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Participant Presentations And Session Transcript For October 26


2 and
10 Thursday, October 26, 2006
18 9:30 A.M. TO 4:00 P.M.
24 Reported and transcribed by:
25 Susanne Bergling, RMR-CLR


3 Deputy Director, Bureau of Competition
4 Federal Trade Commission
5 and
7 Attorney, Antitrust Division
8 U.S. Department of Justice
11 Morning Session:
12 Tony Allan Freyer
13 Louis Galambos
14 James P. May
15 George David Smith
17 Afternoon Session:
18 Jeffrey P. McCrea
19 David J. Reibstein
20 David T. Scheffman
21 George David Smith


1 C O N T E N T S
5 Introduction
6 Presentations
7      Tony Allan Freyer
8      Louis Galambos
9      James P. May
10      George David Smith
11 Moderated Discussion
12 Lunch Recess
16 Introduction
17 Presentations
18      Jeffrey P. McCrea
19      David J. Reibstein
20      David T. Scheffman
21      George David Smith
22 Moderated Discussion
23 Conclusion


1 P R O C E E D I N G S
2 - - - - -
3 MR. GLAZER: Good morning. My name is Kenneth
4 Glazer, and I am the FTC's Deputy Director for the
5 Bureau of Competition. I am one of the moderators for
6 this morning's session. My co-moderator is Ed
7 Eliasberg, Antitrust Division, U.S. Department of
8 Justice.
9 A couple of housekeeping matters before we get
10 started. First of all, please turn off all cell phones,
11 BlackBerries or other electronic devices or turn them to
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13 through the double doors you just came through; the
14 women's room is to the left on the far side of the
15 elevator banks.
16 One safety tip, in the unlikely event the
17 building alarms go off, please proceed calmly and
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20 the Pennsylvania Avenue side. After leaving the
21 building, please follow the stream of FTC people. They
22 have practiced this many times. You will all go to the
23 Sculpture Garden, which is across the intersection of
24 Constitution Avenue.
25 Finally, we request that you not make comments


1 or ask questions during the session. Thank you.
2 This morning's panel is entitled Business
3 History, and as the title suggests, we will be turning
4 the clocks back today and looking at some of the
5 landmark monopolization cases in the past, not the
6 recent past, as in the Microsoft case, but antitrust's
7 deep past, milestone cases such as Standard Oil, Alcoa,
8 American Tobacco and AT&T. Like the ghosts of Christmas
9 past, the ghosts of antitrust past continue to haunt us
10 in good ways and bad.
11 We have come a long way since those cases, to be
12 sure. In many ways, antitrust in the Sherman 2 area,
13 the area of unilateral conduct, is still coming to grips
14 with the issues faced by the courts in those cases,
15 which dealt with the industrial giants of their day.
16 Think, for example, of Learned Hand's Alcoa
17 decision and how to this day his enigmatic
18 pronouncements in the Alcoa case are still invoked and
19 debated. Think of "monopoly thrust upon it," "superior
20 skill, foresight, and industry," and "the successful
21 competitor, having been urged to compete, must not be
22 turned upon when he wins."
23 Take Standard Oil. One historian's view of the
24 record in that case, the Standard Oil case, led to a
25 complete rethinking of the whole area of predatory


1 pricing. Anyone who thinks history is unimportant
2 should look at John McGee's article on Standard Oil and
3 the impact it had on the case law.
4 To help us understand this critical part of our
5 antitrust heritage, we are honored today to have with us
6 four distinguished business and legal historians. Our
7 panelists this morning are Jim May from the Washington
8 College of Law at American University; George Smith from
9 the Stern School of Business at New York University;
10 Louis Galambos from the Johns Hopkins University; and
11 Tony Allan Freyer from the School of Law at the
12 University of Alabama.
13 Ed, do you have any introductory comments you
14 would like to make?
15 MR. ELIASBERG: Thanks, Ken.
16 Let me just second how important the Antitrust
17 Division thinks it is for us to take a look back at
18 these major monopolization cases of the past, so with
19 that, let me turn it back to you again so we can get
20 started.
21 MR. GLAZER: Thanks, Ed.
22 So, at this point, let me introduce our first
23 speaker. Jim May is a law professor at the Washington
24 College of Law at American University, where he teaches
25 antitrust, U.S. legal history. He was an attorney with


1 the Antitrust Division and senior staff assistant to the
2 National Commission for the Review of Antitrust Laws and
3 Procedures. He is the author of many law review and
4 other articles on the historical foundation of U.S.
5 antitrust law. He is about a year away from completing
6 a book entitled Standard Oil Company Versus United
7 States, the Supreme Court, and the Foundations of a New
8 American Society, which will be published by the
9 University Press of Kansas.
10 Complete biographical information for each of
11 the four speakers can be found on the FTC and DOJ
12 Antitrust Division Sherman Act Section 2 web sites.
13 Now, I will turn it over to Professor May.
14 DR. MAY: Well, I am very pleased to be here
15 this morning with everyone and to be part of this very
16 distinguished panel, and I want to thank Ed and Ken and
17 Jack and Jim and everyone who has been responsible for
18 pulling this session together.
19 This morning we are talking about insights to be
20 gained from historical scholarship, and I am not going
21 to talk at length about that, but certainly we know that
22 there are many. There are benefits for better
23 understanding the past in its own terms, some having
24 considerable value, but also better insight in our
25 thinking about modern day issues. History often


1 provides a useful point of comparison or contrast or a
2 source of additional questions and perspectives we might
3 not consider otherwise, and it can help to inform modern
4 decision-making in a variety of ways.
5 Historical writing comes from people from a
6 variety of different disciplines and backgrounds, as
7 well as a variety of personal perspectives, business
8 historians, legal historians, intellectual historians,
9 economists, legal scholars, and others, and all of this
10 work can be very valuable to take into account and to
11 compare one with another.
12 When we talk about the potential value of
13 looking back at early episodes and periods of antitrust
14 law in particular, as Ken has said, there is much to be
15 learned, and particularly much convincing to convince
16 people in the antitrust field that looking at the
17 Standard Oil story may, in fact, be of some value in
18 thinking about antitrust law, where it has been, how it
19 got here and where we are today.
20 Now, in his landmark book, The Antitrust
21 Paradox, in 1978, Judge Robert Bork famously remarked
22 that one of the uses of history is to free us from a
23 falsely imagined past. Understanding antitrust's past
24 better allows us to understand more clearly how many of
25 the ideas that are currently in the mainstream first


1 came to be established in antitrust law. At the same
2 time, for example, historical understanding, I think,
3 provides insight into how early antitrust thinking was
4 not merely a less sophisticated early form of
5 neoclassical economic thought, how variations from
6 modern economic analysis that we find in earlier
7 antitrust analysis do not merely reflect the power of
8 "non-economic" concerns uninformed by any systematic
9 theoretical approach, and a look to the past also can
10 give us insight into how much of early antitrust debate,
11 legislation, lawyering, and judicial decision-making was
12 influenced by a different kind of theoretical outlook,
13 an outlook that embraced as a part of, and not simply
14 alongside of, its economic analysis, simultaneous
15 concerns for individual opportunity, freedom of
16 contract, efficiency, economic progress and prosperity,
17 fair distribution of wealth, and political freedom, all
18 to be promoted through a process of largely
19 "non-discretionary" judicial decision-making, it was
20 still widely thought, in the late 19th and early 20th
21 Centuries.
22 Such an outlook, still widely if not universally
23 influential at the time of the Standard Oil decision, of
24 course, today runs deeply counter to antitrust thinking
25 across the entire spectrum of antitrust opinion. Modern


1 antitrust thinking assumes the inevitability of
2 trade-off choices among these various values and is
3 influenced strongly by a modern economic paradigm or
4 paradigms distinctly different from the broader
5 theoretical outlooks most familiar in the late 19th and
6 early 20th Century lawyers and judges.
7 Okay, but that having been said, I want to talk
8 about something else this morning, and that is a
9 different set of issues arising in connection with the
10 rise of the Standard Oil combination and the federal
11 antitrust case brought to challenge it. This is a very
12 big topic, indeed, and a very great deal has been
13 written about it, and in the very brief time I have this
14 morning, I am just going to try to suggest some of the
15 most important themes in the historical record and in
16 the scholarship assessment. If we have time this
17 morning in the discussion period to go into more depth
18 as to some of these points, I will be happy to try to do
19 so.
20 Okay, well, with regard to the ascent of
21 Standard Oil and the challenge to it by the Federal
22 Government, well, to begin with just a single small
23 refining plant established in Cleveland, Ohio in the
24 mid-1860s, John D. Rockefeller and his associates,
25 within a remarkably short period of time, came to


1 dominate both trade in refined petroleum products and
2 the long distance pipeline transportation of crude oil.
3 Exactly how that was accomplished was a subject of
4 considerable controversy in the late 19th and early 20th
5 Centuries, and it has continued to be ever since.
6 As we know, Standard rose to dominance before
7 the era of the automobile, and thus, its main product in
8 the era that we are talking about was not gasoline, but
9 was kerosene for illumination in homes and businesses,
10 but there were other important products as well, such as
11 lubricating oil and naphtha.
12 Now, within just a few years of Rockefeller's
13 entry into oil refining, he and his associates were
14 heavily involved, along with the railroads that were
15 serving the oil fields of Northwest Pennsylvania, in
16 efforts to establish cartels to reduce production and
17 raise and stabilize prices.
18 By 1871 -- oh, here, I have a few pictures
19 that -- this is in 1870. This was Standard Oil's
20 refining operation. It obviously got bigger and much
21 more substantial as time went on.
22 Now, in the 1860s, on to the 1870s, we have
23 these efforts to cartelize refining as well as rear it,
24 but by 1871 as well, Rockefeller had embarked on a
25 successive campaign to acquire what is called the


1 competing refiners in Cleveland, Ohio, and not long
2 thereafter, disenchanted with the possibilities for
3 desirably organizing the oil industry through
4 cartelization, Rockefeller and his associates made
5 determined and successful efforts to acquire the
6 refiners in other parts of the country as well.
7 Now, coordination of the operations of the
8 various acquired firms was achieved first through the
9 trust arrangements of 1879 and 1882, and then more
10 effectively, through the 1899 establishment of the
11 Standard Oil Company of New Jersey as a holding company.
12 Transportation of crude oil to refineries and of
13 refined products to market was a crucial dimension of
14 the early oil business, and early on, transportation of
15 both crude oil and refined products was by rail, and
16 critics charged that the railroads had charged Standard
17 Oil much lower freight rates than they charged
18 Standard's competitors, thereby giving Standard what was
19 seen as an unfair competitive advantage.
20 Later on, with the development of long distance
21 crude oil pipelines that were pioneered by a consortium
22 of crude oil producers in the late 1870s, this newer
23 mode of transport became the most important method for
24 transporting crude oil, and Standard made determined and
25 successful efforts to dominate it.


1 With the discovery of the major new oil field on
2 the Ohio-Indiana border, Standard Oil for the first time
3 made significant investment in oil lands and crude oil
4 production in the late 1880s. Standard Oil aggressively
5 expanded forward as well into retail marketing, and as
6 of the 1890s, this would have been a ubiquitous site in
7 America, the horse-drawn Standard Oil wagons filled with
8 kerosene from which the local grocery, et cetera, would
9 be getting their fill.
10 Now, during the decades following the
11 establishment of the first Standard Oil refinery, the
12 combination expanded the size of its individual
13 refineries to achieve economies of scale, found other
14 ways to cut costs, developed an effective managerial
15 hierarchy that included talented executives who joined
16 Standard Oil after their own firms were acquired and
17 developed new by-products from petroleum, yet John D.
18 Rockefeller and Standard Oil faced growing public and
19 private criticism and in the fear for their dominance
20 and for the abusive tactics they were thought to use,
21 and as a result, Standard Oil ultimately was challenged
22 in numerous states before the federal case was
23 litigated.
24 In 1882, the trust itself -- the 1882 trust
25 itself was dissolved. In the 1890s, in the wake of a


1 challenge to the participation of Standard Oil's Ohio
2 trust, a challenge brought by the Attorney General of
3 Ohio. This then led in 1899 to the establishment of the
4 Standard Oil Company of New Jersey as the new holding
5 company. Seven years later, during the administration
6 of President Theodore Roosevelt, the antitrust suit was
7 brought.
8 Now, Standard's market position we have to look
9 at in two different parts with regard to the export
10 trade and the domestic trade. In the late 19th Century,
11 most refined petroleum that was produced in the U.S. was
12 sold overseas, and of that oil, Ron Chernow in his
13 recent book Titan estimates that in the late 1880s,
14 nearly 80 percent of the refined oil purchased overseas
15 came from Standard Oil.
16 With regard to domestic trade in oil, by the
17 late 1870s, Standard's share of refined oil production
18 within the United States was close to 90 percent. It is
19 estimated that Standard's market share of crude oil
20 production in the United States was a share of one-third
21 achieved in 1898. Most of those market shares declined
22 in subsequent years.
23 Okay, well, what about the antitrust challenge?
24 And one of the things that is always great about this
25 period, the cartoons of the period, here is the classic


1 fear of Roosevelt swinging his big stick to bust the
2 trusts, here facing down a symbol of Standard Oil in
3 this period of the octopus.
4 Okay, well, I am going to largely skip over the
5 Government's position except to say that the Government
6 charged a conspiracy that allegedly had started in
7 1870 -- oh, the case was filed on November 15th of 1906,
8 so we are just short of three weeks away from the great
9 centennial of the filing of this case, so hopefully
10 there will be both a Division and FTC celebration in
11 just a few weeks.
12 Okay, the Government's primary emphasis in its
13 case was a merger-to-monopoly theory. The predatory
14 pricing and other bad acts conduct was much less
15 prominent, although also included in the case.
16 Now, let us talk about the case in hindsight
17 just a little bit, okay? Here is a young John D.
18 Rockefeller in the early days of the conspiracy, okay?
19 Here are some other things stressed in the case: Market
20 shares, profits, alleged increases in prices of
21 principal products, okay? But I want to go quickly
22 through this.
23 Now, the remedy in the case, of course, was
24 breaking up Standard Oil. This is not an exact diagram
25 of how the breakup worked, neither accurate in its


1 verticality nor in the number of units involved, but it
2 is the best I have. So, in any case, what are we left
3 with in the scholarship today about Standard Oil as we
4 think about the case in hindsight? A couple of key
5 things to note.
6 What was right about the Government's position
7 in the case? How might the case be approached
8 differently today, informed by historical as well as
9 economic learning? Some things seem clear. A modern
10 Sherman Act case would be unlikely to focus on a
11 defendant's market intelligence gathering or the
12 operation of bogus independents, as the Government did,
13 in part, and likely would place less reliance on
14 evidence of increased profitability. Analysis of merger
15 activity, predatory pricing and barriers to entry would
16 be more sophisticated today than it was in the earlier
17 years of the 20th Century, although merger to monopoly
18 essentially would remain at the heart of the case. More
19 consideration would be paid today to potential economies
20 of scale and other efficiencies, and in hindsight, more
21 careful attention would be paid to the question of what
22 would be an appropriate remedy in the case.
23 I have things I can say about the remedy, but we
24 are short on time. I will save that for the discussion
25 session in case there are questions about that.


1 Okay, now, what about the scholarship on the
2 rise of Standard Oil and the question of remedy? Well,
3 it is very striking the degree to which -- there is
4 actually some vigorous disagreement about what we would
5 think might be some very basic issues, such as was
6 Standard Oil, in fact, a monopolist? And if a monopoly
7 had been achieved, a monopoly of what? Pointing to
8 increasing output and falling prices for refined
9 petroleum products in the late 19th Century, Dominic,
10 Arendt and Connell, for example, has concluded that
11 Standard Oil never reached or set monopoly prices, even
12 when it had a high market share, and "Standard was a
13 large competitive firm in an open competitive market," a
14 position that has been strongly challenged by, for
15 example, Professor Scherer in a draft paper he presented
16 in an earlier hearing session in this series.
17 Elizabeth Granitz and Benjamin Klein in their
18 1996 article contend that entry into refining was made
19 easy in the late 19th Century and assert that "although
20 Standard earned a significant share of industry profits
21 on its dominant refining operations, it was petroleum
22 transportation and not refining that was monopolized,"
23 and that "the profits earned by Standard in refining
24 should be thought of as merely a share of the monopoly
25 profits from the transportation cartel." Others


1 continue to believe that at least until the early years
2 of the 20th Century, it was possible to acquire monopoly
3 power in the sale of refined petroleum products and that
4 Standard Oil did so.
5 What is the state of thinking about the sources
6 of Standard Oil's profits? Today we have not one but a
7 number of prominent interpretations. Let me just say a
8 real brief word about some of these, and then maybe I
9 can expand later.
10 One is economies of scale or other efficiencies.
11 Alfred Chandler, an eminent business historian, has
12 declared that oil refining is a prime example of an
13 industry in which cost advantages of scale critically
14 shape the growth of firms and determine the structure of
15 the industry. He notes that the Standard Oil Company
16 was one of the first enterprises in the world to exploit
17 the economies of scale by making the three key
18 interrelated investments in production, market and
19 management.
20 Others have pointed to other varieties of
21 efficiency achieved by Standard Oil as significant
22 contributors to its success. On the other hand, others
23 have questioned at least the magnitude of some of the
24 efficiencies claimed by Standard Oil.
25 A second explanation has again focused,


1 understandably, on the large number of mergers and
2 acquisitions, either coerced or uncoerced, that Standard
3 Oil is seen to have engaged in.
4 Another major area that Ken already alluded to,
5 of course, is predatory pricing, and it was noted by the
6 United States in the briefs but not central to its
7 theory of the case, it was famously debunked by John
8 McGee in his 1958 article reflecting the influence of
9 Aaron Director at the University of Chicago. McGee we
10 know declared the claims of predatory pricing in the
11 Standard Oil case were neither in theory nor by direct
12 evidence, but scholarly commentary since McGee's article
13 has been split on whether Standard Oil may ever have
14 engaged in predatory pricing, and, if so, how much this
15 may have contributed to its acquisition or maintenance
16 of monopoly power.
17 Okay, Elizabeth Granitz and Benjamin Klein, in
18 the article we mentioned previously, have presented a
19 much discussed thesis embracing a raising rivals' cost
20 interpretation of Standard's power, and this
21 interpretation is, as we know, that it was
22 transportation, not refining, that could be monopolized.
23 The railroads wanted some help with enforcing a cartel
24 among railroads. They had an incentive to want Standard
25 Oil to have a large volume of shipments that could be


1 moved around among the railroads to enforce compliance
2 with the railroads' cartel agreement, so that the
3 railroads were happy to let Standard Oil be in a more
4 dominant position in refining to serve that function. I
5 am happy to talk about that more at greater length, too.
6 Okay, now, I think that we do not need much
7 convincing to think that people in the antitrust field
8 look to Standard Oil in a variety of ways, as a symbol,
9 and as a detailed case record to be examined as new
10 theories of antitrust action become prominent; thus, as
11 Aaron Director had articulated a very different approach
12 to predatory pricing, it is not entirely surprising that
13 John McGee comes up with an article looking back at
14 Standard Oil and drawing an explicit moral, which is we
15 cannot get Standard Oil wrong, says Professor McGee,
16 because it can be taken to stand for the wrong
17 proposition, that what we should be looking out for is
18 unilateral abusive conduct by dominant firms, and if we
19 got it wrong in the first place about Standard Oil, we
20 should not be paying that much stress to that behavior.
21 We should be worried about group behavior than
22 unilateral behavior.
23 Similarly, at a time when theories of raising
24 rivals' costs have become prominent in antitrust law, we
25 get an article reflecting those ideas and trying to


1 compare them to the extensive record in the Standard Oil
2 case in the Granitz and Klein article, and again,
3 drawing an explicit moral, saying the Standard Oil case
4 tells us that this is a valid kind of theory, but
5 warning -- take it only so far and not further. Take it
6 only so far as situations where there is a horizontal
7 agreement upstream, and worry about the horizontal
8 combination aspect, not the vertical aspect.
9 Well, I will stop there since I am about out of
10 time. There is much for us to mine and give serious
11 consideration given the scholarship on Standard Oil and
12 the federal challenge to it, and historical scholarship
13 relating to American business, the economy and antitrust
14 law in general, and again, I thank you very much for
15 organizing this event and look forward highly to
16 discussing these possibilities.
17 (Applause.)
18 MR. GLAZER: Thank you very much, Professor May.
19 Our next speaker is George Smith. He is a
20 Clinical Professor of Economics and International
21 Business at the Stern School of Business at New York
22 University. Among the courses he teaches at Stern is
23 U.S. business history. He is the author of From
24 Monopoly to Competition: The Transformations of Alcoa,
25 1888 to 1986, and was co-author with Frederick Dalzell


1 of Wisdom From the Robber Barons. He has a book coming
2 out again called The Concise History of Wall Street.
3 Professor Smith?
4 DR. SMITH: Thank you. Good morning. I am
5 delighted to be here.
6 I am not going to repeat what Jim said about the
7 value of history. As an economist, or at least someone
8 who teaches economics, I am going to assume that you
9 already understand that, but suffice it to say that I am
10 going to deal with the case history here, and one of the
11 things that historians bring to the party is that
12 through our studies, we get very much involved in what
13 we would call "the nonrational" or "the extraeconomic"
14 aspects of policy and its enforcement, and we also worry
15 about the consequences of particular decisions and
16 actions and can reflect on those. It is hard to
17 generalize from one case study, but an accumulation of
18 case studies over time might be useful in guiding policy
19 in the future.
20 This is the Alcoa case, which, of course, is a
21 famous, if not notorious, case in antitrust law, and I
22 am also going to assume that all of you at some point in
23 your education have read, if not in its entirety, at
24 least some excerpts from the decision written by Judge
25 Learned Hand. My understanding is that the Alcoa case


1 is a staple of law school education.
2 The Alcoa case, of course, describes one of the
3 important boundaries of the law in antitrust with
4 respect to size and power and market dominance, and it
5 is important for that reason. I am going to take you a
6 little bit through the Alcoa history, the history of the
7 case, but I want to focus most importantly on the
8 remedies and some of the consequences of the remedies.
9 Let's begin with Alcoa in 1937. This is Alcoa's
10 market share in 1937. It is pretty good, you know,
11 having 100 percent of the market in your core
12 businesses, aluminum production, extracted from aluminum
13 oxide, or alumina, also a big capital-intensive
14 business. Alcoa also controlled the critical imputs, in
15 this case the bauxite ore and alumina, at 100 percent
16 market share, in what we quaintly describe as the U.S.
17 market. Remember the days when the U.S. market was the
18 only relevant market? Right? Alcoa had 100 percent,
19 that is pretty good!
20 It also had robust positions in downstream
21 markets in various aluminum semifabricated and end
22 products, as you can see from the table on the right.
23 Suffice it to say that Alcoa was a sitting duck for the
24 antitrust lawyers in the second Roosevelt Administration
25 who were mounting a rather frontal assault on big


1 business in the late 1930s.
2 Alcoa is, of course, one of the great
3 Chandlerian firms, and like Standard Oil, managed to do
4 business by not only achieving economies of scale and
5 scope but by bringing the prices of its product
6 consistently down in order to expand its markets. In
7 that sense, it was a rather good and benign monopoly.
8 Some of the practices it engaged in, in order to
9 build that monopoly, would now be considered to be
10 somewhat dubious if not outright illegal, but the
11 company managed during a period of time -- when it had
12 what looked like a controlling patent in the aluminum
13 smelting process -- to achieve substantial scale
14 economies and was integrated completely from the
15 extraction of the ore from the mines all the way down to
16 the production of end products, which was a completely
17 self-sufficient enterprise, and in the process, Alcoa
18 created substantial barriers to entry that nobody was
19 able to penetrate in the production of primary aluminum.
20 Alcoa secured its position with the help --
21 although not exclusively -- of some exclusive contracts
22 with suppliers of scarce inputs, like hydropower,
23 bauxite, alumina, and developed its own research and
24 development capabilities with respect not only to the
25 technology, but also the science of metallurgy, and


1 built one of the great industrial laboratories in the
2 first half of the 20th Century.
3 Alcoa also relied, of course, on the U.S.
4 Government to keep tariff protection high enough to
5 restrain imports, and it established operations in
6 Canada, which proved to be very useful for managing
7 relations with cartels, European cartels, which strictly
8 divided markets along national lines and relegated the
9 North American market to the Canadian company, a market
10 that was, in fact, serviced by Alcoa.
11 During the period of time that Alcoa was
12 building its monopoly, it was constantly reducing its
13 costs and prices in order to establish markets and built
14 its markets largely by taking share away from other
15 metals, other substances, copper, nickel, iron and
16 steel. By World War I, there were no new entrants in
17 primary production. One French firm had attempted to
18 enter, but when World War I broke out, it left the
19 field.
20 It is not that Alcoa was left alone. Alcoa was
21 always in the cross-hairs of the Department of Justice
22 and later on the FTC. In 1911, it was subject to an
23 antitrust investigation, and Alcoa agreed to cancel all
24 its exclusive supply contracts, to refrain from directly
25 participating with foreign cartels. The Canadian


1 subsidiary continued to do so but apparently with the
2 blessing of the Justice Department for some years to
3 come. Alcoa also agreed to refrain from such downstream
4 practices as price discrimination, and market
5 allocations of aluminum products.
6 In the 1920s, Alcoa went through a rather
7 lengthy and continuous investigation from the Federal
8 Trade Commission. Reports were written, but no action
9 was taken, but this led to an awful lot of bad
10 publicity, and then Alcoa was subject to a lot of
11 private antitrust suits from customers, the most
12 important of which was a case known as Baush v. Alcoa,
13 which went through two trials, two sets of appeals, and
14 wound up being settled out of court. It was a
15 price-squeezing issue.
16 In 1937, Alcoa was charged with violating the
17 Sherman Act, it reflected a big policy shift in the
18 Roosevelt Administration, the second Roosevelt
19 Administration. Alcoa at that time, as I mentioned
20 before, was a real sitting duck for the Justice
21 Department. It was a monopoly, it had a poor public
22 image, it had the misfortune of being closely tied to
23 Andrew Mellon, who was a great scapegoat for the Great
24 Depression. The accumulation of antitrust
25 investigations over a period of time had also made it a


