Full text of "Investigation of concentration of economic power; monograph no. 1[-43]"

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Northeastern University

School of Law
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"^^qS a °^^^®^^l SENATE COMMITTEE PRINT
oa Session j

INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER

TEMPORARY NATIONAL ECONOMIC
COMMITTEE

A STUDY MADE BY THE FEDERAL TRADE COMMISSION
FOR THE TEMPORARY NATIONAL ECONOMIC COM-
MITTEE, SEVENTY-SIXTH CONGRESS, THIRD SESSION,
PURSUANT TO PUBLIC RESOLUTION NO. 113 (SEVENTY-
FIFTH CONGRESS), AUTHORIZING AND DIRECTING A
SELECT COMMITTEE TO MAKE A FULL AND COMPLETE
STUDY AND INVESTIGATION WITH RESPECT TO THE
CONCENTRATION OF ECONOMIC POWER IN, AND
FINANCIAL CONTROL OVER, PRODUCTION AND
DISTRIBUTION OF GOODS AND SERVICES

MONOGRAPH No. 42
THE BASING POINT PROBLEM

Printed for the use of the
Temporary National Economic Committee

UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1941
252918

TEMPORARY NATIONAL ECONOMIC COMMITTEE

JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman

HATTON W. SUMNERS, Representative from Texas. Vice Chairman

JAMES M. MEAD, Senator from New York

WALLACE n. WHITE, Jr., Senator from Maine

CLYDE WILLIAMS, Representative from Missouri

B. CARROLL REECE, Representative from Tennessee

THURMAN W. ARNOLD, Assistant Attorney General

HUGH COX, Special Assistant to the Attorney General

Representing the Department of Justice

SUMNER T. PIKE, Commissioner
Representing the Securities and E.xchange Commission

GARLAND S. FERGUSON, Commissioner

♦EWIN L. DAVIS, Chairman
Representing the Federal Trade Commission

ISADOR LUBIN, Commissioner of Labor Statistics,
*A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics
Representing the Department ef Labor

JOSEPH J. O'CONNELL, Jr., Special Assistant to the General Counsel

♦CHARLES L. KADES, Special Assistant to the General Counsel

Representing the Department of the Treasury

WAYNE C. TAYLOR, Under Secretary of Commerce

*M. JOSEPH MEEHAN, Chief Statistician, Bureau of Foreign and Domestic Commerce

Representing the Department of Commerce

LEON HENDERSON, Economic Coordinator
DEWEY ANDERSON, E.xecutive Secretary
THEODORE J. KREPS, Economic Adviser

•Alternates

Monograph No. 42

THE BASING POINT PROBLEM

THE FEDERAL TRADE COMMISSION

ACKNOWLEDGMENT

This monograph is a compilation of exhibits offered as testimony
by the United States Steel Corporation and the Federal Trade. Com-
mission on the subject of the basing point problem.

The Temporary National Economic Committee is greatly indebted
to the organizations submitting this material.

The status of the materials in this volume is precisely the same as that
of other carefully prepared testimony when given by individual witnesses;
it is information submitted for Committee deliberation. No matter
what the official capacity of the witness or author may be, the publication
of his testimony, report, or monograph by the Committee in no way
signifies nor implies assent to, or approval of, any of the facts, opinions,
or recommendations, nor acceptance thereof in whole or in part by the
members of the Temporary National Economic Committee, individually
or collectively. Sole and undivided responsibility for every statement in
such testimony, reports, or monographs rests entirely upon the respective
authors.

(Signed) Josepi;( C. O'Mahoney,
Chairman, Temporary National Economic Committee

TABLE OF CONTENTS

Page

Letter of transmittal xi

MONOPOLY AND COMPETITION IN STEEL

Visible effects of identical delivered prices 1

Implications of identical delivered prices 3

Indicators of monopoly 4

Effects of identical delivered prices 4

Effects of partial competition 4

Monopoly leads to Government control 5

Competition 6

Approach to the problem --- 8

SOME FACTORS IN THE PRICING OF STEEL

Introduction 11

The demand for steel 12

Immediate source of demand 12

Geographic distribution 13

Characteristics of demand 14

Derived nature of demand 14

Durability and demand 14

Postponability of purchase of durable goods 14

Total demand for steel is inelastic 15

Effect of the substitution factor 15

Potential elasticity of demand from a particular producer 16

The supply of steel 16

Geographic concentration i 16

Technological aspects ' 18

Capital investment requirements 19

Factors in expenditures for new plants and equipment 20

Source of funds 20

Incentives for investment:

Profit motive ., 20

Obsolescence * 20

Size and r umber of producers 20

Channels of distribution 21

Jobbers and vi^arehouses 21

Importance of outlets 21

Summary 21

Characteristics of cost in the industry 22

"Overhead" or "fixed" costs 22

"Additional" costs : 22

Average costs - 23

The dynamics of the market for steel : 23

Costs and demand 23

Psychological factors 24

Characteristic patterns of action by sellers in the market for steel 24

The basing point method of quoting delivered prices 24

Economic roots of the basing point method - 25

Relation of competition to profits, capacity, and costs of distribution 25

Profits 26

Capacity 1 26

Distribution costs 27

Selling expense 27

Freight absorption 27

VI TABLE OF CONTENTS

Conclusion: Pase

The function of the steel industry in the national economy 28

As a source of raw material 28

As a factor in employment 29

As a factor in the growth of the Nation 30

THE BASING POINT METHOD OF QUOTING DELIVERED PRICES

IN THE STEEL INDUSTRY Page

Foreword 31

The operation of the basing point method 31

Delivered prices 31

Pittsburgh plus 31

Basing point, multiple basing point system 32

Calculation of delivered prices.^ 32

Applicable basing point 32

Price absorption 32

Freight absorption — mill net return 32

Freight disadvantage 32

Market penetration 34

Market inter-penetration — cross-hauling 34

So-called "phantom freight"— freight advantage 34

Basing point price differential 36

"Phantom freight" arising from water transportation 36

Variable mill net returns 36

Geographical price discrimination 37

Natural market territory 37

Effect of new basing point 40

Extras, base prices, delivered prices 40

Historical material 41

Criticisms of the basing point method 43

1. "Perfect competition" and the steel industry 43

(a) Geographical separation of producers 45

(b) Size of plants 45

(d) Fluctuations of demand in the business cycle 47

(e) Costs in the steel industry 47

(/) Cyclical fluctuations and overhead costs 48

2. Price leadership 48

3. Elimination of competition 50

(a) Identical delivered prices 50

(6) Where is the market for steel? 54

4. Undue concentration of production facilities 58

5. Excess capacity 61

6. Alleged price discrimination 63

(a) So-called "phantom freight" 63

(1) Non-basing point mill 63

(i) Mills far from a basing point 66

(ii) Mills near a basing point 68

(2) Use of cheaper means of transportation 70

(i) Water deliveries 70

(ii) Truck deliveries 73

(b) Freight absorption 74

(1) General discussion 74

(2) Cross-hauling 76

The_proposcd alternative to the basing point method 78

1. Introduction 78

2. The proposed uniform f. o. b. mill price system 79

(o) "Perfect competition" and the uniform f. o. b. mill price

system 80

(h) The effects of the uniform f. o. b. mill price system 81

(1) The "jature and extent of competition 81

(2) Price leadership 86

(3) Concentration of production facilities 86

(4) Excess cap£(.city ^ 87

(5) Price discrimination 87

^ (6) The cost of ihe system 88

Summary . 88

TABLE OF CONTENTS VII

AN ANALYSIS OF THE BASING POINT SYSTEM OF DELIVERED
PRICES AS PRESENTED BY UNITED STATES STEEL CORPORA-
TION IN "EXHIBITS NOS. 1410 AND 1418"

Page

Introduction ^ 91

The basic issue is whether the basing point system of identical delivered

prices is competitive or monopolistic 92

The objections to the basing point system are grounded upon tangible
legal evidence of collusive price control and not upon abstract criteria:
(o) Continuation of specific agreements formulated during N. R. A.

Code period '. 94

(6) Recent collaboration among competitors on base prices 98

{d) Recent collaboration on uniform delivery charges 102

(e) Relation between price leadership and collaboration among com-
petitors 105

(/) Degree of observance of basing point system 106

The basing point system was not a natural evolution inhering in the peculiar
economic nature of the industry, but was devised by competitors as a

means of eliminating price competition 107

The collection of "phantom freight" charges is inherent in the basing point
system of delivered prices and the amounts collected are proportioned

to the system's objective of maintaining identical delivered prices 110

The so-called "absorption" of freight charges is inherent in the basing point
system and the amoiwits absorbed are proportioned to the s\'stem's

objective of maintaining identical delivered prices 113

The corporation recognizes the systematically varying mill net returns
represented by "phantom freight" and "freight absorplion" are differ-
ences in price and consequently discriminations in price 116

The steel industry's use of the basmg point system conf j-ms to the eco-
nomic specifications of monopoly and is not consistent with the economic
concepts of a competitive economy:

(a) The corporation's claim that identical delivered prices result from

the perfect competition of a free market 120

(6) The corporation's distortion of economic theory as to the nature

and location of free markets 121

sonant with perfect competition - 122

(d) The corporation's contrast between physical conditions in the

steel industry and concepts of perfect competition 123

(e) The corporation's claim that the price of and demand for steel are

unrelated 124

(/) The corporation's claim that prices and profits are reasonable 126

The corporation defends certain uneconomic results of the basing point
system on the principle of vested interests:

(a) The corporation's defense of excess capacity 130

(6) The corporation's defense of existing mill locations 133

basing point system 134

(d) The corporation's claim that substitution of f. o. b. mill pricing

for the basing point system would dislocate industry and create

monopolistic conditions 135

The corporation has misstated the attitude of the Federal Trade Commis-
sion regarding alternatives to the basing point system 138

The steel industry should be prevented from continuing to restrain price
competition through use of the basing point system or through any
equivalent method 139

FE'DERAL TRADE COMMISSION'S SUMMATION OF THE MONOP-
OLISTIC CHARACTERISTICS OF THE BASING POINT SYSTEM

LETTER TO SENATOR O'MAHONEY FROM BENJAMIN F. FAIRLESS
AND REPLY THERETO BY WALTER B. WOODEN

SCHEDULE OF TABLES AND DIAGRAMS

TABLES

Page

1. Percentage distribution of hot rolled iron and steel-production among

major consuming industries 13

2. Estimated assembly costs in the production of pig iron, summer of

1937 - 17

3. Percentage distribution of capacity among producers of steel ingots and

steel for castings — 1938 20

4. United States Steel Corporation and subsidiaries components of

"fixed" costs, under 1938 conditions 22

5. United States Steel Corporation and subsidiaries percentage of

"fixed" to total costs at various rates of operation, under 1938 con-
ditions 22

6. United States Steel Corporation and subsidiaries components of

"additional" costs, under 1938 conditions 23

7. Ratio of earnings to net assets — 1929 to 1937, inclusive (earnings before

interest in percent of total assets less current liabilities) — steel industry
compared with other industries ^ 26

8. Distribution costs of 312 manufacturers, 1931 27

9. Selling expenses and advertising and promotion costs of 312 manu-

facturers in 1931 28

10. Indexes of prices 29

DIAGRAMS

1. How the delivered price is computed 33

2. Explanation of freight disadv antage and freight absorption 33

3. Explanation of first type of freight advantage and so-called "phantom

freight"-. . 35

4. Explanation of second type of freight advantage and so-called

"phantom freight" 35

5. Determination of boundary between natural market territories 38

6. How shipping beyond boundary of natural market territory reduces

mill net___- 38

7. Nonbasing point mill 39

8. Effect of naming new basing point 39

9. Illustration of cross hauling 40

10. Mill net returns of nonbasing point mill 1- 64

11. Freight rates from Pittsburgh to certain important consuming centers. . 64

12. Effect of differential between prices at basing points 67

13. "Phantom freight" and freight absorption in immediate basing point

area 69

14. Water shipment may merely reduce freight absorption 72

15. Natural selling territory increased by use of water route 72

16. Market territories of major mills producing steel sheets facing 83

17. Detailed map of counties in western Pennsylvania and eastern Ohio, facing 84

LETTER OF TRANSMITTAL

Federal Trade Commission,

Washington.
Dr. H. Dewey Anderson,

Executive Secretary, Temporary National Economic Committee,

Washington, D. C.

My Dear Dr. Anderson: For nearly 20 years a very important
controversy has existed between industry and Government experts
engaged in the enforcement of the antitrust laws over the question
of whether the use of a basing-point system by an industry eliminates
price competition in that industry. Government experts have gener-
ally been of the opinion that the use of a basing-point system does
eliminate price competition. Industry has invariably contended that
it does not.

From the standpoint of the enforcement of the antitrust laws the
issue is still undecided. In 1924 the Federal Trade Commission issued
a cease and desist order against the United States Steel Corporation^
ordering this corporation to abandon the use of what was known as
the "single basing-point system." This was the first time that a
basing-point system had been proceeded against by a Federal agency
charged with enforcement of the antitrust laws. The system con-
demned by the Commission was popularly known in the steel industry
as "Pittsburgh plus." Following the order of the Commission the
steel industry adopted what is knoV^^n as a "multiple basing-point
system."

The Commission's order to cease and desist from using the single
basing-point system, issued against the United States Steel Corpora-
tion in 1924, was not contested by the steel industry until the passage
of the Wheeler-Lea Act in 1938. This act would have made this order
of the Commission final unless appealed from within 2 months after
the passage of the act. The United States Steel Corporation is there-
fore at the present time petitioning the courts to set aside the Com-
mission's order in the "Pittsburgh plus" case.

Since the issuance of the Commission's order against "Pittsburgh
plus," the multiple basing-point system and variations of it known
technically as "zone-pricing systems'^' or "freight equalization sys-
tems," have spread rapidly in American industry. Many of the
products of heavy industries are priced by basing-point or analogous
systems. During the period of N. R. A. the codes- revealed that such
systems were employed in the following industries: Iron and steel,
lime, lumber, glass container, builders' supplies, farm equipment,
ice, road machinery, paint and varnish, business furniture, liquefied
gas, auto parts, ladder, paper and pulp, structural clay, china and
porcelain, reinforcing materials, vitrified clay sewer pipe, antifriction
bearing, some wholesale food and grocery products, end-grain strip
wood block, construction machinery, paper bag, lye, wholesale coal,
and others.

XII LETTER OF TRASNSMITTAL

In July 1937 the Federal Trade Commission instituted proceedings
against the cement industry for employing a multiple basing-point
system, and the evidence taken is now being briefed. The cement
case of the Commission is the first one in antitrust enforcement against
a multiple basing-point system. For the first time, therefore, the
multiple basing-point system may reach the courts for final deter-
mination of whether such a system is or is not a monopolistic price-
fixing device.

When the Temporary National Economic Committee was created,
the Committee assigned to the Federal Trade Commission the task of
making for the Committee an analysis of the effects of a basing-point
system on price competition. In making this assignment the Com-
mittee recognized the fact that the Federal Trade Commission had had
extensive experience with basing-point systems.

On November 20, 1935, President Roosevelt sent to the Federal
Trade Commission evidence that in three instances, involving sub-
stantial purchases of steel sheet piling for use on federally financed
construction projects, the several bidders quoted identical delivered
prices. The President requested the Commission to "examine into
the fairness and reasonableness of the bids submitted for steel" on
these three projects and to submit a "report and recommendations."

On June 10, 1936, the Federal Trade Commission submitted to the
President its report in compliance with this request. This report
showed that the basing-point system of pricing steel sheet piling had
produced identical bids to the Government, and contended that the
basing-point system in the steel industry was a monopolistic device.
The report of the Commission was referred to Attorney General Hugh
Cummings for comment. On April 26, 1937, the Attorney General
wrote President Roosevelt in part as follows concerning the Steel Sheet
Piling Report of the Federal Trade Commission:

The question before us is broader, however, than that of identical bidding in the
steel industry. The type of practices complained of in this instance is wide-
spread throughout many of the basic industries of the country. The difficulty in
correcting this situation raises the whole question as to the adequacy of the
present Antitrust Laws for the solution of the monopoly problem as it now exists
in the United States.

In my opinion, the time has come for the Federal Government to undertake a
restatement of the law designed to prevent monopoly and unfair competition.
This proceeds from the conviction that the present laws have not operated to give
adequate protection to the public against monopolistic practices.

*******

I therefore recommend that there be set up a committee to study the antitrust
laws as to their adequacy, their enforcement, and the desirability of amendment,
extension, and clarification. The Committee should have power to enlist the aid
of consultant groups both within and without the Government, as the studies will
naturally cover a wide area including the relation of antimonopoly policies to such
subjects as patents, taxation, commerce, manufacturing, farming, and labor.

The Federal Tra le Commission presented to the Temporary
National Economic Uommittee an analysis of the operation of the
basing-point system in the steel industry, which included a mono-
graph entitled "Monopoly and Competition in Steel" (exhibit 358)^
and expert testimony by Dr. Frank A. Fetter, of Princeton University,
and members of the Commission's staff. Subsequently, the United
Slates Steel Corporation submitted to the Temporary National
Economic Committee a comprehensive defense of the basing-point

1 Hearings before T. N. E. C. Part 5, p. 2192.

LETTCER OF TRAOSISMITTAL XIII

system, challenging the position taken by the Commission that the
basing-point system did repress competition in the steel industry.
This material was in the form of two pamphlets, entitled "Some
Factors in the Pricing of Steel" (exhibit 1410),^ and "The Basing-
Point Method of Quoting Delivered Prices in the Steel Industry"
(exhibit 1418).^ In accordance with its customary procedure, the
Temporary National Economic Committee referred the documents of
the Steel Corporation to the Federal Trade Commission. After
studying these documents, the Commission requested an opportunity
to question before the committee the parties responsible for their
preparation. At the same time, Mr. Walter B. Wooden and Mr.
Hugh E. White, of the staff of the Commission, prepared a rejoinder
to the monographs of the corporation. This document, entitled
"An Analysis of the Basing-Point System of Delivered Prices as
Presented by the United States Steel Corporation in Exhibits 1410
and 1418 for Identification," was submitted to the committee for
the record (exhibit 2242).*

Mr. Wooden is an assistant chief counsel of the Federal Trade
Commission and is the chief trial attorney in the pending case of the
Commission against the cement industry. When "Pittsburgh plus"
was before the Commission, Mr. Wooden was in charge of the Com-
mission's Chicago office and assisted in the gathering of evidence
for this now historic case. As far back as 1923 Mr. Wooden made a
study of the lumber industry for the Commission, including a study
of basing-point practices in that industry. Mr. Wooden has also
been cliaiiman of the Commission's basing-point committee since its
inception several years ago.

Mr. White, also a member of that commiteee, was an important
figure in the inception and trial of the "Pittsburgh plus" case by the
Commission. As secretary of the Minneapolis Traffic Association
and an assistant to the president of the Minneapolis Steel & Machinery
Co. and traffic manager of this companj^, Mr. Wliite had a broad
background of experience in commercial practices and with the
practical details of railroad transportation. Wlien approximately
800 western and midwestern steel fabricators<comprising the Western
Association of Rolled Steel Consumers joined with an organization
known as the Associated States Opposing Pittsburgh Plus, comprising
32 States fighting this pricing system, the services of Mr. Wliite were
drafted in preparing the complaint which was lodged with the Federal
Trade Commission. Subsequently, Mr. White entered the service of
the Federal Trade Commission and assisted the Commission in its
trial of "Pittsburgh plus." After the conclusion of this case, he
remained with the Commission and became one of the Commission's
experts on basing-point systems.

The Temporary National Economic Committee thus produced for
the record first-rate material on the pros and cons of the economic
effects of basing-point systems. Accordingly, it was suggested to the
Committed that a separate monograph be published on the basing-
point system, incorporating this material. This monograph, it was
felt, would afford scholars and students an unusual opportunity to
examine for themselves the nature of this issue.

2 Ibid., Part 26, p. 13893.

3 Ibid., Part 27, p. 14619.
<Ibid., Part 27, p. 14548.

XIV LETTER OF TRANSMITTAL

Included here are some excerpts from testimony of representatives
of the United States Steel Corporation who appeared before the
committee to be questioned by representatives of the Federal Trade
Commission concerning the factual material and conclusions reached
in the exhibits offered by the corporation entitled "Some Factors in the
Pricing of Steel" and "The Basing-Point Method of Quoting Delivered
Prices in the Steel Industry."

The Commission's representatives took the position, in summarizing
the testimony of these representatives of the steel industry at the
hearings, which occurred on January 26, 27, 29, and 30, 1940, that
whereas the exhibits of the corporation had asserted that when the
basing-point system was observed in the steel industry it did not
destroy price competition, representatives of the Steel Corporation
contradicted this contention in their testimony. Representatives of
the Commission contended that witnesses for the corporation had
introduced a novel defense of the basing-point system in the steel
industry by stating that the system did not repress price competition
only because it was not always observed, while admitting that if it
were wholly observed it would eliminate price competition. If that
contention is well grounded, the effect of the testimony of the repre-
sentatives of the corporation, it would seem, was to destroy the
theoretical defense of the basing-point system contained in the
corporation's exhibits. The corporation objected to this construc-
tion of the testimony offered by its representatives. The objections
of the corporation were embodied in a letter to the committee.
This letter and a reply thereto by Mr. Walter B. Wooden were made
a part of the record. It is suggested that students interested in making
a proper appraisal of this issue consult the complete record of the
testimony of the representatives of the corporation, contained in
Part 26 of the Hearings before the Temporary National Economic
Committee. Only the most pertinent excerpts bearing upon this
issue hf^ve been selected for this monograph so as to give the student
a brief background on this question.
Sincerely,

Willis J. Ballinger,
Director of Temporary National Economic Committee Studies
jor the Federal Trade Commission.

February 6, 1941.

MONOPOLY AND COMPETITION IN STEEL '

The following outline describes the price relationships which the Commission
has reason to believe exist, in the steel industry. The statements are based on
investigations of the industry made by the Commission at various times. They
are presented for the preliminary consideration of the Temporary National Eco-
nomic Committee, and will be further developed as the Committee's investiga-
tion proceeds. Although some changes in method were introduced in June 1938,
the fundamentals of the steel pricing system we ■ not affected.

Briefly, the basing point system in steel operat < as follows: For each particular
steel product a number of points have been selec ' at which "base prices" are
quoted. The delivered price at any other point imputed b}' adding to the

base price at each basing point the railway freight charge from that point to point
of delivery and adopting the smallest of these totals. The steel may actually be
shipped from a great distance or from next door to the customer's plant, but the
delivered price is the same in all cases, that is, the customer paj's as if the steel
were always shipped from the "governing" basing point, i. e., that giving the
lowest delivered cost according to the formula.

This is the skeleton outline of the system. In practice it is complicated by the
existence of different basing points, for different steel products, and by a system
of "extras," identical for all companies, representing special quality, size, shape,
or quantity. In effect, however the formula enables all steel producers, without
the necessity of special consultation, to arrive at an identical delivered price for
any order of steel delivered at any point in the United States. With occasional
lapses, the sj'stem works, and the buyer normally receives identical quotations
from all bidders.

The original basing point system in the industry was the so-called Pittsburgh
Plus, under which steel was sold at a delivered price equal to the Pittsburgh price
plus freight from Pittsburgh. Other basing points have since been established,
and the present is a multiple system.

This report deals with the basing-point system as the method for establishing
the identical delivered prices found in the steel industry. It should be made clear
that the objective of this examination is not to find some other mechanism for
producing the same effect, but to consider the effects of identical delivered prices,
whether derived from the use of a basing-point formula, or by an}' other method,

VISIBLK EFFECTS OF IDENTICAL DELIVERED PRICES

When the basing-point system is operating smoothly, it appears that quotations
on steel of a given quality and quantity are identical at any given point of de-
livery. The formula, covering base price and rail freight from the governing
basing point, is known to all members of the industry. Mills located at points
other than the basing point use the standard formula as if they were located there.

To the customer, at his location, there is no difference between the quality and
delivered price offered by all the bidders. Occasional variations from this per-
fect identity are observed, but only during short periods when there was a tem-
porary flurry of price cutting. Such flurries have been an incident of practically
all price-fixing systems. They occurred even in the days of signed price agree-
ments in the steel industry.

On the surface, the producers approach the consumer with a united front.
Competition in such crude matters as price and quality has been put aside, and
all that seems to remain is a gentlemanly emulation in the art of making friends
and influencing people.

Secret discounts or concessions in quantity or quality may continue to exercise
an influence of a more material character in the case of strong and influential pri-
vate purchasers. Small and medium-sized private buyers pay the formula price.
Public bodies, not being permitted to accept secret favors, have no legal reason for
choice, there being no lowest bidder, and are reduced to making awards by lot.

' Exhibit No, 358, Hearings before Temporary National Economic Committee, pt. 5, p. 2192.

2 CONCENTRATION OF ECONOMIC POWER

The available evidence indicates that secret violation of the identical delivered
price system is seldom of such importance as to prevent the general economic
effects of controlled prices.

Since the delivered price quoted is the same among bidders with many different
freight costs, the net amount received or mill realization varies among the bidders,
depending on their distance from the point of delivery.

A plant not located at a basing point will charge even to customers located at
its own door the base price plus freight from the governing basing point. But
in selling to a customer located at the basing point it will quote only the base
price, and will deduct the actual freight from its plant to t^e customer at that
basing point, leaving as a net return the base price minus freight.

A plant located at a basing point will sell its product at all points within the
area where the delivered price is governed by that basing point, at the same base
price, plus the actual rail freight to point of delivery. When bidding outside this
area, however, it must "absorb" a part of the freight, which means accepting a
lower net price in order to match the delivered price which is computed by the
standard formula from some other basing point. That is, outside the area gov-
erned by its own basing point, the basing-point mill will accept varying net pricas
in the same way as a mill not located at a basing point.

Thus the immediate effect of tins artificial price system is to distort the area
of distribution of each mill, in such a way that its net return per ton of steel from
different customers is generally different.

The customer who is nearest the place of production does not necessarily receive
the lowest delivered price for steel.

If the nearby place of production is not a basing point, the customer located
there must nevertheless pay the equivalent of rail freight from the governing
basing point.

Studies of actual sales of steel show that mills deliver steel in the neighborhood
of other mills that are producing steel of the same kind, and these in turn ship
their product to the neighborhood of their rivals, or even beyond. Physically this
cross-hauling is a pure waste; it could be justified only if some other form of
economy were to be obtained by means of an interchange of identical products.
Between two interconnected power systems, for example, power may flow in
one direction at one, -ime and back at another, because of differences in the timing
of peak loads. Butno such excuse can be found for cross-hauling in steel. Occa-
sionally an abnormal demand for steel may appear first in one place and then in
another, so as to overload the nearest producing plants and require importation
from others. The constant cross-hauling of steel, however, is a different matter.
It is a continual and simultaneous process. It unquestionably shows that mills
do not ordinarily supply the nearest customers before looking to more distant
ones. The cost of the wasted freight must be borne in the first instance by the
injured communities and in the last analysis by the general public in one form
or another. The cost is actually covered by maintaining base prices so high that
a producer can ship steel for long distances past another producing mill and still
find the business worth taking.

Finally, the evidence at hand shows what is inherent in the pricing plan, that
a customer not located at a basing point but located near a steel mill is deprived
of the benefit of the low haulage cost from the nearest mill to his door. The
neighboring mill will, to be sure, offer him a bid, but no better than he can get
from mills farther away. Under this pricing system he would be as cheaply sup-
plied if the nearby mill did not exist.

To call the relation of a mill to its nearest customers a "local monopoly" is to
confuse the issue. The correct term is "advantage of location"; it represents a
natural physical fact: low cost of transportation. This is no more properly called
monopoly than would be the possession of a low-cost plant or an unusually effi-
cient personnel. Smce the avowed purpose of competition is to allow the con-
sumers the use of the lowest cost methods, any economy in the physical factors of
production, including economy of transportation, is a legitimate competitive factor.
Moreover, a customer so located that steel can be shipped to him by barge or
by truck, at less than railway freight costs, is not usually allowed the benefit of
this advantage. The mill may ship by water, or by truck, but with relatively few
exceptions the quoted price is based on rail freight. It would seem that the reason
for using rail freights in all cases is that only by .«o doing can identical delivered
quotations oe conveniently a.ssured.

The system appears to be designed not as a means of computing actual delivered
costs, but of assuring the absence of price competition at any point of delivery..

CONCENTRATION OF ECONOMIC POWER 3

This situation must involve a general and continuous waste, since it would obvi-
ously be more efficient if customers were able to buy at a lower cost from the
nearest available source. It is a system that makes a profit for the producer by
wasting the customer's money.

IMPLICATIONS OF IDENTICAL DELIVERED PRICES

It is reasonable to assume that the industry succeeds or expects to succeed in
making the customer pay for the wastes of cross-hauling, and enough more to
furnish a motive for the self-discipline involved in an identical delivered price
system. The base prices established must be intended to produce a profit on the
business as a whole, even though as an incident they may require a company
to accept a comparatively low net return on some particular sale.

Experience indicates, in fact, that when the system temporarily breaks down,
prices fall.

The pricing system in steel is often called an "umbrella," the implication being
that it holds up a price level under which mills of all degrees of efficiency or
obsolescence find shelter. There appears to be a tendency for obsolete mills to
survive after new and more efficient plants fiave entered the field, resulting in
excess capacity and a low average percentage of operation As will be noted
later, the value of an old plant would be more easily defended if it actually served
a neighboring market at a net saving to the customers.

Overequipment in the industry, with failure to elimina.te the least efficient plants,
tends to discourage technological jjrogress, but its chief effect appears to have been
to accustom the industry to the idea of a low ratio of production to capacity.
The industry has felt entitled to a price level that will allow it to make a profit
when operating at less than 40 percent of capacity, although this required per-
centage increased with the base price reductions of June 1938.

But since the capital costs are a large factor in steel making, in effect the public
is required to pay, on a given tonnage of steel, the capita) charges on a larger
plant investment than is needed to produce that tonnage. The price fiurry of
June 1938, reduced base prices; the industry was forced to operate at better than
50 percent of capacity to make a profit. This change was regarded by the industry
as deplorable, though it led to large increases in production and consequently
in employment. " 'The .situation was competitive,' Mr. Grace said, and he
hoped that it had been cured." ^

If the concept of price adopted in Pittsburgh plus case in 1924 is sound under the
present law, the basing point practice may be regarded as one of systematic price
discrimination designed to serve the interests of the sellers, as a group, against the
interests of such buyers as desire price competition, and of consumers in general.
Such systematic discrimination should be distinguished from a different type —
the sporadic, unorganized price discrimination found in an unprotected com-
petitive market where unfair practices are permitted.

Discrimination in the absence of an identical delivered price system takes the
sporadic form of charging profitable prices in nearby territory and accepting a
lower net return on sales to customers who are in a position to buy ivom a rival's
territory. This may easily become price raiding, a use of financial power to
overwhelm a financially weaker competitor. By raiding one small competitor
after another, a powerful company can acquire numerous plants and destroy
competition over a large area, becoming a monopoly of the old fashioned type in
which control over prices is obtained by ownership of the bulk of the business.
This undesirable situation can be expected to occur if competition without
protection against price raiding should be reestablished in industries now under
monopoly control.

The custom of charging an extra price for small quantities of steel over the
price for large quantities requires the small buyer to pay more for his material,
but is not necessarily discriminatory in the sense used in this discussion, since
there may be a difference in cost for producing and handling small items. If,
however, the difference charged is excessive, it becomes a form of discrimination.

The fact that discrimination in an unprotected market may lead to monopoly is
the origin of the opinion, often sincerely held by businessmen, that any kind of
cornpetition must inevitably destroy itself, and that only by controlled prices can
individual businesses be actually preserved. The Commission regards this line of
reason ii g as fallacious and disastrous.

2 New York Times, October 28, 1938.
292918 — 41 — No. 42 2

4 CONCENTRATION OF ECONOMIC POWER

The truth should be recognized, that a free market must be protected to prevent
price discrimination, or it is likely to permit the survival of the financially strongest
rather than of the most efficient. But to sanction private price controls such as
those in the steel industry as a protection against price raiding is to establish
monopoV by agreement for the sake of avoiding monopoly by capture.

The identical delivered price system in steel preserves the shadow of com-
petition by giving up the substance.

The courts have long since declared it unlawful for a great combination to cut
prices in one territory in order to destroy a local competitor, meanwhile making
up the deficiency by the profits of other sections. A similar principle should be
applicable in a vertically integrated company.

The Federal Trade Commission found in the Pittsburgh plus case that the
American Bridge Co. could underbid its competitors because of being able to buy
materials from fellow subsidiaries of the United States Steel Corporation at lower
prices than other fabricators could obtain them. Since this finding was entered,
several other large steel producers have acquired fabricating companies, and
thus have opportunities for a similar advantage over independent fabricators.

If such camouflaged discrimination is to be prevented, it would be necessary to
insist that separate accounts be kept for all parts of a vertically integrated com-
pany as if they were independent concerns, and that these accounts be subject
to visitation by representatives of the Government.

INDICATORS OF MONOPOLY

In a heavy staple industry, such as steel, there are certain indicators that may
be taken as manifesting the existence or absence of monopoly.

If the demand for steel in a certain district is larger than the neighboring mills
can supply, those mills should be running at capacity, unless their costs are higher
than the cost of outside mills by more than the freight. If mills are ru? ig part
time, while steel is being shipped in, monopoly is indicated.

If the supply of steel in a district is larger than the local demand can absorb,
there should be no steel coming in, but the local consumers should be full}- supplied
locally. If steel is being shipped in, and if the fact is not explainable by cost
differentials, monopoly is indicated.

Cross-hauling of identical products is a general symptom of failure of com-
petition.

If identical or close bids on delivered steel are received from mills at different
distances from the buyer, there is a presumption of monopoly, unless the facts
can be explained by differences in cost of production. The only locations at
which the receipt of closely similar bids, from diversely' situated mills, can be
disregarded as indicators are on the borderlines between producing areas.

EFFECTS OF IDENTICAL DELIVERED PRICES

To summarize the effects which we have reason to believe follow from the system
of identical delivered prices: The wastes of cross-hauling and of excess capacity
and high capital overhead are saddled on the consumer as if they were legitimate
costs. Under the guise of freight costs, buyers located at a distance from a
basing point even though they purchase from a mill in their own city are charged
what amounts to a penalty.

Thus the advantage or disadvantage of location for many buyers is an artificial
one, which may be altered by arbitrary private decree through a change in the
basing point. Price competition in the steel industrj', during ah periods when the
system is working, is eliminated. Hi^^h prices, not in conformit}' with the law of
supply and demand, place unreasonable limitations on use of the material. The
effect, when combined with that of similar artificial prices in many other lines of
production, is a depressed condition which can be kept from utter collapse only
by repeated doses of public subsidy.

EFFECTS OF PARTIAL COMPETITION

The fixed-price sj'stem in steel sometimes slips momentarily, as it did in June
1938. When the momentary "competition" is cured and jjeace once more liovers
over the industry, competitive practices still crawl here and there under the
surface. But such vestigial remnants of competition are not enough to restore
a healthy condition.

The industry is adjusted to a condition of monopoly. Its plants are located
at points dictated by monopoly practices — many of them are relics of the "Pitts-

CONCENTRATION OF ECONOMIC POWER 5

burgh plus," under which one principal basing point dominated the price structure.

A temporary restoration of competition is peculiarly painful to the industry
because it cannot quickly adapt itself to an unprotected existence. Some of
the independents, and some units of the larger companies, born and brought up
under the "umbrella," fear to attempt a life of free competition. The desire to
restore and maintain a monopolistic scale of prices is therefore a powerful influence
in the industry. Moreover, such competition as does occur from time to time
in the industry takes the form of sporadic discriminatory price cutting, in which
the more powerful companies may use their power to discipline the weaker inde-
pendents.

The Commission agrees with the industry that unfair forms of competition
should not be substituted in place of monopoly. The Commission is opposed to
both.

It is recognized that the industry will naturally fear the adjustments necessary
for the establishment of healthy competition. The Commission notes in the
published hearings of the Subcommittee of the Senate Committee on the Judiciary
on S. 10 and S. 3072, March 10, 1936, the following statement in a letter from
the late Mr. John Treanor of the Riverside Cement Corporation to Mr. B. H.
Rader of the Cement Institute. Although speaking of the cement industry,
Mr. Treanor expresses a fear of competition that is common to other industries
as well. He says:

"Do you think any of the arguments for the basing-point sj'stem which w^e'have
thus far advanced, will arouse anj^hing but derision in and out of the Govern-
ment? They amount to this — that we price this way in order to discourage monop-
olistic practices and to preserve free competition, etc. This is sheer bunk and
hypocrisy. The truth is, of course — that ours is an industry above all others
that cannot stand free competition and that must systematically restrain com-
petition or be ruined. We sell in a buyers' market all the time." ^

In steel, as the Commission has obser\ed, the normal and wholesome elimina-
tion of obsolete plants has not taken place. The industry has become addicted
to monopoly as to a habit-forming drug. Its members fear nameless horrors if
the drug should be withdrawn. Despite these fears, it remains true that a cure
is necessary if the steel industry, together with American business in general, is
to be restored to health.

MONOPOLY LEADS TO GOVERNMENT CONTROL,

To some extent the steel industry has eliminated obsolete plants, following the
process of merger, the choice of plants to be closed being made arbitrarily by those
in control of the merger. The Commission calls attention to the fact that here,
on a private scale, we see the substitution of arbitrary decision for the impersonal
decisions of the free market in an important industry. But the philosophy of
the competitive theory which underlies capitalism is that natural death in indus-
try, under the forces of fair competition, is more merciful than death by fiat,
and also more clearly in accord with the public interest. It is fair and reasonable
that the best man should win, and that the loser should be obliged to hunt for
some other source of income. But it is offensive to peace and good morals that
a man should be driven out of business by financial power, whether his throat is
cut in a sudcle. attack or whether he is captured first and killed later.

The experience of business in certain countries shows that if the natural elimina-
tion of the less efficient by competition is prevented, and elimination by private
fiat is substituted, fiat will finally become the function of government. When
the elimination of any members of an industry becomes the function of govern-
ment, practices and injustices of an alarming kind have been observed.

The Commission points out that the drift toward monopoly involves the dis-
quieting prospect that decisions, once the product of an impersonal economic
necessity, may become the function of private or public dictators under conditions
that offer the victims no avenue of escape.

The ability to decide on a price and hold to it regardless of demand, which is
the essence of monopoly, is a prime factor in establishing the vicious circle of
high prices, restricted production, and reduced employment so widely condemned
as "scarcity economics." Starting with a price level designed to protect obsolete
and unnecessary plants, and therefore having long periods of part-time operation
and high overhead, the steel industry has established a habit of low production
and high cost that seems to justify high prices. The demand is thereby restricted,

' U. S. Senate Comm. on the Judiciary. Hearings of Subcommittee on S. 10, S. 3072, Mar. 10, 1930, p. 537.

6 CONCENTRATION OF ECONOMIC POWER

and the vicious circle is completed by the continuance of high costs based on
restricted output.

Moreover, in a product like steel which serves as raw material for other products,
and for the machines with which other products are made, any unnecessary cost
will be multiplied from step to step throughout industry so far as the influence
of steel extends. The consumer is burdened with monopoly costs of steel multi-
plied several fold.

Unless and until this vicious circle of scarcity and unemplo3'ment can be
broken, it is clear that it will act to grip the business world in paralysis. The
practices of the steel industry alone may not ruin the capitalist system, but if
they are reinforced by monopolistic practices in other industries, the total effect
may come to be a strangulation of the blood stream of trade. Monopoly, like
coiintc .."citing, is a profitable business for the first comer, but is subject to dimin-
ishing returns when it is more widely practiced.

There appears to be only one way in which the circle of high prices, low produc-
tion, and unemployment can be broken. That is through the restoration of
price competition in accord with the ancient rule of capitalism, that at a low rate
of production an industry ought to be losing money. The alternative is the
abandonment of capitalism and experimentation with authoritarian controls.

Capitalist theorj' has. always held that industry was expected to produce in
the hope of profit, not that it was expected to stand idle at a profit. If the
rewards of full-time industrial production are to be given equally for half-time
work it is inevitable that labor and agriculture must also be supported on a
half-time basis.

The Commission is not impressed with the argument that as steel output falls
off and costs rise, it is necessary or desirable to maintain prices in an effort to
break even. Such an argument violates the fundamental principles of capi-
talism. On the contrary, it is necessary and desirable to reduce prices in a falling
market in an effort to increase tonnage and cut costs.

If free competition is not restored, the alternative will be public control of
the details of business policy, including prices, wages, and production schedules.
If private monopoly is permitted to spread through the greater part of the bu.siness
system, public control appears to be unavoidable.

The Commis.sion calls attention to the .sequence of events in countries where
the cartel form of monopoly has been encouraged. Centralization of j>ower is
the forerunner of a state, in which business, both small and large, is entirely
subject to the direction of the government.

To the Cominission the lesson seems clear that democratic liberty requires, as
one of its foundation stones, the preservation and protection of a sufficient area
of free capitalism to balance the necessary centralization of public utilities and
other natural monopolies.

Freedom depends on preserving a wide field of opportunity for free initiative.
Universal price controls constitute a repudiation of economic freedom and a
demand for some form of authoritarian government.

COMPETITION

It is suggested that the relationship of competition, discrimination, and monop-
oly requires more definite clarification and legal definition in the public interest.
Business in this country has passed through two stages on the way to the estab-
lishment of law and order. The first, or pioneer, stage was one of unrestrained
discriminatory competition, in which financial power and influence were often
used as weapons to destroy competitors. By a natural process of evolution,
businessmen in certain industries organized private agreements for preventing
competition of a kind unprofitable to themselves.

These private organizations for bringing order into business have not eliminated
discrimination but have organized it in their own interest. Organized price
controls have turned out to be monopolistic and oppressive to the consumer,
and a source of depression and paralj'sis to trade. It is necessary now to pass on
into a stage of established law, in which the required protection against discrim-
ination is given by law to competitors and consumers alike

Without an effective guarantee of protection against unfair and discriminatory
attack, businessmen can hardly be expected to relinquish voluntarily their efforts
to maintain private monopolistic systems for mutual self-protection.

As a basis for a sound policy of fair competition as distinguished from monopoly,
it is believed to be essential to recognize the fundamental objectives of the free
market as applied to steel. The free market is expected to give to the consumer
the benefit of the lowest cost of production, and to reward the producer who elim-

CONCENTRATION OF ECONOMIC POWER 7

inates waste. The market is expected to reward not only efficient production
within the plant, but also efficiency in choice of location which minimizes trans-
portation costs.

It is recognized that a market, unless policed to prevent discriminatory prices
and other unfair methods, may fail to distinguish between efficiency and the ad-
vantages of financial power, and may give the rewards to power rather than to
efficiency, as illustrated by the effects of unfair competition. Free markets,
therefore, must be policed to prevent interference by dominant force whether
financial or physical.

The market, finally, is supposed to provide a competitive mechanism that will
automatically eliminate obsolete capital, either by forcing obsolete steel companies
out of business or by forcing them to scale down their liabilities. Definitions of
economic terms must be drawn not from tradition, or from the "custom of the
trade" as shaped by immediate private advantage, but from experience with the
effects of such practices on the proper functioning of the market.

The Commission believes that a condition of sound competition in the steel
industry would be fair to the consumer, efficient as an item in national production,
and as nearly as possible free of brutality or cutthroat activities.

Sound competition would be fair to the consumer because it would permit
him to have any advantage of buying from the nearest mill, at a minimum cost
for freight. It would be fair because the prices he must pay would be under
constant competitive pressure, since his local mill could not arbitrarily raise its
price without giving up its borderline customers to a rival.

Sound competition would be efficient for the Nation because it would reduce
wasteful cross hauling, the cost of which the Nation must bear. It would promote
decentralized location of mills, tending to favor the growth of numerous scattered
mills close to customers, or in the shortest line between customer and raw material,
an important item in terms of economic stability and of national defense.

■ Sound competition would be largely free of the abuses that have tended to give
competition a bad name and have unfortunately driven many businessmen to
seek shelter in monopolistic agreements. While the effect of sound competition
would be to give rewards to efficiency and proper location combined, it would
act upon the less efficient rather by slow pressure than by sudden violence —
impersonally rather than by the exercise of personal and arbitrary power.

It appears evident that a condition of sound competition would be favorable
to the restoration of free initiative in the steel industry. Initiative may be
considered as embodied in two forms, the establishment of new mills in favorable
locations, and an active attempt of existing mills to get business by reducing
costs to the consumer. Both forms are stifled in the steel industry by the basing
point system.

The protection of obsolete plants under the umbrella, by retaining excess
capacity in the industry, impairs the incentive to build new and more efficient
plants or to secure a better location.

Free initiative in the sense of trying to get business by offering advantages
to the consumer is not only restricted under the basing point system, ■ but is
regarded as an offense, subject to the danger of retaliation by the industry.

If a mill merely follows the price leaders in a generally observed price system,
it has relaxed from competition, and is trusting to some more subtle influence
to provide its share of the business. Initiative means leading the price in its
own area, and leading it down to the level at which the area of the local mill is
effectively protected by freight costs against the loss of its profitable business.
Initiative in the form of local self-determination is seldom, if ever, found today
m the steel industry.

Local initiative is frowned upon by the leaders of the industry. In 1930, a
steel industry leader deplored that "several months ago price instability was
permitted to come into our commercial relations." Another high steel executive,
saying that price cuttiftg kills business, added: "We have got to be honest."
The potential punishment for any serious attempt to violate the basing point
price system is price raiding, that soon brings the rebels to terms. It is vital to
an understanding of this situation to make clear the ethics on which it is based.

Unethical conduct in selling steel includes those underhand devices by which a
company offers material inducements to the buyer while pretending to stick to the
concerted formula under which no bid at any given point of delivery will be better
than any other bid at the same pomt. Such methods are abhorred by each member
of the industry when used by others to his disadvantage. They violate the so-
called ethics by whicTi all the brotherhood is bound together against the consumer.

A chiseler is an unreconstructed capitalist who fails to obey the rules of the
monopoly. He may also be dishonest in his methods, but chiseling and dishonesty

g CONCENTEATION OF ECONOMIC POWER

are not identical, and the distinction is vital. To accuse a person of dishonesty
may be necessary and in the public interest. To .use the word "chiseler," however,
as meaning merely one who competes by reducing prices without discrimination,
is to attack the foundation of free initiative, and to invite autocracy.

The Commission holds no brief for deception, but is convinced that the so-called
ethical principle which opposes price competition, forcing it into the form of under-
hand dealings, is itself contrary to the public interest. We believe that competi-
tion in steel should be brought into the open and protected against reprisals that
threaten to drive it back into the dark. Suppression of competition breeds decep-
tion; the cure is not punishment but freedom and protection of individual rights.

Unfair competition, in addition to various forms of fraud and misrepresentation,
includes specifically the use of discrimination for the purpose of price raiding.
The Commission believes, as does a large share of the business world, that price
raiding is a form of industrial violence; sound competition cannot be preserved
unless price raiding is effectively prevented.

APPROACH TO THE PROBLEM

The Commission considers it to be essential to distinguish between protection
of the markets and Government control over business.

Protection works from the outside; its examination of business practices is only
for the purpose of enforcing'the rules of conduct as required for the protection of
freedom. Control penetrates the interior of business, impairing or destroying the
exercise of legitimate private initiative.

It is recognized that certain public utilities, including transportation, communi-
cation, and domestic power distribution, are in some measure required by technical
necessity to operate as monopolies. As monopolies these industries have long been
subject to a large measure of public control of their prices, wages, and production
schedules; in some cases they have been taken into public ownership. The classi-
fication of industries as necessary monopolies should be, in the Commission's
opinion, kept to as narrow limits as technical considerations permit.

It is suggested that in order to protect competitive business, monopolies must
be held to exist only by suffcance in the capitalist system, and to be properly
subject to public control in all details affecting the public interest.

Public control over monopolies is to be clearly distinguished from regulation of
competitive practices, established to give protection to free competition in indus-
try. The latter does not attempt to fix reasonable prices or to interfere with the
countless details within each individual private enterprise.

There is reason to believe that most industrial operations are capable of attain-
ing the highest degree of technical efficiency with plants of moderate size. Even
though a modern steel plant may be physically large, it is relatively small in com-
parison with the total steel business of the United States. If monopoly is to be
permitted in such industries, the Commission can see no escape from the necessity
of removing them from the privileges of free capitalist management and placing
them under Government control.

The Commission denies the necessity for such an outcome in the case of steel.
We believe that to socialize the iron and steel industry, probably the leader of
American business, would be a dangerous precedent. Such an example might
easily spre^^d far through the business world, tending to the break-down of private
enterprise and the rise of an authoritarian state.

The Commission the'refore suggests that the steel industry, which it believes to
be capable of reasonably efficient operation without monopoly, should be definitely
separated in public policy from the "natural" monopolies, and treated as a free
enterprise. As a free enterprise, it should be given an effective protection that
will positively assure it of continuous, sound, and wholesome competition. The
larger the area of business in which fair competition can be assured, the wider the
margin of safety against the loss of both economic and political freedom.

The prevention of identical delivered prices for steel is, in the Commission's
opinion, necessary for the restoration of competitive conditions. This involves
the necessity for the elimination of the basing-point system, since the purpose and
effect of that system is to prevent price competition. It will also be necessary to
prohibit any variation or substitute for the basing-point system, the effect of
which is to establish identical delivered prices.

It is submitted that the principles to be applied to the steel industry should be
those laid down in the Pittsburgh Plus case when the respondents were ordered
to cease and desist:

CONCENTRATION OF ECONOMIC POWER 9

"From quoting for sale or selling in the course of interstate commerce their
said rolled-steel products upon any other basing point than that where the prod-
ucts are manufactured or from which they are shipped.

"From selling or contracting for the sale of or invoicing such steel pl-oducts in
the course of interstate commerce without clearly and distinctly indicating in such
sales, or upon such contracts or invoices, how much is charged for such steel prod-
ucts f. o. b. the producing or shipping point, and how much is charged for the
actual transportation of such products, if any, from such producing or shipping
point to destination."

The open f. o. b. mill price system is essential, in the Commission's opinion, for
the maintenance of fair competition in steel. To fulfill this purpose, however,
there must be no obligation to maintain any announced price for any time what-
soever. Further detailed regulations required for the protection of any open
market need not be listed at length in this preliminary discussion.

The fact that sound conditions can be restored only with considerable trouble
and expense is not a sufficient reason for doing nothing, nor for adopting irritating
but ineffective half measures. The capitalist system of free initiative is not im-
mortal, but is capable of dying and of dragging down with it the system of dem-
ocratic government. Monopoly constitutes the death of capitalism and the
genesis of authoritarian government.

The steel industry is a focal center of a monopolistic infection which, if not
eradicated, may well cause the death of free capitalistic industry in the United
States. This Commission is invested by law with the duty of assisting in the pro-
tection of competitive capitalism and in its restoration to health. Whatever such
protection may cost, we believe it will be less costly to capitalism and to freedom
than any alternative.

SOME FACTORS IN THE PRICING OF STEEL '

This is an analysis made in connection with studies by the United States Steel
Corporation in preparation for hearings on the steel industry before the Tenaporary
National Economic Committee.

Introduction

How much does the price of steel influence the quantity sold? What is the
relationship of cost to the price of steel? What degree of price competition
is desirable, and possible, in the steel industry? Why does the steel industry
quote delivered prices and why does it use the basing point method of quoting
delivered prices; Does the steel industry perform its proper function in the
national economy? Before these questions can be answered a careful analysis
must be made of the fundamental factors underlying the demand-supply situation
in the industry.

Subject to some exceptions with respect to particular products, the salient
characteristics of demand and supply in the steel industry may be summarized
as follows:

(1) The demand for steel is marked by tremendous cyclical fluctuations.

(2) The total demand for steel is inelastic, i. e., the total quantity of steel

bought from the industry would not be greatly different at any
particular time if the price were higher or lower.

(3) In contrast, the demand for steel from a particular producer usually

possesses great potential elasticity. In other words, buyers will
readily shift from one producer to another in response to a difference
in price. This is due to the informed character of the buying of steel.
Buyers have excellent technical knowledge of the product to be
purchased; and since nearly all steel is purchased on specification,
the identical grade and type of steel may be obtained for the most
part from any one of a number of producers. Furthermore, the large
size of individual purchases makes it worth-while for buyers to shop
for the lowest possible price.

(4) The cost structure in the industry is marked by substantial fixed costs

which must be met regardless of the amount of steel produced. ^ Even
more significant is the fact indicated by the operating experience
of the United States Steel Corporation and its subsidiaries over
ihe past ten years that the additional cost per unit of output re-
mains approximately the same regardless of the rate of operations
provided labor rates, prices of raw materials, etc. remain constant.
As a result of these two characteristics the average cost of each
unit of the entire output is higher than the additional cost per addi-
tional unit of output for practically the whole range of operations
up to the limits of practical capacity. Finally, the cost of labor and
of other goods and services purchased from others (which together
constitute about 80 percent of the total cost in the case of the sub-
sidiaries of United States Steel Corporation), are largely outside
the control of the management of the steel producer.

(5) Producers of the great bulk of the tonnage of steel products sold in the

respective consuming areas are relatively few in number.

These characteristics of the steel industry, of course, do not coincide with
the conditions necessary for the "perfect" price competition of classical economic
theory. The theory of "perfect" price competition, for example, assumes each
buyer and seller to be too small to influence the market price; any seller is supposed
to be able to reduce his price and expand his production without fear of reactions

' Exhibit No. 1410, Hearings before Temporary National Economic Committee, Pt. 26, p. 13893.
2 In the case of the subsidiaries of United States Steel Corporation these costs are approximately 30%
of total cost at 40% of capacity operations, 20% at 70% capacity and 15% at 100% capacity.

12 CONCENTRATION OF ECONOMIC POWER

on the part of competitors. This is not true of the market for steel. As a con-
sequence of potential shiftability of buyers in response to price concessions, there
is an incentive to obtain business by price reduction even below average cost
as long as the price of the additional units so sold is above the additional cost
thereof, but in actual competition in the steel industry such a tendency is modified
to some extent by the difficulty of continuing to ofl"er lower prices than competitors
since competitors meet price concessions almost immediately. Furthermore,
"perfect" price competition does not take into account the consequences of the
presence in the market of relatively few, but large, buyers, nor the size of their
individual orders. It overlooks the relative difficulty of new producers entering
the market and many other factors of importance in the competitive situation in
the steel industry. In appraising this situation it should be recognized that the
conditions requisite for theoretically "perfect" price condition have rarely, if
ever, been approached in any industry, and could never be generally achieved
in a manufacturing industry such as steel. Accordingly, it is hardly reasonable
to judge competitive practives in the steel industry by imaginary standards based
on abstract conditions which cannot possibly be fulfilled, and which probably
never have been fulfilled in any industry.

Waiving the reasonableness of tiie application of the criteria, it is pprtinent
to inquire what the consequence of "perfect"' price competition would br in the
steel industry. If such a theoretical state of competition prevailed, each producer
would take all the business he could get so long as the price yielded more than
the additional cost of producina the additional ton of steel so sold. If the demand
exceeded the capacity of existing producers, the price of steel would sky-rocket,
being limited only by the magnitude of the demand. If, however, the demand
declined to less than the existing capacity, the price would drop abruptly to the
level of the additional cost per additional unit of the least efficient producer
remaining in the market. In such a situation producers would cover little, if
any, of their overhead. Producers, therefore, would be operating at heavy
losses whenever existing capacity was not being fully utilized, and would recoup
these looses by high prices and large profits during the peak of prosperity. In
major depressions the efficient as well as the marginal concern would fail to sur-
vive unless it had accumulated an extraordinarily large cash balance.' Under
such conditions existing capacity would be reduced with the result that the steel
industry would become a bottle-neck in the succeeding rise in the business cycle
by limiting the possibility of increased production and creating a premature
boom in prices before the rest of the economy could achieve full employment.

Actually, of course, these characteristics of "perfect" (irice competition would
not be tolerated. The cut-throat struggle in depression and the sharp increases
in prices and profits in prosperity, as well as the bottle-neck in capacity, would
be the object of attacks by legisl.itorS: economists and others.

This ])aper is an attempt to outline the numerous factors involved in the pricing
of steel with the hope that a re-statement of fundamentals will contribute to a
clearer understanding of jjrices and price structure in the steel industry..

The Demand for Steel

immediate source of demand

Orders for steel coine mostly from companies using the products of the steel
industry as raw materials i!i making goods or as equipment in producing services.

Companies purchasing steel have been classified, and estimates of the percentage
of the total steel production of the United States purchased by each class have
been made as follows:

3 If the subsidiaries of United States Steel Corporation sold steel at a price only equal to the additional
cost of add itiobnl units of production, it is estimated that the loss to the Corporation would be approximately
$182,100,000 a year. Under these conditions the Corporation could not survive for more than a few years.

CONCENTRATION OF ECONOMIC POWER

Table 1. — Percentage Distribution of Hot Rolled Iron and Steel Production Among
Major Consuming Industries '

Industry

1938

1932-38

Average

17.3

20.8

18.8

16.0

0.1

10.1

9.1

8.4

4.7

6.0

7.4

6.0

7.5

5.5

3.5

4.2

3.6

1.6

0,9

0.3

0.5

20.1

18.0

1926-31
Average

Automotive

Construction

Railroads.-

Container. -..

Agriculture

Oil. Oasand Water

Exports

Machinery ...

Furniture and Furnishings

Shipbuilding -

Mining

Miscellaneous

16.3
19.9
17.9
4.7
6.0
8.3
5.0
3.8

0.9

0.7

»15.6

• M. W. Worthing, Distribution of Steel Products to Major Consuming Jndvstries, United States Steel
Corporation, October 30, 1939. Computations made by apportioning individual hot-rolled product
totals on the ba.sis of Iron Age distribution reports and by allocating jobber shipments to ultimate con-
sumers.

* "Miscellaneous" for the period 1926-31 includes "Furniture and Furnishings."

In connection with the above classification interesting observations may be
made. First, the purchasers of steel are principally companies engaged in the
production of producers' and consumers' durable goods. An exception is the
container industry which manufactures tin cans, an article classified as a perishable
good since it is generally used but once and discarded. Second, in recent years
there has been a marked increase in the percentage of steel purchased by con-
sumers' durable goods industries, such as the automotive and household appliance
industries, and a decrease in the percentage of steel purchased by producers,
durable goods industries, such as the railroad industry. In this connection "Mis-
cellaneous," which has shown such rapid growth, includes many industries pro-
ducing consumers' durable goods such as refrigerators, air conditioning units,
stoves, etc. Third, "Exports" in some years account for an appreciable amount
of total steel sold. Since the economics of export trade involves conditions not
present in the domestic market, the subject of prices and pricing methods in the
steel export trade have not been included in this study.

Most industries purchasing eteel are characterized by large companies; in the
automotive, container, agricultural implements, household durable goods and
shipbuilding industries, a relatively few large companies comprise a substantial
percentage of the total production of their respective industries.^ In jjufchasing
their steel requirements these large companies usually come into the market with
orders of considerable inagnitude. The demand for steel therefore consists, to a
great degree, in large-slxed orders placed by relatively few companies.^

GEOGRAPHIC DISTRIBUTION

Orders for steel arise for the most part in concentrated geographical areas. The
bulk of tonnage business originates in a belt extending east of the Mississippi,
and north of the Ohio rivers, tapering off toward Philadelphia and New York;
but important markets exist outside this zone, particularly for products required
by the oil and canning industries. Although major markets for particular steel
products vary both as to location and degree of importance, the principal centers
of the composite demand for steel in their general order of precedence are: ^

Detroit
Chicago-Gary
Pittsburgh
Cleveland
Los Angeles

6. Youngstown

7. Milwaukee

8. San Francisco

9. Newark
10. New York

11. Cincinnati

12. Houston

13. Buffalo

14. St. Louis

15. Toledo

< Big Business: Its Growth and Its Place, Chart 3. p. 42 (Twentieth Century Fund,) Exhibit No. 806
submitted to the T. N. K. C, July 11, 1930, ftiased on Census of M ami fact ures).

5 Sales statistics of the subsidiaries of United States Steel Corporation show that in 1937, 941 customers had
Dlllings over $100,000 each and accounted for 73% of gross sales, in 1938, 603 customers had billings over $100,000
each and accounted for 68% of gross sales.

« Based on estimates made in 1937 for the subsidiaries of the United States Steel Corporation of a "normal"
mdustry-wide market for the following products: heavy rails; heavy structural shapes; plates, sheared and
universal; fabricated structural work; merchant bars, including reinforced concrete bars and light structural
shapes; black sheets; galvanized sheets; hot rolled strip; rods, wire and wire products; tin mill products;
pipe^and tubing. . ' ' _ ^

14 CONCENTRATION OF ECONOMIC POWER

Characteristics of Demand

The demand for steel is subject to tremendous cyclical fluctuations. This is due
primarily to the great cyclical fluctuations in the demand for producers' and
consumers' durable goods in the manufacture of which steel is consumed.

DERIVED nature OF DEMAND

The demand for new durable goods is highly sensitive to changes in the demand
for services which the durable goods perform. This may be demonstrated by a
simple theoretical illustration. A railroad needs five hundred cars filled to ca-
pacity to carry 10,000,000 passengers a year. Each year fifty cars normally wear
out and are replaced. More people decide to travel by railroad and passenger
traffic increases 10 percent, so that 11,000,000 passengers a year must be accom-
modated. This requires fifty more cars which must be acquired immediately to
meet the increased demand for passenger service. Therefore, in the year that this
increase occurs the railroad has to buy one hundred cars instead of the fifty
usually purchased for the normal replacement program. Thus a 10 percent in-
crease in the demand for passenger service results in a 100 percent increase in the
demand for railroad passenger cars. This is sometimes called by economists the
"acceleration principle." It works in reverse too. If passenger traffic decreased
10 percent there would not be any demand at all for new passenger railroad cars;
since only four hundred and fifty cars would be required to carry the 9,000,000
passengers left, no additional cars would be needed to' replace the fifty worn out.
In other words, a 10 percent decrease in demand for passenger service would cause
a 100 percent decrease in the demand for new durable goods to perform such
service.

DURABILITY AND DEMAND

The longer the life of durable goods the more sensitive is the demand for the
new durable goods to changes in the demand for services. For example, in the
simple theoretical illustration given above the average life of the railroad car was
presumed to be ten years. Fifty cars normally had to be replaced annually.
However, if the average life had been five years, 100 cars per annum would have
to be replaced. In that event a 10 percent increase in the demand for passenger
service would have resulted in only a 50 percent increase in the demand for new
railroad cars, and a 10 percent decrease in the demand would have resulted in a
50 percent decrease in the demand for new equipment. On the other hand, if the
average life of a car had been twenty years, only twenty-five cars would have to
be replaced annually. Therefore a 10 percent increase in the demand for service
would have caused 200 percent increase in the demand for new rai'road cars.
In the event of a 10 pe-c«nt decrease in the drmand for service, the replacement
demand for new equipment would not only disappear entirely, but twenty-five
additional cars theoretically would be removed from service and be available to
meet the normal replacement demand in the following year.

Thus, while the demand for new durable goods is highly sensitive fo change in
the demand for services which the durable goods perform, the degree of such
sensitivity and the magnitude of the resultant fluctuation in demand depends on
the life span of the durable goods; fluctuations in the demard for new drrable
goods will be progressively greater as durability increases. In actual practice
many qualifications to this principle exist,^ nevertheless it is fundamental in the
demand for durable goods.

POSTPONABILITY OF PURCHASE OF DURABLE GOODS

The purchase of durable goods usually can be easily postponed, and is postponed
when income is scant or prospects for the profitable use of additional durable goods
are discouraging. As a result of postponability of purchase, producers* durable
goods industries feel an immediate effect on demand resulting from the con-
traction of producers' income as expenditures for capital goods are deferred and
the income of the purchaser is directed primarily to meeting necbssary out-of-

' (a) Thp actual a^e distribution of the stock of durable goods in usp mipht change in different years

(b) The effect of obsolescence is to increase replacement rates and therefore limit the magnitude of fluctua-
tions, if it is a constant factor from year to year. If an erratic factor, it would increase the fluctuations if it
occurred in normal or above normal years, or if it occurred in sub-normal years it would limit the fluctuation.

(c) For producers' durable goods, obsolescence can be brought about by shifts in demand, the development
of new producfts, the introduction of new techniques of production, discovery of new resources or new meth-
ods of using resources, migration of industry from one area to another, and similar-changes. In the field of
consumers' durable goods, style changes and shifts in consumers' demands are amoag the causes which may
result in shortening the otherwise useful life of durable goods.

CONCENTRATION OF ECONOxMIC POWER 15

pocket expenses. In addition, even though the immediate business outlook is
favorable, expenditures for capital equipment may be postponed if the long term
business outlook is unfavorable; the business man must anticipate a reasonable
return over the life of the investment before tying up his capital in durable equip-
ment. After a prolonged depression, with purchases of durable goods almost
completely eliminated, increased profits and returning confidence as to the future
may stimulate a great upward surge in the demand for replacements previously
postponed and also for new equipment for expansion.

In like manner, consumers' durable goods industries feel the impact of declining
consumer income, as funds available are used to buy the necessities of life and
existing consumers' durable goods, such as automobiles, are made to last longer
than anticipated, or are discarded without replacement under stringent con-
ditions. Increased consumer income, actual and anticipated, will create a strong
revival in demand for consumers' durable goods as replacements are made and
new equipment purchased.

As previously indicated, the "acceleration principle" becomes more potent as
durability of a product increases. As a result the magnitude of expansion and
contraction in demand for products of the durable goods industries will be greater
than for non-durable goods industries. These fluctuations of demand for new
durable goods will be further magnified by the po.stponability of purchase of these
goods; a producer will buy coal, oil or electrical energy long after he has decided
he must postpone purchase of capital equipment, and a consumer must buy food,
clothing and other necessities even though he cannot afford a new car or a
refrigerator.

TOTAL DEMAND FOR STEEL IS INELASTIC

The magnitude of these cyclical fluctuations in demand cannot be materially
afl"ected by adjustments in the price of steel because the total demand for steel
is inelastic. This is due, first, to the derived nature of the demand for steel, and,
second, to the limited number of substitutes for basic steel products, and con-
versely the limited number of products for which steel may be substituted.

As previously indicated, the demand for steel is derived from the demand for
the services which products made of steel perform. If a change in the price of
steel is to influence the demand for the finished product in which the steel is used,
two conditions must exist: the cost of steel must represent a substantial per-
centage of the selling price of the finished article, and the demand for the finished
article itself must be such that it responds to changes in its price. This is not
generally the case; steel as a raw material usually represents a small percentage of
the total cost of the finished product, and the major industries purchasing steel
have a rather inelastic demand for their products.*

The automotive industry, which during recent years has been the largest single
customer of the steel industry, is a typical example of the derived nature of the
demand for steel and the resultant inelasticity of such demand. The cost of steel
in a low-priced automobile retailing between $700.00 and $800.00 is about $85.00,
or roughly 10 percent of the retail price. Roos and von Szeliski in a recent studj'
contained in "The Dynamics of Automobile Demand" ® estimated 1.5 to be a
representative average of elasticity of demand for new automobiles; i. e., for
every 1 percent decrease in the price, the automobiles sold would increase 1.5
percent. Since steel costs represent 10 percent of retail price, a 5 percent decrease
in steel prices would permit a 0.5 percent reduction in the price of automobiles,
and according to such elasticity of demand would increa.se automobile sales to the
extent of 0.75 percent. The resultant increase in the demand for steel by the
automobile industry would be negligible.

