Nra Trade Practice Programs 9780231887366

Citation preview

NR A TRADE

PRACTICE

PROGRAMS

N RA TRADE

PRACTICE

PROGRAMS BY CHARLES ALBERT

PEARCE

NEW YORK : M O R N I N G S I D E

COLUMBIA

HEIGHTS

UNIVERSITY 1939

PRESS

COPYRIGHT

1939

COLUMBIA UNIVERSITY PRESS, NEW YORK Foreign agents: OXFORD UNIVERSITY PRESS, Humphrey Milford, Amen House, London, E.C. 4, England, AND B. I. Building, Nicol Road, Bombay, India ; KWANG H S U E H PUBLISHING HOUSE, 1 4 0 Peking Road, Shanghai, China; MAR UZEN COMPANY, LTD., 6 Nihonbashi, Tori-Nichome, Tokyo, Japan MANUFACTURED IN THE UNITED STATES OF AMERICA

PREFACE

E

as the National Recovery Administration supported some proposals of industry and refused to support others, it cannot be said to have had a trade practice program.1 The trade practice provisions of the codes, unlike the labor provisions, were sponsored by business groups and provide a record of the objectives, methods, and problems of business in controlling competition. Although regrettably inadequate in many respects, this record makes available a wealth of new material whose analysis should serve to throw additional light on the character of industry's age-old movement to control competition. This book attempts to interpret the record of what business was endeavoring to accomplish through the trade practice provisions of the NRA codes, to describe the regulatory devices employed, to indicate the difficulties encountered and the measure of success achieved. Covering, as it does, a wide range of business circumstances and problems, this study probably contains errors of fact and interpretation that the writer has been unable to amend. His contact with code making leads him to believe, however, that such errors as may exist are not in themselves of a character that can materially affect the validity of the analysis presented herein. I am indebted to my former colleagues in the Research and Planning and Review Divisions of the NRA, of whose studies and insights into the NRA experience I have freely availed myself; to Edwin B. George, L. C. Marshall, and Selig Perlman for their generous reading of the manuscript, their helpful suggestions and XCEPT

1 For a review and appraisal of NRA trade practice policy see Lyon and Others, The National Recovery Administration (1935), Part V, and Roos, NRA Economic Planning (1937), chaps, ix-xii. In many respects the most satisfactory treatment of the NRA trade practice experience is contained in chapters prepared by Corwin D. Edwards and Saul Nelson for the report of the Division of Industrial Economics of the NRA Division of Review ("Report of the Division of Industrial Economics," 1937, pp. 1431 ff.).

vi

PREFACE

criticism; and to Corwin D. Edwards, whose counsel was particularly valuable in the planning and development of the study. I am grateful to Irving Swerdlow and others for suggestions that have enabled me to improve and clarify the presentation of the material. C. A. WASHINGTON, D .

February

20, 1939

C.,

P.

CONTENTS I.

DESTRUCTIVE CHARACTERISTICS OF F R E E COMPETITION

3

PRICE COMPETITION

5

T H E CONCEALMENT OF PRICES

7

Customer classifications and trade discounts

8

Quantity discounts

11

Delivery terms

13

Terms of payment

16

Other elements of price policies

17

UNCERTAINTY

ABOUT

THE

POINT

AT

WHICH

COMPETITORS

WILL DETERMINE PRICE

23

CONCLUSION

COMPETITION I N PRODUCT A N D SALES PROMOTION

27

.

.

27

COMPETITION I N ECONOMIES

33

GROUP OPPORTUNITIES A N D DESTRUCTIVE COMPETITION

36

II.

S U P P L Y CIRCUMSTANCES

36

D E M A N D CIRCUMSTANCES

38

T H E CONTROL OF DESTRUCTIVE PRICE COMPET I T I O N THROUGH P R I C E CONTROL DEVICES

M I N I M U M PRICE CONTROLS

.

.

40 45

M I N I M U M PRICES BASED ON COSTS

46

M I N I M U M PRICES NOT BASED ON COSTS

58

viii

CONTENTS Non-emergency minimum prices

59

Emergency minimum prices

62

PRICE FILING

65

PRICE PUBLICITY AS A CONTROL OF DESTRUCTIVE PRICE COMPETITION

66

T H E NATURE OF PRICE FILING UNDER THE CODES .

Participation in price

.

.

.

73

filing

74

The extent of filed information

75

The extent and promptness of publicity

80

PRICE UNIFORMITY AS A MEASURE OF THE EFFECTIVENESS OF PRICE PUBLICITY

85

CONTROLS OVER SPECIFIC PRICE PRACTICES III.

.

.

.

. 8 7

P R O D U C T I O N CONTROL DEVICES A N D T H E CONTROL OF N O N - P R I C E COMPETITION

91

PRODUCTION QUOTAS

93

PLANT-HOUR LIMITATIONS

102

INVENTORY CONTROL

109

VOLUNTARY SHARING OF BUSINESS

110

CAPACITY LIMITATIONS

114

T H E CONTROL OF DESTRUCTIVE NON-PRICE COMPETITION IV.

121

T H E CONTROL OF U N F A I R PRACTICES

.

.

.127

PRODUCT DEVELOPMENT

131

PRODUCT MISREPRESENTATION

134

PRODUCT IMITATION

138

MAINTENANCE

OF

PRICE

DIFFERENTIALS

BETWEEN

PRODUCTS W I T H DIFFERENT CONSUMER ACCEPTANCE

142

CONTENTS ECONOMIES AMONG PRODUCERS

ix ISO

PRODUCTION ECONOMIES

151

D I S T R I B U T I O N ECONOMIES

ISS

TRANSPORTATION ECONOMIES

1S7

ECONOMIES AMONG DISTRIBUTORS

161

T H E RETAIL TIRE EMERGENCIES

165

LOSS LIMITATION I N T H E RETAIL DRUG TRADE

175

PREDATORY PRACTICES

180

S H A R I N G B Y O U T S I D E R S I N T H E M A R K E T OF CODE M E M BERS V.

184

SUMMARY

AND

CONCLUSIONS

190

APPENDICES A.

T Y P E S OF TRADE R U L E I N N R A CODES

199

B. THE USE OF CODE WAGE AND HOUR PROVISIONS AS TRADE RULES MATERIALS INDEX

CITED

211 215 219

NR A TRADE

PRACTICE

PROGRAMS

CHAPTER I DESTRUCTIVE

CHARACTERISTICS

OF

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as presented for approval by industry groups were characteristically divided into three sections. The first contained requirements in the fields of minimum wages, maximum hours, collective bargaining, and conditions of work. The second provided for the election of the code authority, established its means of support, and defined its rights and duties. The third was designated by such terms as "Trade Practice Provisions" and "Unfair Trade Practices." Over seven hundred industries promulgated code rules covering trade practices during the NRA. Excluding agriculture, every type of industry was represented in this writing of trade practice provisions. Most industries included a score or more of these rules in their codes, and the number of distinctive trade rules proposed by industry and approved by the Administration ran into many hundreds. Many opinions have been advanced concerning the purpose and significance of NRA trade practice rules. They have been dismissed as devices of ignorant business men attempting to lift themselves out of the depression with their boot straps. They have been judged as methods for developing or perfecting monopolies. They have been criticized as props for the inefficient struggling to retain a place in the market. They have been viewed as instruments directed by large concerns against troublesome small enterprises; and, conversely, devices with which small manufacturers and tradesmen endeavored to check the competition of big business. Other observers have held that the tremendous differences between industries in such characteristics as size, function, type of product, and cost and corporate structure, make valid generalization impossible. HE NRA CODES

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This survey was undertaken in the belief that significant similarities in the purposes of NRA trade practice programs could be adduced. Broadly classified, there were two objectives. The first may be described as the control of destructive competition. Such programs were an expression of the mutual interests of competing sellers. They developed from a common belief that rivalry had been carried to a point where unnecessary losses were being incurred. Except incidentally, no conflict over shares in the available business of an industry was present. That is, sellers expected that the proposed controls would not affect their individual share of the industry's business or believed that a lesser portion was preferable to the risks of unrestrained competition. The second objective was the control of unfair practices. These programs resulted from the conflicts of interest among competing sellers. They were sponsored by those factions in an industry enjoying a balance of power to protect their accustomed share of the market in the face of actual or threatened inroads by more able competitors or, as the case may have been, to enlarge their share at the expense of less able competitors when direct action would have been costly. N R A records of code promulgation and code administration do not in themselves afford conclusive evidence that these were the objectives of code programs to control trade practices. This is particularly true of the control of destructive competition. Those records that touch on industry's program to control destructive competition yield their fullest meaning only when one has in mind certain characteristics of competitive relationships, which it is our purpose to develop in this chapter. Destructive competition is a phenomenon of free competition, that is, of business rivalry uncontrolled or undirected by group custom, understanding, or rule. It is not to be confused with predatory competition, which is deliberate loss taking by powerful concerns to cripple or ruin weaker rivals. Although its intensity may depend on the extent of available business opportunities, it is by no means a condition that is confined to depressed markets. Destructive factors may be found in price competition, competition in product and sales promotion, and competition in economies.

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5

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Destructive price competition may arise when members of an industry reduce prices to enlarge their share of the business. Incentives to such price cutting may be present when because of excess productive capacity it is possible to reduce unit costs by enlarging sales volume. Attracted by the prospect of greater profits under these circumstances, a seller may cut prices if he assumes that his competitors will not meet his reductions or if he expects, on the other hand, that they are planning to cut their prices. When all sellers in a market adopt a policy of price reduction, their price inducements will tend to cancel one another, and no one of them may succeed in enlarging his share of the market. As a result of the reduced prices all may be less well off than before. There is no natural market force, standard, or relationship that will halt such a price-cutting movement at the level of costs; it may extend to and persist at a point where losses are general among members of an industry. On the other hand, each seller may assume that his rivals will meet his price cuts if and when he makes them and that they will maintain their prices if he maintains his. Under these circumstances prices will be so established as to yield the greatest return that is possible in view of the condition of the market. Such a return may or may not yield profits. In periods of acutely depressed demand, prices will be fixed and held at the point where losses will be minimized. Should demand for the industry's products for some reason increase sufficiently to justify a higher price, each seller will immediately raise his price; he will not lag behind in this movement in the hope that he may enlarge his volume of business at the expense of rivals who are asking higher prices, because he knows that if he does they will not raise their prices.1 1 CompeThis analysis is suggested in Chamberlin, The Theory of Monopolistic tition (1933), particularly in the treatment of "group equilibrium" under conditions of "large numbers" and "product differentiation" (pp. 81-94, especially, 90-93). In the present analysis it is assumed, however, that sellers are so few that each of them has a price policy and, if it appears in his interest to do so, will restrict output. Cost as considered does not include return on capital investment, which is included in the concept of profits.

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Whether members of an industry will dissipate their opportunities through competitive price cutting or will make the most of their collective situation by refraining from price cutting depends on a number of circumstances. Excluding certain factors for later consideration, 2 it may be reasoned that in the absence of group control over price the probability of competitive price cutting will depend on the extent to which price concealment and several types of uncertainty are present. Facility in concealing prices may lead sellers to cut prices without fearing retaliatory action by competitors; the difficulty of discovering prices may lead them to reduce prices as a protection against price cutting suspected of competitors. But even if price changes are immediately known, sellers may be uncertain about the way competitors will react to a price cut. If they feel that inroads on competitors' business resulting from price reduction will pass unnoticed, they may not hesitate to cut their prices. Another uncertainty concerns the foresight of competitors in establishing and maintaining prices at the level that will result in the most advantageous adjustment to the market situation. Although some business men may possess this foresight, they may be uncertain whether their rivals have a similar judgment and outlook and may be doubtful, therefore, about the desirability of maintaining prices. All competitive price cutting might be considered to be destructive price competition, inasmuch as it involves a dissipation of available opportunities—whether or not there are possibilities of profit. We shall, however, define the term by confining it to mean competitive price cutting that results or threatens to result in losses to a substantial number of the members of an industry. This concept of destructive price competition has been adopted because it focuses attention on a price situation that business men must correct if they are to avoid insolvency or loss of managerial position; such a situation manifestly will afford an urgent and powerful incentive to concerted control of individual action. It appears, moreover, to describe a price situation that code proponents sought to correct through NRA codes and one to which they 2 That is, those relating to the aggregate of business opportunities available to members of an industry.

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commonly applied the term "destructive price competition." It will be observed that this concept of destructive price competition does not exclude competitive price cutting that merely reduces profits. Competitive price cutting that immediately threatens to become destructive must be a matter of concern nearly as grave as competitive price cutting that at the moment is destructive. THE

CONCEALMENT

OF

PRICES

Price concealment has two aspects: one, the completeness with which the various elements of price policies can be ascertained; and, two, the period before price changes can be discovered. Although these aspects are intimately related, they may be considered separately. Traditionally price has been viewed by economists as a single datum, or as a price to a classification of buyers modified by what have been interpreted to be functional discounts, such as cash and quantity discounts. These discounts have been handled as constants, assumed to reflect differences in costs of serving different individuals in such a class of buyers. Price variations between localities have been recognized, but usually they have been regarded merely as indicating differences in costs of transportation. Similarly, price variation between sizes and grades of products have been noted and explained as reflecting differences in costs of production. This, of course, is an oversimplified and misleading picture of prices. The price policy of a seller may be composed of a large number of elements, any one of which may be manipulated to induce purchases. These elements of price may apply uniformly to all buyers, they may vary according to classifications of buyers, or they may vary between individuals in a class of buyers. Variations of price have no necessary relationship to the cost of selling to different buyers or to services performed by these buyers. Price relationships may be changed frequently and abruptly if sellers wish to stimulate purchases by certain customers. On the other hand, price variations may be entirely absent even when there are marked variations in the costs of serving different buyers. In attempting to discover the price policy of a competitor, the

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business man therefore must take into consideration all the price elements that can be manipulated to induce purchases, and he must consider that each of the separate price inducements may be varied between individual buyers. On the other hand, a seller who wishes to prevent rivals from promptly meeting price reductions may resort to any one of many inducing devices while keeping other elements of price stable; and in order better to conceal these inducements he may deal separately with groups of buyers or with individual buyers. The possibilities of concealed pricing that are inherent in a few of the most common elements of price policies may be indicated.3 Customer classifications and trade discounts.—When goods are made for the final consumer, or when they can be made for stock, manufacturers commonly find it convenient to employ independent distributors. When only one class of distributor is employed, the difficulties of discovering the price policies of competitors and the possibilities of price concealment arising from customer classification may not be great. But when, as is more often the case, more than one class of distributor is employed, several prices must be taken into consideration. In one type of situation some members sell directly to retail distributors, whereas others sell only to wholesalers. In such cases the direct sellers, that is, those selling directly to retailers, are in direct competition with the wholesalers of the indirect sellers. Therefore, it is the wholesalers' prices that direct sellers must take into consideration in determining upon their own policies; and wholesalers must look, not only to the prices of other wholesalers, but also to the prices of manufacturers who sell directly. Perhaps the more prevalent practice is to sell to both wholesalers and retailers. In these circumstances, manufacturers to be fully aware 3 Prior to the NRA there was little intensive study of the pricing practices of industry. Several studies were made under the NRA, of which the most notable was conducted under the direction of Willard L. Thorp of seventeen groups of electrical products (NRA, Div. of Rev., Work Materials No. 78). Two other studies of a similar nature were made, one of the fertilizer industry (NRA, Div. of Rev., Work Materials No. 67) and the other of the steel castings industry (NRA, Div. of Rev., Work Materials No. 76, Appendix B ) . In this connection, see Thorp, "Price Theories and Market Realities," American Economic Review, Supplement (March, 1936), pp. 15-22.

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of competitors' policies must be apprised of the terms offered both by rival manufacturers and by wholesalers. The difficulties of obtaining full knowledge of the price policies of competitors are multiplied when customers are divided into a larger number of classes. Both the wholesale and retail fields may be subdivided; and in some industries manufacturers sell directly to final consumers, as well as to wholesalers and retailers. The first code price filings in the flexible cord industry illustrate the extent to which customer classifications may be carried. The following customer classes were recorded: Chains, "Class A" and "Class B," "Chain Store Warehouses," "Mail Order Houses," "National Syndicates," "Purchasing Service Companies," "Billed by Us," "Billed by Them," "Department Stores," "Distributors," "Jobbers," "Wholesalers," "Sales Agencies," "Dealers," "Wiring Device Manufacturers," "Central Stations," "Contractors," "U. S. Government," "Railroads," and "Industrials." 4 Any seller may be aware of the prices or discounts quoted by his rivals to different classes of customers while having little idea of the types of individual buyers included within these classifications. To be fully informed he must know how these classes are defined. The effort of various industries to incorporate in codes mandatory definitions of customer classes suggests the uncertainty with which the proponents contemplated customer classifications in current use/' During the operation of code price filing plans, several industries considered it necessary to go even further by requiring that members submit the names of individual buyers who had been placed in various classes. Thus, the asbestos industry "required the filing of all accounts, except dealers, to be kept confidential in case of dispute or upon request of a member as to the 4

See NRA, Div. of Rev., Work Materials No. 78, pp. 35-36. For frequency of these provisions see NRA, Div. of Rev., Work Materials No. 35, Part C, p. 21. In commenting on prices filed in several of the electrical product groups, the investigator said, "The definition of customer classes is almost invariably insufficient." (NRA, Div. of Rev., Work Materials No. 78, p. 166.) Referring in particular to filings in the radio tube industry, he said, "The description of particular types of distributors are such as to make it practically impossible to determine who could or could not be classified as a distributor. Illustrations of distributor types mentioned are: small jobber, large jobber, dealer, dealer jobber, large dealer, dealer (large or exceptional retailers), dealers—large retailers sold on a jobber basis." (Ibid., p. 114.) 5

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classification of a particular buyer by another member." 6 The farm equipment industry required members to submit a list of jobbers with whom business was done in order that an "accurate list of jobbers" could be obtained. 7 Moreover, even though the definitions in use by competitors were known, there is no certainty that new customer classes will not be created for the purpose of changing the status of, and hence the prices to, individual buyers. Evidence of this uncertainty is the fact that many industries in their codes listed or defined the classes of customers to whom members were restricted in selling.8 Certain producers in the candy manufacturing industry persisted in evading the mandatory classes by creating new ones. Some, for example, "divided the class of jobbers, which received a 20 percent discount, into two groups, service jobbers and supply jobbers, and gave the former 2 0 % and the latter 25 c /c discount. This preferential treatment for 'pet' accounts, when uncovered by price filing, led to a series of price reductions." 9 In the electric arc welding apparatus industry the original price filing revealed that one company had made a special classification to provide for government purchases when no such classification had been customary in the industry. T o offset the advantage held by this company competitors split their prices into two groups: "Government" and "others." "This arrangement enabled competition with Company # 6 in the active market (Government) and at the same time permitted prices to be held firm in quiet markets." 1 0 Yet another and more important element of uncertainty confronts the seller; for, though the customer classification policies of competitors may be well known and stable, the prices to these classifications may be varied. The business man cannot assume that prices or discounts to various classifications will reflect differences in cost of selling and therefore remain relatively stable. The fact that many industries sought to have schedules of maxNRA, Div. of Rev., Work Materials No. 76, p. 245. Ibid., p. 244. 8 For frequency of these provisions see NRA, Div. of Rev., Work Materials 35, Part C, p. 21. 9 NRA, Div. of Rev., Work Materials No. 76, p. 378. 1 0 NRA, Div. of Rev., Work Materials No. 78, p. 87. 6

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imum trade discounts included in their codes is evidence to the contrary. 11 Studies of the price structure of various electrical product groups during the code period show not only that the discount or price policy with respect to various classifications may change markedly over a short period of time but also that customer classifications and accompanying differences in prices may be eliminated entirely in favor of bargaining on an individual customer-to-customer basis. An example is afforded by the dry battery industry's price for large mono cells, as shown by the original and final filings under the code: "Government" and "Industrial" users experienced a pronounced increase in prices; but "Toy Manufacturers" (purchasing more than 500,000) enjoyed decided reductions in prices, as did "Chain Stores," "Mail Order Houses," and "Manufacturers of Battery Consuming Devices." The positions of other groups of buyers remained relatively stable. 12 In the flexible cord industry "a . . . detailed customer classification structure was supplanted by one based on quantities, then by a single price to all buyers, and finally returned to a structure resembling that in the original filings." 13 Quantity discounts.—Quantity discounts based on the number, value, or weight of the items purchased in any order represent only one of many types of quantity discounts in use. Discounts may be based on the quantity or value of products purchased by any customer over a period of time, as a year's purchase; 14 or on the volume purchased over a period of time, not only from the producer granting the discount, but also from all producers of an industry. 15 The original price filings in the radio tube industry disclosed that members were using a number of discount bases, such as numbers of tubes, value of order, turnover, and annual purchases. 16 11

See NRA, Div. of Rev., Work Materials No. 35, Part C, p. 22. See NRA, Div. of Rev., Work Materials No. 76, p. 367, and the chart (p. 368). NRA, Div. of Rev., Work Materials No. 78, p. 182. 14 For example, in the dry cell group "toy manufacturers were quoted in quantities purchased annually in steps ranging from 250,000 to 3,000,000 cells and over." (Ibid., p. 102.) 15 For example, fertilizer (NRA, Div. of Rev., Work Materials No. 67, p. 42) ; and fractional horse power motors (NRA, Div. of Rev., Work Materials No. 78, p. 179). 10 Ibid., p. 114. 12

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Quantity discounts also may vary with respect to the type of customer. In the radio tube industry quantity discounts were varied according to the location of buyers. 17 Variation according to customer classification was practiced in some of the electrical products groups; for example, the basic price structure of the rubber covered building wire industry at the beginning of the code period showed that quantity discounts were granted to "Contractors," that is, "industrials," "railroads," "public utilities," "United States," "counties," "cities," "other municipalities," but not to "Distributors." 18 Quantity discounts, just as customer classifications and trade discounts, are subject to manipulation by producers interested in effecting price changes. The fact that many industries sought to incorporate mandatory maximum discount schedules 19 in their codes is evidence of the adaptability of this element of price. The flexible cord industry illustrates how quantity discounts may undergo major fluctuations over short periods of time. The following tabulation shows list prices, the most favorable discounts, and net prices on one type of flexible cord during the period September, 1933, to February, 1935. It will be noticed that large variations in list prices were accompanied by large variations in discounts, with the result that the fluctuations in net prices were relatively small. LIST PRICES, DISCOUNTS AND MOST FAVORADLE N E T PRICES FOR P O NUMBER 18%4 RAYON "

Dale

Filed:

9/7/33 9/22/33 1/15/34 2/16/34 3/24/34 6/21/34 10/15/34 2/10/35 0 6

17 18

List Prices:

6

$11.50 26.00 26.00 26.00 8.50 8.50 8.90 8.90

Most Favorable Discount:

Net Price:

10 percent 65 percent 60 percent 60 percent 5 percent 10 percent 10 percent 15 percent

$10.35 9.10 10.40 10.40 8.08 7.25 8.11 7.57

Reproduced from NRA, Div. of Rev., Work Materials No. 76, p. 350. All companies filed the same list price. Ibid. Ibid., p. 11. See NRA, Div. of Rev., Work Materials

No. 35, Part C, p. 22.

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Considering manufacturing as a whole, quantity discounts represent one of the most strategic elements of price policies. This is most likely to be true in producers goods industries in which distributors and trade discounts are not employed. Where elaborate customer classifications and trade discounts exist, quantity discounts usually appear as an added complication. Delivery terms.—Ordinarily the business man would not assume that if he knew his competitor's mill price or his delivered price to buyers in a given locality he could compute the prices offered to buyers in every locality by merely allowing for transportation rates. He knows that a variety of geographic pricing methods may be employed that may have vastly different results and that unless he has precise information about methods in use he cannot be certain about the price offers of his competitors. Methods of f.o.b. pricing in which the location of the shipping point is designated, such as a plant basis or an arrangement such as that of some fertilizer companies that shipped nitrate of soda on an "F.O.B. Gulf and Atlantic Ports" basis, 20 may not cause sellers great difficulty, because they will know the points to which their rivals are willing to absorb freight. F.o.b. pricing, however, may not afford ready comparability of prices in any market, since to arrive at such prices it is necessary to apply transportation costs to the plant or mill price. This may be a source of difficulty when a producer has several plants. Greater uncertainty may result when bases such as "f.o.b. warehouses" are employed, inasmuch as the location of such shipping points may not always be known, and they may from time to time be abandoned or others may be added. 2 1 When a delivered basis, or f.o.b., freight allowed, basis of selling is employed, 22 the question may arise whether the full cost of transportation is included in the price offer. 23 An uncertainty of 20 NRA, Div. of Rev., Work Materials No. 67, p. 32. The practice of quoting f.o.b., designated basing points, similarly may provide competitors with a clear idea of one another's geographic price policies. 21 See NRA, Div. of Rev., Work Materials No. 78, p. 177. 22 Price may be quoted for all destinations, in which case the area of uniformity is the entire country; there may be several price zones; or a different price may be quoted for each destination. 23 Several codes required the inclusion of transportation costs in computing delivered prices (NRA, Div. of Rev., Work Materials No. 35, Part C, pp. 9, 42).

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a similar nature arises when goods are sold on a delivered basis, the customer undertaking to truck the product from the factory to the consuming point with the expectation of an allowance in return for the service rendered; there may be no standards by which to measure the value of this service, and the actual allowance may be any one of a number of figures.24 Members of an industry must consider the possibility that more than one geographic price policy may be employed by any one of their competitors. Thus, one member of the fertilizer industry was found to have used "delivered prices in one district, F.O.B. plant prices in another, and a basing point system (i. e., quotation at a given city, although plants from which shipments were made to the district in question were located elsewhere as well) in a third." 25 In the socket industry the original code price filings disclosed that some companies sold f.o.b., freight allowed, on orders of one hundred pounds or more, whereas on smaller orders freight was not allowed except to syndicate stores in large metropolitan areas.20 Similarly, some companies in the flexible cord industry quoted f.o.b., factory, freight allowed, one hundred pounds or more, except that they allowed to "National Syndicate Stores full freight in shipments w.o.g. (with other goods) weighing fifty pounds or more and of total value of thirty dollars and allowed full freight on shipments regardless of weight or value to metropolitan New York, Newark, Hoboken, Jersey City, Philadelphia, and Chicago." 27 The uncertainties that arise from the use of a number of delivery terms is indicated by the efforts of industrial groups to include in codes requirements that members must sell on an f.o.b. basis only, on a delivered basis only, or that they use designated basing points. 28 Delivery terms not only may assume many forms but may be 24 This was an important problem in the fertilizer industry, where approximately 30 percent of shipments east of the Rocky Mts. were by truck. In this industry, members' trucking allowances varied from zone to zone during the codc period (NRA, Div. of Rev., Work Materials No. 67, pp. 34-35). 25 ¡bid., pp. 31-32. 28 NRA, Div. of Rev., Work Materials No. 78, p. 12S. 27 Ibid., p. 40. The allowance of freight on orders of 100 lbs. or more, but not on smaller orders, was a common practice in the electrical products industries covered in the study cited. 28 NRA, Div. of Rev., Work Materials No. 35, Part C, pp. 9, 42-43.

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dynamic elements of price policy as well. Thus, at the beginning of the code period the usual practice in the magnet wire industry was to deliver orders of less than one hundred pounds on an f .o.b., factory basis and orders of one hundred pounds and more, f.o.b., certain basing points. At the end of the code period all prices were quoted on a delivered basis except orders of less than one hundred pounds which were f.o.b., point of shipment; one company, however, continued to employ a basing point system.29 Another instance of change during the code period occurred in the rubber covered building wire industry. To quote: The original price structure provided for factory prices plus a computed freight charge, based upon a special system of determining freight charges according to the destination regardless of the point of shipment. This resulted in higher freight adders for areas such as Texas and Colorado, and smaller additions for the industrial northeast. The revised structure simply includes F.O.B. point of shipment for less than 100 lbs., and a flat delivered price for all larger transactions. The net result of the new structure with uniform prices for all destinations is a higher price in the industrial east and north central areas, where the bulk of the sales are made. On the other hand, prices for other areas were reduced, frequently exceeding the maximum increase. Because of the nature of the product, these freight adders were very considerable, and the revision in the price structure meant a major change in net price at many points.30

Finally, the dry cell and flashlight industry illustrates a diversity of policies employed during the code period without any tendency toward more uniform policies. At the beginning of the period toy manufacturers were sold f.o.b., factory. Mail-order houses and chain stores were sold f.o.b., destination, in carload lots, and f.o.b., warehouse in less than carloads; other customers were similarly quoted on shipments of one hundred pounds and more. The delivery terms varied somewhat on different products. Thus, #6 cell was quoted at a higher delivered price west of the Rockies than elsewhere, but the radio B battery, which was heavier and more costly, was quoted at the same price for all destinations. During the code period "delivery terms were changed continually . . . but no more uniformity developed than in the original filings. Toy 28 30

NRA, Div. of Rev., Work Materials No. 78, pp. 48-49. Ibid., p. 17.

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manufacturers were still sold 'F.O.B. factory.' The warehouse cities from which chain store and mail order shipments were made were increased in number especially on the Pacific coast." 31 Terms of payment.—When sellers extend credit to buyers, the terms governing the credit service represent an element of price of which competitors must be apprised if they are to know one another's complete price offers. That there are a number of types of credit terms is indicated by code provisions that restricted their use in some manner.32 These range from the discount for cash or for early payment to installment, or deferred payment, plans. Elaborate payment plans that govern the sale of machinery and other expensive durable goods contain a number of variables, a change in any one of which may significantly affect the price offer. Any form of delayed billing, such as "seasonal datings," whereby the customer is invoiced sometime after shipment is made, has the effect of extending credit beyond the period indicated by the quoted credit or discount terms. Sellers may or may not announce the period of time after shipment that they will permit to elapse before they date the invoice. Credit terms may be varied according to the type of transaction. Thus, it was the practice of some members of the sockets,33 rubber covered wire,34 and fuse plug 35 industries to vary credit terms according to customer classification. In the fan industry 3 6 credit terms differed according to the location of buyers. In the food service equipment industry 37 payment on the more costly items was deferred over a greater period than on less costly items. Terms of payment, like the other price elements already considered, cannot be counted on to remain stable over a period of time; 3 8 and changes in this price element, particularly in industries selling costly products, may be a matter of considerable significance. For example, it has been observed that under the code Ibid., pp. 104-106. See NRA, Div. of Rev., Work Materials No. 35, Part C, pp. 8-9. 3 3 NRA, Div. of Rev., Work Materials No. 78, p. 125. 34 Ibid., p. 13. 3 5 Ibid., p. 169. 3 6 Ibid., p. 76. 3 7 Ibid., p. 146. 3 8 The large number of codes that regulated these terms in some manner is evidence of their flexible nature (see NRA, Div. of Rev., Work Materials No. 35, Part C, pp. 8-9). 31

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price filing plan the chief concern of the electric arc welding apparatus industry was to disclose the terms and conditions of deferred-payment plans 3 9 in use by industry members. Other elements of price policies.—Perhaps the most generally significant elements of price policies have been surveyed. It is apparent that difficulties may be encountered by any seller in discovering his competitors' policies with respect to each of these price elements because (a) they may assume a number of forms; ( b ) they may vary according to type of transaction; 4 0 and (c) they may undergo considerable changes over short periods of time. Each may afford, then, a method of concealed pricing; each may be used to reduce prices without the immediate danger of retaliatory action by competitors. The trade rules that industrial groups sought to have incorporated in NRA codes revealed many other elements of price policies. A first group of trade rules restricted practices that induce purchases by reducing buyers' risks; among these may be mentioned product guarantees, accepting the return of merchandise, whether or not damaged or defective, price guarantees, and sales on consignment. A second group restricted practices that may serve as inducements because they provide buyers with additional goods or services; for example, free deals, premiums, containers, display materials, demonstrations, and repairs and maintenance. A third group restricted practices that afford a type of delivery particularly convenient to buyers, such as split shipments and oddlot shipments. A fourth group restricted practices that result in excessive allowance for value rendered by buyers; for example, excessive trade-in allowances, advertising allowances, distributionservice allowances, and installation allowances. A fifth group restricted the diversion of commissions or fees to buyers.41 3 9 Together with "rental" and "rental purchase" plans (see NRA, Div. of Rev., Work Materials No. 76, p. 367, and NRA, Div. of Rev., Work Materials No. 78, p. 83). Other industries in which changes in terms of payment occurred during the code period are magnet wire (ibid., pp. 4 9 - 5 0 ) ; fans (ibid., p. 7 7 ) ; and fertilizer (NRA, Div. of Rev., Work Materials No. 67, p. 41). 4 0 Prices or discounts to buyers classified according to trade status by their very nature, of course, are prices that are varied according to type of transaction. 4 1 See Appendix A for others; also, NRA, Div. of Rev., Work Materials No. 35, Part C, pp. 10-15, for frequency with which restrictions of these practices were incorporated in codes.