1 likely target. So, it was charged with the usual
2 kitchen sink of antitrust violations in 1937, but as
3 luck would have it, Alcoa wound up with a trial judge
4 that it liked, Judge Caffey, in the U.S. District Court
5 for the Southern District of New York, and this is where
6 some of the interesting stories begin.
7 It turns out Alcoa had a superb trial lawyer
8 named William Watson Smith who led the defense of its
9 case. He was an older gentleman who had read the law --
10 that is how he learned the law -- and he and Judge
11 Caffey seemed to have bonded very nicely in the
12 courtroom. Irving Lipkowitz, who was the economist for
13 the DOJ at the time, and who sat through the entire
14 trial, described the situation as follows: "The judge
15 and Mr. Smith were the old guys. They had wisdom. They
16 had judgment. And we had a bunch of kids over here,
17 scurrying around..." Right! He also recalled that
18 Smith was very prone to calling the DOJ lawyers boy
19 scouts during the trial, and the Judge never bothered to
20 intervene.
21 The Judge, however, as this trial went on -- it
22 turned out to be the longest trial in Anglo-American
23 history -- the Judge got rather angry and impatient, and
24 I think he essentially blamed the Justice Department for
25 this trial. In any case, Alcoa was able systematically


1 to refute -- through their expert witness and company
2 witnesses and through its own presentation of the case
3 -- all of the behavioral charges brought by the Justice
4 Department, and Arthur Vining Davis, the Alcoa chairman,
5 delivered rather stunning, persuasive testimony over a
6 period of time. In the end, the Judge, of course, ruled
7 in favor of Alcoa on the grounds that it had built a
8 good business, it had brought prices down, and it, in
9 fact, fell within the rule of reason as a benign, good
10 trust.
11 Of course, the Justice Department announced its
12 intention to appeal, and Judge Caffey said, great, get
13 it out of my room courtroom! That is what they did. Of
14 course, the appeal languished during World War II, when
15 the Government had no interest in disturbing the
16 operations of businesses that were supplying critical
17 war material, but in 1944, the appeal was heard
18 following an Act of Congress, which enabled the U.S.
19 Court of Appeals in the Second Circuit to hear the case
20 in lieu of the Supreme Court because too many of the
21 Supreme Court Justices had conflicts of interest in this
22 case.
23 In the meantime, a number of important things
24 happened in the industry environment. As the war geared
25 up in 1941 -- as the United States was preparing for


1 war, it became apparent that Alcoa, as dominant as it
2 was in the industry, was not going to be able to meet
3 aluminum demand for military operations, and so the
4 Government financed the building of primary aluminum as
5 well as fabricated aluminum plants, and effectively
6 doubled U.S. aluminum capacity between 1941 and 1943.
7 Alcoa, of course, built and managed all these
8 plants, but at the same time, it opened the door for new
9 entrants in primary production. And as the war wound
10 down, it was quite clear that Alcoa managers were
11 anticipating that they were going to face some
12 competition in all sectors of the aluminum markets.
13 Then there was the great opinion written by
14 Learned Hand in 1945 (I have extracted some of the
15 quotes here), in which he entirely rejected the idea
16 that the monopoly of Alcoa had been thrust upon them or
17 was inevitable, and he also rejected the doctrine of the
18 rule of reason. It was quite clear that Learned Hand,
19 through some rather sophisticated economic thinking,
20 determined that Alcoa simply had too much market power
21 and was thereby forestalling possibilities for
22 innovation and long-term price competition.
23 He writes in his opinion in very beautiful
24 prose, "It was not inevitable that it [Alcoa] should
25 always anticipate increases in the demand for ingot and


1 supply them, to keep doubling and redoubling its
2 capacity. We can think of no more effective exclusion
3 of competitors than progressively to embrace every
4 opportunity as it opened, and to face every newcomer
5 with new capacity already geared into a great
6 organization, having the advantage of experience, trade
7 connections and the elite of personnel."
8 Now, I teach in a business school. This is what
9 we try to teach our students how to do!
10 "Having proved that 'Alcoa' had a monopoly of
11 the domestic ingot market, the plaintiff had gone far
12 enough; if it was an excuse that 'Alcoa' had not abused
13 its power," and he found no evidence that it had, "it
14 lay upon 'Alcoa' to prove that it had not. But the
15 whole exercise is irrelevant anyway, for there is no
16 excuse for 'monopolizing' a market that the monopoly has
17 not been used to extract from the consumer more than a
18 'fair' profit." It was all beside the point! The whole
19 decision can be reduced to this single paragraph.
20 And then, in what seems on the surface like a
21 wildly nostalgic passage -- although I think in
22 retrospect I would argue that what he was really trying
23 to do was establish what the thinking of Congress was in
24 1890 when it passed the Sherman Act -- Judge Hand says,
25 "Congress did not condone 'good trusts' or condemn 'bad'


1 ones; it forbade them all," which is saying if you want
2 to change the law, change the law, change it, but I
3 cannot do anything about it. "It is possible to prefer
4 a system of small producers, each dependent for his
5 success upon his own skill and character," and so forth.
6 Now, from the point of view of Alcoa, of course,
7 this looked like a superb exercise in reductionist
8 reasoning, and Leon Hickman, who was an attorney on the
9 case for the defense, a gentleman in his nineties when I
10 interviewed him, looked back at this case and said, "I
11 can see why Judge Hand felt that no matter how we got to
12 where we were, that it was not in the public interest.
13 If you kept that in mind, then you worked back from
14 that. 'What do I pin on them?' The fact that we were
15 the first in every market that we opened up.
16 "But suppose that we had acted as a monopoly is
17 supposed to act, and we simply sat back and took our
18 profits and had not developed the market? You would say
19 now that there is a monopoly of action. There is a
20 great need for new markets and the uses for aluminum and
21 you are not meeting it. So, in a way, from his
22 approach, we had no escape. He'd get us either way."
23 What was the remedy? Well, obviously one
24 potential remedy was to break up the company, but
25 fortunately, there were all these government plants


1 sitting there from World War II, and Judge Hand thought
2 this might be a good remedy, and Stuart Symington, who
3 had been the CEO of Emerson Electric and eventually a
4 Senator from Missouri, was head of the Surplus Property
5 Board, and through a lot of painful negotiations, he
6 managed to persuade Alcoa to allow the Government to
7 sell off these plants in a fire sale into two would-be
8 competitors, Kaiser and Reynolds Corporations, so that
9 they could establish themselves as fully integrated
10 aluminum producers. And part of the deal was that Alcoa
11 would license critical patents in technology to these
12 companies, free of charge.
13 In a subsequent court ruling, Aluminum Limited,
14 which was Alcoa's Canadian affiliate, was effectively
15 spun off as the shareholders in both companies had to
16 unwind their position in one or the other, so that there
17 would be no longer any issues about participating in
18 cartels.
19 Now, my concern in writing the book was to look
20 at the impact of this decision on Alcoa's behavior, and
21 here is where things get really interesting. There were
22 a number of consequences to the remedies which I think
23 are worth thinking about today. There is no question
24 that once this oligopolistic industry structure was
25 established, there was a lot greater competition in


1 developing new products, especially end products. This
2 was largely due to the efforts of Reynolds, which had a
3 particularly high sensitively to end markets, so all
4 kinds of new aluminum products appeared, everything from
5 baseball bats to aluminum cans in which you drink your
6 beer and your soda pop, and aluminum siding and so
7 forth, and that was probably an okay thing.
8 But it is also quite clear when reading the
9 testimony of congressional hearings that throughout this
10 period, aluminum prices, both for primary aluminum and
11 probably many downstream products, might have been
12 higher than they needed to be, because Alcoa always had
13 to keep a pricing umbrella over its less efficient
14 competitors to ensure that they stayed in business.
15 Alcoa worried about this a lot, and there was lots of
16 internal documentation of this. Alcoa had an economist
17 named Stanley Malcuit who wrote extensively about how
18 Alcoa conducted its pricing operations. The idea was to
19 keep prices low enough to ensure that demand would grow
20 but high enough at the same time to ensure that the
21 competition would stay in business, and these prices
22 were administered through conventional oligopolistic
23 price signaling.
24 A couple of things that probably people did not
25 understand very well was that the Alcoa Laboratories,


1 which had been a great scientific laboratory -- very
2 productive in advancing the fundamental science in
3 metallurgy and its related chemistry -- saw its focus
4 change after the war. The laboratory replaced its
5 scientists with more engineers, focused on short-term
6 process and product engineering. It withdrew from the
7 academic community -- where it had traditionally worked
8 closely with universities, participated in conferences,
9 gave papers and so forth -- and it became more
10 secretive.
11 It began to rely more on trade secrets as
12 opposed to patents to protect its technology, and it is
13 quite clear that although Alcoa had a store of
14 fundamental knowledge it could draw on by the 1950s, by
15 the mid-1960s, early 1970s, that fundamental knowledge
16 was pretty well depleted, and Alcoa and the industry as
17 a whole became less technologically innovative.
18 And finally, the management of Alcoa during this
19 period spent probably an inordinate amount of time, if
20 not most of its time, worrying about complying with the
21 antitrust remedies. Alcoa remained under court
22 jurisdiction all the way through 1957, and the business
23 of Alcoa's top management was to make sure that the
24 company was in compliance, and so long-term planning and
25 fundamental thinking about resource allocation took a


1 back seat to these considerations, and there is some
2 question as to whether that was, again, good or bad for
3 the industry.
4 I think the larger question I would raise here
5 and something I hope we can discuss subsequent to the
6 presentations today -- is how much do policy-makers and
7 attorneys who bring cases or actions think about the
8 second and third-order consequences of remedies? I
9 know, obviously, there is a long history of economic
10 analysis and the evolution of economic analysis as it
11 applies to antitrust and the thinking of the FTC and the
12 Department of Justice. But in recent years, as
13 antitrust seems to be increasingly focused on changing
14 firm behaviors as opposed to looking for structural
15 remedies in a global economy, I would just like to
16 suggest that new methods in game theory and futuristic
17 planning scenarios might be better incorporated into the
18 way antitrust lawyers think about remedies and the
19 possibilities of what might occur pursuant to their
20 implementation.
21 So, I will leave it there, and we will turn it
22 over to Lou.
23 (Applause.)
24 MR. GLAZER: I will introduce Lou. Our next
25 speaker is Louis Galambos. He is a Professor of History


1 at John Hopkins University, has written extensively on
2 the historical development of America's
3 telecommunications system. His publications include
4 Competition and Cooperation, The Role of Innovation in
5 the Modern Bell System, and Anytime, Anywhere, a study
6 of early wireless development.
7 Professor?
8 DR. GALAMBOS: Now, as you have already figured
9 out, you cannot talk about business history without
10 talking about Alfred D. Chandler, Junior. His books are
11 very long, and so I will try to give you a very short
12 explanation. His books are kind of chest-crushers. If
13 you read them and you fall asleep, they come down on you
14 and hurt, so I will try to give you a little bit on Al
15 and what he did to the history of business.
16 When he started his career after the Second
17 World War, at that time, the dominant historical
18 paradigm for business, which was very closely attuned
19 with the view of the Department of Justice and later the
20 FTC, was provided by Matthew Josephson, who was the
21 author of a very popular book called The Robber Barons.
22 It had a lot of personality, you know, like the columns
23 on the two sides of the Wall Street Journal, a lot of
24 personality there and a lot of quotes. It was published
25 in the depths of the Great Depression, and it focused on


1 scoundrels who ran and robbed corporations and the
2 American people.
3 In the years that followed, business historians
4 responded to that by trying to show that the scoundrels
5 were really good guys. This has also been done in
6 women's history, it is called worthy woman history, so
7 the business leaders were really doing a whole lot, and
8 it was great for America, and they were builders, not
9 robbers.
10 Chandler set out to develop a new context for
11 business history, and by the time he retired, he is now
12 Professor Emeritus at the Harvard Business School, he
13 had achieved that. He and his students had established
14 a new context for looking at business.
15 Now, Chandler built and constructed this on the
16 basis of two bodies of theory, one of which you have
17 heard about and one of which you have not. One was a
18 sociological theory stemming from Max Weber through
19 Talcott Parsons' study, and the other is Joseph
20 Schumpeter's theory of modern capitalism. He changed
21 both of these. Probably most people don't read
22 Schumpeter, but they have heard of creative destruction,
23 which you see often in newspapers.
24 I once lived in Texas, where they condemned
25 Joseph Schumpeter because he had once been in a


1 socialist government. They never bothered to read him.
2 He was a great friend of capitalism.
3 What Chandler did was he built up a dynamic,
4 comparative history of the role of large corporate
5 enterprise and tracked its progress in the early 19th
6 Century through the end of the 20th, and he used the
7 idea of Schumpeterian entrepreneurship, but he looked to
8 organizational capabilities rather than heroic
9 individuals. The organizations that were successful
10 over the long term, he said, were those that made the
11 vital three-pronged investments in an effective
12 managerial hierarchy, in mass production, and in mass
13 distribution, and most of the large second industrial
14 revolution firms he looked at combined those two
15 functions, combined distribution and mass production.
16 Chandler left no doubt about the positive impact
17 of large enterprise over the long run, and I quote, "the
18 modern industrial enterprise played a central role in
19 creating the most technologically advanced,
20 fastest-growing industries of their day. These
21 industries...were the pace setters of the industrial
22 sector of their economies -- the sector so critical to
23 the growth and transformation of national economies into
24 their modern, urban industrial form."
25 He did this in very careful, meticulous,


1 historical studies, the first of the United States, then
2 a comparative study with Germany and the United Kingdom
3 added, then finally, near the end of his career, he
4 brought Japan into the picture and a list of other
5 countries.
6 The Chandlerian construct became linked very
7 closely to developments in two other disciplines that I
8 just want to mention. In economics, Richard Nelson and
9 Sidney Winter developed an evolutionary theory of
10 economic change and tried to bring in dynamic elements,
11 all right, as opposed to comparative static or static
12 analysis of the neoclassical kind of equilibrium
13 analysis. Their effort carried them from theory into
14 history, from a discussion of national innovation
15 systems, a great book that you might want to look at,
16 into the sources of industrial leadership. This left
17 them close to the context in which Chandler was working,
18 as did the work done in transactions costs economics by
19 Oliver Williamson and others. Williamson, like the
20 evolutionary economist, was introducing historically
21 particular elements to theory, and when you think about
22 that, you can see that it does strange things to theory
23 when you add history. It was moving it toward a view
24 that had very strong historical elements, just as was
25 Paul David, who is an economist at Stanford, who was


1 working on path dependency, which had the same impact.
2 All I am suggesting here is that the context in
3 which scholars, a large number of them, placed and
4 analyzed big business was changing in important ways.
5 The comparative static analysis of industrial
6 organization theory was co-existing at this time with
7 dynamic styles of analysis with important elements of
8 place- and time-related history, and they were all
9 answering that great question that Coase asks, "Why Are
10 There Firms?" If markets are more efficient, why do
11 firms exist at all? A great question, all right, and
12 there were a lot of new answers developing for that.
13 Now, similar changes were taking place at the
14 same time in management studies. Management scholars
15 were now devoting a lot of attention to the environment
16 external to the firm, the aspects of the environment
17 that affect the firm's capabilities, and that yielded
18 innovation over the long term, and everything I am going
19 to talk about touches on this: the difference between
20 long-term analysis and short-term analysis, between what
21 is called static or comparative statics and secular or
22 dynamic analysis of the kind I am talking about. So,
23 they looked at how firms responded to drastic changes in
24 their technological environment.
25 This work added something important to the


1 Chandlerian concept, because Al had focused most of his
2 attention on successful firms. (Aside: he was my
3 second mentor; I followed him at Johns Hopkins, took the
4 position that he had, did the same things that he did,
5 so you should be aware of that.)
6 The firms he studied were what are called at the
7 Harvard Business School "Chandler firms". They were all
8 successful, okay? So, they were very carefully
9 selected, all right? And after some of them failed, he
10 did not follow them through. He stopped his history at
11 when they were successful, had a very strong positive
12 element. He also ignored the political history, the
13 administrative state. And scholars at business schools
14 have, since that time, begun to look seriously at the
15 political dimension of the large corporation.
16 Now, at the same time that this was happening,
17 in the seventies and the eighties and the nineties,
18 significant changes were taking place out beyond the
19 academy where academic research was being done by
20 historians, economists and management scholars. The
21 world was changing in a significant way. After the
22 breakdown of Bretton Woods and the decisions by the
23 leading OECD countries to foster relatively free trade,
24 the world entered the second great phase of
25 globalization, and along with that came the third


1 industrial revolution, and these two forces changed
2 things in very dramatic ways for the United States and
3 for our view of competition.
4 Now, that, I believe, is the context in which we
5 have to place the antitrust case against AT&T in the
6 1970s and the subsequent developments that have taken
7 place in telecommunications.
8 The Bell System had done all the right things
9 according to the Chandler paradigm. They had done those
10 three things, and really well, okay? They knew that
11 aside from Sweden, they were the best telecommunications
12 system in the world. They told little telephone jokes:
13 that in France, half of the people are waiting for a
14 telephone, and they were right, and the other half, they
15 said, are waiting for a bell tone. They could make
16 these jokes about almost every country. When I went to
17 Italy, and this has been in the recent past, the last
18 time I was in Italy, I was looking for a touchtone phone
19 so I could get on my phone in Baltimore and check
20 messages. After looking around, I went into a good
21 hotel and I used the only touchtone phone I could find.
22 But that still didn't work, and I listened carefully,
23 and could hear da-da-da-da. It was a dial phone with a
24 touchtone top on it. Italy was far behind and our
25 telephone people knew this. They knew that they had


1 done all of this and done it extremely well.
2 Bell had not only done that but created a very
3 powerful social ethic to the company; in addition to
4 service, it embraced a network mystique in the Bell
5 System that pervaded the enterprise. Bell Labs was a
6 marvelously creative institution. It had developed
7 crucial elements of the modern telephone technology.
8 And it is significant that Bell is where the transistor
9 came from, out of Bell Labs. This was what created the
10 information age.
11 In the 1970s, American productivity was drifting
12 toward zero. Productivity gains reached zero in the
13 beginning of the 1980s. This helps you understand why
14 we had political change at that time. Productivity
15 increases account for two-thirds of our growth in the
16 20th Century, and they were going to zero, and the
17 Japanese were doing really well, and the Germans were
18 doing really well, and we were doing poorer than the
19 British. Could you believe that? We were doing poorer
20 than the British. So, we were in trouble, economically.
21 So, it was in that context, then, that the case took
22 place.
23 The Bell accomplishments I've mentioned
24 establish a pretty impressive record, and so it helps
25 you understand why AT&T leaders ignored their own


1 history, because, in part, that history was not in the
2 Chandler paradigm. When the modern Bell System was
3 being created in the years before World War I and during
4 its subsequent history, AT&T had compromised with public
5 authority, and in my courses, I always distinguish
6 between two kinds of monopolists, dumb monopolists and
7 smart monopolists.
8 AT&T became, under the leadership of Theodore
9 Vail, a smart monopolist. That is why they could
10 maintain that monopoly for such a long period of time in
11 a country that was opposed to it, all right? They did
12 the right things. Their social ethic and their behavior
13 and their performance was extremely important.
14 But at a crucial point in the early 1970's, AT&T
15 forgot about that. It threw down a gauntlet to the DOJ
16 and FTC and said, "We are great, and we want to stay
17 just like we are." The DOJ picked up the gauntlet,
18 brought a suit against AT&T, and by the end of the
19 decade, the company's leaders saw they were losing the
20 case, losing the federal case in Judge Green's court.
21 AT&T settled out of court by breaking up the Bell
22 System.
23 Now, at that crucial point in the development of
24 our telecommunications network, the largest in the
25 world, AT&T's leaders and the Government both shifted


1 gears. Now, they paid too much attention to history and
2 too little attention to those two changes that were
3 taking place in the global economy; that is,
4 globalization, with intense competition, and the third
5 industrial revolution.
6 The settlement opted for the Chandlerian
7 vertically integrated model, with AT&T keeping what was
8 then called the Western Electric business and Bell Labs.
9 It sacrificed the so-called Baby Bells -- no babies any
10 longer -- and the local networks. AT&T gave away the
11 mobile phone business it had created! (I have my cell
12 phone on. It is on vibrate, I hope yours are, too.)
13 So, underestimating the changes that would take
14 place from the top to the bottom of the organization,
15 AT&T struggled and then failed to implement a successful
16 strategy. AT&T failed to make the transition to
17 competition and adopted the strategy of convergence,
18 which failed. The market worked, and AT&T recently had
19 a rendezvous with creative destruction, okay? There's
20 AT&T out there, but it is not the historical AT&T we
21 have been discussing.
22 I probably should not be so harsh with AT&T's
23 leaders, because the Government seems to have been
24 similarly unmindful of the changes taking place in the
25 global economy. There was no consideration in the


1 antitrust case of the Bell System's efficiency. It was
2 ruled out. There was no consideration of the remarkable
3 innovations that Bell Labs had produced. I was told by
4 somebody at DOJ that if the Government wanted a lab, it
5 could build one -- just like that, as if it did not take
6 30 or 40 years to really create an effective
7 institution. You just build one, you know, if you want
8 one. That was the attitude.
9 There was no consideration of the vast market
10 for telecom equipment that was being thrown open to
11 foreign suppliers. There was no consideration of
12 whether deregulation might not serve the public interest
13 better than structural settlements under the Sherman
14 Act. There was, instead, dedication to a policy that
15 was rooted in the past when the most important market
16 was the American market, when American public policy
17 could be framed almost entirely in matters of the
18 domestic economy.
19 Now, subsequent to that decision -- a very
20 important one, the United States Government seems to
21 have learned faster than did the large integrated
22 corporation or the subdiscipline of business history.
23 The United States changed its antitrust policy in the
24 1980s. There were no more structural cases under
25 Section 2 of the Sherman Act until the Clinton


1 Administration launched its attack on Microsoft.
2 Fortunately, from my point of view, attention to global
3 competition and a need for the United States to remain
4 competitive in the world economy seems to have modified
5 even the Microsoft settlement in ways that are suited to
6 the world we actually live in.
7 This is a different world from the one that was
8 at the heart of Chandler's history, and business
9 historians have recently begun to come to grips with
10 that. There is an important work by Naomi Lamoreaux,
11 Dan Raff and Peter Temin who are providing a new
12 understanding of business history. This work and
13 related studies are shifting the field and helping us to
14 understand why in the United States we are spinning off
15 and de-integrating firms. As this new synthesis of
16 business history suggests, this is a world economy
17 rapidly being reconstructed by information technology
18 and intense global competition.
19 So, my conclusion is twofold: First, do not
20 ignore your history or you may suffer, as the Bell
21 System did, and Bill Gates almost did, and second, do
22 not get locked into an historical model when major
23 changes in the political economy are taking place and
24 new ideas are needed. And both conclusions bring me
25 back, I believe, to an evolutionary model broadly


1 conceived.
2 Thank you.
3 (Applause.)
4 MR. GLAZER: Thank you, Professor Galambos.
5 Our last speaker this morning is Tony Freyer.
6 He teaches legal history at the University of Alabama
7 Law School. His publications include Regulating Big
8 Business: Antitrust in Great Britain and American, 1880
9 to 1990, and the recently published Antitrust and Global
10 Capitalism, 1930 to 2004.
11 Professor?
12 DR. FREYER: I want to repeat as my colleagues
13 on the panel, I really feel honored to speak before you
14 today. In that book that was just mentioned, I spent
15 about 13 years interviewing antitrust enforcers around
16 the world as well as business people and drawing on the
17 scholarship of the members of the panel, and so I am
18 grateful to be able to speak and share some thoughts at
19 a program like this.
20 Also, I was really surprised when I got the
21 invitation that there would be attention to business
22 history at an enforcement agency, and so I am really
23 grateful for the opportunity to say something about
24 that.
25 What I would like to begin with is to just think


1 about what do enforcers need to be aware of when it
2 comes to history, and I would like to suggest a couple
3 of things that historians can provide a view for. One
4 is a sense of change, and one is a sense of choices that
5 either have been forgotten or ignored and that those
6 forgotten sources of change may be useful in
7 appreciating kind of the current situation, whatever the
8 current problem, in this case dominance, might be
9 concerned with.
10 So, to do that, I would just like to give you
11 two quotes, kind of one way to think about what are
12 alternatives to what you have in your mind now as kind
13 of the current enforcement options with regard to
14 dominance, and the first is a quote from Barry Hawk, who
15 we all know is a U.S. merger lawyer who runs the Fordham
16 Antitrust Policy Program that is comparative, and he
17 said, "for good or ill, we shall have to live throughout
18 most of the world with clones of Article 81 and 82.
19 That means dominant firms' behavior will be more closely
20 scrutinized than would be the case if the Sherman Act's
21 Section 2 were the model."
22 Eleven years later, the OECD Journal of
23 Competition Law and Policy published the results of a
24 worldwide survey of all major antitrust regimes. The
25 U.S. antitrust regime's core objectives -- the U.S. core


