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UNITED STATES FEDERAL TRADE COMMISSION
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and
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UNITED STATES DEPARTMENT OF JUSTICE
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SHERMAN ACT SECTION 2 JOINT HEARING
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UNDERSTANDING SINGLE-FIRM BEHAVIOR:
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BUSINESS HISTORY SESSION
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BUSINESS STRATEGY SESSION
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Thursday, October 26, 2006
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HELD AT:
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UNITED STATES FEDERAL TRADE COMMISSION
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HEADQUARTERS BUILDING, ROOM 532
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600 PENNSYLVANIA AVENUE, N.W.
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WASHINGTON, D.C.
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9:30 A.M. TO 4:00 P.M.
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Reported and transcribed by:
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Susanne Bergling, RMR-CLR |
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MODERATORS:
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KENNETH L. GLAZER
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Deputy Director, Bureau of Competition
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Federal Trade Commission
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and
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EDWARD D. ELIASBERG
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Attorney, Antitrust Division
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U.S. Department of Justice
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PANELISTS:
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Morning Session:
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Tony Allan Freyer
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Louis Galambos
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James P. May
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George David Smith
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Afternoon Session:
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Jeffrey P. McCrea
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David J. Reibstein
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David T. Scheffman
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George David Smith
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C O N T E N T S
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MORNING SESSION (BUSINESS HISTORY SESSION):
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Introduction
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Presentations
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Tony Allan Freyer
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Louis Galambos
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James P. May
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George David Smith
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Moderated Discussion
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Lunch Recess
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AFTERNOON SESSION (BUSINESS STRATEGY SESSION):
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Introduction
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Presentations
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Jeffrey P. McCrea
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David J. Reibstein
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David T. Scheffman
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George David Smith
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Moderated Discussion
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Conclusion
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P R O C E E D I N G S
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- - - - -
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MR. GLAZER: Good morning. My name is Kenneth
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Glazer, and I am the FTC's Deputy Director for the
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Bureau of Competition. I am one of the moderators for
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this morning's session. My co-moderator is Ed
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Eliasberg, Antitrust Division, U.S. Department of
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Justice.
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A couple of housekeeping matters before we get
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started. First of all, please turn off all cell phones,
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BlackBerries or other electronic devices or turn them to
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vibrate. The men's room is immediately to the left,
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through the double doors you just came through; the
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women's room is to the left on the far side of the
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elevator banks.
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One safety tip, in the unlikely event the
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building alarms go off, please proceed calmly and
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quickly as instructed, and you must leave the building
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through the stairway, which is to the right, which is
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the Pennsylvania Avenue side. After leaving the
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building, please follow the stream of FTC people. They
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have practiced this many times. You will all go to the
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Sculpture Garden, which is across the intersection of
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Constitution Avenue.
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Finally, we request that you not make comments |
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or ask questions during the session. Thank you.
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This morning's panel is entitled Business
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History, and as the title suggests, we will be turning
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the clocks back today and looking at some of the
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landmark monopolization cases in the past, not the
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recent past, as in the Microsoft case, but antitrust's
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deep past, milestone cases such as Standard Oil, Alcoa,
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American Tobacco and AT&T. Like the ghosts of Christmas
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past, the ghosts of antitrust past continue to haunt us
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in good ways and bad.
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We have come a long way since those cases, to be
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sure. In many ways, antitrust in the Sherman 2 area,
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the area of unilateral conduct, is still coming to grips
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with the issues faced by the courts in those cases,
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which dealt with the industrial giants of their day.
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Think, for example, of Learned Hand's Alcoa
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decision and how to this day his enigmatic
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pronouncements in the Alcoa case are still invoked and
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debated. Think of "monopoly thrust upon it," "superior
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skill, foresight, and industry," and "the successful
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competitor, having been urged to compete, must not be
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turned upon when he wins."
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Take Standard Oil. One historian's view of the
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record in that case, the Standard Oil case, led to a
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complete rethinking of the whole area of predatory |
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pricing. Anyone who thinks history is unimportant
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should look at John McGee's article on Standard Oil and
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the impact it had on the case law.
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To help us understand this critical part of our
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antitrust heritage, we are honored today to have with us
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four distinguished business and legal historians. Our
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panelists this morning are Jim May from the Washington
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College of Law at American University; George Smith from
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the Stern School of Business at New York University;
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Louis Galambos from the Johns Hopkins University; and
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Tony Allan Freyer from the School of Law at the
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University of Alabama.
