference to their source of cans. There can hardly be any doubt that elimination of the tying practice and of below-cost rentals has improved the competitive environment. LITIGATION

Almost simultaneously with the antitrust suit in the California District Court, two canners brought private triple-damage suits against American Can Company under the Clayton Act, alleging that they had been injured by price discrimination.13 Neither case was appealed to the Supreme Court. We need not go into the details. The apparent conflict in the appellate court decisions left the legality of American's cost justification of its discounts in doubt. The real significance of the cases however is that they were clear warning signals. If the can companies could not provide an air-tight defense of their discounts, they were liable for triple damages to innumerable firms that could claim injury. Luckily the San Francisco judgment did not declare the discount structure illegally discriminatory; otherwise canners on the strength of such a finding might have overwhelmed the major can companies with damage suits. The two private suits showed the can companies how necessary it was to avoid any special treatment of customers. The prohibition of discounts in the San Francisco judgment lasted for only five years; but the possible enforcement of the Robinson-Patman Act by triple-damage suits has made the can manufacturers extraordinarily cautious about restoring the "lawful" aggregate quantity discounts permitted when the five-year period was over. Enforcement of the decree itself inevitably resulted in litigation. Canners occasionally complained that the large can companies were not treating them fairly under the provisions of the decree, and the Department of Justice, watching the industry closely to determine the consequences of this experiment in antitrust relief, used these occasions to ask the court for further modifications. One such action was the matter of Pacific American Fisheries. This firm petitioned the court, stating its belief that the rentals and sales prices that American Can had established on its machinery under the judgment were too high.14 Again the details 13Bruces Juices v. American Can, 87 F. Supp. 985 was decided in September 1949; Russellville v. American Can, 87 F. Supp. 484, in December 1949. In both cases the district courts found against American and awarded triple damages to the plaintiffs. On appeal, the former judgment was sustained, American Can v. Bruce's Juices, 187 F.2d 919 (5th Cir. 1951), but the other judgment (in a different circuit) was reversed, American Can v. Russellville, 191 F.2d 38 (8th Cir. 1951). " "Report of the Antitrust Division," December 22, 1952.

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are not important.15 The Government took the occasion to demand further relief. While Pacific American had not proved its case that lower prices and rentals should be set on particular machines, said the Government, it was clear that some objective standard of compliance with the decree was needed. The Department of Justice asked the court to set up a "yardstick." The can companies should sell 75 percent of their machines by the end of 1955 (75 percent of those owned on January 1, 1951, and 75 percent of the machines thereafter acquired or manufactured), otherwise the Government would have the right to ask for more basic modifications of industry practice or industry structure. As it happened the can companies met the proposed standard in almost every respect even though the court did not order them to do so. The Department of Justice was less interested in a yardstick for compliance with the machine-sale provision of the decree than in a yardstick for the general objective of the decree: the restoration of competition. E v e n though w e m a y find 1 0 0 percent compliance with every mandate in every injuctive provision contained in the Judgment, it m a y b e that the end result will leave the competitive texture of the industry no different than w h a t it was when these proceedings were instituted. If this is the case, plaintiff will, of course, be required to suggest to this Court that the Judgment provisions presently in existence b e removed and that a more effective type of relief b e instituted. 1 6

The Government noted that the joint share of American and Continental in total sales of metal cans had declined only about one percent since the date of the judgment and held that a decline of two or three times this amount would not even be prima facie evidence of the restoration of competition. It asserted that its own obligations under the judgment required it to determine whether in fact competition had been restored, not merely whether the defendants had done what they had been ordered to do. It is clear that the Department of Justice felt confined and hampered by the legal basis of the case, and that it was again looking longingly at dissolution or some other form of structural reorganization as the "real" solution of the monopoly problem. But the decree was concerned with market practices. American Can Company " Another minor case came up later, involving Davis Bros. Fisheries Corporation of Gloucester, Mass. This firm had been using American's machinery. It began to have troubles with its pack, and suspended operations. When it was ready to resume, American required it to sign contracts and leases with the usual restrictive damage clauses before American would supply it with cans. The Government charged American with contempt of the decree. The court held that American was neither trying to compel Davis to lease machinery nor tying machinery to cans, and dismissed the contempt petition. United States v. American Can Company, 126 F. Supp. 811 (N.D. Cal. 1 9 5 4 ) . 16 "Report of the Antitrust Division," December 22, 1952, p. 65.

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objected to the Government's petition, asserting that there was no changed circumstances which compelled modification of the decree.17 American accused the Government of attempting to broaden the court's findings to convict it of monopoly. American said that the court found it had violated Section 2 of the Sherman Act only in its use of five-year requirements contracts to cover a segment of trade and commerce in containers, but had expressly found that American was not a monopoly. Competition was to be restored by elimination of restrictive practices and the transfer of ownership of closing machines to canners in substantial quantities. The amount of decline in American's sales was irrelevant. The Government's position in this "Yardstick Addition" motion was legally weak and somewhat incoherent. It does, however, serve to sharpen the real issue: can the elimination of restrictive practices create or restore workable competition in a highly-concentrated industry structure? Will it create or hasten structural changes and promote a more competitive structure in the long run? B.

STRUCTURAL

EVOLUTION

Available information indicates that the total share of American and Continental has changed very little since the 1950 judgment, though Continental has increased its share of the market. American has lost relatively while gaining absolutely as was indicated in Chapter V. The individual and "joint" shares of the two leaders are not the only indicators of structural change, however. CAN MACHINERY

When the court decided that the economies of integration between closing machinery, other machinery, and can manufacture were great enough to make divestiture socially undesirable, it turned to compulsory sale and compensatory rentals to break up the previously existing lease structure. This policy involved rather severe constraints on the markets of independent closing machine manufacturers, at least temporarily. As long as canners were able to buy closing machinery from American and Continental at bargain prices, the independent machinery companies could hardly compete for this market on equal terms. Their opportunities were confined, as before, to smaller can manufacturers and to large canners who wanted the particular kinds they manufacture. One might have expected that machinery manufacturers would have especially hard going during the traditional period, since their markets might be even thinner than they formerly were. 17 Memorandum of Points and Authorities in Opposition to Plaintiffs Motion for Order Implementing and Effectuating the Final Judgment, March 24, 1953.

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The opposite has occurred. Machinery makers have enlarged and modernized their output, and small can manufacturers with integrated machinery divisions have likewise found the market outlook very favorable. The firms offering a full line of can-manufacturing machinery have found particularly beneficial opportunities. There are two main reasons for this. One is that large can companies have been going into largescale manufacture of their own cans, and have frequently turned to independent manufacturers of machinery to supply their new factories. The other is the continued growth in output of cans by those companies producing for sale. Independent can manufacturers have not been able to produce all their own requirements of machinery and have procured much of it from independent machine companies. Demand for closing machinery has also grown. Even food packers using conventional types of closing machinery have found their stocks of machines purchased under the decree inadequate. The use of general-line cans that must be closed by automatic machine, such as frozen-concentrate and beer cans, has risen spectacularly. A large part of this increased volume has naturally fallen to American and Continental, as the chief suppliers of both the lease market and the sale market, but the independents and smaller can companies seem to have increased their participation steadily in the more flexible market that resulted from the elimination of tying practices. The hopeful atmosphere of the machinery market is completely different from the situation that prevailed before 1950. For example, E. W. Bliss, which abandoned the manufacture of can machinery in 1948, reentered the market in 1954, reconstituting its research and engineering staff in this field and building a new plant in Michigan. This decision was due to the favorable turn in the market. The results were so encouraging that it doubled its manufacturing facilities in 1955 and continued to operate them at capacity. It introduced a new high-speed body maker in 1955 capable of manufacturing speeds of 450 per minute which compares well with the standards set by American and Continental. 18 Baldwin-Lima-Hamilton Corporation has also expanded its activities. Its predecessor firm, Lima-Hamilton, had brought out some experimental models after World War II, but had not gone into full-scale production immediately. In 1953 Baldwin-LimaHamilton began to develop complete new lines of high-speed can-making machinery. Its orders greatly increased in 1954-55, and its designs have proved highly successful.19 Emergence of these two strong independent full-line suppliers has dissipated the threat of foreclosure of the supply of can-making machinery which hung for a while over the smaller can manufacturers. At the same time several of the smaller can-makers such 18 15

E. W. Bliss Company, Annual Report, 1954, 1955. Baldwin-Lima-Hamilton Corporation, Annual Report, 1954, 1955.

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as United Can & Glass and National's Pacific Division have themselves developed more efficient machinery departments, and are supplying not only their own needs but other can-makers with manufacturing machinery and canners with closing machinery.20 The independent short-line manufacturers of closing machinery do not appear to have been damaged by the sale of machines at bargain prices; two of them, Max Ams and Callahan, have begun to expand into full-line manufacture of automatic can machinery, while Angelus has broadened its line of closing machinery to include more advanced types.21 Both independent can manufacturers and canners now have quite a wide choice of source of supply for canmaking and can-closing machinery. The excellent research and development of American and Continental seem to be acting as a stimulus rather than as a restraint on competition. BACKWARD INTEGRATION BY CANNERS

There is a long history of vertical integration between canning and can manufacture. In the early days of the industry it was quite common for packers to produce their own cans. With the rise of large efficient sellers, integrated manufacture steadily diminished, though there were some large users of cans that never abandoned self-manufacture. Only a few packers entered can manufacture between 1920 and 1950. Campbell's Soup absorbed a supply source previously operated by Continental, and Hunt foods acquired an independent manufacturer (later United Can and Glass); these are the only important instances in food-packing. (The only important instances in general-line manufacture were the oil companies' ventures into oil cans.) Since 1950, however, the trend has been sharply reversed in food canning. Two or three large canners have begun self-manufacture, while others are considering plans to do so. New can plants continue to spring up in the different provinces of the giant canning empire of California Packing Corporation. After beginning self-manufacture of cans in California in 1954, Calpak built a can factory in 1955 at Rochelle, Illinois, to serve its ten canneries in the Middle West. Later in the same year it began construction of a can plant at Toppenish, Washington, to supply a "substantial portion" of the can requirements of its four plants in the Pacific Northwest.22 Hawaiian Pineapple Company had considered making its own cans for 20 In January 1957, United Can & Glass filed suits against E . W . Bliss and National Can Corporation, charging them with infringement of a patent on can bodymaking machines. This, one of the few patent infringement suits on record in can machinery, apparently does not involve Continental or American. Moody's Industrials, January 11, February 8, 1957. 21 According to their published announcements and advertisements in Thomas' Register of American Manufacturers and elsewhere. 22 California Packing Corporation, Annual Report, 1955, 1956.

