general divestiture provision under australian competition law

Report prepared for Coles Pty Ltd

The introduction of a general divestiture

provision under Australian competition law

Dr Alistair Davey

August 2012

Page i

About the Author

Alistair Davey is a Principal in the Canberra office of the Sapere Research Group. Prior to

becoming a consultant in May 2007, he spent 15 years working for the Australian

Government in various roles, serving as the competition and microeconomic advisor to the

Treasurer from March 1996 until June 1999 and working as a director in the mergers and

acquisitions branch of the Australian Competition and Consumer Commission (ACCC) from

June 1999 until September 2003.

Alistair specialises in the economic analysis of trade practices, competition policy and

regulatory instruments. He has advised prominent firms involved in the downstream

petroleum industry, grocery retailing, credit/charge card issuance, agriculture and electricity

generation, as well as various industry associations and Commonwealth and State

government agencies.

Alistair holds a Masters degree in economics from the University of Melbourne and a

professional doctorate at the Australian National University where he examined the

competitive effects of horizontal agreements in the downstream petroleum industry. Alistair

has been published in refereed economic journals writing on competition law and petrol

prices.

Sydney

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Canberra

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Melbourne

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Wellington

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Auckland

Level 17, 3-5 Albert St PO Box 2475 Auckland 1140 Ph: +64 9 913 6240 Fax: +64 9 913 6241

For information on this report please contact:

Name: Dr Alistair Davey

Telephone: +61 2 6267 2705

Mobile: +61 (0) 4222 11110

Email: [email protected]

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Contents

Key points ...................................................................................................................... v

1. Introduction ...................................................................................................... 1

1.1 Divestiture proposals 1 1.2 Cap on market shares 2 1.3 Monopolisation 3 1.4 General divestiture provision? 4

2. Overseas Experience ......................................................................................... 7

2.1 United States 7 2.2 United Kingdom 8

3. Divestiture Case Studies ................................................................................... 9

3.1 Divestitures under the Sherman Act 9 3.1.1 Standard Oil Company 9 3.1.2 American Tobacco Company 11 3.1.3 Du Pont de Nemours & Company 13 3.1.4 International Harvester Company 13 3.1.5 Corn Products Refining Company 14 3.1.6 Eastman Kodak Company 14 3.1.7 Aluminum Company of America (Alcoa) 15 3.1.8 Paramount Pictures, Inc. 15 3.1.9 The Pullman Company 16 3.1.10 United Shoe Machinery Corporation 17 3.1.11 International Business Machines (IBM) 18 3.1.12 Kansas City Star 18 3.1.13 United Fruit Company 18 3.1.14 Grinnell Corporation 19 3.1.15 Music Corporation of America, Inc. 20 3.1.16 Blue Chip Stamps 20 3.1.17 American Telephone and Telegraph Company (AT&T) 21

3.2 Divestiture under UK competition law 22 3.3 Overview of monopolisation divestiture case studies 24

4. Implications of divestiture .............................................................................. 26

4.1 Legal delays and technological change 26 4.2 How do you impose divestiture? 27 4.3 Economic consequences 28 4.4 Other consequences 30

5. Implications of a divestiture provision for grocery retailing ........................... 32

5.1 Application of the US experience to Australia 32 5.2 Application of the UK experience to Australia 34

6. Final observations ........................................................................................... 35

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7. References ....................................................................................................... 37

Appendices Appendix 1 : Workable competition ................................................................................................ 42

Page v

Key points

The primary focus of competition law should be on the maintenance of competitive

pricing, and not on particular numbers of competitors.

Competition damages competitors and may even eliminate competitors from the market altogether.

Economic theory suggests that the level of market concentration alone may not

necessarily be the prime determinant for the actual state of competition in a market. A

competition analysis focusing solely on market concentration could be fundamentally

flawed if it ignores other critical factors such as the height of barriers to entry and the

extent of sunk costs incurred by new entrants.

Where general divestiture provisions exist under the competition law regimes in the

United States and the United Kingdom they are used as remedies for conduct generally

referred to as monopolisation which is any conduct that leads to or protects a

monopoly.

Section 46(1) of Australias primary competition law statute, the Competition and

Consumer Act 2010, is based on the monopolisation provisions of the US Sherman

Act (1890).

History suggests that divestiture has generally not proven to be effective as a remedy in

monopolisation cases in terms of increasing competition, raising industry output, or

reducing prices for consumers.

The historical record suggests that the inclusion of a general divestiture provision

within Australian competition law is not worth pursuing.

One reason advanced for the overall poor record of divestiture remedies has been the

time it takes for matters to work their way through the legal system. By the time a

matter has worked its way through the legal system, an industry may have changed so

much as to render the divestiture irrelevant.

It has been suggested that governments and competition law enforcement agencies

should tread very warily before imposing structural remedies in the face of technological

change that they have very little knowledge, understanding and awareness of.

If divestiture is imposed as a remedy for monopolisation, then the question arises as to

how one should proceed in breaking up a company which can involve a number of

challenging administrative issues.

Under the Liberal National Party policy, the ACCC would apply to the Courts for

the breakup of companies. This presupposes expertise on the part of the ACCC

and the Courts in regard to corporate restructuring.

Divestiture can result in a significant economic harm through the loss of economies of

scale and scope which in turn could flow through to consumers in the form of higher

prices.

Divestiture could impose significant losses on investors which in turn could have

adverse implications for taxpayers and the budgetary position of the Commonwealth

Government through the need to provide compensation.

Page vi

Divestiture could also have adverse consequences for employees of companies that are

broken up through the loss of employment or pay cuts.

The inclusion of a general divestiture provision into Australian competition law based

on US practice is extremely unlikely to result in the breakup of retail grocery chains

Coles and Woolworths.

Under US competition law the overarching principle of equitable remedies in

monopolisation cases is that the remedy must be proportional to the wrongdoing:

the more serious the wrongdoing, the harsher the remedy.

The only material breach of section 46(1) by a retail grocery participant occurred

more than 15 years ago and imposing divestiture as a remedy in this instance

would have been massively out of proportion and overkill in comparison to the

wrong committed when a simple behavioural change would suffice.

The inclusion of a general divestiture provision into Australian competition law based

on UK practice would be highly unlikely to result in divestiture being imposed on Coles

and Woolworths.

If Australia was to follow UK practice, then divestiture would follow on from the

outcome of a formal market investigation conducted by the ACCC.

Given the ACCC has determined that grocery retailing has met the required

standard of workable competition under Australian competition law, it would

appear highly unlikely that the ACCC would be seeking to impose divestiture on

Coles and Woolworths.

Claims made in the public domain may not always accurate. In its inquiry into grocery

retailing in 2008 the ACCC specifically highlighted the unsubstantiated claims being

made by some parties.

In the development of competition law it is critically important that the underlying

principle of protecting allocative efficiency continues to apply and is not overridden by

populist sentiment and concern over the need to protect those who come off second

best in the competitive process.

1. Introduction

1.1 Divestiture proposals The purpose of this report is to examine the efficacy of the inclusion of a general divestiture

provision into Australian competition law. The primary competition law statute in Australia

is the Competition and Consumer Act 2010 (CCA) (formerly known as the Trade Practices Act

1974) (TPA).

A number of proposals have been put forward by various parties for the introduction of a

general divestiture provision. In 2008 Coalition Senators Alan Eggleston, Barnaby Joyce and

David Bushby recommended the adoption of a general divestiture provision in a dissenting

report by the Senate Standing Committee on Economics (2008, p. 11) on the Trade Practices

(Creeping Acquisitions) Amendment Bill 2007:

With Australia having the highest levels of market concentration representing a lack of real

competition, it is clear that fundamental reform of the Trade Practices Act needs to occur to

restore competition into the market place. We need to enact a divesti ture power which allows

the Court to break up corporations that dominate markets by acquiring a substantial

market share to the detriment of small businesses and consumers.

Prominent trade practices adviser and small business advocate, Associate Professor Frank

Zumbo from the University of New South Wales recommended the adoption of a general

divestiture provision in his testimony before the Senate Economics References Committee

(2011, p. E51) inquiry into the impacts of supermarket price decisions on the dairy industry:

... we need a general divestiture power, as per the United Kingdom and the United States.

Once again, Australia is out of step with international best practice in not having a general

divestiture power. To the extent that those two provisions are not in our competition laws

we are out of step with international best practice and those two areas need to be remedied.