1 competition objectives were exceptional in that they
2 combined solely the achievement of greater economic
3 efficiency with promoting and protecting the competitive
4 process. So, what did the other major antitrust regimes
5 do, all of the other except the few such as the United
6 States, they combined the core competition objectives
7 with what were called public interest objectives.
8 So, the United States is basically the outlier
9 when it comes to enforcement in the dominance area, and
10 I would like to just suggest that by comparison, there
11 may be some choices that might be useful to look at to
12 rethink or at least understand our current approach to
13 dominance, but at the same time, one of the things that
14 comes from this comparative perspective is that those
15 regimes, antitrust regimes, have arrived at their
16 enforcement policies, that is, including public
17 interest, because particularly of the business history
18 of their particular countries.
19 All right, what I would like to do, first of
20 all, just to give you just a very quick comparison of
21 two kinds of histories of two antitrust regimes,
22 originally I had grand ideas of giving you Australia and
23 Japan as well as the EU and the United States, but now I
24 am just going to have to give you a couple of thoughts
25 about the EU and the U.S. in particular, and hopefully I


1 can bring up the Japanese and the Australian material
2 later on in our discussion.
3 What I would like to first of all note is just
4 it is helpful to remember, it has come up in the
5 discussion, that the U.S. did arrive at its antitrust
6 approach because it reflects these ingrained values that
7 are distrustful of established authority. Now, what is
8 the alternative? What is the alternative to ingrained
9 values of the distrusting alternative authority? And
10 that is for an enforcement regime to rely upon
11 bureaucratic intervention. That is, government is good.
12 Government is good, and what we have, and just in the
13 antitrust area, it took until after World War II for
14 Europe, Australia and Japan and so forth to appreciate
15 the degree to which antitrust had become part of
16 antitrust intervention in a way that was effective.
17 Now, just to give you an illustration of how
18 that change took place, I would like to just quote from
19 Jean Monnet, who was the founder or father, I guess you
20 would say, of European integration, and he described
21 American antitrust in this way. Harvard Law professor
22 Robert Bowie reconciled American antitrust principles
23 with German principles governing the abuse of dominance
24 in the Treaty of Paris in 1951 in the European coal and
25 steel community, and in that, Monnet argued that Bowie's


1 reconciliation of the German approach to dominance and
2 the American approach to dominance created a new
3 alternative, and that alternative was to achieve not
4 only market integration, but it was also to achieve
5 equality of opportunity within the community, and those
6 two goals, integration and equality of opportunity,
7 would be the principal goal of the European competition
8 policies.
9 Now, in 2003, the European economist Matthias
10 Pflanz echoed that same thinking, so this is pretty
11 current, and let me just read what he had to say about
12 U.S. antitrust policy. He said it is defined primarily
13 in terms of ultimate prices paid by consumers, but the
14 focus of EU competition policy has been on behavior by
15 companies which prevent others from competing on equal
16 terms. Thus, the creation of a level playing field
17 between actual and potential competitors and across
18 different states have been primary objectives of EU
19 competition policy.
20 Now, during the 1970s and the 1980s, the policy
21 of Chicago economics, defining efficiencies,
22 particularly in terms of microeconomic price theory,
23 came to prevail, and that is what we have today, even
24 though there has been kind of modification of in the
25 1990s, but what I would like to indicate is that the EU


1 approach, where you have to consider these public
2 interest norms, it may provide some useful choices,
3 particularly in light of the fact, as we will indicate
4 by concluding with Microsoft, that most countries
5 outside the United States follow the dominance theory of
6 the European Union.
7 Now, I have got just two industries I would like
8 to look at. One is a traditional industry from an old
9 economy, and that is tobacco, and then I will conclude
10 with the leading example from computers, and that is
11 Microsoft. This is a later American Tobacco case, that
12 is in 1946, it is not the famous one of 1911, and what
13 that case did, it was the first time the United States
14 Supreme Court actually upheld the Alcoa decision.
15 Alcoa, of course, was decided by a Special Appeals
16 Court, and a couple of things are interesting to
17 remember about the American Tobacco case.
18 First of all, it originated at roughly the same
19 time as the Alcoa case did itself. We saw that Robert
20 Jackson initiated the Alcoa case, and it was, as we will
21 see at perhaps some other point, a relevant
22 international cartel question, but when -- the
23 replacement for Robert Jackson was Thurman Arnold, and
24 Arnold was a very activist litigator, and his approach
25 to these dominance problems was to try and litigate as


1 many of them as possible, and one of the firms he chose
2 was tobacco, because it had so much prominence as a
3 consumer -- as a consumer good.
4 Now, what is often forgotten about Arnold is
5 that he specifically hired economists to employ and
6 develop theories that were of the new economic theory at
7 the time, which was an oligopolistic theory pioneered by
8 Joan Robinson and E.H. Chamberlin, and what Arnold did
9 in the American Tobacco case was to develop an approach,
10 a theory to monopoly that would kind of carry through
11 with what they subsequently won in the Alcoa decision;
12 that is, carry through an approach that uses
13 circumstantial evidence to try and prove a conspiracy.
14 Now, in the American Tobacco case of 1946, it
15 actually had arisen -- Arnold had argued it back in
16 1939 -- in that case, there was extensive devotion to
17 proving the monopoly through circumstantial evidence by
18 looking at disparity in prices and what we would call
19 various kinds of predatory pricing and this sort of
20 thing, and Arnold and his crew were able to put together
21 a pretty impressive showing that American Tobacco had
22 abused its dominant position, but it was all based upon
23 circumstantial evidence using this monopoly theory that
24 I have just referred to. In 1946, they won the case,
25 and in the process, they established this important


1 precedent.
2 Now, for my purposes, what I would like just to
3 indicate is that first of all, what we might take from
4 this as an example is that you can talk about Alcoa pro
5 and con as a useful theory, but what is also important
6 to remember is that both Tobacco and Alcoa were the
7 cases in which the procedures to establish the remedies
8 in these cases also went from being exceptional to
9 becoming the norm, and that is, to establish the rules
10 of discovery.
11 In both of these cases, as Professor Smith
12 indicated, you had these massive records that were
13 accumulated, and what is interesting about Caffey's
14 decision in Alcoa is that he specifically, of course,
15 decided against Alcoa, but what he also did was to say
16 that the arguments presented for acquiring the evidence
17 I am going to accept; that is, the discovery theories,
18 which were new. Jackson and Arnold organized those
19 theories, developed those theories, using the
20 oligopolistic theory of Robinson and of Chamberlin.
21 Now, those theories are the same theories, of course,
22 that in the 1970s would be reshaped by the Chicago
23 School to use discovery in a new way.
24 Okay, that is kind of the American approach to
25 tobacco. I would like to give another case that gives


1 you the European Commission's approach, and this is the
2 Philip Morris case of 1987, and the Philip Morris case
3 is -- it is very interesting in that it is an American
4 firm trying to restructure, move into the European
5 market, and it is up against these integration, equal
6 opportunity values, public interest values that I have
7 just referred to, and this involved Philip Morris
8 forming a merger with the Rembrandt Group, which was
9 attempting to dominate the tobacco industry in Europe,
10 and they established a 50/50 control of RTH, which was
11 the Rothmans Tobacco Holdings Company, and that, in
12 turn, controlled this Rothmans International, which was
13 a subsidiary, and what the Commission was up against was
14 trying to decide whether or not these purchases would
15 constitute a violation of the dominance theory under
16 Article 82.
17 What we found in this case was that not only was
18 dominance talked about from the point of view of prices,
19 but it was also talked about from the point of view of
20 these public interest values that were protecting small
21 business, protecting regions, this sort of thing, and
22 what the Philip Morris case did was to establish a
23 precedent within dominance where these kinds of
24 financial mergers, this financial restructuring, would
25 be a basis for making a judgment on whether or not a


1 firm was abusing dominance. And what the European
2 Commission and subsequently the Court of First Interest
3 held was that absolutely, these public interest values
4 would be taken into account to decide whether or not
5 there had been abuse of dominant position, and in the
6 case of Philip Morris, it would amount to a consent
7 decree, that it was established to specifically to hold
8 Philip Morris and Rothmans to ongoing oversight,
9 ongoing, and it is a vigorous oversight, to ensure that
10 this dominance has occurred, so it is a bureaucratic
11 intervention, but it is to achieve these various public
12 interest goals.
13 Now, there also are a couple of spin-offs that I
14 would just like to indicate as well, and that is from
15 Philip Morris, they established what was called a
16 decisive influence doctrine, and this is a doctrine
17 where even the most minimum kind of influence by a
18 subsidiary that has been acquired, even that could be,
19 found to be evidence for abuse of dominance if there is
20 a threat to these broader public interest values, and in
21 addition, the Court of First Instance also applied an
22 analysis of microeconomic theory to this decisive
23 influence to try and use these kind of investments or at
24 least to analyze these kind of investments to see
25 whether or not they lead to oligopolistic dominance.


1 Now, what Philip Morris did in establishing
2 these doctrines, both from the standard of proof as well
3 as with regard to the indirect influence, is that the EU
4 Commission applied them when it came to Microsoft, and
5 in just the last few minutes that I have, I would like
6 first of all to draw the distinction between the U.S.
7 Microsoft decision and the EU Microsoft decision in
8 terms of what are the ultimate values, the ultimate
9 outcomes.
10 The policy goals in the U.S. Microsoft case was
11 to preserve this efficiency that had grown up through
12 the internal investment and development of the company,
13 and that, of course, was able to preserve the control of
14 the web browser. The approach from the European
15 Commission was in an effort to try and -- reflected this
16 concern for these public interest values and the
17 integration, and the outcome there was that the remedy
18 was stronger. It required Microsoft to surrender its
19 monopoly over the media player.
20 And in the process of doing that, both the Court
21 of First Instance and the Commission specifically
22 recognized the need to uphold these external interests;
23 that is, the integration and the public interest values
24 as well.
25 The claim was that Microsoft or the European


1 Commission's decision simply was protecting competitors.
2 Indeed, the response of the European Commission and then
3 later on the Court was that we had a broader range of
4 values to be concerned with than efficiency, and I have
5 got the quotes from those decisions to uphold that.
6 Okay, just in conclusion, then, what I would
7 suggest is that in the early Tobacco case, as well as in
8 the Microsoft case and in the Philip Morris case, each
9 of those reflected different business history contexts
10 and also reflected different kind of enforcement regime
11 that was concurrent in those times, in that if you look
12 at them, they provide kind of a range of choices,
13 comparisons, and those comparisons might be helpful in
14 formulating current policy.
15 Thank you very much.
16 (Applause.)
17 MR. GLAZER: At this time, we will take a break
18 and come back at ten minutes after.
19 (A brief recess was taken.)
20 MR. GLAZER: Okay, let's resume. Thank you for
21 those presentations.
22 Professor Galambos, I think you wanted to make a
23 couple of general comments in response to the other
24 presentations.
25 DR. GALAMBOS: Since we are doing history, three


1 of the industries we have touched on, oil,
2 telecommunications and aluminum, have all in the recent
3 past reconsolidated. They are reconsolidating in some
4 cases along global lines, and I think my own view is
5 that we are moving, particularly in commodity
6 industries, we are moving relentlessly toward global
7 oligopoly, and we do not have any way to talk about
8 global markets really very effectively. Most of what we
9 work with is national statistics and stuff. That is a
10 problem.
11 MR. GLAZER: And, George, I believe you also
12 wanted to make a comment.
13 DR. SMITH: Just one point following that.
14 Standard Oil -- well, let me put it this way. The oil
15 industry in the world today is only three transactions
16 away from establishing the pre-1911 Standard Oil
17 Company, so look out.
18 And in the aluminum industry, Lou reminded me,
19 rang a bell on the Reynolds-Alcoa merger recently. The
20 aluminum industry worldwide today is more concentrated
21 than ever, but it is also more competitive than ever,
22 you know, and aluminum was subject to administered
23 pricing, does now appear a commodity and trading in the
24 world markets, and that is an interesting point.
25 Finally, with respect to these three cases, I


1 think one thing that makes AT&T exceptional or different
2 from the other cases is it was through most of the 20th
3 Century a regulated monopoly, and part of what was going
4 on in the 1970s was what the Government gives, it can
5 take away, right? And as a regulated monopoly, I think
6 its behavior was somewhat different from the other two
7 companies, which had become monopolies through pure
8 market development.
9 MR. GLAZER: Okay.
10 DR. GALAMBOS: I think that Alcoa, through most
11 of its history, judging by George's own history of it,
12 was a smart monopolist. I think they did all the right
13 things, and so in their case they got into trouble even
14 though they were a smart monopolist, but that is how
15 tenuous I think it is, to hold that kind of market
16 position.
17 MR. GLAZER: You think they were a smart
18 monopolist, but do you think they did anything that
19 today would be judged to be illegal under the antitrust
20 laws to achieve or preserve that monopoly?
21 DR. SMITH: Well, sure. No, I certainly --
22 MR. GLAZER: No, the question to Professor
23 Galambos.
24 DR. GALAMBOS: Well, I think they were smart
25 insofar as they worked over the long term to be


1 innovative, to be efficient, to provide consumers with
2 what they wanted. They worked closely to develop new
3 uses for aluminum, and remember, when they started, you
4 know, it was a curiosity, and for a while they sold
5 aluminum as jewelry, and so their behavior over the long
6 term certainly favored consumers, and in that regard,
7 they were a smart monopoly.
8 MR. GLAZER: It sounds as though you were on the
9 Judge Caffey side of the case, then.
10 DR. GALAMBOS: That is right.
11 DR. SMITH: If I could just add one point, I
12 mean, what all of these enterprises were doing, these
13 great Chandlerian, vertically integrated,
14 capital-intensive businesses were doing, is they were
15 transforming luxuries into commodities. That is how
16 they made their money, and in turn, were deriving, you
17 know, wealth creation and productivity increases for all
18 of society. So, I mean, you know, I guess from a
19 business historian's standpoint, these were pretty good
20 companies.
21 MR. GLAZER: Jim, let me ask you, you touched on
22 remedies before, indicated you wanted to say a few more
23 things about remedies.
24 DR. MAY: Sure, I would be happy to since that
25 is an important issue.


1 MR. GLAZER: And if you would move the
2 microphone up.
3 DR. MAY: Oh, sure. Obviously perhaps the --
4 you know, certainly one of the most commented upon,
5 criticized aspects of the Standard Oil case was the
6 remedy. Certainly Justice Harlan was very upset about
7 the remedy at the time, as were the progressive
8 reformers, and part of the criticism was that the
9 dissolution was by way of a pro rata stock distribution,
10 so that every shareholder in Standard Oil of New Jersey
11 got a proportionate share in every one of the Standard
12 Oil companies, and so you ended up with the same set of
13 shareholders owning the stock in each of the spun-off
14 companies, and it was thought at the time and later that
15 tempered the interfirm competitive fervor that might
16 otherwise have resulted.
17 It is also the case that the spun-off firms were
18 not vertically integrated, that they tended to be
19 specialized as marketing firms or refining firms, and
20 scholars have widely suggested that the remedy also may
21 have been in some sense not as harmful as it might
22 otherwise have been in the sense that changes were
23 already occurring outside of antitrust litigation to
24 erode Standard Oil's position.
25 There was new intensified competition overseas


1 with a combination of Royal Dutch and Shell. There was
2 new competition from monopoly to oligopoly already
3 underway with the discovery of new oil fields in Texas
4 and California and new integrated firms arising in the
5 wake of those discoveries, and so there has been
6 scholarly criticism that first, maybe what really
7 changed the industry was not so much the antitrust
8 litigation as other changes that were going on anyway,
9 and criticism, in addition to the pro rata distribution,
10 in that a lot of the old patterns were sort of
11 continued.
12 The spun-off companies continued to have the
13 same geographic market definition among the marketing
14 companies as they had before, but on the other hand, the
15 scholarly assessment is not completely negative. There
16 is a notion that a number of writers have suggested that
17 over a decade after 1911, the various companies did
18 become vertically integrated, did become more effective
19 competitors on their own, and there is also this
20 argument that whereas Standard Oil may have been a real
21 pioneer and a real success in bringing together a
22 tremendous managerial hierarchy, that it may have been
23 becoming a bit height-bound and maybe overcentralized
24 and sort of telling, for example, Indiana Standard,
25 okay, well, you have got this new cracking process, but


1 we are not as enthused about it as you are, and maybe we
2 will not move forward, and that there is an argument
3 that the dissolution really allowed some of the younger
4 generation in the separate firms to really have more of
5 an opportunity to go their own way and to try things
6 that were not getting approved as quickly, and there is
7 also this notion that another change afoot, apart from
8 antitrust, was that there was a whole big new demand for
9 gasoline that was opening up new opportunities and
10 spurring competition as well. So, those were a few
11 things I wanted to say.
12 MR. GLAZER: So, it sounds like, in sum, you are
13 saying the record is mixed. The historical record is
14 mixed on whether the remedy had long-term positive or
15 negative effects.
16 DR. MAY: Yes, I think that the consensus is
17 pretty strong that the remedy was not as well thought
18 out or as effective as it should have been in hindsight,
19 but I think it is a mixed record as to what were its
20 effects.
21 MR. GLAZER: Or even whether it mattered or not
22 in light of the other changes taking place in the
23 industry?
24 DR. MAY: Right.
25 MR. GLAZER: Did you want to comment?


1 DR. SMITH: Well, Wall Street certainly liked
2 the remedy, because at least in the short run, the
3 breakup value of Standard Oil was much greater.
4 DR. MAY: Rockefeller's fortune just soared
5 because of it. He had a big windfall himself.
6 DR. GALAMBOS: And you cannot eliminate this
7 from the politics. Politically, the American Tobacco
8 and Standard Oil cases were very important in developing
9 a feeling in the population that things were going to be
10 okay, because the Government was going to move in and do
11 something. Now, it did not shape the American business
12 system and it allowed the development of oligopolies
13 that I think on the long run were efficient, and that is
14 what our productivity record shows, so in that sense, it
15 was something that eased us into a new system, and it
16 had that political impact, and so it seems to me that
17 some of these cases can be understood in that way, not
18 just the economics of what they did, but the politics.
19 DR. FREYER: Could I just follow up on that as
20 well? It is kind of helpful to think about politics in
21 a sense from the enforcer's point of view of symbolism,
22 and that is why Thurman Arnold is kind of the archetype.
23 He was conscious at every part of the litigation that
24 the outcome in court was actually secondary to what
25 people thought about it, and it is just something I


1 think for enforcers to bear in mind as well, but he was
2 very proactive, and in that proactivity -- yet he was
3 able to kind of bring the economy or at least he was
4 able to bring antitrust enforcement to a whole new level
5 of effectiveness, and, in fact, the system that he put
6 in place at the Justice Department, you know, would last
7 until 1980 in terms of the resources that would be put
8 into cartels versus mergers/monopoly, it was basically a
9 60/30 or 60/40 kind of apportionment, and in support of
10 the economists, as well, in the Justice Department.
11 All of that was tied to his perception of what
12 was the cost of the litigation given the evidence that
13 we need to achieve these results, and we do not really
14 need to win if we can also get the public to think and
15 the Congress to think, particularly the Congress to
16 think, that we are making a difference, and then that
17 image actually -- one of the things I was fascinated
18 with when I went to Fortune Magazine, I traced Fortune
19 through into the 1980s, how receptive they were to
20 Arnold's activism for solid business ends, right?
21 Now, you can debate it one way or the other in
22 terms of the actual economic effect, but what I am
23 talking about is the symbolism, you know, he succeeded
24 in capturing the imagination of business journalists, at
25 least a lot of business journalists, as well


1 politicians.
2 DR. MAY: And if I could pick up, too, on some
3 of those comments, of course, the other reason that
4 Standard Oil led to a feeling in the popular mind that
5 now the trust question is really getting resolved and we
6 can feel good about that, is that it was complimented by
7 the reaction to the case in the political realm, which
8 was a revitalized antitrust debate in the 1912 election
9 and the legislative effort that led to the Clayton Act
10 and gave rise to the FTC in this building we are now
11 sitting that provided this other alternative way of
12 thinking about approaching these questions in addition
13 to courtroom litigation.
14 MR. GLAZER: So, thank God for the Standard Oil
15 case you are saying? Otherwise, we would be on the
16 street at this moment.
17 Jim, did you want to expand also on the raising
18 rivals' costs aspect of the case?
19 DR. MAY: Well, we can if you want me to.
20 Essentially, if people have looked at this particular
21 1996 article, essentially what Professors Granitz and
22 Klein try to do is pick up on some of the -- often what
23 is heard as post-Chicago theory that people in the
24 antitrust field have been very familiar with in the last
25 ten years, and basically say, okay, can we make sense of


1 the Standard Oil record in a new way in light of this
2 new theory, this way of understanding exclusionary
3 behavior, and taking issue with John McGee's earlier
4 piece that said, ah, yes, it was not that Chicago School
5 Aaron Director's view, that is the way to understand
6 Standard Oil. Instead, it is a raising rivals' costs
7 theory, but one that is sort of circumscribed and does
8 not go as far as Professor Salop and Krattenmaker in
9 their raising rivals' costs article which got a lot of
10 attention in the antitrust field a few years go, and so
11 basically they say one way in which you can have
12 effective exclusion of new entrants into a particular
13 line of business would be if, in fact, an upstream firm
14 that provides some central service like transportation,
15 in fact, cooperates with you to raise a barrier to entry
16 that otherwise might not be there, and in this
17 particular variant of that notion, the idea is that
18 whereas a supplier of a certain commodity, a railroad
19 normally would say, oh, I would like to have as much
20 competition on the downstream level as possible, because
21 I want just as much demand for my services as possible
22 and why would I ever want to cooperate with increasing
23 market power downstream, that is against my interests,
24 the notion is that if you are having trouble stopping
25 cheating and having trouble maintaining a cartel at your


1 own level, through your own devices at that level, you
2 could, in fact, find downstream firm to be a useful
3 enforcer.
4 In Standard Oil, they called it being an evener
5 among -- you know, if everybody gets their quota as to
6 how much of the freight business they supposedly can
7 get, it is the evener who is supposed to make sure that
8 nobody's breaking ranks in terms of the quota of how
9 much of a particular business they are getting. So, the
10 notion is you want to have somebody downstream who has a
11 great enough volume that if they see somebody, in fact,
12 trying to pick up too much business, they shift a lot of
13 their own volume of demand to somebody else as a way of
14 punishing cheating and to keep a cartel going.
15 The notion in Granitz and Klein's theory is that
16 that is what was going on between the railroads and
17 Standard Oil. It was not the old story that Standard
18 Oil had so much power independently, that it was just
19 coercing a better deal with the railroads, extracting a
20 better deal with the railroads. No, no, no, it was the
21 railroads who had incentive to try to have a player with
22 a large volume, not just for cost savings, for dealing
23 in volume, right, with a shipper, but for this other
24 reason, to provide this cartel enforcement function, and
25 that that is what they were doing, and that the


1 railroads liked it because they got a cartel going more
2 effectively and it was worth it to them, and they had to
3 share something with Standard Oil, and Standard Oil got
4 its return on the monopoly power that was possible, but
5 only possible in transportation, by being able to be in
6 position to have monopsony power to get a better deal on
7 crude oil, and to have power to raise prices to
8 consumers on petroleum prices. That is their theory,
9 okay?
10 And, you know, people here, it sounds very
11 familiar, as you know, just in our own field, you know,
12 there are these kind of raising rivals' costs theory,
13 they are basically taking that and saying, "A-ha, that
14 is how we understand it." It is not a theory that
15 everybody has agreed to. I mean, other people have
16 different explanations for it, but it is a very
17 prominent theory among antitrust people. It is a very
18 leading interpretation now among antitrust folks as to
19 how to think about it.
20 MR. GLAZER: I guess when your book comes out we
21 will find out what you think of the theory.
22 Moving now to the Alcoa decision, George, with
23 the many attempts by the Government to file antitrust
24 cases against Alcoa over the years, was it just a matter
25 of the times and circumstances ultimately caught up with


1 Alcoa and its management, or did Alcoa just finally
2 cross the line into anticompetitive conduct in your
3 view?
4 DR. SMITH: No, I think it is the former, in a
5 word, yes, I think things caught up with Alcoa. I think
6 briefly what I tried to do is describe the political
7 context in which these cases were based. There was no
8 question that the Justice Department was going to go
9 after Alcoa, because it was probably the purest monopoly
10 that existed in the economy at the time, and it really
11 had no choice given its own doctrine, and Alcoa was a
12 public relations disaster.
13 I mean, if you go back and re-read the
14 newspapers and the press accounts, there is a wonderful
15 story I have in my book of Arthur Vining Davis in 1933
16 leading a cheerleading session with a band in a hotel in
17 Washington, saying, you know, "How much of the market do
18 we have?" And everybody would shout, "100 percent."
19 They had a song about this. They did not have a good PR
20 guy around to tell them that, you know, you do not talk
21 this way.
22 But, you know, to be serious about this, I think
23 it --
24 DR. GALAMBOS: Senior counsel.
25 DR. SMITH: -- as historians we are taught that


1 nothing is inevitable, but if something comes close to
2 inevitable, I think it was bringing of the antitrust
3 case.
4 DR. FREYER: Can I just add something for the
5 enforcers in this room to remember, that there is
6 amazing room for unintended consequences, and because of
7 the great work in Alcoa that Professor Smith did, I
8 incorporated it in my new book, and I was really
9 surprised when I went to the Justice Department records
10 and the Jackson papers how they went after Alcoa for
11 entirely different reasons than ended up being the basis
12 for the decision in the case.
13 They went after it because it was an
14 international cartel, an international cartel was a
15 push-button, hot issue in the 1930s because of Hitler
16 and to a lesser degree the Italians, international
17 cartels and so forth, and then there was the threat to
18 the western hemisphere, where the U.S., you know,
19 considered to be dominant markets and so forth, and
20 there was an issue over the venue, whether or not it
21 would be in Pittsburgh or whether or not they would get
22 it in in New York, and to show you how significant it
23 was, they had to get the President involved and they had
24 to go to Congress to get the case moved from Pittsburgh
25 into New York City.