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many years because of the "unusual degree with which can manufacture can be integrated" with its canning operations in the Islands. 23 It began construction of a $3,000,000 plant in January 1955. The plant began supplying all of Hapco's Honolulu pineapple cannery requirements in 1956.24 At the time Hapco indicated no intention of setting up its own can factories to supply its California canneries which pack a variety of other products. Green Giant, another of the largest canning companies, has also decided to manufacture cans for itself. In 1955 it purchased a site at Savage, Minnesota, for a can-manufacturing plant, located where tin plate could be brought in by barge. 25 In December 1956, it announced definite plans to build a can factory there costing upwards of $2,000,000.2β Stokely-Van Camp, Inc., has taken a similar step. In 1956 it announced plans to manufacture cans at Newport, Tennessee, to supply the can requirements of its Tennessee and Georgia canneries.27 Libby, McNeill and Libby followed in 1959. In no case will these moves produce complete self-sufficiency in can manufacture. Some are relatively minor; Stokely, for instance, has 71 canneries scattered over the country, in Canada, and in Hawaii, of which only 5 will be supplied by its can plant. It has more canneries concentrated in Wisconsin or Indiana than in the area where its can factory will be located. Even if future expansion is allowed for, few if any major canners could hope to supply all their canneries efficiently from their own can factories. But complete integration is not necessarily their objective. The significance of backward integration is that it has created a number of new productive nuclei in the can industry. Its long-run effect is bound to be very powerful. While the new integrated factories will not create new sources of supply for small canneries, they do create new competition in can supply by enlarging the productive capacity and displacing some of the existing capacity toward the remain23 Hawaiian Pineapple Company, Ltd., Annual Report, 1955. "Meetings with officials of American Can Company produced proposals which fell short of providing the savings we believe will be possible with our own plant." M Annual Report, 1956. Because of delay in arrival of equipment, Hapco had to purchase a large part of its can requirements for the winter pineapple-canning season in 1956 from American Can. "We could not expect the American Can Company to be enthusiastic about our entering the can-making business, but . . . Canco s Honolulu staff has been most cooperative in servicing our requirements and meeting contingencies." 26 Green Giant Company, Annual Report, 1956. "In the 1949 fiscal year our can cost was 61 percent of our green produce cost. Last year our can cost was 80 percent of our green produce cost. . . . We believe that . . . the trend toward higher can costs must and will be checked. If this involves the manufacture of a substantial portion of our own cans we are prepared to take that step." 26 Moody's Industrials, December 11, 1956. 27 Stokely-Van Camp, Inc., Annual Report, 1956. Stokely had only recently acquired its two Georgia canneries.

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ing open market, intensifying competition there. Though they have as yet only moderately enlarged the proportion of integrated manufacture in total production of cans, the trend is certainly the plainest possible warning to the large can companies that any future monopolistic restriction will call forth competitive investment by their customers. The rapid enlargement of the can sellers' own supply and the growth of integrated capacity in the last few years indicate that there is no monopoly restriction on long-run productive capacity, and that the adjustment of long-run supply to demand meets the test of workable competition. Recent backward integration shows how low the threshold of potential competition can be when large buyers exist. The discounts that the large can companies formerly granted to these buyers were adjusted to this threshold. In part they compensated for certain economies in selling to large buyers — lower selling cost and lower servicing cost. From 1951 through 1955 the major can manufacturers were prohibited from granting any such compensatory discounts, and since then the legal risks involved have doubtless continued to restrain them. If there are real and substantial cost savings in large-scale purchasing and self-service by large canners, the suppression of discounts artificially excludes the major can companies from a portion of the market that they might economically serve. The court had to balance the possible social loss against the gain from increased competitive pressure. "Artificial" backward integration may tend to reduce "artificial" monopoly profits. If industry demand had been static, the canners' substitution of integrated supply for the open market might have idled some of the capacity of the manufacturers producing for sale, leading to painful readjustment and unnecessary waste. Luckily the demand has expanded so rapidly that the industry capacity has on the whole been fully used, and the can sellers have considerably expanded their capacity while some of their buyers were substituting their own. Possibly some distortion in real cost advantages has resulted. But against this must be set the social benefit of more large and well-founded centers of can production to share in future growth and to push technological development along more rapidly. Up to date it is the sort of structural change that promotes and intensifies competition. In the future, if legal standards for cost justification for discounts become more definite, the can companies may again offer discounts in competition with their own large customers, but large and small customers alike will benefit from the threat of backward integration that the large buyers can offer. We may thereafter see the trend changing again from self-manufacture back toward market supply, but the social losses can hardly be very great in the meantime.

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THE REVIVAL O F NATIONAL CAN CORPORATION

After decades of lagging growth and uncertain survival, National Can has recently transformed itself into a strong challenger in the can industry. It accomplished this largely by merger with two other companies — Cans, Inc. in 1952 and Pacific Can in 1955 — which at the time were more profitable than itself, meanwhile building an able management team with a far more aggressive outlook than National's management formerly had. Its acquisitions made it continental in scope, with 13 plants at the end of 1956, and gave National access to the efficient machinery-manufacturing division of Pacific. After a short period necessary to weld the companies into a unified organization, National began to move ahead rapidly. Its sales increased from $71 million in 1955 to $81 million in 1956, its profits meanwhile rising from $990,000 to $2,200,000.28 (The Pacific Division undoubtedly contributed most if not all of the net profit in 1955.) Its improved market prospects and increased capital funds led it to reach out for new sales territories and to expand its facilities. It set up a new lithographing plant in Chicago in 1956, and began construction of three new can plants early in 1957, in Stockton, California; Green Bay, Wisconsin; and Marion, Ohio. It subsequently acquired the can plant formerly operated by Phillips Packing Company in Cambridge, Maryland. It has cut unit costs, modernized its existing plants, and streamlined its organization. National Can obviously hopes to reach parity with the "big two" eventually. It is still a long way from being a big third. Its sales in metal containers in 1956 were only about 12 percent of either American's or Continental's. But with luck it may be able to reach the status of a major can producer selling all products in all markets and achieve comparable results in research and development, even though its size may not be as great as the two leaders'. Improvement of competition in the long run depends on this, for the mere merger of National and Pacific without improvement in operating economies and performance would not create better opportunities for buyers; it would merely replace two independent regional sellers with one firm. For this reason the movement of National into territories and products not previously supplied by either predecessor is very promising. National Can itself apparently thinks that it has crossed a threshold and that the company's position as a "significant element" in the industry 28 The 1955 figures are not an accurate basis for comparison, since they exclude the January 1955 operations of Pacific. January is ordinarily a slack month both in sales volume and in earnings, and inclusion of this month would probably not have increased the 1955 sales total by much more than $1 million. Pacific Can's profits after taxes for the fiscal year ended May 31, 1954, were $1,150,000.

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is now recognized; that buyers will regard it as a permanent, large scale, diversified supplier and will show increasing preference for its products.29 Possibly the increased fluidity of competition following the San Francisco decree has made it easier for National to make inroads into new markets and to attract new customers, but we cannot tell how successful the merger might have been under the old regime. There is little information available on the competitive health of the other independent companies. Crown Can's parent company was experiencing difficulties in its markets in 1956, though the can division apparently continued to expand.30 Crown Can installed new lithographing facilities, installed new can lines in its factories, and opened a new can plant in Baltimore in 1955. DIVERSIFICATION

The trend toward diversification and conglomerate integration that has marked the postwar era in American industry has appeared in the can industry also. Several can companies have acquired firms making other types of containers. One of the two major producers, Continental Can Company, has undertaken a highly ambitious program of diversification. Its goal is to become a general container manufacturer, with a foothold in every segment of that large industrial field. It has already substantially achieved its goal. It has expanded into the production of crown caps, fibre drums (with its acquisition of the Container Company in 1942), paper board (with its acquisition of Hummel-Ross Fibre Corporation in 1947), paper cups and small fibre containers (with four acquisitions between 1942 and 1954, as well as with new plants of its own), plastic laminates (by internal expansion), plastic bottles (with its acquisition of Elmer E. Mills Corporation in 1954), paper milk containers in Canada (with its acquisition of Perga Containers, Ltd.), and flexible packaging with materials such as cellophane, glassine, wax paper, and synthetic films, after acquiring Benjamin C. Betner Company and Shellmar Products Corporation in 1953. These gave it a solid foundation in every segment of the container markets except heavy steel containers and glass. Finally it did move into the glass-container market by merging with Hazel-Atlas Glass Company in 1956. The Department of Justice decided to interfere. In August 1956, it requested the district court in San Francisco to order Continental " National Can Corporation, Annual Report, 1956. "The Can Division continued to show improvement in operating results, while all other divisions of the Company reflected a decline from earnings recorded in the previous year." Crown Cork & Seal Company, Inc., Annual Report, 195Θ. Consolidated net income after taxes fell from $1,824,000 in 1955 to $381,000 in 1956. The company installed additional beer-can production facilities in Philadelphia and San Francisco in 1956, and expanded aerosol-can facilities in Chicago.