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Ed, do you have any introductory comments you
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would like to make?
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MR. ELIASBERG: Thanks, Ken.
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Let me just second how important the Antitrust
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Division thinks it is for us to take a look back at
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these major monopolization cases of the past, so with
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that, let me turn it back to you again so we can get
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started.
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MR. GLAZER: Thanks, Ed.
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So, at this point, let me introduce our first
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speaker. Jim May is a law professor at the Washington
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College of Law at American University, where he teaches
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antitrust, U.S. legal history. He was an attorney with |
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the Antitrust Division and senior staff assistant to the
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National Commission for the Review of Antitrust Laws and
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Procedures. He is the author of many law review and
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other articles on the historical foundation of U.S.
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antitrust law. He is about a year away from completing
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a book entitled Standard Oil Company Versus United
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States, the Supreme Court, and the Foundations of a New
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American Society, which will be published by the
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University Press of Kansas.
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Complete biographical information for each of
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the four speakers can be found on the FTC and DOJ
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Antitrust Division Sherman Act Section 2 web sites.
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Now, I will turn it over to Professor May.
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DR. MAY: Well, I am very pleased to be here
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this morning with everyone and to be part of this very
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distinguished panel, and I want to thank Ed and Ken and
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Jack and Jim and everyone who has been responsible for
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pulling this session together.
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This morning we are talking about insights to be
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gained from historical scholarship, and I am not going
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to talk at length about that, but certainly we know that
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there are many. There are benefits for better
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understanding the past in its own terms, some having
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considerable value, but also better insight in our
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thinking about modern day issues. History often |
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provides a useful point of comparison or contrast or a
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source of additional questions and perspectives we might
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not consider otherwise, and it can help to inform modern
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decision-making in a variety of ways.
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Historical writing comes from people from a
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variety of different disciplines and backgrounds, as
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well as a variety of personal perspectives, business
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historians, legal historians, intellectual historians,
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economists, legal scholars, and others, and all of this
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work can be very valuable to take into account and to
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compare one with another.
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When we talk about the potential value of
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looking back at early episodes and periods of antitrust
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law in particular, as Ken has said, there is much to be
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learned, and particularly much convincing to convince
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people in the antitrust field that looking at the
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Standard Oil story may, in fact, be of some value in
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thinking about antitrust law, where it has been, how it
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got here and where we are today.
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Now, in his landmark book, The Antitrust
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Paradox, in 1978, Judge Robert Bork famously remarked
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that one of the uses of history is to free us from a
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falsely imagined past. Understanding antitrust's past
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better allows us to understand more clearly how many of
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the ideas that are currently in the mainstream first |
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came to be established in antitrust law. At the same
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time, for example, historical understanding, I think,
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provides insight into how early antitrust thinking was
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not merely a less sophisticated early form of
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neoclassical economic thought, how variations from
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modern economic analysis that we find in earlier
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antitrust analysis do not merely reflect the power of
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"non-economic" concerns uninformed by any systematic
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theoretical approach, and a look to the past also can
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give us insight into how much of early antitrust debate,
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legislation, lawyering, and judicial decision-making was
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influenced by a different kind of theoretical outlook,
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an outlook that embraced as a part of, and not simply
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alongside of, its economic analysis, simultaneous
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concerns for individual opportunity, freedom of
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contract, efficiency, economic progress and prosperity,
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fair distribution of wealth, and political freedom, all
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to be promoted through a process of largely
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"non-discretionary" judicial decision-making, it was
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still widely thought, in the late 19th and early 20th
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Centuries.
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Such an outlook, still widely if not universally
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influential at the time of the Standard Oil decision, of
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course, today runs deeply counter to antitrust thinking
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across the entire spectrum of antitrust opinion. Modern |
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antitrust thinking assumes the inevitability of
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trade-off choices among these various values and is
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influenced strongly by a modern economic paradigm or
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paradigms distinctly different from the broader
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theoretical outlooks most familiar in the late 19th and
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early 20th Century lawyers and judges.
