Myths and Facts About Big Business

0:00Okay, so today we're talking a little bit about big business in the 19th century. And what I'm going to do is review some of the items that are actually in that chapter, chapter 8, and then expand on that and add a little more information that's more purely economic, that I think makes it easier for us to understand these ideas. So, as you can see, this is what you might call a revisionist chapter, in the good sense of the word, because it does challenge the received view on big business in the 19th century. And I remember when I was in school, I got that received view, that big businessmen are wicked exploiters, and in order to tame the wicked exploiters, We need these selfless public sector employees to intervene on our behalf and that is sort of the standard view that you get all the time that politicians are wonderful and they just care about the public good whereas these private individuals are nothing but greedy SOBs. I don't know if that can say SOBs in the recording.

1:10And so what I want to suggest is that this is rather cartoonish and unhelpful. I started off by making a distinction that is made by a professor at Hillsdale College named Bert Folsom. He makes a distinction between what he calls market entrepreneurs and in effect political entrepreneurs. A market entrepreneur is somebody who reaches his position in terms of wealth and in terms of his position within his industry by virtue of the contributions he makes to the well-being of the population by producing some product at a cost that is welcomed by the population that makes people better off, well then he profits from this. The political entrepreneur on the other hand is somebody who reaches his position through some kind of grant of government privilege either through some subsidy or through some tariff or something that hobbles his competition Then he reaches his position and so Folsom is trying to argue that that's kind of an artificial kind of entrepreneur.

2:15We're not as impressed by that because anybody can go begging for special privileges from government but not everybody is clever enough to think of some innovation on his own that is so beneficial to the general population that people will voluntarily fork over their money rather than be forced to do so Now Folsom really is the key figure in terms of recent historians on big business, there are some others I cite in my bibliography, but Folsom has this well-known book that came out around 1991 with a very provocative title called The Myth of the Robber Barons, A New Look at the Rise of Big Business in America, and it's been consistently in print since then, and in our day for a non-figurist, it's been in print since then, and in our day for a non-figurist, it's been in print since then.

3:03A fiction book to be in print for 15 years, it's like an incredible classic, it's very, very rare in our day. So he gives the example that I then elaborate on of the railroads in the 19th century and some of the corruption that was associated with railroad construction. And one of the arguments that I put forth there involves the incentive structure that existed with regard to government assistance of the railroads. So what kind of incentives did this create? Because you got two forms of government assistance, if you were a railroad. It wasn't direct money, you didn't get a direct grant from the government, but you would either get subsidized loans, low interest loans, or you get free land.

3:49Government had a lot of land to give away, public lands would be given away to the railroad. So those were the two forms of subsidy. Low-interest loans are obvious in terms of why the business would want them, but the land may not be so obvious. And what typically happened was that the railroads would sell most of this land for money. So it was an indirect grant of money to the railroads. You give them land, they sell the land, they collect and keep the money. And of course by selling this land to people and helping to populate this land, the railroads are in effect creating a built-in market for themselves. by, in effect, populating the very place through which this railroad is going to travel. Will they therefore attract people to that place?

4:34These people are going to need the railroad to be successful in order for themselves to be successful. Now, this is indirectly a kind of a subsidy, a kind of a financial subsidy, even though it's not a direct handing over of cash. On the other hand, the sale of public lands had been one of the major ways that the federal government had raised money, revenue for itself in the 19th century. And so the more government, the more public land it gives away for free, the less will be available for it to sell for revenue purposes. And so therefore, taxes would have to be raised to make up the shortfall. So that is of one effectiveness. Well, so what we saw is that these incentives tend to be perverse because it simply says you lay down this X amount of track, you get X amount in loans and if you lay down track in mountainous terrain or more difficult terrain you get more in terms of loans and more goodies.