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to show cause why it should not be temporarily enjoined from going through with its proposed merger with Hazel-Atlas. A month later the court dismissed the Government's petition, holding that the decree did not restrain Continental from acquiring a glass-container manufacturer, because the antitrust suit had not at any stage involved glass containers.31 It suggested that if glass containers were a "substitute" the appropriate test of the issue would be a proceeding under Section 7 of the Clayton Act, which forbids mergers that may substantially lessen competition or tend to create a monopoly. The Department of Justice filed a suit under Section 7 against Continental in September 1956. The complaint32 charged that the merger would substantially lessen competition by combining the second largest manufacturer of metal cans, accounting for 30 percent of all the metal cans manufactured in the United States, with the third largest manufacturer of glass containers. Sales of Hazel-Atlas were $80,000,000 in 1955. It was the largest producer of wide-mouth glass jars. It supplied about 10 percent of the glass container market.33 Its glass containers were used in the canning and packaging of foods, beer, other beverages, drugs, and other products. The complaint alleged that the merger could have a restraining effect on competition in two ways. The first was the direct elimination of competition between firms producing substitutes. Many manufacturers and canners, it said, package the same product in both glass and plastic bottles (which Continental also produced) or in both metal cans and glass bottles or jars. Since both firms had a substantial share of their respective markets, substitute competition would be substantially affected. We have already seen that substitute competition between cans and glass containers is more active in some areas than in others. There is no one "container market." The markets are heterogeneous. There is certainly potential competition between cans and glass in ordinary foodpacking which would become more effective at some price ratio less favorable to cans than the one that exists. Active competition, however, is confined to a few products such as beer and soft drinks. Glass holds on to many other markets by offering a preferred package at a higher price. It may be doubted whether merger of the two firms will either increase or decrease competition between cans and glass in these inactive areas in the near future. Its effect on competition between beer and soft-drink cans and bottles may be more important. Neither firm has a monopoly in these fields; both the can division and the bottle United States v. Continental Can Company, 143 F. Supp. 787 (N.D. Cal. 1956). Civ. No. 112-367 (S.D.N.Y.), September 10, 1956. 83 The largest manufacturer of glass containers is Owens-Illinois, and the second largest is Anchor-Hocking. Fortune, June 1957, p. 145. 31

33

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division would face competition from larger producers of these particular items. If other producers of cans and bottles offered competition to each other and to the Continental-Hazel-Atlas amalgamation, the integrated firm probably could not do much to curtail substitute competition.34 But the Clayton Act is designed to restrain incipient monopoly, not only fully-developed ones. If other can firms and bottle producers also began to merge, the ultimate restraining effect might become serious. The courts trying cases under Section 7 must project these trends to decide whether the inference of future monopolistic restraint is strong enough to justify interference with the merger. The decision in the Cellophane Case35 has a paradoxical implication for antitrust law. By applying a broad definition of "market" it tended to reduce the market share of each "competitor" when they produce substitute products; this makes it more difficult for the Antitrust Division to prove violations of Section 7 of the Clayton Act or Section 2 of the Sherman Act.36 This at least was its effect when the court found that Du Pont had no monopoly control over the price of cellophane, on the ground that it was part of a larger market for "commodities interchangeable by consumers for the same purposes." 37 But on the other hand it lays open to attack some amalgamations which might otherwise have escaped interference under Section 7. Not every possible definition of "substitute," to be sure, will impose this liability on a merger; the court said that "price, use, and qualities" must be considered in determining whether reasonable interchangeability exists.38 The courts may have some difficulty in applying this rule when there is a merger of firms producing substitutes that are interchangeable in some uses but not in others, with varying cross-elasticities and relative prices.39 We have no information on the extent to which containers sold by Continental competed directly with substitutes sold by Hazel-Atlas, nor on how important substitute competition in general has been to either of them. The general industry statistics given in Chapter VII are our only indicators. Apart from substitute competition, Continental and 34 This study supports no opinion on the possible curtailment of competition between glass and plastic bottles. 35 United States v. Ε. I. du Pont de Nemours 6- Co., 351 U.S. 377 (1956). 36 Robert A. Bicks, "Conglomerates and Diversification Under Section 7 of the Clayton Act," The Antitrust Bulletin, vol. II, nos. 2 and 3 (November-December 1956), pp. 175-186. 87 l/.S. v. Ε. I. du Pont de Nemours, 351 U.S. 377, 395. ''Ibid., 404. 89 A few weeks after entering its complaint in the merger of Hazel-Atlas and Continental, the Department of Justice filed a complaint against the merger of Continental Can and Robert Gair Company. Civ. No. 114-177 (S.D.N.Y.), October 30, 1956. Robert Gair was a producer of paperboard products and paper. Unlike the Hazel-Atlas merger, this one involves both directly competing products and integration of materials supply and fabrication. It does not directly involve metal cans.

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Hazel-Atlas had no commercial relationships. The can division would not become an important customer or supplier of the glass division, nor vice versa. The only other possible effect of the merger on the can market, therefore, would be a long-run effect. Would the merger injure competition by eliminating competitive expansion by both firms into some container field? The answer could be nothing but speculation, since neither had revealed any such intention, but the earlier experience of Owens-Illinois might have restrained Hazel-Atlas from going into can production, and might also have restrained Continental from going into glass-container manufacture unless it could buy out a going concern. There do not appear to be any new container fields which both firms would have entered competitively. Would the merger give Continental a "decisive advantage over its less diversified competitors and . . . result in a substantial lessening of competition or a tendency to monopoly, or both, in the container field" because of the advantages of diversity in long-run competition? This is what the complaint alleges. Again we can only speculate on possible advantages of conglomerate integration. Past experience in the industry indicates that there are no significant production economies or service economies in integration of these disparate technologies. There may be economies of selling and administration, such as elimination of competitive selling costs between the substitutes; but competitors would continue to force selling costs on the integrated firm. Mere economies of scale would be effective whether the firm grew by merger or by internal expansion; inclusion of substitutes would if anything reduce them. Perhaps the outstanding advantage would be flexibility in market development. Continental would be in a position to supply a customer continuously even though he might shift from one container to another. It could develop alternative types of containers for given customers and new types in any field for prospective customers; it would run less risk of being damaged by packaging "revolutions" and could participate in the advantages of growth anywhere. By doing these things it might well create a less heterogeneous, and possibly more competitive, container "market" than has previously existed. Again we see the paradox: these acquisitions might appear to promote more competition from the standpoint of long-run industry development but also to give the individual firm a stronger position in the wider market. In any event, the private economies of flexibility may coincide roughly with the social economies. The Department of Justice is not chiefly concerned with economies but with monopoly, and apparently does not believe that there are any economies that would justify the size of the conglomerate firm whether or not its increased size resulted in increased monopoly immediately. Consumers' interests no doubt will be better

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protected if at least some powerful and independent bases for substitute competition and development exist in substitute industries. Without intervention of public policy there might eventually be only two or three "container" firms with no independent firms in any segment strong enough to challenge them.40 DEVELOPMENTS IN THE TIN-PLATE MARKET

Two developments in the tin-plate market since 1950 have been previously pointed out. One is the increased flexibility of price, paralleling the change in pricing practices in the tin-can market. Sellers in both markets first abandoned the practice of guaranteeing prices for a year; then they abandoned price guarantees for the length of the canning season. (The latter change originated with the steel companies, and seems to be contrary to the wishes and interests of the can companies.) The other is a breakdown of intimate and long-term sales relations between particular can companies and tin-plate manufacturers. The largest buyers now procure tin plate from the steel companies roughly in proportion to their capacity to produce it. Since the can producers no longer have long-term obligation to supply cans to buyers, they have less need for long-term fixed relationships with steel suppliers. It is still true that the can price from year to year tends to escalate with the tin-plate price, and it is still largely true that the leading tin-plate price is the one that American Can and U.S. Steel arrive at. But the breakdown of the long-run contract shelters that used to exist means that negotiation takes place under more immediate pressure of market alternatives on both sides. "Bargaining" is now more implicit than direct. The weakening of American's power to set leading prices in the can markets has undoubtedly influenced its tactics in the tin-plate market. To some extent the organizational changes in the tin-plate market are due to the impact of the antitrust decree on the can market; to some extent they are due to abandonment of the basing-point system and to the protracted postwar boom in steel. High demand and the barriers to entry in tin plate that went up when the industry shifted to cold-rolling technology in the 1930's have greatly strengthened the hand of the steel industry in tin-plate bargaining. The steel companies 40 During the year 1956 American Can entered the manufacture of collapsible tubes with its acquisition of three subsidiaries of Bristol-Myers Corporation, including Sun Tube Corporation. It also acquired Pittsburgh Plastics Corporation, a manufacturer of injection-molded plastics; and Bradley Container Corporation, a producer of extruded plastic tubes and bottles, from Olin Matheson Chemical Corporation. In February 1957, it announced its intention to acquire a paper mill and forest resources and to enter the paper manufacturing field. It already produced fibre milk containers. (Moody's Industrials, January 15, February 7, 1 9 5 7 . ) American Can has not yet indicated any intention to go into the manufacture of glass containers. In April 1957, American merged with Dixie Cup.

