cj#700> Monopolies and predatory pricing


Richard Moore

Dear cj,

Excellent article below - concise, traces highlights of the history, the
critical court decisions, and traces to the current day.  Monopolization is
one of the biggest unreported stories of our day.  With globalization we're
going to see a whole new breed of global monopolies.  "Increased
competition" is only one of globalization's Big Lies.

Mergers, acquisitions, hostile takeovers, and predatory pricing - I guess
these pretty much make up the Monopoly Toolkit.

The pattern doesn't seem to be a SINGLE monopoly in a given industry, but
rather a CLIQUE of them, as we had with NBC, CBS, and ABC in the classical
US television industry, or with the Seven Sisters oil majors.

The members of such a clique compete in a narrow sense, jockying for
relative market shares, but at a macro level they are more accurately
viewed as collaborators.  Similarly mafia dons or drug gangs might elbow
each other's territories, but mainly they're collaborating in maintaining
their collective hegemony.  The same pattern is shown below for the airline

The CLIQUE phenomenon, as opposed to a SINGLE-monopoly scenario, reveals,
perhaps, something of the nature of international capitalism.  The apex of
capitalist power is not INDUSTRIAL CAPITALISM, but rather FINANCE CAPITAL.
Finance capital likes industrial monopolization, but strongly prefers the
clique variety.

With monopolization investment opportunities are enhanced, and with the
clique variety no one industrial operator can get uppity and challenge the
ultimate hegemony of THE MARKET itself.  There are several "markets"
(communications, oil, electronics, aerospace, etc.) but only one "MARKET" -
finance/investment capital.

In the case of cyberspace, I've spoken of Cyberspace INC as characterizing
the eventual regime, with globalization the appropriate metaphor is EARTH

                May the market be with you.
                               - Darth Trader


BTW> Thanks C. Mueller for the article.

To: •••@••.•••
From: •••@••.••• (cmueller)
Subject: Airline Monopolies
Date: Fri, 25 Jul 1997

        Perhaps some members might be interested in how the 5 major U.S.
airlines manage to keep fares 30% to 70% higher than they would be if
competition was allowed to operate at all our airports.  (15% of departures
are now competitive, the other 85% from 'hubs" having no price competition.)
The following is my editorial introduction to an article in a forthcoming
issue of my journal by Dr. Fred C. Allvine of the Georgia Institute of
Technology, Atlanta.

        Charles Mueller, Editor


                            PREDATORY PRICING AND 'FORTRESS HUBS':
                                        MONOPOLIZATION IN THE
                                              AIRLINE INDUSTRY

                                                 Dr. Fred C. Allvine

                                    Trustbuilding Via Predatory Pricing

        Predatory pricing, perhaps more than any other business practice of
America's Robber Barons of the 19th century, fueled the demand for the
passage of its first antitrust law, the Sherman Act of 1890.  The Oil Trust
headed by John D. Rockefeller, for example, absorbed some 400
refiner-competitors--typically after bankrupting their owners with
below-cost prices--and controlled some 90% of the nation's petroleum
industry when it was ordered dissolved by the U.S. Supreme Court in 1911.
(See, for example, Ida Tarbell, History of the Standard Oil Company, 1904.)

                                       'Brute Pricing Power'

         The Tobacco Trust followed the same pattern, taking over roughly
150 competitors and emerging with a comparable share when it, too, was
condemned by the Court in a companion ruling in 1911.  The Sugar Trust
(capturing 55 competing firms); the  Steel Trust (785); and indeed virtually
the whole of American industry was "consolidated" at the turn of the last
century via the technique of pricing below- cost in each competitor's own
narrow market until, facing bankruptcy, it was ready to sell, often at 50%
(and even 10%) of its real market value.  It was the poignant stories of
these independent enterprises everywhere--crushed by the pricing power of
the giants of their industries--that moved first the U.S. public and then
the Congress to demand a halt to this kind of economic violence, the taking
of property by brute pricing power.

                                           Predation 'Irrational'?