The Senate Economics References Committee (2011a, p. 140) subsequently accepted

Associate Professor Zumbos advice, recommending in its final report:

Amend the Competition and Consumer Act 2010 to provide for a general divestiture power

whereby the ACCC could, in appropriate cases, apply to th e Courts for the breakup of

monopolies or dominant companies that engage in conduct that undermines competition.

In mid-July 2012 the Queensland based Liberal National Party (LNP) (The Nationals, 2012)

passed a resolution to give general divestiture powers to the ACCC that was moved by

Senator Joyce:

That this LNP Convention calls on the Federal Government to amend the Competition and

Consumer Act 2010 to provide for a general divestiture power whereby the ACCC could, in

appropriate cases, apply to the Courts for the breakup of monopolies or dominant companies

that engage in conduct that undermines competition.

A general divestiture provision is also supported by the Australian Greens Party. According

to the Australian Greens party spokesperson for competition policy and small business,

Senator Scott Ludlam:

The Greens ... want to enhance the power of the Australian Competition and Consumer

Commission to prevent the formation of monopolies through creeping acquisitions and to

divest monopolies and oligopolies of assets if they are abusing their market power. (The

Australian Greens)

A related suggestion to a general divestiture provision is for a cap on the market share of

retail grocery chains which has been proposed by Katters Australian Party (2012):

Directs that no supermarket chain will have a market share excee ding 22%, corporate

chains holding more than 22% will be capped at current market share and forced to divest

down to below 22%.

The policy proposal for a cap on market shares of the retail grocery chains is briefly

discussed below.

1.2 Cap on market shares The proposal to impose a cap on market shares of the major grocery chains has previously

been considered and rejected by the Joint Select Committee on the Retailing Sector (1999, p.

53):

With the grocery market cont inuing to evolve and expand, driven by consumers, the

Committee is of the view that a market cap would be extremely interventionist, unworkable

and detrimental to consumers.

The then Chairman of the ACCC, Professor Allan Fels, told the Joint Select Committee on

the Retailing Sector that there would be significant practical issues to overcome in imposing

a cap on market shares, such as defining the relevant market for enforcement purposes:

There are ... some fairly significant mechanical problems about a mar ket cap idea. There

are problems about defining it. There are problems about policing it. There are problems

about what happens if there is a strong case for the expansion by an established player into

a particular area. Does that mean that they could only do so if they sold of f some other part

of their business, which might not be good for the area they are withdrawing from? It could

also affect their incentives. In other words, if in going into an area you knew that you would

have to give up something, th en that might reduce the likelihood that you would enter a

market that it would normally make a lot of sense to enter into. We also think that is the

sort of law people spend a lot of time trying to think up ways around, often inefficient and

artificial means of gett ing around the law. It would also t ie up some government resources,

whether with us or someone else, on an activity that might not be very productive. (Joint

Select Committee on the Retailing Sector, 1999a, p. 1 158)

The Joint Select Committee on the Retailing Sector (1999, pp. viii-ix) also identified a

number of other problems associated with the imposition of a cap:

the possibility that major chain employees (if re-employed) may transfer from higher

paying jobs to lower paying jobs;

the possible devaluation of shares owned by thousands of ordinary Australians; and

the opportunity for foreign retailing chains to enter the market to the detriment of

Australian-owned companies.

Professor Fels also told the Joint Select Committee on the Retailing Sector that the

imposition of a cap would have a detrimental impact on consumers as well as independent

supermarket operators seeking to sell their businesses.

The commission is not keen on the cap. We have quite a bit of hesitation in supporting the

cap. It is, firstly, not likely to be beneficial for consumers. In at least some cases, some

areas or some product markets, it does mean that they may be condemned t o supply by

inefficient, high cost operators. Also, it is not even necessarily good for independents. On the

face of it , it sounds good for independents because it frees them from the shackles of

competition by major players who may be entering their marke t. On the other hand, there is

certainly a group of independent people who feel that, at some stage of their business career,

they would like to be able to sell out to a major buyer. (Joint Select Committee on the

Retailing Sector, 1999, p. 1158)

Due to the practical difficulties that must be overcome, the imposition of a cap on the

market share of retail grocery chains is arguably not a serious policy proposal.

1.3 Monopolisation Where general divestiture provisions exist under the competition law regimes in the United

States and the United Kingdom they are used as remedies for conduct generally referred to

as monopolisation. Monopolisation is any conduct that leads to or protects a monopoly

(Meese, 2005, p. 744). The basic result under monopoly is production is cutback and the

price is raised by the monopolist in order to maximise profit. Monopoly power is the power

to exclude competitors and to raise prices in a particular market (Crandall, 2001, p. 109). The

general divestiture provisions that exist under the competition law regimes in the US and the

UK are discussed in section 2 below.

American competition law is referred to as antitrust law. The term antitrust has its origins in

combating the effects of trusts combinations by which businesses prevented competition

among themselves (Barnes, 1999, p. 115).

Section 46(1) of the CCA is based on the monopolisation provisions of the US Sherman Act

(1890) (Quo, 2010). Section 46(1) prohibits firms with substantial market power from taking

advantage of that power for the purpose of eliminating or substantially damaging a

competitor; preventing entry to markets; or deterring or preventing a person from engaging

in competitive conduct. In the Boral decision, High Court Justices Gaudron, Gummow and

Hayne endorsed three general propositions about the competitive conduct provisions of the

TPA, including section 46(1):

The structure of [the competitive conduct provisions] of the Act does, despite the

considerable textual differences, reflect three propositions found in the United States

antitrust decisions. The first is that these laws are concerned with the protection of

competition , not competitors. The second ... is that [e]ven an act of pure malice by one

business competitor against another does not without more, state a claim under the federal

antitrust laws; those laws do not create a law of u nfair competition The third ... is that

it is in the interests of competition to permit f irms with substantial degrees of power in th e

market to engage in vigorous price competition and that it would be a perverse result to

render illegal the cutting of prices in order to maintain or increase market share .1

The effectiveness of section 46(1) has been questioned in the past. However, in light of

clarifying amendments to the operation of section 46(1) by both the current and former

governments, the then Chairman of the ACCC, Graeme Samuel (2008, p. 5), expressed

confidence that the changes made had been sufficient to make it effective and that lingering

dissatisfaction probably had more to do with its inability to provide blanket protection for

businesses struggling to survive in the face of competition from more efficient rivals:

With these changes in place the ACCC considers that the balance has been adequately

struck between ensuring that businesses are exposed to the rigours of competition with all

the associated economic benefits while being protected from the possible anti -competitive

consequences associated with firms gaining power from that competitive process.

This will not put an end to ongoing calls for greater action by the ACCC to protect firms

that are struggling to compete with more efficient rivals whether those rivals greater

efficiency comes from economies of scale or the ability to be nimble and innovate quicker.

But what it does mean is when firms that have market power are using that power for an

anti-competitive purpose the ACCC will be well placed to act.

In light of the views of the former ACCC Chairman, further changes to section 46(1) would

appear unnecessary.

1.4 General divestiture provision? Proponents for a general divestiture provision have not been specific as to which particular

breaches of competition law would trigger divestiture as a potential remedy. Indeed, it

appears that some proponents are suggesting that divestiture could be used as a general

remedy for competition breaches of the CCA. According to Associate Professor Zumbo:

The way that a divestiture power would work is simply that a court would have that as a

possible order in relation to, for example, abuses of market power. There is no reason why

it could not be expanded to other potential breaches of the competition laws but typically it

is linked in with a monopolisation or an abuse of market power provision. (Senate

Economics References Committee, 2011, p. E51)

While there is a lack of specificity as to which particular breaches of competition law would

trigger divestiture as a potential remedy amongst proponents of a general divestiture

provision, nevertheless proponents have usually been highly specific as which companies a

divestiture remedy should be used against. There appears to be a general presumption

amongst proponents of a general divestiture provision that it will be used to breakup and

dismember retail grocery participants Coles and Woolworths.

According to the Senate Economics References Committee (2011a, p. 139):

1 Boral Besser Masonry Limited (now Boral Masonry Ltd) v Australian Competition and Consumer Commission [2003]

HCA 5 at 160.

1.41 The fact that Woolworths and Coles (through its parent company Wesfarmers) hold

the lion's share of the supermarket industry, and are increasing their share of the home

improvement, liquor and petrol industries, should surely be of considerable concern to our

consumer and competition watchdog.