1 And then, it was Caffey. Caffey ended up
2 looking like they failed anyway, right? But what they
3 got from Caffey -- again, unintentionally -- was the
4 success of this discovery, which led to this trail of
5 these international cartel arrangements and patents that
6 it was exactly what Arnold needed to get these huge
7 increases in the Justice Department's budget from 1939
8 to 1942. He was able to remake the Justice Department
9 primarily because he was able to connect national
10 defense in the war years with antitrust, and he was
11 actually being criticized by Bernard Baruch and others
12 who were saying, you know, this is the wrong approach
13 and we need to do what we did in World War I and so
14 forth.
15 So, the Justice Department was looking at Alcoa
16 and these other cases, American Tobacco and so forth,
17 for a different reason, but since all the cases were put
18 on hold during World War II, they were still able to do
19 the discovery and so forth, when they have peace. Peace
20 comes, and then we get the decisions in peacetime that
21 looked much more -- I mean, what we are used to and so
22 forth, but it was all driven by these unintentional
23 motives.
24 MR. GLAZER: And, George, another point on
25 Alcoa, shifting from monopoly an oligopoly, did the


1 aluminum industry seek the types of increases in
2 innovation and productivity that the Government hoped
3 for in seeking its relief?
4 DR. SMITH: Well, it is not clear to me what the
5 Government hoped for other than kind of a general notion
6 they had that if more competitors were in the field,
7 there would simply be more innovation. What I am
8 suggesting is that it depends on what kind of innovation
9 you are talking about. Clearly there was an explosion
10 in product development, which perhaps had some social
11 benefits, but there was also a problem with, as I
12 suggested, in the research and development side of the
13 business, not just for Alcoa, but for the whole
14 industry.
15 One thing monopolies do well is science, because
16 they can afford to do it, and in oligopolistic industry
17 structures, there is more pressure to focus on the short
18 term and do less of that, and I think it is not just
19 Alcoa. You can look at other industries as well to see
20 this pattern.
21 And then the question is, well, where does the
22 science go? Obviously we know that the history of the
23 United States research and development since World War
24 II, the Government plays an increasing role in fostering
25 fundamental science, but that did not happen so much in


1 the aluminum industry.
2 So, to answer your question, I do not think the
3 Government's attorneys, you know, had a clear notion,
4 other than this general idea that it would promote
5 innovation, but I would make another argument, and this
6 is a hypothesis, but based on my reading of the history,
7 it is important to understand that monopolists, at least
8 in growing industries, have to remain alert, you know,
9 and they have every incentive to reduce their costs and
10 drive prices down in order to increase their markets,
11 and we see that again and again in the stories of the
12 great dominant firms of the late 19th Century and early
13 20th Century.
14 That may change as markets mature, but certainly
15 in the growth phases, I think there is a risk in
16 tampering too much by monopolists. They have to remain
17 alert, because there is always room for substitutes and
18 there is always room for competitors to enter under a
19 pricing swell. What happens when industries mature is
20 different, but I would argue that, well, aluminum was
21 mature in terms of its organizational -- Alcoa was a
22 mature company in terms of its organizational
23 capabilities. The markets were still in a growth mode
24 when the Government brought its suit, and to me, that
25 might have been a problem. So, the timing of the suits


1 becomes a big issue as well.
2 MR. GLAZER: And it lasted so long as well.
3 DR. SMITH: Yeah.
4 MR. GLAZER: Professor Galambos, did the breakup
5 of AT&T lead to the increased innovation and
6 productivity that the Government sought in that case?
7 DR. GALAMBOS: That is good, because I was
8 thinking about George's answer, too. I think it is very
9 important to distinguish between the short term and the
10 long term, and I think that almost always the structural
11 cases will probably bring you short term a higher level
12 of innovation. That is not invention, but innovation,
13 as the introduction of something actually in the
14 competitive market. So, that is the important
15 distinction you have to make.
16 That is why I am saying, that is what history I
17 think has to offer, is that you have to look at both the
18 short-term impact of things and the long-term impact on
19 the national economy and now a global economy. So, it
20 seems to me that the Alcoa case brought about
21 accelerated short-term innovation, but what George is
22 suggesting is that long term, it probably did not, and
23 it may have actually hurt the pace of innovation over
24 the long term. That is what I am suggesting in my
25 analysis of the AT&T case. I think, is that in the


1 short term, it clearly did, but in the long term, it
2 probably did not. This is one of those alternatives we
3 do not actually get to measure -- we are doing "what-if"
4 history, what if we had kept this, you see?
5 What we do know is we do know the history. We
6 do know where the transistor came from. We do know
7 where the switching systems came from. We do know that
8 they had a very efficient telephone system, and that
9 accomplishment was based on innovation over the long
10 term.
11 I think the hard thing to think about in public
12 policy is to think about long-term implications and what
13 you mentioned about the unanticipated consequences on
14 the long term I think is a very important point, because
15 it is very hard to construct these counterfactuals. The
16 only one who has really tried to do it methodically that
17 I know about is Robert Fogel, the Nobel Prize winner in
18 Chicago, and if you look at his carefully, you
19 understand just how difficult it is to construct a
20 really good counterfactual for railroad development in
21 the 19th century U.S. so, it is a hard thing.
22 It is a difficult public policy choice. It is
23 difficult for people under immediate pressure to come to
24 these conclusions. I guess what we are calling for is
25 some kind of political-economy statesmanship and a look


1 at that long-term view.
2 MR. GLAZER: Yeah, I think Zhou Enlai was once
3 asked about the French Revolution, and he said, "It's
4 too early to tell." It takes decades sometimes for
5 these things to sort themselves out, and in the case of
6 telecommunications, we are still trying to figure out
7 whether it was a good thing or not to break up AT&T 25
8 years ago.
9 George, you were about to --
10 DR. SMITH: No.
11 MR. GLAZER: Okay.
12 DR. FREYER: I just would like to add, one of
13 the challenges is not to be certain that you can predict
14 the future, because I know that Professor Galambos
15 interviewed Baxter and -- yeah, I only interviewed him
16 once, but one of the things that he -- when I
17 interviewed him, he was receiving a lot of flak from
18 historians for -- and this was six years later, I guess,
19 after the breakup, and he was absolutely certain that
20 they were all wrong in that everything that -- you know,
21 that his motives and -- I mean, the whole policy, in
22 other words, was absolutely right.
23 There was one interesting outcome of that as
24 well that he also told me about, which I also think
25 enforcers can bear in mind, and that is he said what


1 people do not realize is that then helped me to take a
2 budget that was declining, an antitrust budget that was
3 declining, and put 15 percent of it, whereas before it
4 had been 40 percent of it, into monopoly, which was the
5 AT&T stuff, and then 85 percent I could go after
6 price-fixing cartels and so forth, and I would get a lot
7 more attention, and I would almost win all of those, and
8 so forth, right?
9 See, and I can go to Congress and say, well,
10 look, you know, how aggressive we are, so on and so
11 forth. So, just the point is that not only was he
12 certain, but he also had motivations that were within
13 the institutional culture of the Justice Department as
14 well that explained what he was doing, and they
15 reinforce one another.
16 MR. GLAZER: And Professor Galambos, do you
17 believe that deregulation was the more appropriate
18 government response to AT&T's dominant position?
19 DR. GALAMBOS: Yes, I have suggested today that
20 I think that regulation or deregulation in that case, in
21 some cases markets win over the long run, have brought
22 about a more satisfactory solution than the one that we
23 created. These cases were so enormously complex and
24 would take so long to finish that a great deal had
25 changed while the case was being decided.


1 So, even though getting a legislative answer was
2 very difficult in the 1970s, as we know from the
3 legislative history, it would have been, it seems to me,
4 a more satisfactory solution. I think we were moving
5 towards solution, as it was, and I think we could have
6 continued in that more gradual way.
7 MR. GLAZER: In light of this --
8 DR. GALAMBOS: Can I say -- I think what I am
9 suggesting is that the time -- the historical time of
10 structural cases may have passed. That is what I think
11 I am suggesting. They had an important function at one
12 time, and that time now may have passed. We are in a
13 new age.
14 MR. GLAZER: For structural changes?
15 DR. GALAMBOS: For structural cases, yes.
16 MR. GLAZER: And some of it may have even passed
17 by 1911 as well.
18 DR. GALAMBOS: What?
19 MR. GLAZER: It may have passed by 1911 as well?
20 DR. GALAMBOS: No, I do not think so, because of
21 the political saliency of the issue. There were just a
22 tremendous number of Americans very upset about the
23 trusts and very upset about what was happening. You
24 have just got to remember, this was an agricultural
25 commercial society in which this industry was growing,


1 but most of the people, until the 1940s, lived either on
2 farms or in towns of 2500 or less, and this was a
3 society that was very upset about monopoly, did not
4 understand it very well. They were worried about all
5 kinds of things.
6 They were worried about bankers who were making
7 decisions that were affecting, you know, how I can sell
8 my corn and my wheat, and so this had a political
9 importance that you cannot ignore -- this is a
10 democracy, and you cannot ignore all of those people and
11 the way they think about things. So, I would see this
12 as a function of democracy that we have moved in this
13 direction, did all of this work over this period of
14 time, and then the times changed, and now we have to
15 respond to that.
16 DR. SMITH: One thing about that period you have
17 to remember, the Standard Oil revenues were bigger than
18 state budgets, and the $1.4 billion transaction creating
19 U.S. Steel took place in a $21 million economy. I mean,
20 these things were huge by the standards of time, and
21 these businesses operated in secret, they were
22 unregulated, and, you know, it was occurring, as Lou is
23 suggesting, in an agrarian environment where these
24 things were really scary. So, it was a different time.
25 MR. GLAZER: In light of the consolidation that


1 we are seeing in the telecommunications today, do you
2 think we are closer to what AT&T was at the time of the
3 lawsuit?
4 DR. GALAMBOS: No, I do not think we are moving
5 back to the Bell System, but we are getting
6 reconsolidation. It seems to me I think you are seeing
7 the effect of economies of scale and some economies of
8 scope, so you are getting reconsolidation.
9 In wireless, you have got consolidation along
10 international lines, not necessarily national lines.
11 So, you are getting reconsolidation in the industry, but
12 I do not see a move toward vertical integration such as
13 the Bell System had, and I do not see myself a move
14 toward re-regulation. I think that there is such a bad
15 feeling about rate of return regulation and the problems
16 of trying to impose that that we moved away from that,
17 and I do not see any move back toward creating a
18 regulated monopoly.
19 Just remember that Theodore Vail, at the AT&T
20 system, accepted regulation. He said, we have got to
21 have a regulation, we are going to have universal
22 service, we are going to have one big supplier, and it
23 is going to be regulated. But I think that the
24 attitudes now have changed dramatically all around the
25 world.


1 MR. GLAZER: How do other forms of communication
2 such as VOIP, voice over internet protocol, affect the
3 antitrust analysis in your view?
4 DR. GALAMBOS: This industry is changing
5 enormously and very fast, and in those kinds of
6 situations, it seems to me the best thing to do is sort
7 of stand back and watch it, because the whole industry
8 is being transformed. I do not know about you, but I
9 have a number of friends who are no longer hard-wired,
10 okay? They are just on wireless -- and there are big
11 parts of the world that are never going to be
12 hard-wired, in which wireless is now taking over and the
13 internet moving in. And so you can see by my age that I
14 am not doing internet telephone calling myself, but
15 young people are, and that is going to increasingly
16 happen.
17 MR. GLAZER: Tony, as we look at the
18 developments of the worldwide competition law
19 enforcement, are we seeing consensus that dominant firm
20 behavior needs to be at the top of antitrust enforcement
21 by all developed and developing jurisdictions?
22 DR. FREYER: Yeah, on that question, there is,
23 you know, Australia, Japan, the EU, and then the United
24 States, it is a big topic of -- you know, it is a big
25 focus of attention. The big difference is the -- you


1 know, how the enforcers respond, and in the three
2 outside the United States, it is largely bureaucratic
3 intervention.
4 I mean, Japan, they have never had a monopoly
5 case since the occupation that went to court, but they
6 do it virtually every day through administrative
7 guidance, and they -- you know, it is -- you know, all
8 these sectors are -- you know, they have their own --
9 the person in charge of them, and they are working
10 intergovernmental with the treasury ministries as well,
11 continuously, and they have been much more geared to
12 more entrepreneurial kinds of approaches and so forth.
13 In Australia, because you have got a highly
14 concentrated market already, the same kind of
15 bureaucratic intervention, except that there is more
16 willingness to resort to kind of innovative enforcement,
17 things like shaming, you know, relying on publicity
18 extensively, and then working out what we would call
19 consent decrees, but they are compliance programs where
20 the businesses, the corporations or whatever, they are
21 presented in public forums with the enforcers as having
22 agreed to some remedy, you know, on television and this
23 sort of thing.
24 I mean, it is a -- I think it is a highly -- it
25 is a publicity-centered kind of enforcement, and perhaps


1 you can do it in a small country like that, but I would
2 urge all enforcers to look at the Australian example,
3 partly because of this guy, his name is John
4 Braithwaite, and he has tried to develop a lot of
5 alternative, publicity-centered kinds of remedies.
6 Courts -- do not get me wrong, courts are
7 important, but he has tried -- he has, again, found that
8 what he calls these good citizen corporations are to be
9 found if they are given a kind of -- the right kind of
10 incentives. I guess that is one point.
11 Another point I think, that the U.S. really is
12 not going to be able to avoid dealing with the other --
13 you know, dealing with dominance in a global context for
14 the main reason that Lou indicated, that from the point
15 of view -- if you just talk to the Australians or the
16 Japanese or the Europeans about dominance, they all are
17 very aware -- they use the language of a global economy,
18 globally, that is what they talk about.
19 You know, I think the U.S. still, with its huge
20 market and so forth, there is still an awful lot of -- a
21 sense of insularity, maybe not purposefully, just
22 subconsciously or whatever, but these other places are
23 not, and a lot of that has to do with because they do
24 not see such a division between antitrust enforcement
25 and trade policy. There is a lot more interaction


1 between the two, and that gets back to those public
2 interest goals that are common in these other
3 enforcement -- you know, things like preserving jobs is
4 a legitimate antitrust goal in most other antitrust
5 regimes. Now, how you do it is not automatic, but I am
6 just saying it is a legitimate goal.
7 MR. GLAZER: Let me open it up now. These
8 questions will be to all the panelists.
9 From the research that you all have presented
10 today on these landmark cases, and we have touched on
11 this to some extent already, but do you believe there
12 are lessons learned that would be helpful for the
13 Antitrust Division and the FTC in assessing the proper
14 level of antitrust under Section 2 of the Sherman Act?
15 Jim, do you want to begin?
16 DR. MAY: As to the proper level of antitrust
17 enforcement? I am not sure of what lesson I would draw
18 to that just from the Standard Oil case. Certainly
19 there are lessons to be drawn that are commonly drawn
20 with regard to --
21 MR. GLAZER: Use the microphone, please.
22 DR. MAY: Oh, sorry, that are commonly drawn.
23 You know, we begin with respect to how thoroughly things
24 are thought out ahead of time and given attention, but
25 Standard Oil, you know, is an unusual set of facts, an


1 unusual time period, as Professor Galambos, talked
2 about, and drawing a broader conclusion about how many
3 structural Section 2 cases you should bring based on the
4 record of Standard Oil is something I am somewhat
5 hesitant to draw conclusion about.
6 MR. GLAZER: Other panelists? George?
7 DR. SMITH: Well, I think there are many lessons
8 that can be learned here. One, of course, is that
9 antitrust always has a political dimension to it, and
10 one always must be sensitive to whether politics must be
11 paid attention to as well as the economic issues at
12 hand, and sometimes the politics are important and
13 cannot be overlooked. It is not just about economics.
14 I think a second lesson is that I think, looking
15 historically back in time and also considering where we
16 are in the world today, that structural remedies are
17 probably less desirable than more flexible kinds of
18 remedies, because over time, it is hard to undo
19 structural remedies, and that suggests that people in
20 the Government have to become at least as sophisticated
21 as managers in big business corporations in anticipating
22 what possible futures lie ahead.
23 DR. GALAMBOS: I think that the lesson that I
24 would draw particularly would be to look to the global
25 economy and look to what needs to be done. Where I see


1 the great need right now is for consideration of the way
2 the firms are operating and evolving and for a related
3 attempt to level the field of concern and public policy.
4 I do not think you can level the economic field myself,
5 and I am very worried about the way public interest
6 becomes a cloak for private interest.
7 In other words, you claim the public interest,
8 but what you really want to do is you do not want
9 another strike in the middle of Paris. I do not want
10 people to get out in the streets and destroy things, and
11 so I am very worried about the gap that still exists
12 between various countries and the way they approach
13 public policy and competition. I would say that is a
14 really important issue.
15 DR. FREYER: Yeah, I think that there are kind
16 of two -- it is useful to bear in mind that there are
17 two ranges of issues. One is from the point of view of
18 institutional culture of the enforcer themselves, and
19 the other that is from, you know, the business impact.
20 From the enforcers themselves, I think that
21 there are just -- just maybe you all do this, and
22 since -- you know, I do not know, but it is to pay just
23 real attention that there really is a nexus between the
24 resources that you have and what you -- and the evidence
25 that you need to make a case, and that is what drives


1 how you allocate, you know, what -- whether it is cartel
2 cases or merger/monopoly kinds of cases, right, how
3 those are apportioned.
4 And what is very interesting in going to these
5 other places is that there is a very conscious awareness
6 that they have got to select cases in a way that they
7 have got to increase resources given the kind of
8 evidence standards, and in all other countries except
9 the U.S., the evidence standards are -- you know, they
10 are just not as tough, you know, as they are in the
11 United States, because it is not conspiracy. It is more
12 towards results and this sort of thing.
13 So, just being aware of -- you know, that is a
14 lesson from the -- as I say, you may do it consciously,
15 hopefully you do, but one thing that Braithwaite did is
16 actually develop a way to look at this. It is called an
17 enforcement pyramid. It is a way to apportion costs
18 based -- and evidence kinds of things, and it is a
19 useful kind of illustrative device.
20 Yeah, on the other point, you know, Lou's point,
21 what is interesting about whether or not you could go --
22 there is no doubt whatsoever that what is public
23 interest to one person and the public is different, and
24 that is why public choice now is what dominates, you
25 know, the teaching in law schools and in business


1 schools and so forth, you know, because there is no --
2 you know, there -- public interest is relative, but
3 again, all I would say on that is that in these other
4 places, they are very conscious that there is a policy
5 benefit in, you know, linking competition policy to
6 environment, and that is one of the things they do in
7 the European Union, you know, maintain environmental
8 protection.
9 Sure, you have a kind of abuse with the state
10 aids and with the telecoms, you know, Monty's last days
11 was he was absorbed in whether or not he was going to
12 sign on to saving the French from the Italian, you know,
13 big state company and so forth, and he ends up saying
14 okay, you know, but he insisted that he have these very
15 rigorous accountability-based things.
16 So, what I would say, though, when it comes to
17 specific doctrines, like verticals and conglomerate
18 mergers and monopoly, that done rightly or done
19 effectively, the public interest has a lot to be said
20 for in terms of broader interest rather than narrower
21 type interest, and I think that was actually the problem
22 with the U.S. remedies, just looking at conduct.
23 Microsoft was so far ahead of what they could
24 do, what they knew they could do, beyond what the
25 government remedies were, that the Government just, you


1 know, just was not aware. I mean, whereas in the EU,
2 they did not have that problem, because they were just
3 worried about results, right?
4 MR. GLAZER: We have time for one final
5 question, and the question is, drawing on all this
6 history, what would be your advice to the agencies as to
7 what type of conduct the agencies should focus on? When
8 you look back at these cases, what type of conduct do
9 you think had the greatest anticompetitive effect,
10 whether or not it was found by the Court or the agency
11 at the time to have that effect, but from your studies
12 of the actual underlying records of the cases. Any
13 thoughts on that?
14 DR. GALAMBOS: Well, I clearly am very close to
15 Bill Baxter's conclusions about what we should do. It
16 seems to me that there are forms of predatory behavior
17 that you would want to look at in terms of behavior, not
18 necessarily the structure so much as behavior,
19 performance, and I think that some of those -- both for
20 their political impact and their economic impact deserve
21 emphasis.
22 What I am arguing is that you have got to be
23 sensitive to both the political impact and the economic
24 impact. So, it seems to me that there are forms of
25 behavior that we want to eliminate from our competitive


1 economy, and the question is how best to do that.
2 So, I am interested in a very restrained
3 approach. I am interested, as I have said, I do not
4 see -- I just have no confidence in these structural
5 cases at all, but there are certain forms of behavior,
6 and that is the dumb monopolist behavior, I think. They
7 are dumb at times, they do do stupid things, and I think
8 we can see that when it happens.
9 MR. GLAZER: Any particular examples?
10 DR. GALAMBOS: Well, failure to innovate, I
11 think, failure to innovate over the long run. I am
12 opposed to the structural cases. I am enormously
13 enthusiastic about anti-cartel behavior, for instance.
14 I want to eliminate cartels, and I think the public
15 policy of leniency for the first person to come forward,
16 that is, the prisoner's dilemma game, is marvelous, I
17 think it is just wonderful. So, I want to attack that
18 -- this is the kind of behavior that I think we can
19 limit sharply -- collusion is dumb monopoly behavior,
20 and so that kind of behavior deserves attention and
21 government action.
22 DR. SMITH: I would say from, again, from a
23 layperson's perspective, if you look at the Sherman Act,
24 and it has two proscriptions, those shall not conspire
25 to restrain trade, and thou shall not monopolize, and I


1 have a lot of problems with the second, unless in the
2 process of getting to monopoly you violate the
3 provisions of the first, and I think that is -- so, I
4 would agree with Lou.
5 DR. GALAMBOS: Yeah, when a company has to use a
6 shell company to sneak something through, there is
7 probably something wrong, you know, you can smell that.
8 You do not have to be terribly -- you do not have to be
9 a really good economist to know something is probably
10 wrong when they are trying the shell game on you. So, I
11 think that we could handle this.
12 MR. GLAZER: Tony?
13 DR. FREYER: Just on these two points, first of
14 all, there might be something to be said for looking at
15 all of the other regimes outside the United States do
16 pay a lot more attention to verticals and do pay a lot
17 more attention to conglomerate mergers, and the main
18 reason that is so is because of the sophistication in
19 financial arrangements and constructs and this sort of
20 thing, and I am not sure that that sophistication is --
21 I mean, I think there could be more research done to see
22 if there was not room to move U.S. efficiency theories
23 in the dominance area into kind of capturing more of the
24 wide range in which this financial sophistication is
25 worked out, and in that connection, I would give a plug


1 for Professor Smith's book on KKR, primarily because he
2 provides the context for the --
4 DR. FREYER: -- for the use of depth, which has
5 just become a pervasive influence in financing. A lot
6 of it has to do with tax policy, but the problem with
7 the book from my point of view is he says how important
8 antitrust is in setting the precondition for the triumph
9 of debt financing in the seventies, which dominates
10 today, but does not explain what the problem is, and in
11 the last point, that is I think there is a lot of room
12 for looking at conglomerates, in using the kind of
13 indirect influence that the EU has and at least thinking
14 about that as a way to get at these financial kinds of
15 problems.
16 MR. GLAZER: Well, with that, I want to thank
17 the panelists very much for their participation in what
18 was a fascinating panel. Thank you very much.
19 (Applause.)
20 (Whereupon, at 12:00 p.m., a lunch recess was
21 taken.)