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may have enlarged their share of the total profit margin, though we have no proof of this. The tin-plate price has risen at frequent intervals. 41 The recently-announced plans of American, Continental, and National Can companies to procure tin plate in coils and do their own shearing and sorting 42 may indicate that the can companies too are trying to use backward integration to depress prices. However, the buyers cannot hope to improve their bargaining power appreciably by backward integration into the relatively minor shearing operation. Recent developments in continuous processing have now made this change in production methods economical. 43 The can companies are also working out methods to coat and lithograph the metal in continuous strips. 44 The Hinac process, which continuously coats the metal with an inorganic compound rather than plating it, is a promising recent development. Bethlehem Steel Company established a pilot plant at Sparrows Point in 1953 and produced large sample lots of Hinac-treated black plate for evaluation by the can industry. American, Continental and National were all using the new product commercially in 1957, principally for liquid detergent cans. (It is superior to tin plate in this use, since it has greater resistance to alkalis.) 45 " Tin-plate prices were raised four times in the two years between 1955 and 1957. The increase of 35 cents per base box effective May 1, 1957, or about 4.5 percent, was the second largest increase since 1950, and was announced at a time when the steel operating rate had fallen under 90 percent of capacity and was expected to average under 90 percent for the year. (Business Week, April 20, 1957, p. 44.) No information is available on the operating rate in tin plate; however, the product which chiefly competes with tin plate for productive capacity, cold-rolled automobile sheets, was in slack demand. Between 1951 and 1956, United States Steel Corporation reduced average man-hours per ton for all products from 24.7 to 21.1. Its net profits per ton (after taxes) rose 95 percent in those five years, in spite of an increase in employment costs per ton of 26 percent. Total investment per ton shipped rose only 25 percent, from $128 to $160. (Depreciation and amortization per ton rose 76 percent.) However, the price of tin plate did not increase as rapidly as the prices of many other steel products during the five-year period. The composite finished-steel price rose 20 percent; the price of cold-rolled strip increased 48 percent; the price of tin plate increased only 13 percent. (Data from Moody's Industrials, Metal Statistics, and Iron Age.) The price of tin itself fell about 25 percent from 1951 to 1956. " American Can has set aside $27,000,000 to install continuous tin-plate processing equipment at several locations, beginning with a $7,000,000 processing plant at Gary, Indiana. Eventually it expects to procure 75 to 85 percent of its steel in coil form. Moody's Industrials, June 13, 1956. Continental was not yet buying coils in large quantities in 1957; it was using them only for production of can ends. 43 "The best shearing-line equipment available less than a year ago for accurate cutting could process only 150 feet of metal plate per minute. As a result of our development work, however, many of the lines to be installed in Canco's new facilities this year will run four times as fast." American Can Company, Annual Report, 1956. " Business Week, May 11, 1957, p. 182. Iron Age, June 6, 1957, p. 108.

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THE ALUMINUM CAN

In early 1957 a new development appeared on the horizon: the aluminum can.4® Its potential importance overshadows all the other structural changes in the can and tin-plate markets in recent times. It could suddenly undercut the strong position that the steel companies have built in tin plate, and it might also cause great changes in the can industry itself. Cans made of aluminum have been under development for a long time. Two new productive processes have been developed: impact extrusion and deep-drawing. The first process is already in use in Germany, where a subsidiary of Aluminium Ltd. of Canada has set up a completely automatic aluminum production line. In this process a plunger strikes a disc of aluminum, extruding the can in one piece. At present the cost of aluminum in such a can is said to exceed the cost of the finished tin-plate can in the United States,47 but in Europe the manufacturer claims to be selling them at prices comparable to tin-plate cans. An American manufacturer, Aluminum and Chemical Corporation, is building a pilot plant in Arkansas with some new cost-reducing improvements, and claims that it can supply aluminum beer and Aerosol cans at the same price as tin-plate cans by 1958. Kaiser Aluminum & Chemical Corporation has led in developing the deep-drawing process. In May 1957, Kaiser began construction of a four-line plant in Indiana to manufacture aluminum cans on a "demonstration" basis. Like the extrusion method, deep-drawing produces a seamless can which will require only a double-seamed top closure. It uses conventional aluminum sheet. The can walls are only two-thirds as thick as the walls of the tin-plate can, and only half as thick as those of the extruded aluminum can. (No expert opinion is yet available on relative strength.) Both types can be lacquered and enameled like tinplate can. Later in 1957 Continental Can began producing aluminum cans for high-value specialty products which could absorb the higher can cost. It produced these cans by ordinary methods, but expected to begin using the extrusion method in 1958. Aluminum's first invasion of the massproduction field came with the announcement by Esso Standard Oil Company in September 1957, that it was switching from tin plate to aluminum for all quart oil cans used at its Bayonne refinery. It signed a contract with Reynolds Metals Company for enough sheet aluminum " T h e information in this section is based on articles in Business Week, May 11, 1957, p. 183, and September 28, 1957, p. 124; Iron Age, April 25, 1957, p. 67, and May 2, 1957, p. 62; and the Wall Street Journal, September 25, 1957. " A Business Week report says the cost of aluminum in a beer can would be about 4.5 cents, more than a finished steel beer can.

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for 35 million cans, with an option to purchase sheet for 25 million more for its Baltimore refinery. Fabrication of the cans was subcontracted to American Can Company and Crown Cork & Seal Company. Reynolds agreed to buy back Esso's used oil cans for scrap. Aluminum was still priced too high relative to tin plate to be used economically in massproduced food cans, where such a repurchase agreement is impractical. If advance reports are accurate, the aluminum can may accelerate the trend toward backward integration. It is said that a minimal line using the extrusion process would cost about $120,000, with a capacity of 56-60 cans per minute.48 While this does not show what the relative unit cost would be, it does indicate a much lower threshold for backward integration into aluminum cans. Aluminum & Chemical Corporation plans to install can lines in customers' plants on a royalty basis, and expects that canners will be able to buy them in 60-can-per-minute increments. They would use ordinary pig aluminum as the raw material. Obviously the smaller canner would find this more flexible than integrated production of tin cans, though it would not solve all the difficulties of selfmanufacture. Though the informal sentiment in both the steel industry and the aluminum industry is that the aluminum-can cost will be above the steel-can cost in the near future, aluminum cans are now able to compete with tin cans in special uses,49 and these segments will probably expand as the technological problems are overcome. The result would certainly be an intensification of competition in both the tin-plate and the tin-can industry, perhaps going far beyond anything that has resulted from the antitrust decree. C. OLIGOPOLY AND WORKABLE COMPETITION

The public interest ultimately lies in economic performance. The connection between performance and industrial structure is only dimly understood; but the public sentiment embodied in law has favored a competitive structure as the best guarantee of adequate performance. This viewpoint is supported by economic theory. Contemporary antitrust policy, however, must deal with the fait accompli of an oligopolistic industrial structure. Its choice in many cases lies only between a more concentrated and a less concentrated oligopoly. Wholesale pulverization of large-scale industry is out of the question as a practical policy, and both the economists and the public at large realize that the large business size which produces oligopoly may also involve economies of scale and benefits of long-run progress which would be 48 Extruders could be added at $20,000 each. " Aluminum cans have superior corrosion resistance. Aluminum manufacturers claim that beer in aluminum cans has twice the shelf life of beer in steel cans.

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lost in any reversion to an atomistic structure. But in coming to terms with oligopoly the public is entitled to apply strict standards of performance. Public policy may also raise obstacles to needless increases in concentration; it may restrain the exercise of the monopoly power that concentration creates; it may seek to reduce monopoly power by lessening concentration without necessarily aiming to establish a purely competitive industry structure. The law concentrates on business firms' policies, or conduct. It prohibits some kinds of conduct outright, as vehicles or instruments of monopoly. In other cases it forbids certain kinds of conduct if they may produce monopoly control at some later date. The courts may base their inferences of monopoly power and inadequate performance on the patterns of conduct that an industry exhibits, and may alter the business policies in the hope of improving the performance. The courts do, however, retain the ultimate power to reorganize industry structure if there is no other way to eliminate the violation of the antitrust law that the industry's conduct has produced. The can industry in its embroilments with the antitrust laws has so far escaped massive reconstruction; only its conduct has been altered. It is interesting to speculate, however, on what might have been if the Can Trust had been dissolved at an early date in its career. DISSOLUTION: A HYPOTHETICAL RECONSTRUCTION

Let us suppose that Judge Rose had been less favorably impressed with the conduct of American Can Company in the years just before the 1916 antitrust trial and had decreed its dissolution. By that time the identity of its original components had been lost, and there was no possibility of restoring the status quo ante. Following the precedents in the Standard Oil and American Tobacco decrees, the court would probably have split American Can into several fairly large components instead of dividing it into individual-plant firms. It would doubtless have been guided by the apparent regional economies of multiplant operations, so we can assume that several regional packers'-can producers would have emerged from the dissolution. Splitting the can trust along regional boundaries would probably not have resulted in any appreciable loss of efficiency, and at the time the company could not even have claimed that there were any effective scale-advantages of research. On the other hand regional dissolution would not have created much more competition in the short run except near regional boundaries. The development of a more competitive structure would have depended on the geographical expansion of the regional "monopolies" into each other's territories. They would undoubtedly have done this as demand expanded. No one of the producers would have encountered the formi-

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dable difficulties that smaller firms actually did encounter in making headway against the dominant firm. A looser oligopolistic structure would probably have emerged at a relatively early date. (We may assume that the court would have forbidden the can companies to recombine. ) There would have been much more active price competition among the successors to the can trust, and they would have had far less opportunity to follow restrictive practices such as tying contracts and systematic price discrimination. It is possible also that fewer large canners would have given up the manufacture of their own containers if competition had made systematic discrimination less effective. We cannot speculate with any confidence on the long-run effects of dissolution on research and development. There has not been a continuous enough size-range of firms to enable us to tell where the economies (or advantages) of large size in research cease to be significant. We may grant that a perfectly atomistic structure would not have produced the rate of advance that American and Continental have achieved, but Continental's own record in catching up on American's head start when it was much smaller than American, and much smaller than it is now, indicates that the actual dominant size of American was not a prerequisite to good dynamic performance by the industry. And we must not overlook the possibility that if a number of fairly large can firms had all started from scratch in building independent bases for technological development they might have progressed even faster than the industry actually did. They would probably have developed competitive excellence in closing machinery, and this would have made ineffective the tying contracts and all that resulted therefrom. This has a bearing also on the general-line field. In the routine types of general-line cans there never has been much of a monopoly problem. The large firm has had an advantage in new developments. If there had been several large firms competing equally in development, the new types of general-line containers might not have emerged any sooner, but probably not all would have been brought out by the same firm. In many cases different manufacturers would have developed them simultaneously. The temporary advantages of innovation would have been distributed among several producers instead of enhancing the size of the dominant firm, and it is reasonable to suppose that there would be more than two firms now producing several of the more advanced types. In one respect dissolution of American Can would have been unpromising: it would have reduced the bargaining power of the can industry in the tin-plate market. In the early years American's buying power worked to its private advantage and to the injury of its competitors; but later on the growth of its rivals and the pressure of its

