Kuhlman, John M.

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Washington University Law Review Volume 1972 Issue 2 January 1972 Commentary: In Response to a Revisit John M. Kuhlman University of Missouri Follow this and additional works at: https://openscholarship.wustl.edu/law_lawreview Recommended Citation John M. Kuhlman, Commentary: In Response to a Revisit, 1972 WASH. U. L. Q. 245 (1972). Available at: https://openscholarship.wustl.edu/law_lawreview/vol1972/iss2/3 This Article is brought to you for free and open access by the Law School at Washington University Open Scholarship. It has been accepted for inclusion in Washington University Law Review by an authorized administrator of Washington University Open Scholarship. For more information, please contact digital@wumail.wustl.edu. IN RESPONSE TO A REVISITJohn M. Kuhlman*"There's glory for you!" "I don'tknow what you mean by 'glory' ",Alice said. "I meant, 'there'sa nice knock-down argument foryou!'" "But 'Glory' doesn't mean'a nice knock-down argument,"'Alice objected. "When I use aword," Humpty Dumpty said in arather scornful tone, "it meansjust what I choose it to mean,--neither more nor less."--L. Carroll, Through the Looking GlassIn an anti-trust case, for better or for worse-and, one is inclinedto say, until death do they part-lawyers and economists represent apeculiar amalgamation of talent. The lawyers are representative of thelegal institutions and rules within which and by which the issues arelitigated. The economists are representative of the economic issues aswell as the basic intellectual discipline which is used to analyze andrationalize those same issues. It is essential, then, that both learnsomething of the other discipline. The economist must appreciate thelegal institutions and the rules within which the lawyer and the courtfunction. And the lawyer must develop some understanding of thediscipline of economics as well as the framework within which theeconomist operates. To these ends, it is imperative that the dialoguebetween the two professions be continued.Over the past several years, Mr. Luther McKinney and I have car-ried on such a dialogue-as lawyer and economist on opposing sidesin an antitrust case, as contributors to professional journals, and aspostprandial speakers. This dialogue has certainly contributed to myappreciation and understanding of the law and, I hope, has madesome contribution to Mr. McKinney's understanding of economics.But, more than that, I hope that those who have participated as* Professor of Economics, University of Missouri-Columbia.245Washington University Open Scholarship246 WASHINGTON UNIVERSITY LAW QUARTERLYspectators in this dialogue have also gained some insight into one orthe other of the two disciplines.I am afraid that some of the differences between Mr. McKinneyand myself may be semantic in nature. This arises from the factthat economists are prone to use common words in ways that are un-common to the layman or non-economist. Further, the economisthas been trained to speak in as precise a way as possible. But let meexplain two such instances.Mr. McKinney contends that I confuse the two issues in an anti-trust case: (1) the issue of the existence or non-existence of a con-spiracy and (2) the issue of damage estimation.' I very carefullypointed out when referring to the estimation of damages that I wasspeaking to the basic economic issue rather than the basic legal issue.It is in regard to the basic economic issue that the economist has, Ifeel, a major role to play. That is, it is his task to make an estimateof the damages resulting from the alleged violation of the antitrustlaws. It may well be that he can make a contribution to the determi-nation of whether a conspiracy existed, and, in coming years, thisrole of the economist will become increasingly important as conspira-tors become more sophisticated and as the law makes more use ofcomputers. As it stands right now, however, I suspect that fewlawyers would be willing to base their case as to the existence of aconspiracy on the analysis of the economist and nothing else. Cer-tainly since the electrical equipment cases of the middle 1960's, theeconomists' major contribution to antitrust cases has been that of esti-mating damages.Mr. McKinney challenges my proposition that price-fixing arrange-ments have some effect on costs.2 He points out that Professors Left-wich and Adelman take the position that there is "no immutableeconomic rule" to the effect that such a combination will significantlyraise costs. I am confident that both Professors Leftwich and Adle-man would agree that competition stimulates efficiency and yields abetter pattern of resource usage than does monopoly or collusive oligo-poly, but they were not asked that question. They were asked if there1. McKinney, Tainted Costs Revisited, 1972 WASH. U.L.Q. 239, 240.2. Id. at 242.[Vol. 1972:245https://openscholarship.wustl.edu/law_lawreview/vol1972/iss2/3IN RESPONSE TO A REVISITwas an immutable economic rule that such conspiratorial combinationswould increase costs. To that very narrow and technical question,most economists would probably answer in the negative. But if thesame economist were asked to list the benefits of competition, mostwould include increased efficiency as one of their responses.After all, competition has been our national policy since 1890. Thishas been repeated and reaffirmed in congressional debate and action,judicial decisions, and policy statements by governmental officials ofevery administration. Why do we have this deep belief in the efficacyof competition? It has never been better stated than by Judge LearnedHand in the Alcoa decision:Many people believe that possession of unchallenged economic powerdeadens initiative, discourages thrift and depresses energy; that im-munity from competition is a narcotic, and rivalry a stimulant, to in-dustrial progress; that the spur of constant stress is necessary to coun-teract an inevitable disposition to let well enough alone.3If, indeed, economists, lawyers, and judges in any significant num-ber believe that there is no relationship between the level of competi-tion in an industry and the level of efficiency in that industry, thenthere is a very limited basis for the antitrust laws and a nationalpolicy of competition.Mr. McKinney inquires whether there is anything more than a theo-retical possibility that collusive agreements effect costs or "whether italways follows as night the day."4 I am sure that he expects a negativeresponse but I am equally confident that the response has to be in the af-firmative. In the electrical equipment price-fixing rings, there was anallocation system in which each member firm was awarded a share of themarket. Each firm then received that portion of the market regardlessof market conditions. In periods of declining