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There is every reason to believe that these types of price inducement may assume many forms, may be varied from transaction to transaction, and may be employed or withdrawn as transactional circumstances dictate. The reader will find in the N R A Division of Review publication, Work Materials No. 35, Part C (pp. 4 3 - 4 4 , 5 0 - 7 3 ) , a description of the different forms of each of these practices restricted by code rule. 42 Evidence that they are subject to variation between transactions is found in the fact that many codes prohibited them if they were "discriminatory." 4 3 It should be noted in this connection that the vast majority of codes also included general prohibitions against "discrimination" in "terms," "services," or "privileges," between buyers similarly situated, "of the same class," et cetera. 44 That they are used as inducements is evident from the fact that code proponents considered it necessary to impose restrictions on them; that during the code period they Some question may be raised concerning the propriety of designating as "price inducements" many of the practices listed here. Thus it may be contended t h a t practices included in the first three groups are forms of product differentiation, not to be distinguished from variations in the commodity itself, since both types of practice may result in additional outlay to the seller employing them. But, if these practices are viewed from the standpoint of the transactional functions that they may perform for the seller, it can readily be seen that they may be identical with practices customarily thought of as pricing activities. The business man who wishes to induce his customers to expand their purchases of his commodity may reduce his price or he may offer services or conveniences that are particularly attractive to them. If for any reason he cannot or does not wish to reduce his price, he may offer to share the buyer's business risks, may offer to perform special services for the buyer, or arrange to deliver the product in a manner particularly convenient to the buyer. Under such circumstances these practices operate as price inducements and in this manner were viewed by N R A code proponents. Pricing practices, however, may contain elements that represent something more than inducements to customers to buy a quantity of goods. Thus, there may be included in a trade discount a compensation for sales promotion performed in behalf of the manufacturer. It might appear that such terms as "advertising allowances" and "distribution-service allowances" should be excluded from the category of price inducements altogether. But, since they actually may be used in particular transactions as price inducements, they cannot be disregarded. They may not be categorically labeled as sales inducements any more than they may be labeled as price inducements. 42 H e should see, also, Lyon, Free Deals (1933), chaps, ii, iii, vii; Advertising Allowances (1932), chaps, ii, iii; and Terborgh, Price Control Devices in NRA Codes (1934), pp. 32-37. 43 NRA, Div. of Rev., Work Materials No. 35, Part C, pp. 50-73; also, Lyon, Free Deals, chap, vi, and Advertising Allowances, p. 40. 44 NRA, Div. of Rev., Work Materials No. 35, Part C, p. 21.

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were used to evade open and minimum price controls; and from available records of price behavior.40 That they are used as a means for price concealment is indicated by code provisions that prohibited them if they were "secret." 47 But more inherently secret policies may be used by those anxious to conceal their price offers.48 Among them are concessions granted during the performance of the sales agreement, such as "rebates" and departures from the credit terms of the contract; the acceptance of forms of payment in which concessions may be concealed, such as securities; and the rendering of financial assistance or favors to buyers by means of gifts, paying of buyers' personal expenses, subsidies, et cetera. 49 Any seller, then, may encounter difficulty in discovering the price policies of competitors, because these policies may be a composite of a number of highly complex and flexible elements and may be supplemented by a number of informal and secret inducements. Competitive price cutting is likely to be a process, not of uniform reductions of a single figure, but one of separately granting to individual buyers or classes of buyers one or several of a large number of inducements. The ease with which such price reductions can be concealed is obviously greater than would be the case if price were composed of only one element applying uniformly to all buyers. 50 In no industry, of course, does price con45

271.

See, for example, NRA, Div. of Rev., Work Materials No. 76, pp. 111-118, 270-

46 For example, electric arc welding apparatus: trade-ins, guarantees, rental plans (NRA, Div. of Rev., Work Materials No. 78, pp. 82-85); dry cells and flash lights: deals and assortments, special allowances and discounts (ibid., pp. 102-105); radio tubes: special discounts and allowances (ibid., pp. 114-117); domestic electric heating appliances: advertising and other allowances (ibid., pp. 136-137). 47 NRA, Div. of Rev., Work Materials No. 35, Part C, pp. 50-73. 48 These policies are significant mainly in connection with important individual transactions rather than the flow of small transactions. ••"See Appendix A for other secret price policies restricted by code provisions; and ibid., pp. 9, 11-12, 17, for frequency with which such restrictions were included in codes. 60 The price behavior described is not satisfactorily treated in prevailing price theory, which leaves little room for price variations among buyers, except (1) as they may reflect differences in cost of selling to, or service rendered by, customers; (2) as they may result from a monopolist's policy of maximizing revenue through adjusting prices to varying levels of consumer income; and (3) as they may reflect

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tain all the complexities and variations that have been mentioned. W e know from everyday experience that in the over-counter retail and service trades a "one price" practice in the main prevails and that the so-called "nominal price" is the actual price. But even here the price offer is frequently complicated by inducements of trade-in allowances, free deals, premiums, coupons, prizes, and the like. A second aspect of concealed pricing is the lag between the time price offers become effective and the time they are discovered by competitors. Even though price were not subject to the variations and complexities discussed above, any seller might be induced to cut his price if his competitors were unable to discover at once, and hence to meet promptly, his reduction. This lag is likely to be shortest in the field of retailing, where the seller deals directly with the final consumer. Since the average consumer does not believe it worth his time to shop extensively among different sellers each time he buys an article of small value, the predatory policy of a monopolist seeking to eliminate competitors by cutting prices in restricted localities. The first of these theories of price variation rests on a deduction of equilibrium theory, that prices gravitate toward costs. The second and third depend upon a dominating monopolistic power. At least as pervasive are price discriminations (or, as we prefer to say, "variations," reserving the term "discrimination" to mean "unfair price variations"—according to whatever standards of fairness the group may decide on) of other types. The first of these types of price variation is designed precisely for the purpose of lessening the danger of rival sellers' learning about, and consequently meeting and nullifying the benefits of, price reductions. These variations are possible for one reason because individual buyers or groups of buyers do not enjoy a complete knowledge of the offers made by any seller to other buyers. Such price variations are likely to favor large buyers, since it is less difficult and costly to conceal transactions with a few large buyers than with many small ones. The second of these variations results from different degrees of bargaining power among buyers. Additional incentives may be necessary to close transactions with the more powerful buyers. This type of variation would not necessarily be eliminated if these "special" prices were known to other buyers. The third type of variation is designed to permit the seller to expand his volume of sales without upsetting, "spoiling," or taking a loss on his existing business. Strong buyers, when entering long-term contracts, often seek to protect themselves against this practice by demanding that sellers guarantee them against price decline, which means that should prices be reduced to other buyers during the term of the contract, the lower price will apply to all deliveries or to the remaining deliveries under the contract. A fourth type of variation arises from the practice, corresponding to the so-called "price raid," of lowering prices for the single purpose of closing important transactions, after which prices are immediately returned to their former level.

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retail sellers make it a practice to give him information concerning important price changes through price advertising, which informs rival sellers as soon as it does the consumer. Mail-order houses announce their prices for an entire season through price catalogues; and some types of retail establishments make it a practice to sell all their merchandise at designated and unvaried prices. Moreover, because the value of the average transaction at retail is too small to justify the sellers in spending time haggling with each buyer over the terms of the bargain, a one-price policy is likely to prevail at any time with respect to all buyers. The simplicity of retail prices, therefore, makes it possible for competitors to discover price changes easily and quickly. 51 The situation may be quite different in non-retail industries. Here sellers deal in greater values and with buyers who make it a business to compare competing offers. Members of these industries in general employ two methods of making price offers. One is to issue price lists announcing the prices, terms, and conditions of sale on the basis of which they will do business; the other is to negotiate directly with prospective buyers. It may be impossible to announce prices by issuing lists, because the buyer's specifications are unknown. In these cases the price offer will be made through direct negotiation with the buyer; or, if the buyer requests, by submitting a bid. When prices are announced by means of price lists, rival sellers may have no difficulty in obtaining access to them. The ease with which sellers can keep in touch with their rivals' prices by this means will depend on how frequently these price lists are changed and on how completely and accurately they indicate actual offers. In some industries, particularly where it is the practice to "set prices" for the duration of entire seasons, 52 price lists may be changed infrequently. But though they may not change often, they never will be a certain source of accurate information. They 5 1 A retailer can send shoppers to rival stores and be reasonably sure that the prices posted or announced for the various items of merchandise are the going prices to all buyers. 6 - S e e Bums, The Decline of Competition (1936), pp. 197-200. for a partial list of industries in which this is practiced.

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may contain only a skeleton of the issuer's actual policy, they may be ambiguous, they may be inaccurate, and they may be entirely disregarded in practice. The seller's surest method of discovering competitors' actual price offers may be to ask buyers about them. This method obviously is the only one available when price offers are made only by direct negotiation with buyers. What, then, are the general circumstances that determine the interval between the time a price offer is made and the time competitors learn about it through direct contact with buyers ? In the first place, the more complex the price offer, the more will it defy discovery—that is to say, the period of concealment will be longer. In the second place, the buyer may be unwilling to reveal the price offers of competing sellers. Certain buyers may secure favorable prices only upon the express understanding that these prices will not be revealed. Moreover, buyers who have received unusually good terms may fear that the information may circulate among their own competitors, who will exert individual or organized pressure for equally good terms. Finally, buyers may be quite willing to offer information about prices offered them, but in doing so they may deliberately quote a fictitious figure that is lower than the actual offer, seeking thereby to bid off one seller against another. The so-called "lying buyer" was one of the most frequently mentioned targets of code price filing plans. In industries in which single orders involve large values, such as construction and heavy machinery manufacturing, before making commitments buyers will make certain to have before them the offers of all responsible sellers. The usual method of obtaining this information is to announce the specifications of the job and to call for a submission of bids. This procedure affords no opportunity for the meeting of competitive offers, because the offers are not made public. Moreover, such a practice is particularly susceptible to "bid shopping" by buyers, who go from bidder to bidder representing that competitors have quoted lower figures, thus inducing the submission of new and lower bids. T h e original Eddy plan was specifically devised to stop this practice by means of the co-operative exchange of bids among the sellers. 53 6 3 Eddy, The New Competition (1913), chap. x. Most of the trade provisions in the construction codes were designed to make the original bid the final bid (see

FREE UNCERTAINTY WILL

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WHICH

2.3 COMPETITORS

PRICE

The question now may be asked whether even if price offers could be discovered completely and promptly any seller might have reason to doubt that a contemplated price reduction would be met by his rivals. Chamberlin has explored this possibility as follows: . . . uncertainty arises when numbers are such as to leave doubt in the mind of any one as to the extent of the incursions which his move will make upon the sales of the others . . . Uncertainty and hence indeterminateness are now present, not when numbers are small, but when they are fairly large yet not large enough to make the conditions those of pure competition. If numbers are fairly small, any one seller can be certain that his incursions upon the others by a price cut will be large enough to cause them to follow suit; and therefore no one will cut. If they are very large, he can be certain that his incursions will be such a negligible factor to each other seller that no one will "follow suit" (i. e., cut because he did); and therefore everyone will cut. But in between there is a range of doubt. . . 54

Disregarding the possibility that there may exist in some areas of industry a condition of " pure competition," 55 the size of the competitive group may be briefly considered.56 The number of manufacturers that are directly in competition for a market may be identical with or it may be less or greater than the number of producers of a commodity. The number will be identical if all the producers sell directly to users only, or only to one class of middlemen, such as wholesalers. The number will be less in the case of those transactions in which producers deal with wholesalers when other producers conduct all their business directly with retailers; it may be greater in the case of the transacAppendix A for types of provisions). Several industries in the machinery and mining groups also included in codes, requirements for publicizing bids (see NRA, Div. of Rev., Work Materials No. 35, Part C, p. 24). 64 Chamberlin, op. cit., pp. S2-S3. 65 Except, possibly, in certain fields of agriculture. Under pure competition sellers produce at capacity or not at all. They do not restrict output, do not have price policies, and do not engage in competitive price cutting. The fact that industry groups, representative of all branches of mining, manufacturing, distribution, and servicing, sponsored code controls over price competition suggests that pure competition does not exist in these fields. 66 Homogeneous products will be assumed. Additional considerations arising because of product differentiation will be introduced in the next section.

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tions of producers selling directly to retailers, inasmuch as these producers will be directly in competition with wholesalers. Should each producer sell to both middlemen and retailers, then, as in the first case, the entire group of manufacturers will be directly competitive in every transaction. But the competitive group may be even larger than this in the case of transactions with retailers, since middlemen also will bid for the retail business; and when manufacturers also sell to final consumers, the competitive group will embrace retailers as well. T h e size of the competitive group in manufacturing industries in which independent distributors are employed, therefore, will depend on the kinds of distributor with whom the producers do business and on the type of transaction that one has in mind. Similarly, the competitive group engaged in wholesaling or retailing may be larger than the number of. wholesaling or retailing establishments if manufacturers also perform distribution functions. When all sales are made directly to the consumer, as frequently occurs in the contracting industries and in the manufacture of producers goods, the size of the competitive group will vary according to the size of the transaction if some producers are not equipped to handle large orders. Another determinant of the size of the competitive group is the degree of market localization. Where transportation costs are significant, the aggregate market may be divided into a number of local markets and the number of sellers competing for any one of these may be considerably smaller than the total number engaged in the production or distribution of the commodity. Market localization is patently characteristic of the retail and service trades. There may be hundreds of thousands of participants in these trades, but the number of vendors directly in competition may be no greater than the few who are located in any town or neighborhood in any city. Considering the size of the group in this manner, it is difficult to determine whether numbers are anywhere so large as to leave doubt in the minds of sellers that their price reductions will be met by competitors. But it is probable that among the larger groups there will always be some sellers who will cut prices because of their belief that these reductions will pass unnoticed. In doing so, they

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are likely to mistake their competitors' line of action. Some of their competitors may respond immediately, while others may reduce prices after they have seen orders slip away from them. In any event, a result of initial reductions may be general price reduction and consistently low prices. There remains to be examined the uncertainty that may arise concerning whether competitors will maintain prices. This uncertainty has two aspects: One relates to their foresight with respect to the adverse consequences of competitive price cutting; 57 the other relates to their judgment concerning the price that will effect the best adjustment to the prevailing market situation. A n y seller may know that in the long run he will be better off if he foregoes opportunities for immediate gain from competitive price cutting, because he knows that gains that he may secure to the detriment of others may be short-lived and canceled by the gains that others may obtain at his expense. But he may be uncertain whether his rivals possess a similar understanding. If he suspects that they will indulge in price cutting, he might be imprudent not to take advantage of the situation by reducing prices before they do. There can be little doubt that many business men realize the futility of competitive price cutting. Any price agreement or program for price publicity may indicate that business rivals believe they will benefit by halting this form of competition. But, though this foresight may be generally present, there probably will always exist a suspicion that some rivals, under the stress of circumstance or "eagerness for gain," will cut prices or commence "chiseling." Whether this feeling of uneasiness will reach proportions that will lead even the most enlightened and "respectable" members of an industry to initiate price cuts will depend on the experience that these business men have had with their competitors. This will represent a composite, not only of experiences of struggling for markets, but also of experiences with the effectiveness of education and group control efforts in leading rivals to have greater regard for their best individual interests and of the interests of the group of which they are a part. 57

Chamberlin, op. cit., p. 52.

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This uncertainty has particular significance when some sellers believe that the prevailing market situation justifies a price increase. Since, should they raise their price, their rivals might gain by maintaining prices at the existing level, these sellers may refrain from making the contemplated increase. Whether they increase prices will depend on their confidence in the ability of the others to look beyond the immediate opportunities. T h e fact that there might be the additional uncertainty whether the others similarly judge that a price increase is justified by the market situation leads to another phase of the question. Members of an industry may be sufficiently intelligent to refrain from competitive price cutting but uncertain about one another's judgment in adjusting prices to changes in general market circumstances. Whether a seller succeeds in determining upon a price, neither too high nor too low, that will coincide with the theoretical monopoly price is not a matter of importance at this point. What is significant is his uncertainty whether competitors will decide on a lower price and, as a consequence, deprive him of some of his business. If he is uncertain on this score, he may set a price lower than the one his judgment indicates is best. If he takes a chance and maintains his price but later finds that his rivals are profiting at his expense, he will meet their prices; and the next time the market situation in his opinion warrants a price adjustment he will be inclined to establish a price that he guesses will meet the price his rivals will decide on. When everyone similarly speculates, prices may fall to or remain at a point considerably below the level that was initially determined upon by most of the members of an industry. Thus, prices may be lowered, not as a result of price cutting designed to make incursions upon the business of competitors, but as a result of the desire to be protected from inroads that are quite unintentional. No extended discussion is needed to indicate the kinds of uncertainty that a seller faces in determining upon a market price. 58 For example, he must estimate the effect of any change in price 5 8 These uncertainties may not be present when sellers have insufficient foresight to avoid competitive price cutting, since they may never think in terms of adjusting their prices to changes in the aggregate market situation, being rather entirely occupied with the pressures of internal industry warfare.

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1~J

on the demand for the industry's product and in so doing consider the question of the price at which buyers will change their allegiance from the product to substitute products. He must consider whether consumers in anticipation of further reductions will postpone buying in response to a price reduction or, contrariwise, whether they will enlarge purchases in response to a price increase. He must make allowance for the course of aggregate consumer purchasing power. He must estimate the effect of various changes in volume on unit costs of production. In weighing these factors he may have a number of customer demands to consider; changes may occur in the demands of the various classes of customers that make desirable changes in the prices to some, but not to others. 09 CONCLUSION

The circumstances leading to competitive price cutting have been found to consist of the concealment of price offers and several types of uncertainty. I t seems reasonable to conclude that in the absence of group control these circumstances would operate to reduce prices far below the optimum ones and would represent a constant menace to the security of members of industries. Business men will attempt to insure themselves against these risks by participating in controls over price competition or by developing immunities against price competition. In the next section one of these possible avenues of escape will be examined.

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In addition to price the inducement of persuasion is employed by sellers in bargaining transactions. Persuasion commonly takes the forms of product differentiation, advertising, and salesmanship. As considered here, product differentiation consists of changes in the size, quality, or appearance of existing commodities and the 0 9 It should be recalled that in adjusting to changing market situations the seller may deal, not with one price, but with a number of prices—according to the extent t o which he varies prices between buyers. Such an adjustment may be made simply by changing the list price from which discounts and allowances to various types of buyers are computed. An adjustment in the price to some, but not to other, buyers may be accomplished by altering the discount or allowance schedules themselves or by introducing any one of a number of special inducements.

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development of new commodities. Advertising and salesmanship are combined under the heading of sales promotion, which is also considered to embrace the development of new uses for a product. 60 Product differentiation and sales promotion are possible avenues of escape from the hazards of price competition, because they may serve to enlarge a seller's business through persuading buyers of the superiority of his products; any seller who can expand demand by distinguishing his products makes less effective the price competition of his rivals. But such differentiation usually can be had only at a cost. Let us assume that costs are increased and consider the possible consequences of competition in product and sales promotion. Assume, 60 It is desirable at this point to consider briefly the nature of industry groupings as they are affected by product differentiation. Economic theorists have been accustomed to assume that business enterprises may be readily classified according to homogeneity of commodities produced. Such groups of enterprises have been termed "industries," and it has been assumed that between these industries there is as a rule only limited substitution. Except for that resulting from the meeting of competition, product homogeneity usually may be explained on two grounds. One is that buyers frequently lay down rigid specifications for the product that they will buy, thus forcing sellers to make an identical, or nearly identical, good. The standardization or homogeneity that exists here, however, often refers only to given jobs or contracts; sellers may differ greatly in the kinds and sizes of jobs they will undertake. The second significant cause of product homogeneity is group action through private agencies or public agencies such as the United States Bureau of Standards. In some industries a degree of standardization may result from Federal, State, and municipal commodity specifications and from legislation designed to protect public safety and health. (For the most recent comprehensive summary of standardization activities of technical societies, trade associations, and similar organizations see U. S. Department of Commerce, Bureau of Standards, Standards Yearbook 1933, pp. 172-230.) Instead of limited groups of homogeneous products between which there is only imperfect substitution, the number of types of products commanding a market somewhat different from other products in some fields perhaps more nearly approaches the number of enterprises engaged in business. A seller's product differentiation, however, is seldom so complete as to free him from the rather direct competition of at least a few other sellers; beyond this point competition diminishes until it becomes so remote as not to figure in his calculations (see Chamberlin, op. cit., pp. 102-104). But at what points should industry lines be d r a w n ? From the standpoint of business, the question seldom makes itself felt until the need for control of competition arises; then the competitive group must be defined. The lines drawn by business men for this purpose suggests a pragmatic way of defining industries; and the NRA codes probably represent the nearest approximation to industry lines as business men would draw them that has ever been available. When speaking of "industries" in subsequent discussion, we shall have in mind those of the nature defined by N R A codes. (See NRA, Div. of Rev., Work Materials No. 13, for a classification of approved codes in industry groups. For a prominent trade association executive's discussion of the problem of defining industry lines for establishing trade association membership see Donald, Trade Associations, 1933, pp. 101-113.)

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also, that the prices of all sellers in the industry remain fixed, competition being confined to product and sales promotion. 61 T h e outlay for an improved product or for advertising will increase the seller's unit costs at the existing volume. I f , however, there is an increase in sales volume because of these outlays, unit costs may be reduced more than they are raised, thus affording at the new volume an added margin of profits; or the increase in sales volume may be more than sufficient to offset an increase in unit costs. If each seller were to make these outlays on the assumption that the outlays of his rivals would remain fixed, no one would increase demand; the result, because of the increase in costs, would be a smaller margin of profits or greater losses. When sellers disregard the product and sales promotion policies of their competitors, costs may be progressively raised without increase in volume until a point is reached where costs are greater than price. I f members of an industry already were operating at a loss, any one of them might see prospects of lowering cost sufficiently by expanding sales to eliminate these losses. T h e result of product differentiation or sales promotion directed by each seller to this end would be greater losses. 8 2 Competition in product and sales promotion would be destructive. The extent to which business men engage in competitive product differentiation and sales promotion among other circumstances depends on the prevalence of conditions of concealment and uncertainty similar to those already discussed with reference to price competition. There can be no doubt that such circumstances are generally present and that product differentiation and sales promotion, being potentially destructive, by no means afford to the business man a sure avenue of escape from destructive price competition. Several reasons may be suggested, however, why business men may be less inclined to condemn competition in product and sales promotion than competition in price. In the first place, some of its 6 1 An assumption that represents the actual situation in some markets, such as those in which sellers adhere to a price agreement. 6 2 See Chamberlin, op. cit., pp. 94-97, 154-159, for a graphic demonstration of the manner in which "group equilibrium" is attained when there is competition in product and sales promotion.

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forms, particularly certain types of advertising, are of such recent origin and so scattered with instances of spectacular success that business men may not be fully aware of their potentially destructive character. There is always a possibility, moreover, that any one may achieve success. Advertising may be looked upon as a gamble in which if one is lucky the returns are great. And the costs may not be excessive. Clever advertising, salesmanship, branding, packaging, facility in making an item of merchandise appear superior may in some instances be purchased at little cost; when this is true the risks assumed are small. In the second place, capitalistic institutions through trade-marks, patents, and copyrights make it possible in some degree to protect the gains that may result from product differentiation (and product differentiation as implemented and supported by sales promotion). In other words, sellers may be prohibited by law from directly meeting this type of competition. This, of course, is true only within the limits of infringement as determined by the courts. In the third place, any seller may assume that not only may he be uninjured by the sales promotion programs of his competitors but also that he may profit by them. The result of advertising may be to shift customers from non-industry products indiscriminately among the members of an industry. 63 Small enterprises commonly do not engage in advertising, thus avoiding its risks while enjoying its benefits. Finally, when an industry is young and struggling for recognition, its prospects for existence may depend on its ability to improve its products. An example is the automobile industry, whose progress during its early stages depended almost entirely on the ability of its members to develop safe and durable cars. But though competition in product and sales promotion may be potentially less destructive than competition in price, does it follow that price competition may be less destructive when product differentiation and sales promotion are present? Having succeeded in expanding demand by product differentiation or sales promotion, rather than accept a larger revenue through greater sales volume at an unchanged price a seller might enjoy this same revenue by accepting an unchanged sales volume at a 03

Chamberlin, op. cit., 152-153.

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higher price. Or if his program has been very effective, he might raise his price and enjoy a larger volume at the same time. A successful seller may consider it unnecessary to meet the price reductions of his rivals; in fact, if he has spent large sums in persuading buyers that his product is superior, he may raise skepticism in their minds by lowering prices. The cases are probably rare in which a seller can so effectively distinguish his products as to be immune from the price inducements of competitors. The margin of immunity usually will be narrow. Nevertheless, where there are differences between products or where varying outlays are incurred for sales promotion one may expect to find price differences between members of an industry with respect to products serving the same or similar consumer uses. Some may carry quality or style differentiation further than others. Those who make higher quality or better styled products may command a higher price for these products than others may command for their inferior products. Such a price difference may also result from variations in consumer acceptance arising from branding and sales promotion when some members are relatively more competent in using these devices or have made greater outlays than others. This variation may occur in the case of each of the quality or style groups; or, sellers may choose to concentrate their sales promotion on the better grades only or on inferior grades only. Where product differentiation and sales promotion are present, there may be opportunities for concealment and market uncertainties in addition to those found in the case of price competition over a single product. In the first place, it may be less difficult for sellers to conceal their price policies. Instead of a price policy for one product, it may be necessary if competitive price cutting is to be avoided that business rivals be cognizant of policies with respect to a number of products. Any seller may feel that he can escape detection by cutting prices, for example, on only a few grades. Other sellers may reduce prices on other grades for the same reason, with the result that a general competitive lowering of prices on all products takes place. Terms and conditions of sale, moreover, may vary between related products. Thus, freight

32

FREE

COMPETITION

charges and allowances varied according to product in the battery industry; 64 in the magnet wire industry customer discounts were quoted on one class of products, but not on others; 65 and a number of special discounts were based on type of brand 00 in the radio tube industry. Furthermore, sellers may know little about the products priced by rivals. When products have been carefully standardized by group grading or labeling, little difficulty may arise; but when the only label is a brand name, a seller may be forced to assume that quality is roughly indicated by price. Additional uncertainties may arise concerning whether contemplated price reductions will be met by competitors. For what a seller may have to consider in judging the effect of a price reduction by any one of his competitors is a product that potentially commands a demand different both from that of his own products and from the products of any of his competitors. At what price, he must ask, will buyers shift their allegiance from his own brands to those of competitors. To the extent that he is uncertain on this ground he will be disinclined to disrupt his existing price structure by meeting rivals' price cuts. 67 Additional uncertainties must be faced, too, with respect to the point at which competitors will determine their prices in endeavoring to make the most advantageous adjustment to the market situation. This is an uncertainty of considerable magnitude when all members make a single product 64 NRA, Div. of Rev., Work Materials No. 78, p. 177. The reader, by following through the filings of company # 4 (ibid., pp. 498-512), may find variations between related products, not only in delivery terms, but also in customer classifications, trade discounts, and numerous types ol special discounts. 85 Ibid., p. 177. 66 That is, "no quality specification unbranded tubes," "private brand," "special quality specification branded," "particular quality specification branded," and "assorted brands." (Ibid., p. 114.) 67 This is particularly true when consumers tend to judge quality by price and when as a consequence there is always fear on the part of a seller of "spoiling" a product by price reduction. When there is a chance that buyers will not shift their purchases to him, a seller will be hesitant about cutting prices if he is forced at the same time to reduce prices on all his existing business; and when his customers are informed of one another's prices, it will be difficult for him to offer to one group a lower price than to another. Branding may afford a simple solution to his problem. He may give to a product a different brand name (probably changing its appearance slightly) and under the guise of an inferior product sell it at a reduced price. This, perhaps, is one of the most prevalent means of varying prices between buyers, one that is made possible becausc frequently buyers are unable to measure readily the comparative qualities of differently branded merchandise.

FREE

COMPETITION

33

similar in every respect; but when products vary in the amount of consumer acceptance commanded, the difficulties of determining the points at which rivals will determine their prices obviously are multiplied. A seller may find it exceedingly difficult, if not impossible, to arrive at a sound judgment about where to set his own prices. It might be concluded that because of these factors destructive price competition is likely to be more prevalent when there is variation in the consumer acceptance of the products of different members of an industry. Such a conclusion would overlook two considerations. First, competition will not focus entirely on price, as it necessarily would were industry products homogeneous, but on product differentiation and sales promotion as well. Second, sellers may hesitate to cut prices on products that have been promoted, since they may lose in prestige as a consequence of price reduction. Considering all the factors, it is impossible to say whether price competition will become more or less destructive when product differentiation and sales promotion become more prominent in an industry. COMPETITION

IN

ECONOMIES

Economizing is another practice that may prove destructive and consequently afford no easy escape from the hazards of price competition. Perhaps of less general importance than product differentiation and sales promotion, it is a practice that until recently has commanded major attention in the writings of economists on competitive practices. Although many inventions and technological developments are of a nature such that outlays on capital equipment can actually be reduced, many technological improvements require an increase in such outlays. Such an expansion will increase unit production costs at the existing volume of sales unless savings in direct labor costs are very substantial. But whether unit costs are increased considerably or only slightly as a result of technological improvement, they presumably may be lowered by an enlarged sales volume provided the technological change permits savings in direct labor requirements. In an effort to secure this additional volume,

34

F R E E

COMPETITION

68

prices may be lowered. If all members of an industry simultaneously make technological improvements and attempt to lower costs through enlarging volume by cutting price, the situation will develop in which the price reductions neutralize one another; no one gains volume, and because costs have been raised and prices lowered the revenue of each is diminished. If the technological improvements are minor and relatively inexpensive, the reduction in revenue may not be great. Nevertheless, if each member persists in making these improvements, assuming that he can enlarge his volume sufficiently to cover the added costs, it is apparent that prices may fall to and persist at a level below costs, and competition will be destructive. If the initial technological changes necessitate huge capital outlays, so that unit costs at the existing volume are raised sharply, every member may at once be plunged into the red as he lowers price in an unsuccessful effort to increase volume. The ability of business men to conceal new technological processes and price reductions, at least for a time, cannot be seriously questioned. But the time lag is all important when the improvements have been purchased at a considerable cost. Unless there is time to secure a sufficiently great increase in volume through lower prices that a substantial part of the new equipment may be paid for, business men may not risk the investment. Thus, prospective investments that are very costly may not be made; but if the outlay involved is small, every business man may make improvements—with the result, however, that each may come to find himself less well off than before. In deciding whether the lower price will result in sufficient inroads upon the markets of his rivals to cause them to meet his reduction, the business man faces the uncertainties already discussed under the heading of price competition. He also faces uncertainties concerning competitors' foresight with respect to the consequences of competitive price cutting similar to those suggested above. Competition may occur in a number of other types of economies, 68

Although price reduction probably is the device most frequently employed in such circumstances to obtain added volume, it is of course possible that product differentiation and sales promotion may be used. The thesis that the practice of economizing may be destructive, however, would not be affected were the latter the case.

FREE

COMPETITION

35

such as in distribution, in transportation, in materials, and in labor. Depending on the amount of financial outlay needed to make them effective, competition in some of these may have greater destructive possibilities than in others. T h e development of more economical forms of distribution may involve the expense of contacting and building up working relationships with independent distributing outlets; or, if the manufacturer extends his operations to include the function of distribution, expense m a y be incurred in buying or building warehouses, branch offices, retail stores, and similar outlets. T h e essential method by which transportation economies may be achieved is through bringing production equipment closer to important points of consumption or sources of raw material, a move that obviously entails capital expenditure. Economies in materials may be achieved either through reducing the costs of materials purchased or b y cheapening the material content of commodities produced. Economies of the first type are sometimes effected through integrating various stages of the extractive and manufacturing process; they m a y be achieved through developing a scale of operation sufficiently great to permit the enjoyment of economies of quantity and volume purchases and of strong bargaining position. T h e effectiveness of attempts to economize through cheapening the material content of the product depends on the seller's ability to pass off the cheaper product without reducing the buyer's acceptance of it; this, in turn, depends upon skill in deception or product misrepresentation. T h i s type of competition, unlike those previously referred to, does not require important financial outlays; nevertheless it has destructive possibilities, in the sense that the goodwill for an industry's products m a y be seriously damaged if buyers find that they are being deceived. Economies in labor (aside from those that reduce the ratio of labor input to output, the essential end of technological economies) are achieved through the labor bargain and ordinarily take the form of wage reductions. T h e y are frequently employed to reduce costs because, though the resulting advantages to individual sellers m a y cancel out in competitive situations, they do not involve the penalty of financial expenditure.

36

FREE GROUP

COMPETITION

OPPORTUNITIES

AND

DESTRUCTIVE

COMPETITION

Thus far little recognition has been given to those circumstances contributing to destructive competition that vary according to the characteristics of an industry or the phase through which it is passing. 89 These circumstances have one point in common: they relate to the aggregate business opportunities available to the members of an industry. If there is an abundance for every member of an industry, the pressure of competition obviously will be less than if there is a scarcity of opportunities. If each member enjoys a substantial degree of security, he will be less inclined to embark on hazardous ventures against his competitors. But if group opportunities are so limited that members are threatened with losses or bankruptcy, they may attempt inroads upon the markets of their rivals, even though they appreciate that by so doing they may intensify existing competition and render their own position even less secure. Other things being the same, the hazard of destructive competition will be greatest where and when group opportunities are fewest. A few of the significant circumstances that determine the relative availability of group opportunities may be suggested. SUPPLY

CIRCUMSTANCES

An essential tenet of equilibrium economic theory is that opportunities for economic gain tend to equalize over the area of economic activity because of the movement of capital and labor resources to and out of industries. Imperfect mobility and imperfect divisibility of resources and imperfect knowledge of opportunities, however, have been recognized as more or less significant hindrances to such a tendency. Other circumstances are being increasingly recognized as responsible for variations in the availability of opportunities between industries. The absence of opportunities for making a return on investment is a condition that is not always corrected by a withdrawal of resources. If after going into bankruptcy the less productive enter69 The importance of fixed costs as a factor contributing to destructive competition is, of course, implicit throughout the preceding analysis.

FREE

COMPETITION

37

prises were permanently eliminated, the remaining concerns might recoup some of their losses through sharing the business formerly enjoyed by these enterprises. But in industries in which plant equipment is specialized and not readily convertible into the production of other goods, the more likely circumstance is a recapitalization of the bankrupt concerns and their re-entry into business on a cost basis sufficiently low to give them a competitive equality or advantage with respect to those concerns that may still be solvent. Unless there is an increase in aggregate opportunities or concerted effort to raise prices, this process may continue until all have suffered bankruptcy. Supply in large part may be independent of a growing scarcity of opportunities. The dependence of supply, not on opportunities to sell, but on peculiar conditions of natural-resource exploitation is a familiar phenomenon in the oil industry, where the amount of oil on the market in the absence of group control is governed by the necessity for all owners of a pool to produce if any one of them commences a drilling.70 Overspeculation in material resources and inventories and pressure for liquidation at the very time the market is least able to absorb them is of general significance; an example is afforded by the lumber industry, in which mills continued to sell during the depression years of 1930-1933 because of financial inability to carry lumber stands purchased at high values during speculative booms of previous years. 71 A consequence of a depression in demand in some industries is an increase in the number of enterprises. When little capital is required to set up a shop, the natural course for a worker thrown out of employment may be to enter business on his own account, accepting as his wages any business that he can divert from his former employers.72 Institutional factors may play a direct and immediate role. Thus, during the years 1930-1933 a tremendous growth in the capacity of the motor vehicle storage and parking industry resulted from an expan70 This, in turn, is dependent upon a "grotesque" legal principle, whereby property rights in crude oil may be obtained only by "capture." (Bums, op. cit., p. 23.) " NRA, Div. of Rev., Work Materials No. 79, pp. 2-3. 72 During the depression years of 1930-1933 such a situation developed, for example, in the barber shop trade, automotive garage trade, commercial warehousing industry, and fur dressing and dyeing industry.