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own large buyers tended to pass part of its gains in the tin-plate market along to subsequent buyers. In these oligopolistic markets large size tends to produce a countercheck to market power among suppliers. If several regional can producers had been fashioned out of American Can, they would still have possessed appreciable bargaining power — perhaps more than enough; but a really substantial reduction in their buying power might simply have enabled the tin-plate manufacturers to capture the benefits intended for the ultimate consumer.50 For this reason an optimum program of structural reorganization would have had to include the steel industry as well. The courts had the opportunity in the United States Steel case, at about the same time and on much the same basis, and they declined the opportunity for much the same reasons. Judge Rose's decision not to dissolve American Can in 1916 is also highly significant when we evaluate the position of Continental in the contemporary scene. The preceding chapters of this book have advanced the view that the growth of Continental Can to a position equal to American's improved competition on balance. The dominant position of American at the beginning of the period was recognized as an irrevocable fact. In this context, the growth of Continental curtailed American's power to dominate, and the oligopoly that resulted appears to have behaved more competitively than the dominant firm did earlier. Considered alone, however, Continental's successive acquisitions reduced competition in the long run. Some of the firms it acquired were in themselves efficient and healthy enterprises in their own markets, though some were stagnant or marginal firms. Continental combined all these into a strong rival to American, stronger than any one of these firms could have become through its own efforts. It was only the immense gap between their respective positions and that of American Can that handicapped the best of the smaller firms. If American had been broken into several parts in 1916, its successors would have encountered strong competition from these firms on much more equal terms. Continental's acquisitions then would have appeared in an entirely different light. They could hardly have promoted competition. If the amended Section 7 of the Clayton Act, forbidding acquisitions of assets which might tend to promote monopoly, had also been in effect at the time, Continental would have collided with it very soon. It might also have run afoul of the Sherman Act. But as it was, with American having the dominant position, the government would not have found it easy to demonstrate in any Section 7 proceeding that Continental's acquisitions tended to make competition less effective. This problem is still with us. While American and Continental now 50 Any regional successor companies to the Can Trust would probably have been large enough to guard against monopsonistic exploitation by the large can buyers.

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could probably make no important acquisition in the metal-container field under the continuing injunction of the 1950 decree, 51 the smaller firms may think that the only way they can grow to full competitive parity with the two leaders in any reasonable length of time is by combining among themselves. National Can and Pacific Can have already done so. Although such combinations may improve competition among the large firms, they tend to wipe out the middle-tier firms and increase the concentration ratio for the industry at large. But as long as dissolution of the large firms is excluded, combination may be the most promising route for the small firms to follow. SUMMARY: WORKABLE COMPETITION IN THE CAN INDUSTRY

The preceding speculative reconstruction of the industry indicates that perhaps no pattern of behavior in the present industry structure would be as "workably competitive" as that which would have resulted (we may guess) from dissolution of American in 1916 and subsequent restraint on Continental's acquisitions. Present industry trends will not produce a reversion to such a competitive structure in the foreseeable future. In this sense, all present and foreseeable patterns of conduct might be called "unworkable." But this would only evade the issue. The industrial structure as it stands may produce acceptable economic performance. We may ask the following questions: (1) What has been its performance in the immediate past? (2) Do the large firms still possess substantial power to control, or is monopoly effectively limited by the objective forces of the market? (3) Do present trends in the industry point toward a reversion to monopoly or an improvement in competition? ( I ) Performance. The performance of an industry "can be described in terms of price-cost relationships, the extent and nature of nonprice competition, and the efficiency of resource use as indicated by the scale and utilization of facilities and the location of production." 52 It also depends on dynamic development: the introduction of cost-reducing improvements and new goods.53 Price-cost relationships involve both the flexibility of price and its long-term relationship to cost. Prices have recently become much more flexible than they formerly were, but our data do not include any recent severe depressions. During depressions, can prices have been very rigid, owing to the reluctance of oligopolists 61 "Defendent is hereby enjoined and restrained from acquiring . . . any other person, engaged, in whole or in part, in the manufacture for sale of containers in the United States, except after an affirmative showing to this Court, upon reasonable notice to the Attorney General, that the effect of such acquisition may not b e substantially to lessen competition." (Section 11-12.) ω Kaysen, U.S. υ. United Shoe, p. 17. See Chapter I above. M Ibid., p. 18.

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in an interdependent market situation to cut them. The growth of competition in other respects may promote downward flexibility in future recessions, but there is no reason to suppose that the oligopolistic price will behave like a competitive one. The tin-plate price, on which the price depends, may if anything be more rigid during downswings of demand because of the tin-plate producers' somewhat stronger market position. It is too early to determine whether the tin-plate industry itself will be undermined by wholesale adoption of the aluminum can. On the other hand, the long-term relationships of price to cost indicate that the fabrication margin has been narrowed by cost reductions which can producers have passed along to consumers. The leading can producers' profit margins on sales have fallen while their profit rates as a percent of total assets have fallen much less. Published financial statements do not show that any can firm is earning excessively high rates of profit; on the whole they are below the average for most large manufacturing corporations.54 If monopoly exists it has not been reflected in recent profit rates. 55 Nor is it likely that monopoly gains have been absorbed in excessive selling costs. Nonprice competition in the can industry takes the form of service competition, but nothing in the industry's record would support an inference that service competition involves excessive costs. It may have involved distortions of competitive resource allocation when it was coupled with tying practices and longterm requirements contracts, but those practices are now gone. In the can industry there is no long-term imbalance between capacity and demand, nor has there been chronic under-utilization of capacity in the short run. The race to capture markets has led both major and minor sellers to build new plants in anticipation of the rising trend of demand. The occasional "shortages" of cans have been caused by "shortages" of tin plate, where expansion is much less flexible. The geographical distribution of can capacity likewise shows no major " W e may compare the profits after taxes as percent of net worth for the two leading can firms with the average profits after taxes as percent of net worth for 1,843 manufacturing corporations, reported in the April 1957 issue of the N e w York First National City Bank Monthly Letter on Business and Economic Competitions. For 1955, the rates on book value of net worth were American, 10.7 percent; Continental, 10.3 (or 10.9 when consolidated with Continental's new acquisitions); 1,843 manufacturing corporations, 14.9 percent. For 1956: American, 9.8 percent; Continental, 11.4; 1,843 manufacturing corporations, 13.9. This comparison involves the usual difficulties of interpreting book values of net assets and accounting profits. M A recent tabulation of profit rates for dominant firms in 20 industries shows that while most firms in industries with "substantial" entry barriers greatly increased their profit rate on equity between 1936-40 and 1947-51, American and Continental increased theirs only slightly. American's profits after taxes as a percentage of equity averaged 10.5 in 1936-40, rising to 12.3 in 1947-51; Continental's rose from 8.1 to 9.1 percent. By contrast, the average rates for four petroleum refining firms almost doubled; for four leading steel firms they almost tripled. Bain, Barriers to New Competition, p. 193, Table 16.

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allocative distortions, though the locational pattern of tin plate does not measure up so well. The producers of cans are quick to build new plants as soon as a developing canning region shows any promise of utilizing the capacity. The distortions in price arising from freight equalization and associated practices in cans have been secondary, though again we must recognize underlying distortions in the geographical price structure of tin plate. In research and development the leading companies have an impressive record. Clearly, the atmosphere in the industry has been one of keen rivalry and active search for improvement; but we do not have any basis for comparing the record of achievements with what was ultimately possible. All we can infer is that technological advance was one of the principal ways in which American differentiated and protected its market position, and that oligopolistic rivalry intensified development. (This does not, of course, mean that a less concentrated industry would not have done as well.) (2) Market power and market compulsion. The large size of the leading can producers has endowed them individually with an appreciable degree of market power. This power has manifested itself through market practices tending to restrict entry and restrain price competition. Public policy has limited the scope for such practices more and more strictly. The 1950 decree finally knocked out all the remaining artificial props of market control. We may assume that any equally restrictive substitute practices would suffer the same fafe in the future. What is left is the oligopolistic structure itself. Will this structure compel adequate economic performance? If the leading firms continue in the state of rivalry that now prevails, we can be reasonably confident that adequate performance will result. Any one firm which relies on size alone, or the momentum of past achievements, to preserve its market position is likely to find that position speedily deteriorating. Economies of scale are not large enough to protect either leading firm from damaging competition. In an atmosphere of change and growth the two leaders are likely to continue their attempts to overreach each other in capturing new markets and developing new products. It is conceivable, of course, that the atmosphere might change. If the market became static the compulsion toward active rivalry would diminish. In that event the limited-duopoly structure would become a more serious threat to workable competition than it is now. If the two leaders tacitly colluded on prices, output, investment and innovation, they would eliminate rivalry between themselves. We are therefore interested in the market checks on their joint power to control, not merely in the performance that results from the actually existing state of

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rivalry between them. "The ultimate question in distinguishing 'effective monopoly' from effective competition is whether the pressures of the market situation are such as tend of themselves to bring about the main beneficial effects which constitute the economic reasons why we try to maintain competition in our economy."56 Performance is only collateral evidence. "The economic definition of workable competition concentrates on the effective limits it sets on the power of a seller, or group of sellers acting in concert, over their price. That power cannot normally be retained for long without natural or imposed limitations on the opportunity for entry or growth of rivals."57 Without using the condemned forms of restrictive practices, American and Continental would have small power to control entry and growth except by behaving competitively themselves, i.e. by setting low prices and high standards of performance which other firms cannot meet.58 The recent backward integration by can buyers and the competitive investment in new facilities by both large and small producers are concrete evidence of the disciplinary force of the market. The rivalry between American and Continental, and the possible development of substitute competition, simply give it greater force. (3) Future trends. The present situation shows no tendency to revert to monopoly. Almost all the indicia of competition are favorable. The growth of existing markets and the development of new markets, which always lend competitive vigor to an oligopolistic industry, continue unabated. New independent centers of production have been created or are planned. Independent sources of machine supply have revived. Small can producers are competitively healthy. Substitute competition promises to become more effective. The less favorable developments are the conglomerate integration of the large can-makers and the apparent strengthening of the steel producers' power in the tin-plate market. Conglomerate integration threatens to extend the large can companies' power to control substitute competition; but public policy has not yet said its last word on that. The tin-plate producers' market power may be undermined by competition from aluminum in the future, and may possibly be diminished by the can companies' partial backward integration. What the large can companies can do is to take advantage of their evident moderate superiorities in research, development, and technical Report of the Attorney General's National Committee, p. 322. "Ibid., p. 324. 68 Because the 1950 decree eliminated some substantial barriers to entry, Bain reclassified the metal-container industry from the category of "industries with substantial entry barriers" for the period before 1950 to the category of "industries with moderate to low entry barriers" after 1950. Barriers to New Competition, pp. 170, 272. 58

