11. Concentration and Competition

II. Concentrationand Competition When the economists of the Federal Trade Commis sion wrote their study on industrial concentration, they probably did not realize how much it would become a bible to the critics of American business. It has become almost a "must" reading for many Congressmen and government officials; and they quote its figures almost like a gospel. The FTC economists also, however, probably did not realize how carefully New York economists would ex amine this report. It has been gone over as "with a fine-tooth comb." And unsympathetic economists have made some criticisms. They say it does not prove as much as it is supposed to. What the FTC economists reponed was, in effect, that in a great many industries a handful of companies, or even two or three, do most of the business,or at least, own most of it. Critics, how ever, take exception to some of the FTC statistics. They say they are slanted.

There are two major ways of measuring and com paring corporations. One is by the amount they sell; the other by the amount of property they have. By the first measure, the Great Atlantic & Pacific Tea Company is a very large company; it sells almost three billion dol lars of groceries a year. By the measure of assets, or 84 CONCENTRATION AND COMPETITION 85 property, A&P is a pint-sized outfit; its total assets are somewhere around 100 million dollars. In contrast -rail road, electric power, and telephone men, to do three billion dollars of business a year, must have assets of more nearly ten billion dollars. The FTC economists, on page 5 of their report, re marked that if they compared companies by assets they would show more "concentration" than if they compared them by sales. They used assets. On later pages, they showed that big. companies tended to have less invested in inventory than in plant. They excluded inventories.

To mention it may be captious, but still another mis leading statistical method, used by FTC, should be noted. "To take an example," says the FTC report, page 7, "General Motors Corporation is engaged in a number of industries-motor vehicles... refrigerators . . . Diesel locomotives, etc. Yet its financial figures are available only for th~ corporation as a whole. Accord ingly, since the production of automobiles represents its principal activity, its total net capital assets . . . must necessarilybe classifiedin one industry-motor vehicles." B. Bradford Smith, economist for the United States Steel Corporation, has said, This introduces a cumulative statistical error . . . thus in a first industry an asset figure is used for larger com panies that is bigger than the assets those companies actually employ in that . . . industry . . . while, at the same time, the . . . size of a second industry is reduced, leaving a smaller base with which to compare the assets of the bigger companies in that second industry. The error does not compensate as between industries but cumulates.1 The FTC economists did another thing with their figures which, for the offhand reader, makes American industry look "worse" in the sense of being more con86 CONCENTRATION AND COMPETITION centrated. They defined "industry" very narrowly and based their figures either on small industries or on parts of large industries.

Thus, perhaps by coincidence, they discussed"Carpets and Rugs" as one industry, and on the next page "Lino leum" as another. They showed that six companies had two-thirds of the net capital assetsin "Carpets and Rugs" and that five companies accounted for 94 ~ per cent of the net capital assets in the "Linoleum" industry. Had they, of course, taken "Floor Coverings" as an industry of which to measure the "degree of concentration," the figures would have been much smaller and so looked much less alarming. In fact, on this same line, a statistician can show almost any degree of industrial "concentration" he wants, simply by narrowing down his definition of an "indus try." If, for instance, one drew a line around something called "the food industry," the degree of concentration would be very small. But the FTC economists took, in this industry alone, "Meat products," "Canning and pre serving," "Grain mill products," "Bread baking," "Bis cuits and crackers," and "Dairy products." They found high figures of concentration in each one. But, as a New York economist has pointed out, if one were to define an automobile so narrowly that only a Lincoln would fit the definition, then one could find a 100 per cent concentration without more ado. Only one com pany makes Lincolns.

In the last analysis, the fair test of an industry is "who competes with whom?" And you can go as far toward enlarging the definition of an industry as the FTC men went in narrowing it. Oil, bituminous coal, and natural gas, for instance, could be lumped as the "fuel business," since they compete; and the "bagging CONCENTRATION AND COMPETITION 87 industry" could include both the coarsest counts of cotton and the heaviest products of the kraft paper business, which have now been for many years locked in the most strenuous competition. Economists have another serious criticism of the FTC's report, not of the figures, but of the implication some people draw from them. The implication is, of course, "the more concentration, the less competition." But B. B. Smith comments that the FTC studies "do not tell us nearly as much about competition, as distinguished from concentration, as we would like to know. The two are not the same. . .. There could, for example, be one producer of a given product in each state, each en joying a statewide monopoly, and the statistics as com piled by the government would show comparatively little concentration. .On the other hand, there could be only four producers competing everywhere on a nation wide scale and the government statistics would show 100 per cent concentration in four companies.

"The concentration ratios would thus convey impres sions that were the exact opposite of the truth as far as competition is concerned. "Nor is this just a theoretical criticism. For it is, in fact, the larger companies whose distributions of prod ucts reach out, overlap each other, and thus multiply the choices availableto buyers. "There is the possibility that the [FTC's] concentra tion ratios mean the opposite of what they seem to mean in so far as competition is concerned . . ." 2 And on the same subject, Peter F. Drucker recently wrote: According to the old yardstick the building industry is, for instance, a highly competitive one; individual building contractors are in sharp competition with' each other for 88 CONCENTRATION AND COMPETITION business. Measured by the new yardstick of "workable competition," however, the building industry would hardly pass muster; no matter how competitive in behavior, build ing does not give the consumer too much of the effects of competition.

