Prof. Frederick A. Hayeck in 1948 in "Individualism and the Economic Order," said that Where there is entrenched monopoly, prices were likely to be higher than marginal cost, but that much more serious than the fact that prices may not correspond to marginal cost is the fact that with entrenched monopoly costs are likely to be much higher than is necessary. Mr. Edward F. Howrey, the appointee of President Eisenhower as Chairman of the Federal Trade Commission in 1955 in an address to the Antitrust Law Section of the New York State Bar Association, said that An indicator of competition is the passing of cost savings on to the consumer or the responsiveness of prices to changes in cost. In a recently published book published by the Vanderbilt University Press in 1961, Prof. George W. Stocking, one of the outstanding scholars in this field, has said, and I quote: The aspects of performance most relevant to determining whether a firm possesses monopoly power are its pricing policies and its profits record. The courts have defined monopoly power as the power to exclude competitors and the power to control price. In doing so, they doubtless have been influenced by economists. At any rate, economists will not take exception to their definition, although they might suggest a narrowing of it to the single concept, the power to control price since the power to exclude competitors will reflect itself in the power to control price. Senator KEFAUVER. Yes, I know Dr. Stocking. Now, Judge Loevinger, in trying to consider legislative standards as to what would constitute monopoly, would not cost data be valuable to a committee considering legislation? Mr. LOEVINGER. Senator, I always refused to tell my clients what to do when I was in private practice, and I do not think I should tell the Senate what to do. There are many considerations that may be involved. As you are aware, the U.S. Supreme Court has said, and some of our outstanding judges on our circuit courts have said, that there are other than economic considerations involved in antitrust objectives. There are considerations involved in maintaining a plural organization of economic power which go to the kind of society in which we live. The Supreme Court has said that one of the objectives of the antitrust laws is maintaining a kind of social organization in which democracy may flourish. These are considerations which Congress has taken into account and which I think it may properly take into account. Economic considerations are obviously relevant. I would not say what the considerations might be that Congress may wish to weigh in determining policy. Senator KEFAUVER. Very well. This subcommittee, for a number of years, has been studying administered prices. We have conducted inquiries into pricing practices and policies of a number of industries, particularly steel, where there is a relatively high level of concentration, and where prices do not change unless they go up, even though the plants may be operating at a low rate of capacity, where they do not respond in the way that you would expect under normal competitive circumstances. Questions have arisen as to whether the Sherman Act should be strengthened with respect to this kind of pricing practice, Is it your opinion that cost data is important in the study of pricing practices in a concentrated industry in an inquiry to determine what laws might be passed, what might be done to the Sherman Act or how the problem of administered prices can be handled? Mr. LOEVINGER. There is no question that cost data is relevant to the issue of concentration of economic power and of monopoly power. I think that one of the best summaries of the legal view of this subject is contained in a report of the Sherman Act Subcommittee of the American Bar Association Antitrust Section in August 1960. This is to be found in volume 17. Senator KEFAUVER. Judge Loevinger, that came out earlier today and has been made a part of the record. Mr. LOEVINGER. It has been put in the record. Judge Loevinger, it has been noted that we have a bill before us which has passed the House, which proposes that in bidding to the Government under sealed bids, where over 50 percent of the bids are identical, there should be a requirement for the signing of an affidavit as to noncollusion. Is not the matter of cost data relevant in considering legislation of this kind, that is, whether it is by virtue of identical costs they are giving the same price? Mr. LOEVINGER. The cost data is relevant certainly to the issue whether or not prices are the same because of collusion or because of other factors. As was pointed out in the ABA Subcommittee report which I understand is in the record, this has been held in a number of cases. There are a significant number of antitrust cases in which the courts have specifically held cost data to be relevant to the issue of collusion in establishing price. This, of course, was the precise issue presented to the district court in New Jersey in the Eli Lily & Co. case which may or may not be in this record. For the record, the citation is 24 Federal Rules Decision 285, where this was the precise issue presented to the district court, and it held that cost data should be produced because they were relevant to a charge of collusion in establishing price. (At this point in the proceedings Senator Hart left the hearing room.) Senator KEFAUVER. It has been suggested by quite a number of witnesses and in this subcommittee, and as a matter of fact, we have had a bill to