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and geographical service to keep ahead of the market pressure. Each of the two large firms will attempt to maintain leadership in the field, while the smaller companies run at their heels and their large customers prod them along with the threat of backward integration. Thus, although the concentrated industry structure is not as reliable a guarantee of competitive performance as we might like to have, a forecast of workable competition for the can market appears to be justified. OPPOSING VIEWS

Other students of antitrust policy have not been so sanguine about future competition in the can-making industry. Professor Hession doubts that the 1950 decree will restore effective competition. Emphasizing the former lease system as a source of monopoly, he questions whether the new system will break the effective tie between machines and cans as long as the companies service the machines. "Government attorneys during and after the 1949 trial made much of the machine lease and tying clause as producing a 'conditioning effect' on the sale of cans. . . . Will not the servicing of these machines by these two dominant companies give them a similar psychological and economic advantage over the smaller can companies?" Hession also finds discouraging the failure of the industry structure to change more rapidly; concentration has continued as before. "In criticism of these decrees it may be argued that American and Continental have merely accommodated themselves to the government's strong case against them with the thought of preserving the essential elements in their respective market positions." 59 Hession raises the question of dissolution as the only effective remedy, without answering it other than to say that "dissolution of American and Continental Can would pose difficult but not insuperable problems." 60 Stocking and Watkins also believe that dissolution would be the most promising guarantee of competitive performance. "The dissolution problem today is similar to that which confronted the court in 1916." 61 They think that although a dissolution plan would have to be carefully drawn to avoid upsetting economies of research and integration, "a breakdown of American Can into a half-dozen or more separate firms would no doubt eventually lead to an intensification of competition. . . . If the government should elect to intensify competition by dissolving American Can, its efforts might prove futile unless it also dissolved Conse C. H. Hession, "The Tin Can Industry," in The Structure of American Industry, ed. Walter Adams (rev. ed., New York, 1954), pp. 438-39. At the time the decree was only two years old, and Hession had no opportunity to assess some of the more recent developments. °° Ibid., p. 440. 61 George W. Stocking and Myron W. Watkins, Monopoly and Free Enterprise (New York: The Twentieth Century Fund, 1951), p. 181.

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tinental and unless it took whatever steps were necessary to insure more effective competition in the sale of tin plate." 62 These comments would have had even greater force in 1916; but Stocking and Watkins believe that the present structure and trends in the industry are not an adequate basis for workable competition. Professor J. H. Stauss also has his doubts. 63 He acknowledges that the "enabling conditions" of competition, making it possible for buyers to select their sellers, were strengthened by the 1950 decree. But he questions whether the "limiting conditions" which restrict the range of actions of the container manufacturers are equivalent to genuine disciplinary restrictions. "The structural situation, present and prospective, in regard to fewness of sellers, dominant market shares, and impediments to entry, does not appear to represent 'workable competition. . . . The uncertainties are too great to justify a forecast of workable competition." 64 The uncertainties may be lifting a little. In any case there are more signs in the industry's environment favorable to the development of workable competition than there have been for fifty years. e2

Ibid., pp. 182-83. In his Comment on my paper, "The Decline of Monopoly in the Metal Container Industry," American Economic Review, 45 (May 1955), 528-30. 81 Ibid., p. 529. 83

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Hession, C. Η., Competition in the Metal Food Container Industry, 19161946 (Brooklyn, 1948). "The Tin Can Industry," The Structure of American Industry, ed. W. Adams, rev. ed. (New York, 1954). Hicks, J. R., "Annual Survey of Economic Theory: The Theory of Monopoly," Econometrica, 3 (January 1935). Isard, Walter and William M. Capron, "The Future Locational Pattern of Iron and Steel Production in the United States," Journal of Political Economy, 57 (April 1949). Kaysen, Carl, "Basing Point Pricing and Public Policy," Quarterly Journal of Economics, 63 (August 1949). United States v. United Shoe Machinery Corporation (Cambridge, Mass, 1956). Knox, H. A , "The Development of the American Tin Plate Industry," Iron Age, November 11, November 18, and December 2, 1943. Leon tief, W , "Introduction to a Theory of Internal Structure of Functional Relationships," Econometrica, 15 (October 1947). Lindholm, C. E , " 'Bargaining Power' in Price and Wage Determination," Quarterly Journal of Economics, 62 (May 1948). Lippert, T. W , "Food in Cans," Iron Age, April 30, 1942. Machlup, Fritz, The Basing-Point System (Philadelphia, 1949). Marengo, Louis, "The Basing Point Decisions and the Steel Industry," American Economic Review, 45 (May 1955). Markham, Jesse W , "The Concept of Workable Competition: An Alternative Approach," American Economic Review, 40 (June 1950). "The Nature and Significance of Price Leadership," American Economic Review, 41 (December 1951). Mason, E. S , "The Current Status of the Monopoly Problem in the United States," Harvard Law Review, 62 (June 1949). McArthur, D. A , Electrolytic Tin Plate (Warren, Ohio: Wean Engineering Company, 1952). McKie, James, "The Decline of Monopoly in the Metal Container Industry," American Economic Review, 45 (May 1955). Morgan, James N., "Bilateral Monopoly and the Competitive Output," Quarterly Journal of Economics, 63 (August 1949). " 'Competitive' Output in Bilateral Monopoly: Reply," Quarterly Journal of Economics, 64 (November 1950). Neumann, John von and Oskar Morgenstern, The Theory of Games and Economic Behavior (Princeton, 1944). Nicholls, W. H , A Theoretical Analysis of Imperfect Competition with Special Application to the Agricultural Industries (Ames, Iowa, 1941). Reynolds, Lloyd G , "Competition in the Rubber Tire Industry," American Economic Review, 28 (September 1938). Robinson, J , The Economics of Imperfect Competition (London, 1933). Schumpeter, Joseph Α., Capitalism, Socialism and Democracy, 2 ed. (New York, 1947).

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Spengler, Joseph J., "Vertical Integration and Antitrust Policy," Journal of Political Economy, 58 (August 1950). Stackelberg, Heinrich von, Marktform und Gleichgewicht (Berlin, 1934). The Theory of the Market Economy (New York, 1952). Stigler, George J., "Extent and Bases of Monopoly," American Economic Review, 32 (June 1942), Supplement. "The Kinky Oligopoly Demand Curve and Rigid Prices," Journal of Political Economy, 55 (October 1947). Stocking, George W., Basing Point Pricing and Regional Development (Chapel Hill, North Carolina, 1954). Stocking, George W. and Myron W. Watkins, Monopoly and Free Enterprise (New York: The Twentieth Century Fund, 1951). Tintner, G., "Note on the Problem of Bilateral Monopoly," Journal of Political Economy, 47 (April 1939). Tyson, Robert C., "The Cost Facts of U.S. Steel," testimony before the subcommittee on Anti-trust and Monopoly of the Senate Committee on the Judiciary, 1957 (published in pamphlet form by the U.S. Steel Corporation). Van Fleet, H. S., "Engineering the Tin Can," Mechanical Engineering, April 1948. Wallace, D. H., "Price and Production Policies of Large-Scale Enterprise," American Economic Review, 29 (March 1939), Supplement. Wilcox, Clair, Competition and Monopoly in American Industry, TNEC Monograph no. 21 (Washington, 1940). Public Policies Toward Business (Chicago, 1955). CASES CITED American Can Company v. Brace's Juices, Inc., 187 F.2d 919 (5th Cir. 1951) American Can Company v. Russelville Canning Company, 191 F.2d 38 (8th Cir. 1951) Brace's Juices, Inc. v. American Can Company, 87 F. Supp. 985 (S.D. Fla. 1949) Corn Products Refining Company et al. v. Federal Trade Commission, 324 U.S. 726 (1945) Federal Trade Commission v. A. E. Staley Manufacturing Company et al., 324 U.S. 746 (1945) Federal Trade Commission v. Cement Institute, 333 U.S. 683 (1948) George Van Camp and Sons Company v. American Can Company et al., 278 U.S. 245 (1929) Goodyear Tire and Rubber Company v. Federal Trade Commission, 101 F.2d 620, cert, denied 308 U.S. 557 (1939) Ladoga Canning Company v. American Can Company, 44 F.2d 763 (7th Cir. 1930), cert, denied 282 U.S. 899 (1931) Russellville Canning Company v. American Can Company, 87 F. Supp. 484 (W.D. Ark. 1949)