It lacks the "controls" without which competition is unlikely to be "workable"-in this case, companies large enough to. push toward a mass market, to develop new and better ways of building, and to be able to operate on a low profit margin per unit.... 3 At no point in the FTC's study of industrial concen tration do the writers actually claim that the more "con centrated" iridustries are less competitive. They merely take it for granted. 4 If they could have made any reason able case to this effect, it seems likely that they would have done so. But actually, it seems to work the other way. Thus, for instance, the FTC, in reporting on 26 "industries," said it found "extreme concentration" in 13 of them. These 13 included aluminum; tin cans; linoleum; copper refining; cigarettes; distilled liquors; plumbing equipment and supplies; rubber tires and tubes; office machinery; automobiles; biscuits, crackers and pretzels; farm machinery; and meat-packing. But the public has certainly been well served by these industries.

Thus two of these industries have had for at least a generation among the best price records of American industry: rubber tires, and primary aluminum. Again, the price of copper is no higher than it was a genera tion ago. The farm tractor industry has been enough different from the story-book "monopoly" to have in creased the number of tractors on American farms in the last 30 years from about 250,000 to nearly five mil lions. The technical achievements of the automobile industry are too well known to need telling. If these industries are examples of "dangerous" concentration, as CONCENTRATION AND COMPETITION 89 the saying goes, the danger does not seem to be to the consumer or to the public. Most people are familiar with some industries that are highly "concentrated," yet highly competitive. They know, for instance, about the recent battle in the phono graph record business and in television. Both industries are highly concentrated. The platter business is, in Washington idiom, "dominated" by the "big three"- Columbia, RCA Victor, and Decca. And in television, five companies do 70 per cent of the business. And be fore the fight is over· the "concentration" will probably be even greater. Yet in the phonograph business, the year 1949 saw a hectic struggle. Said the Wall Street Journal on August 23, 1949, "The war of the phono~ graph records has entered a new phase. Truce attempts have broken down and new alliances are shaping up for a fiercer showdown battle. The struggle, as everyone knows by now, is between two 'revolutionary' kinds of record."

In the television business, there was slashing competi tion during the recession year 1949 and steady price cutting and product-improving competition have been the general rule, ever since the Federal Communications Commission granted new station permits in March 1947. Notable, in the brief history of this young industry,has been the rise of a corporate "nobody," named Motorola, to a position among the "dominant" firms in video, in the face of competition from such well-known veterans in the electrical equipment industry as General Electric and Westinghouse. The automobile industry, an outstanding example of "concentration," is as competitive as ever. In its earlier days the Ford people pulled far ahead of everybody else. Th7n, ,vhen the Model T faded, they lost this place.

90 CONCENTRATION AND COMPETITION Chrysler came up. General Motors became the chief producer. Recently Ford has been gaining again, Stude baker has been moving up and some other producers have been sliding back in the competitive race. The soap business has been heavily attacked in recent years in Washington for undue "concentration." But meantime, it has been the scene of a titanic three-way battle between Procter & Gamble, Colgate, and Lever Brothers. Oxydol, Super-Suds, Tide, Dreft and Vel have been swirled in competition as the new detergents have been put on the market. A year ago, according to the Wall Street Journalof January 25, 1950, "the sharp est defeats . . . have been suffered by Lever, and the biggest single victory has been won by Procter & Gam ble." But such report carries no more permanence than a three-star story of a World Series fourth inning. But the competition within these easily defined "indus tries" is, if anything, exceeded in intensity by the com petition which has developed between industries which were, until recently, total strangers to each other.

Thus for instance the New York Journalof Commerce said recently, There has been so much talk of competition among textile fibers in recent years that it has tended to obscure the potential effects upon the industry of non-textile materials. The rising use of synthetics in former cotton and wool markets has focussed considerable attention upon these in roads . . . [but] other materials have made inroads of a substantial nature . . . the increasing use of plastic film and sheeting, paper and metals, in fields formerly thought of as exclusively textile, may have a much more profound in fluence upon the industry than the inter-fiber competi tion ... For another example, the petroleum, natural gas, and soft-coal people are now locked in competition, particuCONCENTRATION AND COMPETITION 91 larly over home-heating and heavy industrial markets. Also there is competition between the railroads and the air lines for the passenger dollar, and between the post office, Western Union, and the long-lines service of the American Telephone &Telegraph Company for the com munication dollars of businessmen and sweethearts.

The president of the du Pont company recently re marked: . . . in most of the fields in which the du Pont Company has a position of importance it is confronted with the most rugged ... competition. . .. Du Pont manufactures paints and lacquers. . .. There are 1200 producers in this field and . . . Sherwin-Williams is larger in this field than is du Pont. . .. American Viscose is larger in the viscosefield . . . and Celanese in the acetate field. Du Pont makes photographic film; but Eastman makesmore. And so it goes right on down the line . . . nylon must compete with wool, cotton, silk, rayon, and other synthetic fibers . . . cellophane . . . had to compete with paper, glassine, metal foils, and plastics ... [but] a new wrapping material better than cellophane or . . . costing less, could change the situation rapidly. . .. Competition is far from dead and it is our belief that in coming years it will become even more in tense ...

"You know," remarked the president of the United States Steel Corporation, apparently exasperated at the sniping remarks of Washington Congressmen about the lack of competition in his and other leading American industries, "sometimes I wish these critics could join our sales force for a few weeks and try to sell a little steel. I think they would find out for themselves what compe tition really is." 5 The sales managers, advertising heads, vice-presidents, board-chairmen, and others of the big companies' official dom, who have helped lift their firms to "dominant"

92 CONCENTRATION AND COMPETITION positions in the ceaselesscompetition that has made Amer ican industry the power it is, all seem to feel that there is "no rest for the weary." Some of them, in fact, sound, or even look, a little weary themselves. But there is no rest for them. Competition in this country is getting, as the years roll by, not less strenuous, but 1nore so.