EFFECT OF THE SUBSTITUTION FACTOR

Substitution of steel for other materials, or a reverse substitution, is not an
important factor in the cyclical fluctuations in the demand for steel. If, through
lower prices, steel could mvade a major market served by other products, or if
high relative steel prices meant invasion of major steel markets by substitute
products, there would be imparted to the total demand for steel a degree of
elasticity not now present. Steel possesses more physical strength per dollar
of investment than any other existing product; wood and concrete have a restricted

' The approximate proportion of stoel cost in price of finished product for various items is as follows:
mile of railroad, SO.T.'r'r; apartment building, 10%; automobile. 10%; can of food, 8%: frame house, 6.2%;
electric refrigerator. 3.4%; dniry barn, 3 2%; mile of reinforced highway, 0.7%.

9 Publication of the Qeceral Motors Corporation based upon papers presented at a joint meeting of the
American Statistical Association and the Econometric Society in Detroit, Michigan, on December 27, 1938.

Ig CONCENTKATION OF ECONOMIC POWER

field in which they may be substituted for heavy steel. Glass, plastics, rubber,
aluminum and certain alloys may serve as substitutes in specialized fields; but
even in these cases price may be only one of many competitive factors involved.
Therefore, price reduction would result in very little additional steel being sold
as substitutes for other products, and a price advance, unless abnormal, probably
would not result in additional competition from substitute products.

POTENTIAL ELASTICITY OF DEMAND FROM A PARTICULAR PRODUCER

Although the over-all demand for steel is inelastic and the total quantity bought
would not be substantially different if the price within reasonable limits were
lower or higher, the demand for steel from a particular producer possesses great
potential elasticity. This readiness of a buyer to shift from one producer to
another because of a lower price is due to the informed character of the buying
of steel. Technical knowledge of the product to be purchased is available through
laboratories of individual purchasers, trade associations and independent research
agencies; exactly the same steel may, for the most part, be obtained from any one
of a number of producers. Furthermore, the large size of individual purchases
makes it worth-while for buyers to seek the lowest possible price. This propensity
to shop is enhanced by knowledge of latest price quotations, by familiarity with
psychological and other factors resulting in a "buyers" or a "sellers" market for
all or particular products, and by a general understanding of approximate costs
of steel production; indeed, a few purchasers '•^ of steel- operate completelyinte-
grated steel works to supply a portion of their requirements, and others •' have
semi-integrated and non-integrated capacity.

Thus, potentially, the demand for steel from an individual producer is elastic
and buyers are often in a position to exert bargaining pressure to obtain the lowest
possible prices, especially when the steel industry is not operating near capacity.

The Supply of Steel

geographic concentration

The most economical source of steel is that location at which the raw materials
can be assembled, the steel produced and delivery to the market effected at the
lowe.st possible total cost. In determining plant location '^ assembly costs are
most important; more than four tons of raw materials must be assembled for every
ton of steel produced. Although production costs are subject to variations due
primarily to geographical wage rate differentials, these variations are supple-
mentary to and, in a measure, compensatory for otherwise uneconomical assembly
or delivery costs.

The approximate amounts of principal raw materials required per ton of pig
iron are: 4075 pounds of iron ore (assuming ore of a reasonably high metallic
content), 2700 pounds of coking coal and 900 pounds of limestone. Another 1500
pounds of coal may be consumed for power and heating before a ton of finished
steel product has left the mills. The greater, proportion of the raw materials is
used in the blast furnace, but integrated steel works have developed from blast
furnace plants because (a) as steel approaches the finished stage the cost of ship-
ment becomes a smaller percentage of the cost of the product to the buyer; (b)
integration assures more constant and reasonably full utilization of blast furnaces
and open hearths; (c) economies of converting molten iron into steel and other
heat conservation factors are important in the economical production of steel.

Limitations imposed by the necessity for the most favorable combination of
assembly, production and delivery costs have confined steel production to a few
geographical areas.

The most favorable combination of the three variables is probably to be found
at Lake Erie and Lake Michigan ports and in the Pittsburgh district (including
the Mahoning and Ohio Valleys). These locations '^ were primarily determined
by the assembly costs of Lake Superior ores which are the backbone of the steel
industry in the United States and supply about 82 percent of the ore consumed in
the country, and of the finest metallurgical coking coals which are found in Western
Pennsylvania, West Virginia and Kentucky. The assembly cost of limestone,

I" Ford Motor Company and International Harvester Company.

" American Car and Foundry Co.; American Locomotive Co.; Atchison, Topeka and Santa Fe Railroad
Co.; Continental Can Co.; Simonds Saw and Steel Co.; Tiniken Roller Bearing Co., Inc.

'2 Availability of a laree water supply is important in steel mill location.

" Although Pittsburgh historically was established as a steel producing center before Lake Superior ores
and coking coal came into general use, its growth and the maintenance of its dominant position has been
based on its economical accessibility to thesa resources.

CONCENTRATION OF ECONOMIC POWER

which is well distributed and the least important of the major raw materials, is
usually an incidental factor.

Comparative assembly costs at principal production centers in this area have
been estimated as follows:

Table 2. — Estimated Assembly Costs in the Production of Pig Iron, Shimmer

of 19S7 '

[In dollars per gross ton of pig iron)

Producing Center

Iron Ore

Coal

Flux

Total

Annual Blast-Furnace
Capacity

Thousands

of Gross

Tons

Percentage

of U.S.

Total

Weirton-Steubenville.

Pittsburgh

Cleveland...

Buffalo

Detroit-.-

Youngstown.

Chica^ro

$5. 508
5.804
3.497
3.497
3.497
5.193
3.487

$0. 468
0.284
2.714
2.909
3.249
1.979
3.867

$0. 337
0.337
0.241
0.241
0.086
0.170
0.241

$6. 313
6.425
6. 452
6.647
6. 832
7.342
7.595

2,093
11.521
2,685
3,267
1,423
6,592
10, 266

4.2
23.0
5.4
6.6
2.8
13.2
20.5

Total.

75.6

I Worthing, Marion, "Comparative Assembly Costs in the Manufacture of Pig Iron", Pittsburgh Business
Review, v. VIII., No. 1, January 31, 1938, pp. 21-25, Table 1.

Assembly costs at these locations vary; the importance of each component of
the costs is emphasized by the difference of $1.17 in favor of Pittsburgh over Chicago
due entirely to Pittsburgh's fortunate position in the center of the finest metallur-
gical coking coal fields in the country.

Although primarily based upon assembly costs, the growth of these great steel
production centers to their present size would not have been possible if outlets
for at least a considerable part of their products did not exist fairly close at hand;
all the production centers coincide with, or are adjacent to, major centers of steel
demand. However, the location of these production centers depends only in part
'on relative assembly costs and the magnitude of local demand for a particular
product; it depends, among other things, on the conformation of the market for
each product and for the group of products that may be economically produced
together.!*

For example, hot rolled sheets, cold rolled sheets and tin plate, which are
produced at the Gary sheet and tin mills of a subsidiary of United States Steel
Corporation with all the attendant economies of large scale production, are products
of virtually the same integrated process. Major outlets for hot rolled sheets are
Chicago, Detroit, and Indiana with important sources of demand in Iowa, Minne-
sota, and Ohio; Detroit is the principal market for cold rolled sheets, and Chicago
is an important market for tin plate. A similar situation exists at the Irvin
Works of this same subsidiary in the Pittsburgh district which rolls the same three
products. Ohio and adjacent West Virginia counties, Pittsburgh and Philadelphia
are major markets for its hot rolled sheets. Cold rolled sheets are principally
shipped to Cleveland, other Ohio centers and Philadelphia. The Irvin Works
may also supplement Gary in the Detroit market with hot and cold rolled sheets
in periods of peak demand, while Metropolitan New York is the major market
for its large ouput of tin plate.

This market structure of groups of products that may economically be produced
together accounts in part for production patterns with such apparent inconsisten-
cies as limited capacity at Detroit and excess capacity, as compared to local de-
mand, at Pittsburgh. The effects of historical development and the immobility
of steel making equipment will be discussed later.

Birmingham, Alabama, and vicinity is another location with a favorable
combination of assembly and production costs. Assembly costs at Birmingham
are undoubtedly the lowest in the country — iron ore, coal and flux being in close
proximity. In this case low assembly costs compensate in part for the com-
paratively poor quality of the raw materials; iron content of the ores is low and
phosphorous content high, making conditioning and sintering desirable; the coal

'< Committee on Iron and Steel Price Research, National Bureau of Economic Research Conference on
Price Research, Proposals for Research on Prices and Pricing Policies in the Iron an.d Steel Industry (1930).

Ig CONCENTRATION OF ECONOMIC POWER

requires washing before coking. With wage rates lower than other districts,
production costs are also economical, although basic wage rates have been rising
in the South. These advantages of assembly and production costs are offset by re-
moteness from major markets; a substantial part of the tin plate produced at the
large plant recently erected by Tennessee Coal, Iron & Railroad Company,
another subsidiary of United States Steel Corporation, at Fairfield, Alabama, is
shipped to the West Coast and Hawaii.

Sparrows Point, Maryland, is strategically located. Based on the use of
high grade imported ores, iron ore costs have been estimated '^ to be less at
Sparrows Point than at Lake Erie and Pittsburgh area plants, which advantage
is offset, in part at least, by higher assembly costs for coal and limestone. Its
accessibility to the large markets of the eastern seaboard, and its ability to com-
pete on the West Coast via all-water transportation due to tidewater facihties,
make economical distribution costs a major factor in the favorable location of
Sparrows Point.

Combined assembly, production and delivery costs make possible integrated
steel production on a commercial basis in only one other geographical area at the
present time; '^ Colorado and Utah both possess iron ore, fair coking coal and
limestone in sufficient quantities and within reasonable assembly distance of
each other. Due to prohibitive distribution costs, however, this district must
depend, in the main, on local demand for special products. At Pueblo, Colorado,
the Colorado Fuel and Iron Corporation, cognizant of this situation, produces
principally rails and track accessories for Western roads, and wire products for
farm and ranch consumption. At fronton, Utah, the Columbia Steel Company,
a subsidiary of United States Steel Corporation, operates a blast furnace whose
pig iron output is taken in part by its West Coast steel mills near Los Angeles
and San Francisco and in part by local buyers. California steel mills also use a
considerable amount of scrap obtained locally.

Although it is an important steel consuming area, the West Coast cannot sup-
port more than limited steel making capacity due to high assembly costs, par-
ticularly in the face of competition from Birmingham and Sparrows Point, both
of which can serve this area on a more economical basis.

The principal steel producing centers of the- nation, therefore, are confined to
particular geographical areas where the raw materials for steel making can be
economically assembled. Differences in the development and activity of these
producing areas have been determined to a considerable extent by the relative
costs of transporting steel to consuming areas. Many small non-integrated
mills, however, are located outside the major producing areas where they may
use local scrap, merchant pig iron or semi-finished steel to produce steel for con-
sumption in the local area or may specialize in particular products to distribute in
more widespread markets.

TECHNOLOGICAL ASPECTS

Steel making equipment installed at the producing centers is both costly and
immobile; the economies of size inherent in steel manufacture have been important
factors in determining the design of modern mills. The result is that the small
plants of fifty years ago have been succeeded by complex and gigantic operating
units.

Twenty years ago the coke used in blast furnaces was principally made in banks
of simple beehive ovens, usually located at the mine. Today, it is made at or
near the steel plant in long batteries of by-product coke ovens with alternating
coking and heating chambers topped by coal larries, off'-takes and collecting mains.
In close proximity stand the tall cooling towers and scrubbers, the ammonia house
and benzol plant used to obtain numerous by-products from the tars and gases
emanating from the coking ovens, which are today recovered and put to use.

In 1880 the capacity of the most efficient blast furnace, a comparatively simple
unit, was one hundred tons per day; at present the newest and most efficient
furnaces are rated at 1100 to 1200 tons per day. This increased output has been
accomplished not only by increase in size and better blast furnace practice, but
by mechanical improvements and the development of auxiliary equipment. A
blast furnace plant 'today is enormous and complicated. The furnace is a tall
circular structure 90 to 100 feet high, built of firebrick and reinforced externall}'

'5 Maryland State Planning Commission, The Iron and Steel Industry— Blast Furnaces, Steel Works and
RollinQ Mills, November 1938. p. 14.

18 With the exception of certain areas with small local ore deposits, capable of supporting limited operations,
i. e., ore deposits of New Jersey, Eastern Pennsylvania, and the Adirondacks, economically accessible to
Pennsylvania coal fields.

CONCENTRATION OF ECONOMIC TOWER 19

by a close-fitting steel shell. Iti s provided with apparatus for hoisting iron ore,
coke and limestone to the top where they are charged into the furnace. Large
pipes carry the gas generated in the furnace to the stoves where it is used for
heating purposes. Beside each furnace stand four cylindrical stoves nearly
as high as the furnace itself. These stoves heat air to high temperatures before
it is blown into the furnace at the rate of five tons of air for every ton of iron
produced. The impurities in the raw material are either burned out or accumu-
lated in the slag which gathers on top of the molten metal. This slag is removed
through the higher of two tapping holes. Through another tapping hole the
molten iron is drawn at periodic intervals either into ladles to be carried to huge
containers known as mixers subsequently to be taken to the ojjcn hearth and
Bessemer converters, or into runners leading to the pig iron casting beds. A
boiler house, power plant, pumping station, turbo-blower, stockyard, ore bridge,
car dumper and raw material bins, all constitute important parts of blast furnace
equipment.

The steel making equipment is equally complex and has increased in size as it
has become more efficient. In 1899 the average open hearth furnace had a
capacity of 22 tons per heat; in 1938 the average furnace capacity was 95 tons
per heat and the largest 400 tons per heat. Even more spectacular has been the
radical improvement in design and the increase in size of continuous rolling mills
for flat rolled products in recent years. This acceleration of growth has been so
dramatic that in 1936 a continuous rolling mill with a capacity of as much as
600,000 tons of finished flat rolled steel per year was unprecedented; yet in March
1938 a continuous strip mill was opened with an annual capacity of approximately
one miUion tons.'^

Equipment used in each stage of modern steel making is usually so combined
as to perform a series of vertically integrated operations; conservation of heat
and power requires continuous processes. Assurance of adequate sources of raw
material and the elimination of purchasing expenses at each stage of operations
are important factors in promoting further integration.

Vertical integration is a dual development in the industry. Non-integrated
and semi-integrated producers desiring independence from producers of semi-
finished steel and the owners of raw material reserves, and influenced by the
possibility of additional savings, integrate toward the sources of their raw materials.
Partly as a result of such movement and partly due to the decline in demand for
steel used in producers' durable goods industries, producers of semi-finished and
heavy steel have obtained outlets for their productive capacity by integration
towards more highl}' finished products.

CAPITAL INVESTMENT REQUIREMENTS

This combination of huge units vertically integrated requires large capital
investment. A modern blast furnace of about 1,000 tons capacity with the
auxiliary equipment above mentioned costs four to five million dollars. The
average investment required for a modern steel works of efficient size is approxi-
mately $100,000,000. Such a mill would be capable of producing about 1,000,000
tons of ingots per annum and would have diversified finishing equipment of suffi-
cient capacity to convert about half the output into billets and other semi-finished
steel and the other half into sheets and strip. Such an investment would not
include operations prior to the assembly of raw materials at the plant site, i. e.,
the plant would be integrated only from coke plant to continuous rolling mills.
Operating units may be and sometimes are much larger; a single continuous hot
and cold rolling finishing plant alone may require an investment of $60,000,000.

Such large and complex equipment cannot be moved in response to geographical
shifts in demand, and only extraordinarily great differential advantages of a new
location justify scrapping existing facilities embodying large unamortized invest-
ment and long remaining service life. New areas of demand usually develop only
for particular products or groups of products and it may be more economical for
the established producer to install sufficient capacity at the existing location to
compete in the new markets than to build integrated steel works at the source of
the new demand. This decision may depend first, on the combination of products
that can be economically produced together, and second, on whether the steel
demanded can be produced by integrating new facilities with unused capacity at
the existing location. Modernization and expansion at the established location
may be rational; and the development of an individual company at a particular
location may thus be perpetuated.

" Republic Steel Company continuouf strip mill, Cuyahoga Valley, Ohio.
292918— 41— No. 42 3

20 CONCENTRATION OF ECONOMIC POWER

FACTORS IN EXPENDITURES FOR NEW PLANTS AND EQUIPMENT

The number of producers of any particular steel product bears a rather direct
relationship to the minimum investment required to become such a producer.
It is pertinent to inquire first, the source of the funds for such capital expenditures
and second the inducements necessary for the investment of these funds.

Source of Funds. — Funds for investment in new plants and equipment may be
obtained from any one or a combination of the following sources: (1) Outside
capital; both existing companies and promoters of new companies may borrow
through the medium of notes and bonds or sell stock to obtain funds from this
source. (2) Accumulated earnings; the availability of this source of funds over
the years enabled existing companies to promote ^nd keep pace with the upward
trend in national steel consumption, and in addition helped small non-integrated
and semi-integrated steel companies grow into large integrated units. (3) De-
preciation and other reserves; this has been the primary source of funds for replace-
ment and modernization programs.

Incentives for Investment — Profit Motive. — The normal incentive for investment
is prospective profits. This may cause the expansion of existing companies; the
development of non-integrated and semi-integrated companies into integrated
companies being a case in point; or it may induce new companies to enter the
field usually as non-integrated or semi-integrated specialists. The formation of
a new integrated steel company, except by merger, would not be likely today
since: (1) A large capital investment is necessary. (2) The technological and
organizational difficulties in forming such a company are great. (3) The difficulty
of obtaining an immediate market for the output of such a new company would
be tremendous; great losses in early years would therefore seem inevitable.

Incentives for Investment — Obsolescence. — Obsolescence has been an important
motive for capital expenditures by the steel industry in recent years. This has
been due to: (1) New production techniques; the introduction of continuous hot
strip mills and continuous cold reduction processes has brought about a major
technological revolution in the industry. (2) The development of new products;
cold reduced sheets and cold reduced tin plate have practically displaced the hot
rolled products in major markets. In order to remain in markets demanding the
new and better products, companies have had to purchase new equipment and
construct new plants. (3) Shifts in demand; e. g., the marked increase in the
demand for sheets, strip, tin plate and other steel required by consumer goods
industries, and the decline until very recently in the demand for rails, plates and
structural shapes. This shift has caused expansion or existing companies both
to meet the new demand and to obtain outlets for otherwise unutilized ingot
capacities.

SIZE AND NUMBER OP PRODUCERS

The producers of the bulk of tonnage steel are large in size and relatively few
in number, which is a natural development in an industry requiring great capital
investment as the result of large scale equipment, vertical integration and, in
certain cases, horizontal integration. Principal producers (including subsidiariec)
and their respective percentages of total ingot capacity for the year 1938 are
indicated in the following table :'8

Table 3.— Percentage Distribution of Capacity Among Producers of Steel Ingots
and Steel for Castings — 1938

Percentage of
Total 1 Arimittt

Name of Corporation ' Capacity

United States Steel Corporation 35. 3

Bethlehem Steel Corporation 13. 7

Republic Steel Corporation . 8. 9

Jones & Laughlin Steel Corporation 5.

National Steel Corporation 4. 7

Youngstown Sheet & Tube Company ^ 4. 3

Inland Steel Company - 3. 9

American Rolline Mill Company 3. 6

Wheeling Steel Corporation 2. 4

Other smaller companies 18. 2

Total : 100.0

' This total does not Include those companies that produce steel only for castings.

>* American Iron and Steel Institute, Iron and Steel Works Directory of the United States and Canada,
/95S, pp. 401-402.

CONCENTHATION OF ECONO.AIIC POWER 21

However, ingot capacities should not be the sole criteria of the size and number
of producers, especially in the consideration of markets for particular products,
since the number of companies and the percentage of the total that each has
capacity to produce varies with individual steel products. The number is deter-
mined by: (1) The minimum investment required in equipment to produce the
product, the prospective return thereon, and the relative simplicity of the opera-
tion. The investment formerly required for a steel mill and past profit margins
must be considered in a study of any particular company, since most of the
present producers entered the market under conditions different from those which
today would face a newcomer. (2) The technological history of the product and
the equipment used to produce it. (3) The nature of .the demand for the product;
its diversity and geographical distribution. (4) The historical development of
the producers.

The percentage of the total represented by the capacity of any individual pro-
ducer is principally a reflection of: (1) The historical development of that producer,
particularly with reference to product specialization ; (2) The technological history
of the product and the equipment used to produce it; (3) The producer's location
with respect to demand.

Under the influence of these factors there are distinct variations in the character
and total number of producers of each steel product, and in the percentage of
total capacity possessed by each producer for each product, and in the geographical
distribution of their plants.

CHANNELS OF DISTRIBUTION

Approximately 80 percent of the steel produced by the steel industry is sold
directly to consuming industries through the sales organizations of the producing
companies so that in the majority of cases "sellers" and "producers" are inter-
changeable terms in the market for steel.

Jobbers and Warehovses.- — The balance of the steel sold passes through the hands
of jobbers, warehouses and other distributors which are essential in the sale of
standardized products in small lots to widely scattered consumers, or where
geographical conditions such as exist on the West Coast make this form of dis-
tribution particularly economical.

Although the jobber market is an important factor in the distribution of steel,
the influence of this form of distribution on the pricing and marketing of the
majority of steel products is negligible. Jobber outlets are, however, important
elements in the marketing of galvanized sheets, concrete reinforcing bars, standard
pipe, tubes, and merchant wire products.

Importance of Outlets. — Maintenance of outlets for semi-finished and finished
steel is important for most members of the steel industry. The acquisitions of
such outlets, by integrated producers, which occur from time to time, involve a
change in the distribution pattern of the industry.

SUMMARY

The supply side of the steel market from a long term viewpoint is marked by
these characteristics: (1) The areas of production are geographically concentrated
in a few districts because of location of raw materials and transportation costs.
(2) Large size equipment and vertical integration are typical of the industry;
some companies are also horizontally integrated, while a number of semi-integrated
or non-integrated companies are specialists in particular products. (3) Large
capital investment is necessary; however, for certain products the investment
necessary to become a producer is relatively much smaller than for others, and
this seems to be an important controlling factor in determining the number of
producers of a given product. (4) Generally speaking, producers are large in
size and few in number, although in particular cases major producers of specialty
products may be smaller non-integrated or semi-integrated units. (5) Investment
in new plants and equipment arises both in response to prospective profits and
as a result of obsolescence.

In contrast with many types of markets the steel market is one not easily entered
by producers, or withdrawn from, once entry has been accomplished. The
large investment required, technological and organizational difficulties, and the
problem of obtaining an immediate market are obstacles to entry. The non-
recoverable costs that must be sunk in a steel company are not conducive to with-
drawal if there is an opportunity for any return in excess of out-of-pocket expenses.

In much the same manner, the supply side of the steel market differs from other
markets in that productive capacity cannot be easily adjusted to meet changing

CONCENTRATION OF ECONOMIC POWER

market conditions. Once capacity is installed, it is inelastic and cannot be re-
moved except by scrapping, which ordinarily does not appear desirable due to
the large investment involved; nor can capacity be easily cx])anded except by
heavy capital expenditures requiring a considerable time interval.

Characteristics of Cost in the Industry

"overhead" or "fixed" costs

There are certain costs in the steel industry which are approximately the
same regardless of the amount of steel produced.'" These costs are sometimes
known as "overhead" or "fixed" costs. In the case of the United States Steel
Corporation and its subsidiaries such "fixed" costs are composed of the following
elements in the approximate percentages indicated:

Table 4. — United Staters Steel Corporation <^ Subsidiaries Components of "Fixed"
Costs, under 1938 Conditions

Item

.\pproximate
Percentage

Interest .-.

Pensions

Taxes Cothor than social security and Federal income).

Depreciation and Depiction

Payroll

Social Security Taxes

Goods and Services Purchased from Others

4.56
4.23
13 29
Ifi 20
34.10
1.37
26.26

Total.

100.00

Other steel producers may have different percentages for the components of
their "fixed" costs depending on. the degree of integration and their capital struc-
ture. However, regardless of their composition, such costs are relatively large
for major producers in the steel industry, and with low operating rates are a
substantial percentage of total costs. 2"

"additional" costs

The costs over and above "fixed" costs represent the "additional" cost inci-
dental to the production of each additional ton of steel, assuming the steel mill
is already in operation. Recent studies of the experience of the United States
Steel Corporation and its subsidiaries over the past ten years indicate that the
addition to the total costs arising from the production of each additional ton 2>
of steel is the same regardless of the operating rate at which the additional oirtput
is obtained as long as the other factors affecting costs remain constant. This
phenomenon of constant "additional" costs covers an observable range of output

19 This presumes a company in operation,
sharply.
2« See the following table:

Complete shutdown naturally would decrease these costs

Table 5.-

■United States Steel Corporatinn & Snhsidiaries Percentnae of "Fixed" to Total Costs at
VaTious Rates of Operation, under 19S& Conditions

Operating Rate

Percentage of
"Fixed" to
Total Costs

Operating Rate

Percentage of
"Fixed" to
Total Costs

57.2
43.9
35,8
30.1
26.0

60 .

22.9

70...

20.4
18.8

40 .

90 .

16.8

100...

15.4

" The tons mentioned in describing the cost pattern are weighted tons. This means that each ton of
Rolled and Finished steel product or of other tonnage product which is of a type whose average cost is less
than the average cost of all Rolled and Finished steel products, is made to count as less than a full ton,
while tons of products of a class which is on the average more costly than the average cost of Rolled and
Finished steel products, are made to count more than a full ton. In this way ttie number of tons of all
tonnage products shipped has been converted into equivalent tons of average-cost Rolled and Finished
steel products. The result is that total cost.' of various tonnages shipped are made comparable where ihej
would not be if unweighted tonnages had been used.

CONCENTRATION OF EC0N0:MIC FCWER 23

which extends from around twenty percent of capacity to slightly beyond ninety
percent of the physical limit of output. It is not certain that this relationship
would hold true as the physical limit of capacity is reached since at that point the
equipment may become overtaxed and for various reasons operate less efficiently
and at greater cost. Less efficient reserve units may also be placed in service to
meet the peak levels. In those circumstances the additional costs incidental to
the production of an additional unit of output would cease to be constant and would
probably rise sharply. The percentage composition of these costs in the case of
the United States Steel Corporation and its subsidiaries is indicated in the following
table.

Table 6. — United States Steel Corporation & Stibsidiaries Components of

"Additional" Costs, under 19S8 Conditions

Approximate
Percentage

Taxes (other than social security and Federa,l income) 2. 67

Depreciation and Depletion 4. 25

Payroll 52. 22

Social Security Taxes 2. 08

Goods and Services Purchased from Others 38. 88

Totals 100.00

For companies less integrated than the United States Steel Corporation and
its subsidiaries the percentage attributable to "Goods and Services Purchased
from Others" would increase and the percentage of other components decrease.

AVERAGE COSTS

Since the average cost of producing a given ton of steel is the sum of the "ad-
ditional" costs plus an amount equal to the "fixed" costs divided by the number
of units produced, this "average" cost must necessarily be higher than the
"additional" cost for nearly the whole range of operations almost to the limits
of capacity .22

The components of the average cost of producing a ton of steel are, to a certain
degree, largely outside the control of steel producers; wage rates tend to be
inflexible and lag in adjustment, prices paid for goods and services are often
fixed by outside agencies as they are in the case of railroad rates, interest is
determined by factors in the money "market, taxes are established by law, and
depreciation and depletion charges cannot long be disregarded.

The Dynamics op the Market for Steel
costs and demand

The inelasticity of the total demand for steel and the aforementioned charac-
teristics of cost in the steel industry place definite limitations on the financial
ability of the industry to increase production by decreasing prices. Assuming
that each 1 percent decrease in price -would increase consumption of steel 1
percent, a 10 percent decrease in the average level of steel prices prevailing during
1938 even though offset by a 10 percent increase in the quantity of steel sold,
would have increased the deficit ^ of the United States Steel Corporation from
$8,758,572.00 to $52,058,572.00. This estimate is most conservative, since there
is every indication that the elasticity of the demand for steel is not as great
as assumed above.

Despite this overall price-volume-cost relationship in the industry, the potential
elasticity of demand for the product of an individual steel company and the
internal problems arising within individual companies from this characteristic
cost pattern further affect the market for steel.

Except in periods of high operations, and more particularly in times of slack
demand, there is a tendency to cut prices below average costs so long as the
price for the additional unit sold is above the "additional" cost necessary to
produce such additional ton of steel. The large size of individual orders and the
potential shiftability of buyers of steel in response to price considerations accen-
tuate such a tendency, particularly when, due to the inelastic nature of the total
demand for steel, the problem for the individual producer is to obtain a share

2' In the case of United States Steel Cnrporation and its subsidiaries, the averape cost of nil operations
per ton of steel shipped, under 1938 conditions, would be $55.73, plus an amount equal to $182,100,000 (the
total "fixed" costs) divided by the number of tons produced.

" Deficit after deduction of bond interest, but before Federal income and profit taxes and exclusive of
non-operating income and expense.

24 CONCENTRATION OF ECONOMIC POWER

of the going business. Thus it is that in periods of restricted demand, knowing
that anything above his "additional" costs contributes something toward "over-
head" or "fixed" costs which must be met in any event, the producer will cut
prices below his average costs if he feels he can obtain additional business for his
mills thereby. This inherent tendency to cut prices, however, is offset to some
extent by the knowledge that competitors will meet price concessions as soon as
they become known.

PSyCHOLOGICAL FACTORS

Buyers and sellers of steel react differently at various stages of the business
cycle; this is natural in an industry marked by large cyclical fluctuations in the
demand for its products. In depression the tendency toward price cutting grows
as buyers bargain more sharply and sellers scramble for what business there is
in an effort to reduce deficits mounting under the burden of "overhead" or "fixed"
costs. In better times buyers are less averse to paying higher prices, and sellers
no longer under the goad of operating losses are reluctant to make price conces-
sions. Therefore, in part at least, cyclical fluctuations in steel prices are attrib-
utable to changes in the psychology of buyers and sellers.

CHARACTERISTIC PATTERNS OF ACTION BY SELLERS IN THE MARKET FOR STEEL

The factors mentioned above have resulted in phenomena that reappear each
time the steel industry passes through a full cycle in demand. ^'i In a rising cycle
as demand increases, average costs in the industry decrease as additional units
are produced, but these decreases are usually soon offset by higher raw material
prices, and increased labor and other costs. In addition, as already indicated,
the psychology of the buyers and sellers changes and the industry may feel that
the time is propitious for an increase in prices, not only to cover increased costs,
but also to compensate for past losses and to accumulate resources for possible
future periods of depression. Quite naturally, however, producers of steel do
not care to take the risk of losing their share of business by an increase in prices
which may not be followed by their competitors. ^^ The natural result is that
the industrj' is inclined to wait for some large producer to announce higher
prices. This natural phenomenon in the rising cycle is sometimes called "price
leadership". So long as the term is used to describe a natural phenomenon re-
sulting from factors inherent in the industry and involving no collusion or other
violation of the anti-trust laws, there is little objection to the term.

In the falling cycle, average costs increase as demand and production decrease,
accentuated in part by the continuance of high wages which have a tendency to
become inflexible, or in any event to lag in their adjustment to the lower level of
production. In the early stages of the decline in demand, the industry, aware of
the inflexibility of the total demand for steel and faced by rising average costs per
unit of output, naturally is averse to cutting prices when the prices they are
getting on the going business barely cover their costs. From past experience
the industry is aware that any weakening of prices leads buyers to hold off pur-
chasing in the expectation that prices will go still lower. Then too, the steel
producer may be optimistic about an improvement in general business conditions
in the near future. However, sporadic price cutting soon breaks out spurred by
the individual producer's hope of obtaining an additional share of the going
business. Concessions soon become general knowledge in the trade; and while,
for a period, some producers may not care to compete on the basis of these con-
cessions, eventually all producers must meet competition at the going prices.

The Basing Point Method of Quoting Delivered Prices

The basing point method of quoting delivered prices in the steel industry has
developed over a long period of years in response to the fundamental economic
factors of that industry. Two authorities on the economics of the steel industry
succinctly point to the basic fallacy in the reasoning of most critics of this pricing
method when they state that "Intelligent appreciation of the pricing problem in
the steel industry has suffered from a failure of most commentators to distinguish
between the basing point system as a medium or mere mechanism for the trans-
lation of policy into action and the economic roots of that primary policy itself."^*

** The pattern outlined has perhaps been oversimplified since (1) all products do not pass through each
phase of the cycle simultaneously, making the pattern more confused than it appears in this outline; (2) the
existence of jobbers and distributors complicates the situation with respect to certain products; (3) in addi-
tion, the human factor is unpredictable, makinp it difficult for businessmen always to rationalize their
actions as they participate in a highly competitive market.

*« Does not apply where all capacity of a particular product is booked substantially ahead.

'*de Chazeau and Stratton, Economics of the Iron and Steel Industry, by Daugherty, de Chazeau and
Stratton, p. 678 (McQraw-Hill Book Company, 1937).

CONCEXTIIATION OF p:COXO.MIC POWER 25

ECONOMIC ROOTS OF THE BASING POINT METHOD

In quoting prices manufacturers of steel must take certain basic factors into
consideration: (1) The cost of transportation from steel mill to destination may
be substantial in relation to the value of steel shipped. Consumers of steel are
interested in the cost of steel at the place where they use it. Therefore, most
consumers want to know the lowest delivered price at which they may purchase
the steel they require. (2) Consumers of steel are located in different parts of
the country and although more steel may be sold in some sections than In others,
even major markets for the same steel product may be geographically widespread.

(3) Producers of steel must locate their plants at points where raw materials
may be economically assembled. This confines major steel producing centers to
a few geographical areas. Modern steel making equipment is large and complex;
it requires great capital investment and is extremely immobile once installed.

(4) To insure economical and reasonably stable operations, steel producers must
sell large quantities of steel and since consumers of the group of steel products
that may economically be produced together may be located in different areas, the
producer must be able to quote prices at diversified locations. The extent
to which he may economically serve different consuming areas will be determined
by the most economical combination of assembly costs of raw materials, produc-
tion costs and the cost of delivering finished steel to important markets. (6)
Producers of steel have large "fixed" costs, which must be met regardless of the
number of tons produced so long as operations are continued. Although these
producers realize that the total quantity of steel consumed cannot be greatly
influenced by reductions in steel prices, they do know that the quotation of a
delivered price only slightly below other quoted delivered prices may influence
the placement of substantial orders with a particular producer. Since competition
for available business is keen, and particularly so when low rates of operation
make the "fixed" costs burdensome, a knowledge of the level at which competition
must be met in quoting prices at a definite location is valuable in preventing
completely disorganized markets that might prove disastrous to the industry.

The multiple basing point method of quoting delivered steel prices is a simple
pricing medium which has evolved over a long period of time to meet the peculiar
characteristics of the steel industry. It is an open price method of quoting
delivered prices at diversified locations. Such open prices are similar to list
prices which may be and are reduced to meet competition. As a pricing medium
it permits the consumer to bargain w;th a number of producers for both steel
and service at the lowest possible price and at the point where he needs it. It
serves producers by permitting them to compete in diversified markets to obtain
the volume and even flow of orders necessary to economical operations. In
essence, it provides an orderly medium by means of which consumers and pro-
ducers of steel may trade to their mutual benefit.

Relation of Competition to Profits, Capacity and Costs of Distribution

Price competition is necessary in any industry operating in a capitalistic
system. Is the steel industry competitive? Efforts at such determination too
easily lead into the realms of economic sophistry. Criticism and defense of
competition in the industry should not be based on abstract criteria which fail
to take into account the fundamental phenomena involved; it should be based on
tangible evidence.

Edward Chamberlin in his notable work, "The Theory of Monopolistic Com-
petition", demonstrates that evidence of imperfect functioning of competition
may be found in any one, or a combination of three, undesirable elements.-^
The first is excessive profits resulting from high monopoly prices. The second is
excessive productive capacity induced by high prices which encourage the entrance
of producers into the market, until the reduced volume of each lowers profits to
the minimum level, although the original high prices remain. The third is
excessive selling costs which contribute to higher prices if selling costs per unit are
greater than the decrease in production costs resulting from the increased volume
of production. Selling costs are simply one element of distribution costs, and
Mr. Chamberlin, although he does not do so, could apply his thesis to all distri-
bution costs with equal force. Assuming that excessive profits, excessive capacity
and/or excessive costs of distribution are criteria of the lack of competition, what
is the position of the steel industry with respect to these standards:

27 Chamberlin, Edward, The Theory of Monopolistic C<m»prf»7ton, "Chapters V and VI, Harvard University
Press, 1938.

Earning
Industry — Continued. Ratio

Motion Pictures • 5.6

Building and Real Estate 5. 2

Telej J'.one & Telegraph 5.

Paper and Products 4. 9

Oil Producing and Refining.. 4. 8

Metals (Non-Ferrous) 3.8

Rubber & Automobile Tires. 3. 7

Railroads (Class I) 3. 6

Railroad Equipment 3. 1

Steel and Iron 2.

Textiles & Apparel 1.5

Coal 1.1

2Q CONCENTRATION OF ECONOMIC POWER

Profits in the steel industry are not excessive. From 1919-1928 inclusive,
the average return on investment was 6.1 percent; from 1929-1938 the average
rate of return was 2.4 percent.-*

A study based on a composite of financial statements of leading companies in
their respective industries illustrates the comparative earnings of other industries
and the steel industry for the period from 1929 to 1937 inclusive.

Table 7. — Rniio of Earnings to Net Assets — 1929-37 Inclusive (Earnings Before
Interest in Percent of Total Assets Less Current Liabilities) Steel Industry Com-
pared With Other Industries

Earning
Industry: Ra''o

Tobacco and Products 12. 3

\utomobiles and Trucks 11.7

Household Products 10.6

Office Equipment 10. 3

Automobile Accessories 10. 2

Chemicals and Fertilizers 10. 1

Leather and Shoes 9.3

Retail Trade 9.0

Electrical Equipment &

Radio 7.6

Food Products 7. 6

Public Utilities 6.

Machinery (Industrial & Ag-
ricultural) 5. 7

Sources: Standard Traa: and Securities, Standard Statistics Company, Vol. 31 #20 Section 3 for 1927—
1935, Vol. 89 #15 Section 5 for 1036 and 1937.

On the basis of these figures the steel industry can hardly be accused of excessive
profits. Are these low profits caused by excessive capacity?

CAPACITY

Capacity of the steel industry is not excessive. Unused or idle capacity should
not be confused with "excess" capacity. Past experience indicates that even in
periods of peak demand orders are not distributed among products in such a way
as to make possible full utilization of all facilities. In practice, therefore, opera-
tions probably would never be maintained at 100 percent of finished steel capacity
because of lack of coordination between demand and capacity for various products.
Production might, therefore, be expected to run five or ten ;^ercent, or even more,
below capacity at the peak of the cycle.

In times of real emergency, or under the tremendous pressure of excessive de-
mands on the industr}', it might be possible, by bringing into operation obsolete
facilities, lengthening the work week, eliminating holidays, and by other means,
to attain an operating rate in excess of 100 percent. This last happened in
May 1929.

True, the steel industry had a large amount ■■"*' unused capacity during recent
depression years, but this is reasonable and to be expected iii an industry with
capacities that are rigid and immobile and whose rate of operations is so controlled
by the tremendous cyclical fluctuations in the demand for steel. If the industry
is to have facilities to supply the peak or near-peak demand, it must have idle
capacity during the periods of lower demand. An industry which, in the partial
recovery of 1937, produced steel ingots for three successive months in an amount
roughly equivalent to the average monthly capacity for the industry in the high
production year of 1929, cannot have "excessive" capacity if it is to take care of
the demands of a normal recovery which would only have to be about 10 percent
greater than the peak months of 1937 to utilize the present full capacity of the
industry. The vital importance of existing capacity is emphasized by current
conditions which make it imperative for the steel industry to produce steel in
quantities never before equaled in its history. Quite conceivably, with any
capacity less than it presently posses.ses, the steel industry would become a bottle-
neck and prevent full normal recovery.

28 steel Facta, August 1939, No. 35, p. 3. Since the years, components and sources are different this figure
naturally docs not agree with that for "Iron and Steel" in the table which follows.

CONCENTRATION OF P^CONOiMIC POWER

DISTRIBUTION COSTS

The steel industry does not have excessive distribution costs. In a study of
•distribution costs of 312 manufacturers in 1931 ^' "Iron and Steel and Their
Products," a very broad classification, ranked among those having the lowest
distribution costs. The steel industry proper undoubtedly had even lower dis-
tribution costs than those Companies included in the classification "Iron and
Steel and Their Products," if the records of the United States Steel Corporation
and its subsidiaries are in any way indicative of the average distribution costs for
the steel industry.

Selling Expense. — The major elements in the distribution cost study referred
to are "direct selling costs" and "advertising and proihotion costs." These two
items combined represented 11 percent of net sales of those companies reported as
component manufacturers of "Iron and Steel and Tluir Products"; in 1931, the
same year used in the aforementioned study, direct selling costs and advertising
and promotion costs were 3.1 percent of net sales for the United States Steel
Corporation and its subsidiaries.^" '

Freight Absorption. — An element more or less peculiar to the steel industry is
the amount paid by a steel producer for the transportation of steel from the steel
mill to the customer over and above the amount of the freight charge includetl in
his computation of the delivered price under the basing point method of quoting
delivered prices. This results from compstition in the steel industry, as a pro-
ducer in order to share in the business must meet the delivered price of a com-
petitor whose steel mill is nearer freight-wise to the customer. This is sometimes
called "freight absorption" by critics of the basing point practice.

A broad sampling*' of shipments for the month of February 1939 by the
American Steel & Wire Companj^ Carnegie-Illinois Steel Corporation and
Tennessee Coal, Iron and Railroad Company, three subsidiaries of the United
States Steel Corporation, showed average "freight absorption" of $1.99 per ton
equivalent to 3.75 percent of the net sales return to the companies on these ship-
ments, and 3.6 percent of their delivered value to the customer.*^ jj^ view of
the fact that "freight absorption" plus selling expenses and advertising and pro-
motion costs for the steel industry are less than just the selling expenses and

" See the following table:

Table S.— Distribution Costs of SIS Manufacturers, 19S1

[In Per Cent of Net Sales]

Product

Consumer Products:

Drugs and Toilet articles

Paints & Varnishes

Furniture. -

Heating Equipment

OfHce Equipment & Supplies...
Confections and Bottled Bevor

ages

Petroleum Products.

Jewelry and Silverware..

Grocery Products

Household Appliances

Automotive

Clothing

. Home Furnishings

S hoes

Hardware

Percent

38.6
33.1
32.9
32.2

31.6
31.0
28.7
27.1
26.5
24.7
22.6
21.7
21.2
18.9

Product

Consumer Products— Continued.

Agricultural Supplies

Tobacco Products

Sporting Goods

Radio Equipment.

Industrial Products:

Machinery and Tools

Building Materials

Stone, Clay and Glass

Paper Products

Chemicals and Allied Products.

Electrical Equipment

Iron and Steel & Their Products

Nonferrous Metals

Transportation Equipment

Textiles...

Percent

18.4
18.3
18.2
16.5

25.8
23.7
21.7
20.4
19.9
19.7
19.0
18.6
15.5
9.2

An Analysis ofttie Distribution Costs ofSlS Manufacturers, As.sociation of National Advertisers and
the National Association of Coit Accountants, New York, 1933, pp. 64, 106.

5° Percentage of selling expenses and advertising and promotion cos*s to net sales for the United States

Steel Corporation for 192G is 1.34%; for 1927, 1.65%; for 1928, 1.61%; for 1929, 1.53%; for 1930, 2.29%; for 1931,

3.07%; for 1932, 4.32%; for 1933, 3.22%; for 1934, 3.32%; for 1935, 2.79%,; for 1936, 2.27%; and for 1937, 1.98%.

31 Temporary National Economic Committee, Form B. Distribution and Pricing of Selected Steel

Products for month of February 1939.

'■ "Adjusted" freicrht absorption, i. e., the above mentioned unadjusted freight absorption less basing
point price ditfereiitials, p^-eraged $1.33 per ton, equivalent to 2.4% of the delivered value for the above
named subsidiary comr s. Data based on Form B returns for the 55^steel companies reporting show

or 3.2%, of delivered
i-alue. (See Tempo-
C31.)

CONCENTRATION OF ECONOMIC POWER

advertising and promotion costs of nearly every other industry, ^^ it cannot be
charged that distribution costs in the steel industry are excessive.

Since excessive profits, capacity and distribution costs are not present in the
steel industry, it may reasonably be concluded that, although the economic
factors in the steel industry are such that it cannot survive for long under con-
ditions of cut-throat competition, it is sufficiently competitive to be free of the
alleged evils of lack of competition.

Conclusion

THE FUNCTION OF THE STEEL INDUSTRY IN THE NATIONAL ECONOMY

There remains one question of vital interest. Does the steel industry perform
its proper function in the national economy?

As a Source of Raw Material. — The steel industry primarily supplies a basic
raw material for the production of other goods and services. Properly to per-
form its function it must continuously provide material meeting the exacting
and changing demands of a great variety of industries each of which has diversified
requirements. The steel industry has consistently done so, as is clearly evidenced
by the industrial growth of the United States. The steel industry has developed
new products and improved the old ones, both on its own initiative and in close
cooperation with the steel consuming industries. In fact, if it were not for the
steel industry, many of the major improvements in products of other industries
would not have been possible. For example, the streamlined all-steel automobile
would have been impossible to construct fifteen years ago since it depends upon
the deep drawing qualities and strength of the modern cold rolled sheets. Due
primarily to the recently introduced cold reduced tin plate certain fruits and
vegetables are now available throughout the year as canned products. Beer
could not be sold in cans so readily if the steel industry had not developed a
special type of tin plate which can withstand internal pressure. New stream-
lined trains use high tensile, low alloy steels and stainless steels which have been
developed by the steel industry. Special heat treatments have been discovered
which, when applied to rails, insure better and longer service.

3' See the following table:

T.\ELE.9.- Selling E^iptnsts and Aavtrihing and Fromotion Costs of SIS Manufacturers in 19S1

[In Per Cent of Net Sales]

Product

Direct

Selling
Costs

Advertis-
ing & Pro-
motion

Total

Consumer Products:

Drugs and Toilet Articles

11.3
17.1
118
15.8
21.3
11.5
10.9
11.5
11.1
12.8
12.9
11.2
12.4
8.7
9.1
8.2
3.2
8.4
5.4

14.6
11.8
10.0

9.4
10.6
12.0

9.0
10.2

8.8

5.1

18.4
7.5
6.1
7.9
3.2
6.7
6.0
6.3
6.2
6.8
4.0
3.7
2.9
3.7
2.2
1.6
8.2
3.6
5.3

4.4
3.0
3.1
2.5
1.2
3.0
2.0
1.1
1.7
1.3

29.7

Paints and Varnishes

24.6

Furniture

20.9

Heating Equipment

23.7

Office Equipment and Supplies

24.5

18.2

Petroleum Products.

16.9

Jewelry and Silverware.

17.8

Grocery Products .

17.3

Household Appliances. .. ...

19.6

Automotiye

16.9

Clothing .

14.9

Home Furnishings

15.3

Shoes

12.4

Hardware

n.3

Agricultural Supplies

9.8

Tobacco Products

11.4

Sporting Goods. _.

12.0

Radio Equipment

10.7

Industrial Prwd'icts:

MachiHenrand Tools

19.0

Build ine Afaterials.. .

14.8

Stone, Clay and Glass... .

13.1

Paper Products

11.9

Chemicals and Allied Products _

11.8

Electrical Equipment ..j

15.0

Iron and Steel and Their Products

11.0

Nonferrous Metals _ .,

11.3

Transportation Equipment . ..^

10.5

Textiles.

6.4

A,n Analv*is of the Distribution Costs of SIB Afanufar.turers, Associations of National Advertiser
sritl the National Association of Cost Accountants, New York, 1933, pp. 64. 160.

CONCENTRATION OP ECONOMIC POWER

To produce these hotter products and still keep costs down, the steel industry
over the years has constantly improved its equipment and has developed entirely
new equipment such as the continuous sheet and strip mills which so recently
revolutionized the industry. It cannot bo said that the steel industry has been
remiss in providing better materials to be used by other industries to make
products and provide services. This functioning of the steel industry to supply
new and better steels is particularly germane to the pricing problem since quality
improvements are usually not reflected in price series. In addition, many types
of steel which are in actuality new products may be known by the names orginally
applied to the products they replaced and as a result the new products and the
old may be included in single price scries although they may have little or no
homogeneity.

As a Factor in Employment. — Steel prices would be even more important to
the national economy if they influenced the amount of goods that could be sold
by companies for which the steel industry is a source of supply, and so affected
the rate of employment in those industries. This study has indicated that the
price of steel is of negligible importance as a factor in the demand for goods made
of steel because of the small percentage of the cost of the steel as related to the
cost of the finished product. Steel prices have little effect on national production
or employment. This is not to imply that the steel industry may charge any
price its whim or fancy may dictate. Competition among producers, and bargain-
driving purchasers with large orders to place, keeps prices at levels which some-
times do not even cover costs.

It has been charged by some that steel prices have remained firm in the face
of falling demand, and as a direct result production and pay rolls have declined
drastically. If the implications of this charge could be sustained it would be a
serious indictment. But they cannot be sustained. This study has shown that
the demand for steel is derived from the demand for goods made of steel. This
demand depends in turn on such factors as the level of national income and con-
fidence that in the future there will be opportunity for the profitable use of addi-
tional durable goods. The total demand for steel is inelastic; that is, the total
quantity of steel bought from the industry would not be substantially different
at any particular time if the price were higher or lower. The steel industry must
have orders on hand before it can produce; steel is made to exacting .specificationa
for particular uses; the very bulkiness of such steel items as might be made in
anticipation of future demand prevents their heavy production for inventory.
If there is lack of confidence in the future and declining national income, produc-
tion and consequently hours of employment, will decrease despite all efforts of
steel producers. Only confidence in the future and actual or anticipated increase
in national income can create production and resultant employment in the steel
industry.

Despite the negligible influence of price on demand for steel, and waiving the
fact that the composite published price of steel is more flexible than critics often
suppose, and the further fact that net yields received by the industry are more
flexible than indicated by published figures,^* what adjustments would have to
be made if steel prices were cut appreciably? Since sub.stantial "fixed" costs
must be met regardless of the amount of steel produced, prices cannot be out of
line with total costs over any considerable period.

What costs could be adjusted if prices were substantially reduced when the in-
dustry was operating at 50 percent of capacity? Based on cost data of the
United States Steel Corporation and its subsidiaries previously discussed, pay-
rolls would be approximately 50 percent of total costs at that rate of operation;
goods and services purchased from others, 34 percent; taxes and depreciation and

'* See the following table:

Table , 10.~Indeies of Prices
[1926=100]

Year

Composite

Iron Age

Prices

U. S. R. C.

Mill Net

Yields

Year

Composite

Iron Age

Prices

U. S. S. 0.

Mill Net

Yields

1926...

100.0
95.1
93.5
95.4
88.5
84.5
82.1

100.0
96.5
93.3
94.5
87.9
81.3
78.8

1933

81.2
87.8
88.9
89.7
106.4
103.4

76.7

1927...

1934

1935

89.1

1928

90.0

1929. .

1936

88.6

1930...

1937

99.6

1931...

1938

09.8

1932

30 CONCENTRATION OF ECONOMIC POWER

depletion about 7 percent each; and the remaining 2 percent of total costs would
represent interest to bondholders and pensions to retired workers. There is no
getting away from taxes; they must be paid. Depreciation and depletion charges
could be overlooked for short periods, but not for long. If interest were not
paid, the Company would be forced into bankruptcy. The remaining 84 percent
of total costs represents payrolls and goods and services purchased from others.
Goods and services purchased from others perhaps could be obtained at lower
prices by sharp bargaining where the prices are not fixed by law as they are in the
case of railroad rates. Payrolls remain. They are 50 percent of total costs.
There is very little doubt that any appreciable cut in steel prices over the long
run would have to be met by reducing wage rates.

As a Factor in the Growth of the Nation. — This study has discussed the productive
capacity of the steel industry and indicated the reasons why unused capacity may
be present in certain periods, but excess capacity, in the sense that it is not
necessary to the economic well-being of the industry and of the nation, is absent.
It has been shown that assembly costs of raw materials, the geographical. location
of markets for products that may be economically produced together, the im-
mobility x)f steel-making equipment, the huge investment required therein, and
the historical development of individual companies are more important than the
pricing method in accounting for the existence of more capacity in certain dis-
tricts than local consumption might seem to dictate. It has been pointed out
that steel-making capacity has developed in every area where raw material as-
sembly costs, costs of production and nearness to consuming markets have been
conducive to such development. On these bases it cannot be contended that the
price structure of the steel industry has been instrumental in the preservation of
uneconomic capacity nor in the prevention of the expansion of economic capacity.

In brief, the steel industry has efficiently performed its function in the national
economy, has materially assisted in the development of this country, and has
ever been prepared to meet the needs of the nation in each forward surge of
prosperity as well as in times of national emergency.

THE BASING POINT METHOD OF QUOTING DELIVERED
PRICES IN THE STEEL INDUSTRY '

Foreword

The basing point method of quoting delivered prices in the steel industry has
been the subject of criticism by certain economists and by the Federal Trade
Commission for a number of years. The views of one of the critics, Professor
Frank A. Fetter, are set forth in his book "The Masquerade of Monopoly." The
Federal Trade Commission has issued a number of statements criticizing the basing
point method, the most recent of which is a pamphlet entitled "Monopoly and
Competition in Steel" which was submitted by the Commission to the Temporary
National Economic Committee in March, 1939.

While at least one authoritative and comprehensive work on the steel industry
has been published (Daugherty, deChazeau and Stratton — "The Economics of the
Iron and Steel Industry"), it is believed that there exists a need for a shorter
treatment of the fundamental economic traits of the steel industry and the pricing
method which has evolved in this industry over a long period of years as a con-
sequence thereof.

This statement has been prepared by the United States Steel Corporation in
connection with the hearings on the steel industry before the Temporary National
Economic Committee. It has a twofold purpose: first, to clarify in the mind of
the reader who is not familiar with the facts, the origin and operation of the basing
point method of quoting delivered prices in the steel industry and the theoretical
nature of the criticisms of this pricing- method; and second, to establish that this
pricing method is the natural result of basic economic conditions in the steel
industry and does not result in the absence of price competition. The delivered
prices of steel products at any consuming point are determined by competition
and not by an inflexible application of the basing point method.

The Operation of the Basing Point Method

delivered prices

steel is generally sold on a delivered price basis. A delivered price is the price
of steel delivered at the town or city where the consumer of such steel is located.
The use of delivered prices results largely from the fact that the cost of trans-
porting steel from the steel mill is often a substantial part of its cost at point of
consumption. Buyers for this reason are seldom interested in its price at any
place except where they need it. Manufacturers of Steel must take this factor
into account.

Delivered prices are usually calculated on the basis of the price announced at
the steel mill which is nearest freightwise to the buyer's destination. This
method of calculating delivered prices is often called the "basing point system".

PITTSBURGH PLUS

Under the so-called "Pittsburgh Plus" piactice, which the steel industry gener-
ally used until the 1920's, delivered prices were calculated on the basis of the
quoted f. o. b. Pittsburgh price, with the addition of railroad freight from Pitts-
burgh to the buyer's destination, regardless of where the steel was produced.
Pittsburgh was the basing point. Thiis method of calculating the delivered price
is often termed a "single basing point system". However, even during the so-called
Pittsburgh Plus period, delivered prices were often calculated on the basis of the
quoted f. o. b. price at other steel producing points, withjfche addition of freight
from such points to the buyers' destinations. The practice of using basing points
other than Pittsburgh did not become generally prevalent until about 1924.

' Exhibit No. 1418, hearings before Temporary National Economic Committee, Pt. 27, p. 14169, introduced
In Pt. 20, p. 10803.

32 CONCENTRATION OF ECONOMIC POWER

In 1924, the Federal Trade Commission ordered certain subsidiaries of the
United States Steel Corporation to "cease and desist" from using the Pittsburgh
Plus practice, and from selling steel products based on any point except the actual
place of production or shipment. The practice of announcing prices at producing
centers in addition to Pittsburgh, where such subsidiaries had mills, was then
extended. Other producers announced prices at points selected by them. Such
a point at which steel prices are quoted is generally called a "basing point" and is
usually a place of steel production, although base prices for some steel products
are quoted today f, o. b. certain ports on the. Gulf of Mexico and on the Pacific
Coast where there are no production facilities. This group of places at which
steel prices were quoted was the nucleus of the present method of determining
delivered prices in the steel industry, which is often termed a "multiple basing
point system".

CALCULATION OF DELIVERED PRICES

The existence of many basing points makes the calculation of delivered prices
much more complex than it was under the Pittsburgh Plus practice. Diagram 1
presumes the simplest possible situation, with one basing point, and one consuming
point. The base price ^ at the basing point, A, is $40.00.^ The freight from A to
the consuming point X is $4.00, making a delivered price of $44.00. Diagram 2
presents a slightly more complicated situation. There are three basing points,
A, B, and C, each with a base price of $40.00. The freight to X from A is $3.00,
from B $6.00, and from C $5.00. If A, B and C were each to maintain such base
price of $40.00, there would be three delivered prices at X — $43.00, $45.00, and
$46.00. However, as the buyer naturally wants to purchase his steel as cheaply
as possible, the lowest combination of base price and freight determines the
delivered price. This means that the delivered price at X will be calculated by
reference to A, the nearest mill freight-wise, and will be $43.00 ($40.00 base price
plus $3.00 freight). A will be the "applicable basing point" for sales to X.

The lowest sum of base price and freight determines the delivered price for
competitive reasons. When a mill at A announces or quotes a base price of
$40.00, other producers know that such niill will sell at X for $43.00, or, at any
rate, for no more than $43.00. If the outlying mills at B and C want the business,
they will also quote $43.00 to the consumer at X, because they know that the
mill at A otherwise will undersell them. Thus the consumer at X may receive the
same quoted delivered price from every mill.

The above paragraph ignores the fact that price concessions are common,
especially in times of slack steel demand. Actually, the market price at X may
be considerably lower than $43, and any mill must meet such lower price, or give
up the business. If a sale is made at a price lower than the lowest sum of base
price and freight, the concession is often termed "price absorption".

FREIGHT ABSORPTION MILL NET RETURN

To the extent that prices are uniforrh at X, this means that the consumer may
give his business to any of the mills which are competing for such business. His
final decision may rest upon his preference for the product of one of the mills,
upon superior service, or upon one or more other factors outside of the basing
point practice. If the mill at C secures the business, it will use only $3.00 freight
in calculating the delivered price, while it must actually pay $5.00 for freight.
The mill at B will also use onlv $3.00 freight in calculating the delivered price,
but will have to pay $6.00. The difference between the freight used by these
mills in calculating the delivered price, and the freight actually paid by them
is often called "freight absorption." Freight absorption results from "freight dis-
advantage," or the fact that some mills are further away freight-wise from the
consuming point than the mill at the applicable basing point. In this example,
the mill at C will receive a delivered price of $43.00 which, when the transporta-
tion cost of $5.00 is paid, will result in a mill net return of $38.00, — $2.00 less than
its base price. The mill at B will receive a delivered price of $43.00 which,
when the transportation cost of $6.00 is paid, will result in a mill net return of
$37.00, — $3.00 less than its base price. The amount realized at the mill, the
delivered price less the transportation costs, is called the "mill net return." Only
the mill at A will receive a mill net return equal to its base price of $40.00.

2 Tlie use of the terms "base price" and "delivered price" in this memorandum is explained infra.
' The figure $40.00, used in the text and accompanying diagrams is purely arbitrary and is not to be taken
as ED actual price. Prices vary for different steel products.

CONCENTRATION OF ECONOMIC FOWER

THE BASING POINT METHOD

Most steel products are sold on a Delivered Price basis.
Diagram 1 : How the Delivered Price is computed.

BASING
POINT

CONSUMING
POINT

BASE PRICE
$40

FREIGHT TO DESTINATION
$4

-S

DELIVERED PRICE
$44

Diagram 1

THE BASING POINT METHOD

Diagram 2: Explanation of Freight Disadvantage and Freight Absorption.

Mill at (A) has lowest Base Price plus Freight to [x]
Mills at (B) and (C) are at a Freight Disadvantage;
to sell at [x] they must absorb Freight.

BASING
POINT

BASE PRICE $40
FRT DISADV.
MILL NET 40

(c)

BASE PRICE $40
FR T DISADV 2
MILL NET 38

FREIGHT
$5

^^-4f

CONSUMING
POINT

DELIVERED
PRICE $43

BASING
POINT

-<s)

BASE PRICE $40
FRT DISADV 3
MILL NET 37

Diagram 2

34 CONCENTRATION OF ECONOMIC POWER

The term "freight absorption," it should be noted, is misleading in one sense-
It implies that the mills pay freight charges which the consumer ought to pay.
In fact, however, each mill is selling steel at a given destination, usually in com-
petition with other mills. It has to meet the delivered price which other mills-
will quote, and it knows, within limits, what that price is. The mills which
"absorb freight" are merely recognizing the fact that by reason of a lower freight
rate the mill at A has a competitive advantage over them in selling to X.

MARKET PENETRATION

To the extent that prices are uniform at X, all of the mills are on an equal
level in bidding, regardless of their distance from X. If the order is given to the
mill at B or C, it is argued that the steel is shipped further than is necessary to
lay it down at X, for the nearest source of supply is A. This practice of shipping
from other than the nearest mill has been called "market penetration." * It
results principally from the competition of all the mills for the business at X.
It may also be caused by a preference of the consumer for the product of a par-
ticular mill, or by the inability of the nearest mill to supply the consumer, or by
one or more other factors outside the scope of this discussion.

MARKET INTER-PENETRATION CROSS-HAULING

Market penetration occurs constantly because most of the larger producers in
order to operate at a low unit cost compete in all of the major markets for the
products they make. Consequently, while one mill sells for delivery at points
nearer to other mills, it finds that more distant mills are making sales for delivery
in territories nearer to it. The resulting shipments have been called by critics
of the basing point practice "cross-havling." Professor deChazeau has coined the
term ''marhet inter-penetration." It is not by any means clear what type of
Ghipm^nts critics of the basing point practice intend to include within the term
cross-hauling.

Apparently some critics would call any shipment to a point nearer another
mill having capacity to make the product a cross-haul. However, it is believed
that the term "cross-hauling" should be limited to cross shipments of identical
products at about the same time, as shown on Diagram 9, infra.

Such critics have asserted that cross-hauling is economically wasteful, and
have assumed that the waste is more or less accurately measured by freight ab-
sorption. There are many reasons why this is not so. And, even assuming that
cross-hauling could be satisfactorily measured, there are many reasons why it is
not necessarily wasteful. Nothing is wasteful unless some means can be found
to eliminate it, and unless the cost of elimination is less than what is saved. The
alternatives to the basing point method would not necessarily eliminate all
cross-hauling and thev would probably cost more than the cross-hauling which
now occurs.

SO-CALLED "phantom FREIOHT" FREIGHT ADVANTAGE

It has been shown that when a mill is at a freight disadvantage, it must ab-
sorb freight and accept a mill net return below its base price, if it wishes to com-
pete with a mill located nearer to the buyer. In some cases, however, a mill is
said to have a "freight advantage" which means that its delivered price will yield
it a mill net return higher than the applicable base price. Diagram 3 illustrates
one type of such a freight advantage. In this Diagram, A and B are basing

f)oints and c is a non-basing point mill. X is a point of consumption. Assum-
ng a price of $40.00 at basing points A and B, the delivered price of steel at X,
predicated on A, will be $44.00 ($40.00 base price at A plus $4.00 freight from
A to X) A will be the applicable basing point. If the mill at c were a basing
point, with a base price of $40.00, it would be the applicable basing point for X,
for it has the lowest rail freight rate ($3.00). The mill at c. however, is not a
basing point and has no base price, po.'^sibly because it is located in a territory
where the demand for steel i^, greater than the local production. The mill at e
will meet the delivered price of its competitors and quote the lowest combination
of base price and freight calculated by reference to existing basing point;B.

* By Professor Melvln O. deChazcau. See "Economics of the Iron and Steel Industry," by Daugherty,.
deChazeau and Stratton, Chaoters XII-XIV, passim (Published, by McOraw-Hill Book Company,
N. Y.. 1937).

CONCENTRATION OF ECONOMIC POWKR

THE BASING POINT METHOD

Diagram 3: Explanation of first type of Freight Advantage and so-called "Phantom Freight'

Mill at (a) has lowest Base Price plus Freight to [xj.

Mill at © charges the same Delivered Price. Having a Freight
Advantage of $1 over (A), © realizes a Mill Net
$ 1 higher than (A). This $ 1 is so-called "Phantom Freight".

BASING
POINT

®-

BASE PRICE $40
MILL NET 40

NON-BASING
POINT

NO BASE PRICE (^
FRT ADV. Jl
MILL NH 41

CONSUMING
pj-, POINT

DELIVERED
PRICE $44

BASING
POINT

BASE PRICE $40
MILL NCr ?

Diagram 3

THE BASINS POINT METHOD

Diagram 4: Explanation of second type of Freight Advantage and so called "Phantom Freight"

Mill at (B) has lowest Base Price plus Rail Freight to [Y].

Mill at (K) charges the same Delivered Price.

When mill at (A) ships by water it has a Freight Advantage

of $1 and realizes a Mill Net $1 above its Base Price

This $1 is so-called "Phantom Freight"

&■

FREIGHT (RAIL) $4

POINT POINT

FREIGHT $3

■rS-

■®

BASE PRICE $40 ~

FRT ADV (WATER) 1
MILL NET $41

DELIVERED
FREIGHT IVMTER) $2 price $43

BASE PRICE $40
MILL MET 40

Note: When mill at (a) ships by rail it is at a Freight Disadvanta ge
of $1 an(j realizes a Mill Net $1 below its Base Price

DiA RAM 4

36 . CONCENTRATION OF ECONOMIC POWER

If the mill at c obtains the business at X, it will realize a mill net return of
$44.00, minus $3.00 (actual freight) or $41.00. Critics have dubbed this $1.00
in excess of the applicable base price "phantom freight" , because they say the
mill at charges $4.00 for freight in calculating the delivered price, but actually
pays only $3.00. This terminology is misleading, and contains an erroneous
implication. The mill at c does not charge $4.00 for freight, or any other amount.
On the contrary, it quotes a delivered price, which takes competitive advantage
of its superior geographical location so far as this business is concerned, thus
permitting it to realize a higher mill net return than the applicable base price of
$40.00. The mill at c uses the freight rate from A only to find out what the mills
at A will quote at X. If the mill at c were to quote delivered prices, based on a
base price at c which was $1.00 higher than the base price at A and B, it would
realize a higher mill net return on a sale to X just as it did before c became a
basing point.

If a base price is quoted at a basing point, higher than the price at other basing
points, the diflFerence is called a "basing point price differential", or simply a "differ-
ential". The freight advantage of mills located nearer the buyer than other mills
may be realized either by so-called "phantom freight" or by a differential. In either
case, such freight advantage, due to the mill's location, could only be taken away
from it by the erection of another mill equally near or nearer to its markets. It
should be pointed out that, in most cases, non-basing point mills, and mills which
quote prices with a differential, actually suffer a freight disadvantage due to
higher raw material assembly costs, so that "phantom freight" or differentia]
may be merely compensation for such assembly cost disadvantage.