38

FREE

COMPETITION

sion in parking lot facilities; this was a consequence of the demolition of obsolete office buildings, other types of business establishments, and residences—a demolition that took place primarily for the purpose of saving taxes. On the other hand, unusually abundant opportunities may persist in those industries in which the smallest technically effective plant unit is so large that new competitors cannot hope for sufficient business to make their plants pay. 7 3 As a general proposition it may be said that the larger the unit of investment necessary to establish an effective plant, the greater will be the ability of established producers to protect available opportunities for their own exploitation. DEMAND

CIRCUMSTANCES

Sellers may be confronted with buyers who have very different bargaining powers. The extreme case is one in which a single buyer possesses control over the entire market of a number of sellers. T h e sellers' opportunities then are determined entirely by the policy of the buyer; the buyer is able to dictate the price at which each must sell, whether or not it is destructive. 74 When the number of buyers is greater, there is a correspondingly greater opportunity for bargaining over the terms of the transaction. 7 3 Buyers are less able to exert pressure upon sellers to cut under rival offers; stated conversely, sellers have less incentive to cut prices to maintain their position in the market. Sellers frequently deal with a few large and powerful buyers and a large number of relatively small ones. This is particularly true in consumers' goods industries, where members may sell to wholesalers and retailers, on the one hand, and to mail-order houses, chain syndicates, government agencies, and industrial users, on the other. T h e result is that the large buyers may command a more favorable price than the small ones. This may be a destructive price if the seller is unable, without the loss of considerable time and outlay, to See Cassel, The Theory of Social Economy (1924), pp. 116-121. Presumably, however, the seller would have no incentive to accept prices that were below direct costs for any considerable length of time. 7 5 Unless the buyers operate under an agreement not to pay more than a given price, or unless they independently act according to a common policy—a situation that might develop if there were complete publicity of buyers' price offers, farsightedness about the consequences of over-bidding, etc. 73

74

FREE

COMPETITION

39

build up the contacts necessary to shift to new forms of distribution. Opportunities may vary according to the phase of life history through which an industry passes. 76 During the early phase, when the product is being rapidly developed and improved, the market is an expanding one, and opportunities for profitable business may be plentiful for all who are able to make their way into the industry. As the period of rapid market expansion comes to an end, individual producers will give increasing attention to means for making their position in the market more secure. And during the phase of declining markets they may be compelled to adopt the only method that promises a necessary volume of business, which is to enlarge their own share of the business at the expense of other members of the industry. Therefore, the pressures that result in destructive competition may be greatest during the declining phase of an industry, although they may by no means be absent in the more stable period. In seasonal industries opportunities may differ according to the time of year. During off seasons, when business is dull and capacity is in relatively great excess, the incentive to cut prices is likely to be greater than during other periods of the year. Most important and obvious of all, opportunities will vary according to cyclical fluctuations in consumer purchasing power. During the peak of the cycle sellers may enjoy all the business they can profitably handle for the mere asking and consequently have little incentive for forays into the markets of rivals. As opportunities disappear and excess capacity develops these incentives will reappear. This circumstance is of particular importance in analyzing NRA trade practice control programs, inasmuch as the codes were written during one of the most generally depressed periods of recent history. Industries differ, of course, in their sensitivity to fluctuations in mass purchasing power. Producers goods often enjoy greater opportunities during the upswing of the cycle; but during the declining and depression phases the demand for their products is apt to be very inelastic; 77 the result is that price cutting may only shift business from one member to another and not enlarge aggregate demand. 76

See Edwards in Atkins et al., Economic Behavior (1931), I, 394 ff. See Burns, op. cit., p. 26, and Robinson, Economics of Imperfect Competition (1933), p. 73. 77

CHAPTER THE

CONTROL

OF

COMPETITION

II

DESTRUCTIVE THROUGH

CONTROL

PRICE

PRICE

DEVICES

I

T HAS been shown that in three significant types of trade practice — i n price inducements, in product differentiation and sales promotion, and in economies—competition may prove destructive to the financial security of rival business enterprises. The probability of this outcome was found to depend on the prevalence of several circumstances, including ability to conceal trade practice policies, uncertainty concerning the reaction of business rivals to competitive moves, and uncertainty about their foresight in refraining from intra-industry competition. It was shown that these factors may operate with considerable intensity in most fields of business; an intensity that would be significantly moderated, however, by an abundance of opportunities for doing business. This analysis of group behavior proceeded under the highly unreal assumption that sellers are free to engage in whatever trade practices they choose and, cor relatively, are exposed to every form of competition practiced by their rivals. Attention centered on the probable consequences of competition when the potential concealments and uncertainties of the market operate with full effect. But through concerted action business rivals have always sought to check, and with varying degrees of effectiveness have checked, the destructive tendencies of free competition. T h e development of effective control programs may require continuous education and exhortation by those who best appreciate the destructive potentialities in free competition and the promise of concerted action. This is particularly true after controls have been undertaken. A n y participant may enjoy immediate gains

PRICE

CONTROL

DEVICES

41

by cutting or "chiseling" under the stabilized policies of competitors who are adhering to the controls. These violations are due, not to a feeling that the controls are burdensome, but to prospects of a larger share of the market at the expense of those who abide by the rules. But violations engender retaliatory action in the form of violations by others and eventually wreck the controls. It is this fact that the sponsors must continually impress upon the minds of less judicious members. And it is because there usually is a fringe of sellers in any industry who are likely to behave imprudently that the sanction of law is welcomed as an aid to the control of destructive competition. Such control programs, though fundamentally the result of a compulsion to provide security against destructive competition, may do much more than this. Business men usually will seek to attain as great a margin above this level as is possible; and the most effective programs will yield monopoly returns. However, the margin above the security level that can result from control efforts is limited by the abundance of business opportunities available to the members as a group. T h e most effective programs during periods of generally depressed demand may serve merely to minimize losses that otherwise would be incurred. It is doubtful if at the inception of the N R A the most judicious programs could have prevented losses in many industries. T h e program for control of destructive competition arises from the common realization by members of an industry that free competition is likely to prove futile and disastrous. It centers, not on a struggle over shares in the aggregate of market opportunities, but on a common and joint endeavor to make the most of these opportunities. It is an expression of the harmony of interests that exists among business rivals and is dependent on forethought and a willingness to compromise immediate interests. The compromise necessary to make a control program effective may require that some members sacrifice a fraction of their share in the market to others; but this penalty may be willingly incurred because of the promise of more permanent security in the market. This program is in contrast with industry's program for control of unfair practices, which arises because of the diversity of interests

42

PRICE

CONTROL

DEVICES

among business rivals and represents an effort on the part of some to protect or enlarge their share of the market by suppressing the practices of others.1 The primary evidence of NRA programs to control destructive competition resides in the fact that in a majority of code programs the entire industry group appeared to be in agreement about the desirability of controlling competition, there being no protest against the trade rules proposed to this end either before or after their approval by the Administration. In other cases, however, there was unmistakable conflict over the proposed rules; this was evidenced by protests of minority factions or of individuals both before and after the time the code rules became law. In this group of cases code proponents evidently were intent on curbing the practices of their competitors. Such intention frequently was explicit in their statements. Available records, however, do not permit a precise division between those NRA programs that were designed to prevent destructive competition and those designed to prevent unfair practices. On the one hand, sharp conflicts of interest may have been present in those industries in which verbal protest failed to develop. There were instances of evasion and noncompliance in every code program. This disregard for the rules may merely have indicated that some, the so-called "chiselers," were availing themselves of an opportunity for immediate gain by taking advantage of the fixed policies of other members adhering to the controls.2 But it may 1

See below, pp. 127-129, for discussion of incentives to controls of this type. This weakness of price control was pointed out by a representative of the building material dealers of New York City in describing the results of code price control in that locality: "After year and half of flagrant violation, no penalty has been enforced against violators. "Private secret agreements and rebates between seller and buyer cannot be disclosed or discovered by present legal means, and, of course, will not be volunteered. "The temptation to grab business, is human, and at a time of limited sales project, the temptation to cut prices becomes more acute. "Price provisions are killing the material industry in New York. These price provisions are just an umbrella for the code violator and chiseler—something to shoot at and undersell. Only the ethical, the responsible, the honest business man will respect Code provisions, and he will lose his business and cease to exist." ( N I R A , Public Hearing on Price Provisions, I, Supplement, 220-221.) 2

PRICE

CONTROL

DEVICES

43

have indicated that certain members found the restrictions so burdensome that they preferred to see the entire control collapse than to accept the penalty of adherence; they may have chosen evasion or noncompliance as the most effective method of expressing their opposition to the program of the group in power. The precise reasons for the evasion and the patent noncompliance that characterized in some degree all code programs is not clear from the records; in fact, one can obtain from experience records only a partial notion of the amount of nonadherence to the trade practice provisions of the various codes. On the other hand, it must be recognized that there may have been a mutual interest in curbing destructive competition even in those cases in which a particular faction in an industry called forth violent protest by imposing rules on the practices of rival sellers. For by making these rules effective, members of the faction at the same time set a limit to their own rivalry in such practices and thus established barriers against competition between themselves that might have become destructive. In this sense any trade practice program that is designed by one group to suppress the practices of other groups in an industry may include, as a secondary aspect, the prevention of destructive competition. Therefore, in presenting industry's program for control of trade practices, the various industries could not with confidence be classified according to which of these objectives code sponsors had in mind. The programs of some industries undoubtedly were primarily concerned with curbing destructive competition, whereas those of others were pointed to the suppression of practices deemed injurious, and therefore unfair, to the dominant members. In other cases, the prevention of destructive competition and the elimination of unfair practices probably played roles of equal importance. Our purpose in the following pages will be to select those aspects and incidents of the code experience that illuminate most fully (1) the kinds of destructive competition that industries desired to prevent by means of the codes and the nature and functional significance of the control devices adopted in pursuit of these ends; and (2) the practices that dominating groups in various industries attempted to suppress as unfair together with the types of rules employed to

44

PRICE

CONTROL

DEVICES

accomplish their purposes. Industry's program for control of destructive competition will be presented in this chapter and in Chapter III, its program for control of unfair practices in Chapter IV. Code programs to control destructive competition centered on price. 3 Most of the industries submitting codes had felt the impact of the business depression to such an extent that some members had suffered bankruptcy or had retired from active operation. The situation had become destructive or threatened to become destructive to the security of a substantial number of industry members. Whatever may have been the factors contributing to this condition, it is evident from the almost universal demand for price control that industry looked on excessive price competition as one of them. If they had not altogether collapsed, the informal controls of private action had become increasingly ineffective in the face of the universal drive to enlarge sales volume. The desirability of price adjustment to a generally depressed market was undoubtedly recognized by most code sponsors; what was deplored was the aggravation of the depression by intensified, but futile, price cutting for the diminishing business. The attitude of code proponents toward pre-NRA price competition is reflected in the following comments of Robert H. Winn, of the limestone code authority: Appreciating that in a market which approximates 13 per cent of the normal one-shift production capacity of the industry, some form of quantity production was necessary in order to prevent excessive loss, members of the industry during the depression found themselves in a death struggle for the small amount of business available, and regardless of the selling price. The industry was moving in a vicious circle with prices ever spiraling downward in a vain attempt by each member of the industry to garner for himself 100 per cent of his normal production in a market which was demanding but 13 per cent of the industry's normal production. 4

Price controls were designed to prevent this "vain attempt" of sellers to make their positions in the market more secure by competitive price cutting. Another expression of industry's philosophy 3 See below (pp. 121-126) for evidence concerning the control of non-price competition. 4 NIRA, Public Hearing on Price Provisions, II, Supplement, 522.

PRICE

CONTROL

DEVICES

45

was contained in the price filing provision originally proposed by the fertilizer industry, which read in part as follows: Any new or changed [price] schedule shall only be issued or made as a result of legitimate and general changes in market costs of materials or manufacturing costs or to meet a general competitive condition and not to obtain some special trade advantage not consistent with the spirit of this Code.5

Thus, any member of the fertilizer industry might with the approval of the administrative agency reduce prices in response to falling costs or diminution in general industry demand, but under no circumstances was he to make reductions to enlarge his own "special" share of the available volume of trade at the expense of his competitors. Four types of devices were proposed by industry groups for controlling competition in price which, at one time or another, were acceptable to the NRA: minimum price controls, price filing, controls over specific price practices, and production and capacity controls. MINIMUM

PRICE

CONTROLS

The most popular form of attack on destructive price competition was minimum price fixing. Theoretically, this device possesses an obvious advantage over such alternative measures as price filing and production control in that it may accomplish directly what the others may accomplish only indirectly and with limited promise of success. The right to fix prices below which no member may sell affords an opportunity, not merely to prevent the competitive cutting of prices to levels that are so low as to be destructive, but to raise prices to the point at which a maximum of profits may be returned or a minimum of losses sustained. Industries naturally sought to raise prices as much as they thought the market situation would stand. In most cases, however, the NRA prevented them from setting floors to competitive price cutting that were above the level of "costs." 5

"The Fertilizer Code," Vol. A, Sec. 2, NRA files, U. S. Department of Commerce.

46 MINIMUM

PRICE PRICES

CONTROL

BASED O N

DEVICES

COSTS

In its price-raising activities under the codes, industry is sometimes accused of having attacked the symptoms rather than the causes of the depression in which it found itself at the time of the enactment of the NRA. This implies that members of the various industries had made price adjustments to the circumstance of depressed demand that were as effective as was possible in minimizing losses. It denies the pervasiveness of competitive price cutting and implies that business rivals behave in the way that a theoretically perfect monopolist would. It would be more accurate to charge that industry overemphasized competitive price cutting as a factor contributing to its ills and was overoptimistic about the beneficial effects of price control. This optimism is suggested by the widespread adoption of code prohibitions against selling below cost. Some industries doubtless could have succeeded and perhaps did succeed under the NRA in raising and maintaining prices above cost levels. In other industries such efforts were doomed to failure. It is doubtful, however, if representatives of many of the severely depressed industries considered it advisable to raise prices to the point of existing unit costs. When referring to costs of production some business men have in mind, not current costs, but current direct costs plus normal indirect costs. Such a figure in industries with large elements of overhead may be considerably below current costs during periods of depressed demand. In any event, the cost floors that were made effective under the codes and that industries were willing to accept usually were substantially lower than the level of unit costs prevailing at the time. Of the 764 codes and supplements approved by the NRA, 421 contained prohibitions against selling below cost. Of these, 365 prohibited sales below the individual member's cost; 7 below lowest reasonable cost; 7 below lowest representative cost; and 4 below average cost.6 In subsequent discussion code prohibitions against 6

NRA, Div. of Rev., Work Materials No. 56, p. 102. In addition, 38 distribution codes prohibited sales below cost, as follows: 7 below individual cost; 9 below invoice cost plus transportation; 3 below invoice cost plus individual mark-up; 13 below invoice cost plus a uniform mark-up; 6 below manufacturers', or wholesalers', list price. Price control in the distribution codes will be discussed in Chapter IV in connection with industry's program for fair practices.

PRICE

CONTROL

DEVICES

47

selling below "lowest reasonable" and "lowest representative" costs will be disregarded, inasmuch as the Administration did not permit them to become effective.7 The lumber industry was the only case in which a prohibition against selling below "average" cost became effective.8 A majority of code prohibitions against selling below cost were accompanied by provisions for the promulgation of uniform accounting methods; NRA's approval of these methods usually was required to make the selling-below-cost prohibition effective. Less than half the industries empowered to formulate cost accounting methods presented them to the Administration for approval, and of the formulae submitted only forty were approved. 9 Of these, only twenty-nine were in effect at the time of the Schechter decision; 10 in addition, cost rules were given preliminary approval in six cases; and in at least six other cases code authorities prescribed cost accounting methods without NRA approval. The definition of cost elements was a matter over which the Administration and representatives of industry were in almost continuous disagreement. Industry proposals usually were unacceptable to the Administration because of their tendency to include artificial or abnormally high costs. Certain elements of cost were excluded entirely, or in part, by the NRA. As a matter of policy, interest and return on investment were disallowed from the outset. 11 Administrative salaries were either excluded or limited. Research and developmental expenses usually were not allowed. Insurance, reserves for contingencies, and taxes were excluded, and rent was limited to that amount reported for income tax purposes. Selling and ad7

With the exception of two transportation codes: the codes for the motor bus industry and the inland water carrier trade provided for the establishment of rates on the basis of the lowest reasonable cost of scrvice. The rates established in the motor bus industry were suspended. On the other hand, rates established in the inland water carrier trade appeared to work satisfactorily and remained effective (Taggart, Minimum Prices under the NRA, 1936, pp. 234-236). 8 Average costs were usually defined to mean "weighted average costs." But in the slate industry "that 40 per cent of the Members of the Industry of each particular district having the highest costs" were to be excluded in computing the average (ibid., p. 225). 9 ¡bid., pp. 2S7-2S8. NRA, Div. of Rev., Work Materials No. 56, p. 107. 11 Ibid., pp. 105-106.

48

PRICE

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DEVICES

vertising expenses were excluded or limited to a minimum of ordinary outlays. 12 The definition of raw-material costs was one of the most common sources of friction between the Administration and representatives of industry. Industry usually urged the current replacement value basis of computing raw-material costs. It was contended that such a basis was the only one that would be fair to small members who during the depression years had been financially unable to build up large inventories of raw materials at the depressed prices then prevailing and who as a consequence would be at a competitive disadvantage if the larger concerns were permitted to value inventories at actual cost. It was argued that integrated establishments producing their own raw materials would have an advantage over their rivals if materials were valued on a basis of actual costs, since they actually had, or could develop on their books, a lower cost for materials than the specialized concerns. Finally, it was pointed out that the actual cost basis was impracticable, since, it not being possible to earmark inventory, there was no way of determining when and therefore at what price the material consumed in current manufacturing operations had been purchased. 13 Some industries specified in their codes that raw materials should be valued at current replacement costs, and during the early period of code formulation the Administration approved the use of replacement values. The Administration's policy on this point changed, however, and in July, 1934, it definitely committed itself to the basis of current replacement cost, or actual cost, whichever was the lower. 14 The NRA usually insisted that the basis for computing depreciation charges be original cost, the rate to be based upon the probable life of plant and equipment. This policy was frequently criticized on the ground that it would give an unfair competitive advantage to those firms that had acquired plants and equipment through bankruptcy sales at abnormally low prices, firms that had devalued their equipment through reorganization, and firms that in previous 12 See form memorandum regarding properly allowable elements of cost, Orton W. Boyd, chief of NRA cost accounting unit, to H. Ferris White (June 22, 1934), NRA files, U. S. Department of Commerce. 13 NRA, Div. of Rev., Work Materials No. 56, pp. 105-106, 175. " Ibid., p. 105.

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years had written off serviceable plant and equipment. Representatives of industry sought to eliminate the advantage of these enterprises by providing that depreciation be charged on present replacement values. 15 A final source of difficulty related to the allocation of indirect expenses, such as depreciation, obsolescence, and administrative and selling overhead, to a unit-product basis. At one time or another representatives of industry proposed three bases for making such allocations. One was to distribute the expense on the basis of current output; this basis was designed to give a figure that would cover current unit costs. Another basis was anticipated volume of production over the period during which the cost provision was expected to be operative. A third basis, the one adopted by the Administration, was the volume produced during a period of "normal" or "average" utilization of productive facilities.10 Such a basis was the average volume of output during a period of normal activity in the past, as during a preceding six- or ten-year period. In some cases the code provisions themselves designated the period of years to be used. 17 This basis, while avoiding the inclusion of idle plant cost as a basis for current selling price and the uncertainties involved in basing price on anticipated volume of sales, necessarily made only partial allowance for varying rates of activity between members of an industry. The current output of some members may have exceeded their average output during the six- or ten-year period used as a base, as a result of which they would have been required to make a relatively greater price increase than their competitors. However, it was usually provided that any concern could use current output as a basis for allocating indirect expense if it exceeded the output of the period prescribed as the standard basis. The overhead burden to a large extent was standardized when each 15 Ibid., p. 104. Some cost formulae proposed schedules of depreciation rates which were to be uniform for all members. Few of these were approved by the Administration. 18 Ibid., p. 106. 17 For example, the Paint, Varnish, and Lacquer Code, for distributing indirect factory expense, established "the basis of the average rate of utilization of plant facilities of profit making producers during the years 1928 to 1932 inclusive, and provided that such average rate shall not include any plants not in operation." (Taggart, op. cit., p. 264.) This provision was typical of that found in several other codes (ibid., pp. 260-261).

5°

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member was required to use an average industry rate of plant utilization as a basis for distributing indirect expenses.18 Some industries handled the matter of computing indirect expenses simply by specifying a percentage mark-up over direct costs. This was the usual practice in the construction and allied codes and in some distribution codes.19 Percentage allowances for indirect expenses were approved in the cost formulae of only a few manufacturing industries.20 This method of calculating indirect expenses, of course, had the effect of establishing a cost that was in part uniform for all industry members. The approved cost formulae provided that costs of joint products be allocated on the basis of the relative sales volume of the different products 21 or upon such bases as the relative amount of materials included, relative amount of manufacturing floor space used, or relative proportion of labor costs incurred.22 An approach to the problem of pricing joint products that did not involve individual cost determinations was to specify in dollars and cents the allowable differential between sizes, grades, and types of products.23 Several codes contemplated the establishment of cost for only a socalled "base" or "standard" product, the minimum prices on all other products to be calculated by applying uniform schedules of differentials; some codes empowered their code authorities to draw up such schedules of price differentials, while others incorporated differentials that were customary in the industry.24 The code authorities of at least two industries without administrative approval 1 8 Such as in the paint, varnish, and lacquer industry, whose formula is cited immediately above. T h e proposed cost formula for the rubber manufacturing industry provided that the industry administrative agency should work out an average rate of plant utilization to be used by every member.

Ibid., pp. 259-262, 311-317. MateFor example, luggage and fancy leather goods ( N R A , D i v . of Rev., Work rials No. 56, p. 171). 2 1 F o r example, in the hardwood distillation industry both direct and indirect expenses were allocated in this manner; in the coffee industry, where direct costs could be segregated, only indirect costs were thus allocated. 2 2 T h e cost formula for the rubber tire industry provided that indirect expenses be allocated on the basis of a combination of these criteria. 2 3 N R A , D i v . of Rev., Work Materials No. 35, Part C, p. 3S. 2 4 Only a f e w of the codes providing for differentials required that they "reflect differences in cost." 19

20

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prescribed elaborate schedules of price differentials to be followed by their members. 25 Thus far consideration has been given only to the way average unit-production costs and ordinary selling expenses were defined. The inexactness of the accounting standards and their susceptibility to easy evasion are apparent. If the selling-below-cost provisions had been literally interpreted, the policing of members' compliance in most cases would have required continual examination of their cost records and calculations, which would have imposed upon the code authorities and upon the Administration a grievous burden. Possibilities of evasion varied according to the extent to which the accounting methods left the seller free to determine price in accordance with his own peculiar cost circumstances, that is to say, to the extent to which the methods failed to make costs uniform for all members of an industry. Another aspect of the selling-below-cost controls was the control of expenses that vary according to the customer's trade status, his location, the quantity of his purchase, and the value of services rendered by him. These variations usually were handled apart from the selling-below-cost provision and the cost formula; supplementary code provisions were designed to govern them. Some industries followed the simple expedient of prohibiting price variations between customers. 26 Others arbitrarily specified the dimensions of the variations that were allowable. Still others stated that variations, if made, must be based on the cost of service rendered, without, however, specifying methods for measuring or computing these variable costs. Combinations of these methods of handling the problem, of course, were found in some codes; for example, quantity discounts may have been prohibited; maximum trade differentials specified; advertising allowances limited to the "value of the service" rendered by the buyer; and delivered prices required to cover full transportation costs. 25

See NRA, Div. of Rev., Work Materials No. 76, pp. 23S-241. Through prohibitions, for example, of quantity or trade discounts; advertising allowances; and through requirements that goods be sold on an f.o.b., nofreight-allowed basis, or on a basis of delivered prices uniform for the entire country or for designated zones. 26

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A similar need for control arose from the fact, pointed out in Chapter I, that there are innumerable ways of making price concessions, ranging from the use of cash discounts to the rendering of direct financial assistance to buyers. 2 7 Such concessions may or may not be granted uniformly to all buyers. T h e y represent, in any event, forms of price cutting which if left uncontrolled may vitiate the basic control device. In large part the code controls over various elements of price policies—which represented the largest class of trade rules in the codes—were a necessary element of minimum price control. The Administration, however, was inclined to consider them apart from the basic control and often approved the latter without approving the former, which were the necessary accompaniments. As a consequence the code authorities commonly took it upon themselves to institute these supplementary controls. 2 8 The earliest codes simply prohibited members from selling below cost. I t is reported that soon after the approval of one of these codes, one member announced that, since he was the lowest-cost producer in the industry, the other members had the alternative of closing up shop or of going to jail if they chose to sell below their costs to meet his competition. The Administration immediately amended this code to provide that any member might sell below cost to meet competition, and it became the consistent policy of the Administration and one acceptable to a majority of industries to include this proviso in some form. 2 9 Most often it was stated in this manner: that any member might meet the prices of competitors who were not selling below cost; in other codes members were permitted to meet any prices established by competitors or prices of "lower-cost competi2 7 Significant control problems in some industries arose, too, because wholesalers competing directly with manufacturers for the retail trade were not under the jurisdiction of the manufacturers' codes and hence were not subject to the latter's price control provisions. The methods employed by industry in meeting these problems were identical with those employed with respect to problems that arose in the administration of price filing systems (see below, pp. 74-75). 2 8 For similar reasons code authority rulings concerning terms and conditions of sale were made in connection with the administration of price filing systems. For a listing of code authority regulations over certain terms and conditions of sale in a group of representative industries see ibid., pp. 269-271. 2 9 Taggart, op. cit., pp. 247-248.

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30

tors." Theoretically, the effect in any case was to establish a price floor at the level of the cost of the lowest-cost producer, provided this producer sold down to his own cost; or, if he did not exercise this privilege, at the level of the lowest-cost producer who did. According to the terms of these provisions no member could meet the prices of a competitor unless he was certain that this competitor was a lower-cost producer. This impracticable requirement was modified in many of the codes by the provision that members might meet competition upon notice to the code authority or upon the code authority's approval, the implication being that if the code authority registered no objection the member was free of any legal responsibility in making the move. The impracticability of code rules covering the meeting of competition was greater where the products of the various members of an industry were differentiated by quality, size, appearance, or brand. The extent to which producers of highly advertised and superior quality products were in competition with producers of the least acceptable or the most inferior products and therefore justified in reducing prices below cost on the ground of meeting competition was a question that would have caused unlimited difficulty if administrative agencies had attempted to follow literal interpretations of the rule. Some groups partially anticipated these difficulties by providing that sales might be made below cost only if a member was meeting the competition of products that were "definitely competitive" or of products of equivalent design, character, quality, or specification.31 Difficulties of a similar magnitude would have been encountered in judging bona fide meeting of competition where sales of different quantities or sales to different classes of customers were involved; although the codes were silent on this point, the effect of the grant of permission to meet competition presumably was to vitiate, in part at least, any quantity or trade discount schedules that may have been specified by the code. Another effect of this proviso was to permit producers distantly located freightwise with 30 NRA, Research and Planning Division, Prices and Price Provisions in Codes, Part III. 31 Taggart, op. cit., p. 2S1, and NRA, Research and Planning Division, Prices and Price Provisions in Codes, Part III.

$4

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respect to any market to absorb or equalize freight to meet competition in that market, whatever restrictions the code may have provided on such a practice. Several other types of exceptions were made to the rules that prohibited sales below cost. Fifty-six codes explicitly recognized the need for selling below cost to meet the competition of nonindustry products; twenty-seven excepted sales made in fulfilling contracts made prior to the effective date of the code; four excepted sales made in introducing a new product; and most of the codes excepted the sale of substandard and distressed goods.32 One would expect that these exceptions would be made, but would wonder how any agency could establish adequate standards for administering them. It should be recalled that less than half the industries privileged to formulate cost accounting methods made any effort to have methods approved by the Administration. One authority explains this indifference on the ground that the industries realized the device was not feasible if literally interpreted. 33 Several of the industries that attempted to make the device effective abandoned it because they could not administer it effectively.34 When the device was applied, methods or activities not in accord with the formal requirements of the provision were resorted to, often without NRA's ap32 Ibid. 33 Taggart, op. cit., p. 400. 34 For example, hosiery and macaroni (ibid.). The following statement of a member of the furniture code authority sets forth the attitude of representatives of this industry with respect to this device:

" . . . may I remind you of my impression . . . that any good cost accountant could beat any one of the cost formulas yet erected, if it were argued in court. This is particularly true of our industry, and the cost accounting and field men are definitely aware of the fact. Hence, all that we hope for from this cost formula is its moral effect, and it sometimes seems to us that this has been denied us with great resultant damage to the industry, while the Recovery Administration has continued in the hopeless pursuit of more accurate cost formulas suitable for litigation purposes, for which we do not believe they can ever be used." (Quoted in NRA, Div. of Rev. Work Materials No. 56, p. 113.) It was the conclusion of the Board of Governors of the National Electrical Manufacturers Association, on the basis of the experience of code operation, that rules against selling below cost were not enforceable (NRA, Div. of Rev., Work Materials No. 77, p. 27).

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proval. 35 In many cases the cost elements themselves were arbitrary, in the sense that they were based, not on cost to the individual enterprise, but on some type of industry average. Otherwise, code authorities computed and published so-called "cost" figures, sales 3 5 A review of the cases in which selling-below-cost provisions were applied, and about which there is available information, shows the following situations: After the approval of the code for the men's clothing industry, the code authority attempted to establish uniform percentages for manufacturing, selling, and administrative overheads. The Administration refused approval, whereupon the code authority stated that "the prohibition of sales below individual cost completely determined by the individual establishment would be an idle gesture." (Taggart, op. cit., p. 402.) Members of the graphic arts code were given the alternative of choosing between actual individual cost to be determined by an approved method, so-called "departmental hourly cost rates" and "production standards," and "cost determination schedules." "The latter two bases were established by the code authorities. The practical result of this scheme was that the code authorities determined fixed minimum prices for all graphic arts services." (Ibid., p. 401.) In the gas appliance and apparatus industry uniform "base costs" together with price schedules for "extras" were established by the Gas Range Institute (NRA, Div. of Rev., Work Materials No. 76, pp. 236-238). The retail code authority of the canvas goods industry resorted to a 57-page price list, which was represented to contain the true costs, and indicated that members not following them would be in noncompliance with the code (NRA, Div. of Rev., Work Materials No. 56, p. 116). The code authority for the throwing industry published bulletins setting forth the "lowest possible costs on various standard yarns," and stated that failure to substantiate prices below these figures would result in prosecution (ibid., pp. 118— 119). The code authority for the limestone industry prepared a master bid for each project and indicated that all individual bids lower than this would be considered noncompliant (ibid., p. 128). The code authority for the malleable iron industry prescribed schedules of "fair and reasonable costs," which were partially based upon an average of costs of a group of representative producers. This action was approved by the Administration (ibid., p. 134). In the cost formula for the screw machine products industry it was provided that materials were "to be valued at current market in accordance with quotations in the 'American Metal Market,' with stipulated allowance for waste. Labor and overhead charges were to be computed on the basis of various factors and indexes more or less arbitrary in nature." The unusual success of the code authority in administering this provision was ascribed to the fact that it "substituted education for bureaucracy and arbitrary enforcement." (Ibid., pp. 137, 139.) In the paint, varnish, and lacquer industry raw material costs were determined on the basis of quotations published in the Oil, Paint and Drug Reporter. And processing costs for various products were prescribed through schedules of so-called "lowest reasonable costs," which were averages computed from the costs of a sample group of producers. This action was approved by the Administration (ibid., pp. 140-143). The code for the fire extinguishing appliance industry originally prohibited sales below the cost of the lowest-cost representative producer. Immediately upon code

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below which by any establishment were held or implied to be a violation of the code. 3 0 M a n y code authorities probably made little effort to apply the device except in instances of severe price cutting. In most cases price filing was a necessary part of the mechanism for enforcing whatever cost floors and standards of terms and conditions of sale the code authorities determined were proper; it provided a method of policing members' compliance with established minimum prices. 8 7 This was considered the primary, if not the only, function of price filing in those industries that were seriously endeavoring to enforce minimum price floors.118 Primary emphasis was placed on the reporting of prices to the administrative agency; dissemination of the filed prices to industry members was a secondary consideration. At the beginning of the N R A , industry looked on price filing as a necessary accompaniment of no-selling-below-cost provisions. It became a strategic control device only because of the widespread collapse of minimum price controls. The lumber and timber products industry was the only industry in which the N R A officially made effective a minimum price provision based on average industry costs. It is also a conspicuous case in approval the code authority proceeded to establish lowest representative costs and price differentials. These were abrogated by the Administration, and a cost formula was approved which in the customary manner prohibited sales below individual costs. The important members of the industry, however, continued to abide by the original lowest representative cost figures (ibid., pp. 148-152). The code authority for the coffee industry issued bi-weekly bulletins containing the replacement cost of green coffee to be applied in computing costs and for a period, also, the absolute and percentage figures to be applied in computing roasting costs, shrinkage, and overhead. It was stated that any filed price which did not include these cost figures would be considered evidence of code violation (ibid., p. 167). Overhead costs according to the cost formula for the luggage and fancy leather goods industry were to be determined by a uniform mark-up of 33% percent over direct costs (ibid., pp. 170-171). 3 6 See Taggart, op. cit., pp. 399-403. 3 7 Some codes linked the selling-below-cost and price filing provisions by stating that no prices could be filed that were below cost (NRA, Div. of Rev., Work Materials No. 76, pp. 190, 193-194, 197) ; in other cases, it was in effect provided that the code authority could suspend a member's filed prices until he could show that they were not below cost (ibid., pp. 195-197). 3 8 Thus, Donald Blake of the code authority for the retail monument industry stated: "The failure of the 'selling below cost' provision and the refusal of the NRA to approve a cost system have vitiated and voided the purpose and effect of the price filing system." (Quoted in ibid., p. 189.)