5:30Well, this does not give railroad operators the incentive to build straight efficient tracks. Of course, naturally it gives them the incentive to build curb tracks through mountains, which no private owner putting up his own capital would dream of doing. A private owner would want to be ruthlessly efficient and have the straightest possible most efficient line that he could. And I've given as an example in the past that I used to live on Long Island in New York and the Southern State Parkway was pretty much constructed by giving the same incentives to road builders, The Southern State goes like this, the whole way, the whole way, and by the way, I would take the Southern State back home from LaGuardia Airport for about an hour's drive to my home, and you know, sometimes when you've been flying all day, you're kind of tired, and you'd rather just have that straight, simple drive home, but on the other hand, at least I didn't fall asleep on the way home, because you have to drive like this the whole way. So this is not that uncommon a phenomenon, and it was all over the internet.

6:37And then there is the interesting counter example of James J. Hill and his Great Northern Railroad going from St. Paul to Seattle that he constructed without any government assistance of any kind and he wound up having an extremely efficient road. He actually turned a profit in 1893, the year that most of the other railroads went bankrupt. He had lower fares for his road than the others did. The railroaders did, very prosperous and just super efficient, he didn't have the distortions that the government assistance created in the other roads and he continued to do very well and he had an incentive again to build up the communities alongside his road and he did that through his own funds and he negotiated rights of way with Indian tribes, he didn't just exterminate them all, he negotiated with them as private individuals typically do.

7:34situation, and by the way this is an example of the distinction that Folsom makes because other railroad operators were getting all these government grants of one kind or another. Hill was not. So Hill is a market entrepreneur, the others are political entrepreneurs. There's the example of John D. Rockefeller. Now there are many things we can say, maybe we don't like the Rockefeller foundation, whatever, that's not what we're talking about. It's worth noting that for whatever else we As we can say about John D. Rockefeller, he did improve the well-being of Americans, obviously, by making, for example, kerosene much less expensive for people, making it into an affordable illuminant that was a helpful and important substitute for whale oil that had been in widespread use, but that was obviously not very cheap for people, so all of a sudden people could stay up late at night, which for me is wonderful because I pretty much do all my work around three in the morning, And on the other hand, you don't have to spend a fortune to be able to stay up late at night

8:35because it's cheap now to illuminate your homes. Rockefeller of course was into oil refinery rather than the actual pumping of the oil out of the ground and it was his, again, ruthless efficiency in cost cutting, always wanting to cut costs that made it possible for him to prosper. I even give the example that when he was faced with the waste that's left over from the refining of the crude oil, he developed 300 products out of the waste. So again, super efficient. And we'll talk about predatory pricing later, but the allegation against Rockefeller that he engaged in predatory pricing, and monetary pricing, that is to say that he sold below cost in order to drive all competition from the field and then raised prices to earn monopoly profits is basically no longer believed by historians.

9:29That has been debunked for about 50 years, mainly with an article by a historian named McGee who wrote an article in the Journal of Law and Economics in which he investigated this and read thousands of pages of testimony and court documents and everything and the conclusion that Rockefeller had simply bought out people. That was how he dealt with competition. He purchased them and he apparently purchased them at decent prices. He didn't just say, I'll buy your refinery for five cents. He purchased them at decent prices because we know that, for one thing, because he ended up employing some of these people in his own firm and if he had taken ruthless advantage of them, it's unlikely he'd want to have them sticking around. They'd obviously just engage in sabotage. And we also have the example of at least one guy who sold, made a very nice living selling refineries to Rockefeller, building them up and then selling them.

10:20At least three sold to Rockefeller by one person. So this is, as I say, this is an important cost-cutting innovation by Rockefeller, his efficient oil refinery, which improved the standard of living of everybody. So notice that Rockefeller does not just take from some people and give to other people in political fashion. He increases efficiency such that everybody is wealthier because now I need to expend fewer of my own resources to get what I need. I now have more resources left over to buy additional things that I couldn't have had before. That's how wealth is created. I also make note of Andrew Carnegie who was involved in steel production. Now it's true that Carnegie did favor steel tariffs, you know everybody involved in steel favored steel tariffs so this is a kind of a blot on his record but nevertheless he was still super efficient and I give the example of the homestead plant in Pennsylvania where with 4,000 men Carnegie could produce several times the amount of steel that the most renowned European facility, the Krupp Steel Works could produce with 15,000.