"phantom freight" arising from water transportation

Referring to Diagram 4, it will be seen that the delivered price at X predicated
on shipment by B, is $43.00 ($40.00 base price at B plus $3.00 freight from B to X).
The mill at basing point A, however, can ship to X by water for only $2.00. The
delivered price at X will remain $43.00, as, generally speaking, rail freight rates are
the only transportation rates which are considered in calculating delivered
prices. But if the mill at A gets the business at X, and ships by water, it will
realize a mill net return of $41.00 that is, $43.00 minus $2.00, or $1.00 more than
its base price. Critics also call this $1.00 "phantom freight", because, as in
the other case, they say the mill at A charges $3.00 for freight in calculating the
delivered price, but pays only $2.00 for water transportation. Here again,
however, the mill at A does not charge $3.00 for freight or any other amoimt, but
names a delivered price which permits it to profit from a competitive advantage,
due to a superior geographical location so far as this business is concerned, over
other mills which have to ship to X by rail, if they ship at all.

There are good reasons why the mill at A usually does not quote a delivered
price at X based upon the cost of water transportatioin. First, a barge shipmen^t
must be much larger than a rail shipment before it can be carried economically.
Comparatively few customers are willing to order the quantity of steel required
for a barge load. This rules out many shipments which might otherwise be made
by water. Second, water transportation is slower than rail, and buyers are not
always willing to wait for water delivery. Third, facilities may not be available
at destination for economically and efficiently handling a delivery by water.
Fourth, shipments by water always involve extra costs at both mill and destina-
tion, which greatly reduce or eliminate any saving in transportation costs, except
when shipped for considerable distances. Fifth, closed seasons of navigation by
reason of climatic or flood conditions present transportation hazards uncertain
in time or effect which prevent sound business determinations with respect to
future delivery. Furthermore, if a delivered price of $42.00 at X were quoted by
the mill at A, other mills would meet this reduced price, and by offering quick
delivery by rail would compel the mill at A to ship by rail. Thus the price at
X would fall to the extent of $1.00 and all the steel consumed there would still be
carried in by rail. ^

VARIABLE MILL NET RETURNS

From the discussion thus far, it appears that because of competitive conditions
ill the steel industry steel mills realize variable mill net returns in selling to different
areas. If a mill is located at a basing point, it may realize a mill net equal to its
base price on sales in the area nearest to it; on sales outside the area in which it

5 The problems of water rransportation and the smdll extent to which this type of "phantom freight"
^ay be realized are discussed at leneth in section C-6-(a)-(2) infra.

OONCENTRATION OF ECONOMIC POWER 37

has a freight advantage, its mill net returns will steadily diminish as the freight
■disadvantage grows. "Phantom freight" occurs only if its delivered price is
based upon rail freight and it uses a form of transportation cheaper than all-rail,
as for example, barge shipments on rivers and lakes. By means of water ship-
ment the area in which it can sell without freight absorption may be greatly
increased, but in general the mill will realize its highest mill net returns on sales
to its nearest customers and progressively lower mill net returns as the distance
from the mill to the consumer increases. The same is true of the mill net returns
realized by non-basing point mills. This practice of realizing variable mill net
returns is often critically described as "-price discrimination" , and because it
follows a more or less regular geographical pattern, it is therefore called by some
critics "geographical price discrimination" .

These critics contend that this so-called geographical price discrimination is
unjust because the nearest customers have to pay the highest mill net returns.
They say that under the basing point method the farther the customer is from
a mill the lower is the mill net return, the inference being that distant customers
are given a better price than near-by customers. Actually, the price to the buyer
is the delivered price. This criticism, furthermore, if it has any application, is
true only with respect to mills not at basing points, of which there are few today,
and with respect to mills at basing points only on sales made within areas nearer
another mill. The criticism places undue emphasis on the mill net return. The
customer is only interested in the price he pays (the delivered price), not what
the mill ultimately receives (the mill net return), and the delivered price to a
customer near the mill generally is lower than the delivered prices to customers
located farther away, except those located nearer another source of supply.

The fact cannot be ignored that steel is sold on a competitive basis and that
the size of an economical steel mill is so large and its product so diversified as to
require distribution of certain classes of its products in markets which are nearer
to other mills. In the area in which a mill has a freight advantage, it naturally
quotes a price which will enable it to realize that advantage. When it sells in an
area nearer to some other mill, it has to accept a delivered price which will jield
a lower mill net return, i. e., to be competitive it must meet the delivered price
which the nearer mill is quoting. This is not a "discrimination" in any sense of
the word; it is competition. As between a customer nearby and a customer far
away, there is no uniformity of conditions of purchase on which properly to base
a charge of discrimination.

NATURAL MARKET TERRITORY

The variance in mill net returns is illustrated by Diagrams 5 and 6. Diagram 5
shows the geueral effect of freight charges upon the competitive position of a mill.
A and B are casing points, each with a base price of $40.00 The line 0-0 connects
points at which the delivered prices calculated by reference to A and B are equal.
Thus, at X the delivered price calculated from the base prices and freight from
both A and B, is $47.00 At Y, the delivered price is $46.00 and at Z, the delivered
price is $45.00. This means that both mills can sell in X, Y and Z without absorb-
ing freight. The line connecting X, Y and Z is the boundary of what is sometimes
termed the "natural market territory" of the mills at A and B. The term natural
market territory is used here in a special sense, meaning the area in which each
mill can sell at a delivered price calculated on the basis of its own base price,
plus the actual freight to the point of delivery. Because of the desirability of
operating each mill at a high rate of production and thus obtaining a low unit
cost, and of maintaining an even flow of orders, neither mill limits its sales to its
own side of the line. Each mill must reach the markets where the demand exists
for its products.

The mills at B have a competitive advantage in selling on their own side of
the boundary 0-0 but they must absorb freight in selling on A's side of the line
and in increasing quantities as they approach A, because on that side of the line
delivered prices are calculated by reference to freight rates from A. This fact
is illustrated by Diagram 6. The line 0-0 is again the boundary of the natural
market territories of mills at basing points A and B. At Y, a consuming point,
the delivered price, calculated by reference to A, the nearest basing point, is $41.00.
The mill at B, which realizes its base price on a sale to X, must absorb $3.00
freight in selling to Y, because its delivered price at Y cannot be in excess of $41.00,
while it must pay $4.00 freight. Thus, when a mill sells outside its natural market
territory, the delivered price often falls, while the freight actually paid always
increases, and these two factors combine to reduce the mill net return.

CONCENTRATION OF ECONOMIC POWER

THE BASING POINT METHOD

Diagram 5: Determination of Boundary between Natural Market Territories
The Boundary dividing the Natural Market Territories of mills at
Basing Points (A) and (§) is the line 0-0 connecting the
points at which the delivered prices from (A) and (§) are equal.

OaiVEREO J CONSUMING
PRICE $47 rn POINT

^/ DELIVERED

CONSUMING ^A~.

^y PRICE $46 rr-j POINT ^C^^

BASING /

POINT ,

BASE PRICE
$40

DELIVERED
PRICE $45

_F_R_El£HTJ5_ JzU

hr' CONSUMING
I POINT

BOUNDARY

»^ \ BASING
^^."'^ POINT

BASE PRICE
$40

DiAGKAM 5

THE BASING POINT METHOD
Diagram 6: How shipping beyond Boundary of Natural Market Territory reduces Mill Net.

When mill at (§) sells to [x]- its Mill Net is $40.

When mill at (§) sells to [Y], its Mill Net is only $37 because

1. Freight is $2 higher.

2. Delivered Price is $1 lower.

CONSUMING
POINT

DELIVERED
PRICE

RED LLh--^^

$41 * "~-~.

BASING
POINT

■(A>-

CONSUMING
POINT

CONSUMING """—^

BASE PRICE $40

MILL NET (XorY)

$40

BASING
... POINT

•<B)^

DELIVERED
PRICE $42

BASE PRICC $40
MILL NET (X) 40
MILL NET Ki) 37

BOUNDARY

Diagram 6

CONCENTRATION OF ECONOMIC POWER

THE BASINS POINT METHOD

Diagram 7 Non-basing Point Mill.

Mills at Basing Points (a) and (B) realize full Base Prices on sales in their

respective Natural Market Territories.

Non-basing Point mill at (c) has no Base Price and meets the Delivered Prices

of (a) and (§) when it sells in their respective Natural Market Territories.

NON-
BASING
POINT

MILL

)

BASING
POINT

BASE PRICf
$40

BASING
POINT

BASE PRICE
$40

(

BOUNDARY

Diagram 7

THE BASING POINT METHOD

Diagrams: Effect of naming new Basing Point.

After (c) becomes a Basing Point, the Boundary 00 between (A) and (B)

ceases to be significant.
Mill at (Z) then has a Natural Market Territory, bounded by NN and N'N', in

which it establishes lower delivered prices than (A) or (b)
To sell in this territory, mills at Basing Points (A) and (§) must now absorb freight.

N N'

NEW OLD NEW

BOUNDARY BOUNDARY BOUNDARY

BASING
FOiM

BASE PRICE
$40

Diagram 8

CONCENTRATION OF ECONOMIC POWER

EFFECT OF NEW BASING POINT

Diagrams 7 and 8 illustrate the effect of naming a new basing point. In
Diagram 7, A and B are basing points, and c is a non-basing point mill. The
line 0-0 is again the boundary between the natural market territories of A and B.
Mills at these basing points will realize mill net returns equal to their base prices
on sales on their own side of the boundary line 0-0. The non-basing point mill
at c has no base price, and in naming delivered prices at points in the natural
market territories of A and B meets the delivered prices of A and B at such points.

THE BASING POINT METHOD

Diagram 9: Illustration of Cross-hauling.

Products shipped from (a) to [y] go past products shipped from (b) to [x]
This involves Cross-hauling only if

1. The products shipped are identical.

2. Shipments occur at substantially the same time.

FREIGHT $6

Diagram 7

Suppose that the mill at c decides to make c a basing point, and announces a
base price of $40.00. Any non-basing point mill may at any time announce
base prices and thus become a basing point mill. Diagram 8 shows the immediate
effect of this change. The line 0-0 marking the natural market territories of
A and B now ceases to be significant. Instead, the two new boundaries A^-A'^ and
N'-N' arise. The mill at C now realizes a mill net return equal to its base price
on sales in the territory between A^-A^ and N'-N'. The mills at A and B must
absorb freight in selling to some parts of their old natural market territories (be-
tween N-N and 0-0 and between N'-N' and 0-0), in which they formerly realized
mill net returns equal to their base prices. The effect of so naming the new
basing point has been to lower prices in the area between A^-A^ and N'-N', and
to increase the territory in which the mills at A and B must absorb freight in
order to sell, but it should be noted that these consequences follow only if the base
price named at C is equal to, or lower than the base price at A and B.

***** *

In order to simplify the above discussion, no mention has been made of one of
the elements of the delivered price to a buyer. "Extras" are amounts added to
or deducted from the base prices announced for product classes in order to take
care of the particular buyer's specifications of size, special quality, special treat-
ment, or quantity. Announced prices, not including extras, are termed "base
prices", and, depending upon whether or not the freight charges to destination
are included, are termed "basing point base prices" or "delivered base prices".
Prices quoted for delivery at given destinations, including both freight and extras,
are termed "net delivered prices". The use of the word "base" as an adjective
meaning "without extras", and the use of the same word "base" as a noun,

CONCENTRATION OF ECONOMIC POWER 41

meaning basing point, and also the use of its derivative, "based", is often confusing
to persons not familiar with steel industry terminology. In common parlance
outside of the steel industry, "base price" and "delivered price" are used to
differentiate between the announced price at the basing point and the price at the
destination which is ,the price quoted to the buyer. Such terminology, while
strictly not in accordance with the words used within the steel industry, need
cause no confusion as long as extras are not involved, as is the case in the present
discussion. Since this simpler terminology has been used in most of the theoretical
analyses of the basing point method and in public discussions thereof, it has been
adopted herein.

Historical Material ^

The production of iron in America began in a limited area east of the Alleghenies,
centered around Philadelphia, which was also a principal port of entry for
foreign iron. A contemporary author, writing of the industry as it was in the
1750's, presents a clear picture of a rudimentary basing point structure. Prices on
domestic iron were apparently quoted f. o. b. Philadelphia and were higher in
the outlying territory where the iron was actually made. The manufacturers
absorbed freiglit in order to move their iron to the central market, where it com-
peted with foreign iron.^

Philadelphia's dominance did not endure. Better ores from the Lake Superior
district and good coking coal in the vicinity of Pittsburgh later caused the vast
development at Pittsburgh which rapidly reduced the importance of the eastern
Pennsylvania iron makers and their market. This shift had been accomplished,
at least in rolled products, by 1884.**

In spite of the remarkable evidence of a basing point price structure centered
on Philadelphia prior to the Revolution, there seems to be little doubt that prices
in early days were usually quoted f. o. b. the mills. The industry was small-scale,
and probably local producers discriminated in price between buyers, and enjoyed
the other privileges of local monopolies, due to immunity from outside com-
petition. ^ F. 0. b. mill prices seem to have been the general rule at least until the
ISSO's.'" Such price system was in the process of gradual change during a period
which extended to the late 1890's."

One writer '^ has interpreted the successive steps in the change of the price
structure from an f. o. b. mill basis to a delivered price basis in terms of the growing
scale of operations and of the shift from iron to steel products. The mills were
increasing in size and capacity, serving wider areas, and concentrating, at the
same time, in centers where the necessary raw materials could be assembled at a
low cost. For example, in the thirty years before 1899, pig iron production per
establishment increased 1,258 percent, and per employee, 416 percent, while steel
works and rolling mill production per establishment increased 777 per cent, and
per employee, 179 per cent.** This trend has continued, as shown by the fact
that between 1889 and 1938 the number of individual blast furnaces in the United
States declined by 60%, while the national capacity for the production of iron
increased by 300%. At the beginning of the period there were 575 blast furnaces,
operating in 162 counties and 24 states: at the end of it, there were only 236
furnaces, located in 56 counties and 17 states.'*

The growth in size and capacity of blast furnaces and steel mills and the material
increase in investment and overhead costs, combined with the centralization of
producing units, the widening of markets and the increasing significance of trans-
portation costs in the cost ot steel to the consumer, gradually developed a price
structure which would better meet the needs of the steel industry. It was neces-
sary for these large steel mills to have a wide market for their various products in
order to maintain a satisfactory rate of operations and thus achieve a low unit
cost. In the opinion of Professor deChazeau "this evolution of the economic

« The material in this section was largely drawn from the Trial Examiner's Report on the Facts in the
Pittsburgh Plus case before the Federal Trade Commission (1924).

' Aerelius' History of New Sweden, printed in 1759. See the Report of the National Recovery Adminis-
tration on the Basing Point System in the Iron and Steel Industry, dated Nov. 30, 1934, p. 18. This source
is hereafter referred to as the NRA Report.

« NRA Report, pp. 19, 36.

•NRA Report, p. 34.

i" Daugherty, deChazeau. and Stratton, Economics of the Iron and Steel Industry, p. 533, citing the Federal
Trade Commission's Practices of the Steel Industry under the Code (Report to the U. S. Senate, 73rd Cong.,
2nd Sess., Doc. 159, 1934) p. 60. See also the Trial Examiner's Report on the Facts in Federal Trade Com-
mission V. U. S. Steel Corp., pp. 68-9. This source, which will be referred to as the Trial Examiner's Re-
port, is found on pages 35-380 of the Statement of the Case by Amici Curiae, V. 1.

" Daugherty, etc., op. cit., pp. 538-9.

'2 Professor Melvin Q. deChazeau. See Daugherty, etc., op. cit., pp. 534, 536.

'3 Op. cit. p. 536.

» Steel Facts. Nov. 1938 (No. 29), p. 3.

42 CONCENTRATION OF ECONOMIC POWER

forces impinging upon competitive practices seems more important than the birth
of a dominating corporation" in explaining the development of the basing point
method.'^

When the United States Steel Corporation was formed m 1901, the evolution
in the price structure of the steel industry, vv^hich had been going on for several
decades, had crystalized to the extent that most steel products were then sold on
a delivered price basis and a great many on a Pittsburgh base price plus freight
from that city.'^

The development of the Illinois Steel Company made Chicago important in
the steel industry as early as 1897. By 1908 the Chicago mills had grown to such
extent that they were definitely shipping outside their local market territory.
This growth has continued. The trial examiner in the Pittsburgh Plus case found
that in a circle with a 60 mile radius centered on Chicago, there was an ingot
capacity of 3,230,900 tons in 1908. and that by 1913 the ingot capacity had grown
to 5,557,800 tons.17 From Octoljer, 1911 until March, 1912, the Pittsburgh Plus
price system vanished in Chicago, and prices were quoted by Chicago mills on a
Chicago base. 18 Such a Chicago base price was established for bars, plates, and
shapes, among other products. The report of the National Recovery Adminis-
tration in 1934 thus analyzed this change: '^

"In the growth of the Chicago District's productive capacity, we find early
signs of the natural basing point development, whereby wlien capacity in a
district increases to the point where it begins to require all its own market and
to press for more, it breaks away from the 'mother' basing-point, stands on its
own feet and quotes its own base prices which are lower than prices delivered
from distant producing points. * * *

"While this early defection of Chicago from the Pittsburgh base prices was
only temporary, it is an indication of the maturing of the Chicago District
as an independent basing point, and it is common knowledge that while
Chicago base prices were not regularly published, they existed whenever the
producers in Chicago found it to their advantage to quote under the ruling
Pittsburgh plus prices, long before the Federal Trade Commission's order
issued in 1924 requiring the United States Steel Corporation and certain of its
subsidiaries to cease and desist from selling at 'Pittsburgh Plus' prices."

Aside from a brief period of Government price control during the World War,
the Pittsburgh Plus practice was generally followed in the steel industry until the
1920's. In February, 1921, a price war developed at Chicago with the result that
by July of that year Pittsburgh Plus prices on plates, shapes and bars had to a
large extent been abandoned in the Chicago district. 20 By January, 1923, the
Chicago mills were selling large quantities of steel products on a Chicago miU base,
but prices seem to have recovered to some extent.^'

Underlying this war of prices was the fact that Chicago and other new centers
of production had developed enough capacity to supply their own local markets
and to require other outlets. Under these circumstances, it was natural that new
basing points should be established. Opposition to the Pittsburgh Plus practice
had also developed among the fabricators in the Middle West, possibly caused by
the large increases in freight rates which were made during and after the war.
In 1921 action was begun by the Federal Trade Commission to investigate the
Pittsburgh Plus pricing method, and to determine whether it violated any pro-
vision of law. This proceeding was directed against the United States Steel
Corporation and certain subsidiaries thereof. In 1924, the Federal Trade Com-
mission ordered certain subsidiaries of the United States Steel Corporation to
"cease and desist" from selling at prices based on any point except the actual
place of production or shipment.

The increase in the number of basing points then accelerated. The subsidiaries
of the United States Steel Corporation announced base prices at many cities where
they had plants. These new prices were higher than the base prices at Pittsburgh,
but at many points of consumption resulted in delivered prices which were less
than the full Pittsburgh Plus prices had been before the order of the Federal
Trade Commission. Other steel producers began to name basing points of
their own, and the number of basing points slowly increased. The naming of a

's (leChazeau, in Daugherty, etc., op. cit., p. 534.

" Id. pp. 534-8. The Trial Examiner's Report on The Facts in Federal Trade Commission v. U. S.
Steel Corp. states that by 1901 and 1902 the Pittsburgh Plus system had appeared as an established system,
p. 181.

" 7(i., pp. 298-9.

18 Id., pp. 81, 139-40, 184-5, 534-5. The ingot capacity in 1918 was 7,941,850 tons, and in 1923 it was 8,645,935
tons. Trial Examiner's Report, p. 299.

19 NRA Report, pp. 39-40. See January 4, 1912 issue of Iron Age, p. 59.
2(1 Trial Examiner's Report, pp. 84-85.

21 On the Chicago price break, see also id., pages 94, 141-2, 187, 424, 425-8, 536.

COXCENTRATION OF ECONOMIC TOWER 43

basing point through the announcement of base prices at such point rests solely
in the discretion of the particular steel producer.

The NRA Steel Code recognized and continued the use of the basing point
method in the steel industry. There was some increase in the number of basing
points, but the method remained unchanged in its main outlines. It should be
noted that during the Code period two groups of cities, one on the Gulf of Mexico,
called "Gulf Ports", and the other on the Pacific Coast, called "Pacific Coast
Ports", were added to the list of basing points. There is no production at the
Gulf Ports and comparatively little production at the Pacific Coast Ports. Base
prices were introduced at these ports, principally to meet foreign competition.
Delivered prices, which were lower than the base prices at the applicable basing
points plus rail freight therefrom to these ports, had been quoted at these ports
for some time before the NRA Code, and the formal naming of base prices at these
ports may have been merely a recognition of an existing condition.

During the Code period, the President of the United States issued an executive
order requiring the NRA and the Federal Trade Connnission to study the opera-
tion of the steel basing point practice under the Code, and to report to him their
findings. The Federal Trade Commission, in its report, clung to its old opinion
that the basing point method was an undue restraint on competition, and that
steel should be sold at uniform f. o. b. mill prices without freight absorption. The
NRA Committee, however, came to the conclusion that the basing point method
was a competitive method of selling, and was properly suited to the requirements of
the steel industry. The NRA Committee did not believe that the uniform f. o. b.
mill price system with elimination of freight absorption would produce competition
of a useful kind. The NRA report recognized that some measure of freight ab-
sorption was necessary to enable the mills to function efficiently, but expressed
the belief that freight absorption and cross-hauling should be limited by establish-
ing some sort of limitation upon sales in areas where the mills had freight dis-
advantages. The report also stated that owning to the few number of basing
points there were still some areas in which too much "phantom freight" was
realized. The report concluded by suggesting two similar plans for modifying
the basing point practice in these respects, th.e second of which plans it favored.
Both plans, which need not be discussed in detail, were designed to change the
basing point method into a producing center method of marketing steel, to reduce
"phantom freight" to a negligible quantity by the addition of new basing points
and to reduce cross-hauling by a limitation upon freight absorption. With
these modifications, the NRA Committee believed that the basing point method
would serve the best interests of the steel industry and the public more efficiently
than the uniform f. o. b. mill price system would do, and that it would remedy any
abuses without destroying existing investments. Neither plan suggested in the
NRA report was put into operation. The National Industrial Recovery Act was
declared unconstitutional in May, 1935, and the Steel Code was immediately
abandoned.

On June 24, 1938, subsidiaries of the United States Steel Corporation reduced
the base prices on many steel products at the several basing points where they
had producing mills, and in addition abolished almost all of the price differentials
at basing points outside of Pittsburgh. Other producers made adjustments by
naming lower base prices and new basing points of their own. These changes
have resulted in the establishment of basing points in almost all areas of large
production, and have increased the necessity of" absorbing freight to reach the
various consuming areas, while decreasing the possibilities of the realization of
"phajitom freight".

Criticisms of the Basing Point Method

1. "perfect competition" and the steel industry

Present day ideas of "perfect competition" are abstractions derived by classical
economists from the fairs and markets of the 18th century and earlier times. In
order to have a perfectly competitive market it would be necessary: (1) that the
commodity dealt in be strictly uniform; (2) that there be so many sellers inde-
pendently offering the commodity for sale, and so many buyers independently
bidding for the commodity, that no one seller or buyer could influence the price
level in the market; (3) that sellers and buyers would know all or at least many of
the offers and bids; (4) that all sellers and buyers would be free to enter or retire
from the market; and (5) that as a consequence of the preceding conditions, price
would be the only possible inducement for any buyer or seller to consummate a
sale. Under such conditions there would be a prevailing market price and it
would be impossible for sellers to get higher prices from some buyers than from
others. Since no producer could aflfect the market price, he would maintain his

44 CO^'CENTI{ATION OF ECONOMIC POWER

operations at the point at which the additional cost of producing an additional unit
would be equal to the market price. It should be noted that "perfect competition"
means competition solely in price and is sometimes called "pure price competition",
which is probably a more descriptive term. It excludes the possibility of in-
ducing purchases by selling or advertising activities.

Competition which deviates from the assumed state of facts on which the theory
of "perfect competition" is based, results in what is called by the economists
"imperfect competition". This term can be easily misunderstood by the ordinary
reader. It may be taken to mean complete lack of competition (that is, "perfect
monopoly"), or an agreement or other behavior restraining competition in violation
of the anti-trust laws.

In fact, however, the term "imperfect competition" as used by the economists
covers the whole range of conditions between theoretical "perfect competition"
and theoretical "perfect monopoly," neither of which actually occurs in the
business world, but which are concepts used in the science of economics for the
purpose of analyzing elements of market phenomena. "Imperfect competition,"
therefore, might equally well be called, and is sometimes called, "imperfect
monopoly." It is merely a term used to describe conditions as they are in the
business world, in which there is competition, not only in price, but also in adver-
tising, selling, adaptation of product to the market, and many other factors.
The term has no ethical or legal implications, and is used in the sense described
above by most economists regardless of their social or political views. Never-
theless, it is difficult in social and economic controversies, to limit the term to
its proper definition.22

The term "imperfect competition" is particularly misleading to one not versed
in economic terminolog)^ since it may be taken to imply that "perfect compe-
tition" is a standard of what competition ought to be in the business world.
This wa»s certainly not the intention of the classical economists who formulated
the concept. "Perfect competition" was assumed to be the result which would
follow the presence of the assumed conditions set forth above, but it was not
expected that it would or should result in the absence of such conditions, and the
classical economists were well aware that there were deviations from such condi-
tions in the business world of their own day, which resulted in "imperfect compe-
tition." Consequently, when "perfect competition" is set up as a basis for
criticizing current industrial practices, a use is being made of the term which was
not intended by the theorists who first employed these words. "Perfect compe-
tition" is an abstraction, and exists nowhere.^^

22 Professor Edward Chambcrlin of Harvard University, in his "Theory of Monopolistic Competition,"
published by the Harvard University Press, in which he attempts to formulate a concept for studying
practical economics based neither on "perfect" or "pure" competition, nor "perfect" or "complete" mo-
nopoly, but upon actual conditions, states (p. 10):

"Because most prices involve monopoly elements, it is monopolistic competition that most people think
of in connection with the simple word 'competition.' In fact, it may also be said that under pure compe-
tition the buyers and sellers do not real'y compete in the sense in which the word is currently used. One
never hears of 'competition' in connection with the great markets, and the phrases 'price cutting,' 'under-
selling,' 'unfair competition,' 'meeting competition,' 'securing a market,' etc. are unknown. No wonder
the principles of such a market seem so unreal when applied to the 'business' world where these terms have
meaning. They are based on the supposition that each seller accepts the market price and can dispose of
his entire supply without materially affecting it. "Thus there is no problem of choosing a price policy, no
problem of adapting the product more exactly to the buyers' (real ot fancied) wants, no problem of adver-
tising in order to change their wants. The theory of pure competition could hardly be expected to fit facts
so far difTerent from its assumptions."

Professor Frank U. Knight in his "Risk, Uncertainty, and Profit," page 193, states that under economic
theory practically every business is a partial monopoly, and points out that, in vie w of this, it is remarkable
that the theoretical treatment of economics has related so exclusively to complete monopoly and perfect
competition.

23 In the proceeding now pending against the cement industry. Dr. Jacob Viner of the University of
Chicago, a witness for the Federal Trade Commission, testified as follows:

"Q. Will you describe for us just what you mean by 'fully competitive' method of selling? What are its
requisites? A. Well, its appearance would be that of a movement downward of price at any time when
orders were flowing in less rapidly than the capacity of the— the comfortable capacity of the plants of the
producers to meet them, and the movement up of price, whenever orders were coming in at a quantity such
as to pre.ss the capacity of the plant at the existing i)rice, the requisites of the existence of such a state of
affairs would be the existence of a substantial number of producers so that what anyone — of substantial
coordinate importance or unimportance— so that what one individual ijroducer should do would not be a
matter of substantial concern to any other producer in the industry, and so that this group should behave
as individuals rather than in a concerted fashion through arrangement. Q. Would you say that those are
all of the requisites needed for the existence of complete competition, Doctor? A. I think so. Q. Now,
again, will you list for us all of the industries that use what you call a fully competitive method of selling?
• • * A. I would say there are very nearly none at the present moment. I won't vouch for there not
being one. I would say that wheat is still very near — wheat growing— very near a fully competitive industry,
but I would not say that it is quite that, because of Government interference. And so with oats, and
barley, rye, and hay, although hay may be. I don't think that hay is under any sort of control, but you
would have to hunt for them, I will say that. You will have to hunt for them, they are hot easy to find
now. * * * Q. So, at the present time, you have not such knowledge that would enable you to say —
to make such statement, as I understand it? A. That there exists. Q. A fully competitive industry?
A. A fully competitive industry. Q. Yes. A. No, there does not." See Record of proceedings of the
Federal Trade Commission against Cement Institute, et al, pp. W814-1S817.

CONCEiNTRATION OF ECONO.AIIC POWKK 45

Since deviations from "perfect competition" are universal, and "imperfect
competition" merely implies deviations from an abstraction, it is obviously an
error to conclude that such deviations are necessarily signs of monopoly, in either
the legal or ordinary business sense, or that such deviations can or should be
•prevented by law.

This discussion of economic terminology has been necessitated by the fact that
the classical model of "perfect competition" seems sometimes to be held up as a
practical standard, in spite of the manifest absurdity of such a position. There
are those who insist that "perfect competition" naturally results from the absence
of restraints, that it automatically develops whenever men can be prevented from
interfering with its development, and that, when realized, it solves all our eco-
nomic ills. The criticisms of the basing point practice in the steel industry all
stem from the proposition that it results in deviations from "perfect competition,"
and the proposed alternative, the uniform f. o. b. mill price system, is put forward
as a supposed means of realizing "perfect competition."

Both the criticisms and the proposal of such alternative system ignore factors
in the steel industry which neoessaril}' produce conditions differing from the
assumed conditions of the theory of "perfect competition," and therefore must be
expected to result in "imperfect competition" under any pricing system. There
will often arise, in discussing separately the criticisms of the basing point practice,
the question of whether a given departure from the assumed conditions of "perfect
competition" is due to the basing point practice or to some fundamental economic
trait of the steel industry. Likewise, in discussing the proposed uniform f. o. b.
mill price system, the question will often arise of whether such system is compat-
ible with the fundamental economic traits of the steel industry. It seems perti-
nent, -therefore, to consider briefly these economic traits.

(a) Geographical Separation of Producers.

The more important raw materials for steel, — iron ore and coking coal — are
concentrated in a few deposits. Iron ore is found principally in Minnesota and
other States bordering on Lake Superior, in Alabama, and in restricted areas of
the West. Coking coal comes, for the most part, from the fields of Pennsylvania,
West Virginia, Kentucky, and Alabama. Limestone occurs more generally
throughout the United States. When using ore of high metallic content, it takes
more than 4 tons of raw materials (including coal for power and heating purposes),
to produce one ton of finished steel. Consequently it is necessary to locate steel
mills in areas where raw materials can be assembled at a low cost.^^ This is a
factor of greater importance than nearness of the steel mill to important markets.
The NRA Committee which studied the operation of the basing point practice
under the Code concluded: ^^

"* * * the principal producing centers will always be confined to those
areas within which assembly costs are lowest, such as the general Pittsburgh and
Ohio River District, the Great Lakes cities, the Birmingham District, and Eastern
Pennsylvania and Maryland. Steel producing outside such minimum cost
assembly areas must be limited to the availability of low cost melting scrap."

Assembly costs of raw materials limit the construction of economical integrated
steel plants to a few areas, resulting in steel mills often at great distances from
each other. Most steel products are now produced in the Pittsburgh-Youngs-
town district, the Buffalo district, at Sparrows Point, Md. and in the Philadelphia-
Bethlehem district, at Chicago-Gary, and at Birmingham, Alabama, although
some products are also produced in Colorado and on the West Coast and, in
smaller quantities, at other points. Producers so widely separated from each
other, with differing freight costs to the areas of demand, do not at all resemble the
picture of a "perfectly competitive" market, which assumes many sellers and many
buyers in close contact with each other, such as upon the floor of a stock exchange.

(6) Size of Plants.

Large scale integrated operations produce steel at a lower cost per ton than
small ones. Furthermore, a mill large enough to produce a diversified list of steel
products has merely by reason of such size a large tonnage capacity. Therefore,
the size of individual plants and the amount cf the investment therein have grown
enormously, and at the same time there necessarily has been a reduction in the
number of integrated producers of steel. Today there are about a dozen such
companies in the country. To obtain the even flow of orders required to keep
these large mills operating at a satisfactory rate and thus achieve a low unit cost,
it is necessary that their products be sold in areas where the demand therefor

" It Is also necessary to have available large quantities of water, principally for cooling purposes.
" NRA Report, p. 12.

46 CONCENTRATION OF ECONOMIC POWER

exists, even though outside of the local district surrounding the mill. As a conse-
quence, every seller of steel products must consider, among other things, the effect
of his price policy upon the steel markets of the country and he must take account
of what other sellers will do if he raises or reduces his base prices. He does not
limit his reflections to the probable reactions of producers near at hand, but must
consider, as well, possible responses of producers far away. In all of these ways
the steel industry in actual operation varies from the assumed conditions under-
lying the theory of "perfect competition."

Demand in a "perfect" competitive state is assumed to be concentrated in some
market. The demand for the diversified products of a large steel mill is not
concentrated in any one market or any few markets, and the pattern of the demand
for each of such diversified products presents peculiar characteristics. The de-
mand for certain grades or classes of sheets and strip shows a high degree of con-
centration in the Detroit area, with lesser degrees in the Philadelphia, Chicago,
Cleveland, and Cincinnati areas, while for other grades or classes the demand is
scattered or concentrated elsewhere. Fabricated structural steel is sold prin-
cipally in the large metropolitan areas, and important unpredictable fluctuations
occur in the relative demand in such areas. Furthermore, from time to time the
heaviest demand shifts to widely scattered areas where important structural jobs
are undertaken. Very similar products are destined for the east and west coast
shipbuildii'g industries, and the central Pennsylvania railroad carbuilding in-
dustry. Tin plate demand is somewhat concentrated in a few markets, such as
New York, Chicago and the West Coast, but is largely scattered among various
areas where different types of canning industries are located, and to a higii degree
the demand in the latter areas is subject to seasonal shifts and fluctuations.
Some tubular products have a widely scattered distribution, while others, such as
oil country products, move principally to the Texas and Oklahoma oil fields, or
those of tiie W^est Coast. To effect low cost operations, each producer attempts
to operate his mills at as high a rate of production as possible. To do so, he must
have a diversification of products, as it is dangerous to establish integrated
facilities merely to produce a few finished steel products, and to sell such products
he must reach the actual markets of the country, however widely separated they
may be. Also, he must have access to the most important markets for individual
products in order to avoid seasonal and other shifts and fluctuations in demand.

The demand in a "perfect" competitive market is supposed to be divided among
the n\nny buyers, none of them large enough to affect the level of prices. The
demai ij for many important steel products is concentrated in the hands of a
relatively few largo buyers, such as the automobile and container companies,
whose requirements are an appreciable part not only of the market for particular
products, but also of the whole steel market. Accordingly, the requirements of
these large buyers may affect price levels, which is quite at variance with the
theory of "perfect competition".

In a theoretical "perfect market", demand is assumed to have some degree of
elasticity, that is, consumption is assumed to increase or decrease in response to
decreases or increases in price. In the steel industry this degree of elasticity is
extremely low; the demand for steel is very inelastic. Since the cost of steel is
only a small part of the total cost of the finished consumer product, the price of
steel has vcr.v little effect upon the ultimate consum.er demand. ^^

Under "pertect competition", the demand foi the product of an individual
producer (as differentiated from the product of the industry as a whole), would
be infinitely elastic, since uniformity of product and indifference of buyers and
sellers to any factors except price are among the co\ditions assumed. Thus each
producer's participation in the total business would increase without limit if his
price were below (or decrease to zero if his price were above) the prevailing price.
Obviously this condition of "perfect competition" does not exist in most indus-
tries. Advertising, trade names, style preferences, geographical distribution of
sellers, etc., have tended to reduce the elasticity of the demand for the product
of individual prodiirers. For oxamplo, advertising and trade names enable
sellers of cosmetics, tooth paste and other similar commodities to hold customers,
within limits, even though their prices are above the prevailing level for such com-
modities. In the steel industry, contrary to the general circumstance, the under-

56 On the other liand, differences in prices paid by competing manufacturers for the steel used hy them is an
important consideration. A large disturbance in the relative market levels in different important markets
for steel products, such as might be brought about by an uniform f. o. b. mill price system, might seriously
affect the competitive Dosition of some manufacturing customers of steel mills.

CONCENTRATION OF ECONOMIC POWER 47

lying conditions make for a high elasticity in tl)e demand for the i)roduct of an
individual producer. Since Iniyers are good judges of the quality of steel, intense
competition, assisted by the science of metallurgy, has caused great uniformity
in the ])roducts of all steel producers. Customers generally order in large quanti-
ties, wliich makes a small price cut worth bargaining for. Consequently, a small
difference in price will shift large orders from one producer to another, but will not
increase the total consumption of steel.

Thus, the demand for steel is dispersed over wide geographical areas, and is to a
great extent concentrated in the hands of a few large buyers whose individual
requirements and bargaining powers are often large enough to afi'ect the level of
prices. The demand for steel sul)stantially resembles one of the assumjitions of
"perfect competition," in one respect, namel}', that any individual producer's
partici])ation in the market responds very quickly when he names a price below
the prevailing level. The producers with higher prices simply lose this piece
of business. However, reduction in price does not materially aflfect the total
■quantity of steel which the market will absorb.

{d) Fluctuations of Demand in the Business Cycle.

The concept of "perfect competition" assumes conditions not corresponding to
reality and ignores some major complicating factors. In particular, it assumes a
fairly steady and predictable rate of demand for various products, thus ignoring
cyclical fluctuations in demand. This is a fatal omission in the application of the
theory of "perfect competition" to problems in which the business cycle is impor-
tant. Experience over a long period of time has shown that the demand for dur-
able goods, including- steel, fluctuates violentlj^ and in a manner which makes it
almost impossible to predict the occurrence and degree of such fluctuations. If
a durable goods industry is built to supply the peak or near peak demand of the
business cycle, it will necessarily have a large amount of idle or unused capacity
•during other phases of the cycle. Likewise if it is built to supplj^ only the demand
a,t the lowest point, or even the average demand, it will be unable satisfactorily to
serve the consumer during the higher phases of the cycle.

Fluctuations during the past two years furnish a striking example. According
to weekly estimates collected and distributed by the American Iron & Steel In-
fititute, ingot output was at 92.3% of capacity for the week of April 26, 1937, a
high for recent years. By December, 1937, it had dropped to 19.2% (week of
December 27), the low for recent years. After fluctuating between 22.4% and
62.6% during 1938 (weeks of July 4 and November 14), the rate was 38.5% in
July, 1939 (week of July 3). The rate rose to 63% for the week of August 28,
1939 and for the week of October 16 reached 90.3%, a high since April, 1937.

{e) Costs in the Steel Industry,

Under "perfect competition," as demand decreased and prices fell, the producer
with tiie highest costs would be driven from the market, at leasts temporarily.
The price would stop falling when it reached the level which would keep in business
the xnarginal producer, i. e., the highest cost producer whose production was re-
quired to meet the existing demand. The price level at all times would be just
above the additional cost of producing the last unit necessary to supply the de-
mand, regardless of whether or not this price covered the average cost, including
•overhead, of producing all units.

A large proportion of the costs in the steel industry are overhead costs, which
must be met, no matter how much or how little steel is produced. The additional
cost of producing additional units, however, remains fairly constant at all levels
of production up to very near capacity production. Thus, while the overhead
costs per unit decrease as the rate of production increases, nevertheless the average
cost per unit, including overhead, remains considerably hip-her than the additional
cost of producing additional units, from a low level of production to very nearly
the point of capacity production. As a result of these factors, under "perfect
competition," in a period of decreasing demand and falling prices, the level of steel
prices would almost immediately reach a point, which, while still just above addi-
tional costs, would be below average costs.

High overhead costs, the very large expense incurred in shutting down and start-
ing up mills and departments of mills, and the costliness of intermittent opera-
tions, and the disruption of w^orking forces caused thereby, also make it virtually
impossible for producers to retire from the market in a period of falling demand
and subsequently to re-enter the market as demand increases. Elven high cost
producers will try to keep on producing and selling as long as the price realized

48 CON'CEXTKATION OF ECONOMIC POWER

is more than the additional cost of producing additional units, even though such
price may be considerably below average cost, since overhead continues and thus
any long continued retirement from the market means bankruptcy and permanent
retirement. These results and the causes thereof were not contemplated in the
theory of "perfect competition."

(/) Cyclical Fluctuations and Overhead Costs.

When the effects of large overhead costs are considered in conjunction with the
extreme cyclical fluctuations which are characteristic of durable goods industries,
it can readily be seen that the results would be disastrous, if "perfect competition"
prevailed. In the early stages of the downward phase of the cycle high cost pro-
ducers would find themselves losing more than their overhead costs and would soon
be forced out of business. Lower cost producers would lose most of their over-
head, but rather than retire immediately, would continue producing as long as
prices were just above additional costs and thus contributed something towards
overhead; and, as a direct consequence, even the lowest cost producers would be
unable entirely to cover their overhead costs. In other words, 'the inability of
producers to retire from the market, except permanently, would keep some pro-
ducers in the market long after the point at which they should have retired under
the theory of "perfect competition," and the lowest cost producers, who, under the
theory of "perfect competition," should be operating at a level which would enable
them to more than cover average costs, would be unable to operate at such level
and would be losing a portion of their overhead costs.' As the cycle reached its
lowest level there would be not only an elimination of high cost producers but a
great risk of throwing all of the industry into bankruptcy.

Furthermore, as the upward phase of the cycle began, the producers remaining
would not have capacity to meet the demand, and prices would tend to skyrocket.
If the upward phase continued long enough, additional capacity might be created,
but the time required to build or rehabilitate steel mills and the difficulty of at-
tracting the necessary large capital under such conditions would at least delay for
a long time any increase of capacit}\ These results — periodic alterations between
extremely low prices and bankruptcy of most producers, on the one hand, and en-
tirely inadequate capacity with extremely high prices, on the other hand — were
certainly not contemplated in developing the theory of "perfect competition."
Such results are certainly not socially desirable from any point of view. They are
the effect of applying to short run cyclical changes, a theory based on normal
adjustments during long term changes.

2. PRICE LEADERSHIP

A common charge against the basing point method is that it facilitates "price
leadership". Critics claim that there exists price leadership by a large company
or companies and that the prices established by price leaders are enforced by
retaliations against competitors for price cutting or for other forms of local ini-
tiative in prices. For example, the Federal Trade Commission said in the state-
ment recently submitted to the Temporary National Economic Committee: "

"Free initiative in the sense of trying to get business by offering advantages
to the consumer is not only restricted under the basing point system, but is
regarded as an offense, subject to the danger of retaliation by the industry.

"If a mill merely follows the price leaders in a generally observed price system,
it has relaxed from competition, and is trusting to some more subtle influence
to provide its share of the business. Initiative means leading the price in its
own area, and leading it down to the level at which the area of the local mill is
effectively protected by freight costs against the loss of its profitable business.
Initiative in the form of local self determination is seldom, if ever, found today
in the steel industry.

"Local initiative is frowned upon by the the leaders of the industry. In 1930, a
steel industry leader deplored that 'several months ago price instability was per-
mitted to come into our commercial relations'. Another high steel executive,
saying that price cutting kills business, added: 'We have got to be honest.' The
potential punishment for any serious attempt to violate the basing point price
system is price raiding, that soon brings the rebels to terms. It is vital to an
understanding of this situation to make clear the ethics on which it is based."

In answering this charge, certain features of the steel industry should be
examined which are independent of the basing point method. First, separate
steel producing units are large and diversified as to products. There are only a

-^ Exhibit No. 358. n. 7.

CONCENTRATION OF EC0X0:MIC POWER 49

few of them by reason of the huge investment required therefor and tlie restricted
areas in which they may be economically operated. This means that each
producer in an endeavor to safeguard his own investment will consider the effect
of his actions upon the market. Secondly, the large size of individual orders
and of individual buyers gives the buyers great bargaining powers and means
that buyers can often influence the course of prices. The consequence of these
facts is that each seller is apt to meet any price reduction because, owing to the
standard quality of the products of the various mills, a failure to meet a lower
price would probably result in the seller not sharing at all in the business, with
consequent heavy loss to him. In times of good demand, this factor, together
with the expected business demands has a tendency to continue prices at the
published levels. In times of poor demand, on the other hand, the pressure of
high fixed costs and the desirability of maintaining a satisfactory operating rate,
result in an effort to obtain additional business through unannounced lower prices
in spite of the certainty that such reductions will become known and will be met
by other mills. Price increases are governed by somewhat similar considerations.
If a producer initiates an increase in prices which is not followed by other pro-
ducers, he will usually lose heavily. Consequently, although increasing demand
and rising costs of raw materials and labor may make a price raise advisable,
producers of small or average size may be disposed to wait for the larger pro-
ducers to initiate the change.

A third consideration is the nature of costs in the steel industry. Price com-
petition in steel is more risky than the classical theory of "perfect competition"
contemplated. As shown above, the lowest possible level of prices at which a
producer will continue to produce and sell steel is just above the marginal pro-
ducer's additional production costs for the additional units so produced and sold,
and less than his total cost. At this price level, which contributes little or noth-
ing toward overhead, no company can long survive financially. Considering
that this fact is well known to steel producers, its influence in discouraging price
cutting is obvious.

If the foregoing describes what is meant by "price leadership", such a state
of affairs does not originate from or have any relation to the basing point practice,
but is the consequence of the above mentioned economic factors.

The relation of the basing point method to price leadership of this character
was summarized in the NRA Report, as follows: ^^

"The basing-point system clearly facilitates the use of the open-price system
of price quoting. This system is openly defended as a means of putting compe-
tition on a basis which will yield higher prices than would result without it.
According to the advocates of the system, this does not mean monopoly prices,
but normal competitive prices which can be steadily maintained and will not
naturally tend to degenerate into cutthroat competition as discriminatory price
cutting without system or order is prone to do, especially if discriminatory prices
are secret. Such a condition cannot last, but leads to informal agreements which
in turn cannot last, and thus the natural result is an unhealthy alternation
between profiteering and destructive warfare. An open-price system could be
carried out under any kind of orderly price structure, or even a disorderly one;
but it has its fullest effect if each producer knows the delivered prices he has to
meet at each purchasing point.

"The basing-point system serves this end particularly well by furnishing a
relatively simple formula by which these delivered prices can be calculated.
The system tends to restrain cutthroat competition both by informing each
producer precisely what prices he has to meet at each consuming point, and by
causing changes in prices by any producer to apply to his whole business in his
own basing-point area, with the result that he is practically forced to figure on
a price which will cover total costs and not disregard his overhead costs as he is
likely to do if figuring a special price for a limited area."

The charge of the Federal Trade Commission, however, goes beyond a mere
general accusation of price leadership and asserts that price leadership is cen-
tralized, and has stifled local initiative in prices. This charge cannot be sustained.
The NRA Committee concluded that no one company exercised full leadership: 29

"There seems to be no invariable rule as to what companies take the lead.
Cases systematically canvassed show too few price changes to afford an adequate
basis for generalizing, but general observation indicates that certain producers
more or less habitually take the lead in certain products and other producers in
other products. There is no consistent price leader for the entire industry."

" NRA Report, pp. 134-5.
2» NRA Report, p. 139.

50 CONCENTRATION OF ECONO.MIC FOWER

Basing points for various steel products have sprung up all over the country
since the early 1920's. Every steel producer is free to name basing points at his
own places of production, and many of them have done so. Such producers can
and do lead in the establishment of prices at their own locations. The basing
point method, consequently, has not stifled local price initiative, but, on the
contrary, supplies it with an effective means of expression.

The forces which have produced price leadership of this kind in the .steel industry
would probably have done so under any system of orderly selling. Assume, for
example, that a uniform f. o. b. mill price system were adopted. No mill could
absorb freight, and its sales would be confined to the area in which its mill price
plus freight would be lower than the delivered cost of steel from any other mill.
Boundaries determined by the relative level of mill prices at different locations
would be drawn around each mill, defining tlie area in which it could sell its
products. These boundaries would depend, not upon the absolute level of prices,
but upon the relative levels of prices at different locations. A five, ten or twenty
dollar increase at every mill would leave the market territory of each unchanged,
but would enhance tlie mill net return of each mill by the full amount of the
increase. Under such conditions, price leadership might well flourish, par-
ticularly after the lapse of time had defined the normal market territories of the
different mills.

The basing point method does not cause price leadership. The economic
causes which have produced such price leadership as today exists, if any, would
also produce a similar condition under other circumstances and notably under a
uniform f. o. b. mill price system. The basing point method has not eliminated
local price initiative, for it leaves to the producer at each location the power to
decide whether the location of its mill shall be a basing point and what base prices
shall be named at such basing point.

• 3. ELIMINATION OF COMPETITION

(a) Identical Delivered Prices.

Charges that the basing point method is a device for eliminating competition are
frequent. The Federal Trade Commission is one of the most earnest proponents
of this view. For example, the Commission has stated: 2"

"The statement that the basing-point system is intended to destroy and does
destroy all opportunity to Iniy at other than an identical delivered price regardless
of where purchased is emphasized by a study of prices quoted and received by the
industry in actual transactions. Private buyers state that there is no price
advantage in buying from one steel producer rather than another, since only
delivered prices are obtainable, and that these are identical at any given destina-
tion, regardless of natural advantages of particular buyers or sellers and regardless
of differences in cost of production and delivery."

*******

"This extreme range in prices is the automatic result of a system (an offspring
of the Pittsburgh plus system) by which producers reciprocally forego their
advantages of location and then set up the specious claim that thus any producer
anywhere may 'compete' with every other producer everywhere. The result is
price discrimination and a more or less permanent differential treatment of
buyers in what would otherwise be a common market. It is economically inde-
fensible as free competition and provocative of social unrest. Yet it is defended
by the industry as an 'open price plan', 'open competitive plan' and even as a
^one-price plan', 'similar to that of retail trade'." ^^

The fact that many producers can and do compete in every important market is
taken by the Federal Trade Commission as proof that competition does not
exist: ^2

"As to the monopolistic effect, the witness takes this credit to the system, namely
that it 'does not permit any producer to monopolize any piece of business', since
the mill 'can go to every place in the United States to compete for whatever
business may be offered'. * * * The obvious rejbinder to this defense of the
system is:

3" Federal Trade Commission, Report to the President with respect to the Basing-Point System in the
Iron and Steel Industry, pp. 4-5. This report, hereinafter cited as the "F. T. C. Report", was rendered in
1934, when the industry was operating under the NRA Code. Many of the charges against the basing
point svstem published in this report have since been reiterated by the Commission.

31 F. T. C. Report, p. 14.

32 F. T. C. Report, p. 16.

CONCENTRATION OF ECONOMIC POWER 51

"(a) Whatever 'competition' may exist under these circumstances is in some-
thing other than price.

*******

"(d) The alleged freedom from monopoly is absurd. The prices are monopolis-
tic in the true sense. The system may give many an opportunity to bid, but the
privilege given to the buyer to choosc; between mills at Birmingham, Chicago,
Pittsburgh, and eastern Pennsylvania al precisely the same delivered price is the
negation of that freedom from monopoly which must be restored if the consumer
is to be enabled to return to the market."

These excerpts are taken from the Federal Trade Commission's Report to the
President, published in November, 1934. In the pamphlet "Monopoly and
Competition in Steel", issued by the Commission during the March, 1939,
hearings before the Temporary National Economic Committee, the charges were
reiterated:

"To the customer, at his location, there is no difference between the quality
and delivered price offered by all the bidders. Occasional variations from this
perfect identity are observed, but only during short periods when there was a
temporary flurry of price cutting. Such flurries have been an incident of practi-
cally all price-fi.xing systems. They occurred even in the days of signed price
agreements in the steel industry.

"On the surface, the producers approach the consumer with a united front.
Competition in such crude matters as price and quality has been put aside, and
all that seems to remain is a gentlemanly emulation in the art of making friends
and influencing people."

A related series of charges have arisen in connection with alleged identical
bids. When a government agency or sulidivision calls for bids on a certain
quantity of steel delivered at a certain place, identical bids may result. This
occurred frequently under the Code, and it has also occurred since the NRA
was' declared unconstitutional.

The Federal Trade Commission has said: ^'

"The Federal Government is probably in as good a position to obtain competi-
tive prices as any other buj'er. The statutory requirements and administrative
safeguards thrown about competitive bidding, the volume of its purchases, its
ability to get special rates on land grant railroads, and numerous other factors
unite to make o*" it a buyer whicii can get competiti\e prices if any buyer can.
Against the r -lue-fixitig combination of the steel basing-point system, however,
•the purchasing agencies of the Federal Government are helpless. They have been
reduced to the impotence of having to select the successful bidder by lot because
the bids are identical."

In "Monopoly and Competition in Steel", the Commission made the following
statement, under the heading "Indicators of Monopoly":

"If identical or close bids on delivered steel are received from mills at different
distances from the buyer, there is a presumption of monopoly, unless the facts
can be explained by differences in cost of production. The only locations at
which the receipt of closely similar bids, from diversely situated mills, can be
disregarded as indicators are on the borderlines between producing areas."

Briefly summarized, the argument of the Federal Trade Commission is as
follows: Price competition has been eliminated in the steel industry; this- is
evidenced by the uniformity of delivered prices quoted at each destination. by
mills at different distances from such destination; the basing point method is the
collusive medium used to bring about such identity of delivered prices. None
of theae statements is in accord with the facts.

It is not a fact that identical delivered prices are universally charged by all
producers, particularly in times of low demand. Price cutting is frequent, and
since it is not announced, is not immediately met. If such price cutting con-
tinues, it becomes known and other producers, if they wish to be competitive, and
to share in the available business, must meet the lower prices. In this way a
lower general level of prices may be established, and various producers for a time
may again quote identical delivered prices.

Identical quotations probably occur more frequently in sealed bids to govern-
mental bodies than in private sales of steel products. There are two reasons for
this: (1) The sealed bid practice required by statute prevents public agencies
from bargaining individually with producers as is usually done by private buyers;
(2) Sealed bids are eventually published, and although a producer may be willing

'3 F. T. C. Report, p. 5. See also Appendices A & B.
292918— 41— No. 42 5

52 CONCENTRATIOIN OF ECONOMIC POWER

to quote a lower price on a private sale, he is reluctant to do so when he knows
that such lower price will soon be published and possibly may have to be made
applicable to every similar ton of steel sold by him in the future. Nevertheless,
in spite of this tendency, identical bids on governmental contracts are by no means
the general rule. An examination of records, covering Federal Government
awards for steel products made at Washington, D. C. during 1938 and the first
quarter of 1939, indicates that such awards aggregated approximately $10,550,000,
of which about 80% in value went to the lowest bidder and only about 16.5% in
value by lot on account of identical bids. The balance of 3.5% was awarded on a
basis other than of price.

Furthermore, it is quite erroneous to imply, as does the argument of the Federal
Trade Commission, that identity of prices at any given time is necessarily evidence
of absence of price competition. Quite the contrary is true. In any competitive
market, the price quoted by different producers at any given time for any staple
product will naturally tend to be uniform.

In times of good demand, and to some extent at other times, producers at
different distances from the destination may quote identical delivered prices.
The basing point method is not per se the cause of identical bids. It is of course
true, whenever the identical delivered price quotations occur at the exact level
of published base prices plus freight, that all producers making such quotations
have used the basing point method of computation, but identical delivered price
quotations do occur at levels lower than the sum of base price and freight from
the applicable basing point, such quotations being based upon market prices on
like steel products at the destination as reported by sales representatives. Identi-
cal delivered price quotations would occur under any free competitive system to
the extent that competitors' bids could be estimated, since buyers refuse to pay
more to one producer than to another for a staple product. It is even too broad a
charge to say that the basing point method per se makes identical bids possible
by enabling producers to determine competitors' prices, since the same would be
true of any open price method.

It is charged by the critics of the steel industry that the quotation of identical
delivered prices proves the elimination of competition, because under "perfect
competition" such a thing could not often happen, i. e., the different transportation
costs would usually cause different delivered prices. This charge assumes that
there are only two alternatives, "perfect" competition, and the complete absence
of competition, or monopoly. It does not recognize Ihe existence of the vast range
of phenomena between theoretical "perfect competition" at one extreme and
"perfect monopoly" at the other. Neither identical delivered prices, nor dehvered
prices of any kind, accord with the theory of "perfect competition" because such
theory assumed a freightless marketin which neither seller nor buyer needed to be
concerned with transportation costs. In the steel industry, both seller and buyer
must take into consideration the cost of transportation of steel. This factor
produces competition where the steel is to be used, and thus upon a delivered
price basis. In turn, such competition tends to result in identical delivered
prices. An examination of the importance of the factor of transportation costs,
from the point of view of producer and consumer, clearly shows that these ten-
dencies do not result from monopoly and are not symptoms of monopoly.

First let us take the point of view of an individual producer with one integrated
mill located, say, at Pittsburgh. This producer has base prices at Pittsburgh
for the various products made at his mill. He has located at Pittsburgh primarily
because of the low assembly cost of raw materials at Pittsburgh. He has devel-
oped a large pig iron and steel ingot capacity because of the need of achieving low
costs, and in order to provide an outlet for his steel making capacity he has at-
tempted to secure diversification of product by various rolling and finishing
facilities designed to produce a number of different steel products. A large part of
his total output is sold within a hundred miles of Pittsburgh, at delivered prices
which yield him a mill net return approximately equal to his base prices. But
he cannot dispose of his entire .tonnage there, partly because many other pro-
ducers are also located at Pittsburgh, and partly because he makes some products
which are not in demand in that area, in order to have the necessary diversification
of product. Therefore, he sells part of his output in areas farther from Pittsburgh
and nearer to other producing centers, which also have base prices for similar
products. On this more distant business he cannot hope to get more than the
delivered prices quoted by the nearer mills, andhe therefore meets those prices.
This forces him to absorb freight, taking a lower mill net return than he realizes
on the similar business nearer to Pittsburgh. Because his mill net return is already
lower on this business, he is not apt to cut the prices quoted by the nearer mills —

CONCENTRATION OF ECONOMIC POWER ^3

he is usually content to meet such prices of his competitors. Substantial identity
of delivered prices results.

Examining now the buyer's side of the market, it is evident that the cost of
steel delivered where the buyer wants to use it is the tota-1 cost of the steel to such
consumer — the only cost in which he is interested. Under a f. o. b. mill price
system, the buyer would add freight to the mill price and buy from the source
v/hich permitted the lowest delivered cost. Steel products for the most part are in
the nature of staple commodities and the product of one mill does not differ sub-
stantially from that of another mill. Consequently, it is to be e.xpected that the
various mills will compete in meeting the lowerst delivered prices to the different
buyers, and that the identity of prices which would result from "perfect competi-
tion" in a single market at any one time will take the form of identical delivered
prices in the steel industry. Critics charge, however, that identical delivered-
prices do not conform to the expected results under the theory of "perfect competi-
tion" because the mill net returns of different producers quoting the same delivered
price at one location are not the same. This charge is unrealistic. It has been
pointed out that the theory of "perfect competition" assumed a freightlesa
market. It seems obvious that all of the expected results of the theory of "per-
fect competition" cannot be satisfied in an industry in which delivery costs are ah
important part of total costs, and in which the producers are geographically
separated from each other, while the demand for the product is widely scattered
over large areas.

To anticipate the discussion of alternative systems, it may be noted that
the uniform f. o. b. mill price system with the elimination of freight absorption,
which the Federal Trade Commission proposes to impose by law or mandate,
would by definition prevent identical delivered prices. It would do so because
the system would inherently prohibit or prevent competition at more than a few
destinations at any given t'me. The areas in which mills might compete would
be limited by the relative freight rates from such mills regardless of the relative
levels of mill prices. Producers located close together might compete in a com-
paratively large area to which Ihe freight rates from their mills were the same.
In such an area, it is certain that identical prices at each mill would prevail,
since otherwise the mill with the lowest price would obtain all the business.
Competition between such closely located producers might well be less vigorous
than at the present time when other mills also compete in such area. With respect
to mills located at a distance from each other, competition would be limited to
the boundary between the market territories of such mills. The boundary
of each mill's territory for each product, or most products, would be different.
Such boundaries would be expected to shift from time to time in accordance with
changes in the relative levels of mill prices, but at any given time would embrace
only a very few points. Unless such points happened to be important markets
for the product in question, by the accident of freight rates, there would be little
or no competition between the mills. Thus, while buyers located near a group
of producers might be expected to enjoy competition between the local mills,
the probability of competition would be reduced, sirM^ the number of competing
producers would be less than at the present time, and in many areas in which
a single producer was located, there would be a virtual monopoly.

The NRA Report thus contrasted the two systems: ^*

"The outstanding characteristic of the basing-point system is the fact that
it puts rival producers on a footing of price equality with each other in all the
consuming points over a wide area, instead of merely at the boundary lines of
their respective market areas, as under the unqualified mill-base system. It
thus increases the number of producers the purchaser has to choose from and who
are competing for his business, and widens the areas over which direct competition
acts. This fact is hardly open to question."

Although it may be admitted that there are deviations from theoretical "perfect
competition" in the steel indu-stry, it does not follow that price competition
has been eliminated through the use of the basing point method, or that identical
delivered prices are symptomatic of the absence of price competition. Price
competition has been, and is, vigorous at all principal consuming points. The
basing point method permits many producers to compete on the basis of price,
quality, service and other factors at every market location, thus enabling the
buyers to induce price concessions by trading one producer's prices against
another's. The uniform f. o. b. mill price system would clearly reduce the areas
of competition and would by no means be certain to increase the degree of
competition in the areas in which it would permit competition. It seems obvious
that it would produce less real competition than exists under the present method.

«< NRA Report, p. 143.

54 CONCENTRATION OF ECONOMIC POWER

(b) Where is the Market for Steel?

The insistence of the Federal Trade Commission that delivered prices and the
general identity of such delivered prices at consuming points establish lack of
competition, and the further insistence that uniform f. o. b. mill prices should be
required, are obviously manifestations of a belief that the market for steel is,
or should be at the mill, and is not, or should not be, at the destination. This
belief has apparently been derived from the theories of Professor Frank A. Fetter.

Under the theory of "perfect competition," a market was assumed to be at a
given place, with many buyers and sellers present, and with the goods to be sold
actually present in the market or represented by saleable documents. Professor
Fetter in his "Masquerade of Monopoly," after summarizing the history of the
older fairs and markets, states: ^^

"Every real market is a concrete thing, an actual place where traders gather,
to which actualgoods or certificates of ownership are brought for sale and delivery,
where special facilities for trade exist, where buyers and sellers alike have an
opportunity to learn and know the amounts and qualities of goods present and the
probable intentions of other traders, where traders are forbidden to get apart
and trade outside, and where they act independently, without collusion with each
other, and without discrimination against any traders on the other side. If
we imagine all tliese conditions to be completely attained we get an idealized
picture of a market, and in the degree tiiat these conditions are imperfectly
realized, any particular market falls short of the ideal.

"Against one alteration in this ideal picture of markets a warning is especially
needed. A market must not be thought of either as the various places or as the
whole area to which the goods are taken or delivered after sale."

It would seem equallj' appropriate to warn against thinking of a market as
the place where goods are produced, at which point they cannot be used, but
must first be transported to another place.

The differences between prices in the theoretically "perfect" market and de-
livered prices quoted under the basing point practice has led to the assertion that
uniformity of prices in the first is a sign of competition, while in the second it is
a sign of monopoly. Thus Professor Fetter, in the March, 1939, hearings before
the Temporary National Economic Committee, testified as follows: ^«

"It is a market in, the sense that numerous buyers are there; they are watching
each other; they overhear each other, and consequently the fundamental uni-
formity is a uniformity in the treatment of one's own customers, of the cus-
tomers of each seller.

"Now there follows from that a secondary uniformity, namely a uniformity in
the prices that the different sellers are charging, but I believe this to be less
fundamental for the reason that if any one of the sellers thinks that price is too
low he temporarily withdraws from the market. He simply continues to quote
a somewhat higher price, expecting that the conditions of the market a little later
will bring a higher price.

"Therefore, for the time being, he has a reserve valuation that is a little higher
than the market price, the going market price, and if he has figured it right the
others have sold out at a little lower price and then his stock will sell at the
higher price.

"So we can say there is uniformity in a general sense, a tendency toward uni-
formity, both as between the buyers and as between the prices quoted and received
by the sellers, but the second uniformity is a somewhat less accurate one than the
other.

"So we have laid down practically the test of a true market by the economists,
a price uniformity there. That has no reference whatever to a delivered price,
nor is it a uniformity in the price quoted at places outside of the market."

Professor Fetter is here discussing the theoretical "perfect" market, one of the
assumed conditions of which is the ability of a seller to retire temporarily from
the market if the price is too low. It has been shown that this condition does not
prevail in the steel ind\)stry, at least in the majo^-itv of instances, where large
orders are involved. Because of this assumed condition alone (since no other
reason is given). Professor Fetter concludes that imiformity of the prices of dif-
ferent sellers is unimportant, although clearly the market would not be competi-
tive unless the prices of most sellers were uniform at a ly given time. He con-
cludes, on the other hand, that uniformity of each seller's return is essential.
This conclusion may perhaps be tested by considering possible situations which

" F A. Fetter, "Masquerade of Monopoly", published by Harcoiirt, Brare & Company. Inc., p. 261.
M Record of Proceedings of Temporary National Economic Committee, The Bureau of National Affairs,
Inc.,- March 7, 1939. p. 329, (hereinafter cited as "Temporary National Economic Committee Record").

CONCENTRATION OF ECONOMIC POWER 55

might arise, not in the theoretical "perfect market," which is merely an economic
concept, but in the older fairs and markets which were taken as a model. It does
not violate credibility to presume that some of the sellers in such markets fre-
quented several markets, at differing distances from the place of production of
the goods, and that some transportation costs to the markets were involved.
The price at which such a producer would sell in each such market would be
determined, not by the difference in transportation costs, but by the competitive
price in each such market. Buyers in one market would often pay this producer
a different price than buyers in another market, and his return, less transporta-
tion costs, would be less. Prices of all sellers at each market would tend to be
uniform, but the returns to the particular seller would tend to vary. Of course,
the older markets and fairs were not "perfect markets," but merely the nearest
approach to the theoretical concept of a "perfect market."

Assuming that Professor Fetter has accurately described a "perfect market" as
it was defined by the older economists, he has taken the further step of assuming
that that definition is or was intended to be a norm, or standard, to which all
industries should conform. The economists who developed this concept did not
intend it as a standard, and they were well aware that no "perfect markets"
actually existed in the business world even of their day. Thus Professor Fetter's
attack upon the basing point method is founded upon an unsupported assumption.

Professor Fetter, continuing his analysis, asserted that the true market for steel
is at the mill, and that if the mills were compelled to quote uniform f. o. b. mill
prices, without "phantom freight" or freight absorption, "perfect competition"
would result. Hence arises the contention of the Federal Trade Commission, .
that the true market for steel is at the mill, and that the basing point method, by
providing a means for quoting delivered prices at each buyer's destination., has
destroyed or injured the market and eliminated competition.