314

BIBLIOGRAPHY

Standard Oil Company of California et al. v. United States, 337 U.S. 293 (1949) United States v. Aluminum Company of America, 148 F.2d 416 (2d Cir. 1945) United States v. American Can Company et al., 230 F. 859 (D. Md. 1916) United States v. American Can Company et al., 234 F. 1019 (D. Md. 1916), appeal dismissed 256 U.S. 706 (1921) United States v. American Can Company, 87 F. Supp. 18 (N.D. Cal. 1949) United States v. American Can Company, 126 F. Supp. 811 (N.D. Cal. 1954) United States v. Continental Can Company, 128 F. Supp. 932 (N.D. Cal. 1955) United States v. Continental Can Company, 143 F. Supp. 787 (N.D. Cal. 1956) United States v. Ε. I. du Pont de Nemours & Co., 126 F, Supp. 235 (N.D. 111. 1954), reversed 353 U.S. 586 (1957) United States v. Ε. I. du Pont de Nemours & Co., 351 U.S. 377 (1956) United States v. Libbey-Owens-Ford Glass Company et al., CCH 1948-1949 Trade Cas. 62,323 (N.D. Ohio, 1948) United States v. Standard Oil Company of California et al., 78 F. Supp. 850 (S.D. Calif. 1948) United States v. United States Steel Corporation et al., 251 U.S. 417 (1920) TRADE PUBLICATIONS American Iron and Steel Institute, Annual Statistical Report, 1956. Iron and Steel Works Directory of the United States and Canada, 1954. Metal Statistics, 1945, 1955, 1956. National Canners Association, The Canning Industry (Washington, 1953). Standard and Poor's, Industry Surveys: Containers: Basic Analysis, April 21, 1952 and April 21, 1955. UNITED STATES GOVERNMENT PUBLICATIONS Congress, Hearings before the Temporary National Economic Committee, 76 Cong., 2 sess. (Washington, 1940), part 20. "Price Spreads in the Canning Industry," Senate Committee on Agriculture and Forestry (committee print, 84 Cong., 1 sess., Washington, 1955). "Western Steel Plants and the Tin Plate Industry," Senate Document no. 95, 79 Cong., 1 sess. (Washington, 1945). Department of Agriculture, Agricultural Statistics, 1955. Department of Commerce, Bureau of the Census, Annual Survey of Manufactures, 1940-1956. Biennial Census of Manufactures, 1929-1939. Census of Manufactures, 1947, 1954. Facts for Industry Series, 1945-1956. Department of Labor, Bureau of Labor Statistics, "Metal Containers," Report no. 71, case studies of productivity and factory performance, October 1954.

BIBLIOGRAPHY

315

Federal Trade Commission, Agricultural Income Inquiry, Part II: Fruits, Vegetables and Grapes (Washington, 1938). Tariff Commission, Flat Glass and Related Glass Products, Report no. 123, second series (Washington, 1937). Iron and Steel, Report no. 128, second series (Washington, 1938). UNPUBLISHED DOCTORAL DISSERTATIONS Adelman, Μ. Α., "The Dominant Firm" (Harvard University, 1948). Gettell, Richard G., "Pluralistic Competition: With an Illustrative Case Study of the Rubber Tire Industry" (University of California, 1940). Kaufmann, Thomas D., "Movie Markets and Monopoly" (Harvard University, 1949). McKie, James W., "Bilateral Oligopoly in Industrial Product Markets" (Harvard University, 1951).

Index Acid-bath tin plating. See Tin-plating processes Acme Can Company, 95 Adams, W., 22n Adelman, Μ. Α., 21, 22n, 27n, 234n Aerosol cans, 264-265 Alkaline tin plating. See Tin-plating processes Aluminum and Chemical Corporation, 300, 301 Aluminized cans, 265 Aluminum cans, 49, 300-301 Aluminium Ltd. of Canada, 300 American Can Company, 85, 121, 128, 132-133, 177-180, 221-225, 225-266, 286-287, 301; tin-plate purchases, 46, 65, 298-299; price leadership, 55ff, 208-225, 279-282; price discrimination, 58ff, 160-171, 175-182; history, 8688; as dominant firm, 91, 219; research, 92, 131-133, 248; requirements contracts, 146ff; discounts, 164, 169-171, 212-215; freight equalization, 180-182; closing machines, 182ff, 282-284; tying policy, 185-188; patents, 190-192, 251-253; 1916 antitrust case, 198-199; price policy, 228-233, 278-282; profits, 237 American Can Company v. Bruce's Juices, 163η, 166η, 167n, 179n, 286n American Can Company v. Russellville Canning Company, 108n, 165n, 174n, 179n, 180n, 286n American Rolling Mill Company, 45 American Sheet and Tin Plate Company. See United States Steel Corporation Angelus Sanitary Can Machine Company, 189, 290 Appert, Nicolas, 254n Armour and Company, 111 Armstrong Paint and Varnish Works, 105 Atlas Imperial Diesel Engine Company, 103. See also United Can and Glass Co. Bain, Joe S., 25η, 121η, 122n, 173n, 306n, 308n Baldwin-Lima-Hamilton Corporation, 289 Baldwin Packers, 111 Ballantine and Sons, Ltd., 211 Bargaining power, 63, 65, 82, 224, 298, 303 Base box (of tin plate), definition, 38-39

Basing-point pricing and freight equalization, 66ff, 180, 242-244 Baxter, H. C., 173n Beer cans, development, 257ff, 266 "Behavior," and market structure, 5 Benjamin C. Betner Company, 294 Bethlehem Steel, 64, 178, 267, 274, 299; entry into tin-plate industry, 41; prices, 60; alkaline plating, 272 Bicks, Robert Α., 296n Bilateral oligopoly. See Oligopoly, bilateral Black plate, 35 Blair process, 261 Bliss, E. W„ 193, 289 Boothby Fibre Can Company, 91 Borden's Products Company, 62, 105 Boulding, Kenneth, 223n Bowley, A. L., 17n Brighton, K. W., 271n Bruce's Juices. See American Can Company v. Bruce's Juices California Packing Corporation, 100, 108, 111, 112, 164, 177 Callahan Machine Company, 189, 290 Calpak. See California Packing Co. Cameron Can Machinery, 190 Campbell Soup Company, 62, 64, 89, 102, 290 Can Manufacturers Institute, 263 Canning of food, technological development, 254-268 Cans, Incorporated, 94, 293 Canton Tin Plate Company, 43n Cantrell and Cochrane Company, 265 Capacity of tin-plate production facilities, 40, 45 Capron, W. Μ., 79n, 81n Carnation Milk Company, 62, 104-105 Carnegie-Illinois Steel Corporation. See United States Steel Corporation Chamberlin, Ε. Η., 4n, 15n Clark, J. M„ 7n Clark, J. L., Manufacturing Company, 98 Clayton Anti-Trust Act, 146, 161, 171, 200, 202, 295, 304 Closing machinery, 182-197, 261-263, 282-286, 289; service, 132, 195-197; tying policy, 201-202; patents, 252253; leasing practices, 276; prices, 283 Coase, R. H., l l n

318 Cold-reduction process of steel strip manufacture, 42, 269-270 Collusion, 15, 22-23, 221-225; and bilateral oligopoly, 31-32; and price leadership, 213-215 Colorado Fuel & Iron Corporation, 79n Columbia River Packers, 111 Columbia Steel Corporation. See United States Steel Corporation Competition, substitute, 135-142, 231, 308 Conservation of tin, 266-269 Consolidated Foods Corporation, 104 Container Company, 294 Continental Can Company, 46, 128, 136, 277, 294-300, 303, 304; tin-plate purchases, 46, 64-65; integration, 53; discounts, 59-62, 163, 169, 212-215; history, 89-92; research, 91-92, 131133, 247-248, 259-266; requirements contracts, 148-149, 154-160; price discrimination, 160-170, 175-182; price policy, 181-182, 201, 209-210, 219225, 280-282; patents, 191; profits, 237-238; closing machinery, 282-283; market power, 308 Corn Products Refining Company, 111 Corn Products Refining Co. et al. v. FTC, 180n Cost-price relationships, 5-6, 228, 233, 236, 305-306 Countervailing power, 224—225, 254 Cournot, Augustin, 4n Crombie, J. Ν., 36η, 42n, 269n, 271n Crown Can Company, 64-65, 94-96, 217, 277, 294; tin-plate purchases, 46, 62; plants, 95; sales, 96; requirements contracts, 149, 157; research, 264-265 Crown Cork & Seal Company, 45, 94-95, 301; tin-plate production, 43n, 53, 272; entry into packer's can market, 100 Crucible Steel Co., 271, 274 Curtice Brothers Company, 213 Davis Bros. Fisheries Corporation, 287n De Vilbiss Company, 258 Demand: for tin plate, 40, 46-48, 49, 80; for canned food, 48, 114, 122; for steel, 66, 79, 80; for metal cans, 114, 136, 140, 165, 226, 230, 292 Dirlam, Joel, 22n Discounts, volume, 160ff, 212-215, 278; cost justification, 167-169. See also Price discrimination Dunlop, John Τ., 31n Du Pont Company, 265, 272, 273

INDEX Ellis, Howard, 226n Empire Can Company, 101η Empire Sheet ana Tin Plate Company, 43n Empire State Pickling Company, 104 Entry barriers, can industry, 133-135, 219-221 Escalator clause in can contracts, 227-233 Esso Standard Oil Company, 300 Fairless, Benjamin, 45η, 56n, 58n, 62n Federal Tin Company, 105 Federal Trade Commission, 68, 146, 166, 185-186, 215 Federal Trade Commission v. Cement Institute, 71n Fein Tin Can Company, 97-98, 183n Fellner, William, 4n, 17n, 19n, 222n, 224n Ferguson, C. Α., 36n Ferrostan process. See Tin-plating processes Fibre containers, 135-136 Flow-brightening, 37, 274 Folger Coifee, 211 Freight equalization and freight absorption, 7Iff, 82, 88, 180, 181, 237, 279, 307; and price leadership, 243-245 Gair Company, 92n Galbraith, J. Κ., 9n, 226n Gary, Judge Ε., 67n General Foods Corporation, 111, 158, 257 General-line cans, 113, 114, 124; defined, 85; technology, 118-119; costs of production, 119-122; contracts, 147-148. See also Metal cans George Van Camp & Sons, Inc., 161 Gerber Products, 138 Gettell, Richard, 22n Glass containers, 49, 136-139 Glidden Paints, 211 Goodyear Tire and Rubber Company v. Federal Trade Commission, 162n Grace, Eugene, 57, 62 Granite City Steel Company, 43n, 272 Green Giant, 112, 291 Guthrie, John Α., 22n Halogen plating process. See Tin-plating processes Harris, Judge George B., 201-203, 207 Hartwell, R. R., 267n Hawaiian Pineapple Corporation, 100, 111, 158, 163, 173, 290-291 Hazel-Atlas Glass Co., 136, 294-295