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which minimum prices based on costs were established at a point that without much question proved to be higher than was justified by market conditions. The code, as approved on August 19, 1933, provided for the establishment of a weighted average cost of production. The specified items of cost were broadly inclusive; even interest and depreciation on idle facilities were taken into account. Price determinations were to be made with "due regard to the maintenance of free competition among species, divisions, and subdivisions of the industry and with products of other industries and other countries." Differentials were to be allowed for small mills, and prices were to be revised from time to time to "protect the cost of production of items in the several classifications of lumber and timber products." Customer classifications, maximum discounts, and uniform terms of sale were established. Prices were set on thousands of items soon after code approval and before cost data had been received in response to a code authority questionnaire. The code authority later was able to obtain only fragmentary cost data, which were used to demonstrate to the Administration that the prices that had been set were not above costs.30 Prices evidently had been pegged at levels prevailing in the fall of 1933, which, because of the speculative boom during the spring and summer, were as much as 50 percent higher than those of the early part of the year. During the latter part of the spring of 1934 orders and shipments began to drop at a rapid rate. About five thousand new sawmills had begun operation since the beginning of the code. Price violations were common; and the Administration would not support a prosecution of the violators, because of the questionable basis that had been used for computing prices. As a result the code was amended to provide for emergency price determinations, and an emergency was declared. The existing minimum prices became emergency prices, which presumably had greater legal validity since it was not required that emergency prices be based on costs. Violations continued, however, and during the fall of 1934 open revolt 39 In the spring of 1934 the Administration modified the cost basis by eliminating losses on timber speculation as an element of cost and by reducing the basis for computing depreciation to 65 per cent of total capacity. However, this change in the cost basis apparently had little bearing or effect on the prices established.

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against code prices broke out within the industry. On December 22, 1934, the Administration suspended the prices. One of the essential elements of minimum price determination under the lumber code was the establishment of basing points, delivered price zones, and other devices for the systematic equalization of prices at points of delivery. These price controls were instituted by most of the divisions and subdivisions of the industry. The equalization systems were devices by which freight charges to points of delivery were made to correspond roughly with average freight costs, a correspondence that was in harmony with the formula of average costs specified by the code. Except in a few instances the code equalizations of delivered prices continued a customary industry practice. Any other system of pricing would have deprived some producers of their usual share of the market and thus would have jeopardized the price control.40 Failure by the lumber industry to bring lumber wholesalers within the jurisdiction of the code resulted in one of the most serious difficulties faced in administering the minimum prices, since wholesalers were left free to undercut lumber producers in the retail market. It is also notable that many forms of evasion developed, particularly among which were the practices of "sweetening" grades and shipping a higher quality of lumber than was previously shipped under the same product classification.41 MINIMUM

PRICES

NOT

BASED ON

COSTS

There were two types of minimum price provisions in which cost was not a strategic determinant of prices. One empowered code authorities to prescribe minimum prices; usually it was provided that 40 One of the conclusions of an N R A study of geographic price regulations in the lumber industry during the code was the following:

"It is clear, however, that in the establishment of the basing point, price zoning and other systems the divisional agencies took extreme care to do nothing which might deprive any group of producers, however distantly located with respect to a given market, from the share in that market which they had previously enjoyed. If there was one underlying, general policy in all divisions it was that the status quo must not be disturbed. . . . Any alienation of the support of important groups of producers would have resulted in a breakdown of minimum prices." (NRA, Div. of Rev., Work Materials No. 86, p. 216.) 41 The account of minimum price fixing in the lumber industry was taken from NRA, Div. of Rev., Work Materials No. 56, pp. 48-57, except for the references

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these prices could be made effective only with NRA approval. The other provided for the establishment of minimum prices in cases of emergency only. Non-emergency minimum prices.—Code Authorities were empowered to establish minimum prices without reference to cost in very few instances. Perhaps the most conspicuous case was that of the iron and steel industry, whose code gave to the Board of Directors of the American Iron and Steel Institute the "power to fix a fair base price." This provision raised so much protest from consuming interests that it was deleted after a little more than nine months. 42 Similar to that of the Iron and Steel Code was a provision included in the Iron and Steel Reinforcing Materials Industry Code.43 The codes of four service trades—cleaning and dyeing, laundry, barber shop, and shoe rebuilding—provided for minimum price determination, but the NRA allowed the provision to be made effective only in the case of cleaning and dyeing.44 The experience of the cleaning and dyeing trade with price control will be discussed in Chapter IV. The other codes that made provision for minimum price fixing were those of the domestic freight forwarding, 45 petroleum, 40 wood case lead pencil,47 and bituminous coal industries. One of the most important and successful efforts at price control under the codes was made by the bituminous coal industry. This effort is particularly noteworthy in view of the wide diversity of interests among the members and their lack of experience in industrywide co-operation. Originally, codes were proposed by each of the several regional trade associations of the industry. All these codes contained provisions prohibiting sales below average cost. There was little comment on the proposals at the early hearings; and little comment or protest greeted the price provisions of the proposed to delivered prices, which were to NRA, Div. of Rev., Work Materials No. 86, pp. 129-133, 214-216. For a detailed consideration of the difficulties of cost determination in this industry see NRA, Div. of Rev., Work Materials No. 79, pp. 90-102. 42 Taggart, op. cit., pp. 190-191. 43 Ibid., pp. 281-282. There appear to be no NRA records revealing the manner in which this industry made use of the provision. 44 NRA, Div. of Rev., Work Materials No. 56, p. 48. 45 Rates established by this industry remained in effect until the Schechter decision. 46 The provision of this code was not made effective. 47 This provision was not effective because of NRA disapproval.

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general code as it was finally worked out after a protracted period of conference between the interested groups. Apparently, there was no objection to the principle of price control. 48 As it was finally approved, the minimum price provision of the Bituminous Coal Code contained no reference to cost but stated that for any person to sell at less than a fair market price would create a prima facie presumption of "destructive price cutting." It was provided that in determining "fair market" prices proper consideration should be given to "competition with other coals, fuels and forms of energy or heat production." Minimum prices could be established by any trade association, called a "marketing agency," that represented at least two-thirds of the producers of the commercial tonnage of a district. In the absence of such agencies, prices could be established by the divisional code authorities. Prices were subject to the approval of the "Presidential Member" of the code authority and to review by the NRA. 49 Responsibility for price determination was originally placed with the subdivisions of the various divisional code authorities." 0 There seems to have been no uniform method followed by these agencies in determining the original code prices. Generally speaking, mines were grouped according to the kinds of coal produced. Because of the tremendous problems of grade designation and classification many arbitrary expedients were followed, a procedure that naturally resulted in dissatisfaction among some operators. 51 Reference was made to such basic cost data as were available, but apparently prices were set as high as it was felt the market warranted. Differentials between grades of coal were fixed with an eye to previously existing price relationships. At first prices were determined mainly on an f.o.b., mine basis, with maximum allowances established for freight absorptions to the various consuming markets. This made it difficult for the various subdivisions and divisions to identify one another's actual prices in any market and was a source of evasion and suspicion. As a result of co-operative efforts on the part of the various agencies and the Administration, the practice in the majority of cases came to be one of fixing delivered prices 49

See NRA, Div. of Rev., Work Materials No. 69, pp. 87-89, 105. 51 Ibid., pp. 105, 500-501. '- Ibid., pp. 501-502. Ibid., p. 511.

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6l

for designated market areas—a method contemplated by the code provision."'2 The chief difficulty and source of conflict in the price determinations arose from the fact that every subdivision had more or less unlimited power to fix prices independently, regardless of the determinations made by other subdivisions and divisions competing in the same market. The natural result was that each group attempted to set prices that would give it a competitive advantage over coals mined in other regions. In some areas competitive price cutting between agencies developed and price controls became ineffective.53 This situation was not allowed to persist. At the beginning a procedure had been established in Division I whereby disputes were to be handled by a committee containing representatives of the subdivisional code authorities. 54 In other areas special committees were appointed and procedures established to settle specific conflicts. Often these issues were referred to Washington for final decision.55 Primarily as a result of difficulties between Divisions I and II a procedure was established, in June, 1934, by which new price schedules before becoming effective were to be submitted to the interested code authorities for comment and criticism. Following this the presidential members of the divisional code authorities and the deputy administrators in Washington were to exercise their power of approval. As a result of these efforts a Board of Arbitration was established, in January, 1935, which was granted wide powers for settling disputes and co-ordinating the minimum price determinations of the various agencies/'" The equalizing of competition was the general principle governing price determinations within subdivisions, between subdivisions, and between divisions. Within limits it was aimed to offset the advantages of those operators who possessed superior coals or who were near to important markets by fixing the prices of their coals at relatively high levels. Although this penalty for price protection generally was accepted, it aroused bitter and continued protest. 57 The success of price fixing in the bituminous coal industry is sug52 55 57

53 54 Ibid., p. S12. Ibid., pp. 518-520. Ibid., pp. 501-502. 58 Ibid., pp. 519 , 5 2 2-5 23 . Ibid., pp. 127-128, 523-524. See Taggart, op. cit., pp. 284-285.

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gested by the advance of average prices (net mine realization) from $1.34 per ton, in 1933, to $1.75 per ton, in 1934. The best available data show that during the period November, 1933, to January, 1935, prices on the average returned more than operating costs, although in a few subdivisions the average operator consistently failed to cover costs. 58 Noncompliance with the price schedules did not become a matter of general consequence until early in 1935.59 The breakdown that occurred at that time has been attributed to several factors. One was the realization that the price schedules could not be enforced. 00 Pressure for undercutting scheduled prices developed as the result of the opening of thousands of small mines.61 Disregard for the code prices increased as a result of uncertainty about the continuation of the NRA. 62 Finally, methods for evading the requirements were developed and widely employed.63 It is noteworthy that, unlike the situation in other industries, such as lumber and timber products, coal operators were not harassed by the competition of wholesalers. The Wholesale Coal Code explicitly prohibited persons within its jurisdiction from selling at prices less than those established by the code for the coal producers.04 Emergency minimum prices.—Emergency minimum price controls represented a compromise between those parties in the Administration who were opposed to direct price controls as a matter of principle and those who, while sympathetic with industry's desire for price control, appreciated, as did an increasing number of industries, that prohibitions against selling below cost were administratively impracticable. The emergency method of price control, as it was worked out under the codes, was based on two principles: First, direct price controls were justified only when an industry had become demoral68

NRA, Div. of Rev., Work Materials No. 69, pp. 8-9, S47-S50. 60 61 Ibid., p. 8. Ibid., and Taggart, op. cit., p. 287. Ibid. 62 Ibid., p. 288. 63 Among them were the substitution of coal of higher quality than that contracted for and shipments in excess of tonnage specified in contracts; reporting of sales as falling under pre-code contracts and thus not subject to minimum prices; accepting of forfeits in case coal did not meet requirements that it was known were impossible of fulfillment (ibid., p. 289). 64 Ibid., p. 290. S9

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ized by price cutting. The emergency price provision, as prescribed by the Office Memorandum of February 3, 1934, provided that emergencies might be declared when "destructive price cutting" rendered ineffective or seriously endangered the provisions of a code.85 The emergency price provision of Office Memorandum No. 228 (June 7, 1934), which superseded that of February 3, 1934, stated that an emergency might be declared when small enterprises, wages, or labor conditions were adversely affected by price cutting or when monopoly or other acute conditions developed that tended to defeat the purposes of the Act.00 Second, the determination of minimum prices was a prerogative of the Administration. In the Office Memorandum of February 3, 1934, it was provided that minimum prices were to be based on "lowest reasonable cost," whereas in Office Memorandum No. 228 no reference was made to cost. The former memorandum gave code authorities the right to declare emergencies, while the latter reserved this right to the Administration. In practice, however, no distinction was made between these provisions. The Administration exercised in each case 67 the right to declare the emergencies and felt no obligation to base prices on costs. Two hundred and twenty-three codes included these provisions.88 The incentive to incorporate emergency price provisions in codes was intensified after the issuance of Office Memorandum No. 228, since the Administration refused to approve and make effective further provisions prohibiting selling below cost. Many code authorities made requests for the setting of emergency prices; but emergencies were declared and prices established in the following nine industries only: agricultural insecticide and fungicide; cast iron soil pipe; retail rubber tire and battery; retail tobacco; wholesale tobacco; retail solid fuel; lumber and timber products; ice; and waste paper. The emergency price controls of the first six industries were significant mainly as devices with which majority members attempted to restrain as unfair the practices of minority groups; they will be discussed in Chapter IV. Mention has already been made 65 67 68

86 See Appendix A, p. 2 09 . See Appendix A, pp. 209-210. With the exception of the retail solid fuel trade. NRA, Div. of Rev., Work Materials No. 35, Part C, p. 8.

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of the lumber and timber industry's use of emergency prices to give greater legal validity to its existing minimum prices. Price control in the ice industry will be referred to later. The code for the waste paper trade was a supplement to the code for the scrap iron, nonferrous scrap materials and waste material trade. It was approved on July 12, 1934, chiefly to correct a bad price situation. The emergency price provision of Office Memorandum No. 228 was included, and, as a basis for price determination, provision was made for the definition of the various grades and types of waste paper."9 A member of the waste paper trade was defined as any person engaged in the business of "buying and/or handling for resale purposes on commission or otherwise of waste paper." The essential operations performed by the trade were the collecting of waste paper, the removing of dirt, grading, packing, storing, and shipping. Nearly all waste paper was sold to paper board mills, where it represented about two-thirds of the raw materials used. 70 The waste paper trade is a good example of a situation in which limited opportunities for selling and unusual pressure for competitive price cutting exist as a result of the excessive bargaining power of buyers. At the time of the code paperboard mills in large part had been able to dictate waste-paper prices. Some of the larger mills had exercised this power through acquiring control of large wastepaper handling plants at strategic points and installing their purchasing agents as managers. "Prices set by these captive plants become the ruling prices in the Trade." 71 With the exception of one large captive plant, which violently protested, the emergency declaration appeared to meet with the unanimous approval of the members of the trade. The captive plant referred to supplied only a small part of the waste-paper requirements of the paper board concern that controlled it, but exercised a substantial control over prices by periodically quoting prices, as low as was desired, to eastern paper board mills; these mills, in turn, "used these quoted prices in obtaining waste paper from their regular sources." 72 69 70 71

Taggart, op. tit., pp. 327-328. NRA, Div. of Rev., Work Materials No. 56, p. 202. 72 Ibid. Ibid., p. 79.

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The establishing of minimum prices in this trade was mainly the responsibility of the Research and Planning Division of the NRA. It relied almost entirely on code authority data, which showed that the cost 7 3 to a waste-paper dealer of a ton of mixed paper was $7.50 and of newspaper, $11.00, whereas the prices that had been received in recent months were $3.00 to $5.00 for mixed paper and $5.00 to $8.00 for newspapers. The emergency order established minimum prices for "mixed paper" at $6.50 per ton and for "folder news" at $8.50 per ton. 74 Prices, first established in August, 1934, were renewed with minor changes in September and again in November. In December they were rescinded by the Administration on the ground that they had failed to correct the conditions they were designed to remedy. Representatives both of the trade and of the Administration had endeavored to enlist the assistance of the consuming mills in enforcing the prices, and many of these mills expressed their willingness to co-operate as long as their competitors did the same; but disregard for the prices by certain captive plants and general withholding of purchases by consuming mills resulted in an increasing number of violations among the dealers and in open opposition to price control by some of them. 75 Prices fell as low as $1.50 per ton after the withdrawal of the emergency order. Dealers were forced to take tremendous losses on inventories that had been accumulated in the hope that consuming mills would eventually have to buy. Many dealers were bankrupt, and at least one large plant was purchased by the paperboard mill that from the beginning had protested the emergency prices. The trade was demoralized, and the trade association virtually dissolved.70 PRICE

FILING

In the Senate debates preceding the enactment of the NRA the leading spokesman for the Administration cited price filing as one of the salutory measures that, restricted by court interpretation of the antitrust laws, should be permitted under the codes.77 The NRA 73 75 77

That is, raw material plus conversion costs. 73 Ibid., pp. 81-82. Ibid. NRA, Div. of Rev., Work Materials No. 76, p. 7.

74

Ibid., pp. 80-81.

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was virtually committed to price filing and never actually prohibited its inclusion in any code, although later it approved only certain types of plans. Four hundred and forty-four codes, 78 nearly twothirds of the total number, included provisions for the enactment and administration of price filing systems. Because of NRA opposition to other forms of price control, price filing became the most important available device for preventing destructive price competition. P R I C E P U B L I C I T Y AS A CONTROL OF D E S T R U C T I V E P R I C E COMPETITION

It has previously been pointed out that price filing provisions were designed in part to supplement minimum price controls by affording a means for policing adherence to price floors established on the basis of code authorizations. In a number of cases price filing undoubtedly served a similar end in connection with code authority price determinations and informal price arrangements. 79 In the following discussion, however, only the publicity function of price filing will be considered. It is clear from the analysis in Chapter I that the curbing of destructive price competition may have been the essential objective of the price publicity afforded by filing plans. One of the circumstances contributing to destructive price cutting is price concealment. A seller's ability to conceal his price reductions makes it pos7 8 Three hundred and nineteen of these made price filing mandatory, while 125 left the question of establishment to code authority or industry vote. 7 9 Thus, the following observation was made by an investigator concerning the significance of the price filing provision of the Iron and Steel Code:

". . . price filing served as an automatic impersonal mechanism to record and to perfect the process of price leadership, already dominant in the iron and steel industry. It contributed to the efficiency and smooth operation of the basing point control by preventing secret price cutting and local rebates, which had been in part induced by the basing point practice which tends to discriminate against purchasers located near a non-basing-point mill. By requiring adherence to base prices, the price filing provisions prevented open as well as secret departures from the basing point structure . . . price filing served largely as a mechanism for facilitating orderly changes in uniform prices, already well established by price leadership and by the basing point structure." (Ibid,., p. 258.) The cement and cast iron soil pipe industries, also, further implemented previously existing basing-point systems by means of code price filing provisions (ibid., pp. 259261).

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67

sible for him to enlarge his share of the available business; if all competitors reduce prices, however, no one of them can enjoy appreciable success, and prices may decline to a point where an entire industry suffers losses. The same situation may result when price cuts are initiated by only a few, since those who find themselves losing business may reduce prices in an effort to regain their position in the market. In the absence of group effort to promote publicity, knowledge of price cutting may spread very slowly among members of an industry. Price policies are a composite of many elements, any one of which may be adjusted to attract business; these prices, moreover, may be varied from customer to customer. The complexity of price formation itself presents an obstacle to ready knowledge about price changes. In their statements representatives of industry tend to confirm this interpretation of the role that publicity may play in reducing the hazards of price competition. Thus, in defending price filing at an NRA hearing on price provisions, Charles J. Brand, executive director of the fertilizer recovery committee, had the following to say: Circulation of false reports, secrecy, ignorance of the true facts as to prices, terms, and conditions of sale, suspicion, and distrust He at the root of most of the destructive competitive practices that harass business. Open pricing is a device whereby producer, distributor and consumer may act intelligently in making business decisions, particularly as to all matters that involve price. Open pricing does not involve, directly or indirectly, agreement upon price, coercion to file or observe particular prices, or action in any way inequitable or adverse to the consumer. In the fertilizer industry the open pricing provisions of the Code have profoundly and in the public interest decreased fraud or misrepresentation, price discrimination, destructive price-cutting, and even what might be termed "blood letting" which in the years 1931 and 1932 nearly involved industry self destruction. 80

Other statements were of similar import; they declared simply that price publicity, by eliminating secrecy and concealment in pricing, was a necessary condition to the elimination of destructive 80 NIRA, Public Hearing on Price Provisions, I, 131. See a similar statement by George A. Sloan, representing 200 consumers goods industries (op. cit., II, S16).

68 competition.

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S o m e t i m e s the expressions w e r e pointed at particular

t y p e s of c o n c e a l e d pricing. It w a s a r g u e d t h a t p u b l i c i t y g i v e n to t h e various t y p e s of indirect and secret price concessions would bring a n e n d t o s u c h c o n c e s s i o n s . F o r e x a m p l e , t h e p r e s i d e n t of t h e C o p p e r a n d B r a s s M i l l P r o d u c t s A s s o c i a t i o n d e c l a r e d t h a t t h e filing o f prices paid for scrap purchased from customers w o u l d prevent the u s e of s u c h t r a n s a c t i o n s a s a n o p p o r t u n i t y for granting indirect price concessions to these customers.82 In other cases primary emp h a s i s w a s p l a c e d o n t h e e l i m i n a t i o n of " d i s c r i m i n a t i o n . " I n this c o n n e c t i o n , H e r m a n H . L i n d , e x e c u t i v e officer of the s u p e r v i s o r y a g e n c y , m a c h i n e tool and forging m a c h i n e r y industry, stated: T h e r e is a l w a y s a minority of producers in a n y industry w h o are weak or unscrupulous in their policies to the extent that t h e y are willing to b u y business at increasingly low prices and conditions f r o m one customer, h o p i n g to make up the difference through sales to another. . . . I n m a n y industries t h e y are less than ten per cent, b u t no matter h o w few there are, in times of low business their blighting h a n d spreads ruinous throatcutting through the rest of the industry. . . . It has long been recognized b y business men . . . that the firm price policy based upon a published price list from which deviation shall not be made under a n y circumstances is . . . the only policy under which all customers are treated equally and w i t h o u t discrimination. 8 3 81 For example, statement made by the code authority of the folding paper box industry, quoted in NRA, Div. of Rev., Work Materials No. 76, p. 88: "An open price plan adapted to the needs of this industry is essential if the conditions of vindictive cutting and destructive competition which existed in the past shall be avoided in the future." Often, instead of preventing "destructive competition," "destructive price cutting," or "price demoralization," the objective of price filing was stated as that of affording "price stability." (Ibid., pp. 87-88.) 82 Ibid., p. 89. 83 NIRA, Public Hearing on Price Provisions, I, 62-64. Industry representatives frequently suggested that buyers would profit by the elimination of discrimination. Their arguments sometimes were wholly concerned with the advantages that would be reaped by buyers (see NRA, Div. of Rev., Work Materials No. 76, p. 94). There is no reason, however, to believe that they were particularly concerned with the welfare of buyers. As was pointed out in Chapter I, competitive price cutting in many industries probably always involves discriminations, if by such is meant price variations between customers. Industry would go a long way in reducing competitive price cutting if it could eliminate these price variations. The fact that many considered the elimination of "discrimination" among buyers to be a desirable end of public policy, in that it would promote a "free" and "open" market, is one of the significant reasons that price filing was encouraged by the NRA. It is not our purpose to consider this issue here (the writer has discussed it in ibid., pp. 63-66), except to say that

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69

One of the most common types of price concealment mentioned was that resulting from misrepresentations of buyers. A typical statement to this effect was made by the code authority of the folding paper box industry, which pointed out that lack of price publicity: . . . made the industry a victim of rumors and misleading information arising between buyers and salesmen, and the absence of known market levels resulted in a condition of uncertainty and the complete lack of factual information . . . to such a degree that m a n y shrewd buyers developed a condition where the members of the industry were competing o n l y with themselves, and o f t e n at prices below cost. 8 4

Somewhat more emphatic was the statement by a member of the paper distributing trade that price filing would protect: . . . members of the trade from unscrupulous buyers who m a y play one member of the trade against the other in a n attempt to break down the whole price structure. W e h a v e had buyers g o to the extreme of sending themselves telegrams purporting to c o m e from a competitor of ours, quotprice filing offers no promise of eliminating the discriminations opposed by buyers unless publicity of sellers' prices extends to the buyers themselves, thus affording to any buyer an opportunity to discover the prices offered to his competitors. Most industries did not desire that publicity to customers extend to the point where every buyer was fully aware of the prices made or quoted to his (the buyer's) competitors. They feared that publicity to customers would force them to sell to customers on an equal basis, when they desired to be free to vary prices between these customers under some circumstances. Little systematic effort was made by price filing agencies to make price lists available to customers, even though many codes required the agencies to do so (ibid., pp. 158-162, 183). Sellers wished to be fully aware of their competitors' price policies with respect to various customers but did not desire that each of their own customers be fully apprised of their price policies regarding other customers. For similar reasons, certain buying groups opposed the exposure to other buyers of their price arrangements with sellers. (See statement of Mail Order Association of America—ibid., p. 95.) On some occasions the Administration attempted to persuade industry groups that it was to their advantage to extend the publicity of filed prices to customers, since buyers could then inform sellers about the accuracy of one another's filed priccs and thus aid in checking compliance with the filing requirements. (For example, see account of NRA's efforts to persuade the clock industry to provide price publicity to buyers—NRA, Advisory Council Decisions, III, 233-237.) This argument was employed with little success. Sellers were apprehensive about the effect of such publicity on their individual price structures (ibid.) and were suspicious of the accuracy of buyers' statements concerning the price offers of competitors; price filing in part was designed for the purpose of eliminating the need for relying on buyers for information about competing price offers and, unless it could do so, it was considered a somewhat futile device. 84 Quoted in NRA, Div. of Rev., Work Materials No. 76, p. 90.

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ing conditions of sale which were fictitious, misleading and dishonest. We have had buyers change the written quotations of our competitors, in order to mislead our salesmen that there were better terms and conditions than actually existed. I could go on and name many more such unethical methods used by purchasing agents to tear down a trade. I am sure we are all familiar with many of them.85 Perhaps the most important source of controversy between the Administration and representatives of industry over price filing plans was the so-called "waiting period." Early codes uniformly provided that price changes were not effective until a specified number of days (usually ten) after they were filed. After several months of code experience the Administration became convinced that this period was being used by code authorities and individual members to persuade or coerce sellers who filed price reductions to withdraw these prices. I t was in defending themselves against this charge that representatives of industry revealed the manner in which price publicity was designed to prevent competitive price cutting. One of the most explicit statements was made by the code authority secretary of the brakelining division of the asbestos industry: The objection raised by NRA theorists is that if anyone files a lower price, someone else comes along, threatens him and forces him to revise his price before the five days are up. I don't believe such threats will ever be effective in this industry. As it stands now anyone can go in and arrange, verbally the details of an order, then file the price and no one has been given an opportunity to meet the price. Everyone I have consulted ¡eels that one oj the things to be done was to make everyone realize that if anyone should cut the price, he would promptly be met and he would not get the order,86 I n a similar vein F . Sims M c G r a t h , attorney for the asphalt and shingle roofing industry's code authority, in discussing the waiting period's function of preventing competitive price cutting that takes the form of special inducements to new customers, stated: . . . take the Asphalt and Shingle Roofing Industry. The manufacturers who compete with each other are scattered all over the country. It does 85

Quoted in ibid.

Quoted in ibid., p. 218. Italics supplied. Although the writer believes that NRA critics tended to overlook this function of the waiting period, he agrees that the waiting period was rather widely (and quite naturally) used as an occasion for bringing pressure against the price cutter. (For evidence on this point see ibid., pp. 215-221.) 86

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take a few days. It need not be S days—perhaps 3 days would accomplish it; but in all of them it takes some period of time to notify them, so that they can lower their price to meet the lowered price of the competitor and prevent a raid. Now that is what I suppose all business men like to prevent—the jackal practice of somebody who jumps in and gets some business at a low price from a competitor and immediately puts his price up again. They don't like that, and it seems to me that also leads to discrimination."

This function of the waiting period is readily understandable. But industry was by no means willing to discard price filing when the Administration, in February, 1934, eliminated waiting period provisions and required that prices become effective upon receipt by the filing agency. Industry was forced to satisfy itself with a less effective publicity device; but price filing's function of increasing knowledge of price changes remained. It should be recalled that price filing, regardless of how effective it may be in spreading knowledge of price changes among members of an industry, by no means represents a sure preventive of destructive price competition. Its potential contribution is largely that of preventing concealed pricing, and, as such, it has no direct bearing on certain other circumstances that may bring about a destructive price situation. As was indicated in Chapter I, competitive price cutting may develop if sellers are uncertain whether their competitors will meet a price reduction or if they are uncertain about the point at which their competitors will establish prices in adjusting to a changing market situation. Competitive price cutting may be quite compatible with full price publicity 88 when these uncertainties are present in a marked degree. Yet price publicity is not without some bearing on these conditions of uncertainty. Having observed his rivals' price behavior over a period of time and in various circumstances, any seller presumably would be in a better position to know what competitive reactions to expect in response to any move. Such observations, too, may convince him that certain competitors are pursuing a wise market policy and 87

Quoted In fact, ting if some competitors' 88

in ibid., p. 222. one of the first consequences of price filing may be a wave of price cutmembers find that their prices have been considerably out of line with prices.

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lead him to follow their policy. If it has been the practice to follow the policies of a leader, greater publicity may serve to make this relationship more precise. It is doubtful if sponsors of price filing believed that price publicity in itself would be sufficient to eliminate destructive price competition. Although they hoped that this would be the effect, it is evident from their greater enthusiasm for more direct forms of price control that they viewed the potentialities of price filing with some skepticism. By and large, however, they expected that price filing would have an important stabilizing effect upon prices. They did not often express a judgment about the way prices would move under price filing, but the following statements probably reflect their attitude. The chairman of the code authority for the ice industry expressed his opinion that: This provision [the waiting period] does not serve to promote collusive price-fixing in any degree. On the contrary, it very definitely serves to prevent the development of those demoralizing and destructive market conditions which tend to force competitors into collusive agreements in order to save their economic lives. Because of the standard nature of the products and other characteristics of the industry which we have already discussed ice prices must necessarily be uniform in any market where a destructive price war is not in effect—the lowest price-minded member of the industry in a market, therefore, establishes the price for the entire market.™

Apparently, when publicity was complete no seller could afford to allow a competitor to set a lower price than he was offering; the result was that prices would move uniformly at a level determined on by that member who in view of the market situation set the lowest price. Supplementing this opinion is the following statement of Henry S. Dennison to the effect that, though price filing would afford an important obstacle to destructive price cutting, in the absence of a strong market, prices would have a greater tendency to move downward than to rise: Quite obviously, if there is to be any defence whatever against destructive competition, secret pricing must be made illegitimate . . . the open price system makes quite simple the reduction of the whole list of prices 80

Quoted in ibid., p. 218. Italics supplied.

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73

and quite difficult the increase of such list . . . it takes a rising market of some considerable extent and persistence to convince a significant number of members of a trade that they can safely raise the prices and hope that the rest of the trade will come up to them . . . the leader or leaders in the price increase must feel convinced that economic conditions will be such as to make the gentleman's agreement stick. 00 T h e attitude expressed in the two statements m a y be interpreted to mean that under price publicity prices will have a tendency to be determined in relation to the policy of that member who in view of the industry's market situation sets the lowest price; but because of the hazards of single-handed price raising, this price, in the absence of strong leadership or agreement, is likely to be less than the m a r k e t situation justifies. T H E N A T U R E OF P R I C E F I L I N G U N D E R T H E

CODES

Complete publicity of prices by means of price filing requires that two conditions be m e t : One is the filing of currently complete price policies by all members of the industry. T h e other is the prompt dissemination of the filed prices among all competitors. Rules contributing to such publicity under the N R A embraced, not only the code price filing provisions themselves, but also various types of auxiliary code provisions and rules promulgated by price filing agencies in administering the plans. Ordinarily, the price filing agency was the code authority, which was charged with the administration of other price provisions;

it was also the agency

through which unofficial price agreements often were made effective. I t is usually impossible to distinguish between rulings of code authorities bearing primarily on price publicity and those having primary significance in these other connections. 0 1 Consequently, it must be recognized that the various rulings and activities of code authorities relating to price filing may have had significance with respect to other types of control devices. P r i c e filing systems as developed during the N R A may be considered under three headings, according to the problems that arose NIRA, Public Hearing on Price Provisions, I, 73, 77. For example, code authorities frequently placed restrictions on the granting of terms and conditions of sale. These may have been designed to facilitate price publicity through eliminating avenues of evasion, or they may have been primarily designed to bolster up minimum price controls. 90

81

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in achieving full publicity: (a) participation in price filing; ( b ) the extent of filed information; and (c) the extent and promptness of publicity. Participation in price filing.—The codes uniformly provided that prices must be filed by all members. Available evidence suggests that code authorities seldom modified this requirement.02 The central issue that arose over participation in price filing related to enterprises engaged in distributing the products of manufacturers who were required to file prices. In many industries manufacturers are in direct competition with wholesalers or jobbers and, if they sell to the final consumer, with retailers as well. But the Administration as a general rule opposed the definition of industries along vertical lines; and distributors usually believed that they had more in common with one another than with any group of manufacturers and consequently desired their own codes. Manufacturers were placed at a competitive disadvantage unless in some way they could force the distributors to conform to the filing requirements. Manufacturing groups usually failed in their efforts to include distributors in their code or price filing plans. 03 Consequently, another expedient was adopted. Through code provisions and amendments or through informal industry action attempts were made to force distributors to observe the manufacturers' filed or published resale prices: attempts were made to require members to stipulate in their contracts that distributors must adhere to the filed prices or to prohibit members from selling to distributors who did not adhere to these prices.04 Because of the Administration's opposition to such proposals, on the ground that they would result in resale price maintenance and would bind individuals to rules in the formulation of which they had had no voice, provisions of this character were incorporated in few codes. 95 As a consequence many 62 NRA, Div. of Rev., Work Materials No. 76, pp. 103, 105. As in the case of other trade practice provisions, questions arose concerning whether a concern devoting only a fraction of its facilities to the production of products covered by a code was required to file prices on those products. The Administration generally took the position that any concern must abide by the trade practice provisions of every code within the jurisdiction of which its products had been defined. 93 94 Ibid., pp. 104—105, 278-280. Ibid., pp. 293-298. 95 See NRA, Div. of Rev., Work Materials No. 35, Part C, p. 22.