1.42 Unlike the United Kingdom and the United States, Australia does not have an

express legislative prohibition against anti -competitive price discrimination. Similarly,

Australia does not have a general d ivestiture power. Such a power also exists in the United

Kingdom and the United States.

1.43 Divestiture powers effectively deal with market power by forcing businesses to 'break

up' their companies once they become so large they become anti -competitive. This in turn

helps maintain a level playing field and fosters more effect ive competition.

In discussing his LNP divestiture resolution, Senator Joyce referred to 78 per cent of the

grocery sector being owned by two companies, and further commented:

This is no longer an issue just for farmers and small businesses though. Both Heinz and

Coca-Cola Amatil have complained about the retail sector environment over the past year.

It's time the ACCC had the full armoury of weapons to use against anti -competitive

conduct.

Divestiture is of course a serious response but there is no point walking softly i f you don't

carry a big stick. (The Nationals, 2012)

Similarly, Senator Ludlam in discussing the general divestiture provision policy of the

Australian Greens party commented:

In a number of important parts of the economy, such as the grocery, media, and possibly

electricity sectors, there is insufficient competition to ensure that everyone gets a fair deal. A

good example of this is the fact that Coles and Woolworths now control about 80% of all

supermarkets. Together they exert significant and often harmful control over farmers and

food processors, not to mention smaller competitors. (The Australian Greens)

Amongst proponents of a general divestiture provision there appears to an overemphasis

placed upon the role of market concentration in determining market conduct. Professor

David Round (2006, p. 54), the Director of the Centre for Regulation and Market Analysis at

the University of South Australia, has warned:

concentration statistics or even market shares attributable to individual firms by

themselves tell us nothing about the dynamics of competition within a releva nt market. They

present a snapshot only, and tell us neither how firms obtained those market shares, nor

whether those shares are currently increasing or decreasing, and they certainly offer no guide

as to what might happen as future market conditions chan ge.

Economic theory would suggest that the level of market concentration alone may not

necessarily be the prime determinant for the actual state of competition in a market. Thus, a

competition analysis focusing solely on market concentration could be fundamentally flawed

because it ignores other critical factors. These other factors include the height of barriers to

entry and the extent of sunk costs incurred by new entrants.

It also appears that proponents of a general divestiture provision are far more interested in

dismembering certain participants in various sectors rather than arguing for the merits of a

general divestiture provision per se. Such an approach may not be entirely consistent with

the rule of law which stresses the need for legal certainty and requires institutions that will

enable the consistent application of law free from ad hoc influences (Casper, 2004).

Even if general divestiture provisions that operate in the US and the UK were enacted in

Australia, it is not necessarily the case that they would result in the dismemberment of retail

grocery participants Coles and Woolworths. This issue is further examined in section 5

below.

2. Overseas Experience

2.1 United States Section 2 of the Sherman Act (1890) declares:

Every person who shall monopoli se, or attempt to monopoli se, or combine or conspire with

any other person or persons, to monopoli se any part of the trade or commerce among the

several States, or with foreign nations, shall be deemed guilty of a fe lony . .. 2

Section 2 prohibits single-firm conduct that undermines the competitive process and thereby

enables a firm to acquire, credibly threaten to acquire, or maintain monopoly power (US

Department of Justice, 2008, p. vii).

Section 4 of the Sherman Act empowers US District Courts with the jurisdiction to prevent

and restrain violations of section 2. Various remedies are available for violations of section 2,

including conduct and structural remedies as well as the imposition of monetary penalties.

Conduct remedies mostly focus on prohibiting a party from engaging in specific

anticompetitive acts in the future (US Department of Justice, 2008, p. 150). Typically, US

Courts have issued injunctions against the continuation of the conduct found to be illegal

and have included provisions to eliminate the effects of the unlawful conduct in the

marketplace (Weber Waller, 2009, p. 18). Structural remedies include divestiture. The US

Supreme Court has recognised that divestiture is the most dramatic remedy available.3 In

the Microsoft case, the US Court of Appeals for the District of Columbia warned:

divestiture is a remedy that is imposed only with great caution, in part because its long -

term efficacy is rarely certain. 4

According to the prominent Antitrust Law (Areeda & Hovenkamp, 2002, pp. 97-98):5

No particular type of relief is automatic in a Sherman Act s 2 case. The statutes contain

no such warrant, and our observations elsewhere are particularly relevant to s 2 namely,

that remedies for the same statutory violat ion vary considerable, dependi ng on the nature of

the violation and the identity of the plantiff . Thus, it never follows automatical ly from the

finding of a s 2 violation that dissolution or divestiture is in order ...

The outcomes arising from various divestitures that have occurred under the Sherman Act

are examined in section 2 below.

2 15 U.S.C. 2 (2007).

3 United States v. E. I. du Pont de Nemours & Co., 366 U.S. 316, 326 (1961).

4 United States v. Microsoft Corp., 253 F.3d 34, 171 (D.C. Cir. 2001).

5 Antitrust Law is frequently cited by US Court judgements.

2.2 United Kingdom There has been a general divestiture provision available under UK competition law since

1973 that is related to the outcome of a formal market investigation conducted by the

current Competition Commission (CC) and its predecessor, the Monopoly and Mergers

Commission (MMC).

Prior to 2003, divestiture could only be ordered by the relevant Minister on the

recommendation of the CC or MMC under the previous Fair Trading Act 1973. Since 2003,

the CC has been responsible for determining remedies in market investigations, including the

power to require divestiture, under provisions of the Enterprise Act 2002. The relevant

Minister did not accept divestiture recommendations in relation to MMCs market

investigation into British Gas in 1993 and in relation to the CCs market investigation into

the supply of raw cows milk in 1999.

Under Part 4 of the Enterprise Act the UK Office of Fair Trading, the relevant sectoral

regulator or Minister can refer a market to the CC for investigation if there are reasonable

grounds for suspecting that any feature, or combination of features, of a market in the

United Kingdom for goods or services prevents, restricts or distorts competition in

connection with the supply or acquisition of any goods or services in the UK or a part of the

UK.

If it is found there is an adverse effect on competition (known as AEC), the CC is under

duty to take such action as it considers reasonable and practicable to remedy, mitigate or

prevent the adverse effect on competition or any detrimental effects on customers (Freeman,

2010, pp. 1-2). The CC can intervene directly to address these concerns (subject to control

by the Courts and a reserve power retained by Ministers to intervene on specific public

interest grounds). Under section 161(3)(a) and Schedule 8, paragraph 13 of the Enterprise

Act, this includes the imposition of an order for divestment.

Since the enactment of the Enterprise Act, the CC has only identified divestiture as the

preferred option in only one out of nine market investigations. One market investigation in

which the CC (2008, p. 228) explicitly considered but ruled out the use of divestiture was in

its market investigation of the supply of groceries in the UK:

Divestitures would represent a significan t intervention in property rights, as well as being

disruptive to consumers. We do not believe that such an intervention is supported by the

gravity and prevalence of the AEC we found.

The CC found an AEC arising from barriers to entry created by the planning approval

process and through grocery retailers placing restrictive covenants over sites which

prevented them from being used for grocery retailing. Instead of divestiture, the CC pursued

remedies that sought to lower barriers to entry to grocery retailing.

3. Divestiture Case Studies

Robert Crandall (2001, p. 15), a senior fellow with the Brookings Institution, has warned:

Before any other jurisdiction decides to follow U.S. precedent in government policy, it should

at the very least review carefully the published empirical literature on the effects of that

policy.

Following this advice, this section will provide case studies of various divestitures that have

occurred under US and UK competition law.

3.1 Divestitures under the Sherman Act The case studies of various divestitures under the Sherman Act have been chosen where the

outcomes have been well documented. This includes all of the high profile divestitures that

occurred last century.

3.1.1 Standard Oil Company The Standard Oil Company was originally founded in 1870 by John D Rockefeller who

served as its Chairman and was its major shareholder. Standard Oil monopolised the

petroleum industry during the 1870s by cartelising the stage of production where entry was

difficult petroleum transportation (Granitz & Klein, 1996). Standard Oil enforced the

transportation cartel by shifting its refinery shipments among railroads to stabilise individual

railroad market shares at collusively agreed-on levels. This method of cartel policing was

effective because Standard Oil possessed a dominant share of refining, a dominance made

possible with the assistance of the railroads. Standard Oil expanded its position by raising

rivals costs6, in the sense that Standard Oil used its substantial transportation cost advantage

to acquire many of its refining competitors at distress prices. Standard Oils control of the

transportation of petroleum was complete after the construction of its pipeline network and

the negotiation of final collusive market sharing and price-setting agreements with the

railways and the Tidewater Pipeline Company. Major competitive threats to Standard Oil

would not come until new oil fields were discovered.