that effect, that in certain basic, highly concentrated industries there should be some preliminary notice of price increases. Would not cost data be helpful in determining whether such legislation would be useful or not? Mr. LOEVINGER. I do not know that I can add much to what I have said, Senator. There are, of course, many considerations involved in determining policy with respect to such a proposal as that. Some of them obviously relate to matters such as monopoly power and the existence of collusion or price leadership as to which cost data are relevant. Others may involve other considerations. I am aware of this proposal which I believe was made by Senator O'Mahoney specifically in certain bills that he introduced, but I am not prepared to discuss that specific proposal, really, at this time. Senator KEFAUVER. There is a proposal similar to that pending at the present time, although I think that particular one went to another committee, as I recall. Judge Loevinger, finally have not the courts held uniformly that in contests against the Federal Trade Commission under its powers to obtain cost data under section 6 of the Federal Trade Commission Act, and in contests under the other antitrust laws, where cost data may be needed, the courts have required the production of cost data. Mr. LOEVINGER. Again, the principle, I think, is best statedSenator KEFAUVER. That is, if it is pertinent to the matter. Mr. LOEVINGER. Yes. If I may quote briefly from the ABA Subcommittee report, it states the principle correctly I believe in a paragraph which says: Despite the prejudice which may result, the law is clearly established that a party has no absolute right to refuse to disclose information on the grounds that trade secrets will be divulged. Although the fundamental principle seems to call for disclosure of information divulging trade secrets, as long as it is relevant to a party's contentions the extent to which disclosure will be compelled in a particular case is within the court's discretion. And it says later: In any event, whenever cost data are offered at trial, the court must necessarily balance the equities in each case and weigh the disadvantages or burden and complication against the materiality of the data offered. Senator KEFAUVER. Judge Loevinger, you have been to Europe on several occasions studying the antitrust laws, the charters, and so forth, of the European Common Market and the charter of the High Authority of the European Coal and Steel Community, have you not? Mr. LOEVINGER. Yes, sir. Senator KEFAUVER. Í see a statement by Mr. Patton here which he has repeated several times: As an indication of the importance the foreign steel producers attach to the confidential character of product cost data, I call your attention to the fact that the High Authority of the European Coal and Steel Community is not permitted to obtain manufacturing costs data from the participating companies without the explicit permission of such companies. Have you examined the charter of the High Authority of the European Coal and Steel Community? (At this point in the proceedings Senator Hart returned to the hearing room.) Mr. LOEVINGER. Yes, sir. That statement is not quite in accord with my understanding. A translation of the Treaty of Paris appears in volume 46 of the American Journal of International Law. The Treaty of Paris is the treaty constituting the European Coal and Steel Community signed at Paris on April 18, 1951. Article 47 of that treaty, which so far as I am able to ascertain has not been modified, reads insofar as relevant as follows: The High Authority may gather such information as may be necessary to the accomplishment of its mission. It may have the necessary verifications carried out. The High Authority shall not divulge information which by its nature is considered a professional secret, and in particular information pertaining to the commercial relations or the breakdown of the costs of production of enterprises. With this reservation it shall publish such data as may be useful to governments or to any other interested parties. I take it to be fairly evident from this that the High Authority may obtain such information but is not to publish it as stated here in such form as to show the breakdown of costs. Senator KEFAUVER. It may be available for governments. (At this point in the proceedings Senators Ervin and Scott left the hearing room.) Senator KEFAUVER. Did you understand my question? Mr. LOEVINGER. Sir? Senator KEFAUVER. You read that they could get such information as they want and that would be useful to governments. Mr. LOEVINGER. They can get such information, but are not to disclose it. I believe the principle against nondisclosure goes to the national governments. Essentially the Coal and Steel Community, like the Common Market, is something on the order of a federal government, and the national governments correspond somewhat roughly to our State governments. Senator KEFAUVER. Any other questions? Thank you very much, Judge Loevinger. Mr. LOEVINGER. Thank you, sir. Senator KEFAUVER. Senator Hart, do wish to make before we leave? you have any observations you Senator HART. No, Mr. Chairman, except to say that I wish I had left for the rollcall already. I think I have indicated that I am satisfied that cost information would enable this committee to determine with greater certainty than they can without it whether the antitrust laws are in fact adequate to today's marketplace conditions as it relates to steel. Not