75 industries attempted to meet this deficiency by informal action.90 By and large, however, this problem was not successfully handled and was the primary reason for the unwillingness of members in several industries to co-operate in plans for price publicity.97 The extent of filed information.—Only about one-third of the codes specifically required the filing of prices on all products. The others provided for filing on "standard" products only, gave to the code authority the right to designate the products on which prices were to be filed, or specified the products subject to the filing requirements. Ordinarily filing was not required on "non-standard" products; by "non-standard" was meant "custom-built" or "tailormade" products, products "not customarily offered for sale," products not customarily "sold on the basis of price lists," and other products of special design.98 Filing sometimes was limited to products most frequently figuring in transactions. When this policy was adopted, members found it possible to evade the requirements by supplying as free, or nearly free, those goods on which filing was not required. Several devices were employed to promote comparability between products on which filings were required. The most drastic of these was product standardization. The admitted purpose of some code provisions for product standardization was to provide a basis for price control. In view of the limited scale on which product standardization was achieved during the NRA, however, it is PRICE

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00 For illustrations see NRA, Div. of Rev., Work Materials No. 76, pp. 298-313. In a few instances distributors were willing to be bound to manufacturers' prices, for such prices gave them a measure of control over their own competition. 97 Conversely, wholesalers were sometimes hesitant about adopting price filing when there was no way of forcing manufacturers of the products they handled to abide by the plan. 08 Ibid., pp. 122-125. When an important part of an industry's sales were made on the basis of bids rather than price lists, bid filing plans sometimes were established to accompany price filing. Sixteen of the twenty-one bid filing plans, however, were contained in the codes of the construction industry, in which no provision was made for price filing. Almost without exception these plans required the filing of duplicate bids, before the closing date fixed by the awarding authority. The opening of bids by the depository usually was prohibited until a specified number of hours (generally twenty-four) after the closing date, at which time copies of the bids were to be sent to all participating bidders. About half of these codes provided that upon the request of a bidder the code authority could investigate any bid to determine whether any code provisions (e. g., minimum price) had been violated. (NRA, Div. of Rev., Work Materials No. 3S, Part C, pp. 24, 100-101.)

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doubtful whether this device was important in this connection. Of considerable importance were rough and more or less arbitrary classifications of products. The candy manufacturing industry, for example, reduced the many industry products to eighteen classes; members were requested to file only one price for each class." One of the most successful code price filing systems was that of the steel castings industry, in which there were hundreds of thousands of different patterns in existence. A code authority committee of this industry classified these products into some 1,100 groups. 100 Product classifications in some industries were supplemented by fixedprice differentials for extras attached to a "base" or "standard" product. 101 Several codes provided that filings must include a description of the products for which prices were filed, but there is no evidence that this requirement was extended to include the qualitative characteristics of the products. 102 In most cases no attempt was made to standardize, classify, or describe products for purposes of promoting price comparability. Members were forced to rely on much cruder means of distinguishing quality differences between products: One measure of difference was price itself. Another was past knowledge of one another's products. An essential purpose of the requirement that filed prices be disseminated in such a way as to identify the filing concern was to enable members to capitalize on what information they had con99 N R A , Div. of Rev., Work tion was established:

Materials

No. 76, p. 127-A. The following classifica-

Five- and ten-cent units (including bar Gums and jellies goods and cellophane packages) Hard candy—solid, filled, mixtures Counter goods Marshmallows Penny goods Lozenges Butter cream goods Pan work Caramels (wrapped) Iced goods Chocolate (bulk) Licorice Cocoanut work Chocolate moulded goods Package goods Miscellaneous Cream work 100 Ibid., pp. 607-608. 101 See cases in ibid., pp. 232-233, 235-241. T h e standard steel barrel and drum industry contended that if evasion of the price filing provision of its code was to be forestalled, it would be necessary to provide fixed price differentials under the standard products to govern the sale of "seconds." ( N R A , Advisory Council Decisions, V, 409-413.) 102 See N R A , Div. of Rev., Work Materials No. 76, p. 127.

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cerning the nature of one another's products

103

77

and sales promo-

tion policies. I t was assumed that members would file all elements that composed their price offers. In describing the information to be filed, the code provisions used such terms as "prices," "prices, terms, and conditions of sale," and "prices, discounts, and allowances." Some codes listed the price elements that were to be filed, and code authorities frequently found it necessary to expand this list. M e m bers continually found new ways of making price concessions, which code authorities by repeated instruction attempted to bring within the scope of the filing requirements. T h e y usually failed to catch up with sellers who were bent on evading the mandate of full price publicity. 1 0 4 I t was sometimes difficult to obtain filings that were intelligible or revealed the nature of the price offers actually made. I t was a comparatively simple task f o r members with complicated price policies to file them in a confusing manner. T o avoid this difficulty code authorities often prescribed the form to be used in

filing.105

But the very nature of certain price elements made it difficult to obtain a clear indication of the offers made. T h e specific terms of such policies as trade-in allowances, allowances on returned goods, allowances for services rendered by customers, handling of unpaid accounts, and credit terms could not be stated precisely, because they often varied according to particular circumstances of the customer or the type of transaction. These difficulties were anticipated in many codes b y the provision that only "most favorable t e r m s " or "maximum allowances or discounts" were to be filed. It can be seen that in these cases publicity was limited to what was equivalent to a member's minimum or lowest price offer. Such an expedient was subject to obvious abuses

106

and was avoided where

possible. Cf. writer's comments in ibid., pp. 57-58. Ibid., pp. 112-114, 119-120. 105 Ibid., p. 114. Uniform pricc filing forms also facilitated the physical handling of price reports by the central agency and tended to prevent members from neglecting to report desired items. 108 For example, in the canvas goods industry discounts of as much as 99 percent off list were filed (ibid., p. 118). In the dry cell battery industry discounts of 10 percent "in consideration of quantity, quality, and cost of selling and transportation" 103 104

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The sheer complexity of filed prices, their lack of precision, and their susceptibility to evasion necessarily resulted in only partial publicity. To correct or avoid this condition, code groups attempted to prohibit or to standardize in some fashion those terms and conditions of sale that caused difficulty. Code restrictions on the various elements of price policy 107 had as their primary purpose the supplementing of minimum and open price controls; they played an important role among rules governing price filing, just as they did among rules governing minimum prices. These code restrictions were usually supplemented by code authority rulings. 108 Special mention may be made of problems faced because of the inexactness of customer classifications. Members frequently attempted to evade the publicity requirements by selling through affiliates or controlled sales representatives whose prices were not filed. The Administration and representatives of industry devoted much time to making precise the definition of affiliates, agents, were granted at the beginning of the price filing period. This discount was taken up by member after member until one company quoted up to 80 percent for these considerations (NRA, Div. of Rev., Work Materials No. 78, p. 106). 107 See Appendix A, pp. 200-205. 108 A study of restrictions on a sample group of eleven terms and conditions of sale in a sample group of 57 industries in which price filing was operative showed the following: Either the code or the code authority imposed restrictions on cash discounts or credit terms in 39 cases; length of contract in 28; consignment selling in 26; protections against price declines or advances in 25; quantity discounts in 22; premiums in 21; advertising allowances in 20; accepting the return of goods in 14; product guarantees in 13; granting of subsidies in 11; and trade-in allowances in 8 (NRA, Div. of Rev., Work Materials No. 76, p. 271). Special mention may be made of the steel castings industry, because information is fairly complete in this case. The code made uniform cash discounts m a n d a t o r y ; prohibited the absorption of "pattern costs," "inspection charges," and insurance costs; and prohibited the accepting of responsibility for "consequential, special, or contingent damages," and offering "to do more than to replace castings rejected due to defective workmanship a n d / o r materials." (Ibid., p. 605.) In addition, the code authority prohibited the subsidizing or financing of customers; the furnishing of free goods or services; the guaranteeing of delivery dates which members could not meet; and lump-sum bidding. It defined sales and commission agents and required prices quo,ted by them to be not less than prices quoted by the foundry that produced the castings; it provided that prices be filed on a uniform delivered basis, except to railroads, which could not be quoted at a net price less than the scheduled price "with freight allowed to the nearest point of road with additional freight allowances of five mills per ton mile for the on line haul." In addition to product classifications, uniform schedules of quantity and weight discounts were prescribed (ibid., pp. 703-710).

PRICE

CONTROL

DEVICES

79

109

branch warehouses, et cetera. The definition of customer classifications was a subject of protracted controversy between the Administration and industry. The latter claimed that without uniform definitions the way was open for any member to evade the filing requirements. The Administration came to oppose mandatory definitions on the ground that they would result in undue rigidification of distribution channels. 110 Prior to the announcement of this policy, mandatory customer classifications had been included in a number of codes; 111 code authority releases were replete with instructions concerning proper definitions of customer classes.112 Of strategic importance in the administration of price filing plans in some industries was the method of quoting prices to customers situated at different locations. Where freight costs were important, efforts were made to force members to quote on a uniform basis— either some form of f .o.b. or delivered price basis. Of these methods the delivered basis was preferred, because it assured a more ready comparability of prices to buyers in any market. 113 A few codes required members to file prices on the basis of designated basing points. In some cases members were permitted, and occasionally required, to use an f.o.b. basis and absorb all freight, thus in effect obtaining the kind of price comparability provided by delivered pricing. When a delivered price basis was prescribed, members usually were permitted to vary prices between a limited number of areas. A few codes specified zone or area price differentials that members were required to observe in filing.114 Twenty-two of the 444 codes containing price filing provisions provided that prices be filed with zone or area agencies rather than with one central agency. One of the purposes of this regional organization was to reduce the volume of price filings. In some cases further simplification was introduced by the device of prohibiting the filing in outside zones of prices lower than the lowest 109 See ibid., pp. 273-276. In the main the Administration supported industry's effort to prevent evasion of price controls by selling through controlled sales representatives or affiliates. 110 Ibid., pp. 242-243. The possibilities of manipulating customer classifications are indicated above (pp. 8-11). 111 See NRA, Div. of Rev., Work Materials No. 35, Part C, p. 21. 112 See NRA, Div. of Rev., Work Materials No. 76, pp. 133-135, 244-2S4. 113 114 See ibid., pp. 138, 256-2S7. Ibid., pp. 138-140, 258-266.

8o

PRICE

CONTROL

DEVICES

prices filed by producers located in those areas; thus members of any zone could assume that their filed prices applied to sales within their area made by competitors located in other areas. Where competition was more or less localized, such regional organization, moreover, emphasized the "interdependence between competitors and the values of co-operation" and made possible a better adjustment of supplemental marketing regulations to local competitive circumstances. 115 The extent and promptness of publicity.—The

essential purpose of

organized systems of price publicity is to shorten the period between the time price offers are made and the time they can be discovered by competitors. B y one means or another any business man may eventually learn about his rivals' price changes; but this knowledge many come too late to enable him to protect his position in the market. Under N R A price filing plans members were required to report every change in their price offers. P r e - N R A open price associations, because of Supreme Court interpretation of the antitrust laws, tended to confine their activities to the reporting of prices on past or closed transactions. The early codes uniformly provided for a waiting period between the time price offers were filed with the agency and the time they could become effective. These periods ranged from one day to twenty days; most frequently they were ten days. Waiting periods were designed to afford rivals an opportunity

to meet

price

changes ; 1 1 0 they made possible the prompt publicity of filed prices. Because of the Administration's opposition, waiting periods were effective in only about 25 percent of the codes that included price filing provisions. Several industries stated that without waiting periods their price filing systems were of no value, 117 but few of 115 Ibid., pp. 138-139, 266-268. Area organization of price filing also makes possible the isolation of troublesome price conditions. Thus, the vitrified clay sewer pipe industry "when faced with a severe price cutting situation in metropolitan N e w Y o r k , considered the advisability of abandoning price filing in that area in order t o preserve the price structure outside N e w Y o r k , or of filing separate prices f o r the area which would not apply to the rest of the region." (Ibid., p. 269.) 1 1 6 It was usually provided that when any member met the price change of another his price would become effective at the end of the waiting period that applied to the original change. 1 1 7 See ibid., pp. 213-214, 221-222.

PRICE

CONTROL

DEVICES

8l

them abandoned price filing. Industries that were denied waiting periods usually provided that prices were effective upon their receipt by the filing agency. There was necessarily a lag in these cases between the time price changes became effective and the time members could learn about them; the length of the lag depended on how rapidly the filing agency disseminated the information. About two-thirds of the 444 codes containing price filing provisions provided for automatic dissemination of filed data. Nearly 4 0 percent of these limited the distribution of data to manufacturers of similar products. In a few codes distribution was restricted to members of the same region. A majority of the codes providing for automatic dissemination specified that price information should be distributed "immediately" or "promptly." 1 1 8 Of the remaining third of the codes, about 55 percent provided that price filing should be made available upon request or for inspection in the agency's office. Slightly more than 6 percent stipulated that data should be sent only upon payment of the cost of preparing and mailing. T h e remaining codes made no provision for the distribution of filed information. 1 1 0 Study of the price filing experience of a sample group of some fifty industries suggests that the amount of dissemination achieved was less than the codes intended. It appears that in only eight of these industries was price information on all products distributed to all members. T h e code authorities for the asphalt shingle and roofing and ladder industries mailed the price lists that were submitted by members. In the industrial alcohol, nottingham lace curtain, and envelope industries copies of price lists were mailed. The code authority for the steel castings industry prepared a daily bulletin that notified members of changes made by any producer; this bulletin carried reference symbols to a master industry price list which indicated the nature of the changes. T h e sales-clearing agency of the copper industry disseminated prices to all members. Members of the fertilizer industry mailed copies of price lists directly to other members in the same zone and sent one copy to /¿»id., pp. 152—153. Ibid. The fact that more than 60 codes made no provision for the distribution of price information suggests a preoccupation with price filing as an instrument for policing adherence to minimum price controls. 118 119

82

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CONTROL

DEVICES

the National Fertilizer Association; the association sent daily lists of revised schedules to each member. In addition to these industries, the crushed stone, sand, and gravel and cement industries provided that price information should be sent to members selling in the same regions. 120 In three other industries it was the announced policy of the code authorities to send filed price information to all members, but complaints indicate that this policy was not always adhered to.121 In a number of industries studied, automatic dissemination was limited to members producing similar products. Thus the code authority for the fire extinguishing industry wired price changes to producers of similar products. Members of the folding paper box industry were required to register for products about which they desired information ; when registered they received all revisions of prices and terms on these products. Duplicate copies of price lists were mailed to members in the gas appliance industry, although on certain products dissemination was made on request only. In the machine tool and forging industry duplicate price lists were mailed to those members indicated by the filing member to be "direct" competitors. The code authority for the automobile fabrics division of the rubber manufacturing industry sent letters containing the details of price changes as soon as they were filed. Other industries following a policy of automatic dissemination to producers of similar products were paper and pulp, tag, farm equipment, and electrical manufacturing. 122 In approximately a third of the industries a policy of systematic dissemination to all members was followed, but the information forwarded was less complete than that filed. Thus in the funeral supply industry prices on only staple and highly competitive items were distributed. In the paper distributing trade and paper tag industries, distribution was limited to the lowest prices and most favorable terms filed, except that in the former case "representative medium" prices also were disseminated. Special discounts to special buyers were not distributed in the plumbing fixtures industry. In N R A , Div. of Rev., Work Materials No. 76, pp. 154-155. i " Ibid. Ibid. The diversity of products in the electrical manufacturing industry frequently resulted in the sending of price lists to members not making the products covered by the schedules. 122

PRICE

CONTROL

DEVICES

83

the metal window industry initial revisions of discounts were distributed, but not filings made to meet these revisions. The code authorities of the mayonnaise industry and vitrified clay sewer pipe industry sent out letters containing summaries of information filed. In some regions of the retail monument trade it was decided not to disseminate prices that were more than 50 percent off list. Many of these industries required that members desiring information must pay the cost of preparing and mailing.123 The filing agencies of other industries studied did not in any way attempt to notify members of changes in prices filed with them. In some of these industries information could be obtained on general request and on payment for costs of copying. In other industries it was required that requests be for specific filings. In the underwear industry "members had to state the reason for the request and no specific prices were given out, the agency only stating whether the particular price in question was above or below the one stated by the inquirer." In several industries members were limited to inspection of prices in the office of the filing agency; 124 it was sometimes required that a "legitimate interest" be established before such information would be made available for inspection. Finally, in five industries studied there was no release of filed data, either through distribution or inspection. In one case it was stated that dissemination would be too expensive; in another (retail tire and battery), members were required to post their prices in their stores; it is reported that no significant data were filed in the remaining three industries. 125 Taking into consideration both the small proportion of codes that had effective waiting periods and the relatively small number of industries in which price lists were automatically disseminated to interested members, it is apparent that in most cases a considerable period must have elapsed between the effective date of filed prices and the time competitors learned about them. There are several likely reasons for the sluggish manner in which price data were distributed in some industries. The preoccupation of some code 123

Ibid., In at in favor of 125 Ibid., 124

pp. 155-156. least two industries, on the other hand, inspection of prices was prohibited mail or telegraphic dissemination (ibid., p. 157). pp. 157-158.

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DEVICES

authorities with the achievement of minimum price control has already been mentioned; in these industries filed prices were little more than a body of data from which the agency could determine the extent of adherence to price floors. Perhaps a more significant explanation, in view of the fact that few minimum price controls were officially made effective, was that few code authorities possessed sufficient resources to prepare and mail copies of all filed price lists. In some industries inexperience with the mechanism of price filing contributed to the failure to achieve the degree of publicity hoped for when the codes were written. Finally, some agencies undoubtedly encountered price-cutting movements that full publicity would only have intensified or made widespread. 1 - 0 In conclusion, it may be said that industry faced a very difficult task in achieving price publicity under the NRA. Difficulties were encountered in bringing competing distributors under the plans; in providing a basis for price comparison where products were extensively differentiated; in reducing to an intelligible and comparable basis the complexity of elements that constitute price; in closing up avenues of evasion; and in promptly disseminating data that were filed. The result was only partial publicity. In many cases, however, the publicity achieved undoubtedly had an important effect in curbing destructive price competition. The success enjoyed by many industries must be partly attributed to the fact that price filing plans were supported by rules directly regulating the trade practices of participating members. These included mandates on distributors to maintain manufacturers' published resale prices; product classifications and differentials; and restrictions on various terms and conditions of sale. During the latter half of the code period the Administration usually disapproved these supplementary rules, which were considered by many industries to be a necessary part of their price filing plans. As a consequence, code authorities were disposed to rely on such authority as they might exercise without formal NRA approval. The withdrawal of the waiting period was the hardest blow struck by the Administration at the successful functioning of plans for price publicity. But it is questionable whether many industries could have made effective use of waiting 120

In this connection see pp. 147-150, below.

PRICE

CONTROL

DEVICES

85

periods in view of their inability or reluctance to distribute fully and promptly those data that were filed. PRICE

UNIFORMITY

PRICE

PUBLICITY

AS A M E A S U R E

OF T H E

EFFECTIVENESS

OF

In the absence of data with which to measure changes in costs or in aggregate industry demand, one must consider the characteristics of price movements themselves if he is interested in ascertaining whether under price publicity there has been a diminution in price competition. Of these characteristics, price uniformity perhaps is the most valuable. Secret pricing makes possible the existence of the differential price advantages that are necessary to the price cutter seeking to take business from his competitors. T h e absence of price uniformity, then, may indicate the presence of competitive price cutting. Under open prices, on the other hand, it may be expected that, because of the meeting of competition, differential price advantages would not persist. 1 2 7 T h e level at which competitive price cutting is stopped, however, may be destructive to members of the competitive group. Prices may remain at a level that is destructive to some even in the face of an upturn in aggregate industry demand, if no one will lead off with a price increase for fear that others will not follow; prices may rise more slowly than the market situation justifies; or, when there is a declining demand, price may fall more or less rapidly than is necessary to effect the best adjustment. Price uniformity affords no answer to how effectively members of an 1 2 7 Some economists h a v e questioned price uniformity as a measure of the a b sence of price c o m p e t i t i o n a m o n g producers of similar products, maintaining that since price u n i f o r m i t y is a necessary result of pure or pcrfect competition, a tendency t o w a r d u n i f o r m i t y m a y indicate a closer approximation to a purely or perfectly competitive situation rather than a lessening of competition. T h i s is supported by the reasoning that, since full k n o w l e d g e of prices is a condition of perfect or pure competition, greater publicity will ex hypothesi contribute to a closer approximation of this competition. T h i s a r g u m e n t implies that groups of competing sellers are willing to sponsor or u n w i t t i n g l y sponsor programs that instead of restricting competition actually intensify competition. T h e r e is no evidence that industries that sponsored code price filing plans were t h u s m o v e d or deluded. As a theoretical proposition, too, this argument is fallacious, because it identifies all competitive situations in which there is an absence of agreements, understandings, or collusions as purely competitive or perfectly c o m p e t i t i v e , o v e r l o o k i n g the fact that the primary requisite of pure or perfect competition is a n u m b e r of sellers and buyers so large that no one of them has a n y control o v e r price. S u c h an " a t o m i s m " is rarely f o u n d .

86

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CONTROL

DEVICES

industry are adjusting to changes in their collective situation, except to indicate that they are not engaged in competitive price cutting. Where products are highly differentiated, price differentials are compatible with price uniformity if they merely reflect differing consumer acceptances and if competitors are satisfied with the differentials that exist between their products. Therefore, when the products of the various sellers are dissimilar, the degree of price uniformity existing at any time may be of no significance. Under these circumstances the value of the test is limited to indicating whether there has been a tendency toward uniformity over the period measured. Difficulties may be encountered in applying the test of uniformity when price is a composite of a number of elements. There may be tendencies toward uniformity in some of these elements, but tendencies away from uniformity in others. For example, list prices, quantity discounts, and freight allowances may become more uniform, while trade discounts, terms of guarantee, and terms of payment become less uniform. It may be impossible to reduce these varied elements to a net price. If so, the question arises concerning their relative significance. One answer is the judgment of industry members about which of them were of strategic competitive significance during the phase of the industry in question. Studies of price behavior under price filing during the NRA were made of four industries: fertilizer, asphalt shingle and roofing, steel castings, and electrical manufacturing; in the last-mentioned industry separate studies were made of seventeen product groups. In each of these industries price publicity was relatively complete; there were waiting periods and prompt dissemination of filed data to all interested members. In the first three industries (fertilizer, asphalt shingle, steel castings), the price filing plans were supported by code restrictions on a number of terms and conditions of sale, the filing of which would have been impracticable or would have afforded ready avenues of evasion. An outstanding characteristic of the behavior of each of these groups was a tendency toward price uniformity. 128 128 j h i s was the conclusion of the investigators on the basis of evidence set forth in the following publications: Electrical manufacturing (NRA, Div. of Rev., Work

PRICE CONTROLS

CONTROL

OVER

SPECIFIC

DEVICES PRICE

8?

PRACTICES

It has been shown in preceding sections that code controls over various elements of price policies were functional parts of code plans for minimum and open price control. This, no doubt, was their primary objective in most codes. But it would be a mistake to think of them as not having had significant functions in the absence of these major price controls. They may have served to supplement informal industry price agreements or understandings; in the absence of such price controls they may have contributed to the prevention of concealed price inducements; and, depending on the importance of the price inducements restricted, they may, in themselves, have afforded a considerable measure of direct price control. The case of the salt producing industry may be cited: Prior to the code, through association activity, quality and packaging were standardized, and a freight equalization system put into effect, eliminating freight absorption from the field of competitive price cutting. Because of high fixed overhead costs, there is a strong incentive on the part of manufacturers to increase volume through reduced prices, in order to reduce unit cost. Since a general reduction in price levels would not materially increase the total consumption of salt, an increase in the sales volume of one producer would result in a decrease in the volume of other competitive producers, who must meet price competition to retain their market. As long as there is active price competition between manufacturers, there is a tendency toward complete price demoralization. Prior to the code, the industry had succeeded in securing and maintaining almost complete uniformity in published prices between manufacturers, but because of the existence of secret rebates and price concessions, and the existence of price competition between producers and distributors, the industry had not succeeded in controlling price competition as a primary weapon in securing access to the market.120 To prevent the granting of the "secret rebates" and "concessions" referred to, the salt industry in its code prohibited a number of practices such as "secret rebates," "advertising allowances," "brokerage and other commissions," "substitution of grades different Materials No. 78, pp. 183-184). Fertilizer (NRA, Div. of Rev., Work Materials No. 67, p. 29). Asphalt shingle and roofing (NRA, Div. of Rev., Work Materials No. 76, p. 558). Steel castings (ibid., pp. 666-667). 128 NRA, Div. of Rev., Work Materials No. 62, p. 20.

88

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CONTROL

DEVICES

than those ordered," "warehousing of salt with customer," "delayed billings," "gratuities," and "free deals."

130

In the past the industry

had attempted to control the competition of distributors by requiring resale price maintenance. Because it had failed in this attempt, it had undertaken a program of eliminating distributors entirely by discontinuing preferential jobbers' discounts. This, too, proved only partially successful, inasmuch as jobbers found it profitable to buy bulk salt, package it, and sell it in competition with manufacturers who sold packaged salt directly to retailers or final consumers. This was made possible by the manufacturers' policy of selling packaged salt at a substantially higher price than bulk salt. Not wishing to eliminate this differential or to discontinue the sale of bulk salt, producers under the code stopped the sale of bulk salt to resellers and thus left jobbers no opportunity for profitable selling. 1 3 1 Other cases may be mentioned. Uniformity in price lists in the carpet and rug and the asbestos (brake lining division) industries indicates that some success in price control had been attained in these industries prior to the N R A . 1 3 2 Members of the former industry, however, were bothered by the competition of wholesalers. T o eliminate this obstacle to price control they incorporated a provision in their code that required wholesalers to sell to the consumer at the same price as did the manufacturers. 1 3 3 Prior to the code, price control in the asbestos industry had been weakened by competition in quantity discounts to jobbers and other classes of distributors. The code trade practice program of this industry was pointed to the control of this form of price competition and included schedules of quantity discounts, trade discounts, and customer classifications. 134 The cement industry, notable for its close control over prices, prior to the code had been harassed by the price cutting of independent dealers, who, in competition with producers, sold directly to the final consumer. The industry, through its code, attempted to take care of this difficulty by eliminating the dealers' discount. 1 3 3 Through its code the iron and steel industry modified and supplemented an existing multiple-basing-point system of geographic pricing; and provided for resale price maintenance by 130 133

Ibid., pp. 105-106. Ibid., p. 33.

131 134

Ibid., pp. 20-21. Ibid., pp. 52—55.

135

Ibid., pp. 33, 52. Ibid., pp. 24-26.

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CONTROL

DEVICES

89

jobbers in order to render the existing system more effective. 1 3 6 I n the case of each of the above-mentioned industries the code, in addition to restrictions on the particular elements of price policies mentioned, included minimum or open price provisions or both. But it is apparent, in view of the control these industries exercised prior to the N R A , that these restrictions, though limited to certain aspects of price policies, would have had an important control function even had they been unaccompanied b y minimum or open price provisions. I n some codes, particularly in the apparel field, restrictions on terms and conditions of sale were included or urged for inclusion in codes, when no real effort was made to obtain minimum or open price control. 1 3 7 Insofar as comments indicate, two general reasons were advanced for restricting these practices: they abetted secret pricing and were costly and destructive forms of price concession. 138 I t is not evident why these industries did not seriously undertake minimum or open price control, although representatives of the ladies handbag industry stated that prices were fixed to such a large extent b y custom that price competition necessarily assumed indirect forms. 1 3 9 I t has already been pointed out that minimum price control in the men's clothing industry was abandoned because of its impracticability. Certainly, plans for minimum 1 3 6 See N R A , D i v . of Rev., Work Materials No. 86, pp. 263-267; and Burns, op. cit., pp. 307-317. 1 3 7 For example, in the ladies' handbag industry code restrictions were placed on advertising allowances, terms of payment, consignment selling, and accepting return of merchandise ( N R A , D i v . of Rev., Work Materials No. 71, pp. 90 ff.). In the hosiery industry the practice of guaranteeing against price declines was prohibited by the code ( N R A , D i v . of Rev., Work Materials No. 80, pp. 117-118). In the knitted outerwear industry cash discounts were limited, quantity discounts prohibited ( b y code authority ruling), elaborate rules prescribed for accepting the return of merchandise, "rebates" through advertising allowances prohibited, and consignment selling prohibited (ibid., pp. 240 f f . ) . In the millinery industry maximum cash discounts were prescribed, cancellations and returns limited, and consignment selling prohibited ( N R A , D i v . of Rev., Work Materials No. 53, pp. 83-8S). In the men's clothing industry consignment selling was prohibited; and an effort was made to establish maximum cash discounts and anticipations and to restrict the acceptance of returned merchandise ( N R A , D i v . of Rev., Work Materials No. 58, pp. 256 ff.). The hat industry attempted to amend its code by prescribing maximum cash and quantity discounts and by limiting datings ( N R A , Advisory Council Decisions, I I , 139-140). 1 3 8 Citation: as in preceding note. 1 3 9 See N R A , D i v . of Rev., Work Materials No. 71, pp. 231-235.

PRICE CONTROL DEVICES 9° or open price controls of the types sanctioned by the NRA would have been difficult to administer in many of the apparel industries because of the excessive differentiation that characterizes their products. The importance of the control achieved by some of these indirect restrictions, moreover, should not be overlooked. Because they may result in the manufacturers' carrying the retailer's burden of risk, the closely related practices of consignment selling and accepting the return of any or all merchandise may represent substantial, but at the same time extremely costly, inducements. This is particularly true when it is considered that in the apparel field products are highly styled and subject to rapid obsolescence.140 140 In several cases the policy-making agency of the NRA went on record as being in sympathy with efforts to prevent types of pricing that had not been customary among a majority of industry members in the past from developing into methods of making concessions to customers. (See the decision of the NRA Advisory Council on a proposal to prohibit guarantees against price decline in the Pacific coast dried fruit industry—NRA, Advisory Council Decisions, II, 177-181; and on a proposal to limit terms of payment in the woven labels branch of the silk textile industry—NRA, op. cit., I l l , 241-242 ; in this connection see also decision on a proposal to limit tradein allowances in the printing equipment industry—NRA, op. cit., I, 27-31.)

CHAPTER PRODUCTION

CONTROL

III DEVICES AND

C O N T R O L OF N O N - P R I C E

THE

COMPETITION

to limit production and capacity shared a fate C similar to proposals to establish minimum prices. After the ODE PROPOSALS

rush of code making during the fall and winter of 1933 the Administration became increasingly reluctant to approve code provisions so patently restrictive as production and capacity controls. As a consequence few of these provisions were incorporated in codes after the spring of 1934. In all, 126 codes authorized or contemplated some form of control of production or capacity. Thirty-five of these merely authorized their code authorities to formulate plans for the Administration's approval ; few of these plans were submitted and none were approved. Of the 91 codes 1 in which provisions were nominally effective, 7 provided for the establishment of production quotas; 61, limitations on plant hours; 3, limitations on inventories; 1, voluntary sharing of business; and 32, limitations on the installation of new capacity. 2 In some industries production or capacity restrictions were considered indispensable to effective price control devices. Thus, Landon C. Bell, of the lumber code authority, said: Production control in the lumber industry is an economic necessity. There never has been any effective price control respecting a commodity of which there is an enormous oversupply. Overproduction breeds cut-throat competition . . . Cost protection prices may be useful in connection with it but are no substitutes for production control. Minimum fixed 1 Drury, "Administration and Effects of Production and Capacity Control Provisions in NRA Codes," NRA, Research and Planning Division, pp. 184-200. 2 Ibid., p. 200. The total of these provisions is greater than the figure of 91, because some codes included more than one type of restriction.

92

PRODUCTION

CONTROL

DEVICES

prices are at the same time the maximum prices that can be obtained for articles of which there are enormous surpluses.3

The need for production control was felt most keenly in those industries in which excessive inventories had accumulated during the depression period and where the supply of goods responded with little sensitivity to declining demand. And whenever goods were produced for inventory, there was always the danger that without production control overoptimism about market possibilities would result in the accumulation of excessive stocks and lead to a collapse of price controls when these stocks became too costly to carry. 4 As is suggested by the following statement of the executive director of the code authority for the rayon and silk dyeing and printing industry, production controls in other industries were sponsored as substitutes for direct price control devices: It is generally felt that the problem of this industry is, "How can we get a better price for our goods?" The only way . . . is to control the supply and supply in this industry can be controlled only through the medium of controlled production.5

This was particularly true when differentiation of product or complexity of price structure created administrative difficulties of such magnitude that the possible advantages of direct price control were not sufficiently great to offset the simplicity of production control devices. This may be illustrated by the following statement taken from a study of the machine waste industry: One year's experience convinced the industry that the code did not serve its interests. The main effort to regulate competition through the 3 NIRA, Hearing on Conference of Code Authorities and Trade Association Code Committees, Vol. I, No. I l l , p. 52. 4 The dependence of price upon production control is pointed out in the following statements made by members of the hosiery industry. In the Code Authority Bulletin of March 17, 1934, there appeared this statement: "It was decided to set up a special committee to study inventory and other suggested methods of production control. This subject is fundamentally the most important one we have before us because proper solution of it will bring us the desired improvement in our price structure." Later, in a memorandum to Deputy Administrator King, the secretary of the code authority said: "The condition of over-production continues to give us keenest price competition of a character that makes ineffective that provision of our code which prohibits the sale of a product below the manufacturers individual cost. Prices today are so low and unstable as to discourage rather than encourage buying." These statements are quoted in NRA, Div. of Rev., Work Materials . cents in 1932. As of January 1, 1934, American stocks were estimated at 775,000 tons, which represented an excess to the extent of nearly a year's consumption and was almost half as much as the annual productive capacity of American primary copper producers. Copper production already had been curtailed; it was a situation that from the standpoint of the industry called for either complete stoppage of production or a freezing of existing stocks to permit new production to continue. The industry was interested in eliminating the pressure of supply on the price of copper, which had been increased from the low of 5% cents, in 1932, to about 8 cents, in 1934. It agreed with the Administration that it was desirable to maintain production and employment. The Administration also was anxious to prevent the destruction of small producers, which was threatened by the fact that some of the largest users of copper were controlled by the largest producers of copper; these consumers could have met their entire copper needs from their parent companies. When members of the industry were unable to agree on a plan to accomplish these results, the Administration promulgated one of its own, which was incorporated in the code by the order of approval in April, 1934. The plan provided for the allocation of sales 22 and that "every member shall produce an amount equal to his sales quota reasonably averaged over a period of three months or such of gasoline would bear its proper relationship to the price of crude, to the end that non-integrated refiners who had to maintain their business on the basis of refining alone could compete with integrated refiners producing all, or a large share of the crude oil refined." (Drury, op. cit., pp. 21-22.) 22 Sales of copper for direct export were exempted from the plan.