In November 1906 the US Department of Justice filed a complaint alleging breaches of

Sherman Acts restraint of trade and monopolization provisions against the Standard Oil

Company of New Jersey which was the holding company for the various subsidiary

companies and its directors. The complaint charged that the Standard Oil holding company

had monopolised the refining and marketing of petroleum products and had achieved its

dominance through control of pipelines and various predatory means, including local price-

cutting, bribery, obtaining rebates from railroads, and commercial espionage (Kovacic, 1999,

p. 1295). After a fifteen month trial, the Missouri Federal Circuit Court issued a judgement in

6 Raising rivals costs (RRC) is a form of anti-competitive exclusion whereby conduct by a predatory firm or

firms places rival competitors at a cost disadvantage sufficient to allow the predatory firm or firms to exercise market power by raising prices (Krattenmaker & Salop, 1986, p. 214).

favour of the US Government and ordered the dissolution of the Standard Oil Company of

New Jersey by distributing the stock of the 37 subsidiaries to its shareholders.7 The court

dismissed the US Governments complaint against 32 other subsidiary companies.

Standard Oil subsequently appealed the decision to the US Supreme Court. In May 1911, the

US Supreme Court upheld the trial Court's finding of illegal monopolisation and the

dissolution decree (Kovacic, 1999, p. 1298).8

There has been considerable criticism of the terms of the dissolution of the Standard Oil

Company. According to distinguished American economist, the late Walter Adams (1951, p.

2), the dissolution had the fatal flaw of leaving economic control over the successor

companies with the same interests that had exercised control over the parent company prior

to dissolution. Former President Theodore Roosevelt, whose administration brought the suit

against Standard Oil, commented in 1915 that not one particle of good resulted to

anybody (Giddens, 1955, p. 126).

Similarly, prominent US antitrust expert Judge Richard Posner (2001, p. 107) has expressed

the view that the formulation of the dissolution turned a national monopoly into a series of

regional monopolies:

The result was to spin off the operating companies to the shareholders of the holding

company Rockefeller and his associated. Not only did they retain control (eventually

dissipated by normal turnover of stock ownership) of the operating companies, but since the

companies were organised along regional lines and each had exclusive territory, there was at

first litt le competition among the companies. The decree had substituted a series of regional

monopolies for a national monopoly.

Moreover, Richard Posner (2001, p. 107) observes the discovery of new oil reserves in Texas

had already begun to erode Standard Oils grip over the petroleum markets:

By the time divestiture took place, moreover, the discovery of vast quantities of oi l in Texas,

where Standard Oil had only a small presence ... had injected important new competition

into the industry.

Similarly, Robert Crandall has concluded on the futile nature of the breakup of Standard Oil:

... the dissolution of the Standard Oil Trust in 1911 had no discernible effect on output

and prices in the petroleum industry after 1911 because Standard' s position in the rapidly

growing petroleum industry of the early 1900s was already eroding due to the success of

entrants in the booming oil patches outside Standard's stronghold in Pennsylvania and

Ohio. Establishing thirty -eight separate, independent companies by dissolving the Trust had

little impact on the ability of new, independent companies to expand their operations in

Oklahoma, Texas, or California. The alleged sins visited on Standard's early competitors

in Pennsylvania or Ohio had nothing do wit h the state of competition in Missouri, Kansas,

Oklahoma, Texas, or California a decade or so later. (Crandall, 2001, p. 112)

7 United States v. Standard Oil Co., 173 Fed. 177 (ED. Mo. 1909).

8 Standard Oil Co. v. United States, 221 U.S. 1 (1911).

Whatever the merits of the government's case for the pre -1900 industry, it appears that t he

case had already been rendered moot by competitive developments in the early 1900s... the

Standard Oil litigation involved allegations of monopoly abuses whose effects were surely

being overtaken by rapidly changing market conditions. (Crandall, 2001, p. 136)

On the other hand, Professor William Comanor of the University of California at Santa

Barbara and Professor F. M. Scherer (1995) from Harvard University have arrived at an

entirely different conclusion of the efficacy of the breakup of Standard Oil based on an

historical counterfactual exercise. They compared the performance of the Standard Oil spin-

off companies to the performance of US Steel which managed to thwart attempts by the US

Government to dissolve it. On this basis, Comanor and Scherer concluded that the breakup

of Standard Oil had few deleterious short-run consequences and, by shaping a more

competitive environment, had a decidedly positive long-run effect. Despite this positive

appraisal, Comanor and Scherer (1995, p. 270) recognise that Standard Oil would have lost

its dominant position over the petroleum industry whether broken up or not:

... it seems probable that the original Standard Oil would have had trouble keeping up with

rapidly growing demand, even if it had not been broken into 34 parts in 1911, so that its

tight monopoly position would not have endured.

However, Richard Posner (2001, p. 108) has dismissed the historical speculation of Comanor

and Scherer in the following terms:

Comparing the success of Standards successor companies with the relatively poor long - term

performance of US Steel, which of course was not broken up, Comanor and Scherer

conjecture that the Standard Oil decree promoted competition after all, despite its ve ry

limited short-run effects and the exogenous impact of new oil discoveries and the enormous

rise in the demand for oil that resulted from increased automobile and truck transposition

in the years after the decree was entered. There conjecture is conjectural, as it is

impossible to control for the other factors, besides divestiture or absence thereof, that

affected the performance of the oil and steel industries in the postdecree era.

3.1.2 American Tobacco Company The American Tobacco Company was first incorporated in 1890 and grew to assume a

dominant position of all US tobacco production other than cigars, accounting for between

76 per cent and 96 per cent of such products as plug tobacco, smoking tobacco, snuff, and

cigarettes in 1910 (Crandall, 2001, p. 136). This market position was obtained primarily

through acquisition with interests in some 250 companies being acquired (Tennant, 1950, p.

27). Competitors were given the option of either joining with American Tobacco or having it

engage in aggressive price wars with losses willingly assumed in order to eliminate

competitors (Tennant, 1950, p. 28). Any price wars generally ended in a compromise

settlement in which all parties joined in a new and greater tobacco monopoly (Tennant, 1950,

p. 28).

Many US states filed suits against American Tobacco for breaches of their antitrust statutes

without much success (Tennant, 1950, p. 58).

In 1908 the US Department of Justice filed a complaint against the American Tobacco

Company alleging breaches of the Sherman Act in the Court for the South District of New

York which sought to dissolve the company. The case was decided in favour of the US

Government and American Tobacco was barred by an injunction from continuing to operate

in interstate commerce until the conditions that existed prior to the formation of the

company were restored.9

Both sides appealed the verdict to the US Supreme Court. The US Supreme Court found the

remedy to be applied by the lower Court to be too drastic and instead directed the trial Court

to hold hearings for the purpose of ascertaining and determining upon some plan or

method of dissolving the combination and of recreating, out of the elements now composing

it, a new condition which shall be honestly in harmony with and not repugnant to the law.10

The trial Court subsequently approved a plan (decree) for the dissolution of American

Tobacco that divided up cigarette production into three separate companies.11 American

Tobacco kept assets that accounted for 37 per cent of the market while a newly organised

P Lorillard Company had 15 per cent, and a newly organised Liggett and Myers was provided

with the assets to produce brands that accounted for 28 per cent of cigarette output

(Tennant, 1950, pp. 60-61). The monopoly position of American Tobacco was replaced by

an oligopoly (Tennant, 1950, p. 66).12

The immediate practical effect of the dissolution of American Tobacco was to unleash a

battle for market share, carried out largely through advertising as the three-firm oligopoly did

not engage in any vigorous price competition (Crandall, 2001, p. 138). Robert Crandall (2001,

p. 141) thus concludes:

... immediately after the 1911 decree, real prices actually rose. The decree's principal effect

appears to have been the development of ol igopolistic rivalry that diverted substant ial

resources to advertising while having litt le effect on cigarette prices. Thus, it is diff icult to

conclude that the decree improved consumer welfare. The stability of the industry s profit

rate and the absence of any decided break in prices after 1911 inevitably leads to the

conclusion that this major section 2 case contributed very little to developing meaningful

competition in the cigarette industry.