11:33So an extraordinary testament to his efficiency and again dramatic price reduction over time. From the 1860s to the 1890s, the price of steel rails goes down from $160 to $17 a ton. Now it's true that the general price level was also falling in the late 19th century, but the price of steel was falling much faster than the rest of prices were. Now I want to go into in some detail this concept of predatory pricing because it has, after years of falling out of fashion in the economics profession, it has come back into some degree of respectability. So I do want to talk about it and to go on at greater length than is in the text.

12:21Predatory pricing, as I indicated a moment ago, is the practice whereby a dominant firm will simply price its goods below cost for some length of time, whatever length of time is necessary to drive all its competitors from the field, that's what's predatory about it, and then with its competitors gone, it will then raise its prices and enjoy monopoly profits. Now this for a long time was considered to be a real danger and in fact we have economists in the 50s warning that this could happen. Well then with the passage of time by the 1970s and early 80s certainly this doctrine was really falling out of favor because for one thing it was very hard to find an actual example of this.

13:07If you look through antitrust cases you can hardly find an actual example of a firm really trying this much less succeeding So it seemed to be, as one economist has said, rather like sightings of the Loch Ness Monster, finding examples of predatory pricing. You can find firms lowering their prices, obviously all over the place, but you don't find this pattern whereby their competition disappears and they just raise their prices. What a number of economists observed is that it's extremely difficult to carry out this strategy. It sounds very simple, it sounds almost plausible. It's almost plausible that sure, yeah, that businesses do this all the time, but in fact it's very difficult to do this for a number of reasons. One of them is people tend to stock up on whatever it is you're selling.

13:55If you're going to sell below cost, well, people will just buy huge quantities and keep them in their garage. And so it's going to take you even longer to recoup your losses because even if you do drive all your competitors out, everybody has all they need. Okay, so when I used to have to do my own food shopping when I was a bachelor, see, now my wife and I go together, but I used to go all by myself when I was a bachelor, and I will never buy Progresso soup for $2.59 a can. I don't care how much I want it, I am just not paying that. I'll wait for it to go down to $1.25 or $1 a can, and then I'll buy whatever the maximum amount is and take that home with me. So that's naturally what you do, you stock up in those situations. But beyond that, there's the problem of what do you do about new competitors entering the field? Sure, I drive these people out of business, but okay, well then some other competitor can buy their physical plant for next to nothing

14:45and then go into business with me with very low cost foundations and once again I have to compete against yet another entrant into the market. And it turns out that it's basically impossible to drive everybody out consistently. It's an enormously expensive strategy and it's very difficult to carry out. Now, I have got some, I devised in one of my books a kind of a thought experiment about what it would involve to actually engage in predatory pricing. And I rely on an important book by George Reisman, who in 1996 wrote a book called Capitalism. It's the size of a phone book. It's the most, it's the biggest book I've ever seen. It's like a thousand pages. It's this big. And then you open it up and it's two columns.

15:33So, how somebody could write a book like this is completely beyond me, but nevertheless, Riesman points out that one thing to remember is that a large firm that attempts predatory pricing during the predatory stage where it's cutting its prices below cost is making losses commensurate with its size. size. That is to say, suppose I'm a firm and I dominate, I've got 90% of the market in some product, well then I am making losses on my 90% market share. So my competitor, suppose I've got just one competitor for simplicity's sake, and he's got the other 10%. Well okay, so he's making losses on his 10%, but I am losing an absolutely gigantic amount of money with the passage of time. And Riesman says, it is difficult to see and the advantage constituted by nine times the wealth and nine times the business if money is lost at a rate that is nine times as great.