Professor Fetter's insistence that the existence of identical delivered prices
alone, and in and of itself, establishes monopoly, regardless of other economic
considerations, is shown by subsequent statements made during the March, 1939,
hearings before the Temporary National Economic Committee. After remarking
that it is always difficult to tell whether business men are actually fixing prices,
he concluded: "

"* * * If what they are doing is what they would do if they got together
and made a formal agreement, then we should treat that as a formal agreement.

"Mr. Hinrichs. Your primary test, Professor, of behavior would be what?
Would it be the establishment of a breakeven point for an industry when it is
operating at an extremely low percentage of capacitj'? Would that be the
primary test of whether the price were a competitive or a non-competitive price?

"Professor Fetter. No, let's stay here at home; it would be quoting identical
delivered prices."

Even if the uniform f. o. b. mill price system were put into operation, the result
v/ould not be "perfect competition," since the conditions under which "perfect
competition" was expected to occur do not exist in the steel industry. Professor
Fetter makes no attempt to explain such differences, -©r to prove that his theory
would work satisfactorily in spite of such differences. Aside from this, however,
his conclusion that the market is at the mill must be doubted. If there is any
true market for steel, it is at the buyer's door. As transportation costs cannot be
disregarded, every buyer, under any price system, will look to the delivered price
at his door, and not to the f. o. b. mill price fifty or five hundred miles away.
Since delivered prices are the principal concern of the buyers, competition between
steel producers naturally takes the form of meeting the others' delivered prices.
Certainly, there is no approach to thi? assumed condition of a true market at the
mill.

The Federal Trade Commission stated in 1934 that base prices for steel were
too high, and that the basing point method made them inflexible. An example
of such a contention follows :^8

"It is a most significant fact that the steel industry was able to show satisfactory
profits for the first 6 months of 1934 without operating to more than half its
producing capacity. Profits under such conditions necessarily involve prices
per ton which include a high margin over cost of production. It is theoretically
possible to fix prices at a point where profits would be shown on a much smaller
percentage of capacity. The consuming public would doubtless revolt against
the exaction of prices that would provide a profit on an investment of which only

3' Temporary National Economic Committee Record, p. 363.
" F. T. C. Report to President, p. 37.

56 CONCENlTtATION OF ECONOMIC POWER

a minor percentage is being used. It has borne more or less patiently the burden
of prices which provided a profit on an investment of which only 50 percent was
used. Recent trade press reports state that some of the younger and stronger
independent producers of steel are now contending for a drastic reduction in
prices on the theory that it is better business to have a high volume of production
on a reduced margin of profit than a small output at a high price. Such a position
is consonant with the view of the Commission above expressed and with any
logical long-run view of economic recovery."

This contention was repeated by the Federal Trade Commission in 1939 in the
statement submitted to the Temporary National Economic Committee:

"Overequipment in the industry, with failure to eliminate the least efF.cient
plants, tends to discourage technological progress, but it^ chief effect appears to
have been to accustom the industry to the idea of a low ratio of production to
capacity. The industry has felt entitled to a price level that will allow it to make
a profit when oj^erating at less than 40 per cent of capacity, although this required
percentage increased with the base price reductions of June, 1938."

The Commission also "contended that the price level is so high as to thret;tea
the survival of the capitalist system:

"Thus the advantage or disadvantage of location for many buyers is an arti-
ficial one, which may be altered by arbitrary private decree through a change in
the basing point. Price competition in the steel industry, during all periods when
the system is working, is eliminated. High prices, not in conformity with the
law of supply and demand, place unreasonable limitations on use of the material.
The effect, when combined with that of similar artificial prices in many other
lines of production, is a depressed condition which can be kept from utter collapse
only by repeated doses of public subsidy.

He sifi ^ )|c :(; % :f:

"The ability to decide on a price and hold to it regardless of demand, which is
the essence of monopoly, is a prime factor in establishing the vicious circle of
high prices, restricted production, and reduced employment so widely condemned
as 'scarcity economies'. Starting with a price level designed to protect obsolete
and unnecessary plants, and therefore having long periods of part-time operation
and high overhead, the steel industry has established a habit of low production
ard high cost that seems to justify high prices. The demand is thereby restricted,
and the vicious circle is completed by the continuance of high costs based on
restricted output.

"Moreover, in a product like steel which serves as raw material for other prod-
ucts, and for the machines with which other products are made, any unnecessary
cost will be multiplied from step to step throughout industry so far as the influence
of steel extends. The consumer is burdened with monopoly costs of steel multi-
plied several fold. * * * The steel industry is a focal center of monopolistic
infection which, if not eradicated, may well cause the death of free capitalistic
industry in the United States."

These contentions may be summarized as follows: Base prices under the basing
point method are high, and the proceeds are used to defray the costs of excess
capacity and of wasteful cross-hauling, and to realize unreasonable profits. The
contention that the steel industry earns unreasonable or "monopoly" profits is
refuted by the steel industry's low rate of return on investment.

The NRA Report, published in 1934, concluded that steel prices had declined
-relatively to other prices over a long period. ^^

"* * * j^ appears that over a term of thirty-three years, steel prices have
declined relatively to all prices. While the same could be said of metals and
metal products generally, it is still significant that there have been periods of
long continued gradual decline, from 1900-1914 and from 1923-1929. This
behavior is certainly not unmistakably monopolistic. All these examinations
of evidence are instructive, but fall short of proving a conclusive case for or
against the existence of monopolistic control. * * *"

The NRA Report contained the following statement relative to profits in the
.steel industry: *"

"* ♦ * In 1929, the industry's best year since the War, net income was
$362,000,000— (Compiled from Standard Trade and Securities of May 4, 1934,
by G. C. Gamble, Division of Research & Planning, N. R. A., May 8, 1934).
These earnings were to be compared with total assets in the general neighborhood
of $4,500,000,000, indicating a return of about 8% in this uniquely prosperous
year. The average for the four years 1927-1930 was about $231,000,000, or

• »• NRA Report, pp. 13fr-40.
« lb., p. 138^

CONCENTRATION OF ECONOMIC POWER 57

less than 5% on actual investment. Thus there are not only no monopoly
profits at the present time, but no sustained profits of a clearly monopolistic
character during the more recent years of prosperity, which might serve as oflfseta
to the losses of the past four years." *^

Thus, it is demonstrable that the earnings of the steel industry show no signs
of excessive profits. In the case of the United States Steel Corporation, the
ratio of earnings to total assets, less current liabilities, as reported by its annual
reports, has averaged approximately 3.4% during the period from 1920 to 1938,
inclusive. For the ten year period ending with 1938, such ratio has been less
ihan 2%.

The correlated statements that the proceeds of high prices are dissipated in the
costs of excess capacity, retention of obsolete plants, and wasteful cross-hauling
are dealt with at length elsewhere in this memorandum, but the first two may be
briefly analyzed and considered at this point. Contrary to the unsupported
assertion of the Federal Trade Commission, technological progress has been
extremely advanced in the steel industry. In the last dozen years, the develop-
ment of modern machinery and processes has revolutionized the industry and
its products, and, to a high degree, industries and products of industries which
are consumers of steel. Such changes necessarily have outmoded some machinery
and mills, a large proportion of which have not been operated, until recently,
for some time. It seems implicit in the Federal Trade Commission statements
that the Commission would contend that such mills and machinery should have
been scrapped itnmediately, their capacities deducted from total capacity figures,
and their value written off the assets of their corporate owners. However, such
plants were by no means so obsolete as to make it necessary to scrap them, since
their full useful life had not been served and their products were, and are, still
useful for many purposes, and the cost of retaining rather than scrapping such
mills was not appreciable. Thus, the policy of most corporations has been to
retain such plants as reserve capacity, and this policy is justified by the fact
that the recent sudden increase in demand has already forced into operation
many of such older mills, and is requiring others to be brought into operation
as rapidly as possible.

The capacity figures of recent years have included the capacity of many such
older mills. To say that capacity figures, when compared with production figures
during periods of business recession, show excess capacity is to ignore entirely
the proper distinction between excess capacity and idle, or reserve capacity. The
capacity of the steel industry is not more than sufficient to supply the demand
at the height of the business cycle, even with the utilization of what may be
termed marginal mills, as is clearly shown by the situation at the present time with
mills operating in excess of 90% of ingot capacity. Apparently the Federal Trade
Commission would wish to see mill after mill scrapped as demand decreased in a
downward phase of the business cycle. It is not entirely clear whether the im-
plication is that this should occur as a voluntary policy of scrapping mills in order
of age or degree of obsolescence, or that it should occur as a "natural" economic
result. At any rate, the Commission contends that the industry should not have
shown a profit during the first six months of 1934 when operating at 40% of
capacity, and it may be assumed from the Commission's statement that the indus-
try would have been expected to show a not inconsiderable loss during such period.
A continuation of such circumstances for any substantial period of time would,
undoubtedly, result in a forced liquidation of many steel producing companies.
Thus, it may perhaps be concluded that tjie Federal Trade Comiilission expects^.

<i other qualified commentators have reached the same conclusion. In Daugherty, etc., "Economics
of the I'on and Steel Industry," Vol. 1, pp. 408-410, it is stated:

"A survey of the financial operations of the steel industry as it is represented by the integrated companies
indicates that it earned but a modest return (net income) on its capitalization even in the 1924 to 1929 era.
For those 5ix years the average rate of return on its capitalization was approximately 6.37 per cent. For
the years 1931 to 1934 inclusive, losses after charges exceeded net income, with the result that an average
net loss of 1.82 per cent on capitalization was experienced. The relatively low earning power of the stert
industry is further emphasi2red when it is compared with' groups of miscellaneous manufacturing corpo-
rations. From Chart 59 it Is apparent that the average annual rate of return on capitalization earned by
both the 50 corporations and the larger sample of 2,046 corporations exceeded the rate of return earned by
the steel industry in every year of the period covered.

"Further substantiation of the relatively low return on capitalization in the steel industry is to be found
in Epstein's Industrial Profits in the United States. Epstein shows that of 106 minor industrial groups,,
the 'Castings and Forgings' industry ranked, in percentage of net income to capitalization, 13th from the
lowest both in 1921 and in 1928. This group comprised 99 corporations with an average total capital of
$49.5 millions. Included in this group are foundries, rolling mills, and all kinds of iron and steel plants. '

"Explanation of the persistent relatively low rate of earnings in the steel industry is not ea.sily formulated.
It is, of course, possible that the steel group has placed a higher valuation on its assets than have eorpo-
ratioiis in other industries, but the validity of such a surmise cannot be demonstrated. At least, if such
Inflation of assets exists, it does not appear in such items as eoodwill and patents. In none of the years of
the period covered did these items exceed 0.3 per cent of total assets."

53 CONCENTRATION OF ECONOMIC POWER

this to be the means by which capacity utilized at periods of high demand would
be eliminated as demand decreased. It is apparently immaterial in the Commis-
sion's view that this method would not necessarily eliminate mills in order of degree
of obsolescence since many other factors, such as the comparative financial strength
of producing companies, would influence the determination of which mills would
disappear. Furthermore, the Federal Trade Commission does not suggest the
means of increasing capacity in periods of rising demand. The length of time
necessary to construct a modern mill, or to rehabilitate a mill abandoned by a
bankrupt company, would alone cause a considerable lag of capacity behind de-
mand. The necessary amount of capital and the difficulty of attracting capital
under such circumstances would increase this problem. The natural result would
be in the direction of the skyrocketing of prices in periods of rising demand. These
are all factors which should be, but often are not, considered before assertions
are made that total capacity, which includes reserve capacity barely sufficient to
supply peak demands, is excessive, and that "obsolete mills," which constitute
such reserve capacity, are improperly retained.

There remains for consideration the contention that steel prices are inflexible
and that the cause of such inflexibility is the basing point method. Steel prices
are relatively stable, or inflexible, as compared to prices of agricultural products
and other consumers' goods. This is a characteristic of durable goods industries,
which results naturally from relatively inflexible costs, proportionately high over-
head costs, inelasticity of demand, and other factors, and, thus, inflexibility is
not necessarily an indication of monopolistic or price-fixing tendencies. Steel
prices are certainly not entirely inflexible, and no evidence has been brought for-
ward to prove that they should be more flexible or that any advantage to steel
consumers or the community as a whole would result from a greater degree of
flexibility. In fact, a relative degree of stability is essential from the point of
view of the buyer of steel since he must plan his production and his own prices
for advanced periods of time. It is not believed that most buyers of steel would
wish to be forced into the necessity of dealing in "futures" in steel products by
constantly fluctuating market prices, such as are characteristic of the prices of
grain and other agricultural products.

The effect of the basing point method upon flexibihty of steel prices could only
be measured accurately by comparison of present prices with prices which would
have existed in the absence of the basing point method. Such alternative prices
cannot be known, as it cannot be determined what practice would have developed
if the basing point method had not been used, and thus it cannot be estimated
what effect this other practice w?uld have had upon prices.

Nevertheless, it is probably correct to assume that some features of the basing
point method have contributed to an orderly price structure. For example, the
publication of prices probably has a stabilizing influence on the market, and thus
has some eff'ect upon actual prices, although this influence is subject to inany and
powerful counteracting tendencies. The same stabilizing influence would result
from any open price system. It is to be noted, however, that any stabilizing
influence of the basing point method operates more powerfully to prevent prices
from rising than to prevent them from decreasing, since unpublished price reduc-
tions are possible, whereas unpublished price increases do not, of course, occur.
Finally, if it be assumed, merely for the sake of argument, that the basing point
method has had some influence in the retention of older mills as reserve capacity,
it then follows that the basing point method has prevented large increases in
prices in periods of high demand, such as at the present time.

4. UNDUE CONCENTRATION OF PRODUCTION FACILITIES

Critics of the basing point practice have asserted that it has caused undue Qon-
centration of production facilities, particularly at Pittsburgh, but also at other
basing points. They have also contended that the basing point practice has
resulted in "uneconomic" location of producing mills. This may be taken as the
same criticism differently expressed. The criticism continues to the effect that
producing mills should be scattered over the country and assumes that steel
mills would be so scattered had it not been for the basing point practice. The
following passage from the statement submitted by the Federal Trade Commission
to the Temporary National Economic Committee is an example:

"Souqjd competition would be efficient for the nation because it would reduce
wasteful cross hauling, the cost of which the nation must bear. It would promote
decentralized location of mills, tending to favor the growth of numerous scattered
milifrek>se to customers, or in the shortest line between customer and raw material,
an important item in terms of economic stability and of national defense."

CONCENTRATION OF ECONOMIC POWER 59

Under the Pittsburgh Plus pricing method, tlie mills at Pittsburgh sold steel
products all over the country at delivered prices equal to the Pittsburgh base
price, plus freight from Pittsburgh, thus realizing net mill returns equal to their
base prices. Other mills, in theory, met those delivered prices. Consequently,
the mills at Pittsburgh enjoyed a nation-wide market with normally even mill
net returns. Some critics have concluded that this supposed advantage resulting
from Pittsburgh Plus was the cause of the location of the many large produciifg
mills at Pittsburgh. They have also concluded that the location of large steel
producing capacities at other basing points has resulted from the basing point
practice.

An accurate appraisal of this criticism would require comparison of the existing
facilities at Pittsburgh and other large basing points with those which would exist
there if the Pittsburgh Plus and basing point pricing methods had not been in use.
Such comparison would require an examination of the extent to which any pricing
practice could affect the location of production facilities, what practice would
have been followed in the absence of Pittsburgh Plus and the basing point method
and what effect such different practice would have had upon the location of produc-
tion facilities. There is no way by which the present steel producing facilities
can be compared scientifically with those which would have existed under other
conditions. However, it can be pointed out that in many respects the existence
of the Pittsburgh Plus method would have a natural tendency to encourage loca-
tion of mills outsjde of rather than at Pittsburgh.

Under the Pittsburgh Plus method delivered prices all over the country were
higher than the Pittsburgh base price by the amount of the freight from Pittsburgh.
The mill located away from Pittsburgh realized a higher mill net return on sales
in its immediate territory than Pittsburgh mills. For example, a mill at Chicago,
or other producing points, received a delivered price on sales at such point higher
than the Pittsburgh base price by the amount of the freight from Pittsburgh to
such point; it retained this advantage roughly on sales in directions away from
Pittsburgh ; *^ and it retained an advantage over Pittsburgh mills in smaller amounts
in sales toward Pittsburgh up to points half-way between Pittsburgh and the
location of the mill. This encouraged the location of mills at Chicago, Buffalo,
Bethlehem, Sparrows Point, Cleveland, Birmingham, etc., and made possible the
constant expansion of their facilities. The price differentials at basing points
outside of Pittsburgh during the Pittsburgh Plus period and subsequently had
the same effect.

Such statistics as are available indicate that Pittsburgh declined in relative
importance as a producing center during the Pittsburgh Plus period and sub-
sequently.

In Chapter VIII of "The Economics of the Iron and Steel Industry," there is
an incomplete study of the relative capacities in the Pittsburgh district and at
other locations during the years from 1900 to 1934. The author concluded that
Pittsburgh declined relatively in pig iron capacity during that period: *^

"(1) Pennsylvania throughout the period 1900-1934 suffered a gradual decline
in its relative importance as an iron-producing state. Inspection of the curve
shows that, in general, in years when total production of pig iron of the country
declined, c. g., 1921, 1924, 1927, Pennsylvania's percentage of total production
decreased. The subsequent increases in the share of total output in years of revi-
val of total production were insufficient to maintain the relative posion of Pennsyl-
vania. Decline in the output of the smaller furnaces in years of falling prices
and the gradual abandonment of such furnaces, together with an increase in the
number of larger stacks in the regions west of Pennsylvania, are behind the changes
noted.

"(2) In sharp contrast to the situation in Pennsylvania were the developments
in Ohio and in Indiaiia-Mictiigan. The upward slope of the curves shows strik-
ingly the tendency for pig-iron production to move westward. For most of the
period the gains made in Indiana-Michigan represent developments at Gary, Ind.
In Ohio advances made in the Cleveland and Youngstown Valley districts offset
the declining output of the smaller furnaces in central Ohio.

*******

"(4) The sharp decline in total pig-iron production subsequent to 1930 was
accompanied by striking changes in the relative positions of Ohio and Pennsyl-
vania. In 1932, for the first time in the entire period, production of pig-iron in
Ohio exceeded the output of Pennsylvania furnaces."

" It wns reduced to some extent by the difference between long and short haul rail freight rates.
" Daugherty, etc., "Economics of the Iron and Steel Industry," Vol. I, pp. 334-337.

60 CONCENTRATION OP ECONOMIC POWER

This writer found the same. trend in the capacity for the production of ingots
and rolled steel products:^*

"Chart 38 presents similar curves for steel ingots and castings, but the lack
of comparable data has made it necessary to omit Alabama. On the other hand,
it has been possible to plot separate curves for Michigan and for Indiana. In
general, where the data are for identical regions, the curves show much the same
slopes as those already noted for pig-iron production and capacity. In Uhnois,
however, the percentage of ingot and castings capacity increased sharply after
1929, but at the same time the percentage of production of ingots and castings
declined appreciably. In this instance, the behavior of the percentage curves for
capacity resulted, in part at least, from the erection by one of the large steel cor-
porations of 14 basic open-hearth furnaces with a total annual capacitv of more
than 1,500,000 tons. * * *

"The relative importance of the several regions changes but little when meas-
ured in terms of the production of finished hot-rolled products. Nor do these
regions exhibit any important difference in trends over the period covered. Per-
haps of chief significance is the fact that the decline in the relative importance
of Pennsylvania has not been equally sharp in each of the stages of iron and
steel production. Throughout the period, Pennsylvania has maintained first
place in the production of finished steel products. (It will be recalled that Ohio
surpassed Pennsylvania in 1932 in the production of both pig iron and ingots and
castings.) Inspection of the curves in Chart 39, however, yields no indication
that the downward drift in the percentage of finished steel production will not
continue. Since 1920 Pennsylvania rolling mills have improved their relative
position only in 1926 and in 1929, years of expanding production for the entire
industry. In 1933 and in 1934, total production of the country increased, but
Pennsylvania plants continued to account for slightly smaller percentages of total
output. The development of the continuous rolling mill and the erection of such
mills in regions nearer to the automobile plants, which are the important con-
sumers of sheet and strip steel, may result in further decline in Pennsylvania's
relative importance as an iron- and steel-producing state."

The Federal Trade Commission's assertion that the existence of basing points
has caused the location of mills at such points may be countered with the fact
that, as a matter of record, with certain minor exceptions,** the naming of a basing
point has followed rather than preceded the installation of production facilities
at such points. This is the normal course of development of the basing point
method. The NRA report stated:

"In the growth of the Chicago District's productive capacity, we find early
signs of the natural basing point development, whereby when capacity in a dis-
trict increases to the point where it begins to require all its own market and to
press for more, it breaks away from the 'mother' basing point, stands on its own
feet and quotes its own base prices which are lower than prices delivered from
distant producing points." *^

In fact, the location of production facilities has been due to the fundamental
economic traits of the steel industry which have already been set forth, rather
than to any pricing system. The primary factor has been low assembly costs of
raw materials. Large steel producing capacities would be expected in the Pitts-
burgh district independently of any pricing method because of the location at
Pittsburgh in relation to the raw materials necessary in the production of steel.
Pittsburgh is^pear deposits of the best coking coal, and large supplies of iron ore
can be brought to it cheaply by water from the Lake Superior district with only
short rail hauls. Limestone is also readily obtainable. This factor was the cause
of the rise of Pittsburgh as a steel producing center long before the Pittsburgh
Plus pricing method grew up. This consideration also caused the location of mills
at other large producing centers and has been one of the principal determining
factors in limiting the location of steel mills to a comparatively few districts."

While nearness to markets is also an important factor, which had an influence
upon the location of existing mills, it cannot be the determining factor in the
location of a steel mill. The Federal Trade Commission's theory seems to be that
steel mills should be located near the markets for steel products — in effect that
they should be scattered over the country wherever there is a market regardless
of other considerations. Such location might result in lower transportation costs

" /</., pp. 337-339.

<» Certain Oulf Ports were named basing points, although there was little capacity located near them, in
order to enable domestic mills to meet foreign competition. The effect has not been the installation of
producing facilitiei; at such points.

«NRA Report, p. 39.

« JIm tfa« passage from the NRA Report quoted on p. 45, mpra.

CONCENTRATION OF ECONOMIC POWER Ql

for finished steel products but no evidence is presented that this would offset the
disadvantage which such scattered mills would have iil the transportation costs
of assembling more than four tons of raw materials for every ton of finished steel.

Furthermore, there is an entire disregard of other 'costs which would be an
inevitable consequence of an application of the Commission's theory. Concen-
tration of steel producing facilities in a few districts is also due to the economies
of integration. The economies of vertical integration necessitate the location of
steel producing operations near the blast furnaces and rolling mill operations
near the steel producing facilities. A modern integrated mill inherently has large
capacities and its products must be distributed to many markets. The demands
of large markets are often limited to one or a few products. An integrated mill
cannot economically limit its production to one or two products but must have
a wide diversification of products, the demand for which is geographically scattered.

Thus, a location cannot justly be called "uneconomic" unless some other loca-
tion can be shown to be better. The benefits of proximity to a large consuming
market may be offset by high assembly costs. A large steel mill cannot limit
its operations to the few products for which there might be a local demand, and
the small scale operations of a smaller mill would undoubtedly result in high
operating costs with no saving to its customers. The location of mills upon the
sole basis of nearness to a market would always subject them to local and seasonal
variations in demand, and might well be disastrous if the market should subse-
quently move away because of labor difficulties or other causes. Concentration
of facilities necessarily results from the nature of the steel industry, and present
locations of mills are based upon a proper consideration of the economic factors
involved. They cannot be attributed to any pricing method.

6. EXCESS CAPACITY

Critics of the basing point method have stated that it causes "excess capacity".
For example, the statement recently submitted to the Temporary National Eco-
nomic Committee by the Federal Trade Commission contained the following
passage : ^^

"The protection of obsolete plants under the umbrella, by retaining excess
capacity in the industry, impairs the incentive to build new and more efficient
plants or to secure a better location."

What is meant by "excess capacity"? What factors should be considered in
determining capacity? Should theoretical output be based upon a 24 hours-a-day
operation, or on some lesser number of hours? Should one deduct for idle time-
required by repairs, labor shortage, etc.? Steel capacity figures are generally
taken from the "Directory of the Iron and Steel Works of the United States and
Canada", published by the American Iron and Steel Institute, which has adopted
the following formula:

"The figures of capacity desired'are your practical capacity, that is, an output
which you feel can be attained under conditions of maximum demand, assuming
adequate transportation service and no serious labor shortage. You are especially
requested to base your figures on j'our usual normal number of operating turns
per week; and to make due allowance for such holidays as you customarily observe,
as well as for average time lost for repairs, relining, and for rebuilding of furnaces."

This definition, among others, is quoted by Dr. Willard L. Thorp, now asso-
ciated with the Department of Commerce in connection with its work for the
Temporary National Economic Committee, m a study of the relation of over-
capacity to business depressions, entitled "The Problem of Overcapacity." *'

The criticism of the Federal Trade Commission mfers that steel capacity has
been accurately measured against a correct standard and has been found to be
excessive. But Dr. Thorp, after noting that unused or idle capacity in the steel
industry is necessary and inevitable, denies that it is possible at present to for-
mulate a test of "excess" capacity. He says:

"There is somewhere a degree of excess which, under the techniques of produc-
tion and the shifts arising in demand, might be considered necessary, a degree
which is probably taken into practical financial account through charges for depre-
ciation and obsolescence, and through various other forms of liquidation of cap-
ital. * * * A study of excess capacity as a cause of depression would involve,
then, a knowledge of its fluctuations above and below the line of necessary excess.
Such knowledge is only in the smallest fraction available today."

«8 Exhibit Xo. 358, p. 7.

" Contained in "Economic Essays in Honor of Wesley Clair Mitchell", pp. 477-495. All references to
Dr. Thorp's views contained in this section are from this study, and quotations are made by permission oj
the Columbia University Press.

Q2 CONCENTRATION OF ECONOMIC POWER

The Federal Trade Commission has probably based its conclusion upon the fact
that the industry during most of the past ten years has operated at a low per cent
of its reported capacity. This is a sign of idle, but not necessarilj- of excess capacity.

Dr. Thorp lists the following as being among the causes of idle capacity:

1. Seasonal variations in demand. For example, telephone, electric light and
power industries, docks, wharves and ice cream all experience sharp seasonal
fluctuations in demand. (This applies to some steel products, such as cotton bale
ties, automobile sheets, tin plate, etc.)^"

2. Seasonal variations in supply. Canning factories, brick yards and logging
camps are exampIes,of industries which must maintain facilities to deal with one
busy season, and which operate at a low rate during the rest of the year. (Through
storage of raw materials, the steel industry largely avoids seasonal fluctuations in
supply.)

3. Reduced demand, resulting from technological changes, substitute products,
legal proliibitions, fashion changes, etc. (The steel industry over the last tefi
years has experienced a reduced denrjand for heavy products, such as structurals
and rails, partly compensated by an increased demrjid for light, fiat rolled prod-
ucts.)

4. Style changes. In certain industries style changes require new machineiy,
while the old machinery is retained because it is not worn out. This results in
unused capacity. (In the steel industry style changes occur in finished articles
made from steel products, and such changes are closely inter-related to techno-
logical improvements in the quality of steel products. Tlie one piece steel tops,
deeply recessed steel panels, and sharply rounded, high crowned one piece fenders
of modern automobiles, which may be considered in part style changes, were made
possible by the greatly improved steel sheets produced on modern continuous
rolling mills. The demand for the improved sheets required the installation of
continuous rolling mills, but the old hand mills were retained because their product
was still satisfactory for other purposes, and the capacity of the hand mills was
useful as a reserve.)

5. Hand-to-mouth buying. In industries in which the carrying of stocks of
their products is risky because of style changes, adequate capacity must be main-
tained to meet sudden demand. (Most steel products are made to meet varying
customers' requirements, but this furnishes no clear basis on which to charge that
excess capacity results.)

6. Technical advances and obsolescence. New inventions and improvements
may increase the capacity of old facilities, and new equipment may supplant
older facilities which are still usable but not as efficient. Nevertheless, the old
machinery which has not served its full useful life is held as reserve capacity and
is usually included in total capacity figures. (The capacity figures assembled
by the American Iron & Steel Institute include the capacity of various so-called
hand mills, which have been largely outmoded by the modern continuous mills.
Many such old mills were retained as reserve capacity, rather than scrapped,
because they had not served their full useful life. The sudden increase in demand
in the fall of 1939 has forced into operation all or most of this formerly idle capacity,
and the existence of these mills has been of inestimable importance in satisfying
customer requirements. It has also probably been a factor in preventing any
sudden change in prices during this marked upturn in the business cycle.)

7. Planning ahead. After years of steady growth in a given industry's facilities,
new plants will ordinarily be built to accommodate expected future growth,
which in the interim may result in some temporary overcapacity. (This probably
is true to some extent in the steel industry, in which the building of a plant is a
major engineering job. Additions to already existing steel plants are not easy to
design, and when built are not apt to be satisfactory.)

8. Competition. The competitive scheme requires that there be at least two
sellers between whom the buyer can choose. As a result, there must be some
duplication of capacity. (Some duplication of capacity results from the desire
not only to earn a profit but also to insure against deeper losses for the time being.
For example; following the recent shift in demand from heavy steel products to
light, flat-rolled products, many companies installed continuous sheet and strip
mills, as a long-range program, not only because thej' thought such facilities could
eventually be profitably employed, but also beca ise they felt they had to do so
in order to stay in the market. This probably las resulted in some temporary
overcapacity for sheets and strip.)

Since Dr. Thorp was examining the effect of capacities in producing depressions,
he did not list the business cycle among the causes of idle capacity. Demand

» Parenthetical statements are not derived from Dr. Thorp's essay.

CONCENTRATION OF ECONOMIC POWEK g3

fluctuates enormously through the different phases of the business cycle, particu-
larly in the durable goods industries, as clearly appears from the figures cited
supra. Naturally, if the industry has facilities to supply the peak or near-peak
demand, it will have idle capacity during the periods of lower demand. Even if
excess capacity were proven, it would be extremely difficult to establish that any
part of it could properly be attributed to the basing point practice.

The criticism of the Federal Trade Commission may, however, be construed to
mean that the basing point method n;aintains prices at higher than competitive
levels, thus attracting too many producers and causing the installation of excess
capacity. However, the price of steel over a long period has declined, relatively
to other prices, and the profits of the steel industry liave been considerably lower
than the average among industries.

The attack on "excess capacity" has received an emphasis out of proportion to
its real significance. Dr. Thorp says,

"* * * the few indicators which have been gathered together here fail to
provide any final affirmative evidence to support the belief that unusual increases
in productive capacity did much to bring the recession."

Dr. Thorp notes, for example, that output during the years 1925 to 1929
increased faster than capacity. The NRA Report made the following comment: ^^

"So far as the installing of new productive capacity is an indication, it is
significant to note that the recent study made by the Brookings Institution:.
'America's Capacity to Produce', pp. 251-270, finds no evidence that the per-
centage of excess capacity in the industry had shown any long-run tendency to-
increase prior to the present depression, but distinctly the opposite, especially if
the figures are carried back to 1898-1900."

6. ALLEGED PRICE DISCRIMINATION

Steel mills, in general, realize their highest mill net returns on sales to buyers
in the territory nearest" to the mills, and, after passing beyond their natural market
territories, progressively lower mil] net returns as the distances to the customers
increase. As before mentioned, this variation in mill net returns is often
critically, although inaccurately, characterized as "price discrimination," and
•because it follows roughly a geographic pattern, it is sometimes called "geograph-
ical price discrimination."

Tlie basing point method is often criticized on the basis of such a difference in
mill net returns. In a "perfect market", the argument runs, discrimination of this
character would not take place. A seller would then cith'er meet the price deter-
mined by supply and demand and sell in the market at that price, or he would
demand a higher price and, failing to ol)tain it, would withdraw from active par-
ticipation in the market. But, tlic critics argue, he would not have two prices for
the same product at the same time and thus would not discriminate in price
between different buyers (ignoring quantity discounts, possible differences in
handling costs, etc., which would require some classification of buyers). By con-
trast, according to such conimentatoiS, the variable mUl net returns realized by a
steel mill on business in different areas are ^iiscrimirlatory, and therefore non-
competitive. The fallacies in this theor}- generally, and with reference to the steel
industry in particular, have been discussed elsewhere in this study. The causes
of variations in mill net returns may be considered here.

(a) So-called "Phantom Freight."

Critics of the steel industry contend that producers charge "phantom freight"
in two types of situations, first, in certain .sales by non-basing point mills, and
second, on sliipments made by a medium of transportation cheaper than that
which is used in calculating the delivered- prices. These may be considered
separately. ^^

(]) Non-Basing Point Mill. — Referring to the foregoing Diagram 3, which is
here reproduced, A and B are basing points, and c is a non-basing point mill.
A is tlie applicable basing point. The delivered price at X, a point of consump-
tion, is $-14 ($40 base price at A, plus $4 freight from A to X). The mill at c, a
non-basing point mill, will meet tiiis delivered price at X, paying only $3 freight
and realizing a mill net return of $41, or $1 more than the base price at A. This
$1 is called by the critics "phantom freight", because, it is said, the mill at c
charges $4 for freight, while it pays only $3. Of course, this criticism is inaccurate.
The niiil at c has not charged any freight, "phantom" or otherwise, but has merely
named a delivered price of $44, equal to that of tJie competitive mill at A.

" NRA Unport p C.
" See niagram 3, p. 3.'i.

CONCENTRATION OF ECONOMIC POWER

THE BASING POINT METHOD

Diagratn 10: Mill Net Returns of Non- Basing Point Mill.

BASE PRICE $40

MILL NtT RETURNS TO MILL AT ©

CONSUMING
POINT

rSEIGHT 1 FREICHI MILL NCT 1
ADDED 1 PAID | RHURN ]

{400

J 100 1 J43 00

Y ■

t300

$300 j J400O

J150 1 J350 ! t38.00 |

Diagram 10

THE BASING POINT

METHOD

Diagram

11.

Freight Rates from Pittsburgh to Certain Important Consi

jming Centers.

7 ir\ {

\ Grand Rapids I ^
\ o $680 „ Y

_.-CBuHalo

t
i
\

Chicago oL.
$740 >

i
/''

2-^/ I?I?^9^^?\N..

(Cleveland /

•Pettilehem^/
$650^'

Phiiade'.pl-'ia
o/i640

fort Wayne O-i— ..T^"" -Z^
$6.00 1 -~:

Indianapolis
$660 1

SS14 00 /

" Tjpinrburgn

Diagram 11

CONCENTRATION OF ECONOMIC POWER 65

Diagram 10 shows a more complex picture of the mill net returns of a non-basing
point mill. A is a basing point with a base price of $40, and c is a non-basing point
mill. X, Y and Z are points of consumption. The delivered price at X will be $44,
and the mill at c will meet that price realizing a mill net return of $44 minus $1
actual freight, or $43. This difference of $3 between the freight rates from A to X,
and from c to X, is characterized by such critics as "phantom freight." In fact,
however, the mill at c is only naming a delivered price which will enable it to
realize the proper advantage resulting from its superior geographical location with
respect to a sale at X. At Y the delivered price will be $43, and the mill at c will
pay e.\actly as much freight as is used in determining ite delivered price, realizing
a mill net return equal to the base price of the basing point mill at A, or ^40.
The delivered price at Z will be $41.50, and the mill at c will pay $3.50 freight,
realizing a mill net return of $38.00. On this sale the mill at c is said to be absorbing
$2 freight. Actually, it is merely meeting the competitive price at Z.

Summarizing, the non-basing point mill at c realizes its highest mill net returns
on sales to the customers nearest it, at X for example, and progressively lower mill
net returns as the distance to the customer increases, so long as it is selling toward
the basing point. On sales in directions away from the basing point, it will con-
tinue to realize mill net returns which such critics argue embrace "phantom
freight", until it begins to sell in territory nearer freightwise to some other basing
point.

This practice of a non-basing point mill of merely meeting delivered prices of
basing point mills when the freight rate from the non-basing point mill is lower is
said to be non-competitive and an evidence of monopoly. The objections probably
arise from two sources. The first is a survival of the criticisms which developed
during the long Pittsburgh Plus period, when almost every mill calculated delivered
prices by adding the freight from Pittsburgh to the destination. Diagram 11
shows roughly the substantial amounts of freight charges from Pittsburgh to
certain important consuming centers. This diagram is based upon existing freight
rates, which have not changed greatly since 1922. During much of the Pittsburgh
Plus period, however, the freight rates were lower, the major increases coming
during and immediately after the last World War. It should be noted, moreover,
that price differentials over Pittsburgh at outlying basing points were a natural
part of the development of the basing point practice. New mills needed higher
prices in order to cover their higher costs, and to provide capital funds for expand-
ing their facilities. Pittsburgh, on the other hand, stood in need of wide market
territories to provide an outlet for its capacity, and it was natural for the price
there to be lower. The conditions illustrated by Diagram 11, however, have not
existed for more than 15 j'ears. Since 1920, the nunaber of basing points has
steadily increased, and the basis of this criticism has correspondingly diminished.

A second source of misunderstanding about this practice- of non-basing point
mills is the idea that it is made possible by some act of monopoly. Professor
Fetter, for example, in his testimony at the March, 1939 hearings before the
T. N. E. C, explained the origin of "phantom freight" roughly as follows: First
there are two widely separated cities, with a number of producers at each. The
producers at each city compete with each other in the local market, and the
market price at each city determines what part of the area between the cities
will buy from each group of producers. Now, he says, the producers at one city
may merge. There will be no competition in that city, and the merged concern .
will simply adopt the market price at the other city, (i. e., use that other city as
a basing point) and collect "phantom freight" on sales in that part of the sur-
rounding territory which is nearer to it than to the basing point. The merged
concern thus would realize its highest mill net returns on sales in the area im-
mediately around its mill and progressively lower mill net returns as it sold to-
ward the other market. ^^

While Professor Fetter, did not state that he was describing actual occurrences
in the steel industry, his language might have been so understood. In any case,
this is not a true story of the steel industry. As steel producing capacity was
installed at points outside of Pittsburgh, the distant mills confined themselves to
meeting Pittsburgh Plus prices, instead of setting up prices of their own. They
could easily do so as long as the demand in their locality exceeded the local pro-
duction, and in so doing they were only taking advantage of their superior geo-
graphical location. No record has been found of any steel producer originating
a basing point at another producer's mill, or of an existing basing point being
eliminated.

M Temporary National Economic Committee Record, pp. 332-3.

QQ CONCENTRATION OF ECONOMIC POWER

In further analyzing this criticism, separate consideration may be given to (i)
mills far from a basing point, and (ii) mills near a basing point.

(i) Mills Far From a Basing Point. — As has been pointed out, mills at a con-
siderable distance from a basing point have a freight advantage over other mills
in selling to buyers in the territory around their mills. They behave competi-
tively and naturally when they charge their customers a price which realizes that
advantage. They are merely reaping the benefit of their superior geographical
location, as compared with competitive steel mills. They can scarcely be ex-
pected to offer lower prices than their nearest competitors until further competi-
tion forces them to do so. The advantage of a non-basing point mill cannot be
taken from it except by the erection of another mill near it or between it and its
best markets. It is interesting to note that a representative of the Federal Trade
Commission expressed this same opinion before the Temporary National Eco-
nomic Committee.**

"I would say that under our competitive system, a man who is particularly
well located as regards his raw materials, and his market, will charge, and under
our system is expected to charge, a good fat profit until somebody else puts in a
plant and competes with him."

The NRA Report also supports this position: **

"Akin to the preceding point is the criticism, on the grounds of justice, of
the relatively high prices paid by customers located close to mills which do not
happen to be basing points. For such customers, located near a non-basing
point mill in the direction of its governing basing point, the less freight cost
actually incurred, the higher price is charged.

"It is hardly necessary to point out that this criticism depends on the assump-
tion that the customer has a right to a price based on the freight service he
actually uses rather than the higher freight for the longer haul from the more
distant basing point — :& haul which he does not use. It may seem strange to
call this an assumption, since to many it is a self-evident truth. Yet it will repay
some examination. In the utmost strictness, the customer is not literally paying
for the freight haulage which he does not use; he is merely paying a price for
steel which the nearby producer is enabled to charge through the protection
afforded him by the barrier of a long freight haul from his competitor's mill."
At a later point in this NRA Report, it is said: *^

"As for the producer who is located at some distance from any competitor,
there is no reason why he should, under competition, be compelled to charge a
base price to his nearest customers and add the actual freight to all customers at
a greater distance. On the principle formulated above, tliat he is governed l)y
the best alternative offer which is open to his customer, it is quite likely that the
farther he goes from his own mill, the lower is the price at wliich his customers
can get goods from some rival, because the customers are nearer to the rival's
mill. Thus an isolated producer may start immediately from the door of his
mill to charge his customers the freight which his competitor has to pay, instead
of the freight he has to pay himself, and as a result he may charge his nearer
customers a higher price than his more distant ones, from the very start, at least
in the direction in which the mills of his most active competitors lie."

These excerpts support the propriety of a non-basing point producer realizing
the benefits of his geographical location in selling to customers near his mill.
A still stronger case is presented by the steel mill which needs high prices in
its most profitable territory in order to survive. A new producer, or any pro-
ducer in a period of low demand, may require all the profit it can realize from
sales to its nearest customers in order to cover its total costs. This is particularly
true when the producer, in order to obtain an economical rate of operation, must
sell a large part of its output in more distant markets, paying large amounts of
freight to reach such markets. The NRA Report recognized this fact: *^

"In an extreme case, the producer who charges his nearby customers the
highest prices may not be" able to afford to charge them any les<5, despite tiie
apparent contradiction involved in his voluntarily making lower prices to other
customers who are farther off, that is, he may conceivably need all tlie benefit
he can get from the utmost discrimination which his inarket situation permits,
in order to cover his total costs at all. Assuming such a case to exist, if this
producer were not allowed to charge high prices to a nearby customer, he would
merely be forced out of production, and the customer would gain nothing in

5^ Mr. Eugene W. Burr, in the March 1939 hearings before the Temporary National Eeonomie Commit-
tee—Temporary National Economic Committee Record, p. 318.
" NRA Report, pp. 71-2.
*• NRA Report, p. 127
% »' NRA Raoort, pp. 72-3.

COXCENTKATION OF ECONOMIC POWER

the way of lower prices, but would lose the convenience of being able to get
service from a nearby source. This extreme case is not very likely to be found
in practice, but it is possible.

"If a plant of this character becomes a basing point, the chances are that
it will automatically settle the question by quoting prices not much lower than
the prices it now receives from its nearby customers. And plants which are
in a stronger position are likely to be able to afford the luxury of putting their
nearby customers on a more favorable basis by quoting basing point prices
more nearly comparable with those in force at other basing points. Thus, if
the customers are discriminated against simply because the producer near whom
they arc located is a weak producer, the discrimination will not be removed;
but if they are discriminated against arbitrarily by the system, then the estab-
lishment o^ new basing points will be likely to remedy the case."

THE BASING POINT METHOD

Diagram 12: Effect of Differential between Prices at Basing Points.

In selling at [x] or any point up to the Boundary 0-0 of its Market

Jerritory, (C) realizes its Base Price.
In selling at \Y\, (c) realizes less than its Base Price, although

it adds more Freight than it pays.

BASING
FfitlGHT POINT
$.50 ^

EASE rRlCE $40

BASE PRICE $-5

BOUNDARY

DlAORAM 12

Even if a producer sverc compelled by some outside force to name a basing
point at his mill, he probably would minimize the effect of the change by quoting
a high base price. Diagram 12 illustrates the technical consequences of such a
change. A has long been a basing point, and C represents the location of a mill
which has only recently announced base prices at this point. The base price at
A is and has been $40. The mill at C has been meeting delivered prices calculated
by reference to A, and consequently has been realizing its highest mill net retirrns
on sales in the territory closest to it. Delivered prices have been highest in the
territory farthest from A, 'no matter how near the purchasers were to C. Upon
announcing base prices at C, the mill at C still needs the highest mill net returns
it can get, and accordingly it announces a base price of $45 at C. The line 0-0
represents the boundary of the natural market territories of the basing points as
determined by these prices, i.e., the territory in which each mill can quote a
delivered price equal to its own base price plus freight. On sales at any point on
its own side of the line 0-0 the mill at C will now realize a mill net return equal
to its base price of $45. But in selling past the line 0-0, for example, at Y, the
mill at C could still be accused by such critics of adding more freight than it
pays on the theory that C is adopting A's base price. In fact, however, C is
merely meeting A's delivered price at Y and thus taking advantage of its own
superior geographical location. The same accusation could be made of sales by

292918— 41— No. 42-

68 CONCENTRATION OF ECONOMIC POWER

the mill at C in all of the territory on A's side of the lind up to the point where
freight rates from A and C are equal.

When the mill at C names a base price of $45, the effect is to lower prices slightly
on its side of the' line 0-0, while on sales beyond that line, neither the previous
level of delivered prices nor C's mill net returns will be changed.

Thus, the previously existing scale of delivered prices in the territory around
the non-basing point miU can and undoubtedly will remain about the same even
though the mill becomes a basing point. The possibihty of a non-basing point
mill realizing mill net returns higher than those obtained by competitive mills at
basing points is not due to the absence of a basing point, but to a geographical
advantage over these other miUs — an advantage which a representative of the
Federal Trade Commission, in the excerpt quoted above, has said should be
retained by the well located mill until the erection of competing facilities near
its location takes that advantage away.

The accuracy of the assumption made in the NRA Report that a mill in a
strong position, upon becoming a basing point, would quote substantially lower
prices to its nearby customers, is open to question. It would appear much more
likely that an isolated producer, whether strong or weak, would quote delivered
prices which would enable it to realize its freight advantage as against other
competitive mills. If it did not, then, as the NRA Report says in another pas-
sage, it would be following some non-competitive principle. Of course, it is pos-
sible that other competitive factors would make it advisable for an isolated pro-
ducer to establish a base price and substantially to lower delivered prices in its
local territory. An example of such a factor would be the desire to enable its
local fabricators to sell in more distant markets. But the fact remains that the
strong as well as the weak producers are behaving competitively and naturally
when they charge prices which reflect their freight advantage over other producers
on sales in their local territories.

Thus, the behavior of non-basing mills, erroneously described as realizing
"phantom freight", is not to be construed as the critics construe it — as a symbol
of the absence of competition. It is, on the contrary, truly competitive behavior,
but of a type which varies from the assumptions of "perfect competition", because
marketing conditions in the steel industry are more complex than those which
were assumed in developing the concept of a "perfect market".

The following statement from the N RA Report indicates an appreciation of the
true situation:

"* * * one competitor's price to customers is governed or limited by the
price charged to these same customers by the rival whose price the first com-
petitor has to meet if he is to sell goods to these particular customers. If the
rival's price includes the rival's freight costs, then the price which the first com-
petitor has to make includes his rival's freight charges rather than his own. If
his own freight costs happen to be lower, and if he gives the customer the benefit,
he is giving the customer a lower price than competition forces him to give. In
other words, he is following some sort of a non-competitive principle rather than
a competitive one." **

(ii) Mills Near a Basing Point. — The above discussion has concerned mills
located at a considerable distance from a basing point. Mills located within a
25 or 50 mile radius of a basing point city are generally considered basing points
mills. However, some mills may receive delivered prices which yield a mill net
return higher than their base prices, due to their being located in the industrial
area of a basing point city, but not within the switching limits of such city. Dia-
gram 13 shows what might be called a typical situation. It was suggested by the
location of mills in the Pittsburgh area, although it does not purport to be an
accurate representation of that area. The irregular rectangular area near the
center of the chart marks the switching limits of a basing point city. A, B, C,
D, E, F, G and H are mills, all located within a 50 mile airline radius of the basing
point city, and X is a near-by consuming point. All of the mills announce base
prices at the basing point city and quote delivered prices based upon such basing
point. On sales to customers at X, only the single mill E, which is inside the
switching lipiits of the basing point city would realize the exact base price. Any
other of the mills which sell products at X, would in the eyes of the critics realize
"phantom freight" or absorb freight, depending upon whether freightwise they
were farther from or nearer to X than is the mill at the basing point city. Since
freight rates on steel products for short hauls are comparatively high, the varia-
tion among their mill net returns might be as much as a dollar and a half per
ton, as indicated on the diagram, but the amounts which they might realize over
their base prices are of no consequence to either producer or consumer.

"NRAReport, p. 125.

CONCENTRATION OF ECONOMIC POWER

The problem here is different from the problem of mills located far from a basing
point, not only in the amounts of freight involved but also in the reason for
merely meeting competitive delivered prices. Freight rates from all outlying mills
to most consuming points are the same as, or within a few cents of the rates from
the basing point city to such points. Customers consider all of the mills as located
at the basing point city. It would be difficult for producers and customers alike
to calculate freight rates from the obscure suburban stations nearest the mills,
while the rates from the basing point city are more easily ascertainable. Thus,
convenience dictates the announcing of base prices at and the calculation of
delivered prices upon the basing point city.^^

THE BASING POINT METHOD

Diagram 13: "Phantom Freight" and Freight Absorption in Immediate Basing Point Area.

SWITCHING LIMITS
OF BASING
POINT CITY

MILLS

■PHANTOM 1 fREIGHI 1
FREIGHT lA8S0RPTf0N|

10 2S

tow

. C

to 10

tioo

S02S

$0.10

so.n

Diagram 13

The reason for the practice of such mills can be better understood by examining
the consequences of prohibiting it. This is illustrated by the detailed map of the
Pittsburgh area shown facing page 90.*" Then each mill located in the area near
the present basing point would have its own base price, and would realize that base
price exactly on every sale. To calculate a delivered price at any destination near
the basing point and in the vicinity of these many competitive mills, the base price
of each of these mills and the freight from each mill would have to be considered.
The resulting inconvenience is obvious. Each mill would have a monopoly in a
few towns in its immediate neighborhood, and there would be a few towns in which
more than one mill could sell. A slight reduction in base price by one mill would
enlarge its exclusive territory, but all other mills would be forced to follow such
reduction, or else be excluded not only from most of their nearest markets, but
also from all markets to which freight rates from the group of mills were the same.
To prohibit the practice of announcing prices at the basing point city, instead of at
the actual mill location a few miles away, would involve a very great trouble for
a very small gain, if it would, under any circumstances, be a gain at all.*' One

5' The same reasoning applies to the so-called "switching arbitraries". Before the adoption of the NRA
Code, all mills sold to a customer located within the switching limits of a basing point at the base price,
without adding any freight. Freight rates vary even within switching limits. The varii^tions are not large
and the most convenient way of calculating the delivered price was simply to add no freight. Under the
Code the practice was developed of adding to the base price a so-called "switching arbitrary" of 2!-ic a
hundredweight (3c a hundredweight in the Chicago-Qary switching limits) for delivery within the switch-
ing limits, and the practice, has generally been followed since the Code. Since the actual switching rates
vary, the mills may be said to realize "phantom freight" on some deliveries, and to absorb freight on others,
but the amounts involved in either case are insignificant.

6' Of the original document. See facing page 84, infra.

•' Many of these points are noted in the NRA Report, pp. 104-107, and p. 173.

70 CONCENTRATION OF ECONOMIC POWER

should also note that while a mill may realize small amounts in excess of its base
prices on some sales in its own local district, it must accept returns less than its
base prices on other sales in the same district, in order to meet competition, so
that it is very doubtful whether any mill in a basing point area realizes any net
gain even on sales to its nearest customers.

(2) Use of Cheaper Means of Transportation. — Referring to the foregoing
Diagram 4, which is here reproduced, the mill at A must "absorb"' $1 freight if it
sells at X and ships by rail. On the other hand, if it ships by water, it will pay
$1 less freight than it uses in calculating the delivered price, and will realize a mill
net return $1 higher than its base price. As before mentioned, this $1 has been
called "phantom freight" by critics of the baling point method.

The same result would be reached if the mill at A could ship by truck to X for $1
less than the rail freight from B. This $1, too, would be called "phantom freight"
by such critics. ''2

This practice is criticized because it is said that the mills are keeping to them-
selves all the benefits of the cheaper forms of transportation which they employ.
Critics assert that the mill should sell to any customer at the mill for its base price,
and should let the customer arrange for shipment by any means that appeals to
him. For example, in Diagram 4, the mill at A should, it is said, sell steel at its mill
to the customer at X for $40 per ton, because that is its base price at A, and
should let the customer ship the steel by water himself, with a total delivered
cost to him of $40 plus $2, the cost of water transportation, or $1 below the pre-
vailing delivered price at X.

Likewise, the argument continues, the customer should be permitted to arrange
for delivery by truck or any other available kind of transport cheaper than all-rail,
such as rail-and-water.

(i) Water Deliveries. — In discussing Diagram 4, a case was assumed in which
the mill shipping by water reahzed a mill net return which was $1 over its base
price. On such a shipment, critics sat, the benefit of the cheaper transportation
should be given to the customer. The answer is that if the mill is the only one
which can reach the destination by water, there is no competitive reason why it
should give the benefit of the lower transportation to the customer. In fact, if it
did so, it would be following some non-competitive principle. Consequently,
critics are obviously mistaken when they contend that the alleged collection of
"phantom freight" on such deliveries is evidence of a lack of competition. The
same conclusion follows when some, but not all, of the competing mills are able
to reach a destination by water, and all of these particular mills retain the benefits
of the cheaper water transportation when it is used by them.

Water shipments, even though they may cost less than rail transportation,
do not always, hpwever, result in the ni'll realizing more than its base price.
In Diagram 14, A and B are basing points, each with a base price of $40, and X is a
consuming point with a delivered price, calculated from B, the applicable basing
point, of $42. When the mill at A ships to X by rail, it realizes $42 less $4.50
actual freight or $37.50, — $2.50 less than its base price. If it ships by water to X,
it realizes $42 less $2.75 actual freight, or $39.25 — $0.75 loss than its base price.
That is, the use of water transportation by the mill at A for shipments to X does
not yield a mill net return above its base price, — it merely enables the mill at A
partially to overcome its freight disadvantage as compared with B. It can hardly
be said that in such a case the consumer at X is being discriminated against.
Such situations comprise a vast majority of shipments by water and include most
of the water shipments to the Pacific Coast, the Gulf of Mexico, Lower Mississippi
River points and principal Great Lakes consuming centers.

It may he argued that this is no reply to the criticism as applied to instances
in which tlie mill actually does realize more than its base price on a water ship-
ment. However, a general review of the revenues of a mill on navigable waters
puts the matter in a different light. In Diagram 15, A is a basing point, located
on a navigable river, and the iiregular circular line marks its natural selling terri-
tory based on rail freight rates. So long as A ships by rail, it has a freight disad-
vantage on sales outside of this line, because it is hemmed in by competitive mills
at other basing points. The use of river transportation, however, increases the
areas in which A can sell without a freight disadvantage, as shown b}' the dotted
lines. Beyond the dotted lines. A has a freight disadvantage even if it ships by
water, but the lower water freight cost will reduce the freight disadvantage below
that present in a rail shipment. The mill at A will reahze more than its base
price on sales to points within the dotted lines, but since on all other water ship-
ments it will still be "absorbing" freight, it may not, on the whole, be profiting

62 See diagram 4, p. -35.

CONCENTRATION OF ECONOMIC POWER 71

by the use of water transportation, — it will merely be reducing its freight disad-
vantage. Hence, from the point of view of successful operation of the mill, it is
natural and even necessary for A to keep the advantages resulting from some
water shipments in order to offset disadvantages resulting from other shipments.

It should also be remembered that water transportation, if available, can be
used only on a limited class of business. Ordinarily, only orders of 200 tons or
more can be carried economically by barge, and the minimum load for shipment by
boat on the Great Lakes or on large rivers is also considerably larger than for rail
transportation. Furthermore, water delivery is slower than rail delivery and
consequently the customer must be willing to wait. This means that much of the
steel carried to towns which are accessible by water moves by rail because buyers'
requirements are tof^ small or because buyers demand quicker delivery. At the
same time, a mill located on water is probably absorbing large amounts of freight
on shipments outside its local market territory. Consequently, it seems proper
for the mill to keep such savings as it can effect through the use of water trans-
portation, until it is compelled by competition to give up this advantage.

Competitivelj^ there is a good reason why a mill located on water is not dis-
posed voluntarily to give customers the advantage of cheaper water delivery.
Suppose that a new mill is built, which is ideally located for shipment of its
products by water, and can so reach many towns which are inaccessbile to any
other mill except by rail. Assume that it can reach town X by water for $1 less
than the prevailing delivered price at that destination. Suppose that the mill
makes a delivered price at X, based on water freight, $1 less than such prevailing
delivered price. It will, of course, quote that delivered price only on business
which can actually move by water, which means that the buyer must order a
minimum of 200 tons at one time, and must be willing to wait for water delivery.
These requirements in themselves greatly limit the number of customers who can
take advantage of the lower price, and these limitations are imposed not by the
steel mills but by the natural circumstances of water shipment. However,
some customers may take advantage of the lower price. Competitors will find
out about the new price and will meet it. That is normal practice in the steel
industry. One might expect that so long as competitors merely met the cut, the
customers would keep ordering from the mill which initiated it, by way of a
reward. But the competitors meeting the lower delivered price will be inland
mills, which cannot ship by water. In addition to meeting the new price, these
inland mills will offer other inducements, for they will ship by rail, which is faster,
and will require a minimum order of only a 20-ton carload, instead of 200 tons.
Salesmen naturally will emphasize these advantages and buyers will welcome
them. Moreover, the inland mills will not confine the lower price to the few
customers who are able to order in 200-ton lots, as the first mill did; the 200-ton
minimum which applies to water shipments will have no significance for a mill
which must ship by rail in any case and the lower price will be extended to cus-
tomers to whom the first mill would not have given it. Consequently, the first
mill will find that the delivered price at X has fallen by $1 and that inland com-
petitors, by accepting smaller orders and delivering more quickly, are taking the
bulk of the business there. It will ultimately be forced to ship by rail also and
perhaps to accept mill net returns less than its base price. The net result wil!
be to lower the delivered price at X, while all or most of the steel used there will
still be carried by rail.

When competitors find that a lower delivered price has been made at one
destination on navigable water, they may themselves initiate prices based on
water freight at other towns, similarly located, believing that the first mill has
made or will name lower prices all along the water route. Lower prices may
thus extend from town to town, into areas in which the first miU intended to
maintain its delivered prices based on rail freight. After buyers have become
accustomed to the new price level, they may begin again to put pressure on the
first mill to cut the prevailing delivered price by the amount of its savings on
water shipment. And so the circle may be traversed again.

Price reduction of this kind throws delivered prices along the water route out
of relation to the ordinarily applicable base prices. Such price changes spread to
inland shipments. Frequently consumers located away from water are in com-
petition with consumers on the water, and they will insist that the lower price
should be given also to them. A steel mill is reluctant to see any customer losing
his market, because that means a loss of business for the mill. Consequently,
inland customers after a period of time, are apt to be given the lower price, merely
because it is applicable to their competitors on the water route, thus tending to
reduce the entire price level in a large area with no ultimate advantage to the
mill initiating the lower delivered price

CONCENTRATION OF ECONOMIC POWER

THE BASINS POINT METHOD

Diagram 14: Water Shipment may merely reduce Freight Absorption.

Mill at ® absorbs $2.50 Freight when shipping to [x] by rail.
It absorbs only $ .75 Freight when shipping to [x] by water.

BASING
POINT

DELIVERED PRICE J«

'2'>—N BASING
B) POINT

BASE PRICE J40

Diagram 14

THE BASING POINT METHOD

Diagram 15: Natural Selling Territory increased by use of water route.

BOUNDARY OF NATURAL
SELLING TERRITORY ON
RAIL SHIPMENTS
BOUNDARY OF INCREASED
NATURAL SELLING TERRI-
TORY RESULTING FROM
WATER SHIPMENTS

Diagram 15

CONCENTRATION OF ECONOMIC POWER 73

Apart from theoretical considerations, however, it may be stated that the
problems of water transportation have been greatly exaggerated by critics of the
steel industry. In actuality, water transportation is not available to the extent
suggested by the criticisms nor to the extent which might be supposed merely
from a study of the location of steel mills and markets in relation to waterways,
since there are many limitations to water transportation, the most important of
which is that only very large tonnages can ordinarily be transported economically
by water. Customer demand for water shipments is negligible and the only
basis for such demand is the possibility of a saving in delivered prices, since
water delivery is much slower and involves other inconveniences to the buyer.
In a great many situations, charging the customer the water freight rate from the
mill to the destination would not result in lower delivered prices than charging
the rail freight rate from the applicable backing point to the destination, in view
of the number and location of existing basing points. In many instances, where
lower delivered prices would result, the actual water rate is charged or the cus-
tomer is given all or a part of the saving resulting from water transportation.

(ii) Truck Deliveries. — When delivery by truck is cheaper than rail delivery,
if the mill includes rail freight in calculating the delivered price, it will realize
more than its base price. Critics will contend that it has charged "phantom
freight". The situations with respect to which this criticism may be made,
however, are limited by several factors.

Although almost any steel product can be shipped by truck, not every product
can be shipped economically in that way. Light, flat rolled products are the
easiest to load and to transport by truck. Many types of wire products also can
be carried economically by truck. But the shipment by truck of heavy products,
such as structural shapes, plates, heavy tubes, etc., which usually are ordered in
carload quantities, is almost certain to cost more, both in money and in incon-
venience, than delivery by rail.

Large consumers of steel, moreover, are usually equipped with railroad sidings,
cranes, and other machinery for large-scale railroad car unloading operations.
The use of trucks, which carry smaller loads, would require the installation of
new equipment, while the smaJer scale of operations would make it doubtful
whether any savings could be realized, even if the cost of transporting by truck
should be lower than by rail.

While there is considerable demand for delivery by truck of some products,
it is primarily with a view to obtaining quick delivery of small quantities from
nearby mills, rather than any advantage in delivered prices. Truck freight rates
are generally substantially the same as rail freight rates for corresponding quan-
tities, except in a limited weight range, and are not infrequently higher. On
deliveries within the rail switching limits of producing centers, truck freight rates
are almost always higher than the rail switching rates, and, on carload quantities,
substantially higher. Also to be considered is the additional cost and incon-
venience of loading trucks, which reduces any possibility of advantage to the
mills. Subsidiaries of the United States Steel Corporation seldom receive any
advantage from truck deliveries, and lose, rather than gain, on truck shipments
as a whole. This is believed to be tmp of the steel industry generally.

Large consumers usually have found it unprofitable to use their own trucks in
assembling raw materials at their plants. Trucks belonging to such an industrial
company are generally forced to make an empty trip from the plant to the source
of the raw materials. The use of trucks produces a saving only when the trucks
have a pay-load both coming and going. An industrial company could fill its
trucks on runs in both directions only by maintaining a staff to find business for
the tru^cks, which would mean entering a new and competitive business as a sid*^-
line.

A practice generally exists in the steel industry of including in the delivered
price to a buyer, who accepts delivery by sending his own truck to- the mill, the
rail freight from applicable basing point to destination, and allowing him a credit
equal to 65% of the rail freight from mill to destination. This might be construed
to mean that the buyer always pays one-third of the rail freight used in calculating
the delivered price for the privilege of taking delivery by his own truck. This is
true, however, only when the mill is at the basing point freightwise nearest to the
buyers' destination. If the mill is not at any basing point, the effect of this
practice will be either to increase the amount realized by such mill in excess of the
base price at the basing point as a result of its geographical location, or merely to
decrease the freight absorption which would result from a rail shipment. For
example, suppose that the buyer is located $.50 freightwise from the applicable
basing point, while the mill is only $.12 freightwise from the destination. In this

74 CONCENTRATION OF ECONOMIC POWER

case $.50 per hundredweight will be included in the competitive delivered price,
while only two-thirds of $.12 or $.08, will be allowed as a credit, thus resulting in
a mill net return of $.42 higher than the base price at the basing point. If the
mill had shipped by rail it would have realized $.38 higher than the base price at
the basing point. Conversely, suppose the buyer is located $.10 away from the
applicable basing point, while the mill is $.30 freightwise away from the destina-
tion. In this case $.10 freight is included in the delivered price, while two-thirds
of $.30, or $.20 will be allowed as a credit, thus resulting in a freight absorption
of $.10, as compared with $.20 which the mill would have absorbed if it had
shipped by rail.

Freight absorptions may also occur in the case of mills at basing points. For
example, suppose that both Chicago and Cleveland are basing points, that a buyer
located $.10 freightwise away from Chicago sends his own truck to a Cleveland
mill, perhaps in an effort to obtain a quicker delivery, and that the freight from
Cleveland to the destination is $.33. The mill will include $.10 freight in com-
puting its delivered price (based on Chicago as the applicable basing point), but
will allow a credit of $.22. which results in freight absorption of $.12.

The practice of including in the delivered price the full rail freight from the
applicable basing point and allowing a credit of only 65% of the rail freight from
mill to destination is primarily due to the fact that the loading of trucks is more
costly and inconvenient than the loading of railroad cars. It is vmdoubtedly true
that truckloading generally costs more, and often considerably more than railroad
carloading, although this is not universally the case. The inconvenience to the
mills and indirect costs resulting therefrom is considerable at almost all mills.
Such inconvenience arises from the problems of routing trucks through the grounds
of large works, waiting for late trucks, arranging for trucks at the buyers' request,
interruption of railroad carloading operations, etc., and is greater in the case of
buyers' trucks. Undoubtedly the additional cost and inconvenience of loading
trucks justifies an extra charge, particularly at older mills which were planned
exclusively for carloading, and offer little possibility for installation of truck-
loading facilities.

In summary, the answers to the criticism of "phantom freight" supposedly
realized by steel mills on truck deliveries may be summarized in the following
points: first, only an extremely small proportion of steel tonnage is delivered by
trucks, partly because many products cannot be economically hauled by truck,
and partly because large consumers prefer rail delivery. Secondly, truck move-
ments frequently result in freight absorptions, sometimes because of the 65%
allowance for shipments in buyers' own trucks, and also, because of deliveries
within the switching limits of basing points, where only the "switching arbitraries"
are included in the delivered price. Third, the rates of common carrier trucks,
regulated by governmental agencies, are seldom much lower than rail freight rates,
and sometimes are higher. Fourth, at the majority of mills it costs more to load
steel into trucks than to load into railroad cars, and furthermore delivery to trucks
involves inconvenience, loss of time, and other similar considerations which cannot
easily be translated into dollars and cents. It seems clear that the mills are not
profiting as a result of truck deliveries. The criticisms on this score are more
theoretical than real.

(6) Freight Absorption.

(1) General Discussion. — When a mill competes with another mill which is
closer freightwise than ,it is to the destination, it must meet the delivered price of
such competitive mill in order to obtain the business. This usually results in the
first mill not realizing a mill net return equal to its base price. Such diflference is
said to be "absorbed" freight. This practice has sometimes been criticised as
discriminatory, because it is contended that the mills realize their highest mill net
returns on sales to their nearest customers and progressively lower mill net returns
as the distance to the customer increases. Critics say that under "perfect com-
petition" the same mill net return would be realized on sales to every customer,
with only such differences as were brought about by changes in the market price
due to supply and demand. They contend that under the basing point practice
the mills permit other mills to sell in their local territories, and, conversely, they
themselves sell in the local territories of other mills, always at the delivered price
calculated with reference to the applicable basing point, and with discriminatory
mill net returns.

It is true that freight absorption of this kind and variable mill net returns were
not contemplated by the classical theory of "perfect competition." Critics of the
basing point practice ignore the fact that "perfect competition" is an abstraction.