George Ellery Hale (1940, p. 620) writing some 30 years following the dissolution of

American Tobacco reflected on decision in the following terms:

While the results have been somewhat obscured in recent years by the greater demand for

cigarettes (the decree allocated all the cigarette business to the three full line companies),

the tobacco industry today bears many marks of monopolistic competition. Concentration

of output in a few firms, rigid and uniform prices, lavish advertising expenditures, and the

lack of new enterprise in the growing business hav e all been found by observers.

Similarly, Simon Whitney (1958a, p. 16) observed that several economists had stated or

clearly implied the terms of the decree were ineffective.

9 United States v. Am. Tobacco Co., 164 F. 700 (C.C.S.D.N.Y. 1908), rev'd, 221 U.S. 106 (1911).

10 United States v. Am. Tobacco Co., 221 U.S. 106, 187 (1911).

11 United States v. Am. Tobacco Co., 191 F. 371, 375 (C.C.S.D.N.Y. 1911).

12 An oligopoly is a market structure characterised by a few participants.

Richard Posner (2001, p. 108) notes that the broken up companies continued to collude for a

number of years and were eventually convicted of having conspired to monopolise the

tobacco industry during the 1930s.

3.1.3 Du Pont de Nemours & Company In the first decade of the 20th century E. I. du Pont de Nemours and Company (DuPont)

had expanded to the point where it had become the major manufacturer of explosives in the

US. DuPont owned some 40 gunpowder and explosives plants around the US (Sass, 2012).

DuPont colluded with its rivals in the supply of explosives behind the scenes through

forming an industry organisation in 1872, the Gunpowder Trade Association.

In 1907 the US Department of Justice filed a complaint against DuPont and other members

of Gunpowder Trade Association alleging breaches of the Sherman Act in the US Circuit

Court for the District of Delaware. In 1911 the Court decreed that DuPonts explosive

business should be broken up through the formation of two new companies, Hercules

Powder Company and Atlas Powder Company, which would receive some of DuPonts

assets (Ndiaye, 2007, p. 109).13

Richard Posner (2001, p. 108) observes that while the divestiture decree succeeded in

reducing the companys market share in explosives from between 64-70 per cent to about 32

per cent, it had little effect on DuPont as explosives had become only a small part of its

business and as many of the plants that were ordered to be divested produced black powder

which was to become obsolete shortly afterwards. By 1919, all but one of the six black

powder plants assigned to Hercules in the decree had ceased operation (Whitney, 1958, p.

194).

3.1.4 International Harvester Company The International Harvester Company was formed in 1902 as a result of a combination of

five companies and produced between 80 to 85 per cent of harvesting equipment (binders,

mowers, reapers and rakes) sold in the United States (Thacher, 1915, p. 123). The US

Department of Justice filed a complaint against the International Harvester in the US District

Court for Minnesota alleging breaches of the Sherman Act and sought dissolution of the

company in 1912. The decree issued by the Court required International Harvester to divest

some of its assets.14 However, following the divestiture International Harvester still held two

thirds of the market for agricultural machinery (Posner, 2001, p. 108). So dissatisfied was the

US Government with the decree that it sought to reopen the case and obtain additional

divestiture which was eventually refused by the US Supreme Court in 1927.15

Writing over 20 years following the divestiture of International Harvester, George Ellery

Hale (1940, p. 622) reflected:

13 United States. v. E. I. Du Pont de Nemours & Co. (1911), 188 Fed. 127.

14 United States v. International Harvester Co., 2I4 Fed. 987 (Dist. Ct. Minn.).

15 United States v. International Harvester Co., 274 U.S. 693 (1927).

. . it i s oft en assert ed that monopolis tic elements remain in the industry, observers pointing to

evidence of price leadership, concentration of output, and rigid prices, which may

overshadow the defendant corporation's contin ued decline in its share of the market.

3.1.5 Corn Products Refining Company The Corn Products Refining Company was founded in 1906. Through a strategy of

acquisition the Corn Products Refining Company had obtained a monopoly over the supply

of glucose and a 64 per cent market share in the supply of corn starch (Fraidin, 1965, p. 920).

The US Department of Justice filed a complaint against the Corn Products Refining

Company in the US District Court for the Southern District of New York alleging breaches

of the Sherman Act in 1913. In the final decree, the Corn Products Refining Company was

required to dispose of certain properties, including its four domestic glucose plants, a

substantial part of its interest in the starch trade and an interest in a candy company (Hale,

1940, p. 622).16 According to Simon Whitney (1958a, p. 263), following the divestiture the

Corn Products Refining Company retained its leadership through effective leadership.

According to Richard Posner (2001, p. 108), the plants that were divested were of little value

or competitively significant, as two ended up in bankruptcy court and another four were sold

outside the industry.

3.1.6 Eastman Kodak Company Through acquisition the Eastman Kodak Company had obtained three-fourths or more of

US domestic output of photographic products and a near monopoly over the amateur

photography industry. The US Department of Justice filed a complaint against the Kodak

Eastman Company in the US District Court for the Western District of New York alleging

breaches of the Sherman Act in 1913. In its decree, the Court required the Eastman Kodak

Company to dispose of two brands of cameras and three of plates and so forth, with the

accompanying plants if the purchasers desired them (Hale, 1940, p. 623).17 Eventually all but

one of the plants were sold.

In commenting on the divestiture, George Ellery Hale (1940, p. 623) observed:

While the government claimed that the properties ordered sold accounted for seven million

dollars in sales per year and despite some recent competition the corporation sustained the

loss in magnificent fashion, for it stil l does an enormous percentage of the national (and

world) business in photographic supplies.

According to Richard Posner (2001, p. 109), the decree had little impact on either the

industry or the Eastman Kodak Company.

16 United States v. Corn Products Refining Company, 234 Fed. 964 (S. D. N. Y. 1916).

17 United States v. Eastman Kodak Company, 226 Fed. 62 (W. D. N. Y. 1915), decree granted, 230 Fed. 522 (W.

D. N. Y. 1916).

3.1.7 Aluminum Company of America (Alcoa) The US Department of Justice initially filed a complaint against Alcoa in 1937 alleging

breaches of the Sherman Act in that it obtained had a monopoly over the manufacture and

supply of virgin aluminum ingot in the US District Court for the Southern District of New

York.

On appeal by the US Government in 1945, the Second Circuit Court of Appeals found

Alcoa guilty of monopolising the market for primary aluminum.18 However, the Court ruled

that major remedies should be postponed until after the war because of changes in the

industrys structure created by the war emergency.

Wartime demand for aluminum led the US Government to construct two large aluminum

plants that Alcoa operated under lease (Posner, 2001, p. 109). All of the US Governments

aluminium plants were sold following the war to Reynolds Metals and Kaiser thus ending

Alcoas monopoly.

With the case eventually referred to back to US District Court for the Southern District of

New York, it ordered the divestiture in 1950 of Alcoas Canadian affiliate, Aluminium

Limited in order to stimulate import competition.19 According to Richard Posner (2001, p.

109), Aluminium Limited was a large producer but its participation in the US market

remained inhibited both by tariffs and by fear the tariffs would be raised at the behest of the

American producers if it cut prices.

The market for aluminum underwent further change with the US Governments Korean War

subsidy program that resulted in the entry of three new competitors, Anaconda, Harvey, and

Ormet into the market (Crandall, 2001, p. 153). Robert Crandall (2001, p. 154) concludes

that changes in the market rendered the monopolisation case against Alcoa largely irrelevant.

3.1.8 Paramount Pictures, Inc. The US Department of Justice initially filed its complaint against five major film distributors

(those who owned theatre chains) and three minor distributors in 1938 alleging breaches of

the Sherman Act.20 These eight firms controlled 95 per cent of total film rentals in the early

1940s and accounted for two thirds of all feature film releases (Crandall, 2001, p. 155). The

eight defendants were charged with fixing the license terms for feature films, excluding

independently produced films, controlling first runs of films in their own theatres, and even

pooling profits in territories where two or more of the five majors operated theatres.

These charges were quickly followed by a consent decree in 1940 that limited the defendants

ability to engage in various types of practices and provided for arbitration of disputes with

unaffiliated theatre owners who felt they had been unfairly denied access to the defendants

18 United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945).

19 United States v. Aluminum Co. of America, 91 F. Supp. 333 (SD.N.Y. 1950).

20 In addition to Paramount Pictures, Inc., the defendants included RKO Radio Pictures, Inc., Loew's, 20th

Century-Fox Film Corporation, Columbia Pictures Corporation, Universal-International, Warner Bros and W.C. Allred.

films. It also allowed the US Government to reinstate the lawsuit if, in three years time, it

had not seen a satisfactory level of compliance.