2 (1:30 p.m.)
3 MR. ELIASBERG: Good afternoon. Welcome back to
4 the hearings. My name is Ed Eliasberg, and I am an
5 attorney with the Legal Policy Section of the Antitrust
6 Division of the United States Department of Justice, and
7 I am one of the co-moderators for this afternoon's
8 session on business strategy. My co-moderator is Ken
9 Glazer. Ken is Deputy Director of the Federal Trade
10 Commission's Bureau of Competition.
11 Before I start, let me cover a few housekeeping
12 matters. They are four in number. First of all is with
13 respect to cell phones, BlackBerries, everything else
14 that may make noise, it is time to turn them off. You
15 can turn them on again after the session is over.
16 The second, the men's room is through this door
17 right here and an immediate left, first door on the
18 left. The ladies room is across the elevator bank, take
19 a left, first door on the left.
20 The third point is a matter of safety. If in
21 the very rare event there should be some sort of
22 building alarm going off or something like that, please
23 proceed calmly and quickly as instructed. If we must
24 leave the building, that will be on the stairway on the
25 right here on the Pennsylvania Avenue side. After


1 leaving the building, please follow the stream of other
2 FTC people -- they have practiced this many times, so
3 they know what the drill is and where to be going -- and
4 we will all go to Sculpture Garden, which is across the
5 intersection of Constitution and Seventh Street on the
6 other side of the building, where you will be
7 re-assembled and we will take things from there.
8 Finally, we request that you not make comments
9 or ask any questions during the session. So, that is it
10 for the housekeeping side.
11 Now, for the session itself, we are honored to
12 have assembled a distinguished panel of business school
13 professors who teach business strategy and marketing and
14 consult with major corporations, as well as an Intel
15 vice president involved in marketing and strategic
16 planning on a day-to-day basis.
17 Our panelists this afternoon are, to my
18 immediate left, Jeff McCrea, who is vice president of
19 the sales and marketing group at Intel. Next to him is
20 Professor David Reibstein, who teaches at The Wharton
21 School of the University of Pennsylvania, where he is
22 the William S. Woodside Professor and Professor of
23 Marketing.
24 Next to Dave Reibstein is Professor David
25 Scheffman, who is a director of the LECG Consulting


1 Group, an Adjunct Professor of Business Strategy and
2 Marketing at the Owen Graduate School of Management at
3 Vanderbilt University, and the former director of the
4 Bureau of Economics here at the FTC, not once, but
5 twice, okay?
6 DR. SCHEFFMAN: Still trying to get away.
7 MR. ELIASBERG: And finally at the end of the
8 table is Professor George David Smith, who is a Clinical
9 Professor of Economics, Entrepreneurship and Innovation
10 at the New York University, Stern School of Business.
11 Professor Smith spoke this morning quite eloquently at
12 the business history session, and although he is not
13 going to be making a presentation at this particular
14 discussion, he has been kind enough to join us as a
15 discussant for this session on strategy. He is the
16 author of the book From Monopoly to Competition: The
17 Transformation of Alcoa, and the co-author with
18 Frederick Dalzell of Wisdom from the Robber Barons, and
19 has a book coming out soon called A Concise History of
20 Wall Street.
21 Both this morning's panel on business history
22 and this afternoon's panel on business strategy are
23 attempts by the Antitrust Division and the FTC to bring
24 together the experience and expertise of different
25 disciplines beyond law and industrial organization


1 economics to see what we here at the enforcement
2 agencies can learn about single-firm conduct that can
3 help us in analyzing it under the antitrust laws.
4 In this morning's very interesting session, we
5 heard from the historians. This afternoon, we look
6 forward to insights from the field of business strategy
7 from this stellar panel that brings several
8 perspectives, from teaching business strategy to future
9 leaders in MBA programs and consulting with major
10 corporations on business strategy, to planning and
11 implementing business strategy on a day-to-day basis
12 within a corporation.
13 We are interested in exploring ways in which
14 current mainstream antitrust analysis of single-firm
15 conduct might be enriched by a better appreciation of
16 what is actually being taught to current and future
17 executives regarding how to successfully operate in the
18 marketplace, and including competitive positioning and
19 obtaining market power, and how business strategy in the
20 real world is developed and implemented within the firm.
21 As we think about incorporating the teaching of
22 business strategy in antitrust analysis, we are all
23 interested in understanding what role, if any, antitrust
24 plays in the teaching of business strategy. It is our
25 hope that this session on business strategy will answer


1 some of these questions. In particular, we hope holding
2 this session will enhance the antitrust agencies'
3 understanding of business strategy that is taught
4 business students and how strategic business thinking
5 might inform our analysis and evaluation of the
6 competitive implications of certain types of conduct.
7 So, with that, let me tell you a little bit
8 about the first of our speakers. That is going to be
9 Professor David Reibstein, who has been at Wharton since
10 1987, and in addition to his current professorship at
11 Wharton, has held a variety of professorships and
12 administrative and adjunct positions. He has been
13 actively involved as a consultant with a number of major
14 companies. Notably, Bud Selig, the Commissioner of
15 Major League Baseball, appointed Dave from 2004 to 2006
16 to a Blue Ribbon Special Task Force working to address
17 the issues facing major league baseball.
18 Dave has also been featured in Fortune Magazine
19 as one of the nation's eight favorite business school
20 professors and was recently named by Business Week as
21 one of the cream of the business school crop of
22 professors. Dave has received teaching awards at
23 Wharton every year he has taught since joining the
24 school. He has recently co-authored the book Marketing
25 Metrics: 50-Plus Metrics Every Manager Should Master.


1 He also co-edited Wharton on Dynamic Competitive
2 Strategy, and has co-authored a book, Marketing:
3 Concepts, Strategies and Decisions, and Strategy
4 Analysis with Value War, and Cases in Marketing
5 Research, and is the author or co-author of numerous
6 articles.
7 I might add that for complete biographical
8 information on Dave and other speakers, it is in the
9 handout that is available on the table out front, and
10 also can be found on the FTC and Antitrust Division
11 Sherman 2 hearings web site.
12 So, with that, Professor Reibstein, welcome, and
13 we look forward to what you have to say.
14 DR. REIBSTEIN: Thank you for inviting me to be
15 part of this panel, and I must confess, it is not
16 totally clear to me why it is I am invited to be here.
17 I say that because, you know, I just am a professor of
18 marketing, and I teach marketing, and I do not know
19 exactly what its real role is other than I have been
20 asked to come, tell us what it is that you teach, and
21 part of my view is I cannot do that unless I have a
22 semester, but I have been allotted only 20 minutes, and
23 I will talk about that.
24 It is also the case I have worked with a number
25 of businesses, and I have worked with them on their


1 marketing strategy, although it does not surprise me in
2 the introduction, the only one that is picked out is,
3 "Well, let's talk baseball."
4 MR. ELIASBERG: It is that time of year.
5 DR. REIBSTEIN: It is that time of year for sure
6 and it is always fun to talk about.
7 So, what I am going to talk about is I am just
8 going to give a little bit of overview of what it is I
9 cover in my marketing strategy course. That is the area
10 I was told is of greatest interest. I will spend a
11 little bit of time talking about what it is that sort of
12 are general approaches to the topic area, and then I
13 thought, well, I might as well take the areas that might
14 be most controversial as it might apply to the
15 Department of Justice and Federal Trade Commission and
16 at least put a statement around of stating what it is
17 that is a philosophy that I teach my students.
18 What I will also say at the outset is that at
19 The Wharton School, we have a course that is required of
20 all of our students, you cannot graduate from The
21 Wharton School without taking a course on business
22 ethics, and within that course, everybody is exposed to
23 all the issues that might pertain to legal practices of
24 business and trying to provide an ethical perspective,
25 so that there are issues that go beyond the law that one


1 needs to be sure and question and make sure that one is
2 incorporating in their everyday life and how everyone
3 goes about practicing. That is not part of my course.
4 On the other hand, I do feel the responsibility
5 as a professor of marketing and when I am talking about
6 marketing practices and how I think about marketing
7 strategy, one needs to pause and incorporate any
8 perspective of what one needs to at least question doing
9 and where there might be some legal boundaries to the
10 degree that I understand them, okay?
11 So, just, you know, my view of marketing
12 strategy, marketing itself sits between the company and
13 the customer. It really is the interface between the
14 company and the customer, and therefore, has a major
15 responsibility of making sure that -- and what we
16 traditionally think of as marketing, is making sure the
17 customers understand what it is that we have to offer to
18 them, often viewed as thinking about marketing in the
19 role of its advertising.
20 I also -- I do not state it that way. I state
21 it as being an interface, because I think part of the
22 responsibility of marketing is making sure the
23 communication goes the other direction to the company,
24 from the customers to the company of what it is the
25 customers really want.


1 The objective, then, once the company has the
2 knowledge and familiarity with what it is that the
3 customer might really want, is to try and satisfy them
4 and do so better than others, better than the
5 competition will, and to do so while making a profit,
6 and that becomes some of their particular objectives.
7 So, they have a marketplace objective of satisfying the
8 customers; they have an objective for their shareholders
9 of trying to maximize their profits.
10 When I talk about marketing strategy, it is
11 looking beyond the tactics that one needs to use on a
12 day-to-day basis or a quarter-to-quarter or maybe even
13 year-to-year basis, but more taking a long-term
14 perspective and trying to think through, you know, where
15 are we trying to go? What is our objective? What are
16 we trying to accomplish? And then what is the pathway
17 for trying to get there? And it should set the
18 principles for guiding all the particular tactics.
19 You know, I feel a little bit silly standing up
20 here talking to you about this, because A, this seems
21 fairly fundamental, and B, then you would be enrolled in
22 a course of marketing strategy, but I am just going to
23 give you an overview of what it is I intend to cover.
24 There are different paradigms that exist out
25 there in the field of marketing strategy. The one that


1 is probably the best known is Porter's Five Forces.
2 Many people would contend that is broader than marketing
3 strategy and it is sort of business strategy, and
4 undoubtedly, marketing strategy is a subset within
5 business strategy, but most of what it is he talks
6 about, not all, is it really infringes upon and covers a
7 strong part of marketing as well, so I mention it up
8 here.
9 It is hard to talk about marketing strategy
10 without thinking about the competitive advantage, and
11 generally, you know, there are views that there are two
12 basic forms of competitive advantage. One is a
13 cost-based one. That is, we have lower cost structure
14 than our competition, we have got that, and there is a
15 variety of ways that one could try and acquire that; or
16 we have in some way differentiated ourselves for a
17 particular segment and are able to appeal to that
18 particular part of the market by offering something
19 different than what the competition is offering, and we
20 often do that by having some unique capabilities that
21 allow us to do that.
22 There is an overall view about what I am really
23 looking for is superior performance, and I am going to
24 break each of these down a little bit. Superior
25 performance can come in a variety of forms, and I will


1 lay that out. And then sort of this notion of value
2 leadership, but I look at those four bullet points and
3 say these are just -- they are general terms to be
4 thinking about.
5 This is just the Porter's Five Forces that I
6 have up here, and many of you are more familiar with
7 this than I am, and it may be, you know, having some
8 supplier power, that there is some concentration in
9 suppliers. An interesting one is trying to think about
10 barriers to entry. To me, there are many barriers to
11 entry that one can establish within marketing, and one
12 often tries to create those to try and minimize some of
13 that competition, and I recognize there are some
14 dangerous terms I just threw out there, you know,
15 barriers to competitive entry and trying to avoid
16 competitive entry are potentially very dangerous things.
17 There is also this notion of buyer power, and
18 buyer power is related to, you know, I get to be so big
19 and so strong that when I am dealing with any of my
20 suppliers, I have some real advantage, because I am an
21 important customer, and I can help influence what it is
22 that my competition will do. And there is also this
23 other philosophy of substitutes, that there is some
24 switching that may exist, any of my customers may
25 switch, and what I often think about are what are the


1 costs to any of my customers switching and how do I try
2 and minimize some of my customers switching to another
3 competitive product.
4 It is a general philosophy, and frankly, I do
5 not talk much about this. Part of the reason I do not
6 talk much about this is because I teach a capstone
7 course in final semester of our students, and they
8 probably have heard this about four or five times
9 before, so they get about as much coverage as you just
10 got from me. Instead, you know, I will spend time
11 thinking about competitive advantage, which could, as I
12 say, happen from lower price, lower cost enabling lower
13 price, but it could be because I have got a superior
14 product or a superior service. Sometimes that can be
15 protected through intellectual property, and I add the
16 opportunity for that.
17 One that we do not often think about, but I
18 spend a fair amount of my time thinking about it, is by
19 having a really strong brand and having what is often
20 referred to as brand equity. In marketing, competition
21 can match almost everything that it is that we do. We
22 drop our price, competition can match the price; we
23 increase our advertising, competition could increase
24 their advertising; we extend our service, we add product
25 features, et cetera, et cetera, and almost always


1 competition can match that.
2 The brand belongs uniquely to us, and it is
3 something that if we can build up perceived customer
4 value in our brand, it really helps lock customers in to
5 us, and that works to our advantage, and I do not shy
6 away from talking about that within my classes.
7 Distribution is an opportunity for some
8 competitive advantage. If I can find the key
9 distributors, if I can occupy a dominant part of their
10 shelf space, that is a competitive advantage that I
11 might have.
12 And the last thing I have up there is sort of
13 owning customers and trying to think about loyalty
14 programs that we see everywhere and the notion of what
15 is it that we do to try and enhance and reward our
16 customers when coming back. One that is not talked
17 about very much in terms of owning customers, and I
18 think it is going to become a bigger and bigger issue,
19 is customer familiarity or intimacy -- those terms used
20 a lot -- but I am really thinking now about familiarity
21 because of the data that we have about our customers,
22 and we can think about an Amazon, who has a customer and
23 a customer record of what it is that they have bought,
24 and they can now use that for trying to get the customer
25 to come back.


1 We are going to get better -- we, Amazon, are
2 going to better serve our customers because of what we
3 know about each of those particular customers, and that
4 really gives them a competitive advantage, and people
5 will be hesitant to switch to another brand or another,
6 you know, online bookseller because of the detailed
7 amount of information that a company might have. All of
8 those -- and I put this out as just a general
9 philosophy.
10 This, by the way, is -- a colleague of mine,
11 very well known, who teaches another section of the
12 marketing strategy course at The Wharton School is
13 George Day. He talks about achieving superior
14 performance, talks about it by positions of advantage
15 that one could have, positions of outcomes and
16 performance of outcomes, and sort of what some of the
17 sources of advantages are, and I wanted just to put this
18 up so that one could see this.
19 And then there is sort of -- he talks about
20 three ways to provide value. One is by price, and one
21 is through the relationship, and one is through
22 performance, and that generally is performance that is
23 superior to our competitors' products. And basically
24 the decision is you have to decide which of these three
25 it is that you are going to be. Many people strive to


1 be all three. It is often difficult to be excellent on
2 all three. So, you generally say, I am going to go out
3 and be the low-cost provider, or I am going to know my
4 customers better than anyone else knows them and know
5 how to serve them better, or I am going to go out there
6 with a superior performing product. Three different
7 approaches that could be combined to various degrees. I
8 am not an advocate that you can only be strong in one.
9 I thought -- actually, I was asked, you know,
10 so, how do you go about teaching this stuff? I have
11 lectures to talk about it, and there is lots of cases,
12 which are cases not just of what has happened
13 historically, but try to have, you know, current cases
14 where you put students in the position of, you are in
15 this position for this business, what are you going to
16 do, and they are all real life cases, and we go through
17 a dialogue trying to walk through how to think through
18 the process of what one should do, and then we have some
19 discussion and debates about what would be a logical
20 step to take from this point forward.
21 The other one that in some of my
22 pre-conversations stimulated a lot of conversation was
23 the use of simulations. I use simulations a lot in my
24 marketing strategy class. Actually, in the Intro to
25 Marketing course offered to all students at the MA


1 program at Wharton, we put them all through a marketing
2 strategy simulation that I help manage, and in that, we
3 take our students, we break them up into groups, we
4 assign them to teams, and they need to go out and try
5 and compete against each other and try and win the
6 customer's favor, and that is all they do.
7 In all instances, what I talk about through any
8 of these three approaches is I spend some time, you
9 know, trying to talk about improving one's position,
10 which could be through sales, it could be through market
11 share, but ultimately, it needs to be by increasing the
12 overall profitability of the firm, and that often
13 happens through improving your customer satisfaction and
14 improving your customer loyalty, and I find any time I
15 talk with a group of lawyers, those terms seem to get
16 people's attention when we talk about, you know,
17 customer loyalty, customer satisfaction, striving for
18 increasing of market share.
19 The simulation is one that if there is a market
20 that has, you know, a product life cycle, goes through
21 its growth, some hypothetical product called the Korex
22 one, and there is a new market that will emerge if
23 people elect to go into it, and the different firms that
24 the students represent are allowed to collaborate with
25 their competitors for licensing agreements of IP and for


1 doing some joint ventures, and they can do that across a
2 variety of technologies, and they operate in an economic
3 environment that is a growing environment, has
4 inflation, and a risk of antitrust intervention.
5 So, if they are seeing -- and by the way, this
6 is a slide that is shown to my students. This is not
7 something I have put together for this. It is put out
8 there very clearly, you know, there are things that you
9 can do which are inappropriate, and I am going to go
10 into that in just a second, but you need to go and
11 operate and try to do the best that you can at
12 increasing the value of your simulated firm within the
13 confines of the law, and all the competitors are open
14 for bringing actions against them. It is not just that
15 I as a professor play that role of the policeman.
16 This is another slide that I show which really
17 tries to highlight, they have got intense competition,
18 and you have got to be aware of what the competition
19 might be trying to do to you, and I will try not to make
20 any comments obtain taking a bite out of the
21 competitor's market share or position at all.
22 And the last slide that I am going to show you
23 that I put up in front of the students is, again,
24 talking about collaboration. So, there are some
25 guidelines that are provided for students on that, and


1 it makes it very clear, you know, that they can, you
2 know, do agreements for licensing and joint venturing.
3 There is going to be some royalties that are paid from
4 one or another.
5 One of the things that it is inappropriate to do
6 is to agree on how one will go to market. One can agree
7 on IP and how it will be shared, and one can agree on
8 licensing arrangements. One cannot agree on prices.
9 One cannot agree on you go for this market and I go for
10 that market, and that is a stipulation that is made
11 very, very clear to them of what it is they are about to
12 do.
13 Now, I thought what I would do is highlight some
14 areas that -- I was trying to figure out what -- you
15 know, why in the world you were having me here, and I am
16 going to highlight some of the things that are on there,
17 but always the focus is we want to acquire customers,
18 and we need to figure out how to acquire them, and some
19 of that is going to be by getting nonusers to start
20 using our product. It could also be by acquiring
21 customers from our competition, and those sort of take
22 different approaches. So, that is one task of acquiring
23 customers.
24 The second task is how do we retain customers,
25 and that is, you know, done generally by satisfying


1 them, and if we satisfy them a lot, there is some good,
2 strong, empirical evidence that very satisfied customers
3 tend to be very loyal, and so the real key is keep
4 customers happy, and that is going to lead to greater
5 levels of loyalty, but they will not always be happy if
6 you are doing the same thing, so you have to be
7 continuously improving, and improving on what it is that
8 you are learning from customers is important, and I
9 thought, well, it has got to be done where you improve
10 and you satisfy your customers better than the
11 competition does. So, I have that in there as well.
12 The general principle is that retaining
13 customers is even more important than acquiring
14 customers, because if you acquire them and it is a leaky
15 boat, then you will just have to be continually
16 replacing them, and in general, there is, again, some
17 good strong empirical evidence that retaining customers
18 is orders of magnitude cheaper than it is to acquire
19 customers, and so the real key is how do we satisfy
20 these customers and keep them coming back.
21 Here were the issues that I thought, well, what
22 would this group potentially be more interested in, and
23 so I thought, given what we are talking about, the topic
24 of the day, I should talk something about monopolies. I
25 will tell you I am an advocate of local monopolies. I


1 have to be clear on my definitions of that, and by local
2 monopolies, what I am really referring to is identify a
3 segment of the market. Do not treat the market as an
4 overall market. Identify a segment of the market,
5 understand them better than anyone else -- and I have
6 got to be careful not to say "own" or "dominate" or
7 "monopolize" -- but establish a very, very strong
8 position with those customers, okay?
9 By being very focused, you can satisfy that set
10 of customers better than people that are not focused on
11 that set of customers, and the example I cite to often
12 just for illustrative purposes is you can look at the
13 toothpaste industry and say, well, there is lots of
14 different brands all out there competing for people
15 brushing their teeth. If we are the ones that are
16 offering smoker's toothpaste and we develop a toothpaste
17 that is going to be better at removing nicotine stains,
18 then we could have a product that is going to satisfy
19 those customers more.
20 The fact that it is a relatively -- I do not
21 want to say dying segment, but small segment, allows us
22 the opportunity to appeal to that segment when others
23 might say there is not room for a second one who comes
24 in and specializes in that market, and I will confess
25 that I am an advocate of trying to get very good at


1 doing very well within a particular segment, okay? And
2 that is one position I take.
3 Another thing that I spend a fair amount of my
4 time talking about is anticipating competitive response,
5 and basically the position that I take on that is before
6 taking any move, one should anticipate what one's
7 competitor's moves are going to be, and also assess, and
8 how are those competitors' moves likely to change and be
9 altered by the action that I take? And if I would take
10 a particular action, there is probably going to be some
11 response to it, and I should take that into
12 consideration in advance to my taking some particular
13 action, rather than take an action, look at what it is
14 they have done, and then say, "Oops, now I need to
15 respond to that."
16 So, my position is build a likely competitor's
17 actions and reactions into our strategy and into our
18 plans before we act, just that simple. There are some
19 game theoretic perspectives that are probably brought
20 into this as well.
21 Predatory pricing, I started to say, well, we
22 all know predatory pricing is illegal, and I said, no,
23 we are going to talk to this group and say, predatory
24 pricing may be illegal, and the key part of that is
25 "predatory," and somebody defined for me predatory


1 pricing recently as predatory pricing is pricing below
2 cost, and actually, for the most part, I have got to
3 strongly advocate against then, but I think there are
4 some exceptions that one could make as to when one could
5 potentially price below cost.
6 In general, it is not very smart, because it is
7 hard to make money when you are pricing below cost. In
8 general, when you lower your prices, your competition
9 turns around and lowers their price, so if you couple
10 this with the slide I just showed you before, all you
11 are doing is bringing the market prices down, and so
12 that works to you and your competitor's disadvantage,
13 and yet there may be some times, particularly when you
14 are starting out, that you may want to have a very low
15 price on a temporary basis to build awareness, to build
16 some trial, to build some traffic, or in some cases, to
17 help sell other products.
18 Now, I recognize, by the way, that as I am
19 talking about this, I wanted to just put myself out
20 there, recognizing I may be removed in cuffs, that, you
21 know, these are all dangerous topics, but I thought it
22 is best to sort of hear what it is that students are
23 hearing and perspectives that they are taught, and they
24 are made very aware of, you know, some applications of
25 the Robinson-Patman Act and some concerns about anything


1 that might be predatory with respect to trying to drive
2 competition out of the market and that there has got to
3 be some rules and regulations against that, and
4 certainly against dumping.
5 We often think about that being brought against
6 many of our companies rather than being the doers of
7 dumping, and I must confess, I have never advocated
8 anybody doing any dumping or suggesting that that would
9 be a good thing for any of our students to do.
10 Then the last thing I will put out here is
11 collusion, and you saw what it is that we talk about
12 within the simulation. We certainly make it very clear
13 you cannot collude on price and you cannot collude on
14 who goes after which market, and those are the things
15 that I really try and cover in the courses that I teach,
16 and I hope this gives you some perspective of what
17 happens at one course in one business school as
18 approached by one professor.
19 So, that is what it is that I hope to try and do
20 with the notion that the goal is to serve customers and
21 build better capabilities and deliver the better value
22 to your customers.
23 So, thank you.
24 (Applause.)
25 MR. ELIASBERG: Thank you, David.


1 Our next is Jeff McCrea, vice president of sales
2 and marketing group at Intel Corporation. Jeff earned
3 his MBA from the University of Michigan in 1991 and
4 received a Bachelor's Degree in electrical engineering
5 from Duke University in 1987.
6 Jeff has held several marketing management
7 positions since joining Intel in 1991. Most recently,
8 Jeff served as co-president for Intel Americas, Inc.,
9 where he was responsible for all sales and marketing
10 activities in both North and South America.
11 Welcome, Jeff. We are very much interested in
12 what you have to say.
13 MR. McCREA: Thank you.
14 Well, if you are kind of wondering what I am
15 here for, I guess I am the single firm today to talk to
16 you about the single-firm approach. What I wanted to do
17 today was talk a little bit differently -- I know that
18 my colleagues will talk a lot more about what students
19 are taught. Instead I thought I would give you a bit
20 more insight into our business, and more importantly, I
21 thought I would do that through a particular case, and
22 what I am going to do is I am going to talk more about
23 our Centrino mobile technology.
24 Let me start off by suggesting if you look at
25 Intel's business, I am going to talk about our core


1 business, which I think all of you are familiar with,
2 which is our microprocessor business, how we build and
3 support the industry of PCs. Clearly any user who owns
4 a PC today, if you look at mature markets like the
5 United States, you have to have a reason to go out there
6 and buy a new one, and that new one is either to replace
7 the existing one or to add another PC, and that is how
8 we pursue our business, and the way we look at it, the
9 vast majority of the growth in this market particularly
10 is going to come from that.
11 So, you kind of start with the basics, well, why
12 would anyone want to do that? And the simple answer and
13 the most obvious answer is that they really upgrade just
14 because they can do something new, and that is because
15 the one that they have no longer does something that
16 they want to do. So, a lot of what we spend a lot of
17 effort on is trying to not only figure out what else
18 they can do with it, what are they going to value, and
19 most importantly, what are they going to pay for it?
20 Through the course of the last 15 years that I
21 have been at Intel, we have done a number of things
22 which is part of our long history of developing the
23 market, which is working with the industry on developing
24 I will call them complementary technologies, and you can
25 think of these things as everything from new interface


1 buses within a PC, things like PCI. You all are
2 probably familiar with things like USB, if you have ever
3 used a USB key or many different devices, your iPod
4 plugging into a PC.
5 We have been developing that with the industry
6 for many years in terms of how to bring it to market,
7 and the net result of that is it is a benefit. By
8 bringing these new capabilities to the platform, if you
9 will, now the user has a new use for that PC, and
10 ideally, it is going to take advantage of your new
11 capabilities of your new products.
12 So, like everything at Intel has a three-letter
13 acronym, CMT is our Centrino mobile technology. If You
14 have looked at your PC recently, you probably saw a
15 little butterfly-looking logo on it, assuming you have a
16 notebook -- and if you do not, there is a Best Buy down
17 the street -- and what that is is this is a pretty good
18 shift for us in the way that we went to market, and I
19 will talk a bit more about that.
20 Centrino, unlike all our previous Pentium
21 generation products, is a combination of three things.
22 It is a microprocessor, it is an Intel chipset, which is
23 the core logic that enables the microprocessor to talk
24 to other components in the PC, memory, et cetera, and it
25 is also an Intel wireless product. So, the only way you


1 can get that logo is actually if you have all three of
2 those components in there, and that is one of the things
3 that we require of our customers before they go to the
4 market.
5 The real use or the intention of this was for
6 several things. Number one is that Centrino was
7 delivered -- we believe it was a radically different
8 usage model to what people had seen before, and this,
9 just to take you back, this was introduced in March of
10 2003, so relatively recently, and at the time, you know,
11 this was the first product that we designed from the
12 ground up for the notebook segment. That included, you
13 know, just a stellar microprocessor. The architecture
14 was a break-through technology for us that really
15 enabled several things, including, you know, thinner and
16 lighter notebooks -- I will pick this one up, although
17 this one is not exactly thinner and lighter, but it is a
18 lot better than most of the ones you had previously
19 seen, which were Bodeckers (ph).
20 Secondly, it had much longer battery life, and
21 most importantly, which is what we spent a lot of time
22 marketing, was the ability to connect wirelessly, and I
23 will talk a lot more about what that really took in
24 terms of creating that ecosystem in wireless.
25 So, to do this, to create that value proposition


1 I just talked about, we had to do several things.
2 Number one is we had all the three components that we
3 had already developed, but this was a pretty radical
4 shift for us. In the past, at least since 1993 when we
5 introduced our first Pentium processor, all of our
6 products were really focused around the branding of just
7 the microprocessor and the PC. If we just called it
8 Pentium, in fact, this PC has a Pentium, which is
9 actually the processor that is inside there, it is the
10 same exact processor that is in our Centrino, but it
11 does not necessarily have all the other components, and
12 by branding the Centrino, what we were able to do, and
13 bundling, if you will, these three pieces, we were now
14 able to talk about that usage model.
15 If we were just talking about Pentium, we could
16 not guarantee that it had wireless in it, or more
17 importantly, that it worked seamlessly. So, we did a
18 number of things to do that. So, first of all, branding
19 was a key component to be able to get really unwired for
20 this usage. When I say unwired, it had to be not only
21 not having to plug in to get connectivity, but also long
22 battery life so you did not have to plug in literally to
23 the wall.
24 What we did was we did several things that were
25 really done in the background. One of them was doing a


1 lot of work on validation. When I say validation, we
2 validate all of our components just as a standard course
3 of business, making sure that they work and they do
4 exactly as we specify, you know, that is kind of
5 natural. What was unnatural in this, we literally spent
6 tens of millions of dollars to do, was ensuring that
7 this worked seamlessly with other components that the
8 user would want to take advantage of, for example, other
9 wireless routers and access points, in particular, as
10 well as validating with other software, so we did a lot
11 of intraoperability testing of components that did not
12 necessarily have any of our silicon in it or any of our
13 software in it, but we wanted to make sure that, again,
14 the user had a better experience, so that when they
15 opened it up, it just worked. What a novel concept.
16 Again, how do we create that value proposition?
17 So, to that end, we still looked at, what do
18 users actually want? Number one, high performance was
19 clearly key, and as I have talked about previously, we
20 had always taken our desktop processors, made some I
21 will call them minor changes, although they were more
22 than minor, to make them work in a notebook form factor,
23 and a lot of times we had to trade off less performance
24 to be able to get that.
25 With this product, it was very different, and


1 that was because it was designed for this, and we were
2 actually achieving at the time desktop levels of
3 performance and would fit into this different form
4 factor. Having that seamless wireless connectivity,
5 being able to connect anywhere anytime, was something
6 that is pretty much with a notebook today, I call it the
7 new normal. Once you are able to connect wirelessly,
8 you never even think about plugging in again, right?
9 Being able to get your information anytime, anywhere,
10 and it sounds like it is pretty easy today, but at the
11 time, you know, it was a pretty novel concept, and it
12 sounded interesting, but it was very unclear that the
13 users actually would want that or, more importantly, pay
14 for it.
15 Long battery life, since you are actually now
16 connecting wirelessly, you certainly do not want to be
17 tethered to your desk or to the nearest plug. You want
18 to be able to take it with you, if you were taking notes
19 in a room or taking notes at a park bench, to be able to
20 get outside and get some fresh air, out of this
21 building.
22 Other things, back to that, again, when you are
23 start carrying around, all of a sudden, you want to make
24 it better and lighter, so again, you go to the gym for
25 your exercise rather than carrying a notebook around.