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Okay, but that having been said, I want to talk
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about something else this morning, and that is a
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different set of issues arising in connection with the
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rise of the Standard Oil combination and the federal
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antitrust case brought to challenge it. This is a very
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big topic, indeed, and a very great deal has been
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written about it, and in the very brief time I have this
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morning, I am just going to try to suggest some of the
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most important themes in the historical record and in
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the scholarship assessment. If we have time this
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morning in the discussion period to go into more depth
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as to some of these points, I will be happy to try to do
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so.
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Okay, well, with regard to the ascent of
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Standard Oil and the challenge to it by the Federal
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Government, well, to begin with just a single small
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refining plant established in Cleveland, Ohio in the
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mid-1860s, John D. Rockefeller and his associates,
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within a remarkably short period of time, came to |
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dominate both trade in refined petroleum products and
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the long distance pipeline transportation of crude oil.
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Exactly how that was accomplished was a subject of
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considerable controversy in the late 19th and early 20th
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Centuries, and it has continued to be ever since.
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As we know, Standard rose to dominance before
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the era of the automobile, and thus, its main product in
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the era that we are talking about was not gasoline, but
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was kerosene for illumination in homes and businesses,
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but there were other important products as well, such as
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lubricating oil and naphtha.
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Now, within just a few years of Rockefeller's
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entry into oil refining, he and his associates were
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heavily involved, along with the railroads that were
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serving the oil fields of Northwest Pennsylvania, in
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efforts to establish cartels to reduce production and
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raise and stabilize prices.
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By 1871 -- oh, here, I have a few pictures
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that -- this is in 1870. This was Standard Oil's
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refining operation. It obviously got bigger and much
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more substantial as time went on.
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Now, in the 1860s, on to the 1870s, we have
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these efforts to cartelize refining as well as rear it,
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but by 1871 as well, Rockefeller had embarked on a
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successive campaign to acquire what is called the |
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competing refiners in Cleveland, Ohio, and not long
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thereafter, disenchanted with the possibilities for
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desirably organizing the oil industry through
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cartelization, Rockefeller and his associates made
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determined and successful efforts to acquire the
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refiners in other parts of the country as well.
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Now, coordination of the operations of the
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various acquired firms was achieved first through the
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trust arrangements of 1879 and 1882, and then more
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effectively, through the 1899 establishment of the
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Standard Oil Company of New Jersey as a holding company.
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Transportation of crude oil to refineries and of
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refined products to market was a crucial dimension of
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the early oil business, and early on, transportation of
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both crude oil and refined products was by rail, and
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critics charged that the railroads had charged Standard
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Oil much lower freight rates than they charged
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Standard's competitors, thereby giving Standard what was
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seen as an unfair competitive advantage.
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Later on, with the development of long distance
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crude oil pipelines that were pioneered by a consortium
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of crude oil producers in the late 1870s, this newer
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mode of transport became the most important method for
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transporting crude oil, and Standard made determined and
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successful efforts to dominate it. |
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With the discovery of the major new oil field on
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the Ohio-Indiana border, Standard Oil for the first time
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made significant investment in oil lands and crude oil
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production in the late 1880s. Standard Oil aggressively
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expanded forward as well into retail marketing, and as
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of the 1890s, this would have been a ubiquitous site in
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America, the horse-drawn Standard Oil wagons filled with
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kerosene from which the local grocery, et cetera, would
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be getting their fill.
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Now, during the decades following the
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establishment of the first Standard Oil refinery, the
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combination expanded the size of its individual
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refineries to achieve economies of scale, found other
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ways to cut costs, developed an effective managerial
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hierarchy that included talented executives who joined
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Standard Oil after their own firms were acquired and
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developed new by-products from petroleum, yet John D.
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Rockefeller and Standard Oil faced growing public and
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private criticism and in the fear for their dominance
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and for the abusive tactics they were thought to use,
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and as a result, Standard Oil ultimately was challenged
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in numerous states before the federal case was
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litigated.
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In 1882, the trust itself -- the 1882 trust
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itself was dissolved. In the 1890s, in the wake of a |
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challenge to the participation of Standard Oil's Ohio
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trust, a challenge brought by the Attorney General of
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Ohio. This then led in 1899 to the establishment of the
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Standard Oil Company of New Jersey as the new holding
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company. Seven years later, during the administration
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of President Theodore Roosevelt, the antitrust suit was
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brought.