        Predatory pricing continued to be illegal under the U.S. antitrust
laws until roughly the mid-1970s, when the country's federal judges began
their attendance at the 2-week economic "seminars" put on for them at
various Florida resorts (all expenses paid by the Fortune 500 and such
"conservative" corporate foundations as those of Olin and Schaife).
Thereafter, the U.S. courts adopted the Chicago-school economic theory that
predatory pricing simply doesn't happen and never has--that it's a mirage, a
myth--because its use would be "irrational."  Why so, given its long
history?  Because it's costly.  Selling below-cost means losing money.  No
rational person deliberately adopts a money-losing policy UNLESS he is going
to get it back, with interest.  That's called "recoupment."  And that,
according to Chicago, is impossible.

                                         The 'Recoupment' Defense

         Why impossible?  Because it requires a post-predation monopoly and
that, too, is impossible.  Why so?  Because, says Chicago, the moment the
price is raised above the competitive level, new entrants will pour in--and
beat the price back to the competitive level, thus blocking recoupment.
Ah, yes.  Rockefeller and his fellow Robber Barons, after bankrupting 400 or
so competitors in each of their industries, were unable to raise their
prices to a "recoupment" level because, if they had done so, those 400
bankrupted competitors would have been replaced by a similar number of new
entrants who hadn't heard about what happened to the first 400?
But the U.S. Supreme Court bought it.  In its Matsushita case, 475 U.S. 574,
l986 (see our 'Dirty Dozen' cases, below, and to call up onscreen the full
text of that opinion, http://webpages.metrolink.net/~cmueller/dirty.html),
it gave us this bit of economic wisdom:  "There is a consensus among
commentators that predatory pricing schemes are rarely tried, and are even
more rarely successful."  As the basis for this fairly spectacular
proposition, the Court cites articles by Robert Bork, Areeda/Turner, Frank
Easterbrook (a paid consultant in the case), Ronald Koller, and Frank McGee.
The Koller citation is especially interesting:  "Koller, The Myth of
Predatory Pricing --An Empirical Study, 4 Antitrust Law & Economics Review,
105, (1971)."

                                           Revisionist 'Research'

        This journal is cited by the Supreme Court in its killing of
predatory-pricing cases?  The Koller article we published was a piece of
Chicago propaganda that we regarded as nonsense then and continue to so
regard it.  Chicago's idea of "research" here--as exemplified by Koller,
McGee, and its other stalwarts who "revisited" the history of America's
Robber Barons--was to get a handsome grant from a right-wing foundation
(Olin, Schaife, etc); dig out the briefs of the defendants in those classic
cases (ignoring all else, including the overwhelming testimony, volumes of
exhibits, the jury verdicts); and present the claims of their lawyers as
historical "facts."  McGee and Koller "discredited" Ida Tarbell and the
historians who came after her?  The U.S. Supreme Court, in antitrust
matters, insists on showing itself a patsy for any right-wing foolishness
that comes along.

                                 The 'Appropriate' Cost Standard

        Example:  How does America's highest court DEFINE predatory pricing?
Selling below cost?  What cost?  Total cost or marginal cost?  If the
latter, short-run or long-run?  The Court hasn't a clue.  You want to bring
a case based on  "unfair" pricing?  The U.S. Supreme Court says neither
below-cost pricing nor any form of price discrimination is "unfair" unless
it's also "predatory."  (See, e.g., Atlantic Richfield Co. v. USA Petroleum
Co., 495 U.S. 328 (1990) and Brooke Group Ltd. v. B & W Tobacco, 509 U.S.
209 (1993), in our "dirty dozen" list, below, and online at our Web site,
supra.)  But it refuses to define the term.  All it has been able to say for
more than a decade is that predation is pricing "below some appropriate
measure of cost."   But it resolutely refuses to say what's "appropriate."

                                   75% Below Competitive Price?