PRODUCTION

CONTROL

DEVICES

lOl

longer period as the code authority or the Administrator may have approved." If he failed to produce in this amount, the member was to lose his right to participate in sales allocation proportionately to his underproduction. Reductions of stocks were permitted when sales ran appreciably beyond sales quotas, in accordance with plans to be worked out by the code authority with the Administration's approval. Sales quotas were established to provide a maximum total output of 245,000 tons per year. Since demand was estimated at approximately 400,000 tons, the obvious intent of the plan was to reduce stocks by approximately 155,000 tons and to meet approximately 40 percent of the demand from inventory. Thus, supply was restricted in order to maintain prices, and a start was made in reducing excess stocks without drastically curtailing production and employment. Individual sales quotas were to be calculated as monthly percentages of the annual productive capacity of each member. Small producers, however, were assigned relatively large quotas. In addition, 9,500 tons per month were to be allocated among producers of secondary copper in accordance with methods agreed on by them; the effect of this provision in large part was to relieve these producers of the code restriction. Provision also was made for copper handled by custom smelters. The administration of the plan was complicated by the fact that some of the stock was in the hands of brass companies and other consumers who were not under the code. It was necessary, therefore, to induce them to enter into voluntary agreements to hold their stocks and buy new copper only through the selling pool that had been established as the channel for copper sales. Copper sold under the plan was called "Blue Eagle Copper." Other copper was not qualified for use in the manufacture of articles for sale to the United States Government. The effect of the copper sales and inventory plan evidently was to increase domestic copper prices slightly and to widen the spread between domestic and foreign prices considerably. Domestic prices increased from 8 cents to 8% cents soon after the code approval. Foreign prices continued at substantially a 7-cent level during the code period. After the code had been discontinued domestic prices

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fell slightly and the spread was reduced to V4-V2 cent. 2 3 I t is notable in this connection that the sales plan was accompanied by an open price plan, which resulted in an almost uniform price of domestic copper during the period. 24 PLANT-HOUR

LIMITATIONS

Limitation of the number of hours that productive equipment may be operated results in limiting production to that volume which can be produced with all productive equipment working at full speed during the allotted number of hours plus the amount that can be produced by productive equipment added to existing facilities. Control by plant-hour limitation is different in several respects from control through production quotas: I t is less precise and certain in its restrictive effects, because it merely limits the time during which equipment may be operated. I t is potentially less restrictive, inasmuch as it does not prevent production increases through the addition of facilities; it is, for this reason, a less certain method of preventing competitive price cutting. I t is not as flexible a device for allocating production among industry members, since the amount that any member can produce is determined entirely by the amount of his productive equipment, whereas direct allocations may be based on a number of other factors, including the actual volume of production or shipments in the past. Because it specifies the maximum number of hours that may be worked in any week, it is less flexible, also, in that it less readily permits increased productive activity to take care of seasonal or other types of peak demand. I t is much less feasible in those industries in which the technological process is such that economical operation requires continuous production. On the other hand, it has the merit of obviating the need 2 3 The import duty of 4 cents per pound prevented embarrassing foreign competition in the domestic market during the code period. American fabricators producing for foreign markets, however, were seriously handicapped by this spread, since they could not—at least during the early code period—import copper, which was "nonblue eagle." (Burns, op. cit., p. 468.) 2 4 This account of the copper sales and inventory plan was taken from NRA, "Report of the Division of Industrial Economies," pp. 1692-1698, 1770, and Drury, op. cit., pp. 26-32.

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for administrative findings with respect to the situations of individual firms. And it is a relatively simple and feasible method of production control in industries whose products are many and highly differentiated—where allocation on a product basis would encounter many difficulties. Limitations on plant hours were incorporated in sixty-one codes, of which nearly 80 percent were textile and apparel. A majority of the textile codes limited production to a two-shift basis, equivalent in most cases to eighty hours a week. Most of the apparel codes limited production to a one-shift basis, usually equivalent to forty hours a week. A few apparel codes permitted a two-shift operation, and a few of the textile codes restricted operations to one shift. The small number of non-textile and non-apparel codes that included plant-hour limitations were divided between the one- and two-shift bases, although one provided for a sixty-hour, one a fifty-two-hour, and one a twenty-seven-hour limitation.25 In a majority of the apparel codes incorporating one-shift limitations the restriction was without material effect in lowering the existing level of production. Prior to the codes, operations beyond a single shift were rare. The essential function of the limitations evidently was that of implementing code labor-hour provisions.26 It was much easier to determine whether an establishment was working more than the maximum number of hours per day or week than whether individual employees had been working more than the permitted number of hours. 27 Actual curtailment of production usually was confined to seasonal or other types of production peaks and to exceptional concerns that for some reason had been working more than the stipulated number of hours. 28 However, exemptions were sometimes granted to take care of these circumstances. 25

Ibid., pp. 204-206. Ibid., pp. SO, 89. The code labor and plant hours usually coincided in these industries. 27 For example, compliance with code labor hours in the millinery industry was policed by sending inspectors around to the various establishments before and after working hours to ascertain whether they were operating. Plant operation during these hours constituted prima facie evidence of nonadherence to the labor-hour restrictions of the code {ibid., p. 80). 28 For example, in the hat manufacturing industry some of the larger concerns had been accustomed to step-up production to a two-shift basis during the rush season. This practice was stopped by the code, and none of these concerns asked for exemp26

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It likewise appears that the two-shift limitations of the textile codes had little effect in curtailing aggregate production. These limitations were adopted as precautionary measures against intensified struggles for industry markets; and in some instances, apparently, only because it had become customary to include them in textile codes. 29 Marked curtailment of the activity of certain types of establishments, however, occurred in some industries. These cases will be called to attention in Chapter IV in the discussion of fair practice programs. The most important attempt at production control through planthour limitation was made by the cotton textile industry. The code, as proposed and approved, provided that no member might operate his productive machinery for more than two shifts of forty hours each, or a total of eighty hours per week. It was evident at the time that this limitation would not restrict production in the majority of mills. According to one student, the provision was directed at those buyers who, in order to obtain reduced prices from individual mills, played upon their fear of vast overhanging inventories and impending price collapse.30 According to George A. Sloan, chairman of the cotton textile code authority, the underlying situation demanding plant-hour limitation in this industry was as follows: N o individual concern, no matter how clearly it saw the devastating effects of what all were doing, could make any impression on the situation. The pressure of overcapacity on each unit to get as large a part of the inadequate demand as it could, in order to keep going at all, drove each along a course which it was obvious was collectively disastrous. Concerted tions (ibid., pp. 83-84). Exemptions for peak operations were granted in the cap and cloth hat and in the robe and allied products industries (ibid., pp. 80-83). Planthour limitations were effective in curtailing seasonal operations in the following industries: millinery; dress (in this industry a good deal of machine installation took place to permit the meeting of requirements during rush seasons) ; and celluloid button (ibid., pp. 79-81, 84). A minor restrictive effect was felt in the cotton garment industry (ibid., p. 83). 29 Ibid., pp. 50-51, 77-78. Dr. Drury, as a result of his investigation of the operation of the two-shift limitations of the textile codes, concludes, "In general, the provisions have tended, as was no doubt one of their purposes, to prevent firms from making successful forays into the fields other than and larger than those which they had previously occupied, and to preserve business for the concerns which had been accustomed to handling it—except, of course, where concerns had required more than 80-hour operation to meet their regular requirements." (Ibid., pp. 77-78.) 30 Dillingham, "The Textile Fabrics Industry," NRA, Div. of Rev., pp. 92-92A.

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action by all to check these destructive forces was the only way in which the situation could be met in this national emergency.31

The important part of the production control measure was the provision that extraordinary limitations of plant hours might be applied whenever excessive stocks began to accumulate or when price cutting became imminent. Ten extraordinary curtailments were made by the industry, 32 covering 477 of the 695 days of the code's operation. Only two of these were industry-wide, the remainder being confined to the more important industry divisions. The additional restrictions imposed on plant hours by these curtailments usually represented a 2 5 percent reduction of the eightyhour week. The curtailments limited not only hours of operation but also the use of any machinery that had not been actively employed during a period, usually of six months, prior to the curtailment order. Available data indicate that prior to the imposition of the curtailments there had been a "piling up of stocks and a glutting of the market for the goods in question." 33 It is believed that some of the curtailments did lower the rate at which the industry as a whole would have operated had they not been effective, but "from the wide disparity indicated at all times between permitted operation and actual operation, their effect upon the general industry average must have been very slight." 34 Severe restrictions of production were threatened and actually occurred among some types of establishment. Most generally affected were southern mills, which had customarily operated well above eighty hours per week. 35 Apparently these mills seldom asked for special treatment and usually abided by the code limitation. Producers of seasonal and novelty goods were handicapped in meeting requirements, although the code authority to some extent met their situation by granting limited exemptions.30 Among the most 31 NIRA, Hearing on Conference of Code Authorities and Trade Association Code Committees, Vol. II, No. I l l , pp. 94-95. 32 The N R A did not participate in these determinations except during the latter part of the code period, when it had one representative on the industry committee charged with the responsibility for declaring the curtailments (Dillingham, op. cit., 33 34 pp. 104-10S, 110B). Ibid., pp. 110-110A. Ibid., p. 130. 30 State legislation prohibited many New England mills from working three shifts (ibid., pp. 92B-92C). 39 Ibid., p. 133.

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vigorous protestants to the plant-hour restriction were certain large rubber tire manufacturers and the largest manufacturer of surgical dressings, who operated cotton mills to serve their raw material requirements. A continual but unsuccessful effort was made by these concerns to modify the code limitation, at least insofar as it affected their own integrated operations. 37 An important feature of plant-hour control in the cotton textile industry, one not found in most other codes containing plant-hour restrictions, was the provision designed to prevent increases in the productive capacity of the industry and hence to prevent circumvention of the plant-hour limitation. Members were free to install machinery only when it was to replace a similar number of units that were retired or for the purpose of bringing the operation of existing productive machinery into balance. New productive machinery not intended for replacement or balance could be installed only with the permission of the N R A . Actually, few applications for permission to install machinery were made. Practically the only increase in cotton mill equipment that took place during the code period was in equipment contracted for prior to the code; this equipment was not covered by the capacity control provision of the code. 3 8 The plant-hour limitation of the Wool Textile Code provided that no productive equipment could be operated more than two shifts of forty hours each per week. As in the case of most codes containing plant-hour limitations, no provision was made for extraordinary curtailments or for limiting the installation of new equipment. I t is reported that in arriving at the basis for the planthour restriction the sponsors computed the average demand for the ten-year period, 1 9 2 3 - 1 9 3 2 , in terms of plant-hour requirements, making allowances for changes in productive efficiency and for normal seasonal variation. 3 9 The overall effect of the restriction on the nonexempted 4 0 equipIbid., pp. 92G-103. Ibid., pp. 113-120. Evidently many members of the industry had anticipated the code restriction and "beat the gun." 39 Ibid., pp. 145—146. 4 0 Sixteen days after the code approval all restrictions on the operation of woolen spinning spindles and worsted combs used for the production of woolen yarns and worsted tops were stayed by administrative order, leaving the limitation effective 37 38

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ment in curtailing production, however, was nil, as is shown by the fact that the average hours operated during the code period were less than 65 percent of the hours permitted in each division of the industry. 41 The industry limitations committee realized the general ineffectiveness of the plant-hour limitation and sent a questionnaire to members in order to ascertain their opinion about the wisdom of further curtailment. Since the majority opposed this move, no action was taken. 42 From the beginning a minority group of operators opposed the plant-hour limitation. Most of these operators were engaged in making seasonal, styled, or other special goods. The code authority consistently opposed their requests for exemptions. Two cases may be mentioned. The Forstmann Woolen Company was engaged in the production of highly styled goods for women's wear, the demand for which was very seasonal and to some extent unpredictable. It requested an exemption on the ground that it was greatly handicapped in filling orders. The code authority, backed by the Administration, denied the request, chiefly on the ground that it would create a precedent for further exemptions. Several months later the Forstmann Company renewed its efforts, but this time argued on a somewhat different ground: the impossibility of securing balance between its spinning and weaving departments. As a consequence permission was granted to operate spindles for three shifts. Since, however, looms continued bound by the code restriction, production was effectively bottled up, and the company remained dissatisfied. 43 The Collins and Aikman Company was engaged in the production from fibers of specialized fabrics ("pile") for the automobile and furniture industries. Most of the concerns manufacturing this type of fabric did not produce their own fiber and so were defined within the Upholstery and Drapery Textile Code. In the winter of 1935 a boom of such proportions occurred in the automobile industry that the Collins and Aikman Company and other firms only against worsted spinning spindles, looms, and knitting machines. A substantial proportion of the industry's equipment was thus exempted. According to the administrative order, "a temporary scarcity and disruption of the supply of woolen yarns and worsted tops may result if this stay be not granted." (Ibid., pp. 1501S2.) 41

Ibid., pp. 166-167.

42

Ibid., pp. 152-153.

« I b i d . , pp. 154-156.

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found themselves unable to fill their orders. Consequently, this company, together with nonintegrated members of the Upholstery Code (which also contained a two-shift limitation), requested an exemption from the plant-hour restrictions. The upholstery code authority supported its own members in this move; but the wool textile code authority opposed the request of the Collins and Aikman Company on the ground that an exemption would endanger the principle of plant-hour limitation in the textile codes and would be unfair to flat fabric manufacturers in the wool textile industry who also competed for the automobile business, but whose fabric was less in demand. 44 Acting upon the recommendation of its Advisory Council, 45 the National Industrial Recovery Board, in February, 1935, granted this exemption and in so doing laid down certain principles that subsequently governed the granting of exemptions from plant-hour restrictions. In brief, it was declared that plant-hour restrictions should not legislate business from newly developed products to products that had largely been displaced; that exemptions should be granted if failure to do so would impose definite hardship on both buyers and sellers and would tend to check increases in production; but that exemptions should be granted only for the purpose of filling actual orders and only during a period when all available capacity was in use at the maximum permitted by the code. Under no circumstances were exemptions to be granted if an undue proportion of extra production would be shifted to low-wage areas. This decision came at such a late stage in the code period that it had little effect in limiting the application of plant-hour limitations. The few plant-hour limitations in nonapparel and nontextile codes were similar to those already considered. Some were primarily designed to supplement code labor provisions. 40 In few cases were they effective in curtailing total industry production, though it is questionable whether production would not have increased ** Ibid., pp. 156-161. 45 See NRA, Advisory Council Decisions, III, 250-255. 40 For example, in the sewing machine industry (rebuilders' division) the limitation was designed to aid enforcement of the provision that persons working for themselves should observe the same hour limitation as employees; a similar motive appears in the case of the dental laboratory industry (Drury, op. cit., pp. 106-107);

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47

in their absence. In nearly every case certain types of establishments were handicapped by the restrictions. 48

INVENTORY

CONTROL

Three codes contained provisions which in effect stipulated that inventories of finished products should not exceed a specified proportion of the member's normal sales. The manifest purpose of these provisions was to prevent an accumulation of inventories beyond what could be sold at profitable prices. The Administration was favorably inclined toward such a control, but it is not difficult to understand its lack of popularity with industry. Inasmuch as it imposes no restriction on the amount of goods that any member may produce and sell, it affords no assurance against price cutting. Its significance as a control over competitive price cutting is largely confined to eliminating the pressure arising from excessive inventory accumulations to dump commodities on the market and thus to break down price levels made effective through direct price control devices. The sales yarn division of the Wool Textile Code prohibited any member from having on hand an amount of yarn equal to more than one-sixth of his previous calendar year's production. It will be recalled that members of this code also operated under a planthour limitation. The provision probably was ineffective, since the allowable inventory far exceeded the normal inventory carried by members of the division during the code period.4" The code for the carpet and rug industry provided that no member's inventory should exceed one-third of his sales of the preceding plant-hour limitation in the southern rice milling code was designed in part to aid code labor-hour provisions in spreading employment, and, in the wall paper code, to reduce seasonal employment peaks (ibid., pp. 91-92). 47 Plant-hour limitation appears to have had a substantial effect in preventing production increases in the furniture manufacturing industry; many requests for exemptions were made but all were denied (ibid., pp. 90-91). 48 It appears that the admitted objective of the sponsors of codes for the cast iron soil pipe, cigar container, and medium- and low-priced jewelry industries was to penalize the operations of certain types of enterprises (see below, pp. 151, 159). 49 Dillingham, op. cil., pp. 171-172. The code authority indicated that it had little knowledge concerning the effectiveness of the provision.

no

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twelve months. As was indicated above, members of this industry had had some success in price control prior to the code, and they attempted to strengthen this control by various types of code price provisions. The N R A was never able to ascertain whether the inventory provision played a role of importance in the industry's price control scheme. T h e code for the carbon black industry required members to regulate production in such a way that it would not exceed deliveries and provided that if at the end of any period of six calendar months the quantity of carbon black held in storage should have increased, storage should be reduced by an equivalent amount during the next six calendar months. Excessive stocks of carbon black had accumulated during the several years preceding the code; the control evidently was aimed at this threat to informal and code price controls. According to the secretary of the code authority this provision was viewed as a guide to the individual producer, and it never was necessary to take official action against any member. 5 0 VOLUNTARY

SHARING

OF

BUSINESS

Provision was made for voluntary sharing of business in only one code, that for the corrugated and solid fiber shipping container industry. Yet, it was informally adopted by a number of industries during the code period. Voluntary sharing of business does not require agreement on prices or production, since it may operate simply through the collection and dissemination of production, sales, or shipments data. In this respect it is closely akin to price filing plans, and, indeed, it was an integral part of many pre-NRA price filing systems. Its basic principle is that any seller furnished with accurate and upto-date information about the total amount of business done by the industry will have no incentive to cut prices as long as he finds that he is maintaining his customary share of the total business. As price filing, this device will prove unsuccessful unless business rivals possess sufficient foresight to refrain from competitive price 60

NRA, Div. of Rev., Work Materials

No. 66, pp. 20-31, especially pp. 26-29.

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cutting. The plan, of course, may be made more precise and effective by definite agreement that no member shall exceed a specified percentage of the available business and by the application of whatever sanctions, moral or economic, the administrative agency has at its disposal. The code for the corrugated and solid fiber shipping container industry granted members the right to agree on the share of the total business that each might obtain. Plans for collection and dissemination of industry sales and production data are natural supplements to price filing systems. One of their functions is to help members judge the accuracy of prices filed by other members. This function was suggested in the following statement of W. J. Donald, of the National Electrical Manufacturers Association: Essentially, trade statistics have the same bearing as uniform costing activities on pricing policy, namely, that they provide additional data on the basis of which members of the industry may do business more intelligently, especially in regard to pricing policies. Knowledge that a company is or is not securing its accustomed percentage of the unit and dollar volume of sales of the industry, in contrast with gossip and "weather reports" brought in by salesmen regarding prices and terms of competitors removes many of the charges and counter charges that would otherwise exist. Data regarding inventory conditions also provide important guidance to individual pricing policies. 50 important is a sound statistical reporting system that some leaders of the industry have expressed the opinion that open price filing without corollary trade statistics sometimes results in more chaotic conditions in the field of pricing than would exist if no accurate knowledge regarding prices were available.51

Conversely, price filing may supplement plans for voluntary sharing of business by indicating to sellers whether changes in their percentages of total business result from price competition rather than from non-price competition. How much informal sharing of business was accomplished by means of code mechanisms for collecting and disseminating production, sales, and shipments data is not known. The Administration encouraged code authorities to collect such data, though it gave little thought to how they might be used. Reference may be made 51

Quoted in NRA, Div. of Rev., Work Materials No. 76, p. 316.

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to a few cases in which plans for sharing business were adopted after it was found that other forms of price control were not satisfactory. The paper industry was among those industries in which sharing of business was practiced. The attitude expressed in the following statement of W. W. Pickard, co-ordinator of the various branches of the paper industry, is illuminating: The real problem was how to divide up such production as there was, among the individual units of the industry in such a way as to cure the existing conditions which had already eliminated profits, reduced wages to a minimum and made huge inroads on capital investment. On the price approach to the problem the most commonly used mechanism was the open price plan. It was soon found that the mechanics of price filing were not nearly so simple as they looked at first. In order to make filed prices intelligible and comparable, one with another, elaborate regulations relating to grade, quality, quantity, freight allowances, discounts, agents' commissions, jobbers, chain stores and a hundred other things were added to the plan. Further regulations were necessary to put cost determination on a uniform basis. The whole thing became a labyrinth. This tended to produce violations and in fact it became difficult to tell in many cases whether a transaction did or did not violate the rules. . . . what was needed was a plan which would apportion such business as there was on a fair basis, or, expressed in another way, as would apportion the burden of carrying equipment already made idle by lack of demand so that no one would be crushed. Only one plan which actually accomplished this was proposed or put into effect. It was the plan which the container industry is using. Under this plan the normal position of each member of the industry, in terms of percentage of the total production, is determined and the members then voluntarily limit their individual production to that percentage of the total, whatever the total may be . . . At this point let me say that I believe now and believed then that as legislation the clause which was included in your code had no value. Its value lay in the fact that by the approval of the code the principle of voluntary sharing of business was recognized and given official expression. In my opinion the practice of sharing business is now and always has been legal. Please understand, however, that this perfectly innocent tool may be used in connection with some illegal act and might for that reason be condemned. Production control by agreement is illegal and always has

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been and the line between limiting production and dividing up such business as is available to the industry must be kept sharp and distinct. My conclusion is that voluntary sharing of business has worked. Furthermore, it is the only one of all the plans submitted to the N R A which has worked. Even in the few cases where the open price plan has been a success it has been so only because it had under it an unannounced and perhaps hardly recognized adherence to the principle of sharing business.52

The above statement was made in June, 1935, to members of the National Container Association, which sponsored the Corrugated and Solid Fibre Shipping Container Code. This code provided that with the approval of the code authority members of the industry might join in a voluntary agreement to share their business. Actually, the code merely lent official sanction to a plan that a firm of management engineers had introduced a year prior to the code. As it worked out, monthly statistics were prepared which showed the percentage of total business done by each member. If these reports indicated that the percentage of any member had increased markedly, it was intimated that he was precipitating a price war, and he was encouraged to raise his prices. 53 Mr. Pickard's statement suggests that the plan was successful. Both the candy industry and the machined waste industry adopted plans for sharing business after price filing had proved impracticable and the Administration had refused to consent to minimum price control. 54 The plan of the candy industry divided the industry into a number of product groups. These groups were to: . . . hold frequent meetings in order that the personal elements and confidence in one another might be established, the group members to furnish statistical information to a confidential agency, such information to be tabulated into some total and the manufacturers' percentage of the total transmitted to the individual member. The Candy Industry more than anything also needs to know more about its industry through the volume of the various kinds of candy marketed in the different areas and to note their own percentages of the total business. If a manufacturer is 82

53 Quoted in ibid., pp. 317-318. Drury, op. ext., pp. 32-34. For a review of the experience of the machine waste industry see NRA, Div. of Rev., Work Materials No. 66, pp. 16-19, 54

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receiving a normal percentage of business he is not apt to sell below cost. In general, this industry has been operating as though there was an unlimited amount of business and that they could eventually bring their volume up to a profitable basis by selling below cost until that profitable volume is reached. The confidential agency able to distribute statistical information of this nature as well as cost information could undoubtedly have great influence in stopping sales below cost. 55

The plan required that each member report statistics on poundage and value of shipments sold through the various trade channels. Although there is little information concerning the success of the plan, it is notable that one large member vigorously opposed it and refused to furnish the data requested. 66 If members of an industry make a variety of products or employ widely different methods of doing business, sharing of business plans may prove complicated and cumbersome. This is indicated by the experience of the envelope industry. In this industry it became necessary to prepare composite volume-shipment reports along the following lines, so that a member not maintaining his share might know where his business was going and thus take appropriate steps to meet competition: shipments to each of a number of market territories; shipments of "jobber plants"; shipments of "paper merchant plants"; shipments of "stationery and tablet plants"; shipments of "trade plants"; and shipments of "consumer plants." It later became necessary to subdivide members into "large" plants, "medium-size" plants, and "small" plants. 57 It is questionable whether this plan operated successfully. 58 CAPACITY

LIMITATIONS

Thirty-two codes contained restrictions on the installation of new equipment.50 Of these, only three authorized the prohibition of the installation of such equipment. The Iron and Steel Code 65 This is from a report to the N R A made by George A. Chapman, former administrative member on the candy code authority (quoted in NRA, Div. of Rev., Work Materials No. 76, pp. 327-328). 68 67 58 ibid., p. 328. Ibid., pp. 323-3 2 4 . See ibid. 89 Although several industries attempted to incorporate in codes provisions for the withdrawal of excess capacity, none were approved. In the paperboard industry, for example, it was proposed to form a corporation, to be financed by stock pur-

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prohibited the "construction of any new blast furnace or open hearth or Bessemer Steel capacity." The Alloys Code and the China Clay Producing Code provided that if the code authority should determine that existing capacity was in excess of the amount required to meet demand it might recommend to the Administrator that such capacity should not be increased. Evidently neither of these industries acted on this authorization; and judging by the fact that only one request for exemption was addressed to the NRA, the prohibition in the Iron and Steel Code had a limited restrictive effect.60 In sixteen of the thirty-two codes it was required that before new equipment might be installed the approval of the Administration or of the code authority must be obtained; 61 with but few exceptions these restrictions applied to both present and prospective industry members. Six of these restrictions were in textile codes. Capacity restrictions were considered to be necessary supplements to the plant-hour restrictions of these codes. In each case it was made clear, either by the code provision or by administrative interpretation, that the restrictions did not apply to installations designed to replace discontinued machinery, to transfers of equipment from one producer to another, and to installations required for balancing purposes. 62 As has already been indicated, the restriction in the cotton textile code had little effect, since few applications were made for the installation of new equipment that would have increased the capacity of the industry. This was true also in the silk textile, throwing, and cordage and twine industries. 63 In two industries, lace manufacturing and rayon and silk dyeing and printing, however, the provisions were vigorously applied by the code authorities and, in a number of cases, served to prevent the installation of new equipment. 84 chases by industry members, to purchase plants that could not operate economically under normal business conditions (NRA, "Report of the Division of Industrial Eco80 nomics," pp. 1679-1680). See Drury, op. cit., pp. 113-116. 81 The approval of the Administration was required in twelve of these. The remaining four placed responsibility for certification of new capacity on the code authorities but made their actions subject to the review of the Administration. 82 Although it is doubtful if the last exception mentioned was applied in every 88 case (see ibid., p. 117). Ibid., pp. 131-134. "Ibid., pp. 124-131.

Il6

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Ten non-textile codes required the approval of the code authority or of the Administrator before new equipment could be installed. They uniformly exempted from this requirement new equipment designed merely to replace existing equipment. In a few cases it was provided that new equipment designed to modernize, increase productive efficiency, or lower costs, was exempted from the code limitation, whether or not it would result in capacity increase. Transfers of equipment from one producer to another were permitted in many cases. 05 With one exception 66 these codes prohibited every kind of plant construction by prospective members, except when approval had been obtained. The provisions had little or no effect in four 67 of the industries under consideration, judging by the paucity of applications for permission to install new equipment and the promptness with which applications were approved. In the other six industries 68 the provision for the most part was effective in preventing the installation of new equipment. With the exception of a few special cases 69 the remaining codes containing capacity control provisions required that members who contemplated equipment additions should notify the code authority of their intention and specified that the code authority might make recommendations on the subject to the Administration. These provisions were somewhat ambiguous, because they did not indicate whether members were required to receive code authority approval before carrying out their plans and did not make clear the type of action properly open to the Administration. Except in the glass container and clay drain tile industries, little effort, however, was made to apply them. 70 65 NRA, Research and Planning Division, Report on the Operation of the National Industrial Recovery Act, p. S3. 66 Refractories. 67 Refrigerated warehousing, candle manufacturing, American glassware, carbon black (Drury, op. cit., pp. 154-156). 68 Ice; structural clay products; refractories; pyrotechnic manufacturing; excelsior; crushed stone, sand, and gravel (ibid., pp. 135-154, 156-163). Most of the applications denied by the code authorities of these industries never reached the Administration. 69 Pertaining to motor bus and transit route certificates—Motor Bus Code—and the orderly development of new oil fields—Petroleum Code (see ibid., pp. 177-180, 183) ; and provisions for voluntary agreements not to increase capacity (Motor Vehicle Storage and Parking Code and Ready Mixed Concrete Code), which were 70 never made effective (ibid., pp. 180-181). Ibid., pp. 163-177.

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The opinion that has been expressed with respect to the effectiveness of code capacity limitations is based primarily on the number of applications made by members to install new equipment. This, however, cannot be accepted as a final measure of their effectiveness, because it does not account for the cases in which code authorities dissuaded members from making applications 71 or cases in which members wishing to install new equipment failed to notify code authorities of their desire. Capacity control has a significant function in preventing destructive price competition only when used in connection with other controls. As has been shown it had an important role in preventing circumvention of plant-hour limitations. And, though NRA allocation plans were not accompanied by capacity control, it is known from foreign cartel experience that where allocations are based on the relative capacity of industry members, these plans may be threatened, in the absence of capacity control, by increases in productive equipment made for the purpose of enlarging quota assignments. A more significant function of capacity control is to safeguard price levels that have been achieved through direct price control devices. The creation of additional capacity by a producer in anticipation of a sales increase must always exert pressure to cut prices if it is found that this increase cannot be realized. An industry's price structure will be particularly endangered when equipment is constructed by persons who have recently entered the industry; it may be imperative that they cut prices, because otherwise customers may have no incentive to shift business to them. 72 And, even if it were possible for newcomers to make a place for themselves without cutting prices, they nevertheless may endanger existing controls, since, by acquiring a share of the market formerly enjoyed by others, they may increase excess capacity and create 71 It is estimated that in the ice industry the number of persons who were discouraged from making formal applications was about equal to the number of those whose applications came through (ibid., p. 136). 72 The situation reported by members of the wrench manufacturing industry should be noted. Code sponsors sought to prevent persons deliberately bent on disrupting the industry's price structure from entering into production. These were large buyers who threatened to enter the industry unless special price concessions were granted them (see statement of J. Harvey Williams in NIRA, Public Hearing on Price Provisions, I, 187-188).

Il8

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pressure for price cutting. Members of an industry, moreover, naturally will desire to prevent newcomers from sharing in benefits achieved through price control. T h e use of capacity control to support price control m a y be illustrated by reviewing the experience of the ice industry, in which the most important code effort was made to control capacity. T h i s was the subject of an intensive investigation by Dr. H . B. Drury, whose summary statement follows: The Ice Code was approved in that earlier part of the life of N R A when the organization and policies of the Administration were not as fully developed as later and industries were able to secure assent to codes which were very largely of their own writing. The code contained a number of provisions which could indirectly influence the production which given manufacturers could turn out, the normal market area and antidumping provision, the emergency price and selling below cost provisions, and possibly the posting of prices provision. In this brief summary, however, attention will be given only to that central provision in the ice code which went by the name of "Control of Production." This title, however, was somewhat of a misnomer, as the provision did not attempt control of production, in the sense that under some codes production quotas were set up or machine hours limited. What article X I of the code really provided was control of new capacity. Construction of new capacity had not constituted a serious problem in the ice industry prior to 1932. From early in the Twentieth Century, manufactured ice had been displacing natural ice, and ice manufacturing capacity was not on the whole being developed more rapidly than the growth of ice consumption. The industry was probably well above the average in profits. Although capacity was not on the whole excessive before 1932, the ice industry was at all times sitting on something of a volcano in the way of a price problem. The demand for ice is highly seasonal. Even when no more capacity exists than is needed to meet maximum demand, there is bound to be much more capacity than can be used during certain parts of the year, unless storage of ice is undertaken to a wasteful and undesirable extent. Because of a high ratio of overhead costs to total costs, and because ice cannot be shipped to any great distance, there is a latent tendency for ice manufacturers to shave prices in an effort to round out their own production at the expense of their neighbors. But a price reduction started by one manufacturer will be met by others. Further price reductions ensue, and in short order the industry may be plunged into a price war.