In 1944 the US Department of Justice sought to amend the consent decree arguing that it

had not eliminated anticompetitive abuses (Crandall, 2001, p. 157). A trial ensued resulting in

a victory for the US Government in the US District Court for the Southern District of New

York although the Court refused to order divestiture.21

In 1948 the US Supreme Court upheld the decision of the lower Court on most counts but it

ordered the lower Court to reconsider divestiture (Crandall, 2001).22 Subsequently, two of the

major distributors entered into consent agreements divorcing their theatres and even

divesting some of their theatres before the divorcement. In decrees entered in 1950-52, the

lower Court ordered the other three major distributors to divest their theatre chains. Stock

ownership of the divorced theatre circuits and the major distributors was to be kept totally

separate.

In the years following the Paramount decision, RKO declined rapidly and exited the industry

in 1957 due to internal problems deriving from Howard Hughess ownership of the

company (Crandall, 2001, p. 159).

The Paramount decrees did not succeed in introducing new competition or new competitors

in theatrical motion picture distribution and after 20 years the seven surviving firms

continued to account for nearly three-fourths of all US theatrical rentals (Crandall, 2001, p.

160). Shortly afterwards the advent of television had a devastating effect on theatre

admissions (Crandall, 2006, p. 7). Furthermore, theatre admission prices rose following the

theatre divestitures (Crandall, 2006, p. 7).

3.1.9 The Pullman Company The Pullman Company had established itself as a monopolist in the manufacture and

servicing of railway sleeping cars. It had established itself as a monopoly in the manufacture

of railway sleeping cars through the acquisition of every other railway sleeping car

manufacturer between 1867 and 1900 (O'Connor, 1976, p. 758n). The US Department of

Justice filed a complaint against the Pullman Company in 1940 alleging breaches of the

Sherman Act in the US District Court for the Eastern District of Pennsylvania.

In the final decree, the Court gave the Pullman Company a choice between divesting either

its manufacturing operation or its servicing operation.23 The Pullman Company chose to

retain its manufacturing operation and sold the servicing arm to a consortium of railroads.

According to Simon Whitney (1958a, p. 326) one of the aims of the suit, which was to

restore competitive conditions, was not achieved. According to Richard Posner (2001, p.

109), by the time the decree was entered, the sleeping car business was in decline and already

21 United States v. Paramount Pictures, Inc., 70 F. Supp. 53, 72-76 (S.D.N.Y. 1946), affjd in part and rev'd in

part, 334 U.S. 131 (1948).

22 United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948).

23 United States v. The Pullman Co., F.Supp. 123 (E.D. Pa. 1943); 53 F.Supp. 908 (E.D. Pa. 1944); 64 F.Supp.

108 (E.D. Pa. 1946).

losing money, and all that was achieved was that the Pullman Company was able to unload a

dying business.

3.1.10 United Shoe Machinery Corporation The United Shoe Machinery Corporation (USM) was formed in 1899 through the acquisition

of three of the largest shoe machinery manufacturers along with the purchase of another two

smaller companies (Crandall, 2001, p. 163). The company grew rapidly through acquiring

further companies. Over the next fifty years USM faced a number of suits alleging various

breaches of US competition law.

USM offered its shoe machines through a combination of sale and lease programs, as well as

provided repair and advisory services relating to machines sold by USM and to the shoe-

making process in general (Crandall, 2001, p. 164). USM had a very large share of the sale or

lease of major shoe machines, and a slightly smaller proportion of the market with regard to

the sale or lease of minor machines.

Originally in late 1947 the US Department of Justice filed a complaint against USM alleging

breaches of the Sherman Act in the US District Court for the Massachusetts. In 1953 the

Court found that USM had violated section 2 of the Sherman Act by illegally monopolising

the shoe machinery market and the market for some shoe machinery supplies (Crandall,

2001, p. 167).24 The Court declined to order USMs dissolution into three separate full-line

manufacturers as requested by the US Government, but instead issued a decree under which

USM had to change its leasing practices and barred it from acquiring any shoe machinery

factory or shoe supply business.

The Court reviewed its decree in 1964 and determined that sufficient competition had been

introduced into the shoe machinery market as a result of the decree, and that the decree

should be left unmodified (Crandall, 2001, p. 172).25 However, on review, the US Supreme

Court disagreed and recommended that the lower Court reconsider more definitive means

to achieve competition.26 Consequently, USM was forced to divest itself of around one third

of its remaining shoe machinery manufacturing operations in 1969. Robert Crandall (2006,

pp. 7-8) observes this divestiture occurred just as a sharp rise in US shoe imports resulted in

a severe decline in US shoe manufacturing.

Professor Richard Epstein (2009, pp. 224-225) of the University of Chicago has reflected on

the USM divestiture in the following terms:

What really mattered were its business efficiencies. But not in the antitrust law, which

seemed to operate on the view that so long as there are explicit restrictions, the magnitude of

the efficiency gains did not matter. Armed with that attitude, it was only a matter of t ime

before the Justice Department and the Supreme Court both concluded that sterner measures

were needed to break up United Shoe. And so it happened. The obvious effic iencies were

lost. There were no offsetting gains to be found in the destruction of a firm which was

24 United States v. United Shoe Mach. Corp., 110 F. Supp. 295 (D. Mass. 1953), affid, 347 U.S. 521 (1954).

25 United States v. United Shoe Mach. Corp., 266 F. Supp. 328 (D. Mass. 1967), rev'd, 391 U.S. 244 (1968).

26 United States v. United Shoe Mach. Corp., 391 U.S. 244 (1969).

beginning to face foreign competition anyhow. A major and unnecessary monopolisation

folly.

3.1.11 International Business Machines (IBM) IBM dominated the tabulating machine business and the related business of tabulating cards,

or punch cards (Crandall & Elzinga, 2004, p. 298). It only leased its machines and did not

offer them for sale.

The US Department of Justice filed a complaint against IBM alleging breaches of the

Sherman Act in the US District Court for the Southern District of New York in 1952. IBM

settled the case in 1956 and as part of the consent decree agreed to divest some of its card

manufacturing capacity if its share of this market had not fallen to 50 per cent or less by

1962.27 Since its share of tabulating card sales had fallen to only 53 per cent by the required

date, some divestiture was required (Crandall & Elzinga, 2004, p. 299). In 1963 IBM sold

rotary presses capable of producing about 3 per cent of industry output.

According to Robert Crandall (2006, p. 7), the divestiture involved data processing that were

shortly to become obsolete because of one of IBMs new products of the 1960s, the

computer.

3.1.12 Kansas City Star The Kansas City Star newspapers had obtained a dominant position in the dissemination of

news and advertising in the Kansas City area through a combination of pricing policies and

acquisitions during the first half of the 20th century (Crandall, 2001, p. 194). The Kansas City

Star also owned a radio and television station.

In 1953 the US Department of Justice filed a complaint against Kansas City Star alleging

breaches of the Sherman Act in the US District Court for the Western District of Missouri.

The US Government alleged that Kansas City Star had vanquished its earlier competitors

through a variety of anticompetitive practices, including requiring advertisers to purchase

combination advertising in the Stars morning and evening newspapers and requiring its

television advertisers to advertise in its newspapers. The case was eventually settled with a

consent decree, that amongst other things, required the Kansas City Star to transfer its

television and radio licenses (Crandall, 2001, p. 195).

According to Robert Crandall (2006, p. 8), the forced divestiture was unsuccessful because it

did not reduce advertising rates nor encourage entry into newspaper publishing in Kansas

City.

3.1.13 United Fruit Company The United Fruit Company was founded in 1899 and traded in tropical fruit, principally

bananas, grown on Central and South American plantations and sold in the United States

27 United States v. International Business Machines Corp., 1956 Trade Cas. 68,245 (S.D.N.Y. 1956).

and Europe. The United Fruit Company established itself as a monopoly supplier in the

production and importation of bananas into the United States (Posner, 2001, p. 110).