16:37Another economist writing in the Journal of Political Economy says this, price wars are far more expensive than is often realized. For one thing, it takes quite a long time to drive a rival from the field. The smaller firms may simply close down and wait and then reopen The larger firm, in the expectation of recovering its losses, raises its prices. Even if the large firm succeeds in driving one set of owners into bankruptcy, the capacity does not thereby disappear from the area. The small company may now reopen under new management, with plant bought at knock-down prices and capable as a consequence of marketing a product at very low cost. Only when the small plant is worn out or becomes obsolete, a matter of years, is it out of the picture. and only then is the large firm in a position to raise its prices to recoup its losses.

17:26After that, the prolonged period over which prices must be kept high in order that the large business can entirely recover its losses may simply invite new entrants or new expansion and start the whole period of unprofitably low prices over again. Now, there is also a chain store variant of the predatory pricing argument. So, a lot of times opponents of chain stores think that chain stores are so large and they have all these resources at their disposal that they'll always win out in competition with smaller stores so they can draw on the profits that they earn in other markets to sustain them while they suffer losses in some local market in order to drive their competitors out. But again, there is some faulty reasoning here. Again, you have all the difficulties associated with predatory pricing.

18:12But let us suppose we have a nationwide chain of grocery stores called Megamart and let's suppose Megamart has a thousand stores around the country and a billion dollars of total capital invested for an average of one million dollars per store. Now a lot of people seem to believe that Megamart can bring its entire fortune to bear in order to drive its competitors out of a new market where it seeks to expand But it would actually be an example of a ludicrously poor business strategy and economic judgment for Megamart to do so. Suppose for the sake of argument that in the face of all the theoretical and empirical evidence to the contrary that we nevertheless conceded the possibility that Megamart could drive all its competitors from the field in a given market and keep them out forever simply through the implicit threat of crushing any new competitor who should emerge on the scene.

19:05Megamart would indeed enjoy abnormally high profits in that market should it be successful and the prospect of those premium profits could well entice the company into making this effort. But as Reisman observes, such a premium profit is surely quite limited, perhaps an additional hundred thousand per year, perhaps even an additional half million per year, but certainly nothing remotely approaching the profit that would be required to justify the commitment of the firm's total financial resources. So let us suppose that the premium profit that could be reaped by Megamart after removing all its competitors fell in the middle of those figures of $100,000 and $500,000. Suppose $300,000 per year they could make in this market as a premium profit after clearing all their competitors out.

19:52Let's also assume the average rate of profit in the economy is 10%. That means that Megamark can afford to lose three million dollars in order to seize this market for itself, because three million dollars is the capitalized value of three hundred thousand dollars per year. If Megamark devoted any more than three million dollars to the acquisition of this market, it would be a bad investment. They would earn a lower than average return on their capital, that is, they would earn less than ten percent on this investment. Despite their billion dollars of capital, even Megamark would find it absurd and self-destructive to devote anything above $3 million to the capture of this market, since they would earn a better return investing their money elsewhere in the economy. If they spent $9 million to capture this market, they would earn a profit of only 3.33% instead of the going rate of 10%.

20:40It would make no economic sense. Now Riesman explains with an example, a similar example of his own. He says, here's what follows from this. Ludwig von Mises says everyone contemplating an investment in the grocery business who has an additional $5 million or even just $1 million to put up is on as good a footing as Megamart in attempting to achieve such premium profits for it simply does not pay to invest additional capital beyond these sums in other words the predatory pricing game if it actually could be played in these circumstances would be open to a fairly substantial number of players not just the extremely large very rich firms but everyone who had an additional capital Now it is true that in some cases of course the larger firm can undersell the smaller firm on the basis of the advantages it enjoys in terms of economies of scale and other benefits but this is not necessarily to be deplored there certainly are advantages that accrue to everyone from business concentration Ludwig von Mises after whom this institute is named