1 So, how do you take this and get more mobility, take it
2 with you wherever you want to go.
3 So, to do this, we looked well beyond just our
4 products. We looked at what we call ecosystems, which
5 was all the other players around us. I talked about
6 wireless hot spots, and anyone who travels, frankly, I
7 take for granted, you can always get connected at the
8 airport and download your files when you are across the
9 country. Well, literally three years ago hot spots, if
10 you can remember, were not only not pervasive, they were
11 not common, and it was pretty rare you saw one. So, we
12 worked with service providers, actually physically we
13 worked with the airports, people like Marriott, the
14 hotel chain, and then retail establishments, to go in
15 and establish, you know, a network, if you will, of hot
16 spots, to enable that connectivity.
17 So, it was just a ton of what I will call heavy
18 lifting in the industry. In fact, we spent a huge
19 amount of money and effort to go do that, because again,
20 you had to go and create that market. Obviously without
21 that, you know, who cares if you have wireless
22 connectivity? You cannot connect anywhere, right? So,
23 how do you create that to enable that value proposition,
24 working with a number of partners?
25 And the other side of this is that we also spent


1 hundreds of millions of dollars to go promote the new
2 brand, and most importantly, that capability. That was
3 important not only for us to be able to, again, garner
4 that value proposition, but more importantly, and create
5 that brand that the Professor just talked about in terms
6 of that brand value, so people can recognize it and they
7 can similarly make that connection and understand, it is
8 in there, and it is just going to work, but as
9 important, it is for our partners.
10 So, knowing that we were going to go out and
11 talk about this new usage model so that the average
12 consumer could actually understand that, hey, this is
13 now here and I can do it. We did several other things
14 in terms of doing everything from what we called mobile
15 experience zones, which were putting in place, you know,
16 wireless notebooks in airports, among other places,
17 where we just literally had some people that could
18 actually see it and experience it, see what it was like
19 to actually use it, and most importantly, see how easy
20 it was to do.
21 So, one of the things I was asked to talk about
22 is how did we come up with this decision to go down this
23 path? This was a pretty radical departure for us and a
24 pretty big gamble if you think about it. As I talked
25 about, we had this product which frankly we knew was


1 exactly what we needed from a notebook market
2 standpoint, from a processor standpoint, but we had very
3 little experience in the wireless arena, and actually,
4 this was a brand new product for us, so we had to come
5 back and we had to develop a whole new product that was
6 going to be part of this, because the only way that we
7 could validate and make that promise, again, is that we
8 knew it was going to work, again, back to our brand
9 promise and our ability that we wanted to ensure that
10 the quality is there.
11 Other technological challenges. Well, if you
12 are just introducing a single product, you know,
13 complexity is death, right? You want to simplify
14 everything. You now suddenly have three different
15 components, you have got tight schedules, you have got
16 technical risk in terms of are they all going to really
17 work together, are they going to perform at the same
18 level, are they going to perform adequately with each
19 one.
20 Branding, I talked a bit about, you know, there
21 was huge, huge brand equity in Pentium. I think
22 everyone hopefully recognizes that very quickly. When
23 you think about it, though, Centrino was going to take a
24 huge amount of money to brand something else, and you
25 could argue, hey, why don't you put both brands on it,


1 but again, that just creates confusion. So, we had to
2 take a business risk in terms of choosing to do that.
3 And then finally, I talked about these large
4 investments on hot spot enabling, co-marketing with many
5 partners. We did this intra-operability testing and we
6 had this huge advertising budget. At the end of the
7 day, we spent an awful lot of money, and is it going to
8 pay off? Are you going to get a return for that
9 investment?
10 So, obviously we made the big bet. We bet it
11 was going to succeed. You know, when you look at this,
12 it was a longer term bet. This is not a -- you do not
13 go back. So, the intent is that you now suddenly have
14 to think about all these components and all these pieces
15 going forward as part of the overall platform and ensure
16 that that is going to keep up.
17 We had to make sure that wireless was actually
18 going to deliver the experience, you know, betting on a
19 new engineering team, as well as, hey, are you actually
20 going to be able to grow your market, and specifically
21 the notebook market.
22 The other piece I did not mention that I
23 probably should have earlier was that, you know, in
24 fairness, we do not do this out of the goodness of our
25 heart, you know, we are in business to make money. So,


1 one of the keys of this product was also this is one of
2 our premium products, so our goal here, too, is to
3 actually shift our mix up to enable people -- to give
4 them that better experience with the Centrino, and plan
5 on and hope that they will pay more, so, in effect, will
6 Centrino increase our revenue as a result of doing this,
7 but by focusing people on these added benefits,
8 arguably, they will pay more at the end of the day.
9 So, obviously the bet paid off. For us, it
10 turned out to be a phenomenal seller, continues to be.
11 It continues to be a strong uplift for us on our overall
12 sales, but I think as importantly, if you look at the
13 notebook segment today, it is grown dramatically versus
14 the desktop segment, and we think that is one of the
15 results of doing this, which actually helps all of our
16 customers, as well as enabling these other usage models
17 and these other revenue streams for other service
18 providers and other components around it. So, you know,
19 we call it the Centrino effect, if you will, which
20 really lifted all boats around us, and I think the
21 result is pretty clear.
22 So, today, wireless computing is ubiquitous, you
23 know, two years after a huge investment and a lot of
24 time, and obviously you will see what is coming next
25 from us shortly.


1 Thank you.
2 (Applause.)
3 MR. ELIASBERG: Thank you very much, Jeff.
4 Our final speaker before we take a break and
5 then begin our round table discussion is David
6 Scheffman, a director of the consulting firm LECG and an
7 Adjunct Professor of Marketing and Strategy -- excuse
8 me, Business Strategy and Marketing at the Owen Graduate
9 School of Management at Vanderbilt University, where he
10 was a chaired professor from 1989 until 1998.
11 He created and taught the business strategy
12 curriculum at Owen, at the Owen School, and continues to
13 teach one course a year every other weekend in the fall,
14 so I guess we are in the middle of it right now, on
15 business strategy and the Executive MBA Program and has
16 won a teaching award for this program.
17 Dave is a noted scholar in the area of
18 industrial organization and antitrust economics, among
19 others, having authored several important articles and
20 books on topics such as market definition, merger
21 analyses, analysis of the various injury and vertical
22 analyses. He also has written on, taught and consulted
23 on issues involving business strategy, marketing,
24 pricing and intellectual property.
25 Dave, thank you for coming, and we very much


1 look forward to your presentation.
2 DR. SCHEFFMAN: Okay, thanks. It is good to be
3 back. I have got my usual audience, usual small
4 audience. I can tell I am not in a business school,
5 because probably you cannot read the slides, which
6 should be, you know, you bounced out of the school
7 immediately if that was true. Your students would
8 revolt, and you do not have good sight lines and
9 comfortable chairs and hookups for your computer so you
10 can search the web while I am talking. All right.
11 A little bit more about my background. I
12 started out as an economist, and I taught Ph.D.
13 economists and did research in theoretical economics
14 before I happened to come on leave to the FTC in 1979, a
15 very exciting time at that time, because I remember we
16 were trying to break up the cereals companies and DOJ
17 was trying to break up IBM, and we were investigating
18 the auto industry and stuff. I will talk a little bit
19 about that.
20 Then I came -- I was here for a really exciting
21 time, which was with HSR and the Reagan Administration
22 and the change in merger policy, and we actually had
23 horizontal mergers to look at for a change, because we
24 had not for many years, because most horizontal mergers
25 were blocked by the Government and were not attempted,


1 so because of HSR, we got to look at all sorts of
2 industries. It was really very interesting, and I
3 learned a lot, and a lot of us that have been involved
4 in industrial organization in that period learned a lot,
5 and what we learned is, gee, the real world of business
6 behavior and competition is just a lot more complicated
7 than our simple models.
8 I worked on, I was lead staffer on one of the
9 last real oligopoly cases, the ethyl investigation,
10 which the companies actually did behave like a real
11 oligopoly as they priced -- as they largely priced in
12 lockstep and had uniform prices, which is that they fit
13 very well a standard economic model of oligopoly, and
14 the FTC challenged that and argued that that was because
15 there were certain practices they were engaging in, and
16 the FTC lost that case, but what was striking about that
17 case is I have never seen another industry since. We
18 had a number of other investigations at the time that I
19 was involved in and looked at similar industries, and
20 none of the rest of them looked like that. So, none of
21 them looked like a classic economic model of oligopoly.
22 So, I spent a lot of time, most of my time in
23 the eighties was spent looking at mergers. I learned
24 all sorts of stuff, where I learned facts and saw all
25 sorts of interesting things, and then I went to


1 Vanderbilt, where the dean was an economist, and said,
2 well, you can come in and, you know, kick off our
3 business strategy program, and I said, what? Well, I am
4 a Ph.D. economist, and I have learned a lot about
5 competition, so I can do that.
6 So, I went in and, it was not overly successful.
7 As David can tell you, teaching MBAs is a very
8 challenging task, and I had to -- you know, I taught it
9 and actually dropped out for a year, and I sat in on
10 some things, and I read a lot of material and everything
11 and I thought about it, and then gradually I got it
12 right. So, actually, my course is -- I will give myself
13 a plug -- is usually the highest rated course in the
14 program, and that is in part, as David will tell you,
15 anybody who can do a good job teaching strategy is going
16 to get high ratings, because it is what students come
17 into the program for. So, if you get it right, you
18 know, they are going to like you.
19 But I think I did contribute a lot, because I
20 think I do get it right, add value, particularly -- now,
21 I still -- the only thing I teach these days is
22 executive MBA students, which I delight to teach,
23 because they are actually on the job. MBA students,
24 even though they have a number of years of business
25 background before they come, that is the requirement in


1 any major business school, you know, a couple weeks into
2 the program, they have forgotten about that entirely.
3 They are back in school, you know, you try to engage
4 them about real stuff, and they say, what is on the exam
5 and how are we going to get a job? But the executive
6 MBA students are wonderful, because they really take it
7 seriously. The problem is sometimes they take it back
8 to the job and apply it. So, that is my background.
9 So, when I was called by Pat to do this, I said,
10 gee, this is great. I have done both these things, so I
11 can talk about this. Well, then actually I thought
12 about it, and I said actually it is going to be
13 difficult to figure out what I would say. So, I am
14 going to tell you what I do have to say.
15 First of all, because I want to say a number of
16 things critical about Section 2 and Section 2
17 enforcement, Section 2 is -- I have been an antitrust
18 enforcer for many years, I believe in the antitrust
19 laws, and Section 2 is important, but the context here
20 is most markets have become increasingly competitive
21 over the past 25 years, and it is strikingly different
22 from when I arrived at the FTC in 1979 and now today.
23 If you think about the auto industry in 1979,
24 think about IBM and, you know, things change so fast
25 because of globalization, because of technology, because


1 of information, because of sophistication of customers,
2 because overwhelmingly competition in almost all markets
3 is about a product now, in the real sense, not like in
4 the 1950s auto industry, they come out with a new model
5 each -- a somewhat changed model of each other. The
6 competition in most markets, even in industrial or
7 commodity markets is overwhelmingly about product these
8 days. So, it is not an economic climate conducive to
9 coordinated oligopoly behavior, which is what we learned
10 about as economists in my day, probably still do.
11 Section 2 is important under the purpose -- the
12 real effect of the antitrust laws, an important effect
13 of the antitrust laws is deterrence, and I think
14 deterrence largely works. I am concerned that if it
15 works too well. I see a lot of counseling as a business
16 consultant and in other ways, seeing companies being
17 advised not to do stuff that I wonder why they are being
18 advised to do that other than having been an enforcer, I
19 can understand that particularly the risk of not
20 enforcement but private litigation is a significant
21 deterrent to otherwise, you know, procompetitive
22 activity.
23 Federal enforcement policy has advanced a lot in
24 the last 25 years, I think in a permanent way. I think
25 we might -- you know, a new administration might be more


1 aggressive than the current administration is, but I
2 cannot imagine going back to the 1970s and trying to do
3 things like break up the cereal companies or IBM or
4 things like that. I think this has come because of a
5 learning experience, an experience in litigating and
6 very fact-intensive cases, like the cases I talked
7 about, and other -- and lot of learning from HSR and
8 mergers.
9 The beauty of Section 2 enforcement, as I have
10 written, is that, you know, for most real Section 2
11 violations, you are going to have a lot of complaining
12 parties, and so you do not need to worry about finding
13 Section 2 cases. The real problem is finding the ones
14 that are worth pursuing, which are far less than the
15 ones that come to your door.
16 Clearly economic theories have a very important
17 impact on Section 2 law and policy, but there are
18 limitations to economic theory. I am an economist, but,
19 you know, I had a very good marketing professor
20 colleague at -- who was -- went to the Sloan School, an
21 economics-oriented business school, but they all are
22 these days, and he wrote a book that said everyone in
23 marketing or business should learn some economics, just
24 do not learn too much, and I think that is right,
25 because what economics is good at and is very good at


1 gives you a very limited slice of what business behavior
2 and conduct is about, and it is difficult actually with
3 an economist, strong economist mind set, to get out of
4 that and try to understand.
5 I remember once seeing in a document in a
6 merger, a company -- they were considering the strategy,
7 this was a branded product, they were going to raise the
8 price of the product, use the money that they got
9 from -- the extra profit they got from raising the price
10 to do advertising and promotion, and as a result of
11 that, they thought they would be able to increase the
12 sales of the product. Now, that is a pretty foreign
13 idea to an economist. I do not think it is a foreign
14 idea to a marketing professor, which takes into account
15 that price is just one of the four Ps, and two, most
16 product lines and businesses are largely self-financing,
17 so if marketing wants to do something, they have to come
18 up with the money somewhere, and this was their idea of
19 how to come up with the money.
20 Okay, limitations of economic theory. The power
21 of economic theory for antitrust is in market power
22 models and the model of monopoly and oligopoly and other
23 sorts of things like that. That is the economic basis
24 of antitrust enforcement, but economic models largely
25 totally assume away all the important businesses


1 considerations. They assume there is a product. They
2 assume there is a demand curve. And the issue is, well,
3 choose the price on the demand curve.
4 Well, that has very little to do with real -- it
5 has something to do, but it has very little to do with
6 real business behavior, especially these days, which is
7 speaking about what products should we have, what can we
8 create, what can we introduce, and who can we find to
9 buy them, and how, how do we get to market. So, real
10 world products and companies have to create and modify
11 products and services, they have to find customers, they
12 have to try and sell.
13 So, the demand curve is that convenient
14 construct, and it does tell you something about pricing,
15 which I think any marketing person would agree with, but
16 it is not -- a demand curve is not -- it is a result
17 fundamentally of business and marketing strategy.
18 Also, a great puzzle to economists are that, you
19 know, production and cost curves are things that just
20 exist. They result as the existence of what happens
21 inside a firm, and what we have seen, great revolutions
22 of that in our economy, for example, the so-called
23 Toyota manufactured cars and other sort of consumer
24 durables fundamentally, you know, fundamentally
25 revolutionized automobile production. You could


1 actually produce higher quality cars at lower cost than
2 what at the time -- in the 1940s, say -- was the GM
3 approach, was clearly, as far as we knew, the most
4 efficient way to do it. It was no longer -- it was no
5 longer efficient to do that. So, competition on costs
6 and production techniques is very important and cannot
7 be taken as given.
8 I think a real problem with economics is that
9 although there are dynamic models of competition in
10 firms, in reality, they are really static and a snapshot
11 of economics is static, and competition these days in
12 all markets is not fundamentally dynamic. It is about
13 developing new products, new services, new technology,
14 new capabilities, et cetera. I am not saying that, you
15 know, that the static view is always wrong, but let's
16 say I think that it gets us into trouble in Section 2
17 when we try and apply Section 2 sometimes, particularly
18 in high technology markets.
19 The problem with economics is there is very -- I
20 think there was a session I was not able to attend on
21 empirical analyses for unilateral conduct. I do not
22 know what it said, but I think I know the literature,
23 and I think the answer is there is very little. There
24 is very little credible use for economic -- empirical
25 economic research. There is a lot of research -- there


1 is a lot of research on business strategy, not of the
2 sort mostly that economists would do, but very
3 insightful, and I will talk about that a little bit
4 later.
5 So, what is the relationship between business
6 strategy and economics? Economics provides a lot of
7 tools. The tools for profit maximization, that is
8 consumer demand and the cost curve, and the lessons for
9 profit maximization are profit-maximizing capacity,
10 expansion of R&D expansion or whatever, tools for
11 analyzing competitive strategies, equilibrium analyses,
12 really important, which is -- that is a really unique
13 contribution I think of economics, of understanding --
14 and game theory is part of that, but understanding that
15 -- you have to understand how the interactions of the
16 various actors in the competitive arena you are looking
17 at, what the outcome of that is, and economics is really
18 plus game theory, and the use of game theory by
19 economists have really been the main contribution to
20 that.
21 Fortunately, the tools -- economics has very
22 limited tools for analyzing the efficiencies or business
23 justifications in the sense we use in antitrust, either
24 in mergers or in Section 2.
25 What is the discipline of business strategy?


1 Well, it is largely multi-disciplinary, largely case
2 study and industry study focused, very rich in facts.
3 It is very interesting because if you look at what
4 industrial organization economics was in the fifties
5 before it was taken over by the theorists, it was
6 exactly that. It was some combination of Professor
7 Smith's and Professor Reibstein's combination of
8 marketing and history and use of economics, case
9 studies, and was what industrial organization economics
10 largely was, and then it was taken over by the
11 theorists, and now we are somewhat coming back, but as
12 consultants, unfortunately, rather than as active
13 academicians, because we usually cannot publish the
14 results when you have proprietary information. So, what
15 we do now as antitrust consultants is we do a lot of
16 case study analyses, apply the tools of economics and
17 other tools.
18 The practitioners of business strategy, when I
19 went to graduate school in economics, there was not such
20 a thing as business strategy really. I mean, there were
21 people, but the people who invented business strategy
22 somewhat after that, which were Bruce Henderson, my
23 departed colleague, who actually started The Boston
24 Consulting Group, and Michael Porter, and a number of
25 others, and this -- I was lucky because about the time I


1 went to Vanderbilt in the late eighties, business
2 strategy began to become a real discipline -- it had
3 been for a while, but it became a real discipline and
4 actually has made great inroads since that time, and
5 practitioners in business strategy have typically been
6 marketing people. That is probably the typical person
7 who teaches business strategy. I think the original
8 people that taught business strategy were often
9 organizational theory people or, you know, people with
10 general business background, and then the economists.
11 We economists got into it because we said, well,
12 we know about strategy, so you increasingly, including
13 at Wharton in the business -- in the business strategy
14 area, you have a lot of economists floating around, I
15 think with -- and more and more Kellogg probably
16 teaching business strategy in other places, like me at
17 Vanderbilt and others. So, it is a very fertile field
18 in which a lot of lines of research are done.
19 What does it do? Well, what is accomplished, I
20 think, is, you know -- which it seems trivial but was
21 actually quite important, which was to analyze and flesh
22 out the rules of value creation, value appropriation,
23 and I will talk a little bit about that, really
24 understanding in a way relevant to real business and
25 real business behavior how value is created and how


1 value is appropriated, what the bases of success are,
2 develop the template and tools for strategic analysis.
3 What is taught in the typical business strategy
4 courses? Not antitrust. Certainly if anything is
5 broaching on collusion or anything pop up in class, we
6 certainly say do not do that. I teach -- antitrust
7 issues come into my class, I teach a case about the
8 breakfast cereals industry in the eighties, which was
9 somewhat based on the FTC cereals case, but the emphasis
10 entirely is on business strategy, and the context of the
11 FTC was investigating the industry, so we spend very
12 little time.
13 That is not to say any good business school
14 program will have an ethics and business law program, so
15 they will warn people about antitrust, but it is really
16 quite striking how little -- the learning of antitrust,
17 how little use it is really for actual business
18 strategy.
19 Okay, business strategy learning teaches us
20 that, you know, what the basic conditions are that are
21 necessary for sustainable competitive advantage, and
22 probably you cannot see this unfortunately, but a
23 sustainable competitive advantage means that you make a
24 very good return on your invested resources compared to
25 what your opportunity costs are, and in simple terms, I


1 think what I would articulate in a business strategy
2 session is you have the right combination of resources
3 and capabilities, and you put them together in a way to
4 develop and get to market products and services in a
5 situation where you are somewhat limited from the
6 competitive forces. That is a positioning.
7 You have taken something that can create
8 significant value for downstream customers, and you get
9 the contribution of significant parts of value, and the
10 key part of that learning is you have got to be in a
11 situation where it is not a commodity type competition.
12 So, you have got to be differentiated in some respects.
13 And as David said, business strategy teaches us really
14 two ways of competing, competing on a lower cost basis
15 or a differentiation basis.
16 I am going to -- since I have run out of time
17 almost, let me try and get to the punch line here on
18 Section 2. We try lots of things. There are lots of
19 economic theories, and they have been around for a lot
20 of years, and all the things you might think about
21 Section 2, manipulation of capacity, intellectual
22 property, predatory pricing, bundling, which is
23 unfortunately a new event, manipulation of product
24 characteristics, distribution, and you have heard now we
25 have purchasing, so those theories have been around a


1 while and they have been tried in various capacities,
2 and we have a pretty checkered record of enforcement.
3 It is interesting, if you take the cases of the
4 late seventies, early eighties, they were business
5 strategy cases. That is what -- exactly what generated
6 them, the Dupont case, the Kellogg's case, IBM, are
7 really fundamentally business strategy cases, and I
8 think none of those cases were won in the end, they were
9 settled or lost, but the fact finder said, well, this
10 looks like competition to us.
11 And I think the lesson -- since I am almost out
12 of time -- the lesson I would draw for business strategy
13 is, business strategy and business conduct is really
14 fundamentally about value creation, and to some extent,
15 about value extraction, of course, because you have got
16 to make money to justify your resources in it, and we
17 tend in Section 2 in antitrust to look at a snapshot of
18 the way the world is and think about what a firm maybe
19 should not do if it is got a "dominant position."
20 Now, with Section 2 -- there is certainly a role
21 for Section 2. Where Section 2 gets into trouble is
22 when it tries to meddle around with what is really core
23 value creating activities in a market. Microsoft, there
24 are very, very good reasons for Microsoft to move into
25 lots of other applications of the browser. I mean, it