The US Department of Justice filed a complaint against the United Fruit Company alleging

breaches of the Sherman Act in the US District Court for the Eastern District of Louisiana

in 1954. The United Fruit Company settled the case and a consent decree was entered in

1958 that required the United Fruit Company to divest itself of 35 per cent of its productive

capacity (Posner, 2001, p. 110).28

There was a time delay of 18 years and five months between the filing of the consent decree

and the completion of the divestiture (Cleary, 1981, p. 126n). Joseph Cleary (1981, p. 126n)

has observed in regard to this case that:

In addition to this increased delay is the possibility that by the time the decree is carried

out, the industry may have changed so drastically as to make the decree inappropriate.

This appears to be what happened as by the time the divestiture actually occurred in 1972,

the divested operations only accounted for 12.7 per cent of the United Fruit Companys

banana output (Posner, 2001, p. 110).

According to Robert Crandall and Professor Kenneth Elzinga (2004, p. 303) from the

University of Virginia, the remedy in this case lagged behind market developments in any

event because the decree was imposed after US banana prices began to decline and after

competition in the supply of bananas had begun to accelerate.

3.1.14 Grinnell Corporation The Grinnell Corporation, through four subsidiaries, controlled 87 per cent of the insurance

company accredited central station fire and burglar alarm service business (O'Connor, 1976,

p. 711n). Grinnell had acquired Holmes Electric Protective Company in 1950 and most of

the stock of the American District Telegraph Company (ADT) in 1953 (Posner, 2001, p.

109). ADT held 73 per cent of the national market and was the principal source of Grinnells

monopoly.

The US Department of Justice filed a complaint against the Pullman Company in 1961

alleging breaches of the Sherman Act in the US District Court for Rhode Island. The matter

eventually found its way to the US Supreme Court which in 1966 ordered divestiture of

some of Grinnells affiliates, as well as some divestiture on the part of ADT.29 The Holmes

Electric Company, ADT along with Grinnells investment in Automatic Fire Alarm

Company were divested in 1968 and ADT was forced to divest itself of service contracts and

equipment in 27 cities that brought in revenues of $3.7 million annually (Posner, 2001, p.

110). According to Richard Posner (2001, p. 110), the divestiture did not appear to eliminate

ADTs monopoly as during the period 1967 to 1973 as it was making most of the required

divestitures, it increased its revenues from $87.4 million to $148.3 million and its profits

from $6.2 million to $10.7 million. Apparently, the divested assets represented only a small

fraction of ADTs total business.

28 United States v. United Fruit Co., No. 4560 (E. D. La., filed July 2, 1954), consent decree entered, (Feb. 4, 1958).

29 United States v. Grinnell Corp., 384 U.S. 563 (1966).

3.1.15 Music Corporation of America, Inc. The Music Corporation of America, Inc. (MCA), was founded in 1924 as a talent agency.

Agents were regulated by the Screen Actors Guild (SAG) pursuant to the Codified Agency

Regulations under which to represent any member of SAG, an agent had to be franchised by

SAG and meet the requirements of the Agency Regulations (Wilson, 2001, p. 403). This

included rules prohibiting an agency from possessing various kinds of financial interests that

would, among other things, transform them into producers and employers of actors.

In 1952 SAG granted the first of several waivers to MCA which allowed it to produce

television programs through its subsidiary, Revue Productions (Wilson, 2001, p. 407). With

its unique access to talent, MCAs television production business flourished and by 1960 it

had became the principal producer and seller of network television productions and

packages.

In 1962 the US Department of Justice filed a complaint against MCA alleging breaches of

the Sherman Act with the case being settled quickly (Wilson, 2001, p. 407). Under the

consent decree, MCA was required to divest itself of its talent agency business, and in its

place, MCA would sign talent to exclusive term contracts (commonly referred to as slave

contracts), under which the studio would pay a guaranteed sum for the duration of the

contract.

According to Richard Posner (2001, p. 110), when MCA divested itself of its talent agency in

1962 television production was already its main business, accounting for 85 per cent of its

sales.

3.1.16 Blue Chip Stamps Blue Chip Stamps was formed in 1956 in California by eight grocery chains and one

pharmacy chain and was organised to compete defensively with existing stamp plans

(Crandall & Elzinga, 2004, p. 330). Customers received trading stamps with purchases at

particular stores as premiums which they pasted into books to redeem for merchandise.

Retailers of all kinds, including dry cleaners, movie theatres and feed mills, offered stamps to

their customers. The retailers who founded Blue Chip Stamps decided to use them

exclusively and to deny them to their competitors.

The US Department of Justice initiated a case against Blue Chip Stamps and the nine

retailers in 1963 for breaches of the Sherman Act in the US District Court for the Central

District of California. The US Government and Blue Chip Stamps engaged in negotiations

for several years, and finally settled on a consent decree in 1968 that included provision for

the reorganisation of Blue Chip Stamps which was characterised as the most practical way to

increase competition (Crandall & Elzinga, 2004, p. 332).30

The consent decree did not provide a plan for the reorganisation of Blue Chip Stamps but

under the terms of the reorganisation approved by the Court, the nine chains who jointly

established Blue Chip were allowed, if they wished, to retain 45 per cent of the companys

30 United States v. Blue Chip Stamp Co., 272 F.Supp. 432, 440 (C. D. Cal.), affd sub. nom Thrifty Shoppers

Scrip Co. v. U.S., 389 U.S. 580 (1968).

stock (Crandall & Elzinga, 2004, p. 332). Retailers who were Blue Chip customers were

permitted to purchase another 45 per cent, and Blue Chips management was allowed to buy

the remaining 10 per cent.

Trading stamps began to decline in popularity at the same time as the consent decree was

entered as grocery chains started to experiment with alternative means of securing consumer

patronage, notably by simply advertising lower prices (Crandall & Elzinga, 2004, pp. 332-

333).

Robert Crandall and Kenneth Elzinga (2004, p. 335) have been critical of the divestiture,

commenting that the US Government acted just as the use of trading stamps was about to

being its slide into economic obscurity.

3.1.17 American Telephone and Telegraph Company (AT&T)

By the 1970s AT&T was the dominant telephony company in the United States, controlling

most of the local operating companies (Regional Bell Operating Companies (RBOCs)) in the

US as well as the dominant national long-distance company. Through its Western Electric

subsidiary, AT&T produced most of its own transmission, switching and terminal

equipment, much of which was developed from research originating from its subsidiary Bell

Laboratories (Crandall, 2001, p. 181). AT&T had been subjected to antitrust investigations

for much of its existence.

In 1974 the US Department of Justice filed a complaint against AT&T alleging that it had

breached section 2 of the Sherman Act through the monopolisation of long distance

telephony services and telecommunications equipment in the US District Court for the

District of Columbia. The US Government contended that AT&Ts ownership of the local

operating companies had provided it with the incentive and the ability to exclude

competitors in long distance services and telecommunications equipment manufacture by

denying competitors interconnection with its local operating companies (Crandall, 2001, pp.

183-184). Following 8 years of litigation, AT&T settled the case in 1982, finally agreeing to a

consent decree in 1984 under which it agreed to divest itself of the RBOCs which in turn

were barred from providing long distance telephony services.31 This left AT&T consisting of

long distance communications, equipment manufacturing, and research and development

(Weber Waller, 2009, p. 15). The rationale behind the divestiture was that AT&T could use

its profits from the monopoly local operating companies to cross-subsidise activities in other

markets (Shelanski & Sidak, 2001, p. 87).

The breakup of AT&T is generally seen as an example of a successful divestiture (Weber

Waller, 2009, p. 15). The decree is often credited with furthering the growth of competition

in long-distance services and with accompanying falls in the price of residential services and

long-distance services (Shelanski & Sidak, 2001, p. 88).

31 United States v. AT&T, 552 F. Supp. 131 (D.D.C. 1982).

However, Robert Crandall (2006, p. 8) has argued that the divestiture of AT&T was totally

unnecessary and due more to regulatory inaction and failure on the part of the US Federal

Communication Commission, the US telecommunications regulator:

This case was brought after the U.S. regulator, the Federal Communications Commission

(FCC), had failed to require that regulated local carriers, such as AT&Ts local

companies, provide equal access to their local circuits for competing long distance carriers.

When AT&T used this opportunity to deny or frustrate the new long distance entrants

connections to its local customers, the U.S. Department of Justice brought a monopolization

suit against AT&T, a regulated company. In effect, one agency of government was trying to

correct the failure of another agency to allow competition.

Similarly, Professor Richard Epstein (2009, p. 237) has commented that AT&T was broken

up under a flawed institutional design that lasted only for a generation.

