16. The Great Atlantic and Pacific Tea Company

They submitted 5,000 of these documents in the trial. SOlne very sour remarks were culled from these docu nlents and placed in the record. Some minor A&P of ficials had talked out of tum and out of the comer of their mouths, on occasions. But if any organization, operating at its heyday over 15,000 stores, and dutifully keeping the records kept by modern business, could survive this kind of a combing over without the uncovering of a few indiscreet remarks, it is hard to imagine. It would have to be an organization with a head only, but no heart. The setting of the A&P case goes back to the early 1930's. Chains were sweeping the cobwebs out of the grocery business. But at the same time, the NRA was trying to protect high distribution margins. When NRA failed, Congress passed the Robinson-Patman Act, frankly aimed at the chains, and particularly the grocery chains. Political foes also pushed bills through various state 124 THE CASE OF THE A&P 125 legislatures to pile punitive taxes on the chains. Con gressman Wright Patman, co-author of the act, in 1940 introduced into Congressa bill called "H.R. 1" to impose a "progressive tax" on chains, progressing with their size.

On A&P the tax vvould have been $450,000,000, or about 50 cents on every dollar the housewife spends at A&P. (The big chain normally takes less than a cent and a half of her dollar for its net profit.) It would have put A&P and all the other chains out of business. The bill never got out of committee. The A&P lawyers promptly set about devising ways for the company to obey the Robinson-Patman Act and yet to continue buying cheap and selling cheap. This was one of the things on which the Circuit Court first criticized them. Said the Court, "After 1936 the [A&P] buyers, instead of getting credit for alleged brokerage, induced their suppliers to reduce their price further to A&P by the amount of the brokerage fee. . .. When this was outlawed by a decision of the Third Circuit upholding a cease and desist order of the Federal Trade Commission. . . .A&P adopted a policy of direct buy ing. It thereafter would buy from no one who sold through a broker. .. .. This clearly affected the busi ness of brokers, who resisted as best they could. . . ."

It was shortly after this that the Antitrust Division be gan its attacks on A&P. The story has been told in A&P's advertising. The first judge, in Washington, D. C., said he hadn't tried a case in 40 years so ",'abso lutely devoid of evidence." The second judge, in North Carolina, said that he had "never tried a case where a greater effort, more work, and more investigating had been done," but that "you can't make bricks without straw and you can't make a case without facts." The third judge, in Dallas, threw the case out, because the 126 THE CASE OF THE A&P indictment contained inflammatory statements that he wouldn't permit to be presented to a jury. The inde fatigable Antitrust Division then took the case to Dan ville, Illinois. During these years the Supreme Court had been reinterpreting the law. A&P was convicted in Danville, appealed, was convicted by the Circuit Court of Appeals, paid its fine, and did not appeal to the Supreme Court. When the Department of Justice, thereupon, as expected, started its present civil suit, A&P began taking its case to the public.

People who want to understand the A&P case must first learn to skip the abusive and "inflammatory" words which the government lawyers persistently used and which even the Circuit Court, in some cases, echoed. They are semantics-the use of words for ulterior pur poses. They include words like "vicious, illegal prac tices " "abuses." "predatory" "coerce" "blacklist" "bo -, , , , ,y cott," and so on. They are not as bad as they sound. A case does not go through four lower courts and up to the United States Circuit Court of Appeals on charges as bad as these words would indicate. "Blacklist" and "boycott" are good examples of this kind of semantics used by the government lawyers. They entered the story on what most people would prob ably consider the simplest grounds. The government lawyers made a great deal of the case of the over-priced corn-flakes. There were only three firms making corn flakes for private brands, a good instance of "monopolistic competition" if corn-flakes are to be considered a separate industry. A&P was buying from one of them. The maker's profits on these sales to A~P were very large.

So A&P buyers, asking for a lower price, pointed out that A&P itself is a very successful manufacturer, and could make its own corn-flakes. Down came the price, THE CASE OF THE A&P 127 not only to A&P, but to others also. The threat was that A&P might, if it went into com-flakes itself,··scratch this manufacturer from··its buying list and do no more busi ness with it. This,.however, to the government lawyers and the Court was "coercion," "blacklisting," and "boy cott." Up to this time a boycott had been an agreement be tween different people not ·to deal with somebody. A Captain Boycott, in. Ireland in 1880, was the first victim of such. As the Circuit Court said, a boycott had been found illegal under the Sherman Act in the Fashion Originators Guild case.2 But it is a big jump from this case to the A&P case. In the former one, a group of originators of fashionstried to drive out of business some manufacturers who kept copying their originals and selling the copies cheap.