        Consider the U.S. airline industry.  The 5 major firms reportedly
have costs that exceed those of the industry's most efficient competitor,
Southwest Airlines, by 30% to 50%.  Short-run marginal cost, we're told, is
less than 25% of total cost, with fixed costs amounting to 75% or more.
(Long-run marginal cost, again, is the same as total cost.  In the long run,
all costs are "variable," including the building of new plants and the like.
See Glossary of Antitrust Terms, this journal, Vol. 26, No. 4, p. 65, and
our Web site at cmueller/ii-03.html.)   If total costs between points A and
B are $100--including a normal or competitive profit--what is the thereshold
of predation?  In other words,  if the test of "predatory" pricing is
"marginal" (variable) cost, is it the short- or long-run variety, i.e.,
below $25 or below $100?  The lower U.S. courts (with the acquiescence of
the Supreme Court) routinely hold that it's the former, below $25--plus
overwhelming evidence that the predator, after crushing his victim, can (1)
raise the price above the $100 (competitive) level and (2) keep it there
long enough to get back the losses it incurred in killing off the
competition.  Cut the price by "only" 50% (to $50 or 1/2 the competitive
level) and it's not "predatory."

                              The Reagan/Meese 'Consolidation' Plan

        The result has been a legalization of predatory pricing in the U.S.
for the past 2 decades, with the most notable example of that policy being
the U.S. airline industry.  After its "deregulation" in 1978, scores of new,
low-cost, startup carriers began operation and, as predicted, industrywide
costs and prices began to plummet --along with the profits of the major
airlines ( and their stock prices).  This did not sit well with Wall Street
or with the Reagan administration when it arrived in Washington in 1981.
Reagan's Attorney General, Ed Meese, filled the Antitrust Division with
economic theorists of the Chicago school, who promptly began encouraging a
"consolidation" of the industry.  A plan was formed:  The majors would "weed
out" the low-cost upstarts via below-cost pricing and, once the industry was
safely in the hands of a half-dozen or so surviving giants, prices (and
profits) would be raised to satisfying levels.  Wall Street was delighted
with this new strategy and showed its confidence by raising and maintaining
airline stock prices even in the face of mounting losses from this concerted
attack on the new entrants.
                                     $10 Billion Airline Losses

        It was an expensive exercise.  The ranks of the upstarts were
decimated by the below-cost prices but others kept appearing, with the
attack plan still being in progress when Bill Clinton became president in
1992.  In the meantime, the U.S. airline industry had registered losses of
some $10 billion, more than its total earnings since the Wright brothers.
And the Clinton administration had early doubts about the "plan"--the
systematic killing  of the discounters.  One of the latter, facing a
below-cost attack by one of the major airlines, complained to Clinton's
then-Transportation Secretary, Frederico Pena, and he reacted quite unlike
Reagan's Attorney General, Ed Meese: Call off your dogs or I'll have the
Justice Department haul you into court.  The major blinked and the attack
was stopped.

                                         30% Fare Overcharge

        Unfortunately, that early pro-competition policy of the Clinton
administration didn't survive for long.  No lawsuits were filed by the
Justice Department.  The major airlines--American, United, U.S. Air, and so
on--continued their predatory attacks on the discounters, albeit with a bit
more care than in the Reagan/Bush years.  They had put in place their giant
"hubs" in the larger American cities, funneling the country's business
travellers (their "cash cows") into a set of big-city airports where they
held all the landing "slots"--and thus could exclude the price-cutting
upstarts.  The "plan" has finally worked.  Under Clinton's FTC and Justice
Department, the U.S. airline industry has been able to reach the goal that
had long eluded it under Reagan and Bush--the end of effective price
competitition and the beginning of supracompetitive airline fares (and
profits and stock prices).   Thanks to the predatory pricing of the majors
and their "fortress hubs," an estimated 15% of U.S. airline traffic takes
place on routes where there is "discount" competition.  The other 85% moves
between "hubs" where discounters are banned-- where a single major typically
controls 75% or so the departures and where ticket prices routinely exceed
the levels in comparable competitive markets by 30% or more.

                                 15% Competitive, 85% Monopolized

        The result?  Airfares are rising steadily, profits of the majors are
up dramatically, and their stock prices are breaking new levels.  The years
in which the industry incurred those $10 billion in losses from its
predatory pricing are gone. The days of the "recoupment" are here.  The
Clinton administration is satisfied with price competition in 15% of the
U.S. airline market, monopoly in 85%.   Professor Fred C. Allvine of the
Georgia Institute of Technology relates below the story of how this
monopolization of the industry has played out in his hub city, Atlanta.

                                                             Charles Mueller


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