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Now, Standard's market position we have to look
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at in two different parts with regard to the export
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trade and the domestic trade. In the late 19th Century,
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most refined petroleum that was produced in the U.S. was
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sold overseas, and of that oil, Ron Chernow in his
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recent book Titan estimates that in the late 1880s,
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nearly 80 percent of the refined oil purchased overseas
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came from Standard Oil.
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With regard to domestic trade in oil, by the
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late 1870s, Standard's share of refined oil production
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within the United States was close to 90 percent. It is
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estimated that Standard's market share of crude oil
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production in the United States was a share of one-third
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achieved in 1898. Most of those market shares declined
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in subsequent years.
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Okay, well, what about the antitrust challenge?
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And one of the things that is always great about this
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period, the cartoons of the period, here is the classic |
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fear of Roosevelt swinging his big stick to bust the
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trusts, here facing down a symbol of Standard Oil in
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this period of the octopus.
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Okay, well, I am going to largely skip over the
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Government's position except to say that the Government
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charged a conspiracy that allegedly had started in
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1870 -- oh, the case was filed on November 15th of 1906,
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so we are just short of three weeks away from the great
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centennial of the filing of this case, so hopefully
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there will be both a Division and FTC celebration in
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just a few weeks.
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Okay, the Government's primary emphasis in its
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case was a merger-to-monopoly theory. The predatory
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pricing and other bad acts conduct was much less
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prominent, although also included in the case.
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Now, let us talk about the case in hindsight
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just a little bit, okay? Here is a young John D.
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Rockefeller in the early days of the conspiracy, okay?
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Here are some other things stressed in the case: Market
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shares, profits, alleged increases in prices of
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principal products, okay? But I want to go quickly
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through this.
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Now, the remedy in the case, of course, was
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breaking up Standard Oil. This is not an exact diagram
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of how the breakup worked, neither accurate in its |
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verticality nor in the number of units involved, but it
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is the best I have. So, in any case, what are we left
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with in the scholarship today about Standard Oil as we
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think about the case in hindsight? A couple of key
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things to note.
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What was right about the Government's position
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in the case? How might the case be approached
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differently today, informed by historical as well as
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economic learning? Some things seem clear. A modern
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Sherman Act case would be unlikely to focus on a
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defendant's market intelligence gathering or the
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operation of bogus independents, as the Government did,
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in part, and likely would place less reliance on
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evidence of increased profitability. Analysis of merger
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activity, predatory pricing and barriers to entry would
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be more sophisticated today than it was in the earlier
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years of the 20th Century, although merger to monopoly
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essentially would remain at the heart of the case. More
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consideration would be paid today to potential economies
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of scale and other efficiencies, and in hindsight, more
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careful attention would be paid to the question of what
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would be an appropriate remedy in the case.
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I have things I can say about the remedy, but we
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are short on time. I will save that for the discussion
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session in case there are questions about that. |
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Okay, now, what about the scholarship on the
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rise of Standard Oil and the question of remedy? Well,
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it is very striking the degree to which -- there is
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actually some vigorous disagreement about what we would
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think might be some very basic issues, such as was
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Standard Oil, in fact, a monopolist? And if a monopoly
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had been achieved, a monopoly of what? Pointing to
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increasing output and falling prices for refined
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petroleum products in the late 19th Century, Dominic,
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Arendt and Connell, for example, has concluded that
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Standard Oil never reached or set monopoly prices, even
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when it had a high market share, and "Standard was a
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large competitive firm in an open competitive market," a
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position that has been strongly challenged by, for
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example, Professor Scherer in a draft paper he presented
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in an earlier hearing session in this series.
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Elizabeth Granitz and Benjamin Klein in their
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1996 article contend that entry into refining was made
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easy in the late 19th Century and assert that "although
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Standard earned a significant share of industry profits
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on its dominant refining operations, it was petroleum
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transportation and not refining that was monopolized,"
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and that "the profits earned by Standard in refining
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should be thought of as merely a share of the monopoly
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profits from the transportation cartel." Others |
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continue to believe that at least until the early years
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of the 20th Century, it was possible to acquire monopoly
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power in the sale of refined petroleum products and that
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Standard Oil did so.
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What is the state of thinking about the sources
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of Standard Oil's profits? Today we have not one but a
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number of prominent interpretations. Let me just say a
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real brief word about some of these, and then maybe I
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can expand later.