In the A&P case, however, the Court found A&P guilty of boycotting by citing the Schine case 8 already mentioned in a previous chapter, in which the Supreme Court found that· the cooperation of the officers of an integrated company might be a conspiracy. And after all, the A&P is really an organization of men. This seemsto mean that any integrated company which refuses to do businesswith some other firm, because the other firm will not cut prices, may be violating the Sherman Antitrust Act in doing so. This, however, is not what most people would assume from the word "boycott. " Nor would most people consider A&P's forcing down of the price of com-flakes by threatening to make them itself, as "coercion." According to that definition, a householder who told a carpenter "Your price is too high, I'll do the job myself," is coercing the carpenter. Out of the millionsof words in the case (and with' the 128 THE CASE OF THE A&P vicious words left out), the government lawyers' criti cisms divide themselvesinto three major groups. They attacked A&P on its methods of buying, on its methods of selling, and on its integration of buying, selling, and manufacturing. Each group of criticisms involves a radical new interpretation of the law and economics and a most questionable one.

The government lawyers attacked A&P'sbuying meth ods chiefly on the following grounds. A&P buys cheaper-or tries to-from manufacturers, propessors, and canners than its competitors. It does so by volume purchases, for vThich the law permits lower prices. But therefore, argued the government lawyers, these suppliers must increase their prices to their other customers, to make up for the smaller profits, or the losses,they take on their A&P business. Therefore, by knocking down prices for what it buys, A&P actually drives them up for other people and for most of the public. Government lawyers have made this economically ab surd statement again and again. It has become almost their theme-song and party-line on the case, since A&P has taken the issue to the consumer. Thus Attorney General Howard McGrath has said that Justice Depart ment success in the A&P case "should result in lower food prices for over 90 per cent of the public which buys from other grocers who because of A&P's practices are required to purchase their supplies at higher • " 4,prIces....

Assistant Attorney-General Herbert A. Bergson said ". . . when these same suppliers sell to other stores or chains, they are obliged to add to their prices the losses they have sustained through doing businesswith A&P."5 The Circuit Court of Appeals, in affirming A&P's con viction, used it three times. It said, ". . . the supplier THE ,CASE OF THE A&P 129 had to make his profit out of his other customers at higher prices which were passed on to the competition A&P met in the retail field . . . the price was added to A&P's competitors' costs . . . increased the price to A&P' · "s competItors. . . . Businessmen do not usually price this way at all, al though they might· like to. When, in an "imperfect market" like that of food products, somebody gets a cut, the likely result is that his competitors will hear about it somehow and go after it also. The effect is not to raise prices, generally, but to lower them. It is a most unreal assumption that a canner or a corn-flakes maker, after tangling with an A&P buyer and conceding a price cut, will be able to turn around and raise his prices to his other customers. If he were able to do so, why didn't he do it before? It is also a most unreal assumption that this canner or corn-flakes maker will have knuckled under to the A&P buyer to the point of taking an A&P order' which nets him an actual loss.

The idea that "over 90 per cent" of the public would get lower prices if A&P didn't get lower prices, is like the idea of the tail wagging the dog. It is out of this world. As an economist has said, "In imperfect markets such as those in which A&P buys, an integral part of the process of price reduction is unsystematic, buyer-en forced price discrimination." 6 And "Actually, buyer instigated price discrimination exerts downward pressure on general price levels. A price reduction to one buyer has what (for the seller) is a most unfortunate tendency to spread." 7 The government lawyers' theory ignored another im portant point. When a food manufacturer has a large, continuous market with a steady, prompt-paying cus tomer, this actually Can make it easier for him to lower 130 THE CASE OF THE A&P his price to other customers. His sales to such a cus tomer involve practically no selling cost, involve no credit risk or loss, carry a large part of the overhead of his business, and spare him the need of reaching for a quick profit on each sale to offset the risk of not soon making a.nother sale.