The benefits of the AT&T divestiture have also been called into question. Robert Crandall

and prominent US antitrust economist Gregory Sidak, (2002, p. 377) have suggested, based

on comparisons with telephony services in Canada, that it was not vertical divestiture, but

equal access, that created the environment for long-distance competition. Along similar lines,

Professor Eli Noam (2008, p. 131) of Columbia University has undertaken a comparison of

the telephony market in the United States with Canada, and arrived at a sceptical conclusion

as to the benefits of the divestiture:

Looking at the empirical evidence, one can find only a few instances of the hoped -for

benefits of the AT&T divestiture. Twenty -five years later, market concentration in the

United States has returned to high leve ls, with the difference being a structure of a national

duopoly of vertically integrated firms rather than a monopoly. This was not different from

Canada...

The AT&T divestiture created not a competit ive market, but an oligopoly at best. The

reason was not an ineffect ive or captured policymaking by lawmakers and legis lators, but

rather the fundamental economics of telecommunications and networks. These exhibit

high fixed costs , low marginal costs, and high network effects. Together, they provide

advantages to large providers. For a time, these advantages were offset by the

accumulated inefficiencies of monopoly. But in time, and after internal cost -cutting, the

large firms economies of scale reasserted themselves. Thus, the previously lucrative long -

distance business turned into a commodity business as prices dropped to the low marginal

costs. Long-distance companies haemorrhaged; AT&T was running out of money... The

regional Bell Operating Companies, meanwhile, consolidated among themselves and

absorbed the ailing long-distance carriers as soon as the law permitted. Similarly, the

advantages of of fering bundles of serviceseconomies of scopebecame a major

advantage for the established companies.

3.2 Divestiture under UK competition law Since 1973 the divestiture power based on the outcome of a market investigation has been

used only sparingly under UK competition law. Between 1973 and 1995 the former Mergers

and Monopolies Commission (MMC) conducted 73 market investigations and only

recommended divestiture by a company of particular assets or activities on only five

occasions (Davies, Driffield, & Clarke, 1999, p. 265).

One prominent divestiture follows the MMC (1989) market investigation into the supply of

beer which recommended a cap on the number of on-licensed premises the six major

brewers could own (2,000 in the case of each brewer) that required the major brewers divest

themselves of around 22,000 premises. In relation to its recommendations, the MMC (1989,

p. 294) commented:

We believe that the recommendations we have made will greatly increase competition and

bring important benefits to consumers. The national br ewers will be forced to compete for the

business of the much larger number of retail outlets that will be in the hands of genuinely

independent retailers and of smaller brewers. The smaller brewers will also have a larger

number of outlets to supply. We expect that this competition will reduce prices at the

wholesale level, particularly in combination with the steps we propose to increase the

transparency of wholesale prices. We expect this reduction in wholesale prices to bring about

lower prices to the final consumer.

However, three separate studies have found that the divestitures resulted in higher retail

prices.32 According to the authors of one of those reports, Professor Margaret Slade (1998, p.

599) of the University of Warwick:

The MMC Report is unclear about the economic reasoning that led to the decision to force

divestiture. .. Nevertheless, with one exception, the Commissioners alleged that brewer

ownership of public houses protected the upstream positio n of the companies. They also

predicted that their remedies would lower retail prices. ..

We have seen that their hopes concerning prices were disappointed. ..

Should the Commission be chastised for its decision? This is a difficult question to answer.

In practice, it is virtually impossible to anticipate all of the ramifications of mandated

changes.

The only divestiture recommended since 2003 has been in relation to the owner of major

airports in London and Scotland, BAA Ltd (Competition Commission, 2009). According to

the CC (2009a):

We have decided that the only way to address comprehensively the detriment to passengers

and airlines from the complete absence of competition between B AAs south -east airports

and between Edinburgh and Glasgow is to require BAA to sell both Gatwick and Stansted

as well as either Edinburgh or Glasgow. They will each then operate under separate

ownership from BAAs other airports. We recognise that in usin g our powers in this way,

we will have a significant impact on BAAs business. However, given the nature and scale

of the competition problems we have found, we do not consider that alternative measures,

such as the sale of only one of the London airports or greater regulation, will suff ice.

However, culpability for any lack of competition between airports operating in London and

Scotland belongs entirely with the UK Government through its decision to privatise its

major airports as a group back in 1987 rather than opening up the airports to competition

and selling them separately. According to economist and former Chairman of the UK Office

32 See Keyworth, Lawton Smith, & Yarrow (1994); Garafas (1995); and Slade (1998).

of Fair Trading Sir John Vickers and George Yarrow (Director of the Regulatory Policy

Institute at Oxford):

We conclude that, above all else, the privati sation of BAA was simply the transfer to

private hands of a monopoly with valuable property assets... The case for promoting

competition and enhancing the effectiveness of regulation by separating the ownership of

BAAs airports was rejected ... (Vickers & Yarrow, 1988)

3.3 Overview of monopolisation divestiture case studies

Several commentators have described the various Court imposed divestitures under the

Sherman Act as a failure. Writing around the time of the centenary of the Sherman Act,

former Chairman of the US Federal Trade Commission William Kovacic (1989, pp. 1105-

1106) has commented:

To most students of antitrust, the histo ry of Sherman Act deconcentration endeavours is

largely a chronicle of costly defeats and inconsequential victories. Even the lustre of the

government's greatest triumphs - for example, the dissolution of Standard Oil in 1911 and

the restructuring of AT&T in the 1980s - often dims in the face of recurring criticism that

the execution of admittedly sweeping relief was either counterproductive or essentially

superfluous.

Richard Posner (2001, p. 107) has described the picture that emerges of what divestiture in

monopolisation cases has meant in practice as not an edifying one.

In assessing the historical record, Robert Crandall (2003) has come to a negative assessment

of government attempts to increase competition through the use of forced divestiture:

US antitrust policy began in earnest almost 100 years ago with attempts to create

competition by breaking up dominant firms, such as Standard Oil and American Tobacco,

into a number of smaller, competing companies. In later years, the government would succeed

in requiring divestitures in the shoe machinery, motion picture, network television, and

telecommunications industries. There is no evidence that any of these extreme measure s,

other than the AT&T divestiture, had salutary effects, and even the AT&T divestiture

could have been avoided if the Federal Communications Commission had adopted a simple

rule of requiring equal access to AT&Ts local faci lities for all long distance ca rriers.

The future effects of divestiture on the market place is, at best, a plunge into the unknown

(Cleary, 1981, p. 121). If the ultimate effects of divestiture are incapable of being accurately

predicted, then its effectiveness in preventing continued or renewed monopolisation

attempts is likewise incapable of being ascertained (Cleary, 1981, p. 121). The inherent

unpredictability of the effects of divestiture on the marketplace coupled with the

concomitant inability in any way to thereby measure the future effectiveness of the remedy

on the market, clearly establishes the superiority of conduct-orientated relief in

monopolisation cases (Cleary, 1981, p. 126).

With the one possible exception of AT&T, US history suggests that divestiture has not

proven to be effective as a remedy in monopolisation cases in terms of increasing

competition, raising industry output, or reducing prices for consumers. Outcomes from

divestitures as a remedy against monopolisation in the United Kingdom are scarce but the

evidence so far is not encouraging, although it is possible that major airport divestiture could

prove effective. It may be the case that divestiture only proves to be an effective remedy in

cases where there has been significant policy and regulatory failure on the part of

government.

The historical record suggests that the inclusion of a general divestiture provision within

Australian competition law is not worth pursuing.

The following section will examine possible reasons as to why divestiture as a remedy for

monopolisation has not proven to be effective.

4. Implications of divestiture

4.1 Legal delays and technological change One reason advanced for the overall poor record of divestiture remedies has been the time it

takes for matters to work their way through the legal system. By the time a matter has

worked its way through the legal system, an industry may have changed so much as to render

the divestiture irrelevant. According to Robert Crandall and Clifford Winston (2003, p. 13)

of Brookings Institution:

One problem is the protracted length of these cases, which often take so long that industry

competition has changed before the remedy is implemented, as in Standard Oil and Alcoa.

According to Richard Posner (2001, p. 111):

The characteristic delay of antitrust proceedings is part of the reason. Law time is not real

time. Often by the time a divestiture decree is entered or can be carried out, the industry has

so changed as to make such a decree an irrelevance.

According to Professor Spencer Weber Weller (2009, p. 20) of Loyola University, sometimes

market conditions change over the course of litigation such that what initially looked like a

good idea no longer appea

general divestiture provision under australian competition law

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