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The losses which are claimed to follow unrestricted competition in ice manufacturing are so great that it is quite understandable that there should be marked tendencies away from price competition—except during the periods of price wars and emergencies. This ingrown tendency towards monopolistic agreement in the ice industry caused at least one pre-code attempt by those interested in better ice service at fair prices to set up public control over the ice industry, which involved among other things control over new capacity. A review of the experience of Oklahoma along this line is contained in this report. The interest of the ice industry in capacity control was caused chiefly by the drastic drop in the demand for ice which first clearly showed itself in 1932. This decline was not in any great measure a depression decline but was due mainly to the introduction of electric refrigeration. By 1933 the ice industry unquestionably had a large amount of excess capacity, even though it be recognized that some of the plants made idle could be scrapped without much real waste because of age and obsolescence. When the demand for ice fell off, the construction of new plants practically ceased, except that a considerable number of small plants were built in places which had not before had a local source of ice supply, and there was some continuation of the process of displacing natural ice with manufactured ice capacity. The immediate problem of the industry related, therefore, not to new plant construction, but to the maintenance 0) ice prices above ice costs under conditions in which existing ice capacity was in general operating much below capacity. Although prior to 1932 the small number of ice manufacturers in any one community had usually been relatively successful in adhering to agreed prices, this became increasingly difficult when ice manufacturers generally had considerable capacity which they could not use at any time of the year. As ice consumption fell o f f , increased stress was laid by manufacturers on the necessity of working in harmony, and in order to put this harmony on a tangible basis, plans were developed in some places by which part of the unneeded capacity was retired at the common expense of all. Obviously, however, a program of plant scrapping, or even a policy by which each manufacturer would refrain from trying to steal from others the business which would mean full operation, could not be successful if new people kept coming into the ice business. And what was to keep them from coming in, assuming, as the manufacturers hoped, that prices could be kept above costs? It was probably the realization of the seriousness of this dilemma which lay ahead, more than any plant construction which had as yet occurred, which made the ice industry determined that, whatever else the code contained or did not contain, it must protect the industry against new construction. So they asked for and obtained in the code a provision

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to the effect that increase of capacity could not be made without the obtaining of a certificate of public necessity and convenience whose issuance had been approved by the Administrator. During the first eight months or so of code operation, the Administration, in the granting or denying of requests for certificates, almost always approved the recommendations made by the Code Authority, which in turn were almost always approvals of actions taken by forty-four local Committees of Arbitration and Appeal. These committees were made up exclusively of members of the ice industry. Unless some one of their own number wanted to make some addition to plant capacity that would not affect the market of other members, these committees, practically without exception, would vote to recommend denial. Relatively little attention was paid to public convenience if there was any existing manufacturer who thought that he could supply ice in a given place. Scant consideration was given as to whether existing manufacturers were charging more than they should—even in cases where prices were twice as much as those usually charged. Attacks on the restriction of new building in the ice industry began in the spring of 1934. The Administration, in the summer of 1934, began to review more carefully the recommendations of the code authority, and a considerable number of recommendations of denial about which there was doubt were held in abeyance. In the fall of 1934, the staff of the Administration working on this provision of the code was considerably increased, and in January a change in procedure was put into effect by which the Administration's own representatives made investigations in the field and conducted hearings, instead of these being conducted by members of the industry. Beginning in January, 1935, many of the recommendations of the code authority for denial which had been held in abeyance were reversed. For sometime prior to the close of the code period, the Administration had, pending a clarification of policy, withheld all approvals of denials. This was, of course, a temporary program. There was great difference of opinion within N R A as to the wisdom of the capacity limitation. The Deputy Administrator of the code and his assistants believed that, granted sufficient funds for proper administration, the provision would be of net gain. Probably a majority of other officials, cognizant of the situation, felt that this feature should be removed from the code. Ice manufacturers were critical, during the closing months, of the cautious attitude in enforcing the provision and attributed growing non-compliance largely to this attitude. However they did not waver in their advocacy of restriction of new capacity. 73 73 N R A , D i v . of Rev., Production and Capacity der the NRA, pp. vii-x. Italics supplied.

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Of the price provisions to which Dr. Drury refers in the first paragraph of his statement, only emergency price fixing was effective. Members in various regions made a number of appeals for emergency price determinations on the grounds of price wars, breakdowns in local production or price control agreements, and dumping of ice from distant points. Six emergencies were declared by the Administration, but minimum prices were established in only three. 74 THE

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COMPETITION

In January, 1935, George A. Sloan, Chairman of the Consumers' Goods Committee, appeared before the National Industrial Recovery Board to discuss the subject of code devices for preventing "price demoralization." After arguing that minimum price, open price, and production control provisions were indispensable to programs for preventing price demoralization, Mr. Sloan made this observation: There may be some trade practice provisions which are not directed against demoralization of price—as for example, piracy of design, misrepresentation of a competitor's goods, and some others. But the great mass of trade practice provisions and those which are vitally important in a time like this, are those which are intended to check price demoralization and protect a fair competitive price. If the National Industrial Recovery Act were to confine its efforts in dealing with the destructive effects of the break-down of the competitive system, to codes with such side issues as these which are, in any event, already protected by existing law, the National Recovery Administration might as well turn us back to 1932 and go home.75 Mr. Sloan's statement is particularly significant as an expression of industry's view of the function of code trade practice rules, because it was prepared by a committee that represented some 200 consumers goods industries. Mr. Sloan clearly states that industry was primarily concerned with the control of competition in price and suggests that there was a lack of interest in controlling non74 In San Antonio, New Orleans, and New York City (see NRA, Div. of Rev., Work Materials No. 56, pp. 84-87; and Taggart, op. cit., pp. 339-344). 75 N I R A , Public Hearing on Price Provisions, II, S20; for his comments on the function and significance of the various price control devices see pp. 510 ff.

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price competition. The evidence appears to support this view. It will be recalled that non-price competition assumes two principal forms: competition in product and sales promotion, and competition in economies. It was shown in Chapter I that these forms of competition, just as price competition, may prove destructive. There is a considerable body of evidence, which will be presented in the next chapter, that the dominant factions of some industries attempted to suppress, as unfair, non-price practices peculiar to their rivals, such as design piracy and product misrepresentation mentioned by Mr. Sloan. But there are few cases that could be interpreted as ones in which members of an industry joined together in a mutual effort to reduce competition in sales promotion, product, or economies. The outstanding fact in connection with this question is that no code prohibited the practices of advertising or of salesmanship, except when they were deceptively employed. 70 The main query relates to the many restrictions that were placed on concessions granted by manufacturers to induce distributors to push their products. Any price granted by a manufacturer to a distributor may contain such an inducement. Trade discounts ordinarily are determined in part to accord with the relative amount of sales promotion services rendered by various classes of distributors. Discounts and allowances, such as the "advertising allowance," are often specifically designated for such purposes. But it is not reasonable to interpret code restrictions on these terms as parts of industry programs to control sales promotion. If groups of manufacturers had been vitally concerned with preventing competition in sales promotion, they would have attacked its most patent form, which is advertising. Such code restrictions must be interpreted as 76

It is notable, however, that in one industry, at least, it was originally intended to limit competition in sales promotion. The following provision, originally proposed, was not urged by the fertilizer industry and did not appear in the approved code: "In order to eliminate excessive sales cost, the use by any producer of mixed fertilizer and/or fertilizer material of more salesmen for marketing his said products, than as indicated below, based on the annual tonnage of such producer and the territory covered, is hereby prohibited." (There followed a detailed schedule indicating the number of salesmen who could be used by producers falling in specified geographic and tonnage classes— "The Fertilizer Code," Vol. A, Sec. 2, NRA files, U. S. Department of Commerce.)

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having been designed to prevent evasions of price controls, whether code or informal controls. This is evident from the nature of the restrictions themselves: thus the majority of prohibitions of advertising allowances applied only when such allowances were "excessive," "unreasonable," "secret," "discriminatory," or not "separate and distinct from any sales contract . . . and from the sale price and . . . not designed or used to reduce a sales price." 77 A similar question arises in connection with code restrictions of product competition. Restrictions were imposed on the granting of a number of special services and goods,78 which might be considered to be a part of the commodity offered for sale. But they, likewise, may be interpreted as integral parts of price control programs, not as elements of group programs for preventing competition in product. 79 There were, however, several codes that, directly or indirectly, imposed restrictions on the commodities themselves. These took the form of requirements for minimum standards, grade and substandard labeling, maximum standards, and simplification. Because they do not limit product improvement, it is apparent that provisions establishing minimum product standards could not have been designed to prevent destructive competition in product; the same applies to grade and substandard labeling.80 But the imposition of maximum standards, by preventing quality improvements, and simplification, by preventing an extension of the number of types and sizes of products, may have had the effect of preventing competition in product. Provisions of the first type were effective in relatively few codes. In some cases it is clear from the code provisions themselves that they had no significance apart from code 77 See N R A , D i v . of Rev., Work Materials No. 35, Part C, pp. 11, 54-55. As examples, see also types of restriction placed on distribution allowances (ibid., p. 55) ; premiums (ibid., p. 71) ; samples (ibid., p. 72) ; providing sales help (ibid., p. 66) ; and demonstrating (ibid., p. 6 6 ) . 78 For example, reconditioning, repair, maintenance, drawings, plans, specifications, installations, special services, gratuities, special containers etc. (ibid. pp. 6 7 68, 73). 79 As in the case of advertising allowances cited above, their function as parts of price control programs is indicated by the fact that, in the main, they were prohibited only when "excessive," "unreasonable," "free," "discriminatory," etc. 80 The use of these provisions to suppress the competition of minority groups will be considered in Chapter I V ; their use to provide a basis of price comparison and thus to aid price control was indicated above (pp. 75-76).

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81

price controls. In other cases sponsors made it clear that they were primarily interested in bolstering up their price control programs. 82 It is likely, however, that simplification programs were adopted by several industries primarily because of a desire to reduce excessive differentiation in the number and diversity of product items and to prevent further differentiation along these lines. 8 3 For many years simplification programs have been developed by various industries in conjunction with such agencies as the United States Bureau of Standards. Numerous codes adopted simplified practice recommendations already issued by the Bureau of Standards. Although they do not directly affect competition in quality, simplified practices may materially limit excessive product competition by reducing the variety of sizes, dimensions, and types of products. It may be noted that although few code provisions appear to have been designed to limit competitive product development or sales promotion many of them may have had this effect in some degree. Thus, prohibitions of advertising allowances and other concessions made to distributors to induce them to promote manufacturers' products probably restricted this form of sales promotion. 84 Mini81 For example, the provision found in the Rubber Footwear Code, which prohibited departure beyond the standards established unless a proportionately higher price was filed (see NRA, Div. of Rev., Work Materials No. 38, Part B, p. 45). The tendency of business men to view minor forms of product improvement as price-cutting devices is illustrated by the following provision, which the ladies handbag industry attempted to include in its code:

"Destructive Price Cutting by means of covering any metal center frame, pocket and coin purse with fabric materials or leather, or the lining of any framepocket or purse with leather in handbags selling at less than $24.00 per dozen is unfair competition." (NRA, Div. of Rev., Work Materials No, 71, pp. 70-71.) 82 Thus, a simplification program adopted by the wood case lead pencil industry was never put into effect, because the Administration disapproved a schedule of minimum prices proposed by the industry for which the simplified product classification was to have served as a basis (NRA, Div. of Rev., Work Materials No. 38, Part B, p. 77). 83 For example, the fertilizer industry, whose code provision read in part as follows: "Section 1, Reduction in Number of Grades of Mixed Fertilizer. In order to eliminate waste and reduce the cost of manufacture, bearing in mind the economic interest of the farmer, a list of grades suitable to meet the agricultural needs of each State or of each zone . . . may be established by the producers in such zone or State . . ." (Ibid., p. 79.) See also the program of the paint, varnish, and lacquer industry (ibid., pp. 77-78). 84 The prohibition of advertising allowances substantially increased the advertising costs of certain members of the millinery industry by making it impossible for them to take advantage of local (newspaper) rates. As a consequence, a move

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mum price controls, by preventing price reductions made for the purpose of introducing new products or by forcing producers to increase the price of improved products in proportion to their added cost, may have served to reduce the incentive to product development. Inflexible plant-hour provisions may have discouraged the development of styled goods by preventing producers from stepping-up production to meet the peaks of demand for these goods. Where they were effective, allocation or sharing of business plans, by fixing the quantity of goods that any member might sell, must have reduced the incentive to expend funds in product development and sales promotion. Finally, limitations on the installation of new equipment may have prevented the production of new types of product. Economies may be effected by business men in a variety of ways, such as in labor costs, in raw material costs, in transportation and distribution costs, and through improved technology. Code trade rules in some manner affected the business man's practice of carrying out economies in all these ways. But, except for technological economies, there is no evidence to suggest that members of any industry as a group were interested in preventing competition in any of them. 8 5 The fact that limitations on the installation of new capacity were included in several codes raises the question whether there may not have been some instances of mutual effort to limit competition in technological economies. It is doubtful if such efforts characterized the sponsorship of capacity control provisions in any code. As has already been pointed out, some codes specifically exempted capacity increases intended to achieve greater efficiency, lower costs, or modernization. s,i The installation of more efficient equipment in other industries whose codes contained capacity conwas made to modify the provision to a form that was less restrictive but which, it was hoped, would prevent concealed price cutting (see N R A , Div. of Rev., Work Materials No. 53, pp. 8 3 - 8 4 ) . 83 See Appendix B for bearing of code wage and hour provisions on economies in labor costs. 8B See N R A , Research and Planning Division, Report on the Operation of the National Industrial Recovery Act, p. S3. It is doubtful, however, if these cases were significant. Either the entire capacity control provision had no effect (feldspar, American glassware, cement, floor and wall clay tile, clay and shale roofing tile— Drury, op. cit., pp. 208-209) ; or, where capacity control provisions were effective, it appears that no attempt was made to distinguish relatively efficient equipment

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trols was uniformly permitted as long as old equipment with a corresponding capacity was retired. There are several possible explanations for industry's apparent lack of interest in attacking the various forms of non-price competition. Several reasons have already been suggested why business men do not consider competition in product and sales promotion as destructive as in price.87 One further comment may be made. It is an undoubted fact that during the depression years prior to the N R A non-price competition was much less intense than price competition. Entrepreneurs, facing an ever increasing scarcity of opportunities, naturally looked to the quickest and most direct method of protecting their market. Price cutting, if it promises relief at all, promises immediate relief. On the other hand, product differentiation and sales promotion require a longer period in which to accomplish their end, a period, particularly in the case of sales promotion, that may extend over a number of years. Moreover, both of them, if employed on a large scale, may require investment; and it is during a period of disappearing market prospects that new investments are least likely to be made. Likewise, an attempt to escape market pressure by effecting economies, especially through technological improvements, may require some capital expenditure and promise no immediate return. Business men turned to price cutting in an effort to preserve sales volume; and price competition, because it had become general and destructive, was the object that commanded their immediate attention when formulating codes. Had the codes become permanent institutions and had there been opportunity to work out effective price controls, business men might have directed their attention to the problem of controlling these other forms of competition. It may be doubted, however, if rival business men in any industry are sufficiently imbued with the philosophy of common sharing of opportunities to shut off every channel through which individual initiative may express itself. from other equipment (structural clay products—ibid., pp. 144-148; crushed stone, sand, and gravel—ibid., pp. 156-163; clay drain tile—ibid., pp. 175-176). 87 See above, pp. 29-30.

CHAPTER THE

CONTROL

OF

IV

UNFAIR

PRACTICES

HUS FAR attention has been centered on code programs or aspects of code programs that developed from a community of interests among members of an industry. In contrast are those programs that arose because of a conflict of interests. T h e latter represented an effort of a particular group in an industry to suppress as unfair the practices of competitors found to be detrimental or oppressive. 1 Such control efforts arise mainly because of differences in competitive ability. Superior ability may reside in competence or in economic power. Incompetent members of an industry have an obvious incentive to accomplish through concerted action what they are unable to accomplish directly: to maintain a position in the market against encroachments by more able competitors. Superior competence may arise in connection with a number of types of practice, a few of which may be suggested: Some business men may be more successful than others in concealing their competitive policies. T h e y may be more aware of their costs and of consumer demand and therefore more skilled in adjusting their policies to market circumstances. T h e y may exercise more ingenuity or inventive genius in developing new products or in altering existing ones; they may show their genius by effectively imitating the products developed by others. T h e y may be more effective in their techniques of salesmanship and advertising. Competitive ability may be indicated in a policy of saving sales-promotion expense while enjoying increases in aggregate industry demand resulting from campaigns conducted by rivals; the relatively inexpensive expedient of deliberately deceiving buyers, both about the merits of 1 In using the term "unfair," the writer does not presume to pass judgment from any standpoint on the desirability or undesirability of the practices restrained. The term has been employed simply because it is one that the sponsors customarily used when referring to such practices.

128 C O N T R O L OF U N F A I R P R A C T I C E S their own products and those of competitors, may be followed. Some business men, moreover, may be more competent than others in effecting economies. Competitive skill may be exercised by appropriating techniques developed by others. It may be reflected in the development of a scale of business sufficiently great to make possible economies of large purchases. Incentives to control the practices of more competent rivals are greater if a costly change in methods of doing business is necessary to meet these practices. A new product may be only slightly more attractive to buyers than rival products and yet command an important part of the market, because rival manufacturers can make a similar product only through costly alterations in their methods of production. A similar situation might develop when members of an industry operate under different schedules of equipment replacement. In replacing his equipment a producer might install machinery only slightly more efficient than that of his competitors; yet he might enjoy a marked competitive advantage if his competitors, having written off only a part of their equipment, were unable to change over to the newer technique without considerable expense.-' Analogous situations may arise in distribution. Competing manufacturers frequently employ different channels for distributing their products. Some may sell directly to mail-order houses or independent retailers, whereas others sell only through wholesalers or jobbers. Either group by effecting moderate economies in their distribution methods might enjoy a substantial advantage if the others were unable to shift their method without expenditures in establishing new contacts. In the distribution trades the fact that quantity discounts have been slightly increased by manufacturers may be a matter of great concern to the small dealer who cannot suddenly enlarge his scale of business to take advantage of them. Nor can the small independent merchant readily meet the economies developed by mail-order houses or department stores when such economies depend upon the mail-order or department-store method of doing business. Superior ability in business also may reside in economic power. 2

For similar reasons individuals entering a business may have a strategic advantage entirely out of proportion to the superiority of the equipment they install.

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This power may be expressed in two significant ways. In the first place, the relatively powerful members of an industry may be best able to engage in the practices of competition through which superior competency is expressed. The more financial outlay is required for these practices, the more likely is this to be the case. Their strategic position is greater, too, in that if necessary they can more readily incur the costs of changing methods of doing business. In the second place, they are best able to extract favorable prices and concessions in purchasing materials. When material costs are important, as they are in the distribution trades, this may be the essential factor in determining the outcome of the struggle for business. The more able as well as the less able members of an industry may initiate trade practice controls. Those who are able sellers because of their competence may wish to control their rivals if these rivals have sufficient resources to meet every move they make. Those who are able sellers because of their economic power may be moved to impose controls on weaker competitors if the latter by competent efforts succeed in improving their market position; the cost of meeting this competition may be avoided if by means of control it can be prevented from becoming effective. The competent and powerful members of an industry may enter into control programs to prevent a horde of petty incompetents from spoiling the market. Such incompetency commonly takes the form of imprudent development of new products, which prove unsalable at prevailing price levels and are "dumped" on the market at drastically reduced prices. This inevitably weakens the price structures of the more permanent and able producers and may make it difficult for them again to accustom buyers to "reasonable" levels of prices. To be distinguished are control incentives arising because of predatory competition. Obviously, the prospective victims have a most urgent reason to control this type of competition. Because in many cases business men have no way of knowing whether a move by powerful rivals is designed to ruin them, they are likely to interpret any aggressive move by these rivals as wilfully destructive and to be particularly insistent upon a program of control.

13°

CONTROL

OF U N F A I R

PRACTICES

The Administration opposed the inclusion in codes of trade rules that were protested by a substantial number of members of an industry. The cases in which trade rules were made effective in the face of the open opposition of many members were relatively few. Moreover, it is likely that in some of the industries in which differences among members did develop code sponsors were not concerned primarily with suppressing practices peculiar to a minority group. Their interest was simply to work out an effective program that would protect every member from destructive competition within the industry; but because of diversity in practices a compromise at any point was impossible unless some members conceded more than others. There were cases in which code sponsors admitted that the purpose of the proposed rules was primarily to restrict the practices of certain rivals; they sometimes received the support of officials of the Administration, who at the time agreed that the practices in question were unfair. There were instances, too, in which sponsors were able to conceal their intention, not only from Administration officials, but also for a time from those members of the industry against whom the rules were directed. In presenting industry's program to control unfair practices we shall draw from those cases in which it is clear from the character of the rules themselves or from statements of code sponsors that the code rules were designed primarily to suppress the practices of certain members; we shall also cite cases in which members protested rules on the ground that they were discriminatory even though it is not clear that it was the intention of the code sponsors to discriminate against them. For the most part the control devices used in code programs for control of unfair practices were identical with those employed in controlling destructive competition: minimum price control; price filing; control over specific price practices; standards, simplification, and labeling requirements; production and capacity control. Additional devices used include the prohibition of design piracy, of product misrepresentation, and of certain forms of trespass and interference. Code programs to control unfair practices will be discussed under the following headings: product development, product mis-

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representation, product imitation, maintenance of price differentials between products with different consumer acceptance, economies among producers, economies among distributors, predatory practices, and sharing by outsiders in the market of code members. PRODUCT

DEVELOPMENT

It is evident that code sponsors in several industries attempted to limit the freedom of certain members to develop and sell the kind of product they chose. One instance occurred in the hat manufacturing industry whose code prohibited the sale of old, worn, used, or discarded hats that had been cleaned and fitted with new linings, ribbons, et cetera, unless the words "Made-Over-UsedHat" were clearly embossed upon the exposed sweatbands. A number of small concerns who were exclusively engaged in the making over of used hats strenuously objected to this provision after its passage on the ground that it unduly prejudiced the consumer against their product. It had been their practice, in accordance with certain state laws and with a ruling of the Federal Trade Commission, to label such hats as "made-over," but not as "made-overused." The protestants claimed that the combined term was inaccurate, inasmuch as such hats were not used hats but new hats that had been made over from used hats, and that its use made it practically impossible for them to dispose of their merchandise. This allegation was not denied by the proponents, who rested their argument on the contention that the hats were produced at a cost so low that they were unable to meet the prices of these "illegitimate manufacturers," as a consequence of which they had lost much of the market appealing to low-income buyers. 3 A somewhat similar situation developed in the bedding industry, whose code prohibited the sale of bedding containing second-hand or used materials. The proponents argued that such a product was detrimental to public health unless the materials had been sterilized and that state laws requiring sterilization of used materials were inadequate; they also argued that sterilization properly carried out would result in a cost that was approximately equal to that of new 3

NRA, Div. of Rev., Work Materials No. 38, Part B, pp. 64-68.

13 2

CONTROL

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bedding. T h e protestants answered that bedding sterilized in accordance with state law had been adjudged to be sanitary and safe for the public—a contention that was substantiated by authorities —and that, in any case, the cost of sterilization was insignificant.4 Both of these code controls were addressed to a type of product whose development by minority members had resulted in loss of market by code sponsors. T o have met this competition it would have been necessary for the sponsors to have made financial outlays in developing sources of used materials and customer outlets and perhaps in installing new processing equipment; after such outlays had been made they would have faced the practical certainty, moreover, that there would have been insufficient business to go around. The prohibition of the practice was the least costly method of dealing with it. The proponents were able to convince the Administration that the controls would serve the public by protecting it against misrepresentation and products detrimental to its health. The mayonnaise industry affords an illustration of a control that discriminated against the products of one manufacturer. As approved, the Mayonnaise Code provided for reducing to four the number of sizes of less-than-gallon containers. The protestant had been using an eleven-ounce container, which was prohibited by the code. H e claimed that over a period of years he had built up a substantial consumer goodwill on the basis of the distinctive size of this container and that this goodwill would be lost if he were not granted an exemption from the provision. The code authority opposed the request for exemption on the ground that it would defeat the purpose of the provision, which was to reduce excessive production and marketing costs arising from an unnecessary number of container sizes.3 Cases such as those mentioned were few and scattered. The more important instances of interference with product policies arose in connection with other types of control device, particularly the plant-hour limitations of the textile and apparel industries. It has already been shown that rigid plant-hour limitations in these in* Ibid., pp. 27-31. A similar provision was included in the Batting and Padding Code (ibid., pp. 31-32). 5 Ibid., pp. 168-169.

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dustries worked particular hardship on concerns engaged in the production of novelty and styled goods subject to sharp peaks of demand. These concerns, as a matter of course, sought exemptions to permit a meeting of orders during such seasons, and some code authorities, as a matter of policy, endeavored to make necessary adjustments.6 Other code authorities opposed the granting of such exemptions.7 Their attitude suggests a desire to use the plant-hour limitation to transfer some of this business to concerns primarily engaged in making staple products. It will be recalled that the wool textile code authority went so far as to argue against granting the Collins and Aikman Company an extra shift to enable it to meet the surging demands of the automobile industry for upholstery fabric on the ground, among others, that such a demand should be shared by manufacturers of out-moded "flat" fabrics. 8 The case of the Forest City Company, a member of the cotton bundle work sock branch of the hosiery industry, merits special mention. Unlike its competitors, the Forest City Company, of Rockford, Illinois, had been working three shifts for many years prior to the NRA. The code imposed a two-shift limitation, which— it was evident from the facts developed by the Administration some time after the code approval—could have had no effect other than to transfer business from the Forest City Company to rival manufacturers. This company protested the inclusion of a twoshift limitation in the code and after its approval attempted to secure an exemption that would permit it to continue its practice of working three shifts. Because the code authority did not act on the application, the company openly violated the code limitation. The NRA then took over the case and granted a temporary exemption. After the expiration of this exemption the Forest City Company reduced its operations to two shifts but continued to petition for exemption. The Administration finally decided that its Research and Planning Division should conduct an investigation to deter6 For example, cotton textile (Dillingham, op. cit., p. 133) ; rayon and silk dyeing and printing (Drury, op. cit., pp. 74-75). The code for the latter industry specifically provided for an extra-shift operation during seasonal production peaks. 7 For example, wool textile (Dillingham, op. cit., pp. 167-168); see also the experience of the silk textile industry (ibid., pp. 184-185). 8 Above, pp. 107-108.

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mine the proper disposition of the petition, which, pending final decision, was to be granted. This exemption was effective during the remainder of the code period. 9 It developed that the unusual activity of the Forest City Company was largely attributable to the fact that the work socks manufactured by it were distinctive from all others because they were seamless. These socks were made by a machine developed and owned by the company. Rival manufacturers were excluded from the market for seamless work socks unless they could so limit Forest City's production as to force customers to shift their purchases to the ordinary type of work sock. The two-shift limitation forced the Forest City Company to choose between the alternatives of losing a good share of its market and investing in enough additional machinery to enable it to maintain its former scale of production. T h e cost of constructing these machines was so great that Forest City would have had to double its investment in order to meet its normal requirements. Nevertheless, this was the course chosen by the company when it seemed that the Administration would not grant it a permanent exemption from the two-shift limitation. 10 PRODUCT

MISREPRESENTATION

Code rules designed to prevent product misrepresentation fell into two groups. One included general mandates against such practices as inaccurate and misleading advertising; false and deceptive labeling, marking, and branding; and the use of deceptive packages and containers. The other included requirements for grade labeling and prohibitions against the sale of products that did not meet specified minimum standards of quality. A majority of the codes included some form of prohibition against product misrepresentation. 1 1 These rules were unique in that their inclusion in codes was never questioned by the Administration. N o r did the Administration question labeling and minimum-standard requirements unless they were patently discriminatory against certain enterprises; such NRA, Div. of Rev., Work Materials No. 66, pp. 8-10. Ibid., pp. 10-12. 1 1 See NRA, Div. of Rev., Work Materials No. 35, Part C, p. 20, for frequency with which the various types of rules appeared in codes, and Appendix A for the significant types of restrictions. 9

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requirements, however, were made effective in relatively few codes. T h e frequency with which mandates against product misrepresentations were included in codes should not be taken as a measure of the importance of the practice to industry. Where they were applicable, the Administration inserted these rules as a matter of general policy; from the standpoint of many industries they were mere "window-dressing." They were a significant addition to existing law in relatively few industries.12 Code rules against product misrepresentation were never the object of formal protest. 13 Protest in those industries in which the provisions were effective took the form of noncompliance, cases of which were brought to the attention of the code authorities through complaints by competitors or were initiated by the code authorities themselves. Few of these cases ever reached the attention of the Administration in Washington, but questionnaires sent to former code authority members by the Division of Review of the N R A showed that they were numerous in several industries and were handled with some measure of success.14 Little is known about the types of misrepresentative practice that were successfully handled, but among the difficulties encountered by code authorities was that of drawing a line between truth and falsity in advertising and labeling when there were no requirements for labeling or product standards to provide criteria for judging misrepresentation. In the absence of such requirements, it is probable that only the most flagrant violations were successfully handled. 15 Several significant code attempts were made to establish 1 2 T h e common law provides a right of private action where fraudulent intent and actual or potential damage can be shown by plaintiff. Although court interpretation of the Federal Trade Commission Act for the most part had prevented the Federal Trade Commission from taking action against "unfair practices" that were not already illegal at common law, the Commission enjoyed a considerable degree of success in curbing misrepresentative practices in a number of consumers goods industries. In fact, most of the Commission's activity had been in the field of misrepresentative practices ( N R A , D i v . of Rev., Work Materials No. 38, Part A, pp. 11-31). N R A code rules potentially were a much more effective weapon against misrepresentative practices, because they did not require a showing of competitive injury or fraudulent intent, and violations were immediately subject to criminal prosecution. 1 3 Evidently because no one would admit that he desired to engage in practices 1 4 Ibid., condemned by existing law. pp. 70-95. 1 5 F o r example, a manufacturer of coffee claimed that all his coffee was sold on

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standards of quality and grade labeling as a means of preventing product misrepresentation. The experience of the preserved fruit industry may be cited. Leading members of the preserve, maraschino cherry, and glace fruit industry saw in the N R A an opportunity to eliminate a practice that for many years had bothered them and which during the depression years had become increasingly detrimental to the industry. This practice was to decrease the fruit content of the product and to add in lieu thereof pectin and sugar. This made it possible to lower significantly the cost of making the product. 1 0 The practice perhaps would not have been objected to had it not been possible to sell these products to the consumer as identical, or nearly identical, to first-quality products. Those manufacturers who attempted to maintain the quality of their products found it difficult to meet the competition of the cheaper product; they feared that if they lowered the fruit content of their own products in the same manner they would jeopardize consumer goodwill and might do irreparable damage to the entire industry by undermining the consumer's faith in its products. In years past the Food and Drug Administration had defined three classes of preserve products: the "pure" product, defined as containing forty-five pounds of fruit per hundred pounds of finished product; the "compound," "spread," or "special name" product, containing from twenty-five to forty-five pounds of fruit; and the "imitation" product, containing less than twenty-five pounds of fruit. It was the second class of product that caused the difficulty; it was possible to lower fruit content to somewhere near twenty-five pounds, attach an attractive name which did not definitely reveal the fact that the preserves were below first quality, and sell the product at a price that materially affected the market a basis whereby "no pound remains on our grocer's shelf for more than ten days," when evidence showed that in various communities the date stamped covered a thirty-day rather than a ten-day period. This case was closed when the company signed a certificate of compliance agreeing to date its coffee in accordance with its advertising (ibid., p. 5 8 ) . 10 Assuming a price of 2.5 cents per lb. for fruit when 53 lbs. of fruit were used to make 100 lbs. of preserve, the cost per case was approximately $1.33; but when only 21 lbs. of fruit were used, the cost was only 53 cents per case ( N R A , D i v . of Rev., Work Materials No. 38, Part B, p. 191).

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for first-quality products. The code sponsors wished to eliminate the second class of product and require that all preserves with less than forty-five pounds of fruit content be labeled as "substandard" or "imitation." They succeeded in incorporating this program in their code and were highly gratified with results achieved. When, after the code's termination, the "borderline" products again appeared on the market, they petitioned the Federal Trade Commission to approve the code standards as fair trade conference rules.17 From the standpoint of those who employ it, product misrepresentation may be an economical business practice: the practice may make it possible to reduce raw-material costs and to avoid many of the risks incident to product improvement. Those who endeavor to do business on the basis of merit have everything to lose from such a practice in their industry. They cannot themselves adopt it without risking the loss of consumer goodwill built up on the basis of honesty in dealing; if they do not engage in the practice, they may find themselves at a marked cost disadvantage. Moreover, all members of an industry may suffer if many adopt product 17 See ibid., pp. 190-206, for detailed review of the code experience of this industry. Problems of a similar character were encountered in the dog food and macaroni industries. The products of the former industry are particularly susceptible to adulteration and exaggeration, and code sponsors considered the restraining of this practice to be the primary function of their code. Efforts were made to enforce the false advertising and deceptive labeling provisions of the code, and, judging by the number of complaints received and handled by the code authority, some degree of success was enjoyed. T o re-enforce these provisions, the industry endeavored to develop minimum product standards, but, owing to the inability of industry representatives and the Administration to agree on a program, standards had not been officially promulgated at the time of the invalidation of the codes (ibid., pp. 86-90, and N R A , Div. of Rev., Work Materials No. 38, Part A, pp. 60-61). During the depression the macaroni industry suffered from product deterioration in the following ways: substitution of inferior flours, chiefly soya bean flour, for the highgrade flours normally used; use of artificial coloring matter to simulate egg content; use of yellow wrappings for the same purpose; and inaccurate labeling of packages with respect to content and weight. The code as approved forbade the use of artificial coloring or deceptive wrappers and established a minimum egg content for noodles; required the labeling of package content and weight; and required the labeling of macaroni as "below standard" if it contained more than a specified percentage of ash. A testing laboratory was employed to check adherence to the standards and labeling requirements, and during the early part of the code period the provisions were effectively enforced (ibid., pp. 67-68, and NRA, Div. of Rev., Work Materials No. 38, Part B, pp. 23-26).