The Court, nevertheless, concluded that "this two price level. . . could not help but restrain.trade and tend toward monopoly. " Yet the government lawyers hadn't proved this curiously naive theory. They merely as sumed it, or deduced it and the Court accepted thededuc tion. The Court's decision also criticized A&P's buying methods for their effect on the food broker. (See page 125 for a part of its words.) This criticism has a curi ous economic implication, as follows. A&P'sbuyers, in their efforts to reduce costs, were trying to save the cost of the brokerage. In effect A&P did its own brokerage. This by-passed a lot of brokers. But the Court's condemnation was only the latest in a -series of "moves in which .firstCongress, then the Federal Trade Commission, and then the Department of Justice were, in effect, trying to make A&P pay brokerage :anyway. That worked as follows: To begin with, when A&P bought from, let us say, a canner, it had to pay the price plus the brokerage. Then it began to demand that it be excused from the brokerage.

This was outlawed by the Robinson-Patman Act,Sec tion 2( c) . A&P began, then, to demand that it get a lower price by the amount of the brokerage, which was really just a different method of billing. This was 'Stopped by the Federal Trade Commission. Then A&P announced to the trade that it would buy solely from firms that dealt only direct and not at all THE CASE OF THE A&P 131 through brokers. (In such case,there could be no charge against A&P of evading the brokerage.) Since this now seems legally questionable, the next natural step for A&P would seem to be to buy or build its own can neries, thus vertically integrating still further. But this would seem to be legally and economically questionable,. since the Antitrust Division has brought a suit to break up the existing A&P, both vertically and horizontally. The government lawyers would seem to favor only one way by which A&P could solve its difficulty. It could pay the brokerage, even where it does not go through brokers. This would be a "phantom broker age," charged by the canner and collected from A&P, even though there was no broker. It would be akin to the "phantom freight" sometimes collected by firms sell ing on geographical basing points. Phantom freight,.

however, has been condemned by the Supreme Court in the Corn Products 8 and Staley 9 cases. And it would violate the spirit of the Federal Trade Commission's "mill-net" definition of price, under which a seller must net the same from different customers, or else a "price discrimination" results. The seller, in this case, would net more from A&P ·by the amount of the phantom brokerage. The "discrimination" would be against A&P. This "discrimination" would be an actual, as well as a legal, one as long as A&P continued to perform its own brokerage functions, while also having to pay phan tom brokerage. The food business is a huge and sprawling one, doing tens of billions of dollars of sales a year, in products and brands as varied as the goods on a super-market's shelves. A&P people say it includes 50,000 food manufacturers,. 45,000 wholesalers and about 500,000 retail food mer chants including nearly 1,600 chain store companies with 132 THE CASE OF THE A&P 50,000 outlets. It is anything but a "perfect market."

Prices are what sellers can get, and they vary between places, between sellers, and.between buyers. This is the reason for brokers, but it is also the reason for large chains' buying success. Any large, close-knit buying department that can be "all over the map" in such an "imperfect market" can find for itself the best prices, and pass them on to the consumer. This, of course, is hard on sellers,who don't like to have this large buying power squeeze down their profit margins. In effect, .such large, skilled buying organizations as A&P's are the actual day-to-day forces, which police such a market against the development of temporary "oligopo lies" and keep profit margins of producers down. But the government lawyers were only getting steam up when they criticised A&P's buying policies. As will be discussed in the next chapter, they also criticized its policies of cutting profit margins to get more customers, of helping out its store operations with profits from manu facturing, and of cutting prices in one division to get businessand making this up in other divisions.

One theme runs consistently through all these charges. Each and all are against price reductions, whether in prices paid or in prices charged. Each remedy asked by the Antitrust Division would result in A&P's either pay ing or charging higher prices, or both. Only by hypothesis did the government lawyers look toward the consumer's interest in lower prices. The A&P policies they attack result from day to day in actual lower prices. The lower prices for the consumer which they favor are conjectural, imaginary, deductive, some other day. This pie-in-the-sky is promised on the grounds that (1) if A&P didn't buy things so cheaply other grocers could; and (2) if A&P were stopped from THE CASE OF THE A&P 133 cutting prices in some districts, it wouldn't raise them so high in others. Actually, the entire soundtrack, except for these falsettos, is concerned with A&P's com F petitors, not its customers.