21:48said this, in the pre-capitalistic ages, the difference between rich and poor was the difference between traveling in a coach and four and traveling sometimes without shoes on foot. Today, in the industrialized parts of the U.S., the difference between rich and poor is the difference between a late model Cadillac and a secondhand Chevrolet. It is difficult to see how this result could have been achieved without bigness in business. and Business. Well on this predatory pricing issue there is yet another example that one might refer to and it's a historical example that's cited in my book about the chemical manufacturer Herbert Dow and again I feel compelled to mention this example because I love the cleverness involved here. If you read in there about Herbert Dow you noted that he was a great, basically a great chemical man who worked extraordinary hours, sometimes 18-hour days, sleeping overnight in his plant and he started Dow Chemical Company right around the turn of the century, into the 19th into the 20th century, and he specialized in particular chemicals

22:54and one in particular he had discovered an inexpensive way to produce bromine which was used for a variety of purposes, used for film developing and sedation as a dye and so on and so forth. And so he wanted to sell his product, not only in the United States, but also in Europe. So he went to sell in Europe, and in Europe they were selling bromine for about 45 cents. You could get your unit. But 45 cents, he could, Dow could do much better than that. He was able to sell at 36 cents. But this was not satisfactory to the German cartel that dominated the chemical market in Europe. a representative of which visited Dow and reminded him around the early 1900s that no American upstart company is allowed to compete in the bromine market in Europe and that if he continues to do this they will drive him out of business by undercutting him in the United States by dumping excess bromine in the United States at very very low prices he won't be able to compete they'll drive him out so they were threatening to engage in predatory pricing but Dow being a strong-willed man continued to sell his bromine

24:04So the German cartel took their revenge and began selling bromine in the United States at the unheard of price of a mere 27 cents. So you've got Europe is the price is 45, Dao's is 36 and now all of a sudden this German cartel is selling for 27. So now Dao has to figure out what to do and what he decides to do is he realizes that the German cartel has to turn a profit in Europe The German cartel has to turn a profit in Europe in order to sustain the losses it's going to make in the United States. So he simply, through his purchasing agent, buys up enormous quantities of bromine at 27 cents a pound in the United States and then goes to Europe and sells it at a slightly higher price, but well under 45.

24:52So the German cartel naturally is wondering how there could be all this demand for bromine in the US. They couldn't have anticipated it. So meanwhile, Dow carries on with this sort of underhanded scheme, and the cartel just continues to drop its price down to 15 cents. We'll show this Herbert Dow. So he just buys all the more of it. So finally it gets to a point where they're reduced to selling it at the absolutely rock bottom price of 10.5 cents, until finally they just can't keep this up. And he gets another knock on his door from the cartel, and they say to him, you know, how about we just make a truce here? And they say, we will have Germany to ourselves, you can have the United States to yourself, but we'll let the rest of the world be open to free competition. How do you like that? And Dow accept them.

25:38So that sort of goes to show that the predatory pricing strategy can seriously backfire, as it did against the competitors of Herbert Dow. But the final point that I want to make involves where economists stand on this predatory pricing doctrine today. Because as I noted in my book, typically economists tend to dismiss predatory pricing. The average person gives it much more credence than the average economist gives it, and I cite George Stiegler, who's a great Chicago School economist, to the effect that today it would be embarrassing to encounter this doctrine in professional discourse. Well, on the other hand, though, it should be noted that in a small number of influential cases, there are economists who increasingly have brought the doctrine up again.

26:31In some ways, it's parallel to economists' views on foreign aid. 1950, 1960, economists said foreign aid is a wonderful thing. It's going to bring about the development of the third world, and we all need to do it. By the 1980s, when everyone could see that foreign aid had been an absolute disaster for the third world, a disaster for a million reasons that perhaps we'll talk about next term or slightly referred to in my book, well, all of a sudden economists were all saying, oh yeah, we all knew that foreign aid would be a disaster because it has all these terrible incentives built in. But then around the year 1995 and up to today you have economists who say well you know let's not abandon foreign aid altogether if we direct it to good regimes then maybe you'll have a good outcome so it's made a comeback.