sales, the less efficientplants produced the same percentage of a smaller total market. Thiswould not happen if the industry were controlled by a single firmwhich operated several plants. In such an instance, the less efficientplant would not be operated during periods of declining sales. Wecan say without any doubt or equivocation, a price-fixing ring which3. United States v. Aluminum Co. of America, 148 F.2d 416, 427 (2d Cir. 1945).4. McKinney, supra note 1, at 242-43.Vol. 1972:245]Washington University Open Scholarship248 WASHINGTON UNIVERSITY LAW QUARTERLYallocates markets on some basis other than costs of production willhave the inevitable effect of raising the cost of production. On thispoint, all economists including Professors Adelman and Leftwich willbe in hearty agreement.'That raises the next question. Do most (or all) price-fixing agree-ments contain market sharing provisions? There is really no way ofsaying for certain, but it would appear that few firms would be willingto enter a price-fixing agreement without some assurance thay theywould receive a portion of the industry's sales regardless of the levelof demand. This issue is sufficiently complex that the reader would dowell to read my analysis of this problem published elsewhere."When the question of entry is introduced, a host of new issues areraised. A price-fixing ring must do what it can to impede entry andit might under certain circumstances even hasten the exit of some re-sources presently in the industry. Certainly the great threat to aprice-fixing ring is an influx of resources which would so alter thesupply situation that the ring could no longer exist. If it is successfuland does impede the flow of resources into or out of the industry inquestion, there can simply be no question whatsoever that the costs ofthat industry are affected. A movement of resources into an industrywill, on the whole, result in increased efficiency and to the extent thata price-fixing ring impedes this flow of resources, industry costs will behigher. In sum, there are, it would seem, relatively few instances inwhich a price-fixing ring would have no effect on the costs of pro-duction. The reasoning does not depend upon restriction of outputand a resultant higher average cost. It results only from an allocationof resources which is different than that which would occur undernoncollusive conditions. An industry organized as a monopoly wouldactually yield superior results in terms of resource utilization thanwould the same industry made up of independent firms but engagedin price fixing.mI.In addition to the problems discussed above, there is also a con-5. R. LEFTWCH, Tim PRICE SySTEM AND RESOURCE ALLOCATION 219 (3d ed.1966).6. Kuhlman, The Nature and Significance of Price-Fixing Rings, 2 ANTITRUST L.AN EcoN. REv. 69 (1969); Kuhlman, Theoretical Issues In the Estimation ofDamages In a Private Antitrust Action, 33 SOUTHERN ECON. J. 548 (1967).[Vol. 1972:245https://openscholarship.wustl.edu/law_lawreview/vol1972/iss2/3IN RESPONSE TO A REVISITceptual problem. In certain theoretical market structures, economistsknow the relationship between costs and price with a great deal ofcertainty. In the real world some businesses have unsophisticatedpricing rules such as a 20% markup. With the exception of thesefew cases, it is not all clear what the relationship is between cost andprice. As a matter of fact, there are instances in which the relation-ship goes from price back to costs. In some instances, overhead costsare assigned on the basis of what the product line will bear. Someproducts may be assigned a great deal of the common costs of thefirm.This means in an antitrust case, then, that the defendant firm wouldnot have the choice of bringing in some of its cost data and ex-cluding other, but would, in the interest of complete analysis, be re-quired to bring in all of its cost data including cost data pertaining toproduct lines not involved in the litigation. It would have to be es-tablished that costs were assigned without any consideration of theexistence or non-existence of a conspiracy.Surely Mr. McKinney must have had his tongue in cheek when hesuggested that the plaintiff should assume the burden of showing thatthe costs would have been in the absence of the alleged (or proven)conspiracy. This would be a monumental, if not impossible, chore forthe accounting staff of the defendant's firm itself with its unimpededaccess to the company records.I am sure that the contemporaneous records of the typical defendantin a treble damage action were not made up with that action inmind. They are, at best, a rationalization of the company's activitiesfor either the stockholders, the management, or the Internal RevenueService.IV.In conclusion, let me point out that the offense, alleged or otherwise,of a price-fixing ring is the fixing of prices. The evidence of thisoffense, if it is to be found, will be in the behavior of prices. Thatis, the prices behaved differently than would have been the case butfor the alleged violation of the antitrust laws.In the case of the electrical equipment trials, the price behavior wassuch that no economist could possibly have explained that behavior onthe basis of anything other than a conspiracy and a breakdown of thatconspiracy. For example, in the case of power transformers, prices fellVol. 1972:245"1Washington University Open Scholarship250 WASHINGTON UNIVERSITY LAW QUARTERLYby a factor of one-half over a period of only a few weeks and recoveredby about the same amount in an equally short period of time. Cer-tainly no economist is going to argue that this kind of abrupt changein price reflects equally abrupt changes in costs.My case can be summed up in the following brief propositions.First, it is impossible to state what the exact relationship between priceand cost is in markets in which we find price-fixing. Second, anyaction by a price-fixing ring which restricts entry, hastens exit, or al-locates production on some basis other than efficiency will, in and ofitself, cause prices to be different than would have been the case hadthe ring never existed. Third, the evidence of a price-fixing con-spiracy and the measure of its impact must be in the prices that thering was alleged to have fixed and not in the relationship between thecost and price of the member firms. And fourth, although there areno generally accepted immutable laws to the effect that competitionlessens incentive for increased efficiency, this is a widely held beliefand it is a basis for all antitrust legislation.[Vol. 1972:245https://openscholarship.wustl.edu/law_lawreview/vol1972/iss2/3Washington University Open Scholarship

Commentary: In Response to a Revisit

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Commentary: In Response to a Revisit

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