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One is economies of scale or other efficiencies.
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Alfred Chandler, an eminent business historian, has
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declared that oil refining is a prime example of an
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industry in which cost advantages of scale critically
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shape the growth of firms and determine the structure of
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the industry. He notes that the Standard Oil Company
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was one of the first enterprises in the world to exploit
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the economies of scale by making the three key
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interrelated investments in production, market and
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management.
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Others have pointed to other varieties of
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efficiency achieved by Standard Oil as significant
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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, |
19
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 |
20
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 |
21
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 |
22
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 |
23
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 |
24
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 |
25
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 |
26
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 |
27
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 |
28
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 |
29
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 |
30
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' |
31
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 |
32
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 |
33
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, |
34
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 |
35
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 |
36
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 |
37
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 |
38
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, |
39
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 |
40
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 |
41
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 |
42
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 |
43
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 |
44
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 |
45
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 |
46
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 |
47
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 |
48
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 |
49
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 |
50
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 |
51
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 |
52
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 |
53
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 |
54
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 |
55
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 |
56
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 |
57
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. |
58
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 |
59
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 |
60
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 |
61
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 |
62
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. |
63
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 |
64
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 |
65
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? |
66
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 |
67
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 |
68
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 |
69
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 |
70
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 |
71
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 |
72
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 |
73
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. |
74
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 |
75
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 |
76
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 |
77
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 |
78
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 |
79
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 |
80
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. |
81
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, |
82
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 |
83
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. |
84
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 |
85
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 |
86
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 |
87
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 |
88
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 |
89
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 |
90
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 |
91
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 |
92
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 |
93
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 |
94
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 |
95
1 |
for Professor Smith's book on KKR, primarily because he
|
2 |
provides the context for the --
|
3 |
DR. SMITH: KKR?
|
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.)
|
22 |
|
23 |
|
24 |
|
25 |
|
96
1 |
AFTERNOON SESSION
|
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 |
97
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 |
98
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 |
99
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 |
100
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. |
101
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 |
102
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 |
103
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. |
104
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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 |
105
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 |
106
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 |
107
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 |
108
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. |
109
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 |
110
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 |
111
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 |
112
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 |
113
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 |
114
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 |
115
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 |
116
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 |
117
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 |
118
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. |
119
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 |
120
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 |
121
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 |
122
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 |
123
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 |
124
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 |
125
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. |
126
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 |
127
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 |
128
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, |
129
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, |
130
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. |
131
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 |
132
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, |
133
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 |
134
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 |
135
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 |
136
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 |
137
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 |
138
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 |
139
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 |
140
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 |
141
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? |
142
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 |
143
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 |
144
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 |
145
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 |
146
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 |
147
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 |
148
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 |
149
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, |
150
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 |
151
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 |
152
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. |
153
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 |
154
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 |
155
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. |
156
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 |
157
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. |
158
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 |
159
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 |
160
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 |
161
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. |
162
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, |
163
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 |
164
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 |
165
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. |
166
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 |
167
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 |
168
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. |
169
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 |
170
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 |
171
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 |
172
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. |
173
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 |
174
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 |
175
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 |
176
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 |
177
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 |
178
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 |
179
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 |
180
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 |
181
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 |
182
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? |
183
DR. SMITH: Well, this really falls somewhat
1 |
|
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 |
184
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. |
185
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, |
186
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 |
187
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, |
188
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 |
189
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. |
190
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 |
191
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 |
192
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 |
193
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 |
194
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.)
|
19 |
|
20 |
|
21 |
|
22 |
|
23 |
|
24 |
|
25 |
|
195
1 |
C E R T I F I C A T I O N O F R E P O R T E R
|
2 |
DOCKET/FILE NUMBER: P062106
|
3 |
CASE TITLE: SECTION 2 HEARING
|
4 |
DATE: OCTOBER 26, 2006
|
5 |
|
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.
|
11 |
|
12 |
|
13 |
|
14 |
|
15 |
|
16 |
|
SUSANNE BERGLING, RMR-CLR |
|
17 |
|
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
|
19 |
|
20 |
I HEREBY CERTIFY that I proofread the transcript
|
21 |
for accuracy in spelling, hyphenation, punctuation and
|
22 |
format.
|
23 |
|
24 |
|
25 |
|
|