1 was interesting and not a major part of the case, but
2 the -- I am sorry, the operating system, but the
3 operating system had devoured all sorts of software by
4 the time the case was brought. Remember all the file
5 management utilities and being able to have files with
6 longer names and all those other sorts of things, which
7 are now part of the operating system? Of course they
8 should be part of the operating system.
9 In other things, it is not surprising, you know,
10 more and more complementary things, like office type
11 software and everything, it is not surprising that those
12 might be complementary to the operating system at all.
13 So, the focus on that and the idea that that should be
14 regulated was, you know, really in my view a very bad
15 idea. I was not involved in Microsoft in any way, and I
16 do not have deep knowledge of it, and I am not defending
17 the things that Microsoft did, but certainly from what I
18 understand, it looks like things you would expect
19 them -- that they should have done.
20 But Section 2, messing around with what is
21 fundamentally about value creation in a market is not --
22 you are essentially regulating the competitive process,
23 and we know antitrust is not a regulatory instrument and
24 should not be regulated.
25 The other thing is when Section 2 tries to


1 regulate what the competition is about. I was fortunate
2 enough to be an expert for U.S. Tobacco in the Conway
3 case where one was allegations was U.S. Tobacco was
4 using category management. Duh. Every major consumer
5 product company uses category management, and the
6 argument was that somehow U.S. Tobacco used category
7 management to either hoodwink WalMart or coerce WalMart
8 or bring WalMart into some collusion against U.S.
9 Tobacco's competitors.
10 That was silly, okay? The jury did not think it
11 was silly, but it does show if you get a private case,
12 which is where the action is in Section 2, if you have
13 got a situation where you have, arguably, you know,
14 market power, monopoly power, as U.S. Tobacco argued
15 they did because it was, you know, a very large share,
16 then you have got to be -- the lesson is in the
17 Microsoft decision, at least that is the -- you have got
18 to be really careful what you do, and that is I think
19 where Section 2 really gets into trouble, is when you
20 start regulating normal business behavior, when you
21 start trying to regulate the way value gets created, is
22 where you get into trouble, I think particularly in high
23 technology markets that move so fast.
24 Remember, whatever there was in the IBM case was
25 over by the time it settled. The market had moved so


1 fast by that time, it was silly, and the market actually
2 moves so fast in operating systems and other things
3 that, you know, it was not anything like the market that
4 the Justice Department attacked in the original case.
5 Again, I am not criticizing bringing the case.
6 So, I think where Section 2 -- where business
7 strategy can help is it provides us a deeper
8 understanding about the way competition really works,
9 about the rules of value creation and how they differ in
10 different contexts, how value extraction works and why
11 it is important, and that is what is missing, and
12 industrial organization economics does not provide that,
13 the law does not provide that. We take each new
14 situation as lawyers and economists and we try and fit
15 what we see into the paradigms we know, and we have to
16 enlarge our understanding and our knowledge to be able
17 to understand better business behavior.
18 Okay, that is not to say there are not good
19 Section 2 cases and there is not a role for Section 2,
20 but that is where I see where the problems are and what
21 the contribution of business strategy could mean to
22 that.
23 Thanks.
24 (Applause.)
25 MR. ELIASBERG: Thank you, Dave. With that,


1 let's take a ten-minute break, and then we will return
2 for first some thoughts and commentary by Professor
3 Smith, and then a round table discussion. So, a
4 ten-minute break, please.
5 (A brief recess was taken.)
6 MR. ELIASBERG: If folks wouldn't mind taking
7 their seats, and we can get started with the
8 observations of George Smith, and then we can give each
9 of the presenters a chance to comment on what they have
10 heard, any thoughts they may have on that, and then we
11 will open it to a round table discussion.
12 So, George, please go ahead.
13 DR. SMITH: All right, thank you. Good
14 afternoon. I was here this morning, and I was added to
15 this panel more or less at the last minute as -- I am
16 not sure why. I guess they thought I might have
17 something useful to say, and I was also asked to speak
18 specifically about what gets taught about antitrust in
19 business schools, and I will address that, but I did
20 want to at least make a couple of observations about the
21 presentations that we just heard, which I found
22 particularly fascinating.
23 For those of you who were not here this morning,
24 I am an historian by training, even though I teach in
25 the Economics Department at the Stern School, and I am


1 very interested in how business strategy has developed
2 over time and how we have to think about business
3 strategy as a discipline and possibly a way of thinking
4 that may be increasingly useful to antitrust authorities
5 and policy-makers.
6 In business schools, of course, what we teach
7 our students is how to drive toward monopoly. That is
8 what we are there to do. That is our mission. Nobody
9 wants to live and work in a world of perfect competition
10 where the prices are driven by costs and you do not have
11 any incentives to innovate or create new wealth. That
12 would be pretty boring. So, explicitly, what we do is
13 we help create cases for you to prosecute, and that is
14 our function.
15 Now, we heard some interesting stories today,
16 very different points of view and sort of vision on this
17 problem of business strategy and the drive toward
18 monopoly. First of all, we hear that at Wharton, they
19 teach marketing strategy as a way of gaining a
20 competitive advantage. And a competitive advantage
21 means, of course, putting yourself in a position where
22 you can charge higher prices for your products and
23 services.
24 Then we heard about Intel, which is a company
25 that practices this sort of thing, and at Intel, of


1 course, branding is very important, and we heard a
2 wonderful story about how creating a brand not only
3 enables Intel maybe to charge higher prices than they
4 might otherwise receive if it were just offering its
5 product as a commodity. But it also implies a promise
6 on which they have to continuously deliver at higher and
7 higher levels of quality over time, and that seems to me
8 to be a pretty good thing.
9 And finally, we heard about the limits of
10 economic theory and an invitation to think more broadly
11 about strategy as a discipline for understanding how
12 business people really think and really behave and to
13 improve our appreciation for that as people interested
14 in policy.
15 Now, I will just leave that hang there and hope
16 that we will have lots of questions and thoughts about
17 those basic issues.
18 As for what gets taught in business schools
19 about antitrust, I did not have a lot of time to think
20 about this, even though I have been involved in academic
21 administration for a period of time in the executive
22 programs at NYU, where I was the academic director for
23 three years, and I learned a lot about the curriculum
24 and what gets taught in it, and I certainly have
25 colleagues who know something about this.


1 When I am put in a position like this, what do I
2 do? I do what every good academic does. I rip off
3 somebody else's work which does not fall within your
4 jurisdiction but my colleague, Larry White, some of you
5 know him, he has had a career in public service as well
6 as academics, did a survey a few years ago, I think
7 around 19 -- excuse me, 2002 -- I am stuck in the wrong
8 century -- 2002, where he surveyed about 33 leading
9 business schools to see what they were doing in
10 antitrust, and he discovered that there was scarcely a
11 business school that offered a course in antitrust
12 unless it was offered once in a while as an elective.
13 More and more business schools over the years have
14 withdrawn from teaching IO, for example, industrial
15 organization. He did find that what antitrust was being
16 taught in business schools generally cropped up
17 episodically in courses, such as David's, where
18 occasionally you have to remind students that some
19 things they might do might transgress or fall outside of
20 the law.
21 And then Larry gave some thought to what should
22 be taught in business schools about antitrust and how,
23 and his conclusion, and I largely agree with him, is
24 that in a business school, where we are mainly concerned
25 with teaching people skills and providing them insights


1 on things that they can use on Monday morning as well as
2 hopefully ten years from now, there is not a lot of room
3 for teaching the fine points of the law in business
4 schools in a way you would in a law school. And
5 business school students, of course, are not demanding
6 that we teach them the intricacies of tying and
7 bundling, predatory pricing and that sort of thing. But
8 Larry did come up with some interesting formulations
9 which I will share with you about what students need to
10 know about antitrust and how it should be delivered.
11 First of all, students should always be aware
12 that antitrust policy exists, and there are good reasons
13 for it. There are good social and economic reasons for
14 antitrust. They should understand that there are dead
15 weight losses in monopoly situations, and very often the
16 drive to monopoly power leads more toward income
17 redistribution rather than wealth creation and that is
18 something that society has to worry about. It is always
19 been my feeling that businesses are supposed to be in
20 the business of wealth creation and politicians are
21 supposed to be in the business of wealth redistribution,
22 and when businesses start doing welfare distribution,
23 you lawyers should start paying attention.
24 Then there should be some admonishments given to
25 students in the context of the course materials that


1 certain actions that they take may make their firm
2 liable for antitrust action and in some cases may make
3 themselves liable for criminal action. They need to
4 know that. They need to be sensitized to categories of
5 issues for which they should be talking to their
6 corporate counsel or seeking advice from their
7 superiors. There are other things one might bring up,
8 but I think those are the main points.
9 Finally, I was asked at lunch today to talk more
10 specifically about the role of ethics courses in
11 business schools, and I can speak to that. I am
12 delighted to hear that ethics is taught as a course as
13 Wharton. Ethics is offered as a course in some business
14 schools but not in others. Columbia University, which
15 pioneered a lot of modern business ethics teaching,
16 actually dropped its ethics course for a while under the
17 assumption that professors ought to introduce an ethics
18 model into every course they teach. I think that kind
19 of decentralized approach can carry some hazards, if
20 only because in any population, there are going to be
21 sociopaths who ignore this instruction, and to be
22 serious, I do not know a single professor who thinks he
23 or she has enough time to even advance their core
24 disciplines in whatever amount of time they have, let
25 alone introduce something else.


1 So, I think it is a good thing for schools to
2 offer ethics courses that deal not only with legal but
3 also extralegal and nonlegal problems, nonmarket
4 problems in business decision-making.
5 What we have done at Stern is to develop an
6 ethics course which has unfolded over a period of time
7 from the 1980s through the 1990s and has evolved into
8 what I think is a pretty good model. We organize the
9 course around our existing senior faculty from all the
10 disciplines of the school, and faculty take turns
11 offering instruction in the ethics courses. We do not
12 leave it to ethicists or philosophers to do this. We
13 think the students feel that the course is a lot more
14 credible if it is delivered by the finance guru, or
15 marketing professor, and then we bring the faculty
16 together into seminars where we go through particular
17 cases to help them better present the cases in
18 classroom.
19 With respect to antitrust, I can say that it
20 forms a very small part of the ethics curriculum, but a
21 good part of the ethics curriculum deals with problems
22 of compliance, and we do spend a lot of time on the
23 sentencing guidelines in an attempt to scare the
24 daylights out of our students as to all the terrible
25 things that might happen to them, even if they are just


1 peripheral to schemes that are going on in their
2 companies.
3 So, that is what business schools are doing, but
4 clearly, business schools do not focus on the core
5 antitrust issues, and I think, ultimately, it is
6 precisely because antitrust, as it is traditionally been
7 addressed in the economics curriculum, does not fit the
8 criteria that David Scheffman laid out for the real
9 business world. It does not help people understand what
10 really goes on in the business decision-making
11 processes.
12 Finally, in David Reibstein's presentation there
13 was one slide where he introduces a discussion about how
14 people should think about anticipating likely outcomes
15 of their own behavior -- it relates to game theory and
16 scenarios that have become integral to the teaching of
17 business strategy, marketing, and I know I beat this
18 drum this morning, but I think those kinds of tools, as
19 they become more and more refined and more accessible,
20 are things that policy-makers should incorporate into
21 their own analysis of business practice, in addition to
22 the economic analysis one already uses, all right?
23 So, I will leave it there and hope for a lively
24 discussion.
25 MR. ELIASBERG: Thank you, George.


1 (Applause.)
2 MR. ELIASBERG: What we thought we would do now
3 is to allow each of our three presenters from before the
4 break if they would like to say a few words, and then
5 turn to a guided discussion with Ken and myself.
6 So, Dave Reibstein, you were first, if there is
7 anything you care to add or comment on what you have
8 heard, we would be delighted to hear it. If you could
9 speak into -- all the speakers, if you could speak into
10 the microphone for posterity's sake here.
11 DR. REIBSTEIN: Sure, okay.
12 One of the things, by the way, you did not
13 provide in my background, and it wasn't relevant at the
14 time, is I served for several years as the dean at
15 Wharton Graduate School, and in that role, one of the
16 questions that I had to ask was where within our
17 curriculum we should have, you know, business ethics and
18 business law taught, and we spent some time addressing
19 the question that George was just raising of whether or
20 not it should be taught as a separate course or taught
21 within existing courses as it applies along each of
22 those disciplines, a very controversial issue.
23 In one sense, the great advantage of having it
24 as a separate course, because we could have some of
25 our -- we have a Department of Business Studies and


1 Business Law, and these are all lawyers that teach in
2 these courses, and they know the law better than the
3 rest of us that sort of do not really know the law, just
4 know about the law, a little bit about it, and it seemed
5 like that was a logical place for it.
6 On the other hand, gee, when you are talking
7 about making real marketing decisions, maybe it should
8 be in the marketing aspect. There is this real
9 trade-off that we wrestled with quite a bit, and the
10 argument against the separate course is that, you know,
11 it is sort of like you go to church on Sunday, and then
12 the rest of the week you do whatever you want to do. We
13 have a business ethics and law course, and then the rest
14 of the week, you do all the things that you want to do,
15 and that did not make sense, yet the reality is, you
16 know, as George pointed out, it is hard for people to
17 keep up with enough time for their own discipline and
18 the knowledge base, and so we elected to do, you know, a
19 separate course, and then we have elective courses
20 within each of the disciplines. So, in marketing, we
21 have a marketing law course that I did not mention.
22 The problem with that is, we get about 30
23 students a year out of our 800 a year that take that
24 course, and my guess is that the 30 who take it are the
25 30 that do not need to take it, and that is a problem


1 that we have.
2 The other thing that I am curious about, and I
3 really raise it as a broader question, is I think most
4 of the law that we have is U.S. law. Most of our
5 students -- actually, most of our students think
6 globally. Almost half of our students are -- carry
7 non-U.S. passports. Almost all of them have spent some
8 time living outside the United States, and all of them
9 aspire to go to work for global businesses. So, trying
10 to think about, so, what are the laws and what are the
11 standards that I should be thinking about globally, and
12 do I need to think about, well, I have got a monopoly or
13 undue power in Indonesia, or do I need to think about,
14 well, what is my, you know, overall position globally,
15 and do I need to understand each of those local laws --
16 you know, it is a complex issue, and it is a real
17 struggle for us to try and think about, and it is an
18 issue of how do we try and take a broader global
19 perspective on some of the standards and perspectives
20 that we are going to take and even how we view the law
21 as it applies to business.
22 MR. ELIASBERG: Thank you, David.
23 Jeff, any thoughts or comments?
24 MR. McCREA: Just to add to that, I will give
25 you one perspective as a former student as opposed to a


1 professor. There was a business ethics class taught at
2 Michigan when I was there ten years ago, and I will be
3 the first to tell you I did not take it, because there
4 were a lot of other interesting things to be doing, so I
5 think it is interesting there is a trade-off of do you
6 build it into your classes or do you have it as
7 something separate.
8 The second comment, which I think you just took
9 my thunder on, was exactly the global nature of all the
10 businesses. When we look at this, we absolutely have to
11 look at this globally. We will not survive if we just
12 look at it in a local market. So, both in terms of
13 where manufacturing is moving to to becoming the lowest
14 cost to how you compete in that environment, as well as
15 what are the local laws, how do they apply to the U.S.,
16 and frankly, you know, what -- if you are building
17 something somewhere else, how does that apply to the
18 work in the market that you are actually selling to
19 here, and I think that is becoming pervasive in all of
20 our industries today.
21 It is a great point that I was going to build in
22 as well, which is when we look at this, we do not just
23 think of the U.S. at all. I mean, in fact, very few
24 businesses that I know of do.
25 MR. ELIASBERG: Thank you, Jeff.


1 Dave Scheffman, any thoughts or comments?
2 DR. SCHEFFMAN: Yeah, I want to give the rest of
3 my presentation, but I do want to talk about something
4 that George -- because George, I can respond to George.
5 George said something that I know I cannot quite
6 characterize, he said what we are teaching is how to get
7 market power and charge high prices, and I know that is
8 not what he meant, maybe that is what I am
9 characterizing, but that is not -- you know, I think an
10 important thing for us to understand is a sustainable
11 competitive advantage usually has nothing to do with
12 market power other than in a trivial sense. Most firms'
13 products or services, when they raise the price, they
14 would not lose all their customers, so in that sense
15 their demand curve in the short run is downward sloping,
16 but that is not what sustained competitive advantage is.
17 It is about producing a product or service and
18 finding it -- in the right way and getting it to market
19 in the right way and finding customers who are willing
20 to pay significantly more than what it cost, and in part
21 it means that it is difficult for other folks to do that
22 same thing, but that is not market power, and that is
23 not what we mean in Section 2 other than in the early
24 termination cases, antitrust cases where you get these
25 real narrow markets alleged by plaintiffs, et cetera,


1 but it is really not about market -- it is really not
2 about market power, what we are teaching about at all.
3 You are trying to create the demand curve and
4 move it up. Of course, the demand curve is downward
5 sloping in some sense, but that is not the important
6 point at all, okay? It might be you are creating a
7 demand curve that is quite elastic. Look at WalMart.
8 WalMart has nothing to do with a downward-sloping demand
9 curve. It has lower costs and it prices below the
10 competition and it tries to drives sales.
11 Now, firms that are competing on a
12 differentiation advantage, which George was alluding to,
13 where you try to get a premium for your product are a
14 little bit different, but it is, again, generally
15 fundamentally not about how downward sloping the demand
16 curve is. It is what demand curve you can create and
17 what willingness to pay can you create that was not
18 there before in the products and services you are
19 bringing to market.
20 MR. ELIASBERG: Thank you, Dave.
21 Let me ask the first question, and it is kind of
22 basic, but it is important for us laboring here in the
23 agencies.
24 We have heard mention of the positioning school,
25 what is associated with Professor Michael Porter, the


1 resource-based school and the abolitionary school of
2 business strategy. It would be very useful for us if
3 you could provide a brief description of the different
4 schools and views, business strategies, just so that
5 everyone is talking about the same thing. If I do not
6 have a volunteer, David Reibstein, you are going to get
7 it.
8 DR. REIBSTEIN: So I am looking for volunteers.
9 MR. ELIASBERG: If you can help us out here,
10 just a brief description of what the various schools or
11 camps within the business strategy schools are.
12 DR. REIBSTEIN: Yeah, and I tried to give a
13 little bit of an overview of that when I put up, you
14 know, Michael Porter's Five Forces and talked briefly
15 about that, and there are sort of different defined
16 schools that are out there.
17 I actually do not think there is a lot of -- you
18 know, while there are sort of -- all of us that are
19 teaching this stuff struggle to find something to teach,
20 I do not think there is an addiction that any of us have
21 or even a strong philosophy that most of us have other
22 than here are the different perspectives when you are
23 going to market, and frankly, if you asked me, so, Dave,
24 you teach this stuff, marketing strategy, what is the,
25 you know, resource-based school, I would say, well, that


1 must be Harvard, because we do not have any resources at
2 Wharton, you know, but I do not know anything else that
3 would describe what that school is.
4 MR. ELIASBERG: Okay, fair enough. Just one
5 follow-up question on that. Having said that, do any of
6 these camps or classifications say anything in
7 particular or specifically or differently than the
8 others with respect to Section 2 and what we ought to be
9 looking at with regard to Section 2?
10 DR. REIBSTEIN: I am going to turn to Dave.
11 DR. SCHEFFMAN: Let me say, I do not think they
12 really differ. Industry analysis is a tool. Michael
13 Porter, when he came out with that book, that the theme
14 of the book was market structure is really important.
15 He very quickly learned after that that that is not
16 true. There is a lot of empirical evidence that market
17 structure is not determinative. Market structure is
18 something you need to take into account, and it is one
19 of the fundamental contributions in the strategy, that
20 you need to understand the external competitive forces,
21 but it is not -- there is not a five forces school.
22 There is no -- no one seriously believes that market
23 structure is the determinative strategy. It is an
24 important ingredient that you need to understand in
25 crafting your strategy.


1 I think everyone -- anyone who teaches strategy,
2 you can think about the resources-based, that is a
3 better articulated version of Michael Porter's second
4 book, which came shortly after, Competitive Advantage,
5 which is all about, you know, more of what strategy is
6 really about, and resource-based was a really good
7 articulation of I think the basic economics of that. I
8 do not think there are schools. These are tools in
9 strategy. There is an understanding in strategy that it
10 is a mixture of what you do internally matched with the
11 external environment.
12 And for Section 2, I do not think I have
13 anything new to say other than what I said before, which
14 is be careful when you are messing around with what is
15 basic value creation and what the basic rules of
16 competition in the industry are, and that is something
17 that Section 2 should be very careful of getting into.
18 The agencies I think largely have been recently, but
19 most of Section 2 is about private litigation.
20 MR. ELIASBERG: Okay. Just any disagreement
21 with that George or Jeff?
22 (No response.)
23 MR. ELIASBERG: Okay, sort of following on that,
24 and I think I foresee the answer, but let's be sure.
25 What explanations or insights into particular types of


1 conduct that has been challenged under Section 2, you
2 know, for example, things like unfair dealing, tying,
3 predatory pricing, loyalty discounts, things like that,
4 you know, what does business strategy provide with
5 respect to explanations or insights with respect to that
6 type of conduct that are different from those derived
7 from industrial organization?
8 Anyone? Dave Scheffman, you are a logical
9 choice. Shall we start with you?
10 DR. SCHEFFMAN: Well, I think -- and I have
11 talked about this often in the past, I mean, you know,
12 industrial organization -- the framework of industrial
13 organization does not -- I am not saying there are not
14 really smart people in industrial organization that have
15 in some understanding of markets, but it is not
16 something that industrial organization fits very well,
17 okay? The marketing function is not understood in
18 industrial organization, because of, to start with, the
19 demand curve.
20 So, we have funny things like an economist's
21 explanation, eureka, you might have, you know, exclusive
22 distributors or RPM because your distributors "provide
23 services," and then you look for the elusive services
24 like in Dentsply. There is something to that, but it is
25 not those services. You think about what a captive


1 sales force does. Distributors are not resellers. They
2 are important to branding, and they are your
3 distribution. You are going to want to control them.
4 There are reasons why -- in some cases clearly why you
5 would want to control the margins of your product or
6 your distributors when your distributors sell a lot of
7 other stuff because that provides them the incentive to
8 sell yours.
9 So, it is really about sales and marketing
10 things where the elusive search for the services, it is
11 really about providing the right structure and
12 incentives for marketing and sales, for middle men to
13 sell your products, and that was a very -- Dentsply was
14 very disappointing in many ways, but sort of saying,
15 well, we do not see any services there, and they are all
16 created out of whole cloth. Well, yes, because you were
17 not even looking in the right place. In Dentsply,
18 exclusive distributors are probably fundamental. The
19 reason why Dentsply was where it was, it was often in an
20 exclusive distribution situation.
21 So, I think that is really -- I think in
22 marketing practices, that is something where the
23 antitrust law is not helped by economics in
24 understanding what is really going on in business, the
25 way distribution and marketing works.


1 MR. ELIASBERG: Okay. Anybody else on this one?
2 DR. REIBSTEIN: Actually, you know, I do not
3 even want to elevate it to the notion of a theory or a
4 marketing or a business strategy theory, and I think it
5 goes back to simply when we look at a lot of these
6 practices, and we think about how do we need to acquire
7 or how do we retain our customers, and one of the
8 examples of those practices you sort of mentioned was
9 loyalty discounting, just a way to try to encourage our
10 customers to continue to buy from us, and it falls under
11 the philosophy of I am trying to retain my customers
12 because it is more economically efficient to do that
13 than it is to attract new customers. Nothing more
14 complex than that.
15 MR. GLAZER: What do you teach about loyalty
16 discounts in school? Do you get into any level of
17 detail about how to structure loyalty discounts?
18 DR. REIBSTEIN: There is some discussion about a
19 couple of aspects of it. One of them is -- you know,
20 actually, I have got some colleagues that are working on
21 some work that says, so, the tiered discounting, the
22 tiered programs are really individual cases, and by that
23 what I am referring to is sort of the gold, silver,
24 platinum levels, making sense with that.
25 What is ironic is one definition of loyalty is


1 customers are so loyal to you, they are willing to pay
2 extra for you, and what we do to our most loyal
3 customers is we give them some of the better discounts,
4 and it sort of is ironic that it works in this, you
5 know, very convoluted way.
6 Now, I think it was Amazon that got themselves
7 in trouble for one brief moment when they recognized
8 that their loyal customers were less price-sensitive,
9 and so they started offering discounts to new customers
10 and higher prices to their loyal customers, and they got
11 caught in that, not legally caught, but they caught at
12 that by some users who, you know, blew the whistle on
13 them, and they immediately abandoned that. But we do
14 spend some time sort of talking about it is of value to
15 you, the company, to keep your customers loyal, and
16 because it provides value to you, you might be willing
17 to charge a lower price, and so some of that discounting
18 can make sense from a business perspective.
19 MR. GLAZER: Do you teach anything about -- and
20 this is for anybody -- anything about sort of what might
21 be called absolute loyalty programs, a situation where
22 you tell the customers that you will not sell to them if
23 they go to other suppliers, which was the situation in
24 the Dentsply case, a loyalty policy? Just moving a
25 little bit away from a loyalty discount program to say


1 refusing to deal with customers who are not loyal to
2 you. Are there sort of things that are taught or
3 thought about in the business strategy courses?
4 DR. REIBSTEIN: I do not think we put it in that
5 frame -- I do not put it in that frame. On the other
6 hand, I have an understanding and an explanation for it,
7 of why one might not explicitly put it that way, if you
8 sell to somebody else, I am not going to carry you, and
9 the logic might go something like this.
10 If you sell to competitor resellers, there is
11 going to be competition on the market for this product
12 driving the margins down that I would make on your
13 product. If I have got other people that exclusively
14 sell to me, the margins are protected at those other
15 products, and as a result, I am going to be more
16 inclined to carry the products that give me more of an
17 exclusivity.
18 And so one of the things that I do teach is a
19 way to get more reseller support by providing them more
20 of an exclusivity.
21 MR. GLAZER: Okay. Now, how about flipping
22 that? I think you were addressing a situation in which
23 the reseller is getting exclusive distributorship, in
24 other words, he gets a deal where the supplier is not
25 selling that product to anyone else. Now, take the


1 reverse of that where the reseller agrees that he is not
2 going to be buying from any other suppliers.
3 DR. REIBSTEIN: If I am not going to be buying
4 from any other suppliers, I am in essence giving you
5 more shelf space, therefore, you are going to capture a
6 larger share within my business, and as a result, I
7 ought to be able to extract from you, the manufacturer,
8 a higher support, margin, placement money, something, et
9 cetera.
10 DR. SCHEFFMAN: Well, that is the focus of the
11 conversation, because where we get in trouble with
12 antitrust is that the bribe is the quid pro quo for the
13 monopolization, and I think it is really much more
14 simple than that, but there may be some cases like that.
15 It is how do you align the incentives of the reseller to
16 sell your product? It is a no-brainer.
17 In a lot of situations, you see captive sales
18 forces doing the same thing that resellers do, and yet
19 the sales forces, of course, are almost never selling
20 competitors' products. Manufacturers' agents sell
21 competitors' products, and that is because it is a
22 no-brainer that if your reseller is selling only your
23 product, they are going to do a better job, not just
24 because they will not cannibalize your sales selling
25 something else.