CONCENTRATION OF ECONOMIC POWER 75

and was not intended, by the econoniists who deve]oped it, as a standard to which
all industries should conform. Furthermore, as has been pointed out, tliey as-
sumed a freightless market so that neither buyer nor seller needed to be concerned
about transportation costs. ®^ Freight absorption is not by any means rare, or
confined to the steel industry. Some customers of department stores, corner
groceries, etc., carry their purchases home, while others have them delivered at
no extra cost. Candy bars and cigarettes are sold at uniform prices all over the
country and at varying distances from the factories where they are made. Com-
peting railroads charge the same rate between two cities, though one ot them may
have a longer route than the other. These few examples will suffice to show that
freierht absorption occurs over a wide range of industry.

The competitive reasons for such a practice in the steel industry can best be
understood by considering the problems of a producer located at a particular
producing center — Pittsburgh, for example. The mills in the Pittsburgh district
have a freight advantage over outside mills in selling in their own local territory,
that is, in and around Pittsburgh. Naturally, therefore, they will quote delivered
prices which realize as fully as may be this advantage of location over their farther
away competitors. The discussion of the location of steel mills has shown that
the mo.st economical locations are those near the sources of raw materials. Con-
sequently, capacities of steel mills in those areas are usually large enough to
supply rnuch more than the local demand. The producer in Pittsburgh undoubt-
edly will Tiave facilities of such size that the full output thereof cannot be sold in
the area in which he has a freight advantage over other mills. He may choose
between three courses. First, he may sell as much of his output as he can in the
area around Pittsburgh, and not attempt to dispose of the balance of his output.
Or, he may lower his base price in an effort to expand the area in which his de-
livered price will be as low as or lower than that of his competitors at other basing
points. Or he may maintain his base price on sales in the Pittsburgh area, and
sell the rest of his output in territories nearer to other mills b^' meeting the de-
livered prices of such competitive mills, thus realizing lower mill net returns on
such sales than on sales in the Pittsburgh district.

The producer is not apt to be content with selling only that part of his output
which can be disposed of in the territory around Pittsburgh at the prevailing
prices. The resulting low rate of operations would greatly increase his unit costs,
and reduce his margin of profit. On the other hand, he is not likely to initiate a
lower base price in his own local territory, because that is the area in which he
rightfully has the greatest advantage over competitors. So long as competition
does not compel him to quote a lower base price there, he is not likely to do so.
This leaves open to him the one remaining course, which is, while selling as much
of his output as he can in his own local territory, to sell the balance in areas nearer
to other mills, where they have a freight advantage over him, at a lower mill net
return. In the steel industry, one prodviccr's advantage over another is for the
most part geographical, and is reflected in different freight rates on both raw
materials and finished steel. Consequently, a producer will try to reach the
existing markets and in so doing may sell a part of his output at points nearer to
other mills, meeting the prices of such competitive mills and thus realizing a lower
mill net return on such sales. It is natural and proper for a producer, in an
effort to keep his mill busy, to sell steel in the different consuming areas where
business is available, in this way realizing varying mill net returns on his business,
the variance representing freight absorption.

The NRA Report thus described the reasons for such freight absorption: "

"* * * Producers regularly set a lower minimum when figuring a special
price to capture a special class of new business than when figuring a general price
for the main body of their sales. For special prices, the minimum is likely to be
close to 'out-of-pocket' or variable costs, while for a general price producers will
not bid below the total costs which they must cover if they are to keep running.
The difference between these two levels is frequently substantial, and lies at the
bottom of the practice of absorbing freight to extend a producer's sale area."

This NRA Report also contained the following summary, in which it was stated
that such freight absorption and such variable mill net returns are the natural
results of bona fide competition: *^

M See the testimony of Prof. F. A. Fetter before the Temporary National Economic Committee, T. N.
E. C. Record, p. 323. In the discussion of Prof. Fetter's theory of markets, the following question was
asked:

Mr. Frank: This is a picture of a railroad-less world?

Professor Fetter- "Y'^s. it is really, of a non-transporting price. A freightless market, in other words.

M NRA Report, pp. 01-62.

" NRA Report, pp. 120-122.

76 CONCENTRATION OF ECONOMIC POWER

"* * * the industry includes localities where several competitors are grouped,
and others at which there is only one producer. In the latter case, the only kind
of competition met is competition at a distance, while in the former case, both
near-by and distant competition may be met. For example, the Pittsburgh
switching area contains a number of different producers who compete not only
with each other, but also with producers located at Birmingham, Chicago, and
other places.

"Fourthly, this competition at a distance is the kind in which, in order to reach
out a little farther and acquire some additional business, a producer will be willing
to accept on this additional business a lower net yield than the minimimi which
he must receive on the average from his whole business, provided he is not in some
way required to extend this low net yield to his entire output if he accepts it on
any business at all. The reasons for this have been discussed under 'Guiding
Principles,' II, 3 above, p. 38fT.

"Fifthly, freight rates are substantial, relative to prices, with the result that a
difference in freight rates, if the customer has to pay tiiem, is just as decisive as
a difference in prices ift determining which producer will get an order. And at the
same time the freight rates between different producing centers are considerably
less than the margin of difference in net yields which a company may voluntarily
accept on different units of business in the attempt to cover its constant costs as
best it can. In other words, the freight rates are not more than producers of this
character are willing to absorb in order to sell more goods by extending their
marketing areas; and they must be absorbed if a producer is to extend his market-
ing area toward the location of a competing producer and into the area where that
competitor is now selUng unless he voluntarily reduces bis price on nearby sales to
less than existing competition forces him to accept.

"In an industry marked by these characteristics, discrimination and freight
absorption are natural results of bona fide competition. They result because
competition acts with different force in different parts of the mai-ket. The
conclusion that a producer accepts a lower net yield on a part of his sales only
because he has raised the net yield on the rest of his business to a monopolistic
level, is unwarranted. It may, of course, be true in a given case. But the mere
existence of discrimination does not prove it. The discrepancy is quite adequately
explained by the difference between competition for added business at the fringe
of one's market, and competition affecting one's main output over the principal
part of his market area."

(2) Cross- Hauling. -^Due to competition and the necessity of obtaining an
even flow of orders, most of the larger producers of steel compete in all of the
major markets for their products. Consequently, while one mill may sell at
points nearer to other mills, more distant mills are making sales in territories
nearer to it. Thus, some of the shipments of steel from mill to destination cross
each other. Critics of the basing point practice have called such shipments
"cross-hauling" and have contended that cross-hauling results in great economic
waste.

The issue is somewhat beclouded by the fact that such critics have never
described with any degree of accuracy what they mean by this ambiguous term
"cross-hauling", which they condemn so heartily. Strictly speaking, the term
means shipments which cross each other, and the criticisms are often so phrased
as to create a mental image of freight trains passing in opposite directions on
parallel tracks loaded with identical steel products. Clearly, however, the
criticism is not limited to the extreme case which is used to support it. Some
statements of such critics indicate that they would consider any shipment to a
destination from any mill other than the mill nearest such destination as a cross-
haul, irrespective of whether there was a corresponding shipment in. the opposite
direction. If such critics intend to criticize something more than cross shipments
of substantially identical products at approximately the same time, some other
term should be used as the expression of the supposed evil. In fact, cross-hauling
is the necessary result of competition.

In substance, the criticism is that transportation costs in the steel industry are
so high as to involve economic waste and to result in inordinately high prices for
steel products. Actually the steel industry does not have excessive distribution
costs, as is evidenced by the fact that such costs are lower in that industry than
in most other industries. In a study of distribution costs of 312 manufacturers
in 1931,**^ "Iron and Steel and Their Products" ranked among those having the
lowest distribution costs of the 29 industries investigated. The steel industry

68 "Analysis of the Distribution Costs of 312 Manufacturers", published by the Association of National
Advertisers and the National Association of Cost Accountants (N. Y. 1933), pp. 64. 106.

CONCENTRATION OF ECONOMIC POWER 77

proper, undoubtedly, had even lower distribution costs than those companies
included in the classification "Iron and Steel and Their Products", if the records
of the United States Steel Corporation are in any way indicative of the average
costs for the steel industry.

The problem of cross-hauling resolves itself into the question of what trans-
portation costs are unnecessary and, at the same time, avoidable without the
incurrence of other costs which would have an effect upon steel prices similar to
that which it is charged results from so-called cross-hauling. It is impossible to
measure quantitatively the amount of transportation costs which might be con-
sidered unnecessary from any point of view, and it is equally impossible to measure
the economic costs which would result from any interference with present prac-
tices, or, more specifically, from any direct or indirect limitation of selling terri-
tories. However, many of the factors in the steel industry which necessitate the
wide distribution of the products of steel mills have been considered herein, and
consideration may be given at this point to the contention of the Federal Trade
Commission that the above mentioned freight abscfrption is a measure of uneco-
nomic cross-hauling.

This position is entirely untenable, as such freight absorption is not a measure
of cross-hauling in any sense, and is certainly not a measure of unnecessary and
avoidable transportation cost. A few examples will emphasize this point.

(1) Some freight absorption occurs when the mills which are nearest freightwise
to the destination do not have sufficient capacity at any time to supply the de-
mand at such destination. To the extent that shipments from more distant mills
supply the excess demand, there is no economic waste.

(2) Some freight absorption results from shipments to destinations for which
the applicable basing points are Gulf of Mexico Ports or Pacific Coast Ports.
Only two of such ports are producing points and these are relatively minor pro-
ducing points, so that in most cases the delivered prices are less than the sum of
base price plus freight from any mill. Such freight absorption certainly does not
represent excessive transportation costs.

(3) Freight absorption occurs in shipments from mills, located within a 25- or
50-mile radius of basing points, to the basing point city, or its immediate vicinity.
The amount of absorption per ton is minute, and any saving resulting from ita
elimination would not justify an artificial prohibition against the mills in such &
small area competing with respect to all the business in that area.

(4) Some freight absorption occurs on shipments from one mill belonging to a
steel company, which has another mill located nearer the destination. Obviously,
there are compensating economies which cause such shipments. Even products
of a single general classification, such as plates, differ greatly in size, gauge,
metallurgical analysis, etc. When a mill in one area is engaged in producing one
kind of plates, it is often more economical to ship another kind of plates from a mill
in another area rather than to change the production schedules at the first mill.
Furthermore, the demand for many specialized products is not large enough to
justify their production at more than a few mills. Production will often be con-
centrated at one or two points, although the product is sold in areas nearer other
producing mills.

(5) Some freight absorption occurs as a result of shipments by a transportation
medium more expensive than that used in calculating the delivered price; e. g.,
shipments by rail where the delivered price reflects the cost of water transporta-
tion, and shipments in Jess than carload lots of a large order priced on the basis
of the carload rate. Similarly, freight absorption occurs in some cases because
the customer is charged freight on the weight of the steel alone while the mill pays
freight on the total weight, including packing and blocking material. Such freight
absorption cannot be condemned as economic waste.

(6) Some freight absorption occurs as a result of customer preferences. Among
the bases of customer preference are suitability of the product of a particular mill
to a particular customer's needs, conditions of service, including time of delivery
and desire on the part of customers to maintain several sources of supply. If
economic waste is here involved, it is, nevertheless, waste which could be elimi-
nated only at the expense of arbitrarily depriving steel consumers of any choice
in their source of supply.

The circumstances above enumerated indicate clearly that freight absorption is
no accurate measure of cross-hauling as this term I.«i used by the critics, that is,
in the sense of an economic waste. There is a further important consideration,
however, which must be emphasized. A large amount of freight absorption may
occur in shipments from mills, located near the source of raw materials, to destina-
tions nearer to competitive mills which have longer hauls of raw materials. To

78 CONCENTRATION OF ECONOMIC POWER

consider such freight absorption alone gives a most incomplete picture. OfT-
setting this'freight absorption is the saving in transportation charges, as compared
with such competitive mills, which such mill has secured by being located near its
source of raw materials. Clearly economic waste is not involved in such cases.

Before cross-hauling is condemned, it should be proven that the alternative
would not involve economic costs, by way of transportation or otherwise, in excess
of the supposed saving which would result. Not to be overlooked is the inter-
ference with competition which would necessarily be the consequence of any
artificial limitation of marl\eting territories. Freight absorpition is primarily
produced by competition in the steel industry

In this section, two causes of variation in mill net returns have been considered,
one of which results in a mill net return above the basje price, while the other results
in a mill net return below the base price. Both of these variations have been
criticized as symptoms of monopoly. It has been shown, ho]ycver, that the
realization of mill net returns above the base price which critics misname "phantom
freight", is actually the result of competition; it is the way in which a producer
realizes his competitive advantage over other producers resulting from his superior
geographical location. The realization of mill net returns lower than the base
price, which critics term freight absorption, also results from the competition of
producers at varying distances from the destination for the same business. With-
out freight absorption, freight rates wouM set up a wall between different producers
and their markets, great'y limiting the area over which competition now takes
place, and producing in many parts of the country virtual monopolies.

It is true that variable mill net returns of the kind found under the basing point
method do not represent the uniform market prices which would be expected if the
assumptions of the theory of "perfect competition" were realized. The fact is,
however, that these variations from the classical assumptions, which are also
found in other industries, are due to certain inherent characteristics of the steel
industry, primarily the importance of low assembly costs in determining the
location of steel mills, the large size and great cost of integrated and diversified
steel mills, the geographical separation of producers, the geographical distribution
of demand and the nature of steel production costs.

The Proposed Alternative to the Basing Point Method
1. introduction

In the preceding discussion, it has been pointed out that the theory of "perfect
competition" is an abstraction, and that the steel industry, like other industries,
varies from the theoretical assumptions underlying "perfect competition"; that the
basing point method is not a responsible cause of variations from the theory;
that the underlying causes are economic factors which are independent of the
basing point method; and that monopoly or monopolistic practices are not among
the underlying causes. The basing point method is not evidence of monopoly,
nor is it caused by monopoly.

Consideration may be given, however, to the question of whether these differ-
ences from the assumed conditions of the theory of "perfect competition" are
desirable from the point of view of the public welfare.

In order to satisfy one of the theorectical requirements of "perfect competition",
it would be necessary that there be steel mills scattered all over the country near
each market and that there be manj' separately owned mills at each location.
The reasons why this physical division of mills could not be accomplished economi-
cally in the steel industry have already been stated. First, raw material assembly
costs limit the locations of mills to a few areas. If mills were erected in other
districts, more than four tons of raw materials would have to be hauled to the
mills for every ton of steel produced. Second, large scale diversified operations
are cheaper than small scale operations. Thus, if the present large units were
broken up and replaced by scattered small mills, both assembly and production
costs would be higher than they are now and would be reflected in higher prices
for steel products. A miU of economical size near the sources of raw materials
probably could and would undersell these local mills in their own territories
gradually forcing a return, through competitive pressure, to present conditions,
unless artificial barriers were set up. Third, mills large enough to produce many
products inherently have large capacity, so that the scattered mills would merely
result in duplication of capacity. To approximate another condition of theoretical
"perfect competition" in the steel industry, the same conditions would have to

CONCENTRATION OF ECONOMIC POWER 79

exist with respect to the buyers as with respect to the sellers, and on the buyers'
side either the economies of size would also gradually cause a return to present
conditions or the disregard of such economics would result in higher prices.

Thus it appears impossible to produce in the steel industry an imitation of the
assumed conditions of "perfect competition" along classical lines. It should be
remembered, however, that the same is true of all other industries in our economy.

In considering the desirability of "perfect competition" in the steel industry,
even if it could possibly be attained, a principal factor is the cost to the public
which it would entail. The costs involved in breaking up sellers and buyers so as
to have many competitors on both sides of the mari^ct has been dealt with in a
preceding paragraph. Another element previously discussed, which cannot be
overempliasized, is the effect of the business cycle.

As has been pointed out herein, the business cycle was ignored in the thinking
which led to the development of the theory of "perfect competition". The
flas.sical economists assumed fairly s( early demand or, at least, moderate, long-run
shifts in demand. Working on this assumption, they concluded that "perfect
competition" would result in the elimination of high-cost producers, would limit
the profits of average and low-cost producers to a reasonable amount, and would
prevent any great amount of excess capacity or of deficiencies in capacity. The
business cycle, however, produces enormous fluctuations in demand, particularly
for producers' durable goods, such as steel. These fluctuations are independent
of .price. Due to such fluctuations, "perfect competition" would produce results
vastly different from those contemplated by the classical economists.

Cyclical fluctuations in demand tend to produce a disproportion between ca-
pacity and demand at either the lower or upper phases of the cycle, which condi-
tions are not satisfactory to industry or to the public. Particularly in the steel
industry, which requires large and expensive plants and machinerv, either facilities
will be built to supply peak or near-peak demand, which will result in idle capacity
during the other phases of the cycle, or facilities constructed to supply a lesser
demand will be insufliicient to supply the peak demand, with the result, in the up-
ward phase of the cycle, of a scarcity and a great rise in prices which might well
impede the development of the expanding economy. It is important to note that
no matter which eourse the industrv may take, dislocations will occur which were
not contemplated in constructing the theory of "perfect competition."

The steel industry has facihties for supplying the peak or near-peak demand for
steel. This is shown by the high operating rates diiring the big production years
of 1929 and 1937, and the present operating rate of more than 90% of ingot
capacity, which rates may be compared with the low operating rates during the
intervening periods.

The injection of the phenomenon of the business cycle has a profound effect
upon the supposedly beneficial consequences of the classical theory of "perfect
competition". It has been assumed that if "perfect competition" along classical
lines could ever be established, it would produce wholly beneficial effects for
society. No one, however, has ever demonstrated that these effects would follow
from "perfect competition" in an economy affected by a pronounced business
cycle. In the absence of such a demonstration, it is impossible to make any cor-
rect assumption that deviations from the theory of "perfect competition" are
damaging to the social welfare. On the contrary, it is quite possible that these
deviations, by interrupting or checking some of the more abrupt changes in the
course of the business cycle, perform a valuable social and economic function.

In considering the question of the social desirability of the basing point practice,
it is necessary to keep constantly in mind the fact that practical analysis cannot be
made in a vacuum. It requires an investigation of alternatives. The practical
problem is whether any alternative would not cost more than it would contribute.
The only alternative seriously suggested by the critics of the basing point method
is the uniform f. o. b. mill price system.

2. THE PROPOSED UNIFORM F. O. B. MILL PRICE SYSTEM

The uniform f. o. b. mill price system, proposed by the Federal Trade Commis-
sion and by Professor Fetter, would require every mill to sell all its products at
prices quoted f. o. b. the mill. The prices at each mill would have to be uniform
for all buyers. In other words, every mill would have to sell its product at the
mill door, at the same price to every buyer, leaving the buyer to find his own means
of transportation from mill to destination.

The Federal Trade Commission has publicly taken the position that the uniform
f. o. b. mill price system was prescribed by its 1924 "cease and desist" order di-

80 CONCENTRATION OF ECONOMIC POWER

rected against certain subsidiaries of the United States Steel Corporation in the
"Pittsburgh Plus" case.^^

The origin of the proposed uniform f. o. b. mill price system probably is to be
found in the testimony of certain economists who testified in the Pittsburgh Plus
case against the continuation of that practice. The trial examiner found as a
fact that prices of steel products had been quoted f. o. b. the mills until the Pitts-
burgh Plus practice began to be followed some time in the 1890's. However, it is
known that about 1750 iron products were sold on a Philadelphia base, with out-
lying mills absorbing freight in order to bring their product to the central market.
The Federal Trade Commission appears to have taken the view that f. o. b.
mill prices were the rule until the beginning of the Pittsburgh Plus practice.

From this assumption the Commission and other critics seem to have con-
cluded that f. o. b. mill prices are the "natural" way of quoting steel prices. This
opinion is bolstered by the further assumption that the "true market" for steel is
at the mill. From this reasoning has come the conclusion that uniform f. o. b.
mill prices would reproduce all the assumed conditions underlying the theory of
"perfect competition", and would produce all the beneficial results which are
supposed, under classical theory, to follow from "perfect competition". This is
the basis of the view that a substitution of uniform f . o. b. mill prices for the basing
point method would result in lower prices for steel, better locations for steel plants,
and, in general, a cure-all for the various alleged defects of the basing point
practice.

(o) "Perfect Competition" and the Uniform F. O. B. Mill Price System.

Since the Federal Trade Commission's view developed, at least in part, from
the supposed earlier f. o. b. mill prices, it should be pointed out that the proposed
uniform f. o. b. mill price system differs fundamentally from its earlier model in
the requirement that mill prices be uniform to all buyers. There is no reason to
suppose that such earlier f. o. b. mill prices, if they existed at all generally, were
the same to all buyers. Undoubtedly, competition must have forced producers to
quote lower prices to customers located nearer other mills, which had geographical
advantages in selling to such customers. The requirement that prices of a pro-
ducer be uniform is arbitrary from the point of view of the producer, both in and
of itself and because of its consequence of strictly limiting the selling territory of
his mills. Since wide distribution is necessary to obtain an even flow of ordfers
and for other reasons which have been discussed, the producer naturally attempts
to realize the highest mill net return on each sale. Thus when he is dealing with
a customer near to him, who cannot purchase from another producer without the
addition of the freight from this other producer's plant, the nearer producer will,
in some circumstances at least, quote a price which is equivalent to what the buyer
will have to pay if he purchases elsewhere. In other cases he will be forced to
meet the price of competitive mills which are nearer to the buyer. Thus sales at
varying mill net returns are natural in the steel industry and result from the play
of competitive forces. A requirement that all sales by any producer be made at
uniform prices regardless of the buyer's location is artificial. It means that the
producer must either refrain from taking orders which are necessary to the opera-
tion of his mills, or else he must extend a lower price to customers near his mill
when competition does not compel him so to do.

Under the uniform f. o. b. mill price system a producer would have to find a
price which would cover his total costs, including overhead, and at the same time
extend his sales over an area broad enough to keep his mill operating at an eco-
nomical rate. If any mill's costs and geographical relation to its customers should
be such as to permit a satisfactory solution of this problem, it would be an excep-
tional case.

Consideration may also be given to the question of the extent to which the
proposed uniform f. o. b. mill price system would bring about the assumed condi-
tions of "perfect competition," as contended by the Federal Trade Commission.

For the most part, the sales of steel producers would be restricted to an area
surrounding their own mills. If they set prices low enough to permit sales to be
made in the territories of other mills, retaliation by the latter mills would natur-
ally follow. In consequence, buyers for the most part would be reduced to pur-
chasing from the nearest mill, unless price differentials at different mills were so
sharp as to permit a lower delivered cost on a shipment from a more distant mill.
In any event there would be very little or no choice.

In some districts where there are many mills, local buyers might have some
choice of sources of supply. ^^ The number of producers among whom they could

" See Exhibit No. 358, p. 9. An appeal from such 1924 order of the Federal Trade Commission is now-
pending before the United States Circuit Court of Appeals for the Third Circuit.
M This would not necessarily be true. See the detailed map, facing p. 84, infra.

CONCENTRATION OF ECONOMIC POWER gl

choose and who /vould be competing with each other for each buyer's business
wou4d, however, be greatly reduced. Any single producer located at a distance
from all other mills would have a virtual monopoly with respect to the buye^s in
his territory. Competition would be principally along the boundary between the
market territories of geographically separated mills and, at all relative price lev-els,
would actually be limited to a few points.

It is difficult to understand how such a competitive situation would conform to
the assumed conditions of the theory of "perfect competition." The theory
requires many buyers and many sellers in contact with each other. In most
producing districts, however, there are not more than two or three competing
producers, and in many areas there is only one.. Since buyers, for the most part,
would buy from the nearest mill because its price plus the transportation charge
to destination would be the lowest, there would often be only one producer and
never more than a very few producers with whom each buyer could be in contact.
On the buyers' side there would be the same number at each point of competition
as at present, but no more. This certainly does not correspond to the assumptions
of the classical theory of "perfect competition."

It is also unlikely that new mills would be constructed near the mill of an
isolated producer who was realizing a high price, unless the local market was
greatly in excess of the output of such isolated producer. The capital investment
required for a steel plant is extremely large, and the nature of the business, with
its difficult production processes, would make the enterprise very questionable.
Furthermore, a new mill, and particularly a small one, would have high produc-
tion costs, and would be more than likely to accept the price structure as it found
it. Thus, it seems unlikely that even over the long run any substantial increase
in the number of producers in any district would occur under the proposed price
system. A law cannot prevent large scale operations being cheaper than small
.scale operations, or shift the iron ore and coking coal deposits to different and
scattered locations.

It thus appears that the uniform f. o. b. mill price system would not produce
conditions resembling those assumed in the theory of "perfect competition." It
would simply be the substitution of a new set of variations from those assumed
conditions. The assertion that the uniform f. o. b. mill p-ice system would pro-
duce all of the assumptions of "perfect competition" cannot be supported, and it,
therefore, cannot be presumed that this system would produce the social and
economic benefits which it is supposed would resu'* from the realization of "perfect
competition."

Some economists have expressed the opinion that the suggested uniform f. o. b.
mill price system would not prodi^e theoretical "perfect competition." "The
NR'A Report, for example, says:™

"Professor F. A. Fetter's discussion of basing point practices classes as competi-
tive only that type of price structure which would result from rivalry between
producers located at identical shipping-points, and thus classes as monopolistic
all modifications of the price structure resulting from rivalry of producers at a
distance from each other. From the standpoint of this second variety of competi-
tion it would be equally valid to class as monopolistic the uniform mill-base price
system which Professor Fetter accepts as the only truly competitive structure."

Professor de Chazeau has written of Professor Fetter's "Masquerade of Monop-
oly" as follows I'f'
_ "Nowhere in his book is there the faintest recognition that the economic condi-
tions of production and distribution may have become fundamentally inconsistent
with the existence of perfect competition. Professor Fetter never raises the ques-
tion: What method of pricing can be made to work in the steel industry? His
defense of the mill-base price rests not on an analysis of the steel industry but on. a
deduction from the concept of a free market under perfect competition. This is
unfortunate. As an exposition of monopolistic discrimination. Professor Fetter's
book is authoritative; as a proof of the economic feasibility and social desirability
of the mill-base price for steel, it is irrelevant except in so far as the opinions of a
recognized economist command respect."

(6) The Effects of the Uniform F. 0. B. Mill Price System.

(1) The Nature and Extent of Competition. — Existing steel mills have been
located largely by reason of low raw material assembly costs. They are obliged
to sell their products over wide areas. Most of such mills have developed large
scaleoperations, with the objectof supplying the entire country from a small number
of produci ng districts. Nevertheless, some isolated plants have been erected, at

«» NRA Report, pp. .59-60.

"> Dftugherty, etc., "Economics of the Iron & Steel Industry," p. 547, note 1.

82 CONCENTRATION OF ECONOMIC POWER

points like Detroit; Granite City, Illinois; St. Louis; Kansas City; Pueblo, Colo-
rado; and Birmingham, Alabama. There are some areas with many producers
whose total capacities far exceed local demands, and other areas in which there is
only one producer, and, over great expanses of the country, no producer at all.
A uniform f. o. b. mill price system would affect the closely grouped producers
and the isolated producers in different ways. An isolated producer would be
protected from other producers by a wall of freight rates, and would be able to
charge high prices to consumers in his own area.

The Federal Trade Commission says that in such a case either outlying producers
would set lower prices and force the isolated producer to lower his own price, or
someone else would construct a mill nearer the isolated producer, and would com-
pete with him in his own market. These suppositions would probably not te
realized. In the first place, if an outside producer tried to compete by naming a
lower price, he would have to extend that price to all of his customers. He would
be mucli less likely to reduce prices than he is under the present practice, which
does not require him to realize the same mill net return on sales to all customers,
including those from whom, owing to a geographical competitive advantage, he
can realize a higher mill net return. Thus, under the proposed uniform f. o. b.
mill price system, unless the isolated producer's price were exceedingly high, out-
lying producers could not afford to name a price enough below his to take any
substantial part of his market. These same outlying producers, it should be
noted, are probably today willing to compete in that area by accepting a lower mill
net return on that part of their output which can be sold in the market territory
of the isolated producer. The artificial requirement of uniform mill net returns
would prevent this existing competition.

The producers who are close together would be in intense competition with
each other, not only because of their nearness to each other, but also because tiiey
could sell onl}' in the territory around them in which demand would be far below
their total capacity. For example, the numerous producers in the Pittsburgh,
Youngstown, and Canton-Massillon districts could sell only in the territory sur-
rounding them, and in that territory demand would be by no means sufficient to
keep their mills operating at an economical rate. The Federal Trade Commission
appears to believe that such groups of mills would enlarge their sales territories by
setting lower base prices than the price at surrounding mills. However, there are
very definite limits to the adjustments which can be made in that way. At Pitts-
burgh, for example, a producer would not only find intense competition from other
mills in the Pittsburgh district, but he would also find that lowering his base price
would not extend his sales territory to any great extent, because Pittsburgh is
surrounded by Youngstown to the northwest, Weirton to the southwest, Bethlehem
and Johnstown to the east and Buffalo to the north.

One possibility which might be envisaged with respect to some products is that
the mills at Pittsburgh would set their price low enough to enable them to sell up
to the nearest mill in each direction, and that such mills would in turn set prices
which would enable them to sell beyond up to the next nearest mill. The rcsuliing
price structure would greatly resemble that which existed under Pittsburgh
Plus. However, it is more probable that the mills surrounding Pittsburgh, at least
at first, would attempt to meet any lower prices that Pittsburgh mills might
name. The net result of competition of this kind would necessarily be the
elimination of some mills. It is asserted that this result would be beneficial,
because the highest cost producers would be eliminated in accordance with the
theory of "perfect competition" and the alleged excess capacities would thus be
withdrawn from the market. It is by no means certain, however, that the high-cost
producers would be the ones to be so eliminated. Financi'il strength would play
a decisive part in determining which mills were eliminated. A company with
several mills might make enough from its lower cost units to keep a higher cost
unit in business until it had eliminated a more economical competitor. In these,
and in many other ways, the elimination of producers would vary from the classical
assumption that the high-cost plants would be driven from the market.

There is another extremely important factor in the market for steel which
must be taken into account. Steel is sold in the form of many different products
which vary all the way from semi-finished products, such as ingots or slabs, to
highly finished products such as cold reduced strip; and from light polished wire
to heavy wide-flange beams. The uses of steel products vary from fine wire
used in musical instruments to thick plate used in the construction of ships, or
heavy girders in skyscrapers and bridges. The market for every product in this
wide range varies. For example, wide-flange beams are used very largely in
big cities such as New York and Chicago. Sheet piling is used almost exclusively

DiAQBAM 16

MARKET TERRITORIES OF MAJOR MILLS
PRODUCING STEEL SHEETS

Assuming Each Such Mill Adopts A Uniform F. O. B. Mill
Price Equal To Prevailing Base Prices

I ME.

m SPARROv^S POINT
rm LACKAWANNA
rP~l PITTSBURGH

rrn butler, apollo

6- VANOERSRIFT
rwn ^X'EIRTON, BEECH BOTTOM

6- steubenville

rY~1 YOUNGSTOWN, CAMPBELL

o- m' donald
waI warren

rcD CLEVELAND

CaI canton-massill

LEoJ PORTSMOUTH
~^A~i ASHLAND
I M I MIDDLETOWN
6c1 GRANITE CITY
rc~l CHICAGO
I G I G/>RY, INDIANA HARBOR
FMo] .ONROE
[ZdI"/ DETROIT

292918 — 41— Nc. 42 (Face p. 83)

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CONCENTRATION OF ECONOMIC POWER §3

in harbors and other developments on the shores of the oceans and Great Lakes
and in navigable rivers. Sheets and strip in one form are used in the manufacture
of automobiles and furniture, and in other form for the construction of roofs for
barns and houses, or in the manufacture of pails and agricultural implements.
Tin plate is used in the manufacture of many varieties of cans extending from
the heavy milk can to the tiny sardine tin. Thus, there are tremendous differ-
ences in the market for different steel products. Some are highly specialized
and are purchased in only a few districts and by a few buyers, while others are
used for many purposes over wide areas and are sold to many different kinds of
buyers. The effect of a uniform f. o. b. mill price system upon the steel industry
cannot be envisaged without considering its different effects upon the markets
for all of these products. For example, one producer, making a range of products
from thin strip to wide-flange beams might find that the low price on some of his
products could be recouped by higli prices on other products. A producer nearby,
however, making only sheets and strip might be driven out of business by low
prices on tiiose products. If a producer had plants in several different districts,
it would be still more difficult to foretell what effect the proposed system would
have upon him.

In order to illustrate some of the complexities of the situation, the accompany-
ing two maps have been prepared showing the distribution of sheets under the
proposed uniform f. o. b. mill price system. The first map shows the locations of
seventeen major sheet producing points, together with the territories in which
the mill or mills at each such point would be able to sell sheets under a uniform
f. o. b. mill price system, assuming prices corresponding to the present level. ^*
The areas in which the mills of each producing point could sell, either exclusively
or in competition with mills at other producing points, are marked with the name
or symbol of such producing point. Under the existing freight rate structure, no
mill would be able to sell sheets in areas other than those marked with its symbol.

The first map demonstrates the rigid and arbitrary nature of the system recom-
mended by the Federal Trade Commission. The uniform f. o. b. mill price
system would arbitrarily fiy both the size and boundaries of the selling territory
of each mill, and the size of its market area would depend generally upon the
proximity of other mills. Thus, mills at Sparrows Point, Maryland, and Lacka-
wanna, New York, would, between them, have a monopoly of the sheet market
in the entire North Atlantic Seaboard. Likewise, the mills at Chicago and
Gary-Indiana Harbor would have as their exclusive selling territory for sheets
all of Wisconsin, the Northern sections of Indiana and Illinois, and the Western
half of Michigan, not to mention territory to the west not shown on this map.
In contrast, the mills located in Western Pennsylvania and in Ohio, which have
very large sheet producing capacity, would have very restricted selling areas.
The mills at Youngstown-Campbell-McDonald could sell sheets in only two coun-
ties in Ohio and five counties in Pennsylvania, and the territory of the Pittsburgh
mills would be almost equally circumscribed.

The first map shows graphically the series of local monopolies for the sale of
sheets which would be created by a uniform f. o. b. mill price system. A vast
majority of all areas would be allocated exclusively to a single producing point,
and only a few small areas would enjoy competition from more than one source.
All of the important steel sheet consuming centers, Detroit, Chicago, Milwaukee,
Cleveland, Toledo, Cincinnati and Philadelphia, would be in the exclusive territory
of a single producing point. The areas in which more than one producing poiht
could compete do not include any which have a large consumption of sheets.

The arbitrary character of the limitation of territory, resulting from such a
rigid pricing system operating under the present freight rate structure, is further
illustrated by the pattern of the selling territories of certain mills. For example,
the mills at Warren-Niles and Youngstown each would have monopolies for the

" The first map was constructed on the following principles:

Producing Points— The 17 major producing points arc those which, according to the American Iron &
Steel Institute Directory, have modern continuous or modernized mills with a substantial capacity for the
production of sheets. Outmoded hand-mills and mills having small capacities were not considered. In
some cases, two or three mills located close to each other wore grouped together, such as the mills at Butler,
Vandergrift and Apollo, since the freight rates from each such mill to most consuming areas are the same.

Prices— Mill prices equal to prevailing basing point prices at nearest 'basing points were assumed. This
would result in a price of $40 per net ton at all producing points, except at Detroit and Granite City, where a
price of $42 would result, and at Monroe where a price of $43 would result, corresponding to existing differ-
entials at such points.

Method of Allocation of Tcrriiory— Territory was allocated upon a county basis, each county being assigned
to the producing point or ix>ints from which there exists the lowest freight rate to one or two key towns in
the county. (In the case of counties near differential producing points, the lowest combination of mill price
and freight was used). .Ml-rail carload freijrht rates wore used, except in the case of certain counties along
the Ohio River having facilities for handling large shipments, for which barge rates were used.

292918 — 41— No. 42 7

84 CONCENTRATION OF ECONOMIC POWER

sale of sheets in the counties in which they are located, Trumbull County and
Mahoning County, Ohio, respectively. Warren-Niles and Youngstown would
share the County of Ashtabula, north of Trumbull County, Ohio, while the mills
at Warren-Niles, passing Youngstown, would share Columbiana County, Ohio, to
the south of Mahoning, with the mills of the Weirton group, and Youngstown
mills could not reach this county. Similarlj', the Canton-Massillon mills would
share with the Cleveland mills Henry and Wood Counties in Northern Ohio,
after passing considerable territory in which the Cleveland mills would have a
local monopoly. To be noted also are the sheet selling territories of Chicago and
Gary. These mills would share most of the territory which either could reach,
including certain Indiana counties. However, there are three Indiana counties
in which Chicago mills, after passing Gary, could undersell the Gary sheet mills,
and a large area in which Gary mills, after passing exclusive Chicago territory,
would have a monopoly for such sales.

The arbitrary nature of the allocation of territory under the uniform f. o. b.
mill price system, and the limited points at which competition could occur, is
even more strikingly illustrated on the second map, which also concerns the sale
of sheets. This map gives a somewhat microscopic view of a section of Western
Pennsylvania and Eastern Ohio. Whereas the allocation on the first map was
on a county basis, according to existing freight rates on sheets from producing
points to one or two key towns in each county, on the second map allocation is on
a town basis, all towns of any importance in each county being separately allocated
to the mill or mills from which the existing freight rates to such towns are lowest.
The symbol of the mill or mills which can sell sheets in each such town are marked
in heavy print.

Although the first map indicated that competition for the sale of sheets between
groups of mills would be possible in various areas shared by them, the detailec^
second map shows that even in such areas many towns would be served exclusively
by one producing point — there being only a few towns that would enjoy competi-
tion in the sale of sheets from more than one producing point. For example, the
County of Columbiana, in Eastern Ohio, is sliown on the first map as being shared
by the mills at Warren-Niles and by the mills at Weirton-Beechbottom-Steuben-
ville. The detailed second map shows, however, three towns accessible only to
the Niles mill, one accessible only to the Steubenville mill, and a fifth town
accessible only to the Canton mill. So, too, Crawford County in Northwestern
Pennsylvania, indicated on the first map as shared by the Youngstown and Butler
groups of mills, is shown on the detailed second map to have six towns which can
be reached only by the mills of the Youngstown group and one town shared by
the mill at Butler and the mills of the Youngstown group. Another example is
Westmoreland County, Pennsylvania, adjoining Allegheny County on the East,
which was divided on the first map between the Pittsburgh mills and the Butler
group of miUs. On the detailed second map it appears that six towns in this
county would be reached only by the mill at Dravosburg, another town would be
reached by the mill at Vandergrift alone, still another would be shared by the
mills at Dravosburg and Apollo, and the remaining town would enjoy the com-
petition of the mills at Pittsburgh, Brackenridge and Vandergrift.

Consideration should also be given to the territories shown on the first map as
the exclusive sheet marketing areas of a group of mills located very near each
other, such as at Butler- Vandergrift-Apollo. It would appear from the first
map that the competition between all these mills would exist throughout the
area allocated to them as a group. The detailed map shows that this would not
be the case and that frequently only one mill of the group would reach a particular
town, while the majority of towns would be reached by not more than two mills.
For example, seven towns in Butler County, Pennsylvania, adjoining Allegheny
County on the north, would be served exclusively by the mill at Butler, and in
Cambria County, Pennsylvania, five towns would be reached by the mill at
Apollo alone, while three towns would be served by the mills at Apollo and Vander-
grift. Similarly, in the area to be shared by the mills at Weirton-Beechbottom-
Steubenville, all towns in Belmont County in Eastern Ohio would be reached
only by the mill at Beechbottom, while in JeiTerson County, just north of Belmont,
two' towns would be accessible to the Steubenville mill alone, a third would be
shared by the mills at Steubenville and Weirton, and a fourth would be served
by the Canton mill.

This detailed map emphasizes both the local monopolies and the arbitrarj'
nature of the allocation of the territory for the sale of sheets which would result
from a uniform f. o. b. mill price system.

Diagram 17

LEGEND

A APOLLO

BB BEECHBOTTOM

Br BRACKENRID6E

Bu BUTLER

C. CANTON

CI CLEVELAND

D DRAVOSBUR6

L LACKAWANNA

M MASSILLON

N NILES

P PITTSBURGH

SP SPARROWS POINT

S STEUBENVILLE

V VANDERGRIFT

Wa WARREN

We WEIRTON

y youngstown
6- McDonald

DETAILED A\AP OF COUNTIES
IN WESTERN PENNSYLVANIA AND EASTERN OHIO

V • " '

i ...i:.

j^^ VENANGO

Bu-Y* 'Bu-Y

Showing towns controlled by mills producing steel sheets
assuming each such mill adopts a uniform F.O.B. mill price
equal to prevailing base price.

\ .Bu-Y
I "Bu-Y

M....,i.. r- "iJ^.v.Br.Bu* Br-Bu

',.Bu-Br-L ,L ~-r

i ^ ^ C.. \ ;,C. ;W.;N L- McPoMLdi'M ,

UWRBNCE /'

BUTLiCt iVBu

1 WAyNE

i Ca»i" "'

- — ]-"'

( . AJlmsn 1

! COLUM9JANA

1 STARK

•M

1 gj ®C«n»on

Ca-M •M

HOLMES

1 Matsillon

J B««di C.ty I
'l •M.- n 1

^'■-" TUSCAgA'rAS 1 ^juQ

1 M« C.. 1

1 BayB'd

i i

•Y eJ.^r.i'. I'Bu

} .V-Br

I V.Br. ''°""^"'

V.^V-Bx

liBu-Br.

• SP

i **'

"""""

1 COSHOCTOM

• BB-s"

— 7if.

1 s«

S«

s»

1 c.

"'s'«

I •••^ ',. 4-.^

EJ.,.v|^ . ,^^^^^^^ • ,-^a£5H£W BracLorldgt^ Vandorgrift / 'A

M.I. • - V ~-''i .A.V

• A-V / .A-V

*-'>''" ,'A-V

s-w..

JEFFERSON I I" \

LWeirton
i SUub«nvJll.j£o-o^rf W

V/fSrAICfifLAWD ^---

!i,: ,A. /

A-V» /

SP-A« f
-; 'A-V SP-A-V /

WBB-Wo «=Dor.u\,

Dr.»c.b>,r9® / >-.-

GU£e«S£>

•S-BB

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""'""' """" BB'i.'.B'B "' °« J

BCLMCNT ,BB f'BB T,i.d.lpl.„|

BB« BB.f ]

( h::

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I It... ''^--.aTv^^/-'^*" /

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PBNN.
W.VA.

292U18— 41— No. 42 (Face p, 84)

CONCENTRATION OF ECONOMIC POWER 85

Referring again to the first map, some consideration should be given to the
comparative capacities of mills and the sheet consumption in the areas served
by such mills." With the exception of Detroit, where Qonsumption is in excess
of capacity, every producing point has capacity in excess of the estimated 1938
sheet consumption figures. In most cases, such excess of sheet capacity over
consumption is large. For example, the capacity of the Pittsburgh mills is more
than 1,500,000 tons, while the sheet consumption in areas which under the pro-
posed pricing system would not be shared with mills in other districts is estimated
at less than 78,000 tons, and the sheet consumption in the total territory which
would be reached by the Pittsburgh mills is approximately 110,000 tons. The
discrepancy is even more striking in the case of the Butler-Vandergrift-Apollo
sheet mills, where the capacity is over 730,000 tons, and the consumption would
be less than 5,000 tons in the exclusive territory under the proposed system, and
less than 41,000 tons ip the total territory to be reached by these mills under that
system. The Weirton-Beechbottom-Steubenville mills have a rated capacity
of over 1,160,000 tons of sheets, which may be contrasted with an estimated
consumption of less than 7,000 tons in the territory which they would not share
with other mills, and less than 55,000 tons in the whole territory to be reached by
such mills under the proposed system.

While outlying sheet mills at Chicago-Gary, Granite City, and Sparrows Point,
which serve nearby large consuming centers, have capacity greatly in excess of the
total estimated consumption in 1938, it should be borne in mind that such mills
would serve territory outside the confines of this map. In the exceptional case of
Detroit, sheet capacity is rated as over 1,400,000 tons, with consumption estimated
for 1938 at slightly more than 1,650,000 tons.

If 1939 consumption of sheets is estimated at twice the 1938 consumption, sheet
capacity at all producing points is still in excess of consumption in the areas served
by the mills at such points (which is natural sinc6 the mills were designed to sup-
ply the demand in many areas outside the confines of this map), with the excep-
tion of Detroit and Sparrows Point. The excess of consimiption in Detroit is, of
course, enormously increased.

. The preceding discussion has been based upon the assumption of mill prices
equal to prevailing base prices for sheets at the several basing points. Of course,
this price structure could not endure, as the slicet mills would necessarily seek
larger markets for their product. It should be emphasized, however, that the local
monopolies and the arbitrary and rigid limitation of territories would prevail under
any given relative level of prices. It is assumed by the proponents of the uniform
f . o. b. mill price system that competition would occur over large areas as the mills
sought markets. In practice, however, there are important limitations upon the
possibility of this occurring. It appears certain that mills located close together
would necessarily have practically identical mill prices since the difference in
freight rates from such mills to consuming points is so small that a slight reduction
in price by one mill would exclude mills close to it from all marketing areas, if such
mills did not follow the price reduction. Thus the pattern of local monopolies
shown on the detailed map would be unlikely to change'to any great extent, even
if the present price structure should be so altered.

There would undoubtedly be changes in the relative levels of prices for sheets
at producing point groups, and prices at producing points surrounded by other
producing points would naturally be lower than at the surrounding points. A
small reduction in price would result in increasing a mill's territory for the sale of
sheets, but in many cases the added territory would not increase the market pro-
portionately. In order to sell sheets in-^ny important market a mill would have
to reduce its price by the amount of the freight to such market. In many cases
this would arbitrarily result in wiping out or greatly reducing the ^riling area of
other mills, compelling retaliation by them, which in turn would deprive the first
mill of access to the market sought by such mill in making the price reduction.
The price would be lower, with little or no real gain in marketing area.

Furthermore, mills at two or more producing points could compete, generally,
at only one important consuming point at the same time. If the Pittsburgh and
Youngstown mills, for example, were to quote mill prices for sheets which would
enable them to compete in Cleveland, the Youngstown mills would automatically
be excluded from the Detroit market, as the Pittsburgh mill price would result

" Capacity figures were obtaineci from me 1938 directory of iron and steel mills, published by the American
Iron and Steel Institute. Taken into consideration were capacities of the modern continuous mills and the
modernized old type mills, the capacities of the old hand mills bcin? disregarded. Consumption figures
are the estimated consumption in 1938, on the basis of aiills operating at approximately 43% of the rated
rapacity, and were compiled by thesalesdepartmentof a subsidiary of the United Stales Steel Corporation.
These fifrurea. while believed to be reasonably accurate, are subject to some margin of error.

86 CONCENTRATION OF PXONOMIC POWER

in a lower price in Detroit. Likewise, if prices at Pittsburgh and Youngstown
mills were such as to result in equal competitive prices in Detroit, the Pittsburgh
mills would be excluded from the Cleveland market. It is impossible to foiesee
what steps the mills would be forced to take to escape the procrustean rigidity of
this system. The Federal Trade Commission contends that the result would be a
scattering of steel producers to areas of large consumption. The catastrophic
efifects of such a dislocation upon producer and consumer ahke have been consid-
ered at length herein. Possibly the result would be merely the installation of final
finishing mills at important markets. Such a change would result in no saving in
transportation costs, and ultimately could only result in higher steel prices, since
costs would be enormously increased.

It should be emphasized that these maps deal with only one product — sheets.
On every other product, maps prepared on the same assumptions would show
similar arbitrary territorial limitations, but on each product the territories would
be different, since the allocation would depend upon the location of competing
mills producing the same product. Thus, a consumer wishing to purchase two
kinds of products to be used together, such as structural shapes and plates, would
often be forced to purchase each product from a diflferent mill.

These maps do not attempt to picture all of the effects of a uniform f. o. b. mill
price system, even with respect to sheets, but they show definitely the delicate
nature of the price structure which would be imposed thereby, and the vast com-
plexities which are involved in any attempt to impose an arbitrary pricing system.
It is believed that the maps and the foregoing analysis of them establishes that
competition under such a system would not be more in the public interest than
it is under the basing point practice, and would necessarily result in local monop-
olies, in widespread dislocation of the steel industry and of industries dependent
upon it, and inevitably in higher prices for steel.

(2) Price Leadership. — Price leadership of the kind which naturally occurs in
an industry with large units and substantial inescapable costs would not be
eliminated by a uniform f. o. b. mill price system. Assuming that some mills
in each of the present large productio^j districts would survive the introduction
of such a system, after some period of time a sort of equilibrium would probably
develop. The surviving mills would become accustomed to the normal territories
which would result to them. Since the prohibition of freight absorption would
prevent sales outside of these territories, the mills would gradually lose their con-
tacts with distant customers, and would cease their efforts to sell to them. Once
this condition was established an equal rise in the price at every mill would leave
the selling territories unchanged and would enhance mill net returns of all the
mills by the amount of the advance. The temptation to follow price increases
is obvious. The mills would be more apt to follow a rise in the price at one mill,
than to try to initiate sales efforts in the new areas in which their old prices were
the lowest, because the mill which had raised its price would almost certainly be
obliged to reduce it if the others did not follow.

For these reasons, there is no reason to suppose that a uniform f. o. b. mill price
system would do away with any price leadership which may exist today. On
the contrary, it seems that by reducing the number of producers and by keeping
the mills out of contact with each others' customers, such a price system would
increase the tendency to follow price raises by other miUs.

(3) Concentration of Production Facilities. — One contention of the Federal Trade
Commission is that uniform f. o. b. mill prices would produce more economic
locations of steel mills. By "more economic" locations the Commission seems
to mean that instead of the present concentrations at various points in the noith-
east, rnills would be scattered all over the country near the various consuming
territories. As a corollary, it is probably thought that supposed "uneconomic"
producers at present basing points would be eliminated.

This reasoning ignores the fact that more than 4 tons of rawmaterials would have
to be hauled to these scattered mills for every ton of steel produced. If they were
located outside the northeastern United States they would be farther from raw
materials than the corresponding capacity is today, and their assembly costs
would be higher." If mills were built to supply small local markets, their scale
of operations would be smaller. This, too, would raise costs. Considering the
low level of profits in the steel industry during the past decade, it seems clear that
higher prices would be necessary to cover these higher costs. Even if the recom-
mended uniform f. o. b. mill price system would conform to the assumptions of

" It is obvious that It Is cheeper to haul one ton of finished steel a long distance to consumer, than to haul
more than 4 tons of raw material a shorter distance to a steel mill, although freight rates on raw materials are
80m8wfa.°-t lower than on finished steel products.

CONCENTRATION OF ECONOMIC POWER 87

"perfect competition" (although it seems clear that it would not), higher prices
for steel would be too much to pay fc uch conformity.

The same factors which prove the undesirability of scattered small mills would
militate against the occurrence of any change. The capital investment per ton
of steel is high, and the annual turnover is relatively low compared with many
other industries. Scattered mills mean a much higher per ton investment cost
than under existing conditions, and would present a serious economic danger to
the industry in periods of low demand. This result is obvious from the fact that
a compact, well-balanced centralized producing unit lends itself to greater flexi-
bility as an economic operating unit than would a number of separately located
mills, each of which would require the same production facilities and complement
of auxiharies, as does the one compact centralized mill.

A centralized mill, because of its greater flexibility in adjusting readily to a
diversity of products, assures lowest operating costs under all conditions, tends
to restrict the amount of unused capacity, and secures to employees the maximum
amount of employment possible when the industrial cycle swings downward.

In the last analysis, the question of scattered mills rests on a determination of
how and where the product can be made at the lowest cost — not only lowest pro-
duction cost at the mill, but lowest cost of the steel delivered to the user of steel,
wherever located. And in that determination, consideration must be given to
(1) the cost of assembling suitable raw materials, (2) the capital investment re-
quired per ton of steel, (3) the kinds of steel products for which a market exists
in the given area, (4) the probable consumer demand for such products in the
particular area and the stability of that demand, (5) the freight charges involved
in delivering the production to the buyer of the steel, and (6) an adequate labor
supply, taking into account housing facilities and living conditions generally.

The weight to be given to each of these considerations will differ according to
the kind of product that is made, and no single rule will apply to every condition.
Item (1) in most cases would probably carry the greatest weight, with item (2)
next in importance. The most important of the considerations have been taken
into account in present locations. It is doubtful whether the other considerations
would outweigh them under any system.

(4) Excess Capacity. — The steel industry had for some time past, until very
recently, a considerable amount of idle capacity, but not necessarily excess capac-
ity. With the sudden increase in the demand for steel products, which has
coincided with the outbreak of the European war, a large part of this idle capacity
has already disappeared, and the "^alance of idle mills are being brought into
operation as rapidly as possible to meet the existing demand. When idle capacity
exists, however, there is no way of telling how much, if any. thereof constitutes
"excess capacity". There are many reasons for what, at times, may appear to
be excess capacity, including one predominant one — the business cycle. The
steel industry has capacity to supply peak or near-peak demand at the height of
the cycle, as in the years 1929, 1937, and at the present time, and consequently
some of its capacity stands idl9 during the lower phases Of the cycle. The alter-
native is to have less capacity than the peak demand requires, thus producing a
scarcity and a tremendous rise in prices during the expanding phase of the cycle.
Neither condition is satisfactory. The business cycle and the other causes of idle
capacity would- operate even if a uniform f. o. b. mill price system were adopted.

A uniform f. o. b. mill price system probably would eliminate some producers,
thus reducing to some extent the possibihty of idle capacity. But no accurate
estimate can be made of how much of such capacity is necessary to supply the
peak demand, or whether the proposed system would eliminate just the right
amount, or at the right place. Any substantial reduction in capacity would prob-
ably leave less than is required for peak demand, and the equally undesirable
alternative of rapidly rising prices would then occur as demand increased in the
upward course of the cycle.

Thus, a uniform f. o. b. mill price system, if it had any effect at all on the amount
of steel capacity in the country, would probably "cause extremely large fluctuations
in prices, which are as undesirable as idle capacity. There is no reason to suppose
that it would produce any better working results than the basing point method.

(5) Price Discrimination. — The suggested uniform f. o. b. mill price system, by
defipition, would do away with variable mill net returns. It would accomplish
this, not by removing the causes of the present variation in such returns — the
location and geographical separation of producers, the wide distribution of con-
sumers, the large size of economical and efficient steel mills — but by an arbitrary
prohib-+ion. The artificiality and rigidity of the situation which would result
have already been discussed.

gg CONCENTRATION OF ECONOMIC POWER

(G) The Cost of the System. — In considering any alternative to the basing point
practice, one vital question is how much the alternative will cost economically.
Even could it be shown to be better in some ways than the present method, if it
would cost the public more than the benefits resulting from it are worth, it would
not be wise to adopt it. The above criticisms of the uniform f. o. b. mill price
system have shown that it involves definite economic costs. It would destroy
the investment in many plants. It would also act injuriously on many local
communities whose welfare is dependent upon the steel mills at that point. It
would not eliminate shipments from other than the nearest mills. It would
probably result also in widespread dislocation of consumers who have located
their manufacturing establishments in reliance upon existing steel mills. It
might eliminate some idle capacity, but it would not necessarily be high-cost
capacity, and this change would probably produce, in the course of the business
cycle, another phenomenon as expensive and as undesirable as idle capacity.
All these are economic costs which it appears would follow from a uniform f. o. b.
mill price system.

The only corresponding saving which would result from a uniform f. o. b. mill
price system would be in its elimination of a certain amount of transportation
costs. As has been pointed out, it is impossible to estimate the amount which
could be saved, but in any case such amount is not the whole amount of freight
absorption under the present pricing method.

Summary

The basing point practice in the steel industry is a simple method of quoting
delivered prices, which results in the competition of many geographically separated
steel producers at the markets for each of the diversified products of modern steel
mills. It is not a price-fixing medium nor does it result in high prices. It
does not stifle price competition but rather extends the benefits of such competition
to all consumers.

This basing point practice has evolved over a period of more than half a century
to meet fundamental economic conditions in the steel industry. Delivered prices
result from the buyer's need to know the cost to him of steel delivered at his
plant, since transportation charges from mill to consumer are often a substantial
part of the value at the place of consumption.

The producer of steel must take into consideration all of the elements of cost
involved, from the transportation of raw materials, through the processes of
converting such raw materials into steel products, to the final delivery of such
products to the consumer. It requires more than four tons of raw materials to
produce one ton of finished steel. The location of facilities for producing pig
iron and steel ingots must be determined largely by the factor of raw material
assembly cost. This limits the location of blast furnaces and open hearth furnaces
to a few areas where the raw materials are readily available. In turn, the econo-
mies of integration cause the location of rolling mills near the steel producing
units. Large welMntegrated mills, designed to supply the scattered markets of
the entire country, have been constructed in such areas. These mills produce
many diversified products in order to utilize ingot capacity to the fullest extent
and achieve low production cost per unit. A modern integrated mill must serve
more than its immediate area; it must reach many of the important markets
for its diversified products in order to obtain an even flow of orders. Thus,
concentration of production facilities in a few areas and wide distribution of
products is a rule in the steel industry enforced by economic considerations.
The result is competition at all consuming points between several geographically
separated producers.

The demand for steel is subject to enormous fluctuations in the business cycle.
The capacity of the industry, including reserve capacity, is not more than sufficient
to supply the needs of the country during periods of high demand, such as 1929,
1937 and the present time. Less capacity would result in scarcity and high prices
during such periods. The problem of adjustment to the fluctuations of the
business cycle is solved in the most economical way. While the industry is
constantly constructing new facilities to incorporate technological advances, the
older mills which, although outmoded, have not served their full useful life, are
retained in reserve to meet the demand at high levels of consumption.

Most criticisms of the basing point method disregard entirely these funda-
lental economic facts. The steel industry is often judged by criteria derived

CONCENT KATION OF ECONOMIC POWER gQ

from abstract theory, based upon imaginary conditions which cannot exist.
Natural deviations from these criteria are arbitrarily assumed to be evils and are,
without demonstration, ascribed to the basing point method. Critics sometimes
rest their case solely upon bland assertions and rheotrical exaggeration. In
many instances, mere name-calling is resorted to. Thus, in the language of some
critics, the practice of meeting competitive prices at a distance becomes "freight
absorption"; the resulting difference in mill net returns becomes "price dis-
crimination"; the resulting shipments from other than the mill nearest the desti-
nation becomes "cross-hauling"; and the realization of a competitive advantage
due to superior geographical location becomes "phantom freight."

Competitive forces determine the prices quoted at all destinations. To obtain
business in a market at a distance from his mill, a producer must meet com-
petitive prices quoted by other producers nearer to such markets; he must pay
the freight necessary to transport the steel product to the consumer; and he will
therefore realize a lower mill net return than on sales to consumers nearer his
mill. This enables him to operate his mill at a lower unit cost and thus to sell to
the nearby consumer for less than he otherwise could.

There will always be some shipments of similar products past each other in
opposite directions unless competition between geographically separated producers
is arbitrarily limited to the marginal territory between their mills. Even under
the uniform f. o. b. mill price system proposed by the Federal Trade Commission,
shipments would not always be made from the nearest mill. The alleged eco-
nomic waste resulting from cross-shipments must be balanced against the counter-
vailing advantages to the public of a competitive system, and also against the
economic losses which would follow from artificial limitation of marketing terri-
tories.

If an isolated producer is located nearer than other producers to an important
market, he will be able to realize a higher mill net return. In so doing, he may
be merely taking proper advantage of his superior geographical location, or he
may need such higher return to compensate for his additional costs in assembling
and processing raw materials. He can obtain higher mill net returns than some
of his competitors either by announcing a higher price at his mill, or by merely
meeting the competitive delivered prices of other producers. Characterizing the
latter practice as the collection of freight charges which are not paid is a distortion
of the facts.

Transportation of steel products by water veliicles and trucks has received
attention unwarranted by its true importance, and significant factors in the
situation have been overlooked. The practical availability of each of these
mediums of transportation is circumscribed by many inherent limitations. The
producer located so as to be able to transport some products by water has an
advantage over other producers not so located, which he is properly entitled to
realize by a higher mill net return. His advantage often lies merely in the ability
to reach markets from which rail freight rates would bar him. Where all the
circumstances warrant it, the advantage is passed on to consumers by lower
delivered prices. The producer's advantage, however, is one which may easily
turn into a disadvantage. If he gives one consumer the benefit of the saving
resulting from water transportation, he may soon have to make the same price
to all consumers in the area and ship by rail, with freight disadvantages which
will lower his mill net returns. Shipment by truck seldom involves an appreciable
freight saving, and often involves additional freight cost. The added expense
and inconvenience to the producer in truck shipments justify any additional
charges made.

The proposed alternative to the basing point method is a uniform f. o. b. mill
price system. The effects of this system would be extremely complex, and are
therefore largely unforseeable. Its exponents propose it in the name of abstract
theory, and have outlined its characteristics and effects only with respect to the
elimination of supposed evils of the basing point method. They have never
described the operation of the system nor analyzed its effects in relation to the
economic facts of the steel industry.

The uniform f. o. b. mill price system is expected by its exponents to eliminate
high cost, inefficient and supposedly uneconomically located mills and to break
up concentration of production facilities, by forcing the erection of small mills in
all parts of the country. Such results, even if they would be accomplished by
the system, would conflict with basic economic factors, and necessarily increase
present production and transportation costs.

9Q CONCENTRATION OF ECONOMIC POWER

The system is also expected to produce theoretical "perfect competition", or
at least to increase competition. This is to be accomplished by the extraordinary
means of arbitrarily hmiting the competition between mills not adjacent to each
other to marginal territory. Each mill, or group of mills, would be restricted in
distribution to a circumscribed area subject to only slight possible variations in
size. Each customer would be confined to a single or a very few sources of
supply. The capacities of mills would be limited to the consumption in the
prescribed territories, and any existing additional capacity would have to be
scrapped. Serious dislocations in the steel industry and in industries dependent
upon it would be inevitable.

Under a uniform f, o. b. mill price system, local monopolies and high assembly
and production costs would displace the present wide-spread competition and
low costs.

AN ANALYSIS OF THE BASING-POINT SYSTEM OF DELIV-
ERED PRICES AS PRESENTED BY UNITED STATES
STEEL CORPORATION IN "EXHIBITS NOS. 1410 AND

1418" '

Walter B. Wooden, Assistant Chief Counsel, and Hugh E. White, Examiner,
Federal Trade Commission

INTRODUCTION

The statement which is submitted herewith is in reply to two printed pamphlets
offered by the United States Steel Corporation and in which appear its defense of
the basing point system used in the steel industry. One is entitled "The Basing
Point Method of Quoting Delivered Prices in the Steel Industry" (Exhibit 1418
for identification). The other is entitled "Some Factors in the Pricing of Steel"
and contains a section on the basing point system. (Exhibit 1410 for identifica-
tion.) Other pamphlets offered by the Corporation and which contain statistical
data regarding prices, consumption, costs, and profits, are not encompassed by
this statement. The two pamphlets are presented as the statements of the
Corporation and their individual authors are not identified.

These two pamphlets raise only a few fundamental issues of fact. They like-
wise raise comparatively few fundamental issOes growing out of the Corporation's
theoretical treatment of its factual material. The fundamental factual issues
may be grouped under two heads:

1. Whether the objections to the basing point system in the iron and steel
industry are founded upon "abstract criteria" as alleged by the Corporation, or
upon tangible legal evidence of collusive restraints upon competition.

2. Whether, and what, collusive methods of restraint upon competition are
involved in the industry's use of the basing point system.

The fundamental theoretical issues may be grouped under three heads, as
follows :

1. Whether the industry's use of the basing point system is consistent with the
economic concepts of a competitive economy or conform to those of monopoly.

2. Whether the industry's use of the basing point system is at variance with
public policy as declared in the antitrust laws.

3. Whether the industry's continued use of the basing point system should be
permitted in the public interest.

In this last connection, a collateral but important factual issue to which certain
misstatements of the Corporation compel attention concerns the nature of the
Federal Trade Commission's position regarding the basing point system in the
iron and steel industry and regarding the possible alternatives to that system.

Such issues cut deeply into the fields of law, of economics and of political
science. The quite numerous incidental issues of fact and theory which are
involved will not be ignored but they should not divert attention from the funda-
mental issues as above formulated and to which they are all subordinate.

At the outset, a statement of the Corporation will be quoted which may be taken
as a common ground of approach. In the pamphlet entitled "Some Factors in
the Pricing of Steel", it is stated by the Corporation:

"Price competition is necessary in any industry operating in a capitalistic
system. Is the steel industry competitive? Efforts at such determination
can easily lead into the realms of economic sophistry. Criticism and defense
of competition in the industry should not be based on abstract criteria which
fail to take into account the fundamental phenomena involved; it should be
based on tangible evidence". (Ej^hibit 1410).
After disposing of the issue whether "tangible evidence" exists for objections
to the basing point system as distinguished from "abstract criteria", an analysis

' Exhibit No. 2242, hearings before T, N. E. C, Part 27, p. 14548.

92 CONCENTRATION OF ECONOMIC POWER

of the economic defenses of the system as presented by the Corporation will be
undertaken. In the course of that analysis it may be possible to determine
whether the system's defenders have successfully avoided the admittedly easy
descent into the "realms of economic sophistry".

The Corporation recognizes throughout its argument the necessity of clinging
to the contention that the system does not involve or facilitate monopolistic
practices, however essential either to the public or private interest it may believe
such practices are. Once that basic factual contention is discredited or destroyed
the system must then be defended in the field of untenable theory. Considering
the purposes, effects and methods involved, in the system, as shown in the Pitts-
burgh Plus case and in published reports of the Federal Trade Commission during
the N. R. A. and since, it might well be thought that the fa(?tual exposition has
already been ample. If debate as to the competitive or monopolistic status of the
system can be prolonged indefinitely, the system will doubtless be continued as
long as those who employ it and defend it find profit in it. It is to be hoped that
the last word on the factual side of the matter can be said before the Temporary
National Economic Committee and that the only question remaining will be one
of governmental policy.

Before any intelligent appraisal of the basing point system can be made it is
necessary to bear in mind certain of its essential features. It is a formula method
of pricing, which when appropriately implemented and observed, automatically
produces identical delivered prices for all sellers at any given destination. Its
success depends first of all upon a common requirement by each seller that pur-
chases be made only at delivered prices and a common refusal to quote or sell
f. o. b. mill. Each delivered price is calculated from some governing basing point
and has no necessary relation to the actual shipping point. The actual cost of
transportation may be greater or less than the amount used to calculate the
delivered price. Non-basing point mills are enabled to and must, if the system
is to function, take advantage of their location by adding the full amount of their
freight advantage, sometimes called "phantom freight", to the basing point price.
Basing point mills are enabled to realize their full base price and sometimes
"phantom freight" in territory where their respective basing points control the
delivered prices. (Ex. 1418.) Other mills, whether basing point or non-basing
point mills, that quote in each such territory, must, if the system is to function,
recognize and adopt the governing base price and the delivered prices calculated
thereon. Just as identical delivered prices automatically result from the system,
so wide variations in the prices realized by each mill from its various customers
are the automatic result. Each result is the necessary complement of the other.

All the above factual features of the system are expressly admitted by the
Corporation in its pamphlet, though in diff"erent words and with different empha-
sis. There are important methods of implementing the system which will be
discussed later and which also cast a significant light upon the system's com-
petitive or non-competitive status.