27:21Well the same sort of pattern is visible with predatory pricing. In the old days yep this model is absolutely true it could really happen. Then by the 70s and early 80s everybody was saying oh no we all knew that this can't really happen it's a big fantasy. But now in recent years there's been this view that, well, maybe in some cases it can be strategically used. Maybe some firms can use it just to put the fear of God into their competitors, to be such vigorous cost cutters that it will intimidate other firms into simply refraining from trying to compete with its cost cutting. So there are some economists who have said that it could possibly still work. The difficulties with even that view are that it's very hard for a court that's called in to adjudicate an antitrust dispute to distinguish between cost cutting that has a predatory goal in mind and just normal cost cutting that any business does, or I should say price cutting.

28:18How do you know that this firm is cutting its prices in order to drive everybody else out of business but this firm is cutting its prices just to be competitive? I mean, conceptually, there's no way to distinguish between them. So there's no non-arbitrary way to adjudicate disputes like that. And even if you uncover internal memos in some firms saying, we've got to crush our competitors. Well, every firm says that about their competitors. I mean, sometimes there is a certain poetic license that's allowed here when speaking about competition. So this is still a problem. And typically, or at least very, very often in antitrust cases, The people who bring the anti-trust cases are not consumers. It's other firms who just are sick of the dominant competitor and they just want to cripple them using the law, using the long arm of the law.

29:06It's typically not the consumer saying, Oh, please, please, I'm so tired of having inexpensive goods. I wish I could pay more. Well, if you want to pay more, go ahead and pay more. Go to the competing firm and pay. But they hardly ever actually bring anti-trust suits themselves. It's the competitors who just see this as the best way to cripple their efficient competition. Competition. But beyond this, there is the point, and this is a point that I want to give credit to Professor Don Boudreaux for. He points out that firms themselves have an incentive to prevent creditory pricing from being successful. And by that we mean as follows. Any one of us in our capacity as a consumer wants to purchase from a company that is competitive in some way.

29:51in some way. I'm not using this strict Austrian definition of competitive, but in other words, I mean, when I was living in Cambridge, Massachusetts, and I wanted to go out and buy music, that was the place to buy music, because they had strawberries there, that was a chain. They had a, I don't even remember the names of these places anymore, they had a whole bunch of big major music things right in the area, so you could get super cheap music. And then now, you know, I go to the mall, and I see the prices they charge for music, and I say, well, I'm not paying that, because I remember when I was in college, I didn't have to pay Well, I'm not living in Cambridge anymore, but I still have this view that I should have to pay only those low prices. Naturally, when I buy music, I want to be in that situation. I want to be in Cambridge, where I can get low prices because there's all this vigorous competition going on.

30:34That's not difficult to understand, that as buyers we want vigorous competition among the firms that are catering to us. But at the same time, a supplier also wants its customers to be competitive. Because suppose you have the example of Coke and Pepsi. Let's suppose Coke and Pepsi collude and decide that they're going to enter into a pool with themselves and then just control their prices. They're going to have the price go up slightly and neither one will undercut the other. So they're going to have some kind of a price setting scheme going on. Well, there is somebody other than consumers that has an interest in preventing that from happening And that would be Archer Daniels Midland, for instance, that produces high fructose corn syrup.

31:20Because, think of it this way, if Coke and Pepsi are vigorously competitive with each other, we're going to buy more of their stuff, they're going to have lower prices, we're going to buy more of their stuff, and so in turn, Coke and Pepsi are going to buy more high fructose corn syrup. But now let's suppose that they set their prices, they have some kind of collusion going on, They set their prices higher than they would otherwise have done. Well, we're going to buy less of their product, and so they're going to need less high fructose corn syrup under that situation. So, Archer Daniels Midland has no desire to see this happen. So, therefore, they have an incentive to try to prevent that from happening. Now, how can they prevent that from happening will hold to the very end. But another example would be, let's suppose Wal-Mart, which is the usual villain in these situations, is set to dominate the pharmaceutical market.