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misrepresentation, since buyers may shift to the products of another industry if their confidence in the industry's products becomes shaken. In this respect every member of an industry may profit from the elimination of product misrepresentation.13 PRODUCT

IMITATION

The practice of imitating products developed by business rivals creates a conflict which in some respects is similar to that arising from product misrepresentation. Those who copy new products 18 However, it is d o u b t f u l if those who depended on product misrepresentation co-operated voluntarily in programs for its elimination, feeling that they had more to gain t h a n to lose. A shift to a merit basis of selling would tend to increase direct costs a n d might entail investment in different types of productive equipment, as well as the establishment of new distribution channels. And where misrepresentation takes a form t h a t is not as much a matter of deception as of "puffing," or exaggerated claims, the investment in goodwill t h a t has been built u p by these means m a y be lost if it is required that products be sold on a strictly merit basis. This is illustrated by the Administration's experience with a labeling program in the canning industry. The grading and labeling program t h a t figured so prominently in the code experience of the canning industry was initiated by the Administration through the Consumers Advisory Board. The industry was interested in a labeling program because it had become evident t h a t consumers' confidence in and consumption of canned products h a d declined steadily in recent years due, in part at least, to the fact t h a t most canned merchandise on sale in retail stores was either totally unmarked as to grade or inaccurately labeled. Yet the industry would not accept the grade-labeling program recommended by the Consumers Advisory Board, evidently because certain large manufacturers feared t h a t much of their consumer goodwill, built up through large expenditures in national advertising, would be sacrificed if products competed strictly on a merit basis. Small manufacturers, however, voiced no objection to the proposal. N o labeling provision was included in the code; b u t the executive order approving the code stipulated that the industry appoint a committee to co-operate with representatives of the Administration in formulating standards of quality for the industry's products. Representatives of the Administration and of the industry were unable to agree on a program. The Administration insisted on a "grade-labeling" system, by which a single word or symbol, as Grades "A," " B , " " C , " would have sufficed to describe the nature of the contents of the can; on the other hand, representatives of the industry rejected grade labeling and recommended a "descriptive-labeling" system, whereby an elaborate system of terms a n d descriptions would have been placed on the can. The system proposed by the industry would have served only partially to inform the average consumer of the quality of the merchandise t h a t was offered for sale, since many of the descriptive terms were technical and confusing. The system proposed probably represented a compromise between the large producers' desire to re-enlist the goodwill of consumers of fruit and vegetable products generally and their desire to maintain their position in the market by protecting the goodwill built up through extensive advertising. T h e grade labeling proposal of the Administration h a d the support of the F o o d and Grocery Chain Stores of America and evidently the tacit support of m a n y small manufacturers. (For a detailed account of this controversy a n d its background see ibid., pp. 136-151.)

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brought on the market by competitors are able to share in the resulting demand while avoiding the developmental costs incurred; and because they may choose between successful and unsuccessful items they need bear none of the risks and costs of unsuccessful product development. As a consequence they possess a cost advantage on the products they choose to sell. T o be safe, originators of new products should count on selling a sufficient volume of products to pay for developmental costs before copies appear. But even though they are unable to do this they may find it necessary to continue their creative efforts; for the well-being of the entire industry to some extent may be contingent on continual product change and development. Patent and copyright laws, designed in the public interest to encourage the development of new products, afford a substantial degree of protection against product imitation in many industries. I t is among industries in which style and design represent a strategic element in determining consumer acceptance that existing law affords inadequate protection. These industries by means of the codes sought to prohibit the practice of "style piracy," or "design piracy."

19

As might be expected, prohibitions against this practice

were included in codes for apparel and allied industries more often than in any other group of codes.20 Those who were engaged in design piracy showed little hesitation in protesting the proposed restrictions. Both they and the sponsors attempted to enlist the support of the Administration by appealing to considerations of public interest. Aside from these considerations, the proponents pointed out that the piracy prac19 Representatives of these industries claimed that patent protection of styled products was inadequate for several reasons: first, it was too costly, since new items of merchandise were constantly being brought out; second, patents could not be made effective soon enough after the product was placed on the market to prevent the "pirate" from doing damage; and, third, patents were merely invitations to law suits and were difficult to uphold in the courts. The copyright, while inexpensive and involving little delay, is of little commercial value in these industries, due to the fact that every pattern or design reproduction must be accompanied by statutory notice of copyright; products such as clothing and wall paper would be rendered unsalable if copyright notice were placed on every reproduction of the original print. Moreover, designs for products that are not "works of art" are not subject to copyright protection ( N R A , Div. of Rev., Work Materials No. 52, pp. 76-101). 20 Ibid., pp. 6-7.

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tice was successful only because the copyists found it possible, due to lower costs, to sell at prices lower than style creators could meet; and that the placing on the market of a large volume of lowerpriced articles quickly destroyed the distinctive character of the originals and made them difficult to sell to the better class of buyers. 21 They further contended that even though they could meet the lower prices of copyists they often were not equipped to produce a volume large enough to permit effective competition. The protestants, on the other hand, argued that the outlawing of the practice would prove ruinous to them, because they did not have a reputation as fashion leaders and could not obtain designers at a cost that would permit them to engage in their own creative work. Furthermore, they claimed that the volume of designs upon which determinations of originality would have to be made and the difficulties involved in making these decisions would be so great that the cost of an effective and at the same time fairly administered design registration bureau would be prohibitive.-Although certain groups, particularly the Consumers Advisory Board and later the Research and Planning and Legal Divisions, rather consistently opposed restrictions on design piracy, the Administration was inclined to support them.- 3 As many as eighty21

The following illustration was cited by members of the lace industry:

"The case was an item of veiling which met with popular approval and which was advertised and sold by two leading New York department stores at 87tf each. Resident buyers were sending the same design to stores throughout the country, purchased at the same price, in expectation that it would be sold at the same price of 87# each. The design was copied almost immediately and advertised by a third big New York department store at 22 and in the cigar manufacturing industry, where cigar makers in the hand-made branch were granted lower minimum-wage rates than their more efficient competitors in the machinemade branch of the industry. 0 3

Maximum-hour provisions were used less extensively as trade rules than were minimum-wage provisions. Perhaps they were most generally restrictive on the operations of those establishments making products subject to sharp peaks of demand; but in most instances tolerance, usually without penalty of overtime rates, was provided for such contingencies. Perhaps the most deliberate use of maximum-hour provisions as trade rules was made in the apparel industries, where they were directed against establishments that enjoyed competitive advantages because they were not bound by union-work-week and wage agreements. Prior to the codes some of these establishments enjoyed a sufficient volume of business to make it profitable to work their employees more than the one-shift customary in these industries. These provisions were almost invariably supplemented and reinforced by limitations on plant hours. Materials No. 58. The Men's Clothing Industry—Work The Millinery Industry—Work Materials No. 53. 3 See NRA, Advisory Council Decisions, IX, 175—176 —plea of Pacific northwest producers of dried fruit for wage differential under California producers. 4 See NRA, op. cit., Ill, 200—decision in favor of area wage differential in the zinc industry. 5 See NRA, Div. of Rev., Work Materials No. 69, pp. 3-6, 357 ff. «See NRA, Div. of Rev., The Tobacco Study, pp. 170-173.

MATERIALS

CITED

Atkins, Willard E., and others, Economic Behavior, Houghton Mifflin Co. (1931). Burns, Arthur Robert, The Decline of Competition, McGraw-Hill Book Co. (1936). Cassel, Gustav, The Theory of Social Economy, Harcourt, Brace and Co. (1924). Chamberlin, Edward, The Theory of Monopolistic Competition, Harvard University Press (1933). Donald, W. J., Trade Associations, McGraw-Hill Book Co. (1933). Eddy, Arthur Jerome, The New Competition, A. C. McClurg and Co. (1913). George, Edwin B., The Federal Trade Commission Decision in the Goodyear Case, reprinted from Dun and Bradstreet Monthly Review (April, May, and June, 1936). Lumber Code Authority, Production Control Department, Production Control in the Lumber Industry with Forecasts for 1935, by George C. Flanagan (June, 1935). Lyon, Leverett S., Advertising Allowances, The Brookings Institution (1932). The Economics of Free Deals, The Brookings Institution (1933). Lyon, Leverett S., and others, The National Recovery Administration, The Brookings Institution (1935). Robinson, Joan, The Economics of Imperfect Competition, Macmillan and Co., Limited (1933). Roos, Charles F., NRA Economic Planning, The Principia Press, Inc. (1937). Taggart, Herbert F., Minimum Prices under the NRA, Michigan Business Studies, Vol. VII, No. 3 (1936). Terborgh, George, Price Control Devices in NRA Codes, The Brookings Institution (1934). Thorp, Willard L., "Price Theories and Market Realities," The American Economic Review, Vol. XXVI, No. 1, Supplement (March, 1936). U. S. Department of Commerce, Bureau of Standards, Standards Yearbook 1933, United States Government Printing Office (1933). U. S. Federal Trade Commission, Report on Steel Code to the United States Senate in Response to Senate Resolution 166 (March, 1934). U. S. National Industrial Recovery Administration, Advisory Council Decisions (June, 1934-May, 1935).

2l6

MATERIALS

CITED

U. S. National Industrial Recovery Administration, Division of Research and Planning, "Administration and Effects of Production and Capacity Control Provisions in NRA Codes" (1935), by Horace B. Drury, unpublished. "Detail of Code Analysis of Trade Practice Provisions" (193S), unpublished. Prices and Price Provisions in Codes (1935). Report on the Operation of the National Industrial Recovery Act (1935). "Revision of Administrative Order No. 410-3" (1934), by C. A. Pearce, unpublished. U. S. National Industrial Recovery Administration, Transcripts of Public Hearings, Hearing on Conferences of Code Authorities and Trade Association Code Committees (1934). Hearing on Price Provisions in Codes of Fair Competition (1935). Hearing on Distribution Differentials (1935). U. S. National Recovery Administration, Consumers Division, Emergency—A Device for Price Control, The (1935), by C. C. Linnenberg, Jr. U. S. National Recovery Administration, Division of Review, Case Studies in Production Control—Work Materials No. 66 (1936), by Louise E. S. Eisenlohr. Classification of Approved Codes in Industry Groups—Work Materials No. 13 (1935). — Content of NIRA Administration Legislation, The: Trade Practice Provision in the Codes—Work Materials No. 35, Part C (1936), by Daniel S. Gerig, Jr., and Beatrice Strasburger. — Control of Geographic Price Relations under Codes of Fair Competition, The—Work Materials No. 86 (1936), by Gustav Seidler, Jr. Design Piracy—the Problem and Its Treatment under NRA Codes—Work Materials No. 52 (1936), by A. C. Johnston, and Florence A. Fitch. Economic Problems of the Lumber and Timber Products Industry —Work Materials No. 79 (1936), by Peter A. Stone, and others. Economic Survey of the Bituminous Coal Industry under Free Competition and Code Regulation—Work Materials No. 69 (1936), by F. E. Berquist and associates. — Fertilizer Industry Price Filing Study—Work Materials No. 67 (1936), by Simon Whitney. Fishery Industry and the Fishery Codes, The—Work Materials No. 31 (1936), by John R. Arnold. History of the Code of Fair Competition for the Ladies Handbag Industry—Work Materials No. 71 (1936), by Oliver W. Pearson.

MATERIALS

CITED

217

U. S. National Recovery Administration, Information concerning Commodities, a Study in NRA and Related Experience in Control: Misrepresentation and Deception—Work Materials No. 38, Part A (1936), by Hunter P. Mulford. Standards and Labeling—Work Materials No. 38, Part B (1936), by Hunter P. Mulford. Knitting Industries, The—Work Materials No. 80 (1936), by W. A. Gill, and others. Manufacturers Control of Distribution: a Study of Trade Practice Provisions in Selected NRA Codes—Work Materials No. 62 (1936), by Irwin S. Moise, and George B. Haddock. Men's Clothing Industry, The—Work Materials No. 58 (1936), by J. W. Hathcock, and others. Millinery Industry, The—Work Materials No. S3 (1936), by James C. Worthy. Minimum Price Regulation under Codes of Fair Competition— Work Materials No. 56 (1936), by Saul Nelson. Motion Picture Industry, The—Work Materials No. 34 (1936), by Daniel Bertrand. Price Filing under NRA Codes—Work Materials No. 76 (1936), by Enid Baird. Production and Capacity Control in the Ice Industry under the NRA (1936), by Horace B. Drury. Report of the Commission for the Coat and Suit Industry—Work Materials No. Ten (1936), by George Gordon Battle, N. I. Stone, and Paul F. Brissenden. "Report of the Division of Industrial Economics" (1937), unpublished. Report by Corwin D. Edwards, pp. 1431 ff. Report of the Special Commission on Wage Differentials in the Cap and Cloth Hat Industry—Work Materials No. Five (1936), by Paul F. Brissenden, Max Meyer, and Wirt A. Gill. Report of the Special Commission on Wages and Hours in the Fur Manufacturing Industry—Work Materials No. Six (1936), by Paul Abelson, Willard E. Atkins, and H. LaRue Frain. Resale Price Maintenance Legislation in the United States— Work Materials No. 16 (1935), by Harry S. Kantor, and Anne Golden. Restriction of Retail Price Cutting with Emphasis on the Drug Industry—Work Material No. 57 (1936), by Mark Merrell, E. T. Grether, and Summer S. Kittelle. Rubber Industry Study, The—Work Materials No. 41 (1936), by W. H. Cross, G. S. Earseman, and J. H. Lenaerts. Some Aspects of the Women's Apparel Industry—Work Materials No. 44 (1936), by Sherman Trowbridge. Study of Open Price Filing in the Electrical Manufacturing In-

218

MATERIALS

CITED

dustry, A—Work Materials No. 78 (1936), by Willard L. Thorp, A. H. Caesar, and F. W. Powell. Study of the Electrical Manufacturing Industry—Work Materials No. 77 (1936), by Thomas P. Kelly. "The Textile Fabrics Industry" (1936), by W. H. Dillingham, unpublished. The Tobacco Study (1936), The Tobacco Unit of the Industry Studies Section. U. S. Senate Document No. 51, 72d Congress, 1st Session, Chain-Store Leaders and Loss Leaders, letter from the chairman of the Federal Trade Commission in Response to Senate Resolution No. 224, Seventieth Congress, United States Government Printing Office (1932).

INDEX Ability, competitive, 127 ff., 196 Accounting methods, uniform, 47 ff., 54 Adjustment to changing market situations, 26 Advertising, 27, 30; allowances for, 122, 124; inaccurate and misleading, 134, 13S Agricultural insecticide and fungicide industry, 63, 181 Alloys Code, 115 American Iron and Steel Institute, 59, 94 Antitrust laws, 80; may prevent development of control devices, 198 Apparel and allied industries, 89 f., 139, 152, 194, 195, 213 Area organization of price filing, 79 Asbestos industry, 9, 70, 88 Asphalt and shingle roofing industry, 70, 86 Atlantic mackerel industry, 95 f. Atlas Company, 168 Automatic dissemination of filed price data, 81 ff. Average costs, 47, 56; defined, 47n Awarding, see Bidding and awarding Bankrupt plants, competition of, 36, 48, 153, 155« Barber shop trade, 59, 147» Basing points, 13, 66«, 79, 158 Bedding industry, 131 Bell, Landon C.. quoted, 91 Best Foods, Inc., 144 ff. Bibliography, 215-18 Bidding and awarding practices, provisions governing, 22, 75«, 208 Bid shopping, 22, 208 "Big F o u r " tire manufacturers, 171 ff. Bituminous coal industry, 213 ; price control, 59-62, 191 Blacklisting, prohibition of, 183, 184, 207 Blake, Donald, quoted, 56n Blue Eagle Copper, 101 Booksellers trade, retail, 179, 195 Boycotting, prohibition of, 183, 184, 207 Boyd, Orton W., 153

Brand, Charles J., quoted, 67 Bureau of Standards, 28«, 124 Business, voluntary sharing of, 110-14, 193 Business furniture industry, 143, 150 Buyers, reduction of risks, 17; discovering prices through contact with, 22; the "lying" buyer, 22; different bargaining powers, 38; misrepresentations of, a type of price concealment, 69; provisions designed to restrict the making of hidden concessions to, 19, 203; provisions restricting the granting of financial assistance or favors to, 19, 52, 193, 204 Buying advantages in retail trades, 163 California, resale price maintenance law, 179n Candy manufacturing industry, 10, 76, 113 Canning industry, preserved fruits, 136 ff.; labeling program, 138n Capacity control, support of price control, 117 Capacity limitation, 91, 106, 114-21, 185, 193, 199; difference of opinion within NRA as to wisdom of, 120 Carbon black industry, 110 Carpet and rug industry, 88, 109 "Cash and carry" business, 146 Cash discounts, 7, 52, 78n, 201 Cast iron soil pipe industry, 63, 66«, 159,181« Cement industry, 66«, 88, 94, 187 Chain stores, retail tire trade, 168 ff. Chamberlin, Edward, quoted, 23 Chapman, George A., quoted, 114 China clay producing industry, 115, 185 "Chiseling," 25, 41, 42, 198 Cigar container industry, 151 Cigarettes, code prices, 180 Cigar manufacturing industry, 213 Classifications, customer, 8-11, 78, 200 Clay drain tile industry, 116

220

INDEX

Clayton Act, 165, 167 Cleaning and dyeing trade, 59; price differentials, 146 Coal industry, bituminous, 213; price control, 59-62, 191 Code members' market, sharing of, by outsiders, 184-89, 196 Coercion, provisions designed to limit forms of, 207 ; see also Predatory practices Coffee industry, 152, 161n Collins and Aikman Company, 107, 133 Commercial relief printing, 152 Commodities, see Product Company-owned retail stores, 168 Competency, 127 ff., 196 Competition, destructive characteristics of free, 3-39; destructive vs. predatory, 4 ; pure, 23, 85n; in product and sales promotion, 27-33, 126; in economies, 33-35, 126; destructive, and group opportunities, 36-39 ; permission to meet, by selling below cost, 52 ; control of destructive non-price competition, 121-26; non-price, industry's apparent lack of interest in control of, 126; predatory, 4, 129; results of destructive, 197; see also Price competition Competitive group, size of, 23, 28n Concealed pricing, see Price concealment Concessions, see Price inducement Consumers Advisory Board, 138n, 140, 142» Consumers goods industries, 38. 121 Container sizes, limitation of. 132 Contracts or contractual relations of competitors, interference with, 183, 207 Control devices, production control, 91126, 193, 199; capacity limitation, 91, 106, 114-21, 185, 193, 199; inventory control, 109-10, 193 ; see also Price control Co-operative wholesale drug companies, 176n Copper and Brass Mill Products Association, 68 Copper industry, 94, 100 Copyright protection, 30, 139 Cork industry, 150 Corrugated and solid fiber shipping container industry, 110, 113 Cost accounting methods, 47 ff., 54

Costs, minimum prices based on, 46-58; definition of elements of, 47 ff.; average, 47, 56; raw-material, 48, 152, 154; allocation of indirect expenses to unit-product basis, 49; pricing of joint products, 50; minimum prices not based on, 58-65; lowest "representative," 46, 154; costs and price cutting provisions of Office Memorandum No. 228, 63, 209; see also Selling-below-cost Cotton textile industry, 115, 152, 153; plant-hour limitation, 104-6 Credit terms, 16, 201 Crushed stone, sand, and gravel industry, 160

Customer classifications, 8-11, 78, 200 Cut-rate drug stores, 176, 177, 179 Cyclical fluctuations, 39 Deception, provisions designed to limit, 207 Delivered prices, 13-16, 58, 79, 158«, 161 Demand, circumstances of, 38-39 Dennison, Henry S., quoted, 72 Department stores, drug trade, 177; book trade, 180 Depreciation, basis for computing, 48, 153 Design piracy, 121, 122, 139, 195, 197, 205 Design Registration Bureau, 141 Designs, provisions restricting the use of, 140-41, 205 Destructive competition, see Competition: Price competition "Detail of Code Analysis of Trade Practice Provisions," 199n Differentials, see under Price Discounts, cash, see Cash discounts Discounts, quantity, see Quantity discounts Discounts, trade, see Trade discounts Discounts and allowances, 77, 122, 200203 Distribution, economies in, 35, 155-57, 196; price differentials needed because of methods, 149 Distributors, participation in price filing, 74; competition with manufacturers for market, 8, 52«, 74, 88, 185 ff., 196; economies among, 161-80; price cutting by mass distributors, 165-74; motion picture industry, 182; provi-

INDEX Distributors (Continued) sions bearing on members' control of the selling policies of, 52n, 74, 20S; see also Retailers; Wholesalers Domestic freight forwarding industry, 59 Donald, W. J., quoted, 111 Dress industry, 142 Druggists Circular Red Book Price List, 178 Drug trade, retail, loss limitation, 165, 175-79, 195 Drury, H. B., quoted, 99», 104», 118 Dry battery industry, 11, 15, 32 Economic power, 128, 196 Economics, competition in, 33-35, 122, 125; among producers, 150-61; distribution, 155-57; transportation, 15761; among distributors, 161-80; of operation, retail establishments, 164 f. Eddy plan, 22 Electrical manufacturing industry, 8n, 9n, 11, 12, 14», 54», 82, 86 Electric arc welding apparatus industry, 10, 17, 19» Emergencies, when declared, 63 Emergency prices, minimum, 57, 62-65, 121, 162», 170, 180, 181, 191 Employment, maintenance of, 94, 97 Envelope industry, 114 Equalization, of delivered prices, 58; freight, 158 ff. Equilibrium, group, 5n, 29n Equilibrium economic theory, opportunities between industries, 36 Equipment, installation of, 106, 114-21, 125, 199; technological improvements in, 33, 151 Excelsior manufacturing industry, 185 Exhibitors, motion picture industry, 182 Fan industry, 16 Farm equipment industry, 10 Fashion Originators' Guild, 142« Federal Trade Commission, 131, 137, 148; activity in field of misrcpresentative practices, 135«; inquiry into retail tire trade practices, 165 ff., 170 Federal Trade Commission Act, 183 Fertilizer industry, 8», 13, 14, 17», 45, 67, 81, 86, 122», 124» Filing of prices, see Price filing

221

Fire Extinguishing Appliance Code, "representative member" defined in, 155 Flexible cord industry, customer classes, 9; discounts, 11, 12; delivery terms, 14 F.o.b. pricing, 13, 51», 79 Folding paper box industry, 69 Food and Drug Administration, defines preserve products, 136 Food and Grocery Chain Stores of America, 138» Food service equipment industry, 16 Foresight re consequences of price cutting, 25, 110 Forest City Company, 133 Forstmann Woolen Company, 107 Free competition, see Competition Freight equalization, 158 ff. Furniture industry, 54«, 108», 143, 150 Fuse plug industry, 16 Gasoline companies, retail tire

trade,

168 ff.

General Wholesale Code, provision covering price differential, text, 185 Glass container industry, 94, 116 Goodrich Company, 168 Goodyear Tire and Rubber Company, contracts with Sears, Roebuck and Company, 165 ff. Great Atlantic and Pacific Tea Company, 144 Grocery trade, retail, 180 Group opportunities, and destructive competition, 36-39; supply circumstances, 36-38; demand circumstances, 38-39 Groups, industrial, nature of, 28» Hat manufacturing industry, 131 Homogeneity of commodities, business enterprises classified according to, 28» Hosiery industry, 89», 92», 133 Hours of labor, plant-hour limitations, 102-9, 132, 151, 153, 193; use of hour and wage provisions as trade rules, 211-13 Ice industry, 63, 72, 151; use of capacity control to support price control, 11821; in New York City, 188 Identifications, imitation of competitors', 141», 205 Imitation of product, 138-42, 205

222

INDEX

Indirect expenses, allocation of, to unitproduct basis, 49 Insull utility, ice machinery, 151 Integrated and nonintegrated enterprises, competition of, 1S3 f. Interference, provisions designed to limit forms of, 207 Inventories, valuation of, 48; accumulated, relation to production quotas, 94; control of, 109-10, 193 Iron and steel industry, 59, 66«, 88, 94, 114, 158 Iron and Steel Reinforcing Materials Industry Code, 59, 158 Jewelry industry, 141, 151 Jobbers, see Distributors Johnstown, Penn., as basing point, 158 Joint products, allocation of costs, 50 Judgment in adjusting prices, 25, 26, 71, 111

Keeling, E. A., quoted, 143 Kraft-Phenix Cheese Corporation, 144 ff. Labeling requirements, 123, 134, 135, 206 Labor, economies in, 35, 152, 212-13 Labor provisions, implemented by planthour limitations, 103; trade rules designed to supplement, 152; included in codes, 211 Lace industry, 140«, 142 Laundry trade, 59, 147» Leather industry, 141 Lime industry, 159 Lind, Herman H., quoted, 68 Litigation, threats of, prohibited, 183, 207 Loss leader, 162, 177, 180, 195; defined, 177 Loss limitation in retail drug trade, 165, 175-79 Luggage and fancy leather goods industry, 154 Lumber and timber products industry, 37, 47, 63, 154, 159, 191, 194; minimum price determination, 56-58; production control, 91, 95, 96-99 McGrath, F. Sims, quoted, 70 Machined waste industry, 92, 113 Machinery, see Equipment

Machine tool and forging machinery industry, 68 Mackerel industry, 95 f. Made-over products, 131 Magnet wire industry, 15, 17«, 32 Mail-order houses, price catalogue, 21; sales to, 156; retail tire business, 16574 Market, code members attempt to prevent outsiders from sharing in, 184-89, 196 Market localization, degree of, 24 Maximum hour, code provisions, 211 Mayonnaise industry, 132; price differentials, 144 ff. Merit basis of selling, 138« Millinery industry, 124«, 142 Minimum price controls, 45-65 Minimum prices, based on costs, 46-58; lumber and timber products industry, 56-58; not based on costs, 58-65; nonemergency, 59-62; code provisions, 191, 192, 199 Minimum prices, emergency, see Emergency prices, minimum Minimum wage, code provisions, 211 Miracle Whip Salad Dressing, 145 Misrepresentation, of product, 121, 122, 134-38, 194, 197, 207 Montgomery, Ward and Company, retail tire trade, 168 ff. Motion picture industry, 182 Motor vehicle storage and parking industry, 37, 155« National Container Association, 113 National Fertilizer Association, 82 National Recovery Administration, types of trade rule in codes, 17, 199-210; evidence of control programs, 4, 42, 130, 190; result of uncertainty about continuation of, 62; attitude toward types of control summarized, 191 ff.; use of wage and hour provision as trade rules, 211-13 Nonferrous scrap materials trade, 64 Non-price competition, see Competition No-selling-below-cost, see Selling-belowcost Oil industry, see Petroleum industry One-price policy, 19«, 20, 21, 68 Open price associations, pre-NRA, 80

INDEX Opportunities between industries, 36 &. "Over buying," motion picture films, 182

Paperboard mills, 64 Paper distributing trade, 69 Paper industry, 112 Paper prices, 65 Parking lot facilities, 38 Patent protection, 30, 139 Payment, terms of, 16-17, 201 Persuasion, inducement of, 27 Petroleum Administrative Board, 99 Petroleum industry, 37, 59; production control, 95, 99 Pickard, W. W., quoted, 112 Plant-hour limitations, 102-9, 132, 151, 153, 193; control by, compared with control by production quotas, 102 Plumbing fixtures industry, distribution economies, 155 ff. Predatory competition, 4; control incentives arising because of, 129 Predatory practices, 180-84, 195; identification of, 181 Preserved fruit industry, 136 ff. Price competition, 5-27; immunities against, 27-36; control of destructive, through price control devices, 40-90; control of destructive, through production control devices, 91-121; programs for control of unfair practices and, compared, 41 ff.; sanction of law as aid to control of destructive, 41; attitude of code sponsors toward adjustment and, 44; publicity as a control of destructive competition, 66-73 Price concealment, 6, 7-22, 66-73, 147 ff.; quantity discounts, 7, 11-13; customer classifications, 8-11; trade discounts, 10; delivery terms, 13-16; terms of payment, 16-17; other elements of price policies, 17-22; secret policies used, 19; time lag, 20; period of concealment, 22; lying and misrepresentation, 22; offset by publicity function of price filing, 66-73, 147 ff.; in retail trade, 164 Price control, over specific price practices, 87-90; relation to production control, 91 ff.; supported by capacity control, 117; restrictions of product as an in-

223

tegral part of, 75, 123-24; summarized, 190-98 Price cutting, incentives to, 5; vs. price uniformity, 85; loss leader a type of, 177; predatory, 181 ff.; "wilfully destructive," 184; provisions of NRA Office Memorandums, 209-10 Price differentials, maintenance of, between products with different consumer acceptance, 142-50, 195; elimination or reduction of, 143; retail tire trade, 173; General Wholesale Code provision, text, 185 Price filing, 56, 65-86, 147-49, 200; publicity function, 66-73; waiting period, 70, 80-81, 192; participation in, 7475; extent of information filed, 7580; extent and promptness of publicity, 80-85; difficulties in way of, 84; partial publicity, 84; four studies of price behavior under, 86; voluntary sharing of business an integral part of, 110; summarized, 191 Price inducement, types of, 8 ff., 192 Price publicity, price uniformity as a measure of the effectiveness of, 85-86; opposition to, 147 ff. Prices, NRA studies of pricing practices, 8n; uncertainty about competitors' price determination and maintenance, 23-27, 32, 71; maintenance through state laws, 179» Producers, economies among, 150-61 Producers goods, effect of cyclical fluctuations upon, 39 Product classification, 50, 76, 193 Product development, 131-34, 196 Product differentiation, 27 ff., 124, 126 Product homogeneity, 28n Product imitation, 138-42, 205 Product misrepresentation, 121, 122, 13438, 194, 197 Product simplification, 123, 193, 197, 206 Product standardization, 75, 123, 193, 197, 206 Production and sales data, 110 Production control, production quotas, 93-102, 193; see also Plant-hour limitations; Inventories; Sharing of business; Capacity limitation Quantity discounts, 11-13; change in, 128, 163, 201

224

INDEX

Radio tube industry, 9n, 11, 12, 32 Rappeport, R. E., Company, 1S4 R a w materials, elimination of advantages due to economies in, 152, 154 Rayon and silk dyeing and printing industry, 92, 141 Registration of designs, 141, 205 Reinforcing fabricating materials industry, 158 Retail booksellers trade, 179, 195 Retail drug trade, loss limitation, 165, 175-79, 195 Retailers, company-owned-store system, 168; see also Distributors Retail grocery trade, 180 Retail tire trade, 165-74 Retail tobacco trade, 180 Retail trades, protection against lowcost competitors, 162 ff.; buying advantages in, 163 f. Rhode Island School of Design, 141 Rubber covered wire industry, 15, 16 Rubber footwear industry, 124«, 148 Rubber heel and sole industry, 149 Rubber tire industry, 63, 106, 152, 160; see also Retail tire trade Salad dressing, 144 £f. Sale, provisions restricting the granting of terms and conditions of, 201 Sales and production data, 110 Sales promotion, 28 ff.; advertising, 27, 30, 122, 124, 134, 135; competition in, 122 ff.; loss leaders, 162, 177, 180, 195 Sales representative, provisions bearing on members' control of the selling policies of, 205 Salt industry, controls over price practices, 87 f. Schiffli industry, 142 Scrap iron trade, 64 Sears, Roebuck and Company, sales contract with Goodyear Tire and Rubber Company, 165 ff. Secret pricing, see Price concealment Selling-below-cost prohibition, 46 ff., 52, 152 f., 160, 191; grant of permission to meet competition, 52; other exceptions, 53; review of cases in which provisions applied, 55»/ price filing, 56 Service trades, minimum price determination, 59; price differentials, 147n

Service Wholesalers, and co-operatives, 176» Sharing of business, voluntary, 110-14, 193 Sherman Act, 183 Shoe rebuilding trade, 59, 147» Silk textile industry, 141, 142, 154«; design registration plan, 142n Slate industry, 47« Sloan, George A., quoted, 9 i n , 104, 121, 212»

Sock branch of hosiery industry, 133 Socket industry, 14, 16 Solid fuel, retail, 63, 162« Steel castings industry, 8n, 76, 78n, 86 Steel joist industry, 158 Sterilization of used materials, 131 Styles, piracy, 139, 195, 205; see also Designs Surgical dressings manufacturers, 106 Technological improvements, costs and economies, 33, 151 Textile industries, 104-9, 115, 132, 141, 152, 153, 194, 195 Thorp, Willard L., 8« Time lag, an aspect of concealed pricing, 20 Tires and tubes, prices, 170, 174; NRA groupings, 173; see also Retail tire trade Tire trade, see Retail tire trade Tobacco manufacturing, 213 Tobacco trade, retail and wholesale, 63, 180 Toy and playthings industry, 141, 148 Trade discounts, 10, 51, 150, 156, 200 Trade-in allowances, motor vehicle trade, 162«; retail tire trade, 169 Trade-marks 30; restrictions on, 141«, 155«, 206 Trade rules, NRA codes, 17, 199-210; designed to supplement code labor provisions, 152; use of code wage and hour provisions as, 211-13 Transportation, economies in, 35, 15761, 196 Trespass, provisions designed to limit forms of, 207 Uncertainty, about competitors' price determination and maintenance, 23-27,

INDEX

225

Uncertainty (Continued) 32; price publicity's bearing on conditions of, 71 Unfair practices, control of, 4, 41, 12789, 195, 196, 212, 213; compared with control of price competition, 4, 41 ff. ; product development, 131-34; product misrepresentation, 134-38; product imitation, 138-42; maintenance of price differentials between products with different consumer acceptance, 142-50; economies among producers, 150; economies among distributors, 161-80; predatory practices, 180-84 ; sharing by outsiders in code market, 184-89 Unfair practices, term, 4, 127n, 190 United States Rubber Company, 168 Upholstery and Drapery Textile Code, 107

Wage and hour provisions, use of, as trade rules, 211-13 Waiting period, price filing system, 70, 80-81, 192 Waste material trade, 64 Waste paper trade, price controls, 63 ff. Wholesalers, prices to, 8; not subject to price control provisions, 52«, 58, 74; competition with manufacturers for market, 88, 161, 185 f., 196; code price differentials, 185; see also Distributors "Wilfully destructive price cutting," 184 Winn, Robert H „ quoted, 44 Wire industry, 15, 16, 17n,32 Wood case lead pencil industry, 59, 124n Wool textile industry, 106-8, 133

Valve and fittings industry, 150 Velvet industry, 141

Youngstown, Ohio, as basing point, 158

Voluntary sharing of business, 110-14, 193