1 They are going to do a better job in a lot of
2 circumstances, even taking that aside, in selling your
3 product and really learning about it and giving the
4 sales pitch for your product as opposed to saying, well,
5 you could have this and you could have this and just buy
6 something, I do not care.
7 Now, there are some markets, we see downstream
8 markets, supermarkets, of course, live by selling
9 everyone's product. There is some point in distribution
10 where exclusion is not going to work in a lot of
11 industries. What the middle man does, the function they
12 provide is just putting stuff on the shelf in a variety.
13 That is what you expect. But any time where the middle
14 man is involved seriously in things related to the brand
15 and the sales effort, you know, actually trying to get
16 people to buy the product, exclusion and exclusive is
17 going to make a lot of sense.
18 It is going to be the dominant -- in a real
19 sense, it will be the best way to have distribution,
20 whereas in a lot of cases it will not work. It is like
21 the Monty Python Scotch tape store. The economics do
22 not work, so the middle man has to carry competitive
23 products, but where they do not, it is a no-brainer that
24 exclusive -- it is the most efficient, and it does not
25 have to be fundamentally to the exclusion of


1 competitors. It has to do with someone selling --
2 concentrated on selling a particular product, where
3 sales effort is the important thing, is going to do a
4 better job than if they can say, well, you can buy this,
5 you can buy this, this, this, this, this does that, and
6 they are simply going to do a better job.
7 You have the same problem within companies,
8 captive sales forces, where they are selling a range of
9 products. You have to manage so they do not, you know,
10 devote all their sales effort to, you know, the
11 high-selling stuff, and you say, no, we actually want to
12 push this product. You have got to direct them to, no,
13 you have got to do that. So, if you look at captive
14 sales, you can understand right away really why you have
15 exclusives and why you could not in some cases because
16 the economics just do not work.
17 DR. REIBSTEIN: So, let me add just a little tag
18 onto that, which I like the framing that David just
19 provided, and we are looking at the manufacturer and the
20 reseller, and one of the things he said is sometimes the
21 reseller has to carry multiple -- you know, a wide range
22 of products, and that is because the reseller has got a
23 set of customers, and those set of customers may be
24 demanding some choice and some variety, and so we have
25 to look at sort of that complete picture. So, there


1 might be an advantage with respect to the manufacturer
2 but a disadvantage otherwise.
3 MR. McCREA: The other thing to add to that is
4 from a reseller perspective, you can also look at the
5 cost of carrying fewer products, and I will train my
6 sales force to be more knowledgeable so that we have a
7 range, but also everything from inventory carrying costs
8 to just the overall breadth of the product line that
9 they want to cover. So, if it is something it needs to
10 meet and that is what they want, then they do not need
11 to carry multiple products in that case.
12 MR. GLAZER: I remember Monty Python's cheese
13 shop, but that didn't have any cheese, okay? So, I do
14 not know what that reflects.
15 DR. SCHEFFMAN: This is a store that only sold
16 Scotch tape.
17 MR. GLAZER: Yeah. I remember a bird shop and a
18 cheese shop.
19 DR. SCHEFFMAN: And it was not bundled either.
20 MR. ELIASBERG: Jeff, let me ask you a question:
21 You mentioned in your presentation that obviously Intel
22 took a big bet, and let me ask you, what sort of
23 simulations or some of the other things that we have
24 heard about, especially from David Reibstein, were done
25 before that happened, without getting into proprietary


1 information, but, you know, what sort of techniques were
2 used to sort of scope out whether this was of value or
3 not?
4 MR. McCREA: Several things. I mean, from an
5 overall understanding of the marketplace and
6 understanding of the market environment, you have to
7 look at what the competitive landscape looked like from
8 both other wireless suppliers, if you will, we had to go
9 through a ton of market research to go understand
10 whether consumers would actually buy and pay for it.
11 I talked a lot about building an ecosystem
12 around it and how expensive that would be. So, we did a
13 lot of work into understanding what we thought we had to
14 do, how to kind of get it to critical mass, so you did
15 not -- kind of seeded it, if you will, and to let it
16 grow with the business around it.
17 Other things we looked at is what our
18 competitive advantage was in terms of we talked about --
19 in the space of microprocessors, having a product that
20 was fundamentally built for a notebook and something we
21 thought was unique at the time, and it was unique in the
22 marketplace, so I think that fundamentally by itself
23 offered us a competitive advantage and provided a value
24 to the customers.
25 MR. ELIASBERG: Right. In some of the materials


1 that Dave Reibstein's written, he has talked about the
2 idea of war rooms and war games being played out,
3 thinking out how a strategy might work out, a marketing
4 strategy in particular. Anything like that done with
5 respect to --
6 MR. McCREA: There were some war games, but I
7 think it is more in terms of understanding what the
8 options are, frankly, for all these decisions, both in
9 terms of launch timing, in terms of some of the risk
10 factors, you have to look at several different options
11 in terms of how to do it, and we looked at pros and cons
12 of each and just applied basic business theory or
13 business practice, which is deciding what is going to
14 get you the highest return and the level of risk you can
15 handle for what cost.
16 MR. ELIASBERG: Okay. Another question for you,
17 Jeff, before I let you off the hook. In your
18 presentation, you made several references to ecosystems.
19 How common is that phenomenon in marketing and are there
20 any other examples that come to mind in general?
21 MR. McCREA: At Intel or --
22 MR. ELIASBERG: In general, if you could just
23 help us out here a little bit.
24 MR. McCREA: Hmm. I think that when you think
25 of traditional -- we are probably in a somewhat unique


1 position, probably because we are involved in an
2 important end product, the end product being a PC in
3 this case, so as a result, you start looking around for
4 all the other things that you need, and whether they are
5 other things that are going to enable your product to be
6 better -- you know, my favorite example -- I will answer
7 your question a little differently.
8 My favorite example is looking for uses for
9 baking soda. So, if you think of baking soda 20 years
10 ago, people use a pinch in what they are baking. Today
11 most of you have some in your refrigerator, some in your
12 toothpaste, et cetera, and so you start thinking about
13 other uses for that product that you can use a much
14 higher volume, so think of it in terms of that gave
15 baking soda a whole new life cycle, if you will, product
16 life cycle.
17 A similar concept in terms of ecosystem that
18 other companies do look at, who their partners are. You
19 look at what is going on in the industry today, there is
20 tons and tons of co-marketing, where you see two
21 companies who will pool their marketing resources in
22 terms of how they go to market for complementary
23 products. In particular, we talked about cell phones as
24 an example, service providers subsidizing the actual
25 phone itself, right, and then cable or satellite TV


1 companies do something similar with their boxes.
2 Some of those dollars come from -- could come
3 from the phone maker, it could come from the service
4 providers. There is a lot of different examples where
5 they do look beyond their own particular product, but
6 look at how all the products work together.
7 MR. ELIASBERG: With respect to this question,
8 let me just ask if any of the three strategy professors
9 have anything they would like to add or comment on with
10 respect to the ecosystems.
11 DR. REIBSTEIN: It is sort of just like
12 bundling, right, that the bundle of the phone and the
13 phone service, we are going to come up with a package
14 that is logical with what it is that the customers want
15 and hope to sell the thing, you know, in putting some of
16 those things together.
17 MR. ELIASBERG: And fairly common in marketing?
18 DR. REIBSTEIN: And becoming more and more
19 common.
20 MR. GLAZER: Could we talk about -- go back to
21 predatory pricing, which you talked about, David, in
22 your remarks, and I think you distinguished between
23 predatory pricing and below cost pricing. Could you
24 expand on that?
25 DR. REIBSTEIN: Well, I actually said that there


1 were some times that you could price below cost that I
2 would advocate, and I sort of distinguished it being --
3 the distinction between pricing below cost and predatory
4 pricing in that predatory pricing has some intent in it,
5 and almost within the word, you hear, you know,
6 predatory, trying to do something to one's competition,
7 versus the below cost, which undoubtedly would have some
8 impact, but the intent might be to make people aware, to
9 try to get people to try.
10 And then in the examples that Jeff just talked
11 about, where you price below cost, which was the third
12 set that I was talking about of where one might want to
13 price below cost, of I am going to give you a phone and
14 sell you phone service; I am going to give you a cable
15 box and sell you cable box service; I am going to price
16 my computer printer at a relatively low price and sell a
17 lot of the supplies, and that would the incentive, not
18 that I know much about it.
19 DR. SMITH: I wanted to change the subject just
20 a little bit, if I may. When we think about business
21 strategy, I think it is important from an historical
22 perspective to ask the question to what extent antitrust
23 becomes a component of business strategy for most firms,
24 especially in private suits, and I wanted to ask David
25 Scheffman to address this. We had a brief exchange


1 about that, meaning private suits to the degree where
2 lawsuits are brought under the antitrust statutes as a
3 competitive weapon or as an attempt to transfer from
4 large firms to small firms and that sort of thing.
5 DR. SCHEFFMAN: I do not know if I would want
6 to -- the real exposure is private litigation under
7 Section 2 of antitrust generally, and I think major
8 firms have counsel, and, Jeff, I am sure you are totally
9 lawyered up and not making any serious business without
10 legal looking at it, and, you know, that is not -- I
11 worry about that a lot, actually. I did some work at
12 the FTC in the -- it was during my first stint, and it
13 is really quite amazing how much lawyers have penetrated
14 the management in American firms, and I think I have
15 seen that some lawyers are really effective managers as
16 lawyers, but I do not think lawyers are necessarily a
17 good fit for someone running an enterprise, so I view
18 that -- again, what I have seen in -- and you talk about
19 predatory pricing, and it is impossible to win a
20 predatory pricing case with a plaintiff, right?
21 You get a lot of counseling within firms about,
22 you know, if you are thinking about doing aggressive
23 pricing nonetheless, because it is really expensive to
24 defend, someone might bring a case, it is very bad for
25 reputation, you know, so even for something like that


1 where there really is a pretty black line, it would be
2 very, very difficult to actually win a case, and people
3 still are pretty conservative, and you get much more
4 conservative -- I am sure, Ken, from your former
5 employer -- you get much more conservative in counseling
6 on marketing practices generally, and boy, be careful
7 how you term things and all that sort of stuff, which
8 leads to a lot of counter-productive and devotion of
9 effort for non-value creating things, but it is part of
10 the over-litigation, the over-litigation climate, that
11 the real exposure is much more, and the RICO is bad
12 these days and environmental, which are worse than
13 antitrust.
14 MR. ELIASBERG: George, I am going to put you on
15 the spot on this one given some of the discussions this
16 morning in the session, but I am going to open it up
17 again to the other panelists.
18 What insights or values does -- lessons does
19 business strategy teach us about crafting remedies in
20 Section 2 cases?
21 DR. SCHEFFMAN: I did not hear you. About what?
22 MR. ELIASBERG: What does the business
23 strategy -- what lessons or insights does business
24 strategy give us with respect to crafting remedies in
25 Section 2 cases, for Section 2 violations?


DR. SMITH: Well, this really falls somewhat
2 outside my expertise. I have to fly pretty high over
3 the landscape to answer this one, I think.
4 You know, I think what I suggested before, that
5 business strategy as a basket of tools is probably
6 something that ought to be incorporated more in
7 assessing remedies or relief in particular antitrust
8 actions, but also even preventively, I mean, before
9 suits are brought, as David has suggested, it is
10 important to understand I think more about how business
11 people really think and what they are trying to achieve
12 in business strategy as distinct from what economic
13 models will necessarily predict, but I think this has,
14 you know, pretty much already been said.
15 Now, with respect to the history, there is
16 something important that was raised this morning, and I
17 think the development of the Chandlerian firm in the
18 second industrial revolution I think, as it is
19 understood by academics, showed that the strategies of
20 the dominant firms in the center industries were, in
21 fact, aimed more at wealth creation and value creation
22 than they were at predatory practices. That is pretty
23 well demonstrated by the history.
24 Now, the results in some cases may have been
25 undesirable from the point of view of the law, but I


1 think we know a lot more about the intentions of
2 successful businesses over time, that you do not stay
3 successful for a long time unless you are creating value
4 and you intend to do that.
5 There is also a relationship the Chairman
6 brought up about the dynamics of strategy and structure,
7 organizational structure, which is something that was
8 left out of the discussion this morning, but it came up
9 at lunch, and that is that what we have learned
10 historically -- it is a very simple problem, but it took
11 a long time to really think through -- is that for every
12 strategy, at least in theory, there is an optimal
13 organization under which companies pursue that strategy,
14 but organizations, once developed, are hard to change.
15 Strategies are easy to change.
16 And we find examples of firms like AT&T or
17 Standard Oil in the early part of the century that at
18 some point acquired a set of organizational rigidities
19 and corporate cultures that were no longer productive,
20 and in both cases we see that actions by the Government,
21 whether intended or not, inadvertently led to more
22 value. I mean, the breakup of Standard Oil, you know,
23 turned out to create an awful lot of value in the equity
24 markets, because the breakup value, you know, was much
25 greater than the previous combination.


1 And with respect to AT&T, my own feeling was --
2 and I did not say this this morning -- was that it was
3 probably a good thing to bring the Bell System to an end
4 when it came to an end, if only because it just
5 unleashed a torrent of innovation for a long time, and
6 having worked at the Bell System myself for some period
7 of time from 1970 until '82, you could see this was an
8 old, tired company, and you got to know the managers of
9 the operating companies, and they were just itching to
10 get out from under. History shows that there was a lot
11 of dynamic wealth creation and innovation as a
12 consequence.
13 I am not sure what this all means for antitrust
14 policy, but I do think that the relationship between
15 strategy and organization is just yet another thing that
16 at least academics certainly want to take into account
17 and may factor into thinking about where firms are in
18 their life cycles and what this means for the economy.
19 MR. ELIASBERG: Dave Scheffman, you have had the
20 advantage of teaching business strategy and being on the
21 enforcement side.
22 DR. SCHEFFMAN: Well, I think we know a lot more
23 from the enforcement side. I mean, I think we all as
24 antitrust economists and lawyers that learn antitrust is
25 about competition. It is not a regulatory instrument,


1 and we should not be -- we back into the regulatory role
2 sometimes, essentially from what we have learned from
3 mergers, and try to do something fairly simple, which
4 the market does all the time, which was shop baskets,
5 and sometimes it does not work very well. Sometimes the
6 FTC -- the AOL/Time Warner consent and how that has
7 played out, regulatory nightmare, and we have the EU
8 looks like it is going to regulate Microsoft for -- into
9 the -- well into this century.
10 I mean, we do not -- I think when we bring
11 Section 2 cases -- I know this was the -- in the Section
12 2 cases I have been involved a lot on the inside, the
13 ethyl case, there was not really a lot of serious
14 thought about what the remedy was going to be. It was,
15 you know, win the case. I think there was more serious
16 thought in Microsoft, but the idea -- and the antitrust
17 principles were followed, I guess, break it up, seemed,
18 you know, a ridiculous idea to me and to many others,
19 and so you are left with a regulatory structure, which
20 the appeals court, you know, did a relatively light hand
21 on the EU.
22 So, I think we have learned from Judge Green in
23 AT&T and can just look at what the EU does, you know, we
24 should think of Section 2 cases in terms of the remedy,
25 the remedy is going to be regulatory, but think about


1 what the case is about and how much you want to pursue
2 it, than to think more about the regulatory side.
3 MR. GLAZER: One of the speakers earlier
4 referred, maybe more than one, referred to the -- did
5 not use the word "chilling," but the basic idea was
6 chilling business strategy by concerns about antitrust
7 law. I am wondering if anyone can point to a specific
8 instance that they know of, and you can speak
9 hypothetically, you do not have to identify the case,
10 but where -- in which you think there was chilling of
11 business conduct based on fear about legal liability.
12 DR. SCHEFFMAN: Yeah, I had something I thought
13 was actually quite absurd under Robinson-Patman in a big
14 company that, you know, I advised it was a relatively
15 small number of customers, selling telecom equipment to
16 the RBOCs largely, and I suggested it was trying to
17 drive incremental volume discounts, pretty common these
18 days, not an unreasonable thing, and business people
19 thought, gee, that is really a good idea, and it was
20 squashed by legal in a second.
21 You cannot do that because of Robinson-Patman.
22 Now, that is really absurd. I am not a lawyer, but I
23 think that is very conservative Robinson-Patman, you
24 know, counseling these days, and again, I have seen
25 situations where they counsel about predatory pricing,


1 which seems to be, you know, the company was not talking
2 at all about pricing below -- were not thinking at all
3 about pricing below cost.
4 So, I do not know what -- Intel probably cannot
5 say, but I would -- you know, doing stuff with
6 interfaces and technology these days, I assume you have
7 got lawyers crawling all over that, because, I mean,
8 what we have learned is through the Microsoft case, and
9 I am not saying it was only learned in Microsoft, but it
10 was learned that sophisticated entities can move the
11 needle a lot, you know, and cause a lot of trouble, and
12 you might get the antitrust agency involved in the end
13 with Microsoft or you are certainly going to get some
14 private litigants involved.
15 So, I think there is, what I have seen in high
16 technology companies, a lot of care in thinking about
17 their product choices and interfaces and things like
18 that, despite that there might be complaints about that,
19 I think it is still very conservative among companies
20 typically what their lawyers actually do.
21 MR. GLAZER: Do other panelists have any -- have
22 other panelists seen instances of competitors -- I mean
23 of large firms pulling their competitive punches?
24 DR. REIBSTEIN: I have been amazed at the number
25 of strategy meetings that I have been in where people


1 have been hesitant even to use certain language, and in
2 a word, somebody might say, well, we -- you know, what
3 we want to do -- in some, you know, macho or aggressive
4 way, somebody might say, well, we are going to try to
5 kill company XYZ, and everybody -- you know, do not put
6 that down on paper, do not say anything, you know, or --
7 I mean, terms of, you know, being aggressive or trying
8 to capture, you know, the market, and there would be a
9 great deal of hesitancy in having some of those
10 discussions even, and this is sort of all companies that
11 have been beaten around by their lawyers, saying, whoa,
12 you just cannot go in any of these territories.
13 So, I think it has had a major influence and has
14 changed the language and the behavior, and I certainly
15 see it in some of the strategy meetings.
16 MR. ELIASBERG: I would like to ask a follow-up
17 question to Ken's here, does business strategy suggest
18 safe harbors, presumptions, other sign posts that
19 businesses and courts can use to assess some kind of
20 safe harbor, that this is stuff we are not going to be
21 looking at under Section 2 or some sort of sign post
22 that this is something we should not be worried about?
23 MR. McCREA: I am not sure I understood the
24 question, so these guys can go ahead.
25 MR. ELIASBERG: Let me try again.


1 Picking up on Dave Reibstein's point about even
2 fear of talking, using some language and things like
3 that, out of your experience in business strategy work,
4 are there particular areas of conduct that should be
5 safe harbors in which folks just should not have to
6 worry about Section 2 enforcement, at least from the
7 federal enforcement agencies, for example, or are there,
8 for example, sign posts of things that would suggest
9 that maybe some safe harbor is something that probably
10 we really should not be worried about?
11 DR. REIBSTEIN: So, essentially following up on
12 your comment -- and now that I do understand the
13 question, thank you -- I will admit that in some of
14 those sessions I was referring to, I have written
15 things -- the most dramatic step was I wrote something,
16 and somebody came up, pulled it off of the flip chart
17 and ate it, because he thought there was a certain word,
18 and I think we should not be harassing companies and
19 bothering companies for wanting to beat competition. I
20 think competition to be very, very healthy.
21 Granted, there is a point when, you know, their
22 power gets out of line, but in general, the notion of
23 coming in and beating competition in a market, serving
24 customers better, is something that should be
25 encouraged, not something that we need to have companies


1 overly concerned about, and I think there is so much
2 fear that we have instituted from some of the regulation
3 that there is this intimidation to talk about if -- you
4 know, there is -- I do not think there are many
5 companies that are too worried about beating
6 competition, but there is, you know, you do not know who
7 is listening, and it has affected, you know, some of the
8 language, and in some cases, you know, some of the
9 decision-making.
10 Now, I know a company that has got large market
11 share, and I do not know that you guys are worried about
12 them, you know, their market share is too big, do we
13 have to worry about -- do you worry about damaging AMD?
14 MR. McCREA: I am not going to go near that.
15 DR. REIBSTEIN: See, you will not go near it,
16 because that is something we cannot talk about.
17 MR. McCREA: You know, I think that in my
18 opinion I agree with your comment, that competition is
19 good and that to comments that we have heard all day
20 from all the business professors is that everyone
21 teaches competition is good. That is exactly why we are
22 all in business, right? You do business to win.
23 To your point, I think you -- depending on your
24 market position, you may look at how you grow the market
25 more than how do I beat my competitor, because I work at


1 a bigger -- I will get a bigger return by growing the
2 overall pile than I will by trying to take one more
3 point of share, right? So, it may shift -- depending on
4 the company, it may shift what your focus is, where you
5 spend more of your resources and revenue.
6 Having said that, I think you are absolutely
7 right in that I think that we probably are overly
8 cautious in some ways -- I do not mean Intel, I mean in
9 general, right now -- because of the reasons you just
10 articulated. I think that frankly we should be figuring
11 out ways to become more competitive and encourage
12 companies to become more competitive, because back to
13 our global comment, it is not competing within the
14 United States. It is competing with the next company in
15 China, the next company in Russia, the next company in a
16 lower cost area, and that is what I think the attention
17 is.
18 DR. REIBSTEIN: And actually, I would come back
19 to that, which is I think as we get so concerned about
20 doing so well that we might, you know, get an undue
21 market share, it may take away some of our efficiency,
22 which makes U.S. corporations perhaps more vulnerable to
23 information competition, and I worry whether or not we
24 have overly struck a fear in some companies by being
25 myopic in looking just U.S. centered and not thinking


1 more globally.
2 DR. SCHEFFMAN: There are three cases in the
3 queue that we do not know if you guys are going to
4 submit if you get an opportunity, Twombley, where you
5 have to have some credible basis for alleging that there
6 is collusion or conspiracy? Have I got the name wrong?
7 Is that --
8 MR. GLAZER: Twombley.
9 DR. SCHEFFMAN: Twombley, okay, that was a
10 textile case. You have got the RPM case that is
11 rumbling around? There is another that's -- I guess
12 Weyerhauser, those three cases are -- I mean, we have
13 had -- you know, we have -- the law has worked, taken a
14 long time, but we have -- you know, the law resolved on
15 predatory pricing really, and Shott (ph)was really
16 important, Matsushita was very important, so that is
17 what we -- that is the only way -- we are going to raise
18 the cost of bringing frivolous cases, so we have got
19 three in the queue, at least pursuing, and we are trying
20 to get some help in the antitrust section to do some
21 submissions on some of those.
22 DR. SMITH: Historically we know that we
23 discussed this morning some cases, the Alcoa case, where
24 clearly the fear of antitrust pressure drove their
25 pricing strategy, and Dupont earlier in the century, you


1 know, after 1912, was very self-conscious about how it
2 competed, and General Motors, after 1956, was very
3 careful -- we know this, it was very careful to maintain
4 its market share at around 50 percent so not to drive
5 American Motors out of business in particular, and you
6 have to wonder, you can speculate about what impact that
7 might have had on the competitiveness of these companies
8 long-term.
9 MR. ELIASBERG: Well, I see that we have arrived
10 at 4:00, and it was fascinating, and I understand people
11 have travel arrangements and other commitments. I want
12 to thank all the panelists for their excellent
13 presentations and useful information and your insights
14 here today, and I hope the audience will join me in a
15 round of applause. Thank you very much.
16 (Applause.)
17 (Whereupon, at 4:00 p.m., the hearing was
18 concluded.)


1 C E R T I F I C A T I O N O F R E P O R T E R
4 DATE: OCTOBER 26, 2006
6 I HEREBY CERTIFY that the transcript contained
7 herein is a full and accurate transcript of the notes
8 taken by me at the hearing on the above cause before the
9 FEDERAL TRADE COMMISSION to the best of my knowledge and
10 belief.
  DATED: 11/13/2006


18 C E R T I F I C A T I O N O F P R O O F R E A D E R
20 I HEREBY CERTIFY that I proofread the transcript
21 for accuracy in spelling, hyphenation, punctuation and
22 format.


Updated January 2, 2024