32:13And in fact, Walmart has announced, I guess some of you have probably seen the signs, that they're making 300 generic pharmaceutical products available for $4 for a 30-day dosage. You know, well, I think most people would welcome that, but other people, and then Target announced that they would match that price. Well, there would be some people who might say, But, what will happen if Wal-Mart drives all its competitors out of business and then it's the only pharmaceutical outlet, then it'll just raise those prices again? Apart from, I think, how implausible that scenario is, let's consider who has an incentive to prevent that from happening. In other words, the market itself has an incentive to prevent this outcome, to prevent an outcome in which Wal-Mart is so dominant that it can just say, well, you want this drug, then it'll be a zillion dollars.

33:04For one thing, I mean, obviously these pharmaceutical companies could just simply open their own storefronts as a last resort, but they probably want to prevent the monopoly from occurring in the first place. How do they prevent that? If they suspect it may be happening, if they suspect that Walmart is engaged in some kind of mad attempt to carry out predatory pricing, well, Merck, Let's say that pharmaceutical company Merck would not necessarily want to see that because let's suppose Walmart suddenly starts charging a zillion dollars for all of Merck's products. All right, well, Merck isn't going to be able to supply as many products as it could before. It's not going to make the profits it could before. So one thing that Merck might consider doing to prevent this from happening in the first place would be to refuse to deal with Walmart, just to distribute all their products through other competing stores, so as to draw some of Walmart's customers away.

33:58And other firms would have the incentive to do that, to prevent Walmart from building up such an unchallengeable position. But there is a second possibility, perhaps even more effective, that suppliers themselves, like Merck or like Archer Daniels Midland, would have an incentive to carry out. And that involves minimum resale price maintenance. Now, this is unfortunately a strategy that the antitrust laws forbid. Antitrust laws forbid the use of minimum resale price maintenance, which I'm going to explain in a minute. But the point is that what I'm about to show you is a perfectly plausible mechanism that private firms could use to prevent, if this really is a problem, if this really isn't just a phantom, to prevent predatory strategies from succeeding, the private market would have an incentive to do this and could use this mechanism.

34:53they can't use this mechanism because it's made illegal by the very legislation that is supposed to encourage competition. Minimum resale price maintenance involves contracts between suppliers and retail outlets whereby a supplier could say to a retail outlet, we're going to supply you with this product but you have to sell it at at least this price. And the reason that that could be useful in this sense is that suppose, Let's say there were people who really believed Walmart was going to become this single producer, single retailer in pharmaceuticals. Well, Merck could prevent that from happening by saying, you've got to sell our product at at least this price or we don't deal with you. And then that way they can't undercut people to that great of an extent. Or conversely, Merck could also use maximum retail price maintenance, which is also prohibited.

35:44The antitrust laws also prohibit a supplier from saying to a retailer, you can't sell this product for above X amount. So there's something that clearly and obviously hurts consumers in the antitrust legislation, that it forbids manufacturers to say to retailers, you can't raise the price above this certain level. Maximum resale price maintenance would have the benefit of, let us say, Let's say, again, let's say that this fantasy scenario comes true and Wal-Mart suddenly becomes this big, staggering, giant, unchallengeable, raising its prices dramatically. Merck could simply use maximum resale price maintenance and say, well, you cannot sell our product for above X number of dollars.

36:33Of course, again, Merck has an incentive to do this. If Wal-Mart does sell it above X number of dollars, they will sell fewer than they otherwise would and Merck's profits will tend to be lower. So Merck would have the incentive to enforce these terms on any potential giant predator. But unfortunately, these very mechanisms have been made unavailable to suppliers and yet it is through these very mechanisms that the market itself could prove to be to be the best guarantor that such nightmare scenarios, whether they are theoretically possible or not, could never actually occur in reality.