THE BASIC ISSUE IS WHETHER THE BASING POINT SYSTEM OF IDENTICAL DELIVERED
PRICES IS COMPETITIVE OR MONOPOLISTIC

The irreconcilable nature of the issue is made clear by the Corporation's posi-
tiop. The foreword of its pamphlet entitled, "The Basing Point Method of
Quoting Delivered Prices in the Steel Industry" (Ex. 1418, for identification)
^■states that one purpose of the pamphlet is:

"To establish that this pricing method is the natural result of basic economic
conditions in the steel industry and does not result in the absence of price com-
petition. The delivered prices of steel products at any consuming point are
determined by competition and not by an inflexible application of the basing
point method."

Again the Corporation states:

"Since delivered prices are the principal concern of the buyers, competition
between steel producers naturally takes the form of meeting the others' delivered
prices." (Ex. 1418.)

Such contentions are made again and again in specific terms and are implicit
throughout the argument. Repeatedly, it is urged that objections to the system
are wholly abstract and theoretical in nature and are without foundation in
tangible evidence. Indeed, it is never admitted that there is anything systematic
about the basing point system and the word method is systematically substituted
for the word system. By contrast, whenever reference is made to a mill base
method of pricing, the word system is systematically applied. However, Mr.

CONCENTRATION OF ECONOMIC POWER 93

Eugene Grace, President of the Bethelehem Steel Corporatron, in his testimony
before the Temporary National Economic Committee thought "By6tem"was a
good word for describing the pricing methods of the steel industry, and testified
that the basing point system was the one used for quoting steel prices. (Ver-
batim Report T. N. E. C. Hearings November 9, 1939, p. 287.)

At this point it is well to understand the concept of competition which permeates
the Corporation's position. In essence it is that unless all sellers make an exactly
equal offer in terms of price to a given buyer they are not competitive. For
example, it is stated:

"Identical delivered price quotations would occur under any free competitive
system to the extent that competitors' bids could be estimated, since buyers
refuse to pay more to one producer than to another for a staple product." (Ex.
1418.)

This is equivalent to saying that no competitors under any free competitive
system would quote at less than they estimated their competitors were going to
quote. In similar vein, the Corporation quoted from a report by N. R. A. to the
efiFect that if a competitor with lower freight costs gives his customer any benefit
"he is giving a lower price than competition forces him to give. In other words,
he is following some sort of a non-competitive principle, rather than a competitive
one." (Ex. 1418.) This is equivalent to saying that a competitor who makes
a lower delivered price than his rival is acting non-competitivel}' and when he
gives him the same delivered price he is acting competitively.

The above contentions of the Corporation should be considered in the light of
the testimony of Mr. Robert Gregg, Vice-President of the Corporation before the
Senate Committee on Interstate Commerce in March, 1936. He testified that
the basing point system had been the general merchandising plan in the industry
and that:

"If that plan were universally followed there would be no competition insofar
as one element of competition is concerned, namely, price." (Hearings on S.
4055, p. 207.)

If, as Mr. Gregg, testified, there would be no price competition if the system
were' universally followed, then deviations from the system represent price com-
petition. Yet, under the quotations from N. R . A. deviations would embody some
non-competitive principle. If one accepts the quotations, and Mr. Gregg's
statement also, then the basing point system and departures from it are both
non-competitive. On the other hand, the Corporation disputes Mr. Gregg by
claiming that the system expresses price competition and treats the deviations
from the system which have occasionally occurred throughout its history as
sufficient in character and extent to justify the system itself.

The Corporation quoted from a report of N. R. A. as follows:

"The outstanding characteristic of the basing point system is the fact that it
puts rival producers on a footing of price equality with each other in all the
consuming points over a wide area * * *." (Ex.1418)

The Corporation also quoted from the N. R. A. report to the eff'ect that the
basing point system facilitates the use of the open price system of price quoting
and that:

"This system is openly defended as a means of putting competition on a basis
which will yield- higher prices than would result without it." (Ex. 1418.)

The Corporation further quotes from the N. R. A. report to the effect that while
an open price system could be used with any kind of a price structure "it has its
fullest effect if each producer knows the delivered prices he has to meet at each
purchasing point." (Ex.1418.)

A pricing method which is systematically followed by competitors for the pur-
pose and with the effect of getting higher prices is plainly at variance with the
common experience that competition does not tend to produce higher prices.

THE OBJECTIONS TO THE BASING POINT SYSTEM ARE GROUNDED UPON TANGIBLE
LEGAL EVIDENCE OF COLLUSIVE PRICE CONTROL AND NOT UPON ABSTRACT
CRITERIA

A striking feature of the Corporation's defense of the basing point system is
its almost complete reliance upon abstract criteria and abstruse theory plus some
irrelevant facts. At the same time, it charges that objections to the system are
wholly grounded in such criteria and theory. It ignores the tangible evidence
which hds been cited over the years to sustain the main objection, which is that
the system suppresses price competition and is monopolistic.

94 CONCENTRATION OF ECONOMIC POWER

A review of such evidence should make it clear that from the time the system
became the complete framework of the industry's price structure down to the
present it has been a device invented for the purpose of producing identical
delivered prices and perfectly adapted to that result. Notwithstanding occasional
deviations and changes in the number of basing points used as well as in base
price differentials, the system has not changed in essence. The American Iron
& Steel Institute publicly declared in March, 1935 that the basing point method
of quoting prices then in use was "in principle the same method. under which the
modern steel industry has operated for more than forty years." ("Basing Points
and Competition in Steel", March 13, 1935, p. 5.) In reviewing the evidence,
however, the period which began in 1933 with the N. R. A. Code of the Iron &
Steel Industry and has continued to the present, is obviously the most important.
Preceding periods ^re important as a matter of historical continuity of purpose,
methods and effects. For that reason', the evidence lying within the present
period will be first reviewed.

(a) Continuation of Specific Agreements Formulated During N. R. A. Code Period.

The Code of the Iron & Steel Industry, as adopted in 1933, specifically incor-
porated the basing point system among its provisions and specified the basing
points themselves. It also incorporated numerous and detailed provisions de-
signed to make the system thoroughly effective. The Code itself declared that
"each member of the Code by becoming such member agrees with every other
member thereof that the Code constitutes a valid and binding contract by and
among all members of the Code". The Board of Directors of the American Iron
& Steel Institute was the Code Authority which was intrusted with and exercised
the functions of enforcing, administering, interpreting and applying "the stand-
ards of fair competition" incorporated in the Code. Among the activities of the
Code Authority was the promulgation of numerous so-called commercial resolu-
tions which embodied rules and regulations designed to implement the Code's
objective of creatmg perfect identity of delivered prices. Members of the Code
who did not comply with the provisions of the Code and the rules and regulations
established under it, were fined at the rate of $10 per ton for each violation, as
the Code itself provided. In the Federal Trade Commission's report to the Senate
of March, 1934, and its report to the President in November, 1934, documentary
evidence from the files of the Institute and of the steel producers was quoted and
analyzed in great detail establishing the above facts. Among other things, that
evidence demonstrated that the Code constituted an agreement among steel
producers whereby producers freely collaborated with each other as to the base
prices they were to use; that the Code compelled adherence to such prices; that
concessions and additions to the base prices were permitted only to the extent
prescribed by the Institute's Board of Directors; and that all rail freight from the
applicable basing point must be used in calculating delivered prices, except as
otherwise provided for by the Board of Directors.

On June 3, 1935, almost immediately after the invalidation of N. R. A. Codes
by the Supreme Court, the Board of Directors of the Institute adopted a resolu-
tion declaring the intention of each member to maintain "the standards of fair
competition which are described in the Steel Code". (F. T. C. Report to the
President on Steel Sheet Piling, June 10, 1936, p. 3.) On June 6, 1935, the reso-
lution was ratified by steel producers representing over 90% of the producing
capacity. On June 17, 1935, the Executive Secretary of the Institute wrote its
president, Mr. Eugene Grace, urging that the Institute go as far as possible within
the law to develop a plan for stabilizing the industry and maintaining conditions
of fair and open competition. The Secretary said that he was "convinced that
the 'wage floor' alone, especially in view of its present voluntary basis, will not
prove adequate for very long to support a structure of fair commercial practices,
and that external pressure from buyers of steel and the corrugating effect of
rumors, suspensions, or actual overt acts from within present a constant menace
which seems certain sooner or later to topple the structure." The Secretary went
on to say:

"I do not believe that the much discussed 'competitive system' is really operat-
ing as it should, when a minority can in effect rule an industry by its wage policy
or its commercial practices. I do not believe, for example, that Bethlehem should
be regarded as 'free to compete' in the true sense of that term, when the acts or
policies of some other steel company might force Bethlehem into meeting a situa-
tion with practices which it knows to be unsound".

The Secretary thereupon urged that —

"We must devise some plan of action in the form of an agreement which will
permit wise management in the industry to prevent, so far as possible, practices

CONCENTRATION OF ECONOMIC POWER 95

which lead to inroads on wages of labor, destruction of profits, and impairment
of capital."

Mr. Grace, in acknowledging the above letter on June 20, wrote that he would
try to discuss orally the "big and important subject" in the near future and "of
course I shall not attempt to make answer in writing." On January 4, 1936,
Walter S. Tower, executive secretary of the Institute, wrote to Mr. Grace, Presi-
dent of Bethlehem Steel Corporation and President of the Institute, as follows:

"Since the meeting here a fortnight ago, I have been giving a good deal of
thought to the subject then discussed, in an effort to figure out some constructive
course of action which might be considered at the meeting scheduled for January 14.
"It now seems necessary to admit that any such sort of procedure as that which
has been followed since the meeting of representatives of the steel industry on
June 6, 1935, cannot be relied on to create or to maintain the conditions required
for a satisfactory commercial policy in the industry.

"It also seems ncccssar}' to recognize that the experiences of the last six months
prove the need for some definite kind of procedure under which the details of
commercial policies and practices of the principal members of the steel industry
will be matters of record. I realize, of course, that it does not necessarily follow
that there would be no further difficulties with which the industry would have to
struggle, if such policies and practices were fully and freely matters of common
knowledge to both producers and purchasers of steel products generally. But it
does seem to me that the only way, if there is any way, to create satisfactory con-
ditions, and to confine the commercial problems within the limits where they may
not prove disastrous to the industry, is to be found through the medium of some
complete record of what are the commercial policies and practices of the leading
companies in the industry.

"Recognizing the fact that the commercial provisions of the Code are now a
closed book, there appear to be only two ways in which, without too serious legal
liabilities, there can be any general or open record in respect to these vital matters.
The first of those ways is to follow the recommendation which yor made some
months ago concerning tlie i)ublication by important members of the industry of
fonmil lists of prices for their respective products, together with statements of the
extras applicable and terms and conditions of sale. I still think that adopting
your gnggestior. w ould help more than anything else which now seems permissible,
"to correct the difficulties of which the entire industry is fully aware. It also
seems to me quite possible that if a group of several of the prominent companies
decided to follow such a policy, none of the other proounent producers could long
afford not to fall in line, if for no other reason than the implications arising from
the failure of any prominent company so to declare itself publicly in respect to
prices and commercial practices.

"The other way of establishing a general or open record would be through
reporting to some central agency, like the Institute, the facts in regard to closed
transactions in which any new concession had been gragited to a purchaser in
respect either to price of a product or the terms and conditions under which it
had been sold."

That a plan for such a system of tacit agreement to Abide by announced prices
was being discussed in the industry is made evident by a letter to E. T. We-r,
National Steel Corporation, written on January 16, 1936, by Charles R. Hook,
president of the American Rolling Mill Company:

"As I remarked when I came into the meeting of bur little groTip last Tuesday,
I had not known whether I was going bo be' there as I had taken Mrs. Hook to the
Johns-Hopkins Hospital the week before and while I was waiting at the hospital
I wrote out a note to E. G., had it typed, and intended to send it in case I could
not be at the meeting.

"I took the letter along with me and laid it on the desk, if you remember. I
am enclosing herewith a copy for your information."
The enclosure reads in part as follows:

"* * * j^ seems to me useless to attempt to cure the general ills of the
steel industry until we make up our minds that we will courageously and definitely
resist the pressure of the automotive or any other large consuming industry to
break down a price structure that will permit of a reasonable return on our
invested capital.

"A decision to make such a stand can only come, of course, if as and when the
major steel companies make up their minds that their price schedules are an open
book, that all purchasers are to be treated alike and that undercover methods of
all kinds are outlawed completely. If any industry or any company is to be
given a price better than the carload price, it must be known by all and it must
b'' a defensible practice that can be shown to be in the public interest."

% CO^'CENTRATIO^ OF ECONOMIC POWER

The trade magazine "Steel", in giving a resume of developments in the industry
about this time said:

"March 1936. After sharp competition as an effort at stabilization, steel
makers announced all prices quoted would be 'open', and uniformly applied,
agreeing to publish price changes whenever made. This continued up until the
recession set in." (Steel, July 18, 1938, p. 24.)

The "Iron Age" in summarizing the developments of the year 1936 referred to
price concessions in the early part of the year and then described the initiation
of a method of open price announcement which it characterized as "the most
successful price stabilizing movement the steel industry has experienced, other
than the Steel Codfe." It stated that the movement was initiated by T. M.
Girdler, President of Republic Steel Corporation at the time of making its
announcement of prices for the second quarter. The Iron Age also states that
other steel companies followed the Republic's example and announced openly
their selling prices with the result that the last three quarters of 1936 were
"remarkably free from price cutting, either open or secret, the general understand-
ing between steel companies and their customers being that any change in
published prices would be similarly announced." (Iron Age, January 7, 1937,
pp. 65-66.)

In May, 1936, the Carnegie Illinois Steel Corporation informed its various sales
manageis that it would "begin our price announcement program" by announcing
prices on certain commodities.' It sent its various managers an initial supply of
price announcement forms quoting prices at various basing points. The sales
managers were also informed that the usual practice of adding published all-rail
freight or using arbitrary rates as estabhshed would be followed, and that only
deUvered prices would be quoted. It said that after making such announcement
of prices it was obligated by the Clayton Act to abide by the announced prices
without any deviation. (Letters to sales managers dated May 21 and May 23,
1936). The price announcements then made by the Carnegie Illinois Steel
Corporation were to the effect that "until further announcement, the following
price will apply on sales of the product or products described below, for delivery
and consumption in the United States, for shipments during the calendar quarter
ending September 30, 1936."

The foregoing facts should be considered in connection with the opinion of the
Supreme Court in the Sugar Institute case, where it held that there should be no
requirement of adherence to prices and terms announced. .

While the above developments were taking place in the industry during 1936,
there is evidence that prices were the subject of discussion at meetings of the
American Iron and Steel Institute.

The executive secretary of the American Iron and Steel Institute wrote to Nor-
borne Berkeley of the Bethlehem Steel Corporation on April 22, 1936:

"In line with our conversation last week, I jotted down some random notes
concerning some aspects of prices which might be worth while discussing at the
institute meeting on May 28 * * * I hand them on to you for what they
may be worth."

Eugene Grace, president of the Bethlehem Steel Corporation and of the Institute
wrote to the executive secretary on the following day:

"I have your letter of April 22, enclosing notes on prices. I have an idea Joe
expects to see you this week. I had a talk with him in line with our discussion,
and shall of course let him see the notes."

W hen the Federal Trade Commission, at the request of the President, investi-
gate d identical bids on steel sheet piling received by the Federal Government some
mo nths after the N. R. A. Codes were invalidated, it found that such bidding
resulted from a continued applicatioxi of the basing point system supplemented
by cooperative activities of competitive bidders similar ,to those which had
characterized their activities during N. R. A.

During N. R. A. the Steel Code lodged in the board of directors of the American
Iron and Steel Institute the authority to prescribe rules and regulations for
implementing and carrying into effect the provisions of the Code. Under that
authority the Board of Directors adopted and promulgated many rules and regula-
tions to govern pricing methods in the industry and which it entitled Commercial
Resolutions and Regulations. Many of these regulations directly and sub-
stantially affected such matters as the method of calculating base prices and
discounts therefrom, the methods of calculating delivery charges and the exact
amounts to be added to base prices in order to determine dehvered prices. The
Federal Trade Commission described many of these rules and regulations in -its
report to the Senate of March 1934 and in its report to the President of November
1934.

CONCEiNTRATION OF ECONOMIC POWER 97

As already stated, the Code declared itself to be an agreement among the
members and violators were penalized at the rate of $10 per ton. When the
Institute's Board of Directors voted in June 1935 to continue the provisions of the
Code regarding standards of fair competition these commercial regulations were
also continued in effect. In a recent letter to the Executive Secretary of the
Temporary National Economic Committee, the Corporation states that it is
aware of no amendment or modification of these resolutions since June 1935.
(Letter Dec. IS, 1939— U. S. Steel Corporation to Mr. Jas. R. Brackett). The
Corporation pamphlet (Exhibit 1418) describes two of the more important of
these Commercial Resolutions as being representative of the current general
practice of the industry.

One of these practices involves the addition of arbitrary switching charges for
delivery in the switching limits of basing point cities, the Corporation stating
that "The practice has generally been followed since the Code." (Ex. 1418.)

The Corporation states further that —

"Under the Code the practice was developed of adding to the base price a so-
called 'switching arbitrary' of 2)^(4 a hundredweight (3(4 a hundredweight ia
Chicago and Gary switching limits) for delivery within the switching limita."
(Ex. 1418.)

These figures correspond exactly to the figures provided for in Commercial
Resolution No. 20 which was described by the Federal Trade Commission in its
report to the Senate (See pp. 23, 24). Resolution No. 20 recited that because of
the "gi'eat diversity" in switching charges at various basing points it was "prac-
tically impossible in most cases" to ascertain in advance of shipment the correct
charge and- that it was deemed advisable "to use arbitrary, in lieu of tne actual,
switching charges in such cases." After setting forth tlie arbitrary charges
described by the Corporation as still in effect, the Resolution gave members per-
mission to deduct from their base price an amount equal to the difference between
the actual and the arbitrary switching rates in cases where tlie actual rates exceeded
th3 arbitrary rates. This was provided for to insure "uniform practice." Inci-
dentally, the Corporation admits in this connection that where the arbitrary
switching rates exceed the actual the mills to that extent realize "phantom freight."

The Corporation also states:

"A practice generally exists in the Steel Industry of including in the delivered
price to a buj'er, who accepts deliver}' by sending his own trucl-: to the mill, the
rail freight from applicable l;asing point to destination, and allowing him a credit
equal to (35% of the rail freight from mill to destination. This might be construed
to mean that the buyer always pays one-third of the rail freight used in calculating
the delivered price for the privilege of taking delivery by his own truck. This is
true, however, only when the mill is at the basing point freightwise nearest to the
buyer's destination." (Ex. 1418.)

The above described practice originated in Commercial Resolution No. 8 E
adopted by the Institute's Board of Directors during the Code period as described
by the Federal Trade Commission in its report to the Senate in March 19S4 (pp.
32-35). The Commission also described and quoted the written protests of con-
cerns within and without the industry, as to the damaging and destructive effects
of this rule upon their business. Buyers as large as the Buick Motor Co. protested
the rule as preventing it "from getting the fuU benefits of competitive transporta-
tion, imposing higher costs and tends to control the method of shipment." Other
objections were by smaller concerns which described the rule as imposipg "a
terrific penalt}'", as giving advantages to large plants with spur tracks, as pi^naliz-
ing "firms having an investment in their own transporting equipment", and as
severely damaging to trucking companies. This is illuminative of the question
whether the objections to the basing point system are founded on "abstract
criteria" or on "tangible evidence".

In view of the admission that there have been no amendments or modifications
of the Commercial Resolutions since June 1935, the price fixing nature of some
of them is pertinent. On pig iron delivered at certain specified points on the
Ohio River and tributaries, on the Great Lakes and North Atlantic seaboard,
the Institute's board of directors authorized certain maximum deductions from
the delivered prices calculated on an all-rail basis from the applicable basing
point to destination (Resolution No. 43). The board also fixed by resolution a
maximum deduction of 38 cents per ton from the base price which could be made
on Southern Foundry pig iron of a certain quality (Resolution No. 10). This
deduction was allowable on pig iron shipped outside the Birmingham and Southern
wage districts. The "Iron Age" for January 13, 1938 carries a note to the effect
that delivered prices on Southern pig iron for shipment to Northern points are

9j^ concentration op economic power

38 cents a ton below delivered prices from nearest Northern basing point on iron
with a certain chemical content. By another resolution the board fixed the maxi-
mum deductions from the base price on specified products which were permitted
when sold for delivery in a specified portion of Michigan (Resolution No. 13),
Other resolutions or regulations adopted by the Board fixed the maximum deduc-
tion that might be made from base prices on hot rolled strip steel (Resolution
No. 40), the maximum discounts for early payment of invoices (Resolutions 1, 2,
3, 4, 9, 25, 30, 31 and 32), the amount of discounts to various classes of buyers
and to jobbers, and the prices to be charged by jobbers on resale (Regulation
Nos. 1, 2, 3), and the qualifications under which a concern could be recognized
as a jobber (Regulation Nos. 1, 3).

The continuation of the agreements embodied in the resolutions relating to
terms and conditions of sale is shown by the following:

On August 7, 1935, the executive secretary of The American Iron and Steel
Institute wrote to J. M. McComb, vice-president of the Crucible Steel Company
of America:

"* * * It has been my understanding that the action taken by members
of the industry at their meeting on June 6 committed each of the companies
there represented to a policy of maintaining the terms and conditions of sale
which were in effect under the Steel Code. As far as information has come to
us since that meeting, it appears that members of the industry generally are
following a uniform policy in respect to such matters. For that reason there has
not been any discussion of action by the Board along the line suggested in your
letter."

Further correspondence between the executive secretary and Mr. McComb
shows that an investigation was being made as to the extent to which members
of the industry were conforming to the requirement of charging interest on past
due accounts.

Under the Code there was also a requirement that in case of products sold for
fabrication in construction of an identified structure, the place of deliver}' should
be considered to be the railroad freight station at or nea/est the place where the
structure was to be erected. In its report to the Senate in March, 1934, the
Federal Trade Commission pointed out the damage done by that requirement to
independent fabricators in their competition with fabricators controlled by inte-
grated steel producers. ^R. pp. 24-26.) Price announcements put out by
various steel producers, including subsidiaries of the Corporation, as late as the
summer of 1936 showed that this rule regarding sales for identified structures
was still being adhered to.

The nature of all the above rules and regulations was pointed out by the Com-
mission in its report to the Senate. (Report pp. 10, 22, 36, 37, 38, 39). All of
them are directed to serving the primary objective of the basing point system as
defined by Judge Gary, that "it was deemed necessary for the orderly conduct
of the business to have one basing price * * * so that every user of steel
all over the country bought and used his steel on a certain basis, knowing in
advance tliat every one else who bought steel had to pay exactly as he did, with
the addition of the increased freight depending upon where he wanted to use the
steel." (F. T. C. Decisions Vol. VIII, p. 33.)

(b) Recent Collaboration Among Competitors on Base Prices'.

While the N. R. A. Code was in effect, abundant documentary evidence was
available in the form of letters, memoranda and minutes which showed that
competitors within the industr.y interchanged information and opinions with a
view to adopting and announcing base prices that would be satisfactory to the
various organized groups whose members manufactured like products. The
Code, however, did not specifically provide for any such cooperative activity among
competitors but was patently constructed upon the assumption and expectation
that base prices at the respective basing points and for the respective products
would be icjentical for all producers, as in fact they were.

In view of the acknowledged price leadership of the Corporation, collaboration
among competitors on base prices is not indispensable to the operation of the
basing point system but seems to have existed nevertheless. Such collaboration
contiibutes to successful price leadership by promoting better feeling and insuring
a grfiter degree of voluntary support for the prices named.

The .* "H ^tory of cYmpetitive collaboration in the determination of base prices
since N. R. A. is impossible to develop, protected as it is by reticent memories
and the natural paucity of documentary records. Occasionally, however, the
veil is lifted, as in the following extract from a letter written by the general sales.

CONCENTRATION OF ECONOMIC POWER gg

manager of the Newport Rolling Mill Companj' of Newport, Kentucky, to the
President of that Company under date of August 17, 1935. He said in part:

"It was not definitely decided until late last evening to put into effect for fourth
quarter a one ])rice policy allowing the galvanized sheet price to remain at $3.10
per 100 lb. for No. 24 gauge base f. o. b. Pittsburgh. A few of the larger interests
such as Weirton and Inland were in favor cf reducing the price to $3.00 base for
No. 24 gauge f. o. b. Pittsburgh but this was finally defeated and it w?s agreed
to allow all prices to remain the same as now in eflfcct.

"The announcement of no further jobber allowance after October 1st will be
made by Continental on Tuesday of next week, after which all mills can announce
likewise. We, of course, in the meantime will notify our people, which will no
doubt be conducive of causing an influx of jobber business for shipment pi ior to
October 1st. * * * j discussed the automotive situation ~with N( il Flora
last evening and he informed me that while some little tonnage was placed several
weeks ago, nothing more has been done and that all the mills are holding firmly
to their prices and are expecting that additional tonnages will have to be placed
soon."

From the above it is clear that the galvanized sheet producers decided by
majority vote not to reduce base prices for the succeeding quarter, although such
reduction was favored by two of the large independent producers. It is also
apparent that at the same time it was decided to make only one price on galvanized
sheets, to eliminate special prices to jobbers, and to follow the lead of the Conti-
nental Company in announcing the withdrawal of jobber allowances.

Mr. Eugene Grace, President of the Bethlehem Steel Corporation, the second
largest producer in the industry, testified before the Temporary National Economic
Committee in November 1939 that he "would feel fret to tell any of my tin plate
competitors at any time if I thought the price of tin plate was too low, and try to
encourage tlicm in some way or other to get a price for it; of course I would.
I would be foolish if I didn't. "(Verbatim Record, T. N. E. C. Hearings, November
9, 1939, p. 291). Mr. Grace further testified that if he happened to meet Mr.
Fairless, President of the Corporation, "and we were approaching the tin plate
season, it would be a perfectly natural thing for me to say, 'Well, Mr. Fairless,
T would like to see tin plate raised somewhat for this next year's business' or
'Conditions have cl.anged in such a way that the present price would be entirely
satisfactorv'. I wouldn't hestitate to talk about it at all with him." (Verbatim
Record, T.' N. E. C. Hearings, November 9, 1939, p. 291).

Mr. Fairless also testified before the Committee that he did not "want to be
in the position of attempting to leave the impression that no manufacturer of
tin plate ever asks me or discusses with me what the price of tin plate is," but
specifically denied that he had ever had a group meeting with other manufacturers
of tin plate to set the price (Ibid, November 8, 1939, p. 256). Mr. Fairless also
testified (Ibid, Nov. 7, p. 221) that steel producers discussed prices when they
met and that "usually we are bewailing the fact thpt they are too low".

The above testimony is to be weighed in the light of their denial that there
was any conference of steel company officials to determine the price of tin plate
for 1938 and that Mr. Grace of the Bethlehem Company had made any promise
at such a conference to maintain prices. The statement denied appeared in a
letter from tlie Vice-President of the American Can Company to its President
under the date of March 24, 1938. The writer of the letter, however, testified
before the Committee that he was unable to give the source of his information
(Ibid, November 7, 1939, p. 255, and Ex. 1407). That company is the largest
buyer of tin plate for can making and the price negotiated between it and the
Corporation has long been recognized as the base price to be accepted by other-
tin pla,te producers.

Another and more recent instance of collaboration among competitive producers
regarding base prices occurred with regard to tubular goods in the Surrimer of
1938. As shown by testimony and exhibits before the Temporary National
Economic Committee, the Corporation on July 1, 1938 discontinued the manu-
facture of lap welded pipe for oil pipe lines and established a new and lower priced
grade of seamless piy)e. In view of the recognized superiority of seamless pipe,
the differential between it and lap welded pipe was considered insufficient by
manufacturers of the latter, especially those who had to buy the semi-finished
steel for manufacture into pipe. The reason for the Corporation's move was that
competing manufacturers of lap welded pipe had been cutting prices and had
increased their relative shares of the total business to the disadvantage of the
Corporation. The Vice-President in Charge of Sales of the National Tube
Company testified thpt "Other lap weld was being manufactured with superior

292918— 41— No. 42 8

100 CONCENTKATION OF ECONOMIC POWER

physical properties to ours and selling at a price below ours." (Ibid, Nov. 14,
1939, p. 368)

The Wheeling Steel Corporaticn and the South Chester Tube Company were
the only manufacturers which were then making lap welded pipe exclusively.
On August 1st the Wheeling Corporatioji tentatively adopted a new price list
on lap welded pipe which the South Ches<,er Tube Company complained of as
being too low. The Pittsburgh sales repres-*ntative of the South Chester Com-
pany wrote the headquarters of his Company on August 12th that he had discussed
these tentative prices with Wheeling Steel Corporation officials and had "re-
monstrated quite vigorously about the reductions in prices on the items other
than the tonnage group." He went on to say that:

"Most of the other mills are after us, in an effort to get our cooperation in
insisting that Wheeling bring the prices on the items other than the tonnage group
up to the previously announced 2}^%."

He then described a telephone conversation with a representative of the Wheel-
ing Corporation and stated that from it he "learned that they had already been
with Goble and that Wheeling is now going to revise their previously announced
prices." Mr. Goble was Vice-President of the National Tube Company, a sub-
sidiary of the Corporation. In the same letter the Pittsburgh representative
stated that Mr. Goble was endeavoring to obtain an interview with an official
of the Wheeling Corporation "and demand that they revise their prices", (E.x-
hibit 1433, p. 349).

On August 15th the Pittsburgh sales representative of the South Chester
Company wrote his general sales manager that no one had received the Wheeling
Corporation's new price list but that rumors were current that such a list had
been issued with greatly reduced prices. According to testimony of both the
South Chester and Wheeling company officials, the price confusion which existed
during August was removed and stabilized in the latter part of August and dur-
ing the first half of September (Verbatim Record, T. N, E. C. Hearings, Nov. 14,
1939, p. 361). On August 24th the Wheeling Corporation issued a new price
list which "reduced the prices to the consumer* on the tonnage items or the im-
portant items and increased the non-tonnage items or the less important items".
(Ibid, p. 351)

Sometime in September the National Tube Company authorized the accept-
ance of orders for its seamless B casing at the price of lap weld. This permission
was given during a period of about six days (Ibid, p. 370). On September 29th
the Pittsburgh sales representative of the South Chester Company wrote his
general sales manager as follows;

"The matter outlined below is in strict confidence and has been received by
the writer, since return of the gentlemen from New York, whom we mentioned
by telephone.

"Naturally, to gain the end which the other mills wanted, that is: Not to have
the National Tube Company quote prices, on Seamless material which would
meet Lapweld competition, it was very necessary for these other mills to give
up something in return. Through the same and another source, we have today-
checked a second meeting of manufacturers other than the National Tube Com-
pany to be held in a few days. As it stands at the moment, the thing resolves
itself as follows:

"The National Tube Company will leave as they are at the moment the prices
for Grade 'B' Seamless, which have already been announced. The National
Tube Company and all other seamless mills will discontinue the manufacture
of new Grade 'C and bring the physicals of new Grade 'B' considerably higher.
This with the new Grade 'D' will bring the status back to where it was prior to
July 1st, when the whole mess was started.

"Youngstown, Spang Chalfant, Jones & Laughlin and Republic Steel will
discontinue the manufacture of Lapweld Pipe in Oil Country sizes 10%" O. D.
and under.

"Wheeling Steel, who has already been contacted today, advised that with
the present spread between Grade 'B' and Lapweld, they were slowly being forced
out of business and would only ask that they be allowed to dispose of present
stocks of Lapweld on hand.

"Bethlehem, who was contacted today, stated they had not made any Lapweld
Oil Country material since July 1st. This I doubt, but they have also signified
their intentions to discontinue the manufacture of this product,

"In so far as the South Chester Tube Company is concerned, a»Jias been stated
this afternoon,, neither the National Tube no'- a meeting of the other mills feel
they should take the responsibility of deteniiHiing or suggesting any policj' for
us to fo!low, as they would not want to be confronted at Washington, since we

CONCENTRATION OF ECONOMIC POWER JQl

make no other product in the way of pipe, and not even any other products manu-
factured of steel.

"We are handing this to Mr. Sweet, and we need not advise that this informa-
tion is of the most confidential nature.

"Prior to the meeting of the mills, other than the National Tube, we are going
over this matter with our source of confidential information. This meeting wiU
be held probably Monday or Tuesday of next week, and within an hour after it
adjourns, we hope to have exactly what transpired." (Exhibit 1437, p. 383)

The above quoted contemporaneous documentary record is to be weighed with
the testimony of the author that he could not identify any of his sources of in-
formation and the testimony of representatives of the Wheeling Corporation and
the National Tube Company that they did not participate in conferences with
competitors. (Verbatim Record, T. N. E. C. Hearings, Nov. 14, 1939, p. 364)
The South Chester Company representative, however, testified that he did not
"believe that they were formal meetings to discuss these particular problems,
but certainly everyone contacted each other to find out what their position should
be and what attitude they should take in so far as the production of this type
of material should be." (Ibid, p. 363) He further testified that he had talked
to representatives of the Youngstown Sheet and Tube Company and of Jones
& Laughlin Company (Ibid, p. 365). He further testified that perhaps the
action of the National Tube Company in reducing prices on seamless pipe during
September to the level of lap weld prices "might stop the action or the supposed
or presumed actions of other manufacturers in disposing of existing stocks of
lap weld material at ruinous prices," and that as a result of such action "the lap
weld stocks in the hands of other operators probably lie dormant." (Ibid, p.
366) On October 1st an official of the Wheeling Steel Corporation wrote that
from developments that past day or two the situation had cleared up and "We
understand that it will not be possible. to secure 'B' Seamless at the same price
as Lapweld material." (Exhibit 1438, p. 367)

The foregoing evidence of collaboration among members of the industry in the
collusive determination of base prices is tangible and legally competent evidence.
It is impossible to classify or characterize it as "abstract criteria"

An important phase of steel prices is the application of so-called "extras" con-
sisting of additions to or deductions from the base price of a base product to cover
differences in quantity, quality, chemical content, size, shape, finish, packing and
similar factors. Extras are so closely related to base prices that when applied
to the base price they may be logically considered as forming a base for the extra
product; for, after such application the calculation of delivered prices proceeds
just as in the case of base products and base prices exclusive of extras. The
Federal Trade Commission's reports on the Steel Code to the Senate and to the
President in 1934 and again in 1936 demonstrated how the price of extras was
controlled under the Code and subsequently. The collaboration of competitors
to fix the price of extras was carried on quite openly. The reports showed how
important extras are as a factor in prices — sometimes exceeding the base price
itself — and how price increases can be made in the guise of extras without requir-
ing any change in the base price. Certain quantity and size extras were increased
by 395 percent on the average when the N. R. A. Code was adopted. Important
increases in quality extras were also made. (F. T. C. Report to the Senate, pp.
12-15, 54, 56). Increases in extras ranging from 100 to 500 percent on high
tensile steel for the Navy were adopted by vote of the Institute's Board of Direc-
tors and made effective September 1, 1934 (F. T. C. Report to the President,
pp. 8-9) Fines at the rate of $10.00 per ton were assessed under the Code for
failure to charge the agreed extras. (Printed hearings before Senate Committee
on Interstate Commerce in re S. 4055, pp. 235, 237, 239, 242, 245, 246, 247).

On June 10, 1936, the vice-president of the A. M. Byers Company wrote to the
manager of tube and pipe sales of the Allegheny Steel Company as follows:

"You are undoubtedly bound by the Uniform Extras and Deductions of the
Iron and Steel Industry for your product in the same way as we are for ours.
You will find on referring to Section 60, top of Page 2, that if couplings are required
for cut length specifications, an extra charge will be made.

"We have checked and find that it is uniform practice among steel pipe manu-
facturers to charge extra for the couplings in exactly the same manner as we
charged you."

Testimony before the Temporary National Economic Committee establishes
that the amount of "extras" to be added or deducted from the base price has con-
tinued to be the subject of collaboration and agreement among members of the

1Q2 CONCENTRATION OF ECONOMIC POWER

industrj'. Mr. Fairless, President of the Corporation, testified that extras were
based on costs, "not only our costs but a cross section of the costs of the industry";
that the Corporation made it its business to find out the costs of competitors,
stating, "We talk over extras with our competitors". He. further testified that
consultations with competitors as to extras had been going on at least for twenty-
five years; that cutting the price of extras "is a very small percentage of the method
in which prices are reduced", and that the numerous changes in extras made in
May 1938 were the outcome of an exhaustive study made by representatives of
the Corporation and other members of the industry. (Verbatim Record, T. N. E.
C. Hearings, Nov. 7, 1939, pp. 219, 220).

Mr. A. C. Adams, a Vice-President of the Corporation, testified that he par-
ticipated in consultations with representatives of competitors regarding the
changes in extras made in May 1938; that because of overlapping of certain prod-
uct clasoifications and varying extras within each classification there had been
"a state of confusion from a pricing standpoint", and that it was impossible to
do more than relate the extras to cost, since they could not be predicated exactly
on costs because costs were constantly changing (Ibid, November 7, 1939, p. 222).
Mr. Fairless testified that the industry had technical committees in the American
Iron and Steel Institute which analyzed the costs of extras (Ibid, November 7,
p. 219).

The new extras were identical as announced by various companies, and six
companies annoimced them on the same date, namely. May 18th (Ibid, Novem-
ber 7, p. 228). In a circular letter to sales managers of the Carnegie-Illinois Steel
Corporation, dated May 26, 1938, Mr. Adams described the new extras and stated
that the net increase of $1.00 per ton on certain items of cold rolled sheets would
undoubtedly result in numerous complaints, that on another width of sheets there
was an increase of $3.00 per ton, and that the buyers of flat rolled products in
certain widths would receive "an increase in most gauges, and therefore you will
undoubtedly receive some complaints from this trade, but you can assure any
buyer that the adjustment in the average price for all sales is slightly downward"
(Ibid, November 7, p. 230; Ex. 1396).

The above facts challenge the contention of the Corporation in Exhibit 1418
that the objections to the pricing methods of the industry are wholly theoretical,
are not based on tangible evidence and rest upon abstract criteria.

(d) Recent Collaboration on Uniform Delivery Charges.

An important ingredient in any -delivered price system is that portion of the
delivered price which is added to the base price as transportation charges. The
basing point system in the steel industry has always included the all rail freight
as the standard of such transportation charges. From time to time, particularly
under the N. R. A. code, and subsequently, there have been variations or quali-
fications of the all rail freight basis, but such exceptions have been just as well
understood as the all rail standard itself. Under the N. R. A. code, which was
declared by the code itself to constitute an agreement among its members, it was
required that delivery charges be calculated from specified common basing points
and that the delivered prices must be calculated by adding to the applicable
basing point quotation "the all rail published tariff rate charges" to "the place of
delivery". In the case of certain products intended for fabrication of an identi-
fied structure, place of delivery was defined as "the freight station at or nearest"
such structure and "not the shop of the fabricator". If other than all rail trans-
portation is used, any reduction in the delivered price resulting therefrom must
be "at a rate which shall have been previously approved by the board of directors
and filed with the secretary". (N. R. A. Code Schedule E, Sections 3 and 4.)

Pursuant to the above requirements of the code, the board of directors author-
ized a number of departures from the all rail delivery charge and prescribed the
"rate" at which or extent to which such departures might be made. A special
committee of traffic managers was set up to aid in the calculation and compilation
of the freight rates to be used. (F. T. C. Report to Senate March, 1934, pp. 20,
21). The board of directors approved and adopted what was known as "Freight
Tariff No. 1, American Iron & Steel Institute". This compilation embodied
delivery charges to various destinations from the basing point or points which
would "customarily" be used for a particular destination. By a commercial
resolution the board of directors resolved that "Freight Tariff No. 1 * * *
shall be deemed" to be tlie lowest published water and water-rail transportation
charges and that the charges therein listed must be added to the applicable base
price to obtahi the correct delivered price. This compilation also provided for
switching charges at dock destination. The resolutions specifically recognized
that the water and water-rail rates included in the nubhcation were not necessarily

CONCENTRATION OF ECONOMIC POWER ]^()3

the lowest rate, that it was "frequently difficult or impossible" to ascertain the
lowest rate and that in some cases the use of published steamship rates "might
result in unfair competitive conditions". For those reasons the board declared
that the rates approved by it should be "deemed" to be the lowest published rate.
(Commercial Resolutions 8 and 18.) During the N. R. A. code period, producers
were fined at the rate of $10 per ton for making sales which were at variance
with the delivery charges which the board of directors had established.

When the board of directors of the institute voted in June, 1935, to continue
the provisions of the code with regard to the standards of fair competition, this
apparently carried with it the continued compilation and promulgation of the
freight rates which were supposed to be used by members of the industry in cal-
culating their delivered prices from the applicable basing points. In hearings
before the Senate Committee on Interstate Commerce, the executive secretary
of the institute testified in March, 1936, that the institute had continued to pub-
lish freight tariffs after the expiration of the N. R. A. code, and in that connection
said that during the code period "when every member of the code was required
to conform to certain provisions of his contractual relationships, it was a con-
venience for him to know what he was supposed to do". (Printed record of
hearings on S. 4055, page 2G6.)

The Federal Trade Commission's report to the President on steel sheet piling,
in June, 1936, described the nature and extent of the collaboration existing among
the members of the ind^istry in preventing any deviation from identical delivered
prices through tlie medium of identical freight charges. To such an extent was
this carried that a complaint was entertained by the institute's traflic committee
involving a P. W. A. project requiring about $60,000 worth of pipe. The bidders
named a uniform delivered price to the extent of carrying out decimals to two
places as usual but one bidder was "awarded the business because carrying the
basing point price to three places resulted jn their bid being 12fi low". (F. T. C.
Report to President on Steel Sheet Piling, p. 24, App. H.) An extensive campaign
was carried on to prevent buyers from diverting shipments consigned to them at
the delivered price calculated under the basing point formula, from the destina-
tion where such price was correct to a destination where such price was below the
correct delivered price. The aid of the railroads was enlisted to prevent buyers
so diverting their purchases, although a number of the railroads objected on the
ground that the consignee was the owner of the goods and bad the legal right to
divert them.

Pursuant to' the general purpose of preventing the slightest divergence in the
delivered prices of the various producers, members of the industry collaborated
in the adoption of rules to eliminate the excessive fractions resulting from the
emergency chargi s prescribed by the Interstate Commerce Commission to dispose
of fractions of a mill and fractions of a cent for the purpose of computing identical
delivered prices, to equalize land grant freight rates so that uniform reductions
in delivered prices might be made on sales to the United States government, and
to standardize freight rates and drayage charges used in connection with sales and
deliveries to various government navy yards. In addition to the foregoing, the
institute has compiled and promulgated compilations of all rail, rail-water-rail
and rail-water freight rates to facilitate the calculation of identical delivered
prices. (F. T. C. Report to President on steel sheet piling, June 10, 1936, pp.
24-27.)

The importance of a standard compilation of freight rates from the standpoint
of promoting identical delivered prices is shown in the following statement in a
letter written by the Chairman of the Traffic Committee of the Institute to the
Chairman of the Conmiercial Committee under date of January 29, 1934:

"While every effort has been made to figure minimum rates, it is not humanly
possible to attain accuracy in each and every instance, bearing in mind that the
half million rates published have been compiled by some 150 men. As errors are
discovered the incorrect rate will be changed, but until the change appears in
the supplement to the tariff it is our opinion it should not be used for sales purposes.
Certain branches of the industry have for years followed such a practice." (F. T.
C. Report to President on Steel Sheet Piling, App. C-5.)

A continuation of this understanding subsequent to the N. R. A. Code period
is shown by the following exchange of correspondence:

On November 9, 1935, O. W. Bryte, of the Traffic Department of the Newport
Rolling Mill Company, wrote to E. T. Butler of the American Iron and Steel
Institute calling attention to the cancellation of certain freight rates and saying:

"As we have not been furnished with supplement carrying similar cancellations
against your Freight Tariff No. 2, will you please inform the writer if we shall be
guided by the corrections as heretofore mentioned or if we shall adhere strictly
to your Freight Tariff No. 2."

104 CONCIONTKATIOX OF ECONOMIC POWER

On November 13, Mr. Butler replied:

"In the meantime, in connection with the question raised in the second para-
graph of your letter it is my understanding that until such time as the rates in
Freight Tariff No. 2 are changed, the rates to be used are those carried in Freight
Tariff No. 2."

The above described practices with regard to freight rates is a tacit recognition
of what the Federal Trade Commission found as a fact from evidence in the Pitts-
burgh plus case to the effect that freight tariffs are complicated, that oftentimes
there are two or more different freight rates between two points given in different
tariffs and that different traffic experts might not arrive at the same results.
(Findings of Fact, Docket 760, Paragraph 14 (n)).

As pointed out by the Federal Trade Commission in its reports to the Senate
in March, 1934 and to the President in November, 1934, the industry has main-
tained the all rail basis of freight in calculating delivered prices in the face of
protests from numerous business interests and numerous organizations of business
interests which were being deprived of their potential natural advantages repre-
teuted in their ability to use cheaperformsof transportation than all rail. N. R. A.
filed with the institute a partial list of protests against the suppressed condition
of inland waterway transportation under the code. That list included seventy-
two names, of which twenty-eight were industrial concerns, eight were water
transportation agencies, four were associations devoted to improvement of rivers
and canals, four were local Chambers of Commerce, twelve were United States
Senators and fourteen were members of the House of Representatives. At a
meeting of members of the industry, these protests were rejected and the aU-rail
basis of freight calculation was reaffirmed by an' overwhelming vote. (F. T. C.
report to the President, November, 1934, page 23).

Shortly after this meeting, the deputy administrator in charge of the code
summarized the situation in part as follows:

"Up until the Code Authority meeting yesterday, it was the belief of Messrs.
Richberg, Simpson and myself that the Industry was making conscientious efforts
to solve this problem. * * *

"After the meeting Mr. Simpson and I, in discussing the matter, reached the
conclusion that the Code Authority recently has not shown the proper attitude or
activity toward formulating a definite method for adjusting this inland waterway
transportation problem, and the further conclusion that some action on the part
of this Administration may be necessary to accomplish this purpose. * * *"

When the institute's board of directors proposed to permit mills shipping by
water to make deductions in delivered prices without at the same time permitting
inland mills from meeting such deductions, resolutions were adopted by certain
groups of competitive producers, stating their opposition as follows:

"If water shipments can be sold at lower prices than rail shipments, it creates a
hardship on inland mills by excluding them from business in which thej' have
always participated,' it creates a hardship on inland consumers by placing them '
in an unfair position as to the cost of their products; it creates a hardship on
inland communities by establishing preferential prices under which it is more
desirable for communities to be located on waterways; all of which is contrary
to the spirit and letter of the code of fair competition for the industry." (F. T. C.
Report to Senate, March, 1934, p. 28).

The Federal Trade Commission commented upon the above position by saying
in its report to the Senate:

"The position above taken is that by imposing equal hardships on communities
located on waterways, the hardships of the inland communities are thereby
removed. It also comprehends the theory that sectional advantages conferred
upon buyers by nature should be nullified in order to insure identical delivered
prices for the benefit of the sellers." (Ibid, p. 28).

The position of the industry with reference to competition from plants having
tlie advantage of water transportation is further shown by correspondence be-
tween Mr. R. P. Lament, President of the Institute when the N. R. A. Code was
adopted, ane the South Chester Tube Company of Chester, Pennsylvania. The
latter compai; y had a plant located on tide water and sought assurance from the
directors that the advantages of its location would not be destroyed or impaired.
Mr. Lament replied that the Board of Directors realized that members of the
industry with advantages of any kind desired to preserve them and that those with
disadvantages desired to have them eliminated. Referring to the geographical
advantage of the South Chester Tube Company, he said:

CONCENTRATION OF ECONOMIC POWER 1Q5

"To leave such advantages with you would result in continuing unfair compe-
tition in your favor as against your competitors who, for some reason or other, may
not be as advantageouslv located in respect to transportation as are vou." (Ibid,
p. 49).

In view of the above facts the question again presents itself as to whether the
objections to the basing point system are based upon "abstract criteria" as
contended by the Corporation or upon "tangible evidence."

(e) Relation Between Price LeaderMp and Collaboration Among Competitors.

How readily leadership of the Corporation on prices may supplement the trend
toward collaboration among competitors is demonstrated by evidence presented
before the Temporary National Economic Committee. It was there established
that for many years it has been customary for competitors of the Corporation
engaged in selling tin plate to can manufacturers to contract with their respective
■customers in terms of whatever base price the Corporation might negotiate and
announce in its contract with the American Can Comi:)any. An American Can
Company official testified that Carnegie-Illinois Steel Corporation, and its pre-
decessor, American Sheet and Tin Plate Company, were the only companies that
published a base price on tin plate (Verbatim Record T. N. E. C. Hearings,
November 8, 1939, p. 256). He also testified that other sellers of tin plate "have
not made a lower price than Carnegie-Illinois have made to us", but had agreed
to take the price fixed by Carnegie-Illinois, which is "the officially named or
published price". Mr. Fairless, President of the Corporation controlling Carnegie-
Illinois and its predecessor, testified that it was a correct assumption that com-
petitors "are content to take whatever price Carnegie-Illinois posts" (Ibid,
November 8, p. 257).

Mr. Grace of the Bethlehem Corporation, the second largest producer, could
not recall any occasions when his company had taken the initiative in reducing
prices, but said that "generally we haven't" and that as far back as he could
remember "in the main we would normally await the schedules as published by
the Steel Corporation" (Ibid, November 9, p. 281). He could recall no instances
where the Bethlehem Corporation failed to follow the Corporation in advancing
prices and in the adoption of standard extras (Ibid, November 9, p. 281).

In hearings before the Senate Committee on Interstate Commerce in April
1936, W. A. Irvin, then President of the Corporation, testified that his companies
"generally make the prices, unless some of the other members of the industry
think that that price may be too high, and they make the price", that com-
petitors "generally" followed the Corporation's price, and that the exceptional
deviators were looked upon as "price cutters". (Hearings on S. 4055, p. 595).

The sales manager of Jones & Laughlin stated to representatives of the Federal
Trade Commission in 1936 that he felt compelled to follow the prices of the Cor-
poration and that to sell below the prices of competitors would bring about a
ruinous competitive condition. The Vice-President in Charge of Sales for the
Carnegie-Illinois company stated that it never takes the initiative in reducing
prices, is anxious to obtain the highest possible price, and that it is a fallacy to
attempt to increase business by reducing prices. Commenting on this in its
report to the President on June 10, 1936, the Federal Trade Commission said:

"Under such a philosophy all that is necessary is to set up some system for
informing all competitors what is the highest mill base any one of them desires
and mill base quotations automatically become identical. Lower costs of pro-
duction and cheaper costs of transportation must not be allowed to bring a price
below that of competitors for fear of a ruinous competitive condition. Such a
view is wholly frustrative of price competition." (p. 6)

The above evidence is merely confirmatory of the Commission's findings of
fact in the Pittsburgh Plus case in 1924 to the effect that the Corporation's
"prices are generally followed by their competitors." (F. T. C. Decisions Vol.
VIII, p. 32, Paragraph 12i). The Commission also found from evidence in that
case that the Corporation had collaborated extensively with its competitors in
preparing, adopting and circulating compilations of uniform extras and differ-
entials, freight rates, tolerances and weights, for the purpose and with the effect
of establishing and maintaining identical delivered prices. Between 1907 and
1911 the Corporation was the leader in promoting the so-called Gary dinners at
which agreements and understandings with its competitors were reached as to
base prices on various products. Prior to 1907 the Corporation was a leader in
pools and zone price-fixing arrangements, and other devices for eliminating price
competition between it and its competitors (See opinion of Judge Buffington in
U. S. vs. U. S. Steel Corporation, 223 Fed. 55).

IQg CONCENTRATION OF ECONOMIC POWER

(/) Degree of Observance of Basing Point System.

'Without an investigation of sales records directed specifically to the above
subject, there is no way of providing an answer that is dependable. The general
opinions of parties interested in defending the basing point system are almost
certain to exaggerate the number, proportion and degree of departures from the
system. Competitors are likely to have an honest but exaggerated idea of the
departures made by their rivals and may unduly minimize their own. Yet de-
partures undoubtedly occur, sometimes unintentionally and sometimes de-
liberately.

The logic of treating deviation from and disregard of the system, however, as
an argument for the system itself is patently defective. Yet the Corporation
adopts it. Thus it is stated that the basing point system enables "the buyers to
induce price concessions by trading one producer's prices against another's"
(Ex. 1418). This statenieiit was made sliortly after the Corporation quoted
from the X. R. A. Report to this effect:

"The outstanding characteristic of the basing point system is the fact that it
puts rival producers on a footing of price equality with each other and all the
consuming points over a wide area * * *" (Ex. 1418).

The system which is designed to prevent buyers getting any lower delivered
prices from one producer than from another is credited with giving buyers the
opportunity of inducing price concessions by trading one identical delivered price
against another.

In another place the Corporation argues that the basing point system tends to
prevent prices from rising more than it tends to prevent them from decreasing
"since unpublished price reductions are possible, whereas unpublished price
increases, of course, never occur" (Ex. 1418). Unpublished price reductions are
also possible where prices are made f. o. b. mill or in fact under any conceivable
pricing system. They are not so peculiar to the basing point system that the
system can take credit for the downward pull upon price levels of unpublished
price reductions. The Corporation also states that the basing point system has no
more of a stabilizing influence than does any open price system, saying that "the
same stabilizing influence would result from any open price system." Obviously
an open price system based wholly upon f. o. b. mill prices could not result in
making delivered prices identical. Mill net prices, of course, might be the mathe-
matical derivative of an identical delivered price. Although as shown above
the Corporation claims that any open price system would produce "the same
stabilizing influence", it also quotes from the N. R. A. Report to the effect that
while an open price system could be used with any kind of a price structure "it
has its fullest effect if each producer knows the delivered prices he has to meet at
each jMu-chasing point" (Kk. 1418). The corporation also argues that without
knowing what prices would have been in the absence of the basing point system
there is no way of determining the effect of the system upon prices (Ex. 1418).
The Corporation neverthele.ss quotes N. R. A. to the effect that the system puts
competition "on a basis which will vield higher prices than would result without
it" (Ex. 1418).

In considering the degree of adherence to or deviation from the basing point
system of identical delivered prices, the testimony of prominent representatives
of the industry is pertinent. Mr. Eugene Grace, president of Bethlehem Steel
testified before the Temporary National Economic Committee that he believed
in the fundamental law of competition and that concessions from base prices were
"wholesome". Yet he agreed that such concessions were inconsistent with the
ideal of the posted price system and said he did not want to see the base price
structure destroyed. (Verbatim Record, T. N. E. C, hearings, November 9, 1939,
p. 283.) Mr. Grace further testified that during the unsettled price conditions of
early 1938, published base prices were not being adhered to in sales to capital
goods producers but that they were getting base prices on the smaller type of
orders and on consumers' goods like the canning industry where the demand was
holding up. He admitted that even some large buyers were probably paying the
full base price, that the government ordinarily continued to be quoted the full
b>se prices and to pay them, and that it was Bethlehem's policy to get published
base prices if it could (Ibid, pp. 277, 278, 279). Mr. Fairless, president of the
Corporation, also testified that some buyers paid the base price plus standard
extras at the same time that others were getting reductions (Ibid, Nov. 7, p. 209).

Mr. Fairless also testified that at no time in 7 years had the Birmingham area
been able to secure its full published prices "except in rare instances" (Ibid. p.
213). The 7 years referred to would have included the N. R. A. Code period,
and if Mr. Fairless's testimony was correct, it is equivalent to a statement that

CONCENTRATION OF ECONOMIC POWER JQ7

there was a wholesale violation and disregard of code requirements which would
have subjected the violators to a fine at the rate of $10 per ton.

Mr. W. A. Irvin, formerly president of the Corporation, testified before the
Senate Committee on Interstate Commerce in April, 1936, that:

"The customers who are able to get concessions are those having larger orders
to place and ones who utilize steel in their own production." (Hearings on S.
4055, p. 607.)

A recent report of the Procurement Division to the Temporary National Eco-
nomic Committee contains illuminating information as to the extent of identical
bidding on steel products. It was presented as part of a survey of the practice of
identical bidding on all commodities purchased by the government during a 12
month's period from December, 1937, to November, 1938, inclusive. The total sur-
vey included more than seven million bids and over 1,600,000 bidders. (Report,
p. 68.) The cases of identical bidding totaled 25,610 and among these "iron and
steel and their products" led all others with 6,693 cases or 26.1 per cent of the total
as against 12.8 per cent for the next highest commodity (Ibid, pp. 72, 73) and 10.15
per cent of identical bids for all commodities. The survey shows three forms of
identical bidding: (a) cases where all bids were identical, (b) cases where two or
more of the lowest bids were identical, (c) cases where two or more identical bids
were higher than other bids. Of the first class "iron and steel and their products"
had 21.4 per cent as against 17.3 per cent for the next highest commodity and 1.72
per cent for all commodities. Of the second class of identical bids "iron and steel
and their products" had 25 per cent as against the next highest commodity of
13.6 per cent and 2.46 per cent for all commodities. Of the third class of identical
bids the indu.str}' had 29.3 per cent as against 11.3 per cent for the next highest
commodity and 5.97 per cent for all commodities.

In the classification of "iron and steel and their products" however, the survey
includes 31 classes of commodities, of which steel works and rolling mill products
are one. On the basis of the sub-classification of steel works and rolling mill
products the percentages of the three types of identical bids were 30.8, 27.8 and
41.3 per cent, respectively, as against 21.4, 25, and 29.3% for the general classi-
fication of "iron and steel and their products". (Ibid, p. 91.) Thus it appears
that the percentage of identical bids among steel works and rolling mill products
was substantially higher than among other products classified under the designa-
tion "iron and steel and their products".

Taking all bids regardless of commodity, the Procurement Division reported
that 89.85 per cent in value and 76.9 per cent in number were non-identical.
Only the remainder showed one of the three types of identical bidding previously
described. It is thus apparent that the practice of identical bidding on federal
government purchases is concentrated in a comparatively few industries and that
"iron and steel and their products" lead all the rest in that respect, and that within
the industry defined by the quoted words, steel works and rolling mill products
lead all other in the percentage of identical bids to the total number included in
the survey. The actual government expenditures in cases of identical bidding
totaled nearly $36,000,000 (Ibid, p. 65). If to this total were applied the 26.1
per cent relation of identical bids in "iron and steel and their products", govern-
ment payments of $9,396,000 would be indicated in cases of identical bidding.
If the simple average of 23.2 per cent applying to the first two types of identical
bids for steel works and rolling mill products were applied to the total purchases
of all commodities, the government payments to the steel works and rolling mills
would be indicated as $8,352,000.

THE BASING POINT SYSTEM WAS NOT A NATURAL EVOLUTION INHERING IN THE
PECULIAR ECONOMIC NATURE OF THE INDUSTRY, BUT WAS DEVISED BY COM-
PETITORS AS A MEANS OF ELIMINATING PRICE COMPETITION

A discussion of this subject is made necessary by certain assertions of the
Corporation which are not in accord with the facts. One of the declared purposes
of its pamphlet is "to establish that this pricing method is the natural result of
basic economic conditions in the steel industry" (Ex. 1418, foreword). In another
pamphlet, the Corporation asserts that the system is "a simple pricing medium
which has evolved over a long period of time to meet the peculiar characteristics
of the steel industry" (Ex. 1410).

Before proceeding to an analysis of the argument made to support the state-
ments quoted, there will be described briefly the evidence developed 'during the
trial of the Pittsburgh Plus case, and which was summarized by the Federal Trade
Commission's Findings of Fact made in 1924. The evidence taken traced the

208 CONCENTKATION OF ECONOMIC POWER

•origin of the basing point system back to its earliest beginnings in the steel in-
dustry. According to the testimony of Col. Henry P. Bope who had been con-
nected with the Carnegie interests since 1879 and was later with the Corporation
until 1918, the first use of the Pittsburgh Plus System was in 1880, when four
manufacturers of structural beams formed an association to fix prices and adopted
Pittsburgh as the basing point on which delivered prices should be made. Prior
to that time the practice was to quote f. o. b. mill and each miti made whatever
price seemed necessary to take the business. Later on, the Beam Association
used a zone method of fixing prices building up the delivered prices upon average
freight rates within each zone. Col. Bope also testified that the various associa-
tions covering various steel products used the basing point system a& fundamental
to their price fixing activities, that they could not maintain prices without a basing
point, and that when a temporary departure from the system occurred in 1909
the mills got into a condition of chaotic prices and were glad to return to the
Pittsburgh base. (Typed Transcript of Testimony, D. 760, pp. 10859, 10861,
10863, 10869, 10870.)

In 1902, the Bar Producers, including the Corporation's subsidiaries, met and
agreed upon the Pittsburgh Plus system as a basis for fixing and maintaining
imiform delivered prices. The plate and structural shape producers met and did
likewise in December, 1903, and in 1904 the large wire producers, including a
corporation subsidiary, agreed upon the Pittsburgh Plus system as a method of
maintaining uniform prices (Findings of Fact, Docket 760, par. 14, b, c and d).

The Pittsburgh Plus System was adopted in 1900 by the National Tube Com-
pany, a Corporation subsidiary, and all its competitors adopted the same practice
(Ibid, par. 14, c). A sales manager of American Steel and Wire Company, a
sul>sidiary of the Corporation, testified that usually there was no price competition
among the wire manufacturers and that generally all wire mills charged the same
delivered prices on a Pittsburgh Plus base (Findings of Fact, Docket 760, par.
12 c).

In 1900 the Pittsburgh Plus system was adopted by the Billet Manufacturers
as a basis for their agreed prices, and in 1918 by an agreement among bolt, nut
and rivet manufacturers (Ibid, par. 14, f & g). The basing point system was not
applied to the sale of tinplate until 1903. Prior to that time the Corporation sold
tinplate f. o. b. mill (Ibid Par. 14, i).

In May, 1901, while the Corporation was still in process of formation, its
various sales managers in meeting assembled formally voted that all carload lots
"shall be sold delivered at destination, based on tariff rates of freight" (Govern-
ment exhibits in case of U. S. vs. U. S. Steel Corporation, Vol. 22, p. 619). This
policy was re-afl!irmed from time to time by vote of the sales managers (Ibid. pp.
625, 627 and Hearings before the Stanley Committee, Vol. 6, p. 3961).

The Federal Trade Commission found in the Pittsburgh Plus case, from evidence
received in that case, that the Corporation was continuing to cooperate actively
with the National Association of Sheet and Tinplate Manufacturers, that the
Corporation's prices were furnished to the Association and relayed by wire from
it to its members before being announced to the public. The Commission found
that the Association members generally adopted the Corporation's prices as their
own (Findings of Fact, Docket 760, par. 14, j.). The Commission also found that
the Corporation was providing its competitors with booklets containing extras and
differentials, with freight rate books which standardized the transportation factor
in delivered prices, and with tables of tolerances and weights, all of which were
necessary in making the Pittsburgh Plus system effective in its objective of
identical delivered prices (Ibid. par. 14, ir, n & p).

The Commission found in the Pittsburgh Plus case that during the World War
Pittsburgh Plus was discontinued at Chicago on plates, shapes and bars, but just
before the close of the war it was restored at the suggestion of Judge Gary and one
or two other steel producers (Findings of Fact, Docket 760, par. 14, z to 11).

It may be noted also that prior to the adoption of the NRA Code for the iron
and steel industry pig iron had been sold on an f. o. b. furnace basis, notwith-
standing that an effort was made by Judge Gary, of the Corporation, to have a
basing point system established on pig iron during the World War. (Ibid, par.
14, z 19). In testifying before the National Recovery Review Board, in April,
1934, the executive ."secretary of the American Iron and Steel Institute stated that,
with one exception, "every one of those furnace locations which had been
previously used as a place for quoting prices f. o. b. furnace is now a place listed
as a basing point", and that whereas pig iron before the Code "was quoted at an
f. o. b. furnace price, it is now an f. o. b. basing point price". (Stenographic
Report of Hearings, Natl. Recov. Rev. Bd., April 20, 1934, p. 181). Since the
Code which provided for this change in the method of pricing pig iron was the

CONCENTRATION OF ECONOMIC POWER 109

product of the organized steel industry, it can hardly be claimed that the estab-
lishment of the basing point system in pig iron was merely a natural evolution of
competitive forces as distinguished from joint effort on the part of competitors.
Passing over this most modern instance of the extension of the basing point
system, the Corporation goes back to a period prior to the American Revolution
for an example of what it says is "a clear picture of a rudimentary basing point
structure" embodied in the Philadelphia iron market. It refers to the "remark-
able evidence of a basing point price structure centered on Philadelphia prior to the
revolution" (Ex. 1418). A description given elsewhere in the same exhibit, hovv-
■ever, says that "iron products were sold on a Philadelphia base with outlying mills
absorbing freight in order to bring their products to the central market" (Ex.
1418). This strongly indicates that this Philadelphia iron market was the very
opposite of a basing point system, in that it was a central buying market, like a
commodity exchange. If so, that was no more freight absorption than a farmer
has in getting his crop to market.

Coming now to the argument made by the Corporation in support of its asser-
tions as to the natural economic evolution of the basing point system, it quotes
from a book by Dr. de Chazeau to the effect that the system evolved naturally
because of the growing scale of operations and the shift from iron to steel production,
and that the evolution of economic forces was more important in explaining the
development of the basing point system than "the birth of a dominating corpora-
tion". Nevertheless, the Corporation admits in the same connection that among
the economic "forces referred to by Dr. de Chazeau were "the material increase in
investment and overhead cost, combined with the centralization of producing
units" (Ex. 1418). Such factors, of course, were one aspect of the birth of the
dominating corporation and, as before shown, the Corporation, after the merger
of its various constituent corporations was completed, formally and definitely
decided upon adherence to the basing point system of delivered prices. The ques-
tion may be raised as to what logical or necessary relationship there is between
the development of large-scale productive facilities and a system of identical de-
livered prices for al) competitors, whether large-scale or otherwise. There may
be some logical relationship between such a system and the permanent success of
mergers which bring together under one ownership scattered productive facilities
which would otherwise compete with each other.

Referring to the fact that in the early days of the steel industry prices were
quoted f. o. b. mill, the Corporation states, "From this assumption the Commission
and other critics seem to have concluded that f, o. b. mill prices are the 'natural'
way of quoting steel prices" (Ex. 1418). As a matter of fact, it was the actual
historical way and the natural way for competitors acting independently to quote.
It is not the natural way for monopoly of course, and is repugnant to identical
delivered prices. The Federal Trade Commission found as a fact in the Pit tsburgh
Plus case that "no systematic Pittsburgh Plus system had been adopted by the
steel producers at the time of Pittsburgh's greatest predominance in the steel indus-
try, or until after 1900" (Findings of Fact, Docket 760, par. 14 a). The Corpora-
tion seeks to create the impression that there was no connection between its initial
merger of competing companies and the use of the basing point system as a com-
prehensive method of pricing all steel products. It is implied that the ])asing
point system had been established for most products prior to the formation of the
Corporation in 1901 (Ex. 1418j. However, the footnote citation given does not
support that implication. The chronology of the basing point system as it was
extended to apply to more and more steel products has been previously shown.

It is stated that the Pittsburgh Plus system vanished in Chicago in 1911 and
1912, and that it was not in force anywhere during the World War (Ex. 1418).
The Federal Trade Commission found from evidence in the Pittsburgh Plus
case that "from the time the Pittsburgh Plus practice was adopted by the steel
industry to the present time, Pittsburgh Plus prices disappeared whenever sus-
stantial price competition occurred in the Chicago district; prices of steel pro-
ducers in such cases were made f. o. b. their respective producing mills. When
the Pittsburgh Plus prices were resumed, price competition had ceased" (Findings
of Fact, Docket 760 par. 14 t). As a matter of fact, when the War Industries
Board fixed maximum prices on steel products during the war, it accepted Pitts-"
burgh and established other points of production basing points for such products.