an unimportant element in our whole economy, I wish we could have it. I would not want to thereby damage that portion of the economy and through it the whole economy any more than anybody else. I have no doubt about the jurisdiction of the committee to request it or the relevancy of the information to our responsibility to evaluate the adequacy of the antitrust laws. I have no doubt at all about that. I am clearly troubled by this businesss as it relates to the policy decision and the effect on the Åmerican steel industry. Yet if I conclude that the American steel industry would be damaged by furnishing the information, I am acknowledging that this committee is not competent to safeguard information given it. I am not quite prepared to acknowledge that. Senator KEFAUVER. Thank you, Senator Hart. We will place in the record a short and very able brief on the law pertaining to this subject prepared by Mr. Flurry the able senior attorney for the subcommittee, and a memorandum prepared by Dr. John M. Blair, of September 11. which has been referred to. (The documents referred to are as follows:) MEMORANDUM SEPTEMBER 11, 1962. To: Bernard Fensterwald, staff director. Subject: Cost data for the steel industry: Purposes and objections. The objective of this memorandum is to discuss in summary form the principal purposes to be served by securing cost data from the steel industry and the major objections which have been advanced against obtaining such data. PURPOSES Obtaining the data will serve two purposes which lie at the heart of the monopoly problem; (a) to reveal the extent and use of monopoly power and (b) to show the relationship between size and efficiency. By relating cost (and the important components thereof) to price it will be possible to determine whether the leading companies possess a significant degree of monopoly power. This can be done by showing whether in a given year, such as 1961, the relationship of costs to price is not what would be expected in a competitive industry under similar circumstances. Moreover, when substantial excess capacity exists, as was true of the years for which the data are sought, 1954 and 1961, an increase in price greater than an increase in cost cannot be explained on the basis of an excess of demand over supply. If it is also not due to an increase in costs, the logical deduction is that it is due to the exercise of monopoly power. Conversely, a showing that the increase in price in this period has been less than the increase in unit labor costs would indicate the possession of significant monopoly power in the hands of the union. 1 3 The existence of an "unreasonable" relationship of costs to price has long been cited among the indicia of monopoly power. For example, in the American Tobacco case cost data were used to show whether there was an intent to monopolize; in the Cellophane? and Alcoa cases cost data were employed to establish whether there existed a monopoly power over prices. In the Alcoa case the court found that the company had monopolized the industry in violation of the Sherman Act. The Department of Justice placed in the record figures showing the cost of producing aluminum, as computed from the books of the company. According to these figures, in 1937 the total net mill cost for producing pig aluminum, plus the cost of converting the pig aluminum into commercial ingots, plus administrative and selling expenses, was 9.6 cents per pound.* The fact that at the time aluminum was selling for 20 cents a pound was one of the considerations which led the court to conclude that the company had attempted to monopolize and had monopolized in violation of the Sherman Act. Recognizing the importance of costs to its consideration of the monopoly problem, the Subcommittee on Antitrust and Monopoly has secured cost data on all of the industries which have been the subject of its administered price inquiry, except steel. In automobiles, figures on unit profits were obtained from the two principal producers which, together with information from other sources that were available for this industry, made possible the construction of a cost breakdown per car, which was published by the subcommittee in its report on the automobile industry. In bread, detailed unit cost data were submitted by the major producers and aggregated into totals for groups of companies by the Department of Agriculture for the subcommittee and published by the subcommittee in its report on the bread industry. In drugs, the subcommittee obtained figures from major companies on their purchase and sales contracts which formed the basis for its figures on unit production costs and were published in its report on the drug industry." 1 American Tobacco Co. et al. v. United States, 328 U.S. 781 (1946). 2 United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377 (1956). 3 United States v. Aluminum Co. of America, 148 F. 2d 416 (C.C.A. 2d 1945). Source: U.S. District Court, Southern District of New York, United States of America v. Aluminum Company of America et al., vol. XVI, exhibit 718. (Received in evidence May 5, 1939.) 585th Cong., 2d sess., "Administered Prices: Automobiles," report of the Subcommittee on Antitrust and Monopoly to the Senate Judiciary Committee, 1958, pp. 124-130. 87th Cong., 1st sess., "Administered Prices: Bread," report of the Committee on the Judiciary, S. Rept. 1923, 1960, p. 113. 787th Cong., 1st sess., "Administered Prices: Drugs," report of the Committee on the Judiciary, S. Rept. 448, 1961, pp. 6-25. |