INDEX Heekin Can Company, 217, 244-245, 277; sales and plants, 96; closing machines, 133; requirements contracts, 149 Heflebower, Richard Β., 33n Heinz Company. See H. J. Heinz Company Hellmuth, William, 22n Hession, Charles Η., 41η, 45n, 47n, 88n, 95η, 99η, 110η, 137n, 190n, 191n, 217218, 267n, 309 Hershey Chocolate Company, 111 H. J. Heinz Company, 103, 109, 112 Hicks, J. R., 17n Higgins, Benjamin, 31n Hills Bros. Coffee Company, 256 Hinac process, 267, 299 Hot-dip plating. See Tin-plating processes Hovden Food Products Company, 218 Hummel-Ross Fibre Corporation, 294 Hunt Foods (Hunt Brothers Packing Co.), 100, 103, 113, 186 Hydrogen-evolution test, 269 Hydrogen springers, 268 Idaho Canning Company, 195n, 239n Inland Steel Company: tin-plate prices, 62; cold-reduction, 269; alkaline plating, 272 Integration, economies and diseconomies of, 51, 77, 131, 196, 288, 297; backward, 28, 52, 110-114, 225, 231, 290292, 301, 309; conglomerate, 297, 308; vertical, 10-11, 290; and bilateral oligopoly, 27-29; quasi integration, 26-27, 64 International Milk Company, 264 Isard, Walter, 79n, 81n Jones & Laughlin, 41, 53; tin-plate prices, 60-62; market ties, 64; alkaline-plating process, 272; halogen-plating process, 273

319 market, 100; volume discounts, 164, 173 Lima-Hamilton Company, 189, 289 Lindholm, C. Ε., 24n Lippert, T. W., 272n, 273n, 274n Machines, closing. See Closing machinery Machlup, Fritz, 243n MacNicnol Packing Company, 111 Marengo, Louis, 76n Markham, Jesse W., 7n, 223n Market power, 3, 7, 219-225, 307-308; bilateral oligopoly, 24-25; price leadership, 224 Mason, E. S., 3n, 6n Max Ams Machine Company, 189, 290 McArthur, D. Α., 36η, 271n, 272n, 273n, 274n McKeesport Tin Plate Company, 53, 60 McKinley Tariff Act, 41 Metal-can industry, structure, 142, 144 Metal cans: production, 47-51, 114, 126; product classes, 117-118; technology and costs, 118-122; prices, 171-172, 278-282; fabrication margin, 231-236 Minnesota Valley Canning Company, 212 Morgan, James Ν., 18n, 19n Morgan Packing Company, 159, 179 Morgenstern, Oskar, 4η, 21η Musselman, C. Η., 180 National Canners Association, 128-129, 247, 263 National Can Company, 53, 64, 94, 217, 244-245, 259, 299, 305; tin-plate purchases, 46, 64; plants, 92, 93; profits and sales, 92, 293; requirements contracts, 149, 157; prices, 281 National Recovery Administration, 59, 213 Nestle Company, 62, 105 Neumann, John von, 4n, 21n Nicholls, W. Η., 19n, 22n Norton, Edwin, 256, 261

Kaiser Aluminum & Chemical Corporation, 300 Kaiser Steel Corporation, 45, 50-51, 272 Kaufman, Thomas D., 22n Kaysen, Carl, 6n, 78η, 80n, 243n, 305n Knox, Η. Α., 41n, 68n Krueger Brewing Company, 259n

Oligopoly, bilateral, 4, 20, 64, 253, 301305; price leadership, 23; research, 249-253 Otoe Food Products Company, 104 Owens-Illinois Glass Corporation, 90, 100, 136, 297

Ladoga Canning Company v. American Can Company, 161n, 162n Leontief, W., l l n Libby, McNeill, & Libby, 108, 111, 112, 176, 291; entry into packer's can

Pabst Brewing Company, 108, 159, 259 Pacific American Fisheries, 286 Pacific Can Company, 64, 92, 99, 218, 244, 265, 277, 293, 304; tin-plate purchases, 64; closing machinery, 133,

320 189; requirements contracts, 149; prices, 281 Packer's cans, 111-113, 118-122, 124, 146-147; defined, 85. See also Metal cans Pasteur, Louis, 254 Patents, 251-253; closing machinery, 190-192 Perga Containers, Ltd., 294 Pet Milk Company, 62, 105 Phelps Can Company, 98 Phillips Packing Company, 104, 293 Pittsburgh Plate Glass Company, 211 Pittsburgh-plus pricing, 67 Prices, in bilateral monopoly, 19-20; of tin plate, 49-50, 59, 71-76, 227, 241, 298; of metal cans, 171-172, 278-282, 298, 305 Price controls, 57, 226-227 Price discrimination, 25, 33, 58-64, 160182; price leadership, 23; backward integration, 28, 113; demand, 165; triple damage suits, 286-287 Price leadership, 22, 32, 208-219, 241242, 280-282; bilateral oligopoly, 23; metal-can industry, 55-66; tin-plate industry, 55-66; basing-point pricing, 76-77; barometric, 224, 282; backward integration, 225; freight equalization, 243-245 Price "policy," 8, 49; and bilateral oligopoly, 2Iff; basing point, 67-82; regional, 241, 279-280 Price stability, 77, 82; cyclical, 226-233; seasonal, 226 Proctor and Gamble, 211 Profit rates, can manufacturers, 172-173, 220, 236-238, 306 Public policy toward the metal-container industry, 3, 7, 8, 175, 298, 302, 307 Rebates. See Price discrimination R. J. Reynolds Tobacco Company, 105 Republic Steel Company, 41, 60, 63, 273 Reynolds, Lloyd G., 22n Reynolds Metals Company, 300 Reynolds, R. J., Tobacco Co. See R. J. Reynolds Tobacco Co. Rio Grande Valley Citrus Exchange, 215 Robinson, J., 18n, 19n Robinson-Patman Act, 102, 177, 200, 224; price policy, 58, 61-62, 210; requirements contracts, 158; volume discounts, 163, 171, 215; triple damage suits, 286 Rose, Judge, 207, 302, 304; quoted on dissolution of American Can, 199 Rumford Chemical Company, 111

INDEX Russellville Canning Company. See American Can Company t>. Russellville Canning Company Sanitary cans. See Packer's cans Sanitary Can Company, 182 San Jose Canning Company, 218 Scale, economies and diseconomies of, 18, 20, 66, 86, 88, 111-112, 122, 127, 132-134, 191, 221, 238, 301, 302, 307; in tin-plate production, 240; in research, 129-133 Shell Oil Company, 154n Schlitz Brewing Company, 113 Schumpeter, Joseph Α., 6n Spengler, Joseph J., 14n Stackelberg, H. von, 4n, 19n, 224n Stigler, George J., 7n, 223n Shellmar Products Corporation, 294 Sherman Anti-Trust Act, 197-198, 200, 288; requirements contracts, 146, 202 Sherwin-Williams Company, 105 Simon, Norton, 103 Sinclair Oil Company, 260 Soft-drink cans, 265-266 Standard Brands, 111 Standard Oil Company of California, 111, 211 Standard Oil Company of California et al. v. United States, 202n Standard Oil Company of Indiana, 111 Standard Oil Company of New Jersey, 111 Standard Oil Company of Ohio, 105, 111 Standard Tin Plate Company, 53 Stauss, J. H., 310 Steel code and steel prices, 59 Stern Can Company, 101η Stocking, G. W„ 67n, 80n, 243n, 309 Stokely-Van Camp, 100, 108, 111; exclusive contracts, 159; plants, 291 Substitutes for tin cans: glass containers, 49, 295; aluminum cans, 49, 300-301; fibre containers, 135-136; competition from, 135-142; frozen food, 141 Sun Oil, 211 S & W Fine Foods, 109n Taylor, Myron, 80 Technology: of tin-plate manufacture, 35-40; of can manufacture, 118ff; of food canning, 254-268 Temporary National Economic Committee, 74-75, 81 Texas Company, 105, 113 Tin cans. See Metal cans Tin-plate trust, 67-68

321

INDEX Tin-plating processes: hot-dip plating, 36-37; electrolytic plating, 37-38, 266, 270-274; acid-bath (Ferrostan), 272273; halogen process, 272-273 Tintner, G., 18n Troyer-Fox Can Machinery Company, 91 Tying contracts, 185-188, 303 United Can and Glass Company, 100, 103, 136, 189, 290 United Engineering & Foundry Company, 272 United States v. Aluminum Co. of America, 7n United States v. American Can Company et al. (1916), 56η, 86η, 110η, 146n, 198n, 199n United States υ. Ε. I. duPont de Nemours & Co., 296n United States v. Libhey-Owens-Ford Glass Co. et al., 22n United States v. United States Steel Corporation et al., 7n, 199n U. S. Brewers Foundation, 140n United States Can Company, 90 United States Steel Corporation, 41, 68, 271-275; antitrust case of 1920, 7n, 199n; cold reduction, 37, 269; American Sheet and Tin Plate Company, 41, 67-68; tin-plate plants, 45; rate

of return, 47-48; price leadership, 55-66; Carnegie-Illinois Steel Corporation, 57, 59-60, 62, 232; price discrimination, 58-64; market ties, 64; basing-point pricing, 68-76; tin-plate prices, 232, 298; research, 248-249 Val-Vita Food Products, 111 Van Camp Packing Company, 161, 173 Van Fleet, H. S„ 261n Wallace, D. H., 3n Watkins, Myron W., 309 Wean Engineering Company, 272 Weirton Steel, 272-275; entry into tinplate industry, 41; pricing, 60, 63; tinplate purchases, 64, 65 Westinghouse Electric Company, 274 Western Can Company, 98 Welfare criteria, 5-7 Wheeling Steel Corporation, 42, 60, 269, 272 Whitney, Simon, 277n Wilcox, Clair, 71n, 109n Wisconsin Can Company, 101η Workable competition, 7, 8, 203-207; definition, 7; and oligopoly, 301-305; in can industry, 305-309 Youngstown Steel, 60-62, 272