The contentions of the Corporation that the basing point system developed
as a natural evolution out of the peculiar economics of the industry are not sup-
ported by any "tangible evidence" and they are contradicted by such evidence.
They are supported by nothing more tangible than assertions, conclusions,
surmises and rationalizations. They are in striking contrast to the tangible

110 CONCENTRATION OF ECONOMIC POWER

evidence recited by the Federal Trade Commission to sustain its conclusion that
the basing point system in the steel industry was devised by competitors as a means
of eliminating price competition.

THE COLLECTION OF "PHANTOM FREIGHT" CHARGES IS INHERENT IN THE BASING
POINT SYSTEM OF DELIVERED PRICES AND THE AMOUNTS COLLECTED ARE PRO-
PORTIONED TO THE system's OBJECTIVE OF MAINTAINING IDENTICAL DELIVERED
PRICES.

The term "phantom freight" simply means that where the actual freight is less
than the amount added to the base price to cover the freight element in the deliv-
ered price, the difference goes to the seller, giving him a mill net yield greater
than the governing base price by the amount of that difference. It is not freight
in any sense but is an addition to the sales price. Nor is it a phantom in the
sense of being unreal. The existence of it is just as real as the base price itself
and the size of it may at times approach the base price. This is one of the features
of the basing point system which sellers find it most difficult to defend. For it
involves the anomaly of a seller realizing the most out of a delivered price where
there is little or no actual freight charge included in it. As between buyer and
seller, the nearby buyer is not onl.y deprived of any price benefit from his location
but is penalized for it.

The Corporation freely concedes the existence of so-called "phantom freight"
and goes into great detail to explain the various circumstances which give rise
to the different types and amounts of such freight. An attempt is made to
vindicate the practice by arguing that it is an expression of normal competition
in which the seller merely takes advantage of his geographical location to obtain
a better price. Thus, it is said that the mill which charges "phantom freight"
merely "names a delivered price which permits it to profit from a competitive
advantage, due to a superior geographical location" (Ex. 1418); that a producer
located on water has an advantage over producers not so located "which he is
properly entitled to realize by a higher mill net return"; that as to such a mill
"there is no competitive reason why it should give the benefit of the lower trans-
portation to the customer" and if it did so "it would be following some non-
competitive principle"; that mills at a considerable distance from a basing point
and with a corresponding freight advantage in selling to nearby customers "behave
competitively and naturally when they charge their customers a price which
realizes that advantage"; and that "the strong as well as the weak producv^^rs are
behaving competitive!}' and naturally when they charge prices which reflect their
freight advantage over other producers on sales in their local territories". A
somewhat similar argument was advanced by the executive secretary of the Amer-
ican Iron & Steel Institute in testimony before the Senate Committee on Interstate
Commerce in March 1936; when he said that if he had a steel plant located at an
isolated point such as Duluth, such plant "would have what might be called, in
effect, a protective tariff on the transportation," because of what a mill located
elsewhere "would hav^e to bear to get his product into my immediate vicinity."
(Printed record of hearings on S. 4055, p. 275.)

It is obvious, of course, that such arguments, except possibly the last, be^ the
question. Thej^ merely assert the competitive character of the practice, the very
thing that is in dispute. They admit that the collection of "phantom freight" is
the necessary result of including more freight in the delivered price than is actually
incurred, a characteristic of the basing point system. Yet it is argued that "the
possibility of a non-basing point mill realizing mill net returns higher than those
obtained by competitive mills at basing points, is not due to the absence of a
basing point, but to a geographical advantage." (Ex. 1418.)

The foregoing arguments divert attention from the crucial fact that the success
of the basing point system in accomplishing its main objective of identical delivered
prices for all competitors, necessitates that mills with advantages of geographical
location retain them, so far as prices are concerned, and not merely retain them
generally, but systematically to the last cent or fraction of a cent of their freight
advantage. If they sliare with t'xir customers the slightest part of such advantages
by making a lower delivered price the main objective of the system is defeated.
Under anything approaching free competition a mill with a geographic freight
advantage might voluntarily share or be forced to share such advantage with the
buyer having the same geographic location as himself. But to do that would
undermine the system itself. The arguments even go to the length that the least
sharing of such ad^'antage is to follow some non-competitive principle. This is
equivalent to contending that a lower delivered price than that of mills with the

CONCENTRATION OF ECONOMIC POWER m

disadvantage of higher transportation is non-competitive. To retain the full
amount of the freight advantage of each mill is of course to cancel the full amount
of the freight disadvantage of each other mill in order to establish and maintain
identical delivered prices. Moreover, the amount of "phantom freight" that may
be collected by a non-basing point mill in a given instance depends upon its
relation freight-wise to the governing basing point. The amount that may be
collected by a basing point mill depends upon its relation freight-wise to the
destination. The amount that either may collect is also related to the difference
between all-rail freight and the actual freight by cheaper modes of delivery.
The Corporation also makes clear that the collection of "phantom freight" is not
limited to non-basing point mills but is indulged in by basing point mills also.
But as to both, the success of the system demands that this be done. The
significance of the Institute secretary's comparison between the protective tariff
and "phantom freight" is that in both cases the amount that must be paid and
the basis on which it is calculated are determined by a system of rules designed to
insure the highest degree of exactitude.

In its illustrations of certain types of "phantom freight", the Corporation
attempts to minimize their amount and importance. Thus, it is said regarding
"phantom freight" realized by non-basing mills within the switching areas of a
basing point that "the amounts which they might realize over their base prices
are of no consequence to either producer or consumer." (Ex. 1418.) Yet even in
such illustration the amount of "phantom freight" was shown to range from 10
cents to 50 cents a ton and it is stated elsewhere by the Corporation that "custom-
ers generally order in large quantities, which inakes a small price cut worth bar-
gaining for" and "consequently, a small difference in price will shift large orders
from one producer to another." (Ex. 1418.) Again, in illustrating "phantom
freight" arising out of differences between arbitrary switching rates and the actual,
it is said that the amounts involved are "insignificant." (Ex. 1418 footnote.)
These "insignificant" amounts, however, may spell the measure of "a small
difference in price" sufficient to shift large orders.

An effort is also made to minimize the amount and importance of "phantom
freight" arising out of differences between cost of delivery by truck and by rail.
It is stated that "only an extremely small proportion of steel tonnage is delivered
by truck, partly because many products cannot be economically hauled by truck,
and partly because large consumers prefer rail delivery." (Ex. 1418.) Yet it is
admitted that almost any steel product can be shipped by truck, that light flat
rolled products are easiest to load and transport by truck, that many types of wire
products can be trucked economically and that there is "considerable demand for
delivery by truck of some products." (Ex. 1418.) As shown by the Federal
Trade Commission in its report to the Senate in March 1934, the amount of
"phantom freight" involved in the 35 percent rule on truck deliveries in many
instances amounted to from $2.50 to $3.90 per ton. (FTC Report, pp. 34, 35.)

The Corporation also states as to "phantom freight" that it is "very doubtful
"whether any mill in a basing point area realizes any net gain, even on sales to its
nearest customers." (Ex. 1418.) The important question is not whether the
total amount of "phantom freight" exceeds the total amount of "freight absorp-
tion," whether for an individual mill or company or for the industry as a whole.
If the total amount of "phantom freight" were always less than the total amount
absorbed, there still would be identical delivered prices and a systematic inclusion
•of such freight to produce that result at any given destination.

It is worthy of note that the Corporation does not show the amounts of "phan-
i/Om freight" which accrue to non-basing mills located at considerable distances
from basing points. Nor does it show the amounts which accrue by reason of
differentials between basing points that embody some or all of the transportation
charge from other basing points. Several illustrations may be given which will
show how substantial and important these omitted types of "phantom freight"
still are to large areas of the country, despite the discontinuance of the single
basing point system, the substitution of the multiple basing point system, the
1938 elimination of certain price differentials between basing points, and the
addition of new basing points in that year.

In its report to the President on the Steel Code in November, ]f^34, the Federal
Trade Commission stated that as to sheets the Pacific Coa.st ports were basing
points "in name only, their prices being merely a composite of the Pittsburgh
base price plus transportation from Pittsburgh. Accordingly, the Pittsburgh-plus
system is literally in effect in that territory." (Report, p. 28) The Commission
ijuoted from a protest filed with the American Iron & Steel Institute by the Los

112 CONCENTRATION OF ECONOMIC TOWER

Angeles Chamber of Commerce in May, 1934. The Chamber said that the Pacific
Coast basing point prices were "substantially equal to the Pittsburgh mill base
prices, plus rail and water transportation charges, including wharfage, handling,
and terminal delivery." The Chamber further said that this had the effect of
"depriving local steel rolling and working industries from the volume and profits
of business afforded by a restricted local territory, as to which they have very
definite geographic and transportation advantages." (Report, p. 19.)

As to certain products the situation on the Pacific Coast remains substantially
unchanged. The general manager of the Pacific Coast Fabricators Association
testified before the Temporary National Economic Committee on November 14,
1939. that prices paid by members of his association at Pacific Coast ports were
as much or more than the eastern mills' base price plus rail and ocean freight to
Pacific Coast ports, plus marine insurance, wharfage and loading on cars from
the wharves at such ports. (Verbatim Record, TNEC Hearings, p. 378, Ex.
1441, pp. 386, 387). Yet products so priced are produced at San Francisco and
Seattle mills owned solely by the Corporation and Bethlehem. Bars produced on
the Pacific Coast are priced at Birmingham plus, shapes at Philadelphia plus, and
sheets at Sparrows Point plus. The amount of "phantom freight" thus involved
ranges from $10 to $13 a ton. Prior to July, 1938, sheets were sold on the Pacific
Coast at Pittsburgh plus and the amount of "phantom freight" was $15 per ton.
The amount of "phantom freight" which led to the application of the Western
Association of Rolled Steel Consumers for relief against the Pittsburgh Plus
practice was only $7.60 a ton at Chicago.

The effect of the present basing point system on Pacific Coast fabricators is
similar to the effect of the Pittsburgh Plus system on Middle Western fabricators
prior to 1924. The manager of the Pacific Coast Fabricators Association testified
that Eastern and Middle Western fabricators were enabled to ship to the far
west and compete with the West Coast fabricators but that the latter could not
ship to the east. (Verbatim Record, TNEC Hearings, Nov. 14, 1939 p. 381)
This is the very predicament that Middle Western fabricators found themselves
in under the Pittsburgh Plus system. Eastern fabricators were enabled to com-
pete with them in the west while the western fabricators were prevented from
competing in the east.

There has been a tendency in some quarters to infer that the discontinuance
of the single basing point system known as Pittsburgh Plus, and the substitution
of the multiple basing point system in 1924 had the effect of ending the dis-
crimination expressed in "phantom freight" charges. That inference was en-
couraged by the addition of new basing points under the N. R. A. Code and of
others in 1938, coupled with the abrogation during that year of price differentials
between various basing points. As a matter of fact any such inference is not
well founded. "Phantom freight" and the discrimination it embodies against
important consuming sections still exist in substantial amounts in various impor-
tant steel products. It will always exist in the basing point sj^stem so long as
given product is priced on a point other than its place of ])roduction and shipment
(assuming local sales are made by non-basing point mills) and so long as it is
priced for delivery by a rhode of transportation higher than that actually employed.

Actual instances and illustrations of the substantial amounts of "phantom
freight" existing at the present time maj' be cited. The following consumers'
goods are produced in large quantities at Sparrows Point (Baltimore) but are
still priced on a Pittsburgh base: Buttweld pipe, Lapweld pipe, cold rolled strip,
cold rolled sheets, tin plate, plain wire and nails and staples. Purchasers of these
goods in Baltimore are charged Pittsburgh Plus by Baltimore producers. This
involves the addition of "phantom freight" from Pittsburgh to Baltimore amount-
ing to $6.00 per ton. A subsidiary of the Corporation produces plain wire and
nails at Allentown, Pennsylvania, but the price is still based on Pittsburgh.
Allen town purchasers of these consumers' goods are charged Pittsburgh Plus
involving "phantom freight" from Pittsburgh to Allentown of $6.20 per ton.

Moving to the middle west, hot rolled sheets and plain wire are produced at
Kokomo, Indiana, by the Continental Steel Corporation and the same producer
produces hot rolled sheets at Indianapolis. The price of the latter product at
Indianapolis is based on Middletown, Ohio. Indianapolis purchasers are charged
Middletown Plus. This involves the addition of "phantom freight" from Middle-
town of $3.80 per ton. Kokomo prices for hot rolled sheets and plain wire are
based on Gary and Chicago. Kokomo purchasers are charged Gary or Chicago
Plus which involves "phantom freight" of $3.60 per ton on sheets and $4.00 a
ton on wire. A mill at St. Louis produces Buttweld pipe but bases on Chicago
This involves a St. Louis price equivalent to Chicago Plus including $4.80 a ton
"phantom freight"* from Chicago. A mill at Pueblo, Colorado, produces large

COXCENTRATIOX OF KCONOMK^ POWKK JJg

quantities of heavy structural shapes, light structural shapes, universal plates,
hot rolled strip, merchant bars, concrete reinforcing bars, billets and blooms for
forging, plain wire, nails and staples, barbed wire, wire fencing and bale ties.
It bases prices for these products on Chicago and Gary. To local purchasers in
Colorado, the addition of "phantom freight" from those basing points is required
by the basing point system. This amounts to $19.60 per ton.

There are two vital and complementary aspects of "phantom freight" such aa
described above. The more obvious one is that purchasers who are located at or
near the non-base mill and bu}^ such products for re-manufacture, are handicapped
by the amount of "phantom freight" in competition with rivals located at or
near the basing point. Written complaints from such handicapped purchasers
were presented by the Federal Trade Commission in its report to the President
in November, 1934. (Report pp. 19, 20, 25, 26). The less obvious but scarcely
less important aspect of "phantom freight" is that the handicap may be so great
as to preclude the establishment of re-manufacturing industries at or near the
non-basing mills or else choke their development. Doubtless the "phantom
freight" to Colorado and adjacent states is enough to forestall the establishment
of re-manufacturing industries there and then utilization of the numerous steel
products made in Colorado, but which are priced on a Chidago plus basis.

The effect of "phantom freight" in crippling or preventing the development of
re-manufacturing industries is greatly enhanced by the ever present factor of
waste. Every steel re-manufacturing plant necessarily wastes some of the rolled
steel products which form its raw material. In some cases this may amount to
50% of the rolled steel products at purchases. When "phantom freight" has to
be paid on raw material of which so much must be wasted and resold as scrap the
burden may readily become too heavy for re-manufacturing to emerge or to survive
even in the vicinity of raw material supplies, and even though the "phantom
freight" without the factor of waste would not have been enough to have that
effect. Competitors at basing points, without the handicap of "phantom freight"
would have a crushing advantage. In the Pittsburgh Plus case it was shown
that with a 30% waste factor, "phantom freight" to Chicago was in effect increased
from $7.60 to $10.80 per ton and this made it impossible for a Chicago re-manu-
facturer to compete even in Chicago with a Pittsburgh competitor. (Com. Ex.
6801, Docket #760)

It can hardly be said that such conditions involve only "abstract criteria" and
do not represent "tangible evidence."

THE SO-CALLED "ABSORPTION" OP FREIGHT CHARGES IS INHERENT IN THE BASING
POINT SYSTEM AND THE AMOUNTS ABSORBED ARE PROPORTIONED TO THE SYSTEM'S
OBJECTIVE OF MAINTAINING IDENTICAL DELIVERED PRICES

Just as the basing point system frequently requires the collection of more than
the actual freight in the exact predetermined amounts necessary to produce
identical delivered prices, it also frequently requires the acceptance of less than
the actual freight in the exact predetermined amounts necessary to accomplish
that end. Instances of the latter type are loosely and inaccurately called "freight
absorption." Just as "phantom freight" is not freight at all but merely a graphic
characterization of a certain tj^pe of addition to the base price, so freight that is
said to be "absorbed" is not freight at all but is merely a characterization of a
certain deduction from the base price and consequent reduction in mill net return.
"Freight absorption" occurs wherever the actual freight of the shipping mill
exceeds the freight from the governing basing point mill which forms the trans-
portation element in the delivered price.

The Corporation admits that the term "freight absorption" is misleading but
only on the ground that it implies the mills pay freight charges which the con-
sumers ought to pay. (Ex. 1418.) The real respect in which it is misleading
is that it is nothing but a price reduction to purchasers located at the delivery
points to which freight is "absorbed." This is implied in the same paragraph
that makes the admission last referred to. Moreover, since the mills ordinarily
do not pay or prepay freight charges, it is not apparent that the term is misleading
in the respect claimed

The Corporation also' states that "freight absorption" is "an element more or
less peculiar to the steel industry." (Ex. 1410.) "Freight absorption" is not
peculiar to the steel industry. It occurs in all delivered price systems wher-
ever the actual freight exceeds the imputed freight element in the delivered price.
In another pamphlet the Corporation argues that "freight absorption" is not rare
or confined to the steel industry, illustrating this by reference to the sale of spe-
cialties such as candy and cigarettes and by individual concerns such as depart-

114 CONCENTRATION OF ECONOMIC POWER

ment stores and corner grocers. In tliis connection the Corporation states that
some customers of retailers carry their purchases home while others have them
delivered at no extra cost, that candy bars and cigarettes are sold at uniform
prices throughout the country at varying distances from the place of production.
(Ex. 1418.) Such arguments ignore the fact that department stores and corner
grocers freely permit their customers to take their purchases with them either
to their homes or to any other place they wish, while under the basing point
system this privilege is denied. Such arguments ignore the fact that the com-
modities involved are not standardized as to quality as are steel products. More
important than all else, these arguments ignore the fact that the sellers referred
to do not "absorb" the cost of delivery to the exact amount necessary to make
their delivered prices to the consumer identical with those of competitors. It is
common knowledge also that candy bars and cigarettes are not sold at uniform
prices r,'l over the country so far as retailers are concerned.

The Corporation quotes from the NRA report to the effect that "discrimina-
tion and freight absorption are natural results of bona fide competition." (Ex.
1418.) At best this is only bare assertion. It is, obviously untenable when
applied to a situation where the "freight absorption" is systematically practiced
by an organized group of competitors, where they simultaneously supplement it
with "phantom freight," and where the coincident identity of delivered prices
depends upon those two complementary practices.

The Corporation states that one reason for "freight absorption" is that ca-
pacities of steel mills in areas containing raw materials "are usually large enough
to supply much more than the local demand." (Ex. 1418.) This ignores the
fact tliat there is considerable cross-hauling of the same product from one mill
location to another and even beyond, in violation of the economic principle that
the normal movement of standardized commodities is from areas of excess produc-
tion into deficit areas and not from one surplus area to another. The Corporation
states :

"It is natural and proper for a producer, in an eflfort to keep his mill busy, to
sell steel in the different consuming areas where business is available, in this way
realizing varying mill net returns on his business, the variance representing freight
absorption." (Ex. 1418.)

This statement errs in treating the variation in mill net returns as being entirely
the result of "freight absorption" when it is also the result of "phantom freight."
It omits an important fact necessary to determine whether it is "natural and
proper," namely, that the purpose and effect of this systematic "freight absorp-
tion" is the consistent creation of identical delivered prices.

Since the Corporation uses only hypothetical illustrations of "freight absorp-
tion" it is impossible to gain from its pamphlets any idea as to the extent and
amount of that factor. The most recent and authoritative information as to the
extent of the practice of "absorbing" freight is that obtained by the Department
of Justice through questionnaires answered by the industry. From such answers,
representing a cross section of shipments for one month, it appears that the steel
mills "absorb" freight on 70 per cent or more of their volume of business and that
the amount of such "absorption" on various products ranged from $r.25 to $6.43
per ton. In the Federal Trade Commission's report to the President on Steel
Sheet Piling in June, 1936, it was pointed out that on one set of bids the Corpora-
tion and Inland each offered to reduce their mill net return by $6.30 a ton below
the price first bid; that Jones & Laughlin offered to reduce its mill net return by
$7.30 a ton, and that Bethlehem offered to reduce its mill net return by $10.70 a
ton. Some of these reductions resulted from a waiver of "phantom freight" in-
voh'ed in the substitution of water transportation for all rail and others involved
a further enlargement of "freight absorption." (FTC Report, pp. 30, 31.)

The Federal Trade Commission's report to the Piesident in November, 1934,
showed that Buffalo producers absorbed freight on structural shapes to Chicago
amounting to $8.00 per ton and to Pittsburgh of $6.40 per ton, thereby reducing
their net returns by those amounts compared to sales made in Buffalo. A Balti-
more sheet producer "absorbed" $7.70 per ton on about 40 per cent of his total
distribution which was shipped to Michigan territory, this involving a correspond-
ing reduction in his mill net compared with sales in Baltimore. (FTC Report,
p.l3.)

In an extended discussion of cress-hauling, the Corporation treats that subject
as a phase of "freight absorption.'' (Ex. 1418.) As a matter of fact, it is just
as much a phase of "phantom freight." It is stated that strictly speaking the
term cross-hauling means shi])ments which cross each other and "the criticisms
are often so phrased as to create a mental image of freight trains crossing in
opposite directions on parallel tracks, loaded with identical products." (Ex.

CONCENTRATION OF ECONOMIC POWER 115

1418.) As a matter of fact, that is the correct mental image of cross-hauling
as applied to the basing point system. The Corporation does not deny the
correctness of that image but treats It as an extreme case. The mental image
described in the quotation, however, is less extreme than the actual situation in
.that shipment of identical products not only frequently cross each other but the
mills frequently ship into each other's home towns and beyond at identical de-
livered prices. Following up its contention that "freight absorption" is the result
of bona fide competition, the Corporation also states that "in fact, cross-hauling
is the necessary result of competition." (Ex. 1418.) The truth is that under
the basing point system, cross-hauling becomes just as systematic and deliberate
as "freight absorption" and "phantom freight." The combined range of these
determines the extent of cross-hauling that may occur in any given instance.

Concluding its discussion of cross-hauling, the Corporations says:

"Before cross-hauling is condemned, it should be proven that the alternative
would not involve economic costs, by way of transportation or otherwise, in
excess of the supposed saving which would result. Not to be overlooked is the
interference with competition which would necessarily be the consequence cf any
artificial limitation of marketing territories. Freight absorption is primarily
produced by competition in the steel industry." (Ex. 1418.)

Again the Corporation says:

"The alleged economic waste resulting from cross-shipments must be balanced
against the countervailing advantages to the public of a competitive system and
also against the economic losses which would follow from artificial limitations of
marketing territories." (Ex. 1418.)

In making the contentions embodied in these last two quotations the Corpo-
ration sets up a requirement which it elsewhere admits cannot be met. It else-
where claims that it is impossible to measure quantitatively the amount of unnec-
essary transportation costs and equally impossible to measure the cost of any
interference with present practices. (Ex. 1418.) It also admits that there
would be a small saving from an f. o. b. mill price system because of "its elimi-
nation of a certain amount of transportation costs." It then says the amount
of such saving could not be estimated. (Ex. 1418.) It is not necessary that
there be any accurate estimate or measurement of the amount of unnecessary
cross-hauling resulting from the basing point system or of the cost of any inter-
ference with it. The basic issue is whether the system which produces unneces-
sary cross-hauling is a collusive interference with competitive forces. If there be
such interference and it be removed, there would go with it only the type of cross-
hauling which was produced by it. The attempt to put the burden upon critics
of cross-hauling resulting from the basing point system is equivalent to putting
upon them the burden of showing that restoration of price competition would
reduce prices and dispense with unnecessary transportation costs. This seems
very much like requiring those who would attack a combination in restraint of
trade first to justify the theory that competition would produce lower prices and
thus be in the public interest. It would apparently require those suggesting
procedure under a statute which embodies long-established public policy to
justify the philosophy of the statute before proceeding under it.

Speaking before the American Iron & Steel Institute in 1928, Charles M. Schwab
referred to cros.s-hauling as one of the principal instances of waste in distribution
and that "it is manifestly uneconomic for a steel manufacturer in Chicago to ship
100,000 tons of steel to Pittsburgh at a time when a Pittsburgh manufacturer is
shipping a like quantity of like material from Pittsburgh to Chicago." (FTC
Report to the President, Nov., 1934, p. 13.) Mr. Schwab also said that "The
net result of the cross-hauling of materials has not been to increase the output
of the individual producers by any appreciable amount" but has "merely served
to dissipate a part of their profits in unnecessary transportation." (Ibid, p. 14.)

The Corporation says that the essence of the criticisms of cross-hauling is that
"transportation costs" are so high as to involve economic waste and inordinately
high prices. To meet that the Corporation immediately asserts that the industry
does not have "excessive distribution costs." To support this it cites a study of
distribution costs made by the Association of National Advertisers covering some
312 manufacturers. An examination of that study discloses that transportation
costs are rnerely one of the lesser elements in distribution costs. The study covers
29 industries, including 1 9 producing consumer goods and only 10 producing indus-
trial goods. Iron and steel products do not have the third lowest "distribution
costs" of the 29 industries investigated, as the Corporation states. There are
5 consuiner goods industries and 3 industrial goods industries that show lower
distribution costs than iron and steel and their products. Iron and steel have

292918— 41— No. 42 9

116 CONCENTRATION OF ECONOMIC POWER

the third lowest "transportation cost" among the industrials, but there are eight
consumer goods industries that show lower transportation costs. (Ex. 1418.)

The assertion is then made that the steel industry proper had even lower dis-
tribution costs than the companies included in the study. No description is given
in the study as to what concerns are included under the classification "Iron and'
Steel and Their Products." The study defines transportation costs as including
"out freight, cartage and express (paid or allowed) ; long distance truck (own
trucks) local delivery; in freight paid on returned sales." ("Analysis of the Dis-
tribution Costs of 312 Manufacturers" published by Assn. of National Advertisers,
(N. Y. 1933) pp. 64, 106.) It is submitted that the Corporation has no ground
for comparing transportation costs under the above definition with transportation
costs in the steel industry. The study obviously includes costs of transportation
which represents an outlay by the seller. By contrast the greatest cost of trans-
portation in the steel industry does not represent an outlay by the seller, since
the buyer pays the freight to the common carrier, deducts it from the face of the
invoice and remits the balance to the .seller. Moreover, the fact that net sales
volume is the basis for calculating the percentage of transportation costs shows
that such costs could not include costs of transportation which do not pass through
the books of the shipper. The Corporation elsewhere makes the point that the
cost of transportation of steel products is relatively heavy in proportion to the
delivered price, while in the study referred to the transportation cost of "iron and
steel and their products" is only 1.30 per cent of the net sales volume.

THE CORPORATION RECOGNIZES THE SYSTEMATICALLY VARYING MILL NET RETURNS
REPRESENTED BY "PHANTOM FREIGHT" AND "FREIGHT ABSORPTION" ARE DIF-
FERENCES IN PRICE AND CONSEQUENTLY DISCRIMINATIONS IN PRICE

In its findings of fact and order to cease and desist in the Pittsburgh plus case,
the Federal Trade Commission decided that the price actually received by the
Corporation's subsidiaries was their mill net return, that this systematically
varied in proportion to the amount of the differences between the actual freight
and the freight from Pittsburgh, the basing point, and that this constituted dis-
crimination in price in violation of the Clayton Act. The amendment of that
Act by the Robinson-Patman Act in 1936 has given rise to legal questions regard-
ing price discriminations that are somewhat different from those previously arising
under the Clayton Act.

It is significant and important nevertheless to note how closely the Corporation
follows the Federal Trade Commission's concept of the basic meaning of the word
"price" in the Pittsburgh Plus Case and in identifying price with mill net return.
The Corporation is not always consistent, however, in taking that position.

The systematic character of variable mill net returns is described by the Corpo-
ration when it says, regarding a basing point mill:

"In general the mill will realize its highest mill net returns on sales to its nearest
customers and progressively lower mill net returns as the distance from the mill to
the consumer increases. The same is true of the mill net returns realized by
non-basing point mills." (Exhibit 1418)

The recognition that mill net return is the equivalent of price is apparent in
recent testimony of officials of the Corporation before the Temporary National
Economic Committee. Mr. Fairless, president of the Corporation, defined mill
net yield as "our realized prices" and said that "realized price means just what it
says it means. What we get for our goods, what we actually get for it." (Ver-
batim Record, TNEC Hearings November 7, 1939, p. 211). Mr. Gregg, a vice
president of the Corporation, referred to "the mill return price" and said, "what
the purchasers pay constitutes our mill net" (Ibid November 6, p. 192; November
7, p. 214). A chart prepared by the Tennessee Coal & Iron Company, a Corpora-
tion subsidiary, and introduced before the T. N. E. C, contains one column which
is headed "Actual Net Sales Prices" (Exhibit 1394; Verbatim Record, November
7, pp. 214 and 235).

The Corporation's recognition that mill net return is .the equivalent of price is
further shown by certain statements in Exhibit 1418. In justifying the collection
of "phantom freight," the Corporation quotes from a report by N. R. A. as follows:

"In an extreme case, the producei; who charges his nearby customers the highest
prices may not be able to afford to charge them any less, despite the apparent
contradiction involved in his voluntarily making lower prices to other customers
who are farther off, that is, he may conceivably need all the benefit he can get
from the utmost discrimination which his market situation permits, in order to

CONCENTllATIOX OF ECONOMIC POWER 217

cover his total costs at all. Assuming such a case to exist, he would merely be
forced out of production, and the customer would gain nothing in the way of
lower prices, but would lose the convenience of being able to get service from a
nearby source. This extrenit case is not very likely to be found in practice, but
it is possible." (Exliibit 1418.)

The Corporation prefaced its use of the above quotation by stating that —
"A still stronger case is presented by the steel mill which needs high prices in
its most profitable territory in order to survive. A new producer, or any producer
in a period of low demand, may require all the profit it can realize from sales to
its nearest customers in order to cover its total costs."

The above quotations plainly imply that mill net returns are prices. The
argument goes to the extent of claiming that the entire industry needs all the
discrimination it can get as the Corporation says that any producer in a period
of low demand may find need of the utmost discrimination which its market situ-
ation permits. In passing, it may be observed that if such discrimination ia
necessary in order to cover a producer's total costs, there is no assurance that it
may not go beyond that point. If a producer may utilize discrimination to cover
its total costs, there is apparently nothing to prevent hihi utilizing it to increase
his profits also.

When the Corporation undertakes to justify "freight absorption" and the con-
sequent acceptance of varying mill net returns from different customers, it again
quotes from the report of N. R. A. The quotation definitely shows that N. R. A.
recognized the mill net return as the equivalent of price.

"Producers regularly set a lower minimum when figuring a special price to
capture a special class of new business than when figuring a general price for the
main body of their sales. For special prices, the minimum is likely to be close to
out-of-pocket or variable costs, while for a general price, producers will not bid
below the total costs which they must cover if they are to keep running. The
difference between these two levels is frequently substantial and lies at the bottom
of the practice of absorbing freight to extend a producer's sale area." (Exhibit
141&.)

Again quoting from the N. R. A. report, the Corporation says that freight rates
to distant territory "must be absorbed if a producer is to extend his marketing
area toward the location of a competing producer and into the area where that
competitor is now selling unless he voluntarily reduces his price on nearby sales
to less than existing competition forces him to accept" (Exhil)it 1418).

Notwithstanding its recognition as above shown that mill net return and price
are equivalents, the Corporation nevertheless contends that variations in mill
net returns from its different customers are not discriminatory prices. 'Even on
this point, however, its position is not consistent. The Corporation q doted from
the N. R. A. report to the effect that in an'industry marked by the characteristics
of the steel industry "discrimination and freight absorption are natural results
of bona fide competition" (Exhibit 1418).

In another place where it discusses variable mill net returns, the Corporation
states "This is not a 'discrimination' in any sense of the word; it is competi-
tion" (Exhibit 1418). By contrast with the above sho%vn recognition that mill
net return is t\]e equivalent of price, the Corporation states elsewhere that
"Actually the price to the buyer is tlie delivered price" (Exhibit 1418).

The range in the variable mill net returns of a given mill is marked on the one
hand by its maximum "phantom freight" and on the other hand by its maximum
"freight absorption". Information is not yeadily available that will permit of
generalizations as to the range of variable mill net returns either as to a particular
mill or as to the industry as a whole. However, some idea may be obtained aa
to the large sections of the country that may be affected by them on the strength
of the Corporation's own statements. In connection with a hypothetical illus-
tration of variable mill nets resulting from the use of water transportation and
where the mill was receiving 75^ per ton more from a customer at one point
than a customer at another point, the Corporation stated:

"Such situations comprise a vast majority of shipments by water and include
most of the water shipments to the Pacific Coast, the Gulf of Mexico, lower
Missi.ssippi River points and principal Great Lakes consuming centers." (Exhibit
1418.-)

Some idea may be gained of the extent of variation in mill net returns by the
figures and graphs presented by the Corporation in Exhibit 1409, Section C.
It there shows the mill net yield on various products by comparison with the base
price, and in that connection the statement is made again and again that "there

118 CO^X'ENTRATION OF ECONOMIC POWER

has been even more fluctuation in the mill net yield, that is, the amount psr
pound actually received by the United States Steel Corporation subsidiary after
deduction of cost of delivery". Similar statements are made as to commodities
sold on a per ton basis.

The Corporation devotes some twenty-five pages of Exhibit 1418 to a detailed
discussion of such subjects as "phantom freight", "freight absorption" and "cross
hauling" all under the head of "Alleged Price Discrimination". While the
variation in mill net feturns resulting from "phantom freight" and "freight
absorption" of various types is freely admitted, described and illustrated, the
discussion as to whether such variation constitutes price discrimination is
extremely meager. In fact, there is little more than a general denial at the outset
of the discussion that variations in mill net returns constitute discrimination in
price. It is stated that the fallacies in the theory that such variations are dis-
criminations in price "have been discussed elsewhere in this study" (Exhibit
1418). There is no such discussion beyond attempts to justify such variations.
Nowhere is issue taken with the proposition that the mill net return is the actual
price received by the seller. Referring to the criticism of alleged price discrimina-
tion as embodied in variable mill net returns, the Corporation states "If it hat
any application, it is true only with respect to mills not at basing points, of Which
there are few today, and with respect to mills at basing points only on sales made
within areas nearest another mill" (Exhibit 1418). Correcting the latter part of
this statement to make it apply to basing point mills "only on sales made within
areas controlled by other basing points" it is an admission that comprehends
practically the full scope of the criticism. The statement that few mills are not
basing points is inaccurate. On some of the most important products the number
of basing points is quite small compared to the number and location of the mills.

In its discussion of variable mill net returns, the Corporation is at least con-
sistent in claiming that they are the result of competition and are not indicative
of its absence. Thus it says that "because of competitive conditions in the
industry, steel mills realize variable miU net returns in selling to different areas"
(Exhibit 1418). In discussing "phantom freight" under the head of "Alleged
Price Discrimination", the Corporation states that the behavior of nonbasing
mills "erroneously described as realizing phantom freight, is not to be con-
strued as the critics construe it — as evidence of the absence of competition.
It is, on the contrary, truly competitive behavior". It is then said to be of a
different type from that assumed in the economic conception of perfect competi-
tion in a perfect market (Exhibit 1418). The claim that variable mill net re-
turns result from competitive conditions obviously begs the question. More-
over, it is not the mere fact of variableness that is significant; it is the systematic
.character and pattern of it. In every case it is exactly the amount that is neces-
sary to equalize the delivered prices of all competitors at any given destination.
The so-called competitive behavior in charging "phantom freight" involves
discrimination that serves no purpose but that of automatically and systematically
reflecting identical delivered prices.

The Corporation argues that criticisms directed to variable mill net returns
place ufidue emphasis on such returns; that the customer is interested only in the
delivered price and not in what "the mill ultimately receives (the mill net return)",
and that the delivered price to a customer near the mill is generally lower than the
delivered price to customers located farther away "except those located nearer
another source of supply". The last quoted statement should be corrected to
read "except those located nearer another basing point" (Exhibit 1418). As
to a customer being interested only in the delivered price, he is probably more
interested in obtaining the lowest possible delivered cost and in the fact that the
systematic variation in mill net returns produces or reflects the identical delivered
prices which prevent the delivered cost being lower from one mill than from
another. There is no significance in the fact that the delivered price to a customer
near the mill may be lower than to a customer farther away. The diS'erence in
freight rates would account for that, and the basing point system is entitled to
no credit. It is just as valid to say that the Corporation's argument places undue
emphasis on the delivered price and unduly minimizes the importance and
significance of sales made at more or less than the basing point prices.

The Corporation quotes from the N. R. A. report to the effect that if purchasers
at non-basing points "are discriminated against arbitrarily by the system then
the establishment of new basing points will be likely to remedy the case" (Exhibit
1418). This is not true. Even though every producing point were made a
basing point, there would still be "freight absorption" and, consequently, vari-

CONCENTRATION OF ECONOMIC POWER HQ

ation or discrimination in the mill net returns whenever one basing point mill
sells in territory at delivered prices controlled by the -base price of another
basing point mill. The Corporation states "The previously existing scale of
delivered prices in the territory around the non-basing point mill can, and
undoubtedly will, remain about the same even though the mill becomes a basing
point" (Exhibit 1418). If this be true, there would l)e no material reduction in
the price level if all mills were made basing points.

As a part of its argument that variation in mill net returns is not discrimination
in an}' sense of the word the Corporation states that "As between a customer
nearby and a customer far away, there is no uniformity of conditions of purchase
on which properly to base a charge of discrimination." (Ex. 1418). Such a
statement is based on a theory of discrimination which ignores the ruling of
the Supreme Court to the effect that tlie discrimination forbidden by the Clayton
Act was not limited to discrimination which lessens competition among pur-
chasers but includes discrimination which lessens competition among sellers.
(Van Camp & Sons Co. v. American Can Co., 278 U. S. 245). The systematic
pattern of geographical discrimination in mill nets under the basing point system
is the alter ego of identical delivered prices. The argliment also takes no note
of the fact that there are discriminations which do substantially affect the ability
of purchasers to compete with each other. Illustrations of such conditions may
be found in the inability of Pacific Coast fabricators to compete toward the
East with Midwestern and Eastern fabricators who are given free access to the
West Coast, and the arbitrarily lower price given to purchasers of certain products
located in the State of Michigan. Purchasers of the same products located
outside the state are in competition with Michigan purchasers, yet are charged
higher prices.

Arguing in justification of the realization by a producer of lower mill net
returns from his distant customers than from nearby ones, the Corporation states

"This enables him to operate his mill at lower unit cost and then to sell to the
nearby consumer for less than he otherwise could." (Ex. 1418.)

It is equally true that the higher mill net returns from nearby customers enable
him to operate at lower unit cost and to at least as great a degree as the lower
nets from distant customers. The argument is analogous to the familiar one for
dumping in foreign trade. The statement quoted is the equivalent of saying
that by discriminating among customers the intent and effect is to realize a
lower average price than otherwise.

The power to determine how much more some purchasers and how much less
others shall contribute to the seller's treasury and the systematic employment of
that power to make delivered prices of all sellers identical, would seem to be the
essence of monopoly. It involves the power to decide how the total price burden
shall be distributed among various purchasers and among the various sections
of the country and consequently what sections shall be developed or retarded.
By the same token it involves the power to decide how the total profit burden for
the industry shall be distributed among purchasers and atnong sections. In the
Pittsburgh Plus case it was shown that the margin between costs of production
and selling prices on various products varied enormoy«ly as between Pittsburgh,
Chicago, Duluth and Birmingham. On bars the margin at Pittsburgh was
slightly over $2.D0 a ton as against about $8.00 a ton at Duluth and Birmingham
and nearly $14.00 a ton at Chicago. If the Birmingham price differential were
not applied and the price had been based on Pittsburgh, the margin at Birming-
ham would have been increased to over $1^8.00 a ton. On structural shapes the
margin at Pittsburgh was slightly over $2.00 a ton as against about $7.00 at
Birmingham and over $18.00 at Chicago. If the Birmingham differential were
not applied and the price had been based on Pittsburgh the margin at Birmingham
would have been increased to nearly $18.00 a ton. On block sheets the margin at
Pittsburgh was slightly over $10.00 a ton compared to over $25.00 a ton at
Chicago. On plates the margin at Birmingham was about $7.00 per ton as against
nearly $10.00 a ton at Pittsburgh and almost $18.00 a ton at Chicago. If the
Birmingham differential were not applied and the Birmingham prices were based
on Pittsburgh, the margin would have been increased to nearly $18.00 a ton.
(F. T. C, Exhibit 6853 in Pittsburgh Plus case, D. 760)'

The above facts emphasize the vital importance of a knowledge of costs of
production in any attempt to determine (once the test of competition is discarded)
whether prices are reasonable, or whether the prices and profit burden is equitably
distributed among purchasers and among sections.

120 CONCENTRATION OP ECONOMIC POWER

THE STEEL INDUSTRY'S USE OP THE BASING POINT SYSTEM CONFORMS TO THE
ECONOMIC SPECIFICATIONS OP MONOPOLY AND IS NOT CONSISTENT WITH THE
ECONOMIC CONCEPTS OF A COMPETITIVE ECONOMY.

Bearing in mind the "tangible evidence" of its origin, its purpose, its collusive
methods of implementation and its arbitrary characteristics and that all these
elements unite to the single end of putting all competitive sellers on an exact
equality of delivered prices to any given purchaser at any given destination, the
Corporation's claim that objections to the basing point system are founded
wholly on "abstract criteria" appears somewhat overdrawn. As a matter of fact
the Corporation's defense of the system is almost entirely based on "abstract
criteria" and not on "tangible evidence". Even in the realm of "abstract cri-
teria" however, the assumptions and conclusions of the Corporation are economi-
cally and logically unsound.

In considering the Corporation's economic concept of price competition it
should be remembered that it holds to the theory that for any competitor with a
lower freight rate to any customer to give him any lower delivered price than others
with a higher freight cost is "giving a lower price than competition forces him to
give" and is "following some sort of a non-competitive principle, rather than a
competitive one." (Ex. 1418.)

(a) The Corporation' s Claim That Identical Delivered Prices Result From the Perfect
Competition of a Free Market.

An attempt is made to discredit the economic theory of competition and at the
same time to appropriate the benefit of that theory for the basing point system.
First, the classical economic concept of theoretically perfect competiton "in a
market" is set up in order to show that the concept "is an abstraction and exists
nowhere". (Ex. 1418.) The quotation cited from Dr. Viner's testimony in
the Cement case to support such contention does not support it. He testified
that agricultural products are very nearly a fully competitive industry and that
the only thing that prevented it being so was recent governmental regulation.
The Corporation implies that present-day economists who use the theoretical
concept of perfect competition are unaware that there are deviations from it in
the world of practical affairs and in this respect are unlike the classical economists
who formulated the concept. Present-day economists are no doubt fully aware
that there have been increasing deviations from that concept in the world of
practical affairs and it is to such deviations that their criticisms have been directed.

The Corporation appears to have no objection to the theoretical concept of
'•imperfect competition" as used by economists and states that it "covers the
whole range of conditions between theoretical perfect competition and theoretical
perfect monopoly." (Ex. 1418.)

This is substantially the same as Dr. de Chazeau's description of "administered
prices". Testifying befoue the Temporary National Economic Committee, he
said that "Within the group of prices which are called administered prices you
may have everything from a purely competitive situation to a very monopolistic
situation." (Verbatim Record, T.N.E.C. Hearings, November 6, 1939, p. 182,
2nd column.)

Obviously, the crux of the problem is the nature and degree of imperfect compe-
tition that is embodied in the basing point system. In any event, no conceivable
combination of competitors or monopoly could produce any greater identity of
delivered prices than the basing point system does when it is adhered to.

After having concluded that perfect competition is "an abstraction and exists
nowhere" (Ex. 1418), the Corporation proceeds to claim that identical delivered
prices are the result of perfect competition as conceived by the economists in a
perfect market. Thus, it says —

"It is to be expected * * * thatNthe identity of delivered prices which
would result from perfect competition in a single market at any one time will take
the form of identical delivered prices in the steel industry." (Exhibit 1418.)

Again the Corporation says that it is quite erroneous to imply, as does the Fed-
eral Trade Commission, "That identity of prices at any given time is necessarily
evidence of absence of competition." It then says:

"Quite the contrary is true. In any competitive market, the prices quoted by
different producers at any given time for any staple product will naturally tend
to be uniform." (Ex. 1418.)

The Corporation goes on to assert that —

"Identical delivered price quotations would occur under any free competitive
system to the extent that competitors' bids could be estimated, since buyers refuse

CONCENTRATION OF ECONOMIC POWER 121

to pay more to one producer than to another for a staple product." (Ex. 1418.)
This statement is made in support of the claim that "The basing point system is
not per se the cause of identical bids." (Ibid.) Yet, in another place it is said
that "Substantial identity of delivered prices results" from the absorption of
freight to go into distant markets. (Ex. 1418.) This ignores the systematic
and reciprocal nature of so-called "freight absorption" and of "phantom freight"
which the system requires. If these were not applied systematically and recip-
rocally, identical delivered prices could not result. Except on a systematic
and reciprocal basis they could not take place at all without destroying the
system itself. The economic concept of price uniformity in a free market never
contemplated that no competitor would undersell his rivals.

Although as shown above, the Corporation twice claimed the benefit of the
theory of perfect competition in a market to explain identical delivered prices, it
also said in between the two quotations given that,

"Neither identical delivered prices nor delivered prices of any kind, accord with
the theory of perfect competifton because such theory assumed a freighiless
market in which neither seller nor buyer needed to be concerned with trans-
portation costs." (Elx. 1418.)

While prices in the classical market were freightless, the buyers and sellers were
always concerned with transportation costs from the market to the place of use.
The relative costs of transportation from various markets to the place of use was
a matter of concern just as it would be now if buyers could buy steel f. o. b. mill.
The Corporation says that critics claim that identical delivered prices prove the
elimination- of competition, "because under perfect competition such a thing
would not often happen, i. e., the different transportation costs would usually
cause different delivered prices." (Ex. 1418.) However, it does not dispute
the result and, in fact, substantially admits the conclusion on the next page where
it says that

"Under a f. o. b. mill system, the buyer would add freight to the mill price and
buy from the source which permitted the lowest delivered costs." (Ex. 1418.)
When the three last quoted statements are considered side by side they are equiva-
lent to an admission that an f. o. b. mill method of pricing more nearly accords
with the theory of perfect competition. Nor is it true as the Corporation says
(Ex. 1418) tiiat criticisms of the basing point system assume that perfect com-
petition and its complete absence or monopoly are the only alternatives. The
basing point system is not the only obstacle to perfect competition and there
should be no illusions about the attainability of the ideal. The practical question
is whether existing restraints on competition are reasonable under existing la'^
and the public policy embodied therein.

(b) The Corporation's Distortion of Economic Theory as to the Nature and Location
of Free Markets.

The confusion which may be injected into a discussion of "abstract criteria"'
is illustrated by the Corporation's attempt to appropriate the benefit of classical
economic theory as to the effect of competition on prices "in a market." In
order to give some semblance of logic to this attempt it is necessary to postulate
the market as being at destination. The classic theory of free markets originated
before basing point systems were thought of. It did not deal with the hybrid
of a price for goods at or in a market plus transportation costs from the market
to various destinations.

The Corporation states that the attitude of the Federal Trade Commission
toward the basing point system and its proposed substitute of f. o. b. mill prices
^'are obviously manifestations of a belief that the market for steel is, or should be,
at the mill, and is not, or should not be, at the destination." (Ex. 1418.) The
Federal Trade Commission has never taken the position that under the basing
point system the market is at the mill. It has taken the position that the sys-
tem, with its refusal to sell f. o. b. mill, its insistence on selling only at delivered
prices and the resulting identity of delivered prices, is a device for closing not only
the market at the mill but by eliminating price competition, closing the market
everywhere in the sense that a market is defined by the economists. There is an
important distinction between claiming that the market is at the mill when the
mills refuse to sell f . o. b. mill and claiming that the market should be placed at
the mill as a means of preventing identical delivered prices and the consequent
elimination of price competition. Even under the delivered price system, how-
ever, there is an important question as to whether title does not actually pass to

122 CONCENTRATION OF ECONOMIC POWER

the buyer at the mill and thus make the mill the market place for the transaction
of purchase and sale. The importance of that question and the change in the
industry's attitude toward it was shown in connection with the efforts of the
industry to induce the railroads to assist the industry in preventing diversion
in transit by the consignee. (See F. T. C. Report to President on Steel Sheet
Piling, June 10, 1936, p. 24.)

In another place the Corporation refers to "the contention of the Federal Trade
Commission that the true market for steel is at the mill, and that the basing point
method, by providing a means for quoting delivered prices at each destination,
has destroyed or injured the market and eliminated competition." (Ex. 1418.)
The above quotation is a more nearly accurate statement of the Commission's
position.

The Corporation seems to imply some doubt as to its own position when it
otates, "If there is any true market for steel, it is at the buyers' doors." (Ex.
1418.) In discussing the subject of cross hailing, however, the Corporation
adopts some terminology which can hardly be reconciled with its contention that
destination is the marliet in the sense used by economists. Dr. de Chazeau is
credited with having coined the term "market interpenetration" as a preferable
substitute for the term "cross hauling." (Ex. 1418.) It is plain that a mill
or producing market may penetrate various destinations or consuming markets
and that one producing market may penetrate another. It would seem equally
clear that destinations or consuming markets cannot penetrate each other. The
Corporation's adoption of such terminology is repugnant to the concept of a
market at destination. The economist's concept of the steel market as stated
by Dr. Wm. Z. Ripley in his testimony in the Pittsburgh Plus case was in part
as follows:

"The market * * * is a place (and here I think I am in agreement with
Dr. Fetter) where a commodity is sold, and this commodity we are considering
here is steel. The market for steel is in Pittsburgh or Chicago or Johnstown or
Bethlehem or Duluth or Birmingham, or what-not:'but the market, as I see it,
is not at the place where some steel and some freight and some wind have all
three been hitched up together to form a kind of a combination — in other words,
where an artificial freight rate, which never was paid on that product, is figured
in on it, making up the delivered price. That does not seem to me like a market.
I think entirely in terms of that market at Chicago, where we are dealing only
with steel." (Transcript of Testimony, Pittsburgh Plus case, p. 18240.)

In order to follow through with its contention that the market is at destination
the Corporation makes certain inaccurate statements regarding payment of freight.
It is asserted that when one producer meets the delivered price quoted by other
producers nearer to a consumer's destination, "He must pay the freight necessary
to transport the .steel product to the consumer." (Ex. 1418.) It also refers
to the necessity of a producer selling ^ large part of its output in distant markets
and of it "paying large amounts of freight to each such market." (Ex. 1418.)
In an overwhelming majority of cases and on an overwhelming proportion of the
shipments, sellers of steel do not pay or prepay the freight. The buyer pays the
freight to the railroad, deducts it from the face of the invoice which shows the
delivered price and remits the balance to the seller. Under those conditions it is
misleading for the Corporation to make the statements above quoted and to
claim that "delivered costs are an important part of total costs." (Ex. 1418.)
They are not a part of the seller's costs at all.

The Corporation states that under conditions of perfect competition it is "im-
possible for sellers to get higher prices from some buyers than from others."
(Ex. 1418.) If this be true, then the possibility of getting higher prices from
some buyers than from others becomes increasingly greater as competition
becomes more imperfect and the greater the degree of monopolistic control the
greater the possibility of getting higher prices from some buyers than from
others. Since steel producers use the basing point system for S3^stematicall}''
realizing higher prices from some buyers than from others, it corresponds more
closely to the economic specifications of monopoly than of competition on the
Corporation's own admission. The Corporation also admits that "variable mill
net returns of the kind found under the basing point method do not represent
the uniform market prices which would be expected if the assumptions of the
theory of perfect competition were realized." (Ex. 1418.) Yet, as previously
shown, it inconsistentlj- claims that "The identity of delivered prices which

CONCENTRATION OF ECONOMIC POWER 123

would result from perfect competition in a s'ingle market at anj' one time will
take the form of identical delivered prices in the steel industry." (Ex. 1418.)

The Corporation says that the critics of identical delivered prices point out a
discrepancy between that condition and the results to be expected under the
theory of perfect competition "because the mill net returns of different producers
quoting the same delivered price at one location are not the same." (Ex. 1418.)
Thi's is not an accurate or adequate statement of the critics' position. Not
only do the mill net returns or prices of different producers vary but those of
the same producer vary and in both cases the variation is the exact amount
required to make the delivered prices of all producers identical at given destina-
tions. In this connection it may be observed that fabricators of steel, like steel
producers, have frequently located themselves in the best raw material areas
and that for producers to realize higher prices from their nearby fabricator-
customers is not only to deprive them of their natural advantage of location but
to penalize them for it. As the Federal Trade Commission said in its report to
the President in November, 1934, for the seller to monopolize the advantages of
location inherent in the natural resources of a section to the exclusion of the
buyer is but little different from monopolizing the resources themselves.

The Corporation's statement that it is impossible for sellers to obtain higher
prices from some buyers than from others under conditions of perfect competi-
tion has no logical place in its argument unless it means to admit there is such
discrimination among buyers.

id) The Corporation's Contrast Between Physical Conditions in the Steel Industry
and Concepts of Perfect Competition.

Drawing one of several contrasts between the concept of perfect competition
and the natural physical conditions in the steel industry, the Corporation says
that the concept calls for many separately owned mills at each mill location and
that mills be scattered all over the country near consuming markets, while the
steel industry is characterized by a small number of producers with large-scale
prbducing units and a small number of large buyers. (Ex. 1418.) The Corpo-
ration presents a tabulation which shows that there are nine companies whose
combined capacity represents 81.8% of the total annual capacity of the country.
The tabulation does not disclose the number of companies which comprise the
remaining 18.2 percent. (Ex. 1410.) It is stated also that "The formation of
a new integrated steel company, except by merger, would not be likely" because
of the large capital investment, the technological and organizational difficulties
and the difficulty of obtaining an immediate market. (Ex. 1410.)

Given such facts it would seem all the more vital to preserve among the few
large producers all the characteristics of price competition that are possible.
Doubts should be resolved against any device or cooperative method that in-
terferes with free competition among them. Otherwise, collusive price control
will become almost automatic and absolute monopoly almost inevitable. It is
not the fact, as the Corporation states, that the same general conditions are
"true of all other Industries in our economy." (Ex. 1418.) Even though
it were true it throws no light upon the competitive or monopolistic status of
the steel industry. It is a matter of common knowledge that some other in-
dustries use systems of price control similar to the basing point system in steel.
To that extent it merely confirms the statement of the Federal Trade Commis-
sion to the Temporary National Economic Committee last March to the effect
that the steel industry "is a focal center of a monopolistic infection which, if
not eradicated, may well cause the death of free capitalistic industry in the
United States." (Exhibit 358.)

In one place the Corporation states with reference to the theory of perfect
competition that

"If such a theoretical state of competition prevailed, each producer would
take all the business he could get so long as the price yielded more than the
additional cost of prodticing the additional ton of steel so sold." (Ex. 1410.)

In another place the Corporation states that under the actual conditions in
the industry "in periods of restricted demand, knowing that anything above his
'additional' costs contributes something toward 'over-head' or 'fixed' costs which
must be met in any event, the producer will cut prices below his average costs
if he feels he can obtain additional business for his mills thereby." (Ex. 1410.)
The above two quotations cannot be reconciled with each other. If the state-
ment last quoted be accepted as a statement of actual conditions then those
conditions would correspond to those set up in the first quotation as characteriz-

124 COXCENTRATION OF ECONOMIC POWER

ing a state of perfect competition. Yet it is claimed ia a footnote on the same
page that if the Corporation's subsidiaries sold "at a price only equal to the
additional cost of additional units or production" this would create estimated
losses of about $182,000,000 a year, .far beyond any actual showing of the
industry.

The Corporation quotes Dr. de Uhazeau as pointing out the "basic fallacy" in
the reasoning of most critics of the basing point system as follows:

"Intelligent explanation of the pricing problem in the steel industry has suffered
from a failure of most commentators to distinguish between the basing point
system as a medium or mere mechanism for the translation of policy into action
and the economic roots of that primary policy itself." (Ex. 1410).

The same might be said of any price-fixing medium or mechanism and the eco-
nomic roots of the desire to remove price competition. Even if the distinction
stated were tenable, legal concepts permit taking hold of any system "as a medium
or mere mechanism for the translation of policy into action" if that policy be one
of destroying price competition.

(e) The Corporation's Claim that the Price of and Demand for Steel are Unrelated^

A remarkable effort is made to show that the steel industry is not subject to the
generally accepted economic principle that the demand for an article varies in-
versely to its price. If this effort is soundly conceived and decreased demand does
not reduce steel prices and increased demand does not tend to enhance them, then
it would follow that some form of artificial price control is responsible for the
price changes that do take place. The truth is that where artificial price control
exists, it may or may not be powerful enough to resist the downward price pull of
reduced demand but may yet be able to take advantage of the upward price
tendency of increased demand.

The Corporation states that "The total quantity of steel bought from the m-
dustry would not be substantially different at any particular time if the price
were higher or lower". It also refers to "the negligible influence of price on de-
mand for steel" and states that "steel prices have little effect on national produc-
tion or employment". (Exhibit 1410). Agairr it is stated that the elasticity
of demand for steel products unlike that in the theoretical perfect market "is
extremely low, the demand for steel is very inelastic". (Exhibit 1418). The
Corporation qualifies its statement as to the negligible influence of price on demand
for steel by stating that this does not imply that the industry "may charge any
price its whim or fancy may dictate". (Exhibit 1410).

The position above expressed is not consistent with the attitude of the Corpora-
tion in other connections. The telegram sent by the head of the Corporation re-
garding the price reductions of June, 1938, and which is in the record of the hear-
ings before the Temporary National Economic Committee, said that the reduc-
tions were being made "to meet competitive conditions and with the hope that
such reductions will stimulate a demand for steel products". (Verbatim Record,
TNEC Hearing Nov. 6, 1939, p. 199). Vice-President Gregg testified that the
Corporation did not want to increase its prices in 1937 to such an extent that it
"would prove a shock to the gradually increasing volume of business" and thus
reduce buying. (Ibid, Page 192). It appears also from Mr. Fairless' testimony
and from records supplied by him that immediately following the reduction in base
prices of June, 1938, ingot production increased every month for the remainder of
the year except December and that the increase was from 587,000 tons in June to
1,224,000 tons in November. Mr. Fairless admitted that the price reductions of
June were possibly a factor in this increased demand but "not to any great extent",
"a very small extent", and finally that he "could not tell to what extent". (Ibid,
Pages 200, 201). Mr. Fairless expressed the view that a reduction in an unreason-
able price would stimulate demand but that a reduction in a reasonable price
would not. (Ibid, Pages 199, 201). If Mr. Fairless is right, the conclusion seems
plain either that the price up until June, 1938, was unreasonable or that there was
no relation whatever between the price reductions and the doubling of demand
during the following five months.

In Exhibit 1381 before the Temporary National Economic Committee it appears
that the 1937 composite price is higher than in 1929, that in 1937 there was a
sharp price increase, and that in 1938 prices were reduced to about the 1929 level.
The Exhibit shows that coincident with that 1938 reduction, output' showed a
rapid increase, and that when prices increased in 1937 there soon followed a very
marked reduction in output. (Ibid, Page 186).

In one of its pamphlets, the Corporation argues that assuming a 10% decrease
in prices during 1938 and a sul^sequent 10% increase in sales, the deficit of the

CONCENTRATION OF ECONOMIC POWER 125

Corporation would have been enormously increased. (Exhibit 1410). It is
not apparent why it should be necessary to assume a 10% increase in sales. The
industry showed about a 65% increase in output during 1939 over 1938. If
the Corporation obtained anything like its natural proportion of the total increase
in output, its sales must have increased far more than 10% above 1938. After
making the statements above referred to, the pamphlet refers next to "this overall
price-volume-cost relationship in the industry". It is difficult to reconcile the
above argument with the contention that price and demand are independent of
each other.

By contrast with its conten ion that there is no relation between demand and
price of steel in general, the Corporation nevertheless states that "the underlying
conditions make for a high elasticity- in the demand for the product of an indi-
vidual producer". (Exhibit 1418). It is also stated that manufacturers who
buy steel for use as raw material consider that differences in prices paid by them
are "an important consideration". (Exhibit 1418). It would seem impossible
for an inelastic total demand to be built up out of a series of particular demands
that are elastic.

Referring to the fact that steel prices are relatively stable and inflexible com-
pared with the prices of agricultural products and other consumers' goods, the
Corporation states that "this is a characteristic of durable goods industries, which
results naturally from relatively inflexible costs, proportionately high overhead
costs, inelasticity of demand, and other factors * * *". (Exhibit 1418).
Unless the competitive conditions in other durable goods industries are taken
into account there is no validity in this argument. The characteristics named
may be the result of systems of restricting price competition and not because
they are durable goods industries. Proceeding to justify inflexibility and stability
of price as ends in themselves, the Corporation expresses the views that most
buyers of steel would not like "constantly fluctuating market prices, such as
are characteristic of the prices of grain and other agricultural products". (Ibid).
The argument is that the uncertainties, instabilities and risks that are inherent
in price competition should be removed. One may question how much price
competition would remain if all its uncertainties and risks could be removed.

The Corporation states that the business cycle was ignored in the thinking of
the classical economists and that "The business cycle, however, produces enormous
fluctuations in demand, particularly for producers of durable goods, such as steel.
These fluctuations are independent of price." (Exhibit 1418). This assumes
that price being independent of demand could not bQ the cause of fluctuations
in demand. It assumes that the business cycle is inescapable and ignores the
possibility that the collapse of demand which accompanies it may be the reflec-
tion of monopolistic price factors. There is as much or more reason to say that
enormous fluctuations in demand produce the business cycle, not vice versa.
The Corporation proceeds to state that the business cycle "has a profound effect
upon the supposedly beneficial consequences of the dassipal theory of 'perfect
competition'." It says further that it has been assumed that perfect competi-
tion along classical lines would produce "wholly beneficial effects for society if it
could ever be established". It then says:

"No one, however, has ever contemplated that these effects would follow from
'perfect competition' in an economy affected by a pronounced business cycle. In
the absence of such a demonstration, it is impossible to make any correct assump-
tion that deviations from the theory of 'perfect competition' are damaging to
social welfare. On the contrary, it is quite possible that these deviations, by
interrupting or checking some of the more abrupt changes in the course of the
business cycle, perform a valuable social and economic function". (Exhibit 1418).
Applied to the basing point system, the above quoted language is an undisguised
argument for monopolistic control and would seem to justify still further devia-
tion from the concept of perfect competition.

As to whether monopolistic restraints upon competition are unconnected wita
the business cycle, consideration should be given to the joint statement of one
hundred twenty-seven economists in 1932. They stated:

"The most competent economic opinion, as well in Europe as in this country,
can be cited in support of the view that a strong contributing cause of the un-
paralleled severity of the present depression was the greatly increased extent of
monopolistic control of commodity prices which stimulated financial speculation
in the security markets. There is growing doubt whether the capitalistic system,
whose basic assumption is free markets and a free price system, can continue to
work with an ever widening range of prices fixed and manipulated by monop-
olies." (F. T. C.'s Report to the President, November 1934, Page 39).

226 COXCENTRATION OF ECONOMIC POWER

In discussing fluctuations of demand in the business cycle, the Corporation
states that classical economic theory assumes a steady and predictable rate of
demand and ignores cyclical fluctuations. (Exhibit 1418). This charge that
classical economic theory ignores variations in demand as a factor in price is
not well founded, but the counter charge might be made that the Corporation's
discussion ignores price as an element in demand. It assumes that an unstable
demand requires a stable price and that the price should stand even when the
demand falls. The basic question here is whether maintenance of prices in the
face of falling demand causes, accentuates or prolongs the violent or cyclical
fluctuations in demand.

(/) The Corporation' s Claim That Prices and Profits are Reasonable.

The Corporation shifts from a discussion of the basing point system to a dis-
cussion of the reasonableness of prices and profits in the industry. It takes the
position that prices and profits are reasonable and that this demonstrates the
absence of monopolistic control. To this it may be said that it is idle to discuss
the reasonableness of results when the more fundamental issue is the legal and
economic right to accomplish those results. Moreover, the presence or absence
of monopolistic control cannot be demonstrated by the criteria of prices and
profits.

The Corporation states that the Federal Trade Commission contends that
"the price level is so high as to threaten the survival of the capitalistic system"
and that "the steel industry earns unreasonable or monopolistic profits", (Ex-
hibit 1418). The Commission has not contended that the survival of the capi-
talistic system is threatened by any particular price level per se. It has pointed
out that it is threatened by the destruction of price competition and by inevitable
social control once it is recognized that price competition has been destroyed
and that a permanent monopolistic condition has developed. That position
was expressed in part of the quotation from the Commission's report which the
Corporation cites: "The steel industry is a focal center of monopolistic infection
which if not eradicated may well cause the death of free capitalistic industry in
tlie Ignited States." (Exhibit 1418). The Commission has not contended that
the industry as a whole has made unreasonable or monopoly profits during the
depression years. That question could not be answered without taking into
account the extent to which the industry is permeated with inflated capitalization
and inflated capital costs.

In its report to the Senate on the basing point system in the steel industry and
again in its report to the President on steel sheet piling, the Federal Trade Com-
mission said:

"The price structure of an industry is a very different thing from its price level
and might be seriously deserving of criticism even if the price level on the whole
were little, if any, open to criticism * * *. On the whole, probably a proper
price structure is of far more importance to the public than is merely a low price
level. * * * It has been a general principle of our law and of economics,
that if competitive forces were allowed to act within a proper price structure, a
reasonable-price level would take care of itself." (F. T. C. Report on Steel
Sheet Piling, p. 28.)

Such a position regarding the reasonableness of price is in close accord with
that set forth by the Supreme Court in the case of U. S. v. Trenton Potteries Co.,
et al. (272 U. S. 392). The Court held that agreements which created the poten-
tial power to fix prices might well be held to be unreasonable or unlawful re-
straints "without the necessity of minute inquiry whether a particular price is
reasonable or unreasonalle as fixed and without placing on the governmer* in
enforcing the Sherman Law the burden of ascertaining from day to day whether
it has become unreasonable through the mere variation of economic conditions".
The Court went on to say that the question whether prices were reasonable is
too uncertain a test and an answer "can be satisfactorily made only after a com-
plete survey of our entire economic organization and a choice between rival
philosophies".

In its report to the President on steel sheet piling in June, 1936, the Federal
Trade Commission pointed out a number of reasons which make it impracticable
to determine whether prices and profits are reasonable, once the test of competition
is discarded. It pointed out the necessity of cost information in appraising the
reasonableness of price, the refusal of the industry to produce its costs, the wide
variation in mill net returns or actual realized prices which steel producers are
habitually accepting, the relation of excess capacity and reduced output to cost,
and the wide variation in earnings among members of the industry at a given price
level. It stated that the acknowledged price leader of the industry is not the

CONCENTRATION OF ECONOMIC POWER 127

producer best fitted to produce and sell steel at the lowest price consistent with
a reasonable return on capitalization, that the Corporation ■established a capitali-
zation at the time of its formation which was more than twice the fair market
value of its securities, and had paid dividends on such a capitalization during
many years. (F. T. C. Report to President on Steel Sheet Piling, June 10,
1936, pp. 32-33.)

The Corporation admits that its capitalization was heavily Inflated at the time
of formation and says:

"When the Corporation was formed, various growing businesses were acquired
at prices in excess of the value of their tangible property, resulting in intangible
assets of about $750,000,000 (as later determined by the U. S. Bureau of Cor-
porations) representing the good will 6r earning power of these businesses. While
originally of real value, it has been deemed prudent to write down from time to
time the value of all such intangible items, good will now being valued at $1.00."
(Exhibit 1409, Section A).

The amount named was about 50% in excess of the entire common stock of
the Corporation down to 1927, when a stock dividend brought the total common
stock up to some $711,000,000. Dividends were paid on common stock every
year except two from 1901 to 1931, inclusive, and also in one year since 1931,
The rate of earnings on the "combined investment of stockholders and bond
holders" for the entire period from 1902 to 1930, inclusive, was 6.33%. Despite
the 40% common stock dividend of 1927, the rate of earnings increased from 4.90
in 1927 to 6.01% in 1928 and 9.85% in 1929. (Exhibit 1409, Section A).

The Bureau of Corporations commented upon the Corporation's original capi-
talization as follows:

"When such values are capitalized into dividend or interest-bearing securities,
they involve important public problems. They are merely another name for
price policy, and the whole public is ultimately concerned in steel prices." (F.
T. C. Report to President on Steel Sheet Piling, June 1936, p. 34.)

As the Federal Trade Commission said in its report to the President in June,
1936:

"The ability of the Corporation to pay dividends on such a capitalization
during many years certainly has some hearing upon the question whether prices
have been fair and reasonable. In this connection, it may be observed that over
capitalization can hardly continue to exist under genuinely competitive conditions."
(Ibid, p. 34.)

The Corporation quotes from an economic study of 'the industry by "qualified
commentators" to the effect that the steel industry showed a relatively low return
on capitalization compared to other industries. The Corporation quotes from
this report in part as follows:

"Explanation of the persistent and relatively low rate of earnings in the steel
industry is not easily formulated. It is, of course, possible that the steel group
has placed a higher valuation on its assets than have corporations in other
industries, but the validity of such a surmise cannot be deraonstrated." (Exhibit
1418).

In any study of the reasonableness of prices and profits, a vital point is whether
the study is based on and proceeds from the standpoint of the industry as a
whole or from the standpoint of different members of the industry. In a com-
petitive industry even under highly prosperous g neral conditions there are
always marginal units whose profits are not adequate -Because of higher costs
than their more efficient rivals. Likewise,, there are always some which show
adequate or more than adequate profits. Yet they all operate upon an approxi-
mately similar level of prices. Under a competitive regime, it is to be expected
that what is a fair and reasonable price for one producer may be wholly inade-
quate for another. A fair and reasonable price for the marginal concern is bound
to be excessive for the more efficient, low-cost producer. To average the profit
showing of a competitive industry in order to ascertain the reasonableness of the'
price level is to discard the fact that the industry is composed of competitive units ■
and to treat it as though it were an entity entitled to a return on its entire property.
Then there is the question of rate of: operation, one of the most powerful factors
affecting cost. Competitive theory requires that the efficient low-cost concern'
shall "be allowed and encouraged to operate at a substantially higher rate of
production than its less efficient, higher-cost competitors and at a higher rate-
than the industry average. If it does not do so, this indicates that competition
has been displaced by some kind of cooperative policy. '

All these phases of the question of reasonableness of prices and profits are
illilstrated by the testimony of Ernest T. Weir, President of the American Iron

128 CONCENTRATION OF ECONOMIC POWER

and Steel Institute and heaa of the National Steel Corp. Mr. Weir testified that
he would want base prices established at a level that would cover the costs of
every individual company, that none "of the standard companies are justified in
selling the product below cost, on the average" and that every company should
sell on a basis which would yield it cost plus a reasonable profit. (Verbatim
Record, TNEC Hearings, Nov. 10, 1939, p. 309). He testified further that his
company did not base its price or volume upon its own costs but upon a kind of
live and let live policy and in consideration for the welfare of the industry as a
whole. (Ibid, p. 310). He further testified that his company did not use its
lower average cost and better average location "to go out and operate, we will
say, full, when the balance of the industry can't meet those costs and operates at
30% or 40%. We "try to take that in additional profit". (Ibid, p. 302). Yet
during the ten years ending in 1936, including the worst years of the depression,
the National Steel Corporation earned about G}i%, while the industry earned on
the average 2.9%. (Ibid, pp. 302, 303). Mr. Weir also testified that in the
nine years ending in 1938, the industry as a whole showed a loss of $80,000,000
on the common stockholders' investment of $2,000,000,000 and that a 35% rate
of operation should be the break-even point in the industry. (Ibid, p. 300).
Mr. Fairless, President of the Corporation, testified that the rate of operation in
1938 "should have at, least reflected a break-even point" but that losses had
occurred because prices were too low. The rate of operation for the entire indus-
try in 1938 was about 39%. (Exhibit 1409, Section D). In a public address,
however, delivered by Mr. Weir in October, 1939, he had stated that price could
not be the subject of cooperation among competitors and in that connection said:

"A price pblicy is one that must be established by each individual company in
accordance with, cost and other factors peculiar to that company." (Verbatim
Record, TNEC Hearings, Nov. 10, 1939, p. 299).

He also stated in -this address that:

"You must charge a price, under any given condition, which covers all of your
costs — including the cost of carrying unused capacity — and returns a reasonable
profit." (Ibid, p. 298).

A position similar to that of Mr. Weir was taken by Mr. Eugene Grace of the
Bethlehem Corporation. In a letter written to Mr. Grace in May, 1938, a small
business man engaged in the steel industry urged price reduction' as a means of
industrial recovery, reciting that the Bethlehem Company working at only 32%
of capacity had shown a profit of over $900,000 for the first quarter of the year.
In reply Mr. Grace said the operating rate was somewhat higher than 32% and,
concerning the suggestion of reduced prices, said among other things: "the
opportunities for stimulating business through price reduction should be looked
at from the point of view of the steel industry as a whole rather than the case of
a single company." (Ibid, Nov. 9, p. 279).

Another angle from which to consider the reasonableness of prices is that of
differentials between various basing point prices on the same products. For
many years, down until June, 1938, the base prices at Birmingham and Chicago
exceeded those at Pittsburgh by several dollars per ton, notwithstanding the
fact as shown in the Pittsburgh Plus case, that the cost of production at Birming-
ham and Chicago substantially was less than that at Pittsburgh. In stressing the
importance of raw material assembly costs as a factor in the location of mills, the
Corporation presents a table of estimated assembly costs in the production of
pig iron. The range of variation shown is $1.28 per ton, and no showing is made
for Birmingham or Sparrow's Point. (Exhibit 1410). Nevertheless, it is stated
that assembly costs at Birmingham are undoubtedly the lowest in the country
and that at Sjiarrow's Point, iron ore costs are less than at Lake Erie and Pitts-
burgh, although, this is partially offset by higher assembly costs for coal and
limestone. (Exhibit 1410).

Quoting from the N. R. A. Report, the argument is made that strong nonbasing
point mills upon becoming basing points "are likely to be able to afford the luxury
of putting their nearby customers on a more favorable basis by quoting basing
point prices more nearly comparable with 1hose in force at other basing points".
(Exhibit 1418). The ability to afford this "lixury" did not prevent the addition
of substantial price differentials when Chicago and Birmingham were made
basing points. It did not prevent the establishment of a $2.00 differential on
sheets at Detroit and of $3.00 at Monroe, Michigan. (Exhibit 1418). The
$2.00 differential at Detroit is effective at the mill location of the National Steel
Corporation, whose profit showing, as previously described, is one of the most

CONCENTRATION OF ECONOMIC POWER 129

favorable in the industry. Moreover, the pig iron assembly costs at Detroit
are 77ji per ton less than at Chicago. (Exhibit 1410).

Shifting from its previous argument that strong mills were able to afford the
luxury of lower prices upon becoming basing points, the Corporation says in
explanation of price differentials over Pittsburgh that "new mills needed higher
prices in order to cover their higher costs and to provide capital funds for expanding
their facilities". (Exhibit 1418). As previously shown, the costs at Gary and
Birmingham were substantially lower than Pittsburgh, while the base prices
were substantially higher.

The issue of reasonable prices and profits having been raised, it cannot be
adequately analyzed without considering whether there is a fair and reasonable
distribution of the price and profit load among various sections of the country,
among various classes of consumer^ and among individual consumers. In this
same connection, the fact should be considered that base prices at Pacific Coast
ports on some products are the equivalent or more than the equivalent of base
prices in the East, plus transportation jcosts to the Pacific Coast, plus unloading
and dock charges there, although some of the products so priced are produced at
mills on Ihe Pacific Coast.

The Corporation's argument that prices and profits disprove the existence of
monopolistic control in the steel industry should be considered in the light of a
■quotation it makes from the N. R. A. Report. After reviewing the trend of steel
prices over a period of years, the N. R. A. Report said:

"All these examinations of evidence are instructive but fall short of proving a
conclusive ease for or against the existence of monopolistic control." (Exhibit
1418).

The Corporation nevertheless continues the quotation from the N. R. A. Report
to the effect that:

"There are not only no monopoly profits at the present time, but no sustained
profits of a clearly monopolistic character during the more recent years of pros-
perity." (Ibid)

Supplementing the above argument, the Corporation cites an economic writer
to the effect that "evidence of imperfect functioning of competition" in any
industry may be found in any one or a combination of three elements, the existence
•of excessive profits, excessive productive capacity or excessive selling costs.
The argument proceeds on the assumption that those three elements are^"criteria
•of the lack of competition". (Exhibit 1410). The three elements named are
not even proposed as proving anything more than an "imperfect functioning of
competition" which, as the Corporation states elsewhere, "covers the whole
range of conditions between theoretical perfect competition and perfect theo-
retical monopoly, neither of which actually occurs in the business world". (Ex-
hibit 1418). The basic assumption of the argument is that the only cause of
excessive profits, excessive producing capacity and excessive selling costs is
monopohstic interference and that certain supposed monopolistic results must
be shown before monopoly can exist. Radically different results will be obtained
■depending on whether the three elements named are considered collectively for an
entire industry or for the various members of the industry separately. In com-
paring the earnings of the steel industry with those of other industries, the Cor-
poration based the comparison upon the ratio of earnings to net assets. (Exhibit
1410). This entire basis of comparison is upon the unchecked claims of various
industries as to the value of their net assets which opens the door to any inflation
of those assets which may be present either in capitalization or in costs. The
table of comparative distribution costs has no validity as a comparison of the
distribution costs of steel producers unless it is known what types of concerns are
included in the classification of iron and steel and for other products. (Exhibit
1410). The argument is also made that "prices cannot be out of line with total
costs over any considerable period" because substantial fixed costs must be
met regardless of the amount of steel produced. (Exhibit 1410). This argu-
ment ignores any di'stinction between the varying costs of different producers
and urges that the total fixed costs of the industry must be met without regard to
whether those costs are the reflection of inflated capital assets or whether that
inflation is in turn the reflection of monopolistic practices. Despite the above-
described fallacies in the argument, the Corporation reached the conclusion that
since excessive profits, excessive capacity and excessive distribution costs do not .
exist in the steel industry "it is suflficiently competitive to be free of the alleged
■evils of lack of competition", (Exhibit 1410).

130

CONCENTRATION OF ECONOMIC POWER

THE CORPORATION DEFENDS CERTAIN UNECONOMIC RESULTS OF THE BASING POINT
SYSTEM ON THE PRINCIPLE OF VESTED INTERESTS

Apparently great reliance is placed upon the argument that whatever the legal
and economic status of the basing point system may be the steel industry and those
dependent on it have so adjusted themselves to the system that to disturb it
would cause substantial economic dislocation and disruption. In the last analysis
this is the familiar vested interest theory. To accept its validity is to recognize
vested rights in the continuance of social wrongs and vital economic maladjust-
ments. It is to paralyze the arm of government in correcting those conditions.
It suggests the unwelcome thought that private monopoly may be more powerful
than government. It leads directly to the inference that such wrongs cannot or
should not be righted within the framework of the capitalistic system of free

In pursuance of this line of argument the Corporation states that bankruptcy
and permanent retirement from business and "the causes thereof were not con-
templated in the theory of perfect competition". (Exh. 1418). In the interest
of the capitalistic system that statement can and should be challenged. It is
the essence of the vested interest argument. It is wholly untenable on broad
principles of economics and public policy. It draws any persuasiveness it may
have from the degree to which competition may have already lost its vitality as
an economic disideratum. Unless competitive forces do bring bankruptcy and
retirement to concerns whose costs and overhead are higher than those whose
output and services are sufficient to supply society's needs, an ever ascending
spiral of costs and prices is invited, to the point where a cyclical collapse of the
whole economy takes place with all its terrific repercussions. The capitalistic
system cannot function normally without risk of bankruptcy and retirement for
some of those who engage in business in the hope of profit. And unless it so
functions as a normal incident, cyclical depressions may destroy its ability to
function sufficiently to meet the simplest basic needs of the people.

(a) The Corporation's Defense of Excess Capacity:.

The Corporation takes several mutually inconsistent positions with regard to
this subject: first, that excess capacity does not exist; second, that if it exists^
there is no way of measuring the amount of it; third, that there is no feasible way
of eliminating it; and fourth, that it has certain economic advantages which justify
its preservation.

A great deal of space is devoted to a description of alleged ambiguities and
uncertainties in the position of the Federal Trade Commission regarding excess
capacity. The Corporation admits, however, that the Commission's position is
not so ambiguous and uncertain v/hen it states later that "the criticism of the
Federal Trade Commission may, however, be taken to mean that the basing point
method maintains prices at higher than competitive levels, thus attracting too
many producers and causing the installation of excess capacity". (Ex. 1418).
That is a fairly accurate statement of the Commission's position, which is that
long-continued' suppression of price competition inevitably tends to encourage
the building of unnecessary plan+«. The Corporation itself does not challenge
the soundness of this position and it is supported both by theory and experience.
Of course, the Corporation does challenge the contention that competition is
suppressed by the basing point practice.

Contending that excess capacity does not exist, the Corporation states:

"The capacity of the industry, including reserve capacity, is not more than suffi-
cient to supply the needs of the country during periods of high demand, such as
1929, 1937 and the present time." (Ex. 1418).

Again it states that the total capacity of the industry "includes reserve capacity
barely sufficient to supply peak demands." These statements are refuted by the
figures of capacity and production submitted by the Corporation in Exhibit 1409.
The total ingot capacity for the year 1929 was some 63,000,000 tons, as against
a total ingot production of some 56,000,000 tons, an excess of about 12><%. In
1937, the total ingot capacity was .some 69,000,000 tons, as against a total ingot
production of about 50,000,000 tons, an excess of 38%- Figures for 1939 are not
yet available but despite the heavy production injthe latter part of the year, it is
quite improbable that the total production for the year approached anything
like the total capacity.

The capacity and production figures in Exhibit 1409 include each year between
1901 and 1938. In only one of those years did the total production of the industry
exceed 90% of the total capacity. That was in 1916 when war demand temporarily
taxed the productive facilities. In 24 years out of the thirty-eight shown, the total

CONCENTRATION OF ECONOMIC POWER 13][

production was less than 75% of total capacity. In 10 years it was less than 60%.
In 8 years it was less than 50%, and in 6 years it was less than 40%. The average
percentage of production to capacity by decades is as follows:

1901-1910 68. 26%

1910-1920 77. 65%

1920-1930 70. 54%

1930-1939 44. 55%

An outstanding fact of these figures is that excess capacity in the steel industry
is not the result of the depression which began in 1929. It has characterized the
industry since the Corporation was formed about the beginning of the century.

A more exact method of determining whether excess capacity exists is to con-
sider the facts regarding particular products. For example, the Corporation states
that the recent introduction of continuous hot strip mills and the continuous cold
reduction process has caused a major technological revolution. (Ex. 1410).
This revolution has taken place within less than ten years, and the result has been
to make the output of hand mills largelj' unnecessary. These new processes
affect primarily the manufacture of sheets, strip, and tin plate, and it is probable
that the greatest excess capacity is in those products. The American Iron &
Steel Institute figures for 1938 show that less than one third of the 52 companies
producing hot rolled sheets and hot rolled strip had a combined capacity more than
twice the total production and that the 52 companies had a combined capacity
about two and one half times the total amount produced.

Arguing that there is no way to measure excess capacity, the Corporation states:
"When idle capacity exists, however, there is no way of telling how much, if any,
thereof constitutes excess capacity." (Ex. 1418.)

The opinion of Dr. Thorp of the Department of Commerce is cited to the effect
that it is impossible to formulate any test of excess capacity. (Ex. 1418.) In the
same connection, it is stated that "the criticism of the Federal Trade Commission
infers that steel capacity has been accurately measured agamst a correct standard
and has been found to be excessive." (Ex. 1418.) The Commission has never
undertaken to measure the degree or extent of excess capacity. Competition is
the only proper method of determining how much reserve capacity is needed. If
competition is not allowed to determine it, it is then left to the determination of
individuals who have a common interest in preventing excess capacity from break-
ing down the price structure which brought excess capacity into being.

It is not necessary to know exactly how much excess capacity exists before tak-
ing steps to eliminate it, when price competition would automatically eliminate it.
If the Corporation is correct in stating that there is no way of telling how much of
the idle capacity constitutes excess capacity, it would follow that there is likewise
no way of telling how much of the idle capacity constitutes proper reserve capacity.
If it is right in quoting Dr. Thorp to the effect that there is no feasible test or
standard for measuring excess capacity, then it foUows that the Corporation has
an uncertain ground for its contention that excess capacity does not exist.

It is also argued that the merits of the criticism of excess capacity cannot be
accurately appraised without comparing the actualities of production and plant
location with potentialities of production and plant location under a wholly
different pricing system which has not existed. (Ex. 1418). Later on, in con-
nection with its attack upon an f. o. b. mill method of pricing, the Corporation
does not hesitate to compare an actuality with a hypothetical situation. As a
matter of fact, since two systems coiild not be in effect at the same time and place,
even a comparison between two actualities might be invalidated by differences in
time and circumstance.

Arguing that there is no feasible method of eliminating excess capacity, the
Corporation refers to outmoded machinery and mills which have not been operated
for some time and implies that the Federal Trade Commission would -contend
that such property "should have been scrapped immediately, their capacities
deducted from total capacity figures, and their value written off from the assets of
their corporate owners". (Ex. 1418). It goes on to state, with reference to
scrapping of mills with decreasing demand in a downward phase of the business
cycle —

"It is not entirely clear whether the implication is that this should occur as a
voluntary policy of scrapping miUs in order of age, or degree of obsolescence,
or that it should occur as a natural, economic result." (Ex. 1418).

It should be entirely clear that the scrapping of mills and machinery repre-
senting excess capacity should occur as a natural, economic result of competitive
conditions. It is not to be implied that tH^ owners of such properties should

292918 — 41— No. 42 10

J 32 CONCENTRATION OF ECONOMIC POWER

iscrap and write them ofif voluntarily. There is a clear distinction between
voluntary scrapping and writing off of such properties and involuntary action
forced by pressure of competition.

Arguing further the impracticability of eliminating excess capacity, the Corpo-
ration states that mills would not necessarily be eliminated in order of their
degree of obsolescence but that comparative financial strength would influence
the outcome and "play a decisive part in determining which mills were elimi-
mated". (Ex. 1418). Since disparity in financial strength has always been
a factor in determining the outcome of price competition, this is really an argu-
ment that the theory of price competition is not sound. However defective the
theory may be in the respect pointed out, the question persists as to whether
there is any equally satisfactory substitute. The Corporation argues that an
integrated producer making a wide range of products might find that a low price
on some of his products could be recouped by high prices on others, and he would
thereby be enabled to drive out of business a nearby producer making only a
limited range of products. This line of argument is suggestive of a threat to
use the power of integration and superior financial strength to drive out com-
petition.

In its argument that excess capacity has certain advantages from a public
standpoint which would be destroyed if excess capacity were eliminated, the
Corporation states that any substantial reduction in capacity would probably
leave less than is required for peak demand with the result of rapidly rising
prices in the upper course of the business cycle. (Ex. 1418). Again, it is urged
that if excess capacity be eliminated there would be a tendency "in the direction
■of the skyrocketing of prices in periods of rising demand". (Ex. 1418). This
ignores the fact that there have been very rapid increases in price at times in
the face of existing excess capacity. Fur example, the base price of heavy
structural shapes at Pittsburgh increased from l.oOi per pound in February,
1932 to l.60j6 in April, 1932, where it remained until September, 1933, when it
increased to 1.700, jumped to 1.85(4 in May, 1934, dropped to 1.800 in August,
1934, where it remained until July, 1936, when it advanced to 1.90, to 2.05 in
January, 1937, 2.21 in March, 1937, and 2.25 in April, 1937, where it remained
until June, 1938. The base price of cold rolled sheets at Pittsburgh was 2.95f5
per pound in June, 1936, advanced to 3.05 in Julv, to 3.25 in December, to 3.49
in March, 1937, and to 3.55 in April, 1937. (Ex. 1409, Section C). Other
illustrations of the same sort might be given. Even though it were a fact that
excess capacity tends to prevent rapid upsweep in price during boom periods,
the question would still remain whether it is cheaper to pay higher prices because
of a temporary shortage of productive facilities until they are enlarged sufficiently
to overtake demand, or to pay for maintaining the excess capacity during all
the periods when demand is low. That question, of course, cannot be answered
on any mathematical basis as Dr. Thorp cleai'ly indicates.

In connection with a discussion of costs, the Corporation implies that it is
good public policy to subsidize producers whose output is not necessary to meet
the existing demand. The question thereupon arises as to who shall determine
how much excess capacity should b^ subsidized. If competitive forces are not
allowed to determine that question, it is evident that the resulting tendency is
to inflate capital costs, overhead and capitalization. If there are excess capacity
and inflated capital costs resulting therefrom in any industry, what corrective
is there in any free economy other than competition?

The Corporation quotes from Dr. Thorp to the effect that there is a degree of
excess capacity "which is probably taken into practical financial account through
charges for depreciation and obsolescence, and through vaqous other forms of
liquidation of capital". (Ex. 1418). Such charges and such liquidation of excess
■capacity, of course, are an effort to evade the physical scrapping of excess facilities
and to include them in costs just as though they were actively employed.

In an editorial entitled ''Excess Capacity is Burden to Steel", the trade maga-
zine Steel produced figures' to show that the average ratio of ingot production to
capacity for the period 1926-1937, inclusive, was 59.55%, and that this 60%
■of capacity earned in the same period 3.49% on the capital invested in the entire
capacity, after absorbing depreciation and overhead on the idle 40%. It stated
that these facts suggest that steel, "instead of being a $4,281,264,890 industry,
actually would be capitalized at considerably less if much excess capacity whose
future usefulness is problematical, were scrapped." It also stated that the facts
suggested that the industry, "always plagued with obsolescence, is slower than
it might be in charging off depreciation." (Steel, July 18, 1938, p. 39.)

CONCENTRATION OF ECONOMIC POWER 133

<(6) The Corporation's Defense of Existing Mill Locations.

The Corporation states that "The location of production facilities has been
•due to the fundamental economic traits of the steel industry which have already
been set forth, rather than to any pricing system." (Exh. 1418). Again it states
that the present location of mills "cannot be attributed to any pricing method."
If this is true then the ending of the basing point method of pricing would not
cause dislocation and disruption of mill locations.

The above quoted claims are contradicted however by the Corporation's own
statements in another place. For example, it says that in many respects the
Pittsburgh Plus method of pricing had a natural tendency to encourage the
location of mills elsewhere than at Pittsburgh in order to increase their mill net
returns by adding the freight from Pittsburgh to their mill locations. It also
says that similar motives underlay the establishment of price differentials over
Pittsburgh at other basing pomts and that "Mills at Pittsburgh enjoyed a Nation-
wide market with normally even mill net returns." (Exh. 1418).

The fact that the basing point system has had some bearing upon mill locations
is confirmed by testimony before the Senate Committee on interstate commerce
in March, 1936. The President of the Laclede "^Steel Company of St. Louis testi-
fied that its plant had been located in St. Louis because of the prospect of making
money "by selling for more than it cost, on account of the protection we got, on
account of the Pittsburgh Plus in existence at that particular time." The Presi-
dent of the Thompson Wire Company of Boston, Massachusetts testified that his
• company was "typical of many others who have been enabled by the basing point
method to ejiter the steel business in the past decade and maintain their position
with fair success." (Printed record of hearings on S. 4055, pp. 123, 146.)

Such testimony from non-basing point mills is to be considered with the Cor-
poration's statement elsewhere that "the possibility of a non-basing point mill
realizing mill net returns higher than those obtained by competitive mills at basing
points, is not due to the absence of a basing point, but to a geographical advan-
tage." (Ex. 1418.) The truth is that every mill probably has some geographical
advantage, no matter what the pricing system is, but from a price standpoint is
protected in it to the full under the basing point system.

The Corporation, however, does not merely take a partially inconsistent posi-
tion. It completely reverses its position that the present location of mills "cannot
be attributed to any pricing method." It does this by arguing that practically
all the mills were located where they are because of the basing point system of
pricing and that the natural advantages of their location are not sufficient to justify
their continuing at those locations without the aid of the basing point system.
Thus it says, referring to the producer's problem of finding a price F. O. B. mill
that will cover his total costs and also provide a large enough sales area to keep
"his mill operating at an economical rate:

"If any mill's costs and geographical relation to its customers should be such
as to permit a satisfactory solution of this problem, it would be an exceptional
case." (Exh. 1418.)

The Corporation states:

"The Federal Trade Commission's theory seems to be that steel mills should be
located near the markets for steel products — in effect that they should be scattered
•over the country wherever there is a market regardless of other consideration."
(Exh. 1418.)

This is not a correct statement. It corresponds more nearly to what was done
by some non-basing point mills which established themselves away from Pitts-
burgh and in the vicinity of large consuming markets in order to take advantage
of the "phantom freight" from Pittsburgh to their nearby customers. There is
no way of determining which mills are properly located without the competitive
test of consumer preference on a price, quality, and service basis as between the
mills at various locations. Mills should not have been located on the assumption
that phantom freight could be collected indefinitely or that the basing point system
would contuiue and that price competition need not be expected.

Referring to any further scattering of mills into various consuming territories,
the Corporation argues that "If they were located outside the Northeastern United
States they would be farther from raw materials than the corresponding capacity
is today, and their assembly costs would be higher." (P^xh. 1418.) This state-
ment overlooks the fact that there has been a great development of the steel
industry in the Middlewest and that production costs there have been lower than
in the Pittsburgh District. The statement gives no consideration to the feasibility
of using iron ore near its place of production in the Middlewest, especially with
fuel being available in the form of oil and natural gas. Unless all mills are equally

2^34 CONCENTRATION OF ECONOMIC POWER

well located which of course is inconceivable, it follows that some of them are
disadvantageously located from a competitive standpoint. The entire argument
of the Corporation is devoted to a defense of the status quo of mill locations in
the entire industry,

By contrast with the dearth of detail regarding unit costs of production, the
corporation gives much space and emphasis to the importance of overhead and
capital costs in the steel industry. The argument is obviously addressed to a
rationalization of overhead and capital costs. There is no showing, however, of
the proportion that these two kinds of costs have to each other or to total costs.
Data from which the reasonableness of costs may be tested are not presented for
examination.

It is asserted that "large scale integrated operations produce steel at a lower
cost per ton than small ones." (Ex. 1418.) No unit costs are presented in
support of this assertion. Moreover, no light is thrown on the crucial question
whether the overhead and capital costs of some large scale integrated companies
may not so far exceed those of smaller concerns as to make the former's total costs
per ton exceed the total costs of the latter.

The argument then proceeds with the above unsupported assertion as a premise.
It is urged that since large integrated operations produce low costs such operations-
must have a wide area of distribution in order to maintain those low costs, and
that consideration must be had for the price policy of other competitors and its
eflfect on the steel markets of the entire country. (Ex. 1418.) The suggestion
implied in this argument is that the identical delivered prices of the basing point
system are somehow necessary to maintain the low costs of production of large
scale integrated companies. The simple truth is ignored that low costs make
possible low mill prices and that low mill prices would provide a wide area of dis-
tribution. The question may be raised as to what benefit the consumer gets from
low cost and wide distribution accompanied by the loss of price competition and
attained at such a sacrifice. Again the point may be stressed that there is no .
assurance that low unit cost of production may not be offset, or more than oflFset,
by high overhead and capital costs.

Without providing any means for measuring such costs on a unit basis, the
Corporation stresses their importance. Thus, it says that "a large proportion of
the costs in the steel industry are overhead costs, which must be met, no matter
how much or how little steel is produced," (Ex. 1418) and that "the cost structure
in the industry is marked by substantial fixed costs which must be met regardless
of the amount of steel produced." (Ex. 1410) It is also stated that the two
most important factors in cost are, in order of importance, raw material assembly
costs and capital investment required per ton of steel. (Ex. 1418) Since the^
first of these factors involves the second, the second will also be a partial reflection'
of the first.

It is also stated that "the capital investment per ton of steel is high and the
annual turnover is relatively low, compared witli many other industries." (Ex.
1418) In its argument that ending of the basing point system would involve
dislocation and relocation of industry, the corporation says that "scattered mills
mean a much higher per ton investment cost than under existing conditions,
and would present a serious economic danger to the industry in periods of low
demand." (Ex. 1418) The nature of this danger is not stated, but it may be
surmised that the temptation to reduce prices in such periods is not excluded.
Whether the corporation itself has "scattered mills" within the meaning of
the above quoted statement is not known, but it does have mills that are widely
scattered, and were Avidely scattered when they were taken over, to the accom-
paniment of high infusions of "water" into the Corporation's capital structure.

In this connection, a study of the industry's capitalization per ton of ingot
capacity is illuminating. A portion of these facts as to four producers only was
presented in the Federal Trade Commission's report to the President on Steel
Sheet Piling in 1936. (P. 32) The magazine "STEEL" tabulated the 1935
earnings, capitalization, assets, and liabilities of twenty-three producers who
represented an aggregate annual ingot capacity of over 63,000,000 tons, or 90%
of the total capacity. The magazine also translated some of that information
into terms of per ton ingot capacity. The range of capitalization per ton of
capacity was from $12.60 to $185.71. Only three concerns were capitalized at
more than $100 per ton of capacity, and they are engaged largely in the production
of special alloy steels. Excluding them, the highest per ton capitalization was
$72.41. The corporation's capitalization per ton was $62.41, and was the third

CONCENTIIATION OF ECONOMIC POWER 135

highest of twenty producers. Twelve of the twenty producers, however, showed
a capitalization of less than $50 per ton of capacity, six less than $40 per ton, and
three less than $30 per ton.

The significance of these facts is that concerns with relatively low capitalization
per ton of capacity are thereby equipped to produce steel and pay satisfactory
returns on their investment at a price level that would not permit concerns with
higher capitalization to pay any returns thereon. To argue generalities about
high capital costs per ton of capacity is to ignore these wide differences among
supposedly independent competitive enterprises. It assumes that such differ-
ences should not express themselves in the form of price competition lest the
relatively high capital costs of some concerns be reduced. It is an extension of
the vested interest principle to include the capitahzation of anticipated earning
power based on monopolistic suppression of price competition. If any inflation
of capital costs does exist, the argument is perfectly calculated to protect and
■continue it.

The Corporation states that "the average investment required for a modern
steel works of efficient size is approximately $100,000,000," exclusive of invest-
ment in operations prior to the assembly of raw'materials at the plant site. (Ex.
1410.) The implication is that smaller plants and smaller companies are not
efficient. This is to be considered in connection with the fact that in 1935
only ten out of twenty-three companies, representing 90% of the total ingot
capacity of the industry, each had assets running as high as $100,000,000 and
four of these ten each had less than $125,000,000, total assets. ("Steel," May
11, 1936)

The close connection between overhead and capital costs and excess capacity
should not be overlooked. As the magazine "Steel" said in an editorial on
excess capacity, steel, "instead of being a $4,281,264,890 industry, actually would
be capitalized at considerably less if much excess capacity, whose future useful-
ness is problematical, were scrapped." ("Steel," July 18, 1938, p. 39)

{d) The Corporation's Claim That Substitution off. o. h. Mill Pricing for the Basing
Point System Would Dislocate Industry and Create Monopolistic Conditions

In no respect does the Corporation's defense of the basing point system more
•clearly invade the realm of economic sophistry than in its argument that abroga-
tion of the system in order to restore price competition will mean in fact the
€stablishment of monopoly. Building upon the premise that the innovation of
price competition would produce important changes in the physical and geo-
graphical characteristics of the industry, the Corporation magnifies such changes
to the point of suggesting that price competition would be the equivalerit of
economic disaster. Apropos of this it might be said that unless pi ice competition
would produce some important changes it would not be worth insisting upon.
The changes that might result would simply be the automatic measure of the
need for them, provided our social and economic philosophy is not to be basically
and permanently altered.

The Corporation's argument combines the contention that the basing point
system is competitive with the claim that its abrogation would therefore destroy
competition and create monopoly. But the most insinuating part of the argu-
ment is that in the process of changing from one type of economy to the other
the result would be financial losses, dislocation of industry, increased unemploy-
ment, and consequent detriment to the public. This is the vested interest
argument at its ultimate. It could have been applied with equal force to the
institution of slavery or to any other institution that has conflicted with basic
public policj' as does private monopoly.

The Corporation's contention as to dislocation and disruption of industry is
that the only substitute suggested for the basing point system is one of f . o. b.
mill prices uniform to all customers. As shown hereafter this is a misconception
and the conclusions based upon that contention as a premise are therefore beside
the point. Aside from that, however, the Corporation attempts to measure the
extent of dislocation resulting from a hypothetical f. o. b. mill price on sheets,
one of the most important rolled steel products. As to that product, it endeavors
to demonstrate that a series of local or sectional monopolies would result. An
analysis of this attempt will now be made.

A striking fact is that in making this attempt the Corporation employs a
technique which it elsewhere says is not accurate. Thus it says:

"It is impossible to measure quantitatively the amount of transportation costs
which might be considered unnecessary from any point of view, and it is equally
impossible to measure the economic costs which would result from any inter-

236 CONCENTRATION OF ECONOMIC POWER

ference with present practices, or, more specifically, from any direct or indirect
limitation of selling territories." (Ex. 1418.)

Again it says:

"The effect of the basing point method upon the flexibility of steel prices
could only be measured accurately by comparison of present prices with prices
which would have existed in the absence of the basing point method. Such
alternative prices cannot be known, as it cannot be determined what practice
would have developed if the basing point method had not been used, and thus it
cannot be estimated what effect this other practice would have had upon prices."

To a similar effect is a statement made with reference to the criticism that the
present location of mills is the result of the basing point system, as follows:

"An accurate appraisal of this criticism would require comparison of the
existing facilities at Pittsburgh and other large basing points with those which
would exist there if the Pittsburgh plus and basing point pricing methods had not
been in use. Such comparison would require an examination of the extent to
which any pricing practice could affect the location of production facilities,
what practice would have been followed in the absence of Pittsburgh plus and the
basing point method, and what effect such different practice would have had
upon the location of production facilities. There is no way by which the present
steel producing facilities can be compared scientifically with those which would
have existed under other conditions."

The above-admitted infirmities in the technique employed by the Corporation
are enough to vitiate the conclusions that are worked out from certain assumptions
with much more elaborate detail and show of scientific exactitude. But there are
other fallacies that may be pointed out. Discussing the probable effect of a
mill price method, the Corporation says:

"An isolated producer would be protected from other producers by a wall of
freight rates, and would be able to charge high prices to consumers in his own
area." (Ex. 1418.)

Whatever protection is given an isolated producer by a wall of freight rates
is given in fullest possible measure under the basing point system. He would
violate a cardinal principle of the system if he did not avail himself of that pro-
tection. It is also argued that under f. o. b. mill pricing the prices at each mill
would be identical since "otherwise the mill with the lowest price would obtain
all the business." (Ex. 1418.) This overlooks the fact that identical mill
prices could not produce identical delivered costs in view of the difference in
transportation charges. The Corporation also says:

"Under the proposed uniform f. o. b. mill base system, unless the isolated
producer's prices were exceedingly high outlying producers could not afford to
name a price enough below his to take any substantial part in his market.'*
(Ex. 1418.)

That is exactly the situation under the basing point system. No matter how
high the isolated producer's mill net price, no matter how much "phantom freight'^
is included in it, no matter whether outlying producers can afford to undersell
him, the system will not permit them to do so. Nor is the producer with the freight
rate advantage permitted to use it to reduce his mill net price by sharing that
advantage with the purchaser. The Corporation goes on to say that under the
basing point system outlying producers are willing to compete in the vicinity
of the isolated producer by accepting lower mill net returns. This omits the
fact that they accept these lower returns in the exact amounts needed to make
their delivered prices the same as those of the isolated producer. It also omits,
the fact that each producer is isolated as to some of his business, and so reciprocal
relationship develops if the system is to be maintained.

In flat contradiction of the foregoing claims the Corporation has elsewhere
admitted that the ending of the basing point system would tend to reduce prices,
and then proceeded to exaggerate it to the point of absurdity. Testifying before
the Senate Committee on Interstate Commerce in April 1936, W. A. Irvin,
president of the Corporation, said that the effect of f. o. b. mill pricing would
be "to produce a downward spiral of prices." (Printed Hearings on S. 4055,
p. 596.) In the pamphlet under consideration, the Corporation says that under
a mill pricing method producers that are close together "would be in intense
competition with each other" and the buyers for the most part "would buy
from the nearest mill because its price plus the transportation charges to desti-
nation would be the lowest." (Ex. 1418.) Again it is said that:

"In order to sell sheets in any important market a mill would have to reduce
its price by the amount of the freight to such market. In many cases this would
arbitrarily result in wiping out the selling area of other miUs, compelling retalia-

CONCENTRATION OF ECONOMIC POWER ^37

tion by them which in turn would deprive the first mill of access to the market
sought by such mill in making the price reduction. The price would be lower,
with little or no real gain in marketing area." (Ex. 1418.)

In still another place the Corporation argues the reverse of the above. It
says that a mill price method "would increase the tendency to follow price raises
by other mills by reducing the number of producers and by keeping the mills
out of contact with each other's customers." It also says that "The mills would
be more apt to follow a rise in the price at one mill, than to try to initiate sales
efforts in the new area in which their old prices were the lowest because the mill
which had raised its price would almost certainly be obliged to reduce its price
if the others did so." (Ex. 1418.)

Despite the admission that f. o. b. mill pricing would reduce prices, the Corpo-
ration uses twelve printed pages and presents maps all based on the assumption
that mill prices at non-basing point mills would be made equal to present basing
point prices at the nearest basing points. In making that assumption the Cor-
poration cannot maintain its statement that "the previously existing scale of
delivered prices in the territory around the non-basing point mill can and un-
doubtedly will remain about the same even though the mill becomes a basing
point." (Ex. 1418.)

When the Corporation finally concludes that the effect of f. o. b. mill pricing
would be to give local mills a virtual monopoly against their more distant com-
petitors, it necessarily reverts to the position that a mill price method would
reduce prices. It assumes, concedes, and emphasizes that fact. (Ex. 1418.)
Unless prices were reduced the mills could continue to sell in as wide a terri-
tory as at present. In reverting to this position, the Corporation holds up
the bogey of a monopoly that would keep out competitors by the simple process
of underselling them. This is no more than any competitor does when he
makes a lower price. To apply the word "monopoly" to the particular busi-
ness which a competitor takes by making a lower price is to distort and reverse
the ordinary meaning of the word, if indeed it is not "economic sophistry." The
same might be said of applying the word "competition" to a system that permits-
all producers to share in business anywhere but only at identical delivered prices.
Purchasers might well forego access to so many sources of supply if they could
thereby obtain lower prices.

There are other weaknesses in the conclusions drawn as to the effect of f. o. b.
mill prices in allegedly creating the local monopolies described. Some of them
may be mentioned. The geographical effects are based on all rail carload freight
rates with slight exceptions, while, of course, the use of water and truck rates
would substantially enlarge the sales area of the mills using them. (Ex. 1418.)
It is also assumed that the ratio of mill operation to capacity would be no larger
than in 1938 when it was 43%. (Ex. 1418.) Incidentally, sheets, the prod-
uct selected for the showing, probably has a greater degree of excess capacity
than any other and might, therefore, not be typical of results as to other products.
The conclusions drawn assume that the present base price level will continue,
that each mill would have the same mill price, that the sales area of each mill
would remain constant, and that differences in the costs of various mills would
have no effect upon the sales areas or prices. In short, the necessities of the
argument require that these unstable factors be arbitrarily stabilized in order
to make them conform to an assertedly resultant condition of monopolistic
stabilization.

Finally, it may be observed that if f. o. b. mill pricing actually tended to
create monopolies, it had abundant opportunity to demonstrate it in the case
of pig iron. Pig iron had always been priced f. o. b. furnace until the NRA
Code in 1933 substituted the basing point system on that underlying product
of the steel industry. This was fifteen years after Judge Gary's effort to that
end had failed. As shown in the Federal Trade Commission's report to the
Senate in ,1934, when the so-called "monopoly" of the f. o. b. furnace price of
pig iron was replaced by the so-called "competition" of the basing point system,
prices were simultaneously advanced. ("Practices of the Steel Industry Under
the Code," p. 58: See also F. T. C. report to the President of November 1934,
p. 7, and Appendix C.) Likewise, when the price of steel billets was changed
under the Code from an f. o. b. mill basis to the basing point system it auto-
matically increased the delivered cost to a certain purchaser by over $3.00 a
ton, this increase representing "phantom freight" to a nearby source of supply.
(F. T. C. Report to the Senate, p. 59.) Only in the topsy-turvy realm of eco-
nomic sophistry can such behavior of competition and monopoly be explained.

The Corporation of course does not carry the vested interest argument ta
the point of opposing changes that the industry might find it advantageous ta

138 CONCENTRATION OF ECONOMIC POWER

make, regardless of their effect upon other vested interetss. The trade magazine
Steel, commenting upon the results of the changes in base prices and abolition
of base price differentials of June 1938, said:

"Some consumers may move their plants with a view to improving their
position in respect to buying material and selling their products. Others may
change their products; a few already have indicated their intention of doing
so." (Steel, July 1938, pp. 23, 24.)

The magazine Steel summarized the replies to a questionnaire it had sent out
to representative steel users, concerning the effect on their business of the changes
in base prices and base price differentials made in July 1938. It appears that
about 13% of the replies were to the effect that their competitive position had
been unfavorably affected, while about 20% reported that their competitive
position had been affected favorably. (Steel, July 24, 1939, p. 15.) Such facts
illustrate the point that in considering vested interests much depends on "whose
ox is gored."

An article entitled "War and the Steel Ghost Towns" in the January 1940
Harpers' Magazine describes graphically the technological displacement of hand
mills by the continuous strip process, the consequent disemployment of thousands
of skilled workers, and the shattering effect upon the whole economy of scores
of substantial communities. The only pertinent comment in this connection
is that the public policy of preserving competition is no less fundamental than
that of preserving the right of technological advancement. Nor is the vested
interest defense any more valid in the one situation than in the other.

Under the NRA Code, many long established and important business interests
protested various steel code provisions as damaging, discriminatory and destruc-
tive to their respective businesses. Yet such code provisions were not modified
and the ones objected to are still in practical effect. The vested interests that
have been protected by and embodied in the basing point system are at least
partially offset by vested interests that were injured and perhaps destroyed by
it. So, unless government should take the broader view that the vested interest
of the whole public in fundamental public policy is paramount to all other con-
siderations, it must choose which particular group of vested interests shall be
protected and which other groups may become its prey.

THE CORPORATION HAS MISSTATED THE ATTITUDE OF THE FEDERAL TRADE COM-
MISSION REGARDING ALTERNATIVES TO THE BASING POINT SYSTEM

In order to support its thesis that objections to the basing-point system are
founded upon abstract criteria and not upon tangible evidence, the Corporation
devotes 18 pages of its 101 page pamphlet to an analysis of what it says is the
alternative to the basing point system that is proposed by the Federal Trade
Commission. It is said that such alternative has been proposed in order to
"produce all of the assumptions of 'perfect competition' " (Ex. 1418).

Besides being itself theoretically abstruse and highly speculative, such analysis
is wholly beside the point. The Commission has not proposed the alternative
to which the Corporation's analysis is directed. What it has proposed is quite
different from what the Corporation claims. The crux of this issue is whether
the quoting of f. o. b. mill prices, which is the natural and logical negation of a
delivered price system, must take the form of a uniform mill price to all customers.
The most extreme misstatement of the Commission's position on this question
appears in the following terms:

"The Federal Trade Commission has publicly taken the position that the uni-
form f. o. b. mill price system was prescribed by its 1924 'cease and desist' order
directed against said subsidiaries of the United States Steel Corporation, in the
Pittsburgh Plus case." (Ex. 1418.)

To support this statement the Corporation cites the Commission's pamphlet
entitled "Monopoly and Competition in Steel," (p. 80), submitted to the
Temporary National Economic Committee in March 1939. The citation given
does not support the above quoted statement of the Corporation. On the page
cited, the Commission stated its position to the effect that the basing poirt system
should be eliminated as a device that prevents price competition and that it was
necessary to guard against any substitute for it .which would produce the same
results in the form of identical delivered prices. The Commission then quoted
the text of its order in the Pittsburgh Plus case and stated that the principles of
that order should be applied to the steel industry. The terms of that order
made no reference to f. o. b. mill prices of steel uniform to all customers. Im-
mediately following the text of the order, the Commission said:

CONCENTRATION OF ECONOMIC POWER ][39

"The open f. o. b. mill price system is essential, in the Commission's opinion,
for the maintenance of fair competition in steel. To fulfill this purpose, however,
there must be no obligation to maintain any announced price for any time what-
soever." (Exhibit 358, Part 5 of Printed Hearings before TNEC, P. 2200).

From this last statement of the Commission's position, it is clear that the
Commission has not proposed to require the use of a mill price uniform to all
customers.

Certain of its findings in the Pittsburgh Plus case were to the effect that the
pressure of buyers would compel equal price treatment by a particular seller
quoting f. o. b. mill, when discrimination between buyers would not be concealed,
as it is under the basing point system. But it is a distortion of facts to say, as the
Corporation does, that "the Federal Trade Commission proposes to impose
by law or mandate" a uniformity in mill prices to all customers (Ex. 1418).
From its enactment, in 1914 until its amendment in 1936, the Clayton Act
specifically safeguarded the right of a seller to discriminate in price for various
reasons, among them being discrimination in good faith to meet competition.
The amended Act now safeguards the right of a seller to discriminate in price in
good faith to meet an equally low price of a competitor, but he has the burden
of proof on that question. This right is guaranteed by statute and could not be
curtailed by any mandate or order of the Commission. The Commission has
never proposed that this right be disturbed by amendment of the statute. The
right of self defense against competitive price attacks is as vital in a competitive
economy as the right of self defense against personal attack.

In view of the above clear and consistent record of the Commission on this
question, numerous statements or references by the Corporation may be challenged,
such as the Commission's "insistence that uniform f. o. b. mill prices should be
required" (Ex. 1418); that the Commission had "clung to its old opinion" that
"steel should be sold at uniform f. o. b. mill prices without freight absorption"; that
the "proposed uniform f. o. b. mill price system differs fundamentally from its
earlier model in the requirement that mill prices be uniform to all buyers";
that it is questionable whether "the proposed uniform mill price system would
bring about the assumed conditions of 'perfect competition' as contended by the
Federal Trade Commission"; that refer to "the rigid and arbitrary nature of the
system recommended by the Federal Trade Commission"; and that it would be
impossible to foresee "What steps the mills would be forced to take to escape the
Procrustean rigidity of this system."

The Corporation further states that "The only alternative seriously suggested
by the critics of the basing point method is the uniform f. o. b. mill price system."
This is not true. The alternative has been proposed of restoring price com-
petition through f. o. b. mill pricing and the ending of the basing point system
as a means of ending a system of identical delivered prices. If the ending of
the system and the substitution of f. o. b. mill prices did not operate to prevent
a mill from charging different prices to its different customers, this would be taken
care of under the law as it now stands if it amounted to unlawful price discrimina-
tion.

In furtherance of its argument on this question, the Corporation states "a
requirement that all sales by any producer be made at uniform prices, regardless
of the buyer's location, is artificial" (Ex. 1418). To this it may be said that
even if such a requirement were to be imposed by some form of social mandate,
it would be much less artificial than the present requirement of the basing point
system which is that the mill net returns or prices shall vary systematically
according to the location of the buyer in order that he 'may be quoted identical
delivered prices, regardless of the location of the sellers.

THE STEEL INDUSTRY SHOULD BE PREVENTED FROM CONTINUING TO RESTRAI^
PRICE COMPETITION THROUGH USE OF THE BASING POINT SYSTEM OR THROUGB
ANY EQUIVALENT METHOD

As stated at the outset, the Corporation admits that "price competition is
necessary in any industry operating in a capitalistic system." (Exhibit 1410.)
In making this statement the Corporation agrees that the stability and per-
petuity of the capitalistic system depends upon the preservation of price com-
petition. The only real issue, therefore, is whether the structure and the
philosophy of the basing point system are hostile to the existence of price compe-
tition. Considering its inception, its purpose, the methods employed to imple-
ment it, and most of all, its results, it is believed that the "tangible evidence"'
presented herein supports the conclusion that the basing point system in the

140 CONCENTRATION OF ECONOMIC POWER

Steel Industry is the negation and frustration of price competition. It is also
believed that even judged by the standards of "abstract criteria", the system
conforms to the economic concepts of monopoly and violates the economic
concepts of a competitive economy. If the Congress or other socially created
agencies should accept these conclusions as embodiments of ultimate fact, then
the Corporation itself, if it is to follow the logic of its own position must abandon
the basing point system or imperil the capitalistic system. If the theory of vested
interests is to dominate the decision, the status quo will have been maintained
at the sacrifice of a cardinal principle of the capitalistic system.

As stated by the Federal Trade Commission in its report to the President on
steel sheet piling in June, 1936 (p. 41) "the issue thus presented is whether this
Industry shall be required to obey the law or whether it shall be allowed to violate
the law in the guise of maintaining the so-called 'standards of fair competition
which are described in the Steel Code' ". The Commission also said in that
report that either an affirmative or negative policy on the subject would have
equally far reaching and fundamental consequences. More specifically, the
fundamental issue of public policy is whether the systematic suppression of price
competition which was perfected under the N. R. A. Steel Code and the emergency
legislation which preceded it shall be allowed to continue indefinitely after that
emergency legislation has been nullified.

The Commission recommended to the President that the results of its investiga-
tion on steel sheet piling be referred to the Attorney General for appropriate
action. This was done. On April 26, 1937, the Attorney General reported to
the President that an investigation by his department had failed to produce
"sufficient evidence admissible in civil and criminal litigations to make advisable
proceedings in court or under the Anti-trust Acts as they have been construed by
the courts."

The Commission recommended to the President in the Steel Piling report that
he consider "recommending to Congress the enactment of legislation making
unlawful such organized systems of delivered prices as frustrate price competi-
tion." The Commission's statement on the advantages of such legislation was
as follows:

"Bills are now pending in both Houses of Congress that would make the
operation of non-competitive basing point systems unlawful per se. There are
distinct advantages to be gained through legislation directly outlawing such
basing point systems. The enactment of such a general act supplementary to the
Anti-trust laws would render unnecessary the separate investigation of a great
number of industries together with the effect of the system in each upon the
competition therein, looking toward the bringing of separate proceedings with
respect to each industry using such a basing point system. Once Congress has
enacted an anti-basing point bill, the immense expense of separate investigations
and the laborious trial of separate suits would be avoided. If in but one case
the Supreme Court upheld the validity of the statute, it is believed that the
artificial character of such basing point systems would aid in their collapse.
There would be a strong sentiment on the part of many members of the Industry
to return to price competition rather than defy an Act of Congress and await
action by the Department of Justice or by this Commission. The result would
be the elimination of uncertainty as to the law which is expensive to Industry
and to the public in many ways." (Report, to President on steel sheet piling
June 10, 1936, pages 41, 42.)

The Attorney General in his report to the President above referred to, recom-
mended the establishment of a committee to survey the whole field of methods of
monopolistic control and the desirability of amending, extending and clarifying
the Anti-trust laws. The Temporary National Economic Committee has grown
out of that recommendation. No more vitally needed legislation within the scope
of the committee's functions can be suggested than that of directly prohibiting
the basing point system by Congressional mandate. The constitutional power of
Congress to regulate interstate commerce could find no more appropriate exercise,
assuming that our long established public policy of preserving competition and
free enterprise is to be something more than an abstraction.

FEDERAL TRADE COMMISSION'S SUMMATION OF THE
MONOPOLISTIC CHARACTERISTICS OF THE BASING
POINT SYSTEM 1

Mr. Ballinger, Mr. Chairman, at this point I want to offer for
the record a document which has been prepared by Mr. Wooden and
Mr. Hugh AVliite of the Federal Trade Commission who have been
associated with the Commission's activities for many years with
respect to the basing-point system in the steel iiukistry. This docu-
ment is addressed to a detailed consideration of the documents pre-
pared by the Corporation, including some additional factual matter
relating to the basing-point system.^

In my opinion, Mr. Chairman, this document, prepared by Mr.
Wooden and his associates, is perhaps the most complete and compre-
hensive document that has been prepared by the Government on the
monopolistic nature of the basing-point system in the steel industry.

Mr. Wooden is going to take th^e stand very briefly. Senator, just
to point out some of the high lights in this pamphlet, but before Mr.
Wooden starts in to tell you about that I want, if possible, to sum-
marize very briefly what we think this hearing has shown from the
standpoint of the Federal Trade Commission, where this hearing has
taken us, because, we made the charge that the basing-point system
was monopolistic, and we would like to point out to the committee
that we don't think that conclusion has been upset.

I will start in this way. Back in 1924 the trial staff of the Federal
Trade Commission contended in the Pittsburgh plus case that the
basing-point system was a monopolistic device in that it repressed
price competition in the steel industry. The steel industry stoutly
denied this, and, of course, the Commission made a decision and issued
a cease and desist order against the system. There was no appeal
from that order for 15 years. Then the industry went into the
multiple basing-point system.

The Chairman. There was no appeal for 15 years. What hap-
pened during that 15 years?

Mr. Ballinger. The industry went over into what is known as the
multiple basing-point system.

The Chairman. Then the industry a tandoned the basing-point
system?

Mr. Ballinger. No, a multiple basing point system is merely a
series of Pittsburgh plus systems. Each "base" in a multiple basing
point system governs a particular sales territory, and in that sales
territory the price of products governed by the multiple basing point
system is arrived at by adding to the base price the cost of trans-
portation from the "base" to the point of delivery. Thus the multiple
basing-point system merely breaks up the United States into a series
of sales territories, and within each sales territory the price of products

' Hearings before T. N. E. C, Pt. 27, p. 14,312.
2 Exhibit No. 2242, see p. 91.

141

142 COXCENTRATIOX OF ECONOMIC POWER

governed by the basing point system is determined exactly as it was
under Pittsburgh plus, which had only one "base" for the Nation as a
whole.

Mr. Ballinger. Wlien the industry went over, Mr, Chairman, to
the multiple basing point system, it wasn't long before the Federal
Trade Commission said that this system, too, repressed price compe-
tition in the steel industry. Last March when we put on our hearing
before this committee we charged that the multiple basing point sys-
tem repressed price competition in the steel industry. Then in the
interim the Corporation prepared two documents in which it said that
the basing point system did not repress price competition. Then when
Mr. Fairless came before this committee he made some very astonish-
ing admissions, at least they seem very happy to us because they seem
to clear up the controversy that has existed between the Federal Trade
Commission and some of the experts in the steel industry.

Mr. Fairless admitted that when the basing point system was fol-
lowed, that it eliminated price competition in the steel industry. That
was a very significant admission. Now with that admission, I want
to show just how that was brought about. Mr. Wooden brought into
the record a statement of Mr. Gregg, vice president of the United
States Steel Corporation, in which Mr. Gregg admitted when the
basing point system worked, it did repress price competition in the
steel industry.

Mr. Gregg. To answer your question specifically, if that ))lan were universally
followed there would be no competition insofar as one element of competition is
concerned, namely, price.

Then Mr. Wooden asked Mr. Fairless:

I take it, Mr. Fairless, that you are in agreement with Mr. Gregg to the effect
that if the system is followed, and to the extent that it is followed, there is no
competition in price; is that right?

Mr. Fairless. Well, I thought I had made myself clear.

Mr. O'CoNNELL. Well, the answer is "Yes," but you say that, as a practical
matter, the system is not followed?

Mr. Fairless. I have answered it that way. All the things you said, Mr.
Wooden, if they were true, then your conclusion, or the conclusion I assume that
you are striking for, would be true.

So he conceded the point, and we think that is a very significant
admission.

Now it becomes a question of how much the basing point system is
followed in the steel industry, as Mr. Fairless' whole defense was that
the basing point system is sort of a shadowy thing that stands there
and nobody takes advantage of it, they are always departing from it,
and naturally that suggests, why have it in the first place?

The Chairman. The committee is aware that I was necessarily
away all last week while the presentation was being made by the
steel industry. Am I to imderstand from what you say now that the
steel industry defended the basing point system but said at the same
time that it was not followed?

Mr. Ballinger. Apparently, as I get it, they did not defend the
basing point system. They said competition existed in the industry
because of departures from it.

Mr. Wooden. They defended, of course, the basing point system.
They put in these two pamphlets

Mr. Ballinger (interposing). Isay Mr. Fairless' testimony.

CONCENTRATION OF ECONOMIC POWER 143

The Chairman. I am talking about the industry. This pamphlet
which was offered for the record by the industry was a defense of the
basing point system, was it?

Mr. Ballinger. Yes, of the basing point system.

Mr. Wooden. It was not offered by the industry, Mr. Fairless was
careful to emphasize, but by the Corporation; but it is a defense of
the system from the industry standpoint, not from the Corporation
standpoint.

The Chairman. But at the same time, the testimony was. that the
basing point system thus defended is not followed, is that right?

Mr. Wooden. That, is true.

Mr. Ballinger. It is this way. They said in the pamphlet
which they prepared ^ wdien the basing point system worked that a
system of identical delivered prices was still a competitive price
situation in the steel industry. Then Mr. Fairless testified that if
the basing point system were followed it eliminated price com-
petition. In other words, Mr. Fairless' testimony was in direct
opposition to what the document had said. He had taken an entirely
new position in defense of the basing point system, maintaining it
did not repress price competition because it was departed from, not
because it was adhered to, conceding if it was adhered to it was
monopolistic in that it eliminated price competition.

If we had known Mr. Fairless was going to say that, we wouldn't
have taken all the trouble we did to prepare Air. Wooden's document
and Mr. White's document, trying to prove when the basing point
system operates, it represses price competition. We got that con-
cession from Mr. Fairless. We think that is significant because it
brings the Steel Corporation and the Federal Trade Commission into
agreement on the theory of the system.

Now the question is how far the system is departed from in actuality.
I think some significant things have been introduced here. First
Mr. Fairless admitted during the N. R. A. period the basing point
system worked beautifully, so we may assume from that that price
competition was eliminated in the steel industry during the N. R. A.
days. Then Mr. Wooden read a statement into the record by Mr.
Irvin where he said as late as 1936 that Mr. Grace, president of the
Betlilehem Steel Corporation, must have been speaking facetiously
when he said that U. S. Steel would cut below the base prices of
Bethlehem Steel Corporation. I think that is rather significant, be-
cause it shows it would be rather a joke in the steel industry if anybody
did that.

Then Mr. Wooden showed that many of the provisions of the N. R.
A. code which are absolutely necessary if you are going to make the
basing point system work, that there are certain things that you have
to have standardized if you are going to get identical delivered prices,
are still in existence. You have to have standard switching charges
and you have to prevent trucks from breaking up the price structure,
and you have to implement it various other ways. Mr. Wooden
showed many of those provisions were carried on after the expiration
of the code and many of them are still in force today.

Finally, we come down to identical bids on Government business and
used by the United States Steel Corporation, that about 90 percent

3 "Exhibit No. 1418", see p. 52.

144 CONCENTRATION OF ECONOMIC POWER

of the bids were identical delivered prices, showing, I think, that the
basing point system was working very well on those bids.

The question remaining, therefore, is. How serious and how numer-
ous are the departures in private business? We can't answer that
question. But if the basing point system works as well in private busi-
ness as it does when the steel industry does business witli the Govern-
ment, you might say the steel industry is 90 percent monopolistic and
10 percent competitive.^

* The percentages in this and the following paragraph were materially changed, the percentages above
stated'" being found to be in error. The fact api)ears to be that during the particular limited period of time
involved, there was, according to the data submitted by the Coriioration, no notable uniformity in bids to
the Government such as characterizes the system when it is adhered to. As shown by the Department jf
Justice in their exhibit 13-19, part of the i)eriod covered by Corporation's data was one of "price confusion,"
"exceptional weaknesses in the prices of many steel products," and marked by "many companies" beginning
the "quotation of base prices, especially for flat rolled products like strip, sheet, or plates at their own mills."

The situation during more typical periods is shown in bids to the Navy Department during 1935 and
1936. (See exhibits 2240, 2241, and pp. 392 and 393 of the verbatim record.) In one case there were 43 bids,
identical to the penny, in the amount of $15,683.48, and in another there were 31 Iflds. identical to the penny,
in the amount of $20,727.26. The whole matter of the significance of the percentage errors referred to is
covered by the letter of Mr. Irving S. Olds, chairman of the Board of the Corporation, to Chairman
O'JVIahonev, dated October 4, 1940, and the letter of Walter B. Wooden in comment thereon dated Novem-
ber 29, 1940, both of -..'hich are in the record. (See hearings before T. N. E. C, Part 27, p. 14691, and
14693.) In any event, it should be ob\ ious that the merits and demerits of any system cannot be deter-
mined by the extent of temporary departures from it.

The argument advanced in the paragraphs covered by this footnote is that the high percentage of identical
bids on Government orders from the steel industry is a refutation of the contention of the representatives of
the Steel Corporation before the Temporary National Economic Committee that the basing point system
is a "shadowy thing," which is practically disregarded in the determination of steel prices. The staff of
the Commission feels that this argument is not invalidated, because the United States Steel Corporation
submitted data to the Committee which applied to a very limited period, and a period during which the
basing point system in the steel industry was temporarily abandoned because of price-cutting. The staff
of the Commission is of the opinion that there is ample evidence in a number of previous studies conducted
both by the Federal Trade Commission and other governmental agencies, such as the National Recovery
Administration, to show convincingly that the basing point system in the steel industry is closely observed
by th ' industry, with the result that a very high percentage of bids on Government purchases have been
Identical to the penny.

LETTER TO SENATOR O'MAHONEY FROM BENJAMIN F.
FAIRLESS AxND REPLY THERETO BY WALTER B.
WOODEN '

United States Steel Corpohation,

February 1, 1940.
Hon. Joseph C. O'Mahoney,

Chairman, Temporary National Economic Committee,

United States Senate, Washington, D. C.

Dear Senator O'Mahoney: My attention has just been called to certain state-
ments made by Mr. Willis J. Ballinger, Director of Studies of the Federal Trade
Commission, at the hearing before the Temporary National Economic Committee
on January 30, 1940, in which Mr. Ballinger purported to summarize some of my
testimony at previous hearings. I was not present at this hearing on January 30,
1940, as i had been informed by representatives of the Federal Trade Commission
at the conclusion of the hearing on the preceding day that the Federal Trade
Commission had no further questions to ask of Mr. Avery C. Adams and myself,
and that we were excused from attending the hearing on January 30, 1940.

As events beyond your control prevented you from attending any of the hearings
at which I was a witness, I think it is proper for me to state to you that the sum-
marization of my testimony so given by Mr. Ballinger is not accurate and gives a
meaning entirely different from that conveyed by my complete testimony. I
respectfully ask that before you and the other members of the Temporary National
Economic Committee reach any conclusion, my entire testimony be considered,
rather than any summarization thereof given by Mr. Ballinger or by any other
representative of the Federal Trade Commission.

As reported on page 395 of the Verbatim Record of the Proceedings on January
30, 1940, Mr. Ballinger stated: "Mr. Fairless admitted that when the basing-point
system was followed that it eliminated price competition in the steel industry.
That was a very significant admission. * * *"; and then quoted a few excerpts
from my testimony, apparently in an attempt to support his further statement
(also reported on page 395) that "when the basing-point system was observed,
Mr. Fairless clearly conceded that price competition was eliminated from the steel
industry. * * * Now it becomes a question of how much the basing system
is followed in the steel industry, and Mr. Fairless' whole defense was that this
thing, the basing-point system, is sort of a shadowy thing that stands there and
nobody takes advantage of it, they are always departing from it, and naturally
that suggests why they have it in the first place. * * * Apparently, as I get
it, they did not defend the basing point system. They said competition existed
in the industry because of departures from it."

Another statement by Mr. Ballinger to the same effect is reported in the first
column on page 396 of the Verbatim Record of the Proceedings on January 30,
1940.

May I bring to your attention that Mr. Ballinger failed to cite the following
portions of my testimony, which I think throw some additional light on the
character of my testimony relative to theparticular points he was discussing:

(Extract from page 318 of Verbatim Record of Proceedings on January 26,
1940):

"Mr. Wooden. Mr. Fairless in that connection, even when the basing-point
system is working one hundred percent and producing an identical delivered price,
your mill net realizations fluctuate even then, do they not?

"Mr. Fairless. The basing point system works one hundred percent every day,
twenty-four hours of every day, but it doesn't result in uniform prices because
that isn't the reason that the system is in vogue or practice."

(Extract from page 319 of Verbatim Record of Proceedings on January 26,
1940):

> Hearings before Temporary National Economic Committee, Pt. 27, p. 14688.

145

146 CONCENTRATION OF ECONOMIC POWER

"Mr. Fairless. I would like most emphatically, if I have that ability, to once
and for all state our position in so far as the basing-point sj^stem is concerned.
Our contention is that breaks in prices are not a breakdown to any degree of the
so-called basing-point system. We contend that the basing-point system was in
effect and worked just as well when sheets and other flat rolled products sold for
eight dollars a ton under the market as it did when they sold definitely on the
market.

"There is no relationship, and to constantly be asking us the question about the
breakdown of the basing-point system we don't believe is a fair presentation.
Everybody, of course, is entitled to their own opinion of the basing-point system,
but we contend that the basing-point system is only a vehicle which we use to
merchandise our products. We have told you we use it because we know of no
better method to merchandise our product. There might be, and if out of these
hearings could come that, we would be the first to welcome it.

"Now so far as competition, the fact that you have basing points and that prices
are quoted as applying to those basing points for various products, and the fact
that those prices are not maintained or arc maintained or are reduced, so many
dollars one time and more or less dollars at another time, is in no way in relation-
ship to the basing point system is our contention, and I would like to make that
clear if I can."

(Extract from page 341 of Verbatim Record of Proceedings on January 27,
1940) :

"Mr. Wooden. Now I also recall that you testified yesterday afternoon that
you agreed with Mr. Gregg, Vice-President of your company, when he testified
that if the basing point systems were fully operative there would be no competition
in price. Is that correct?

"Mr. Faihless. That is not correct.

"Mr. Wooden. What is your position with reference to that?"

"Mr. Fairleps. My contention is that competition exists even although two or
more companies arrive at the same price or have identical bids, providing, of
course, that the conclusion is arrived at legally. It seems to me that when two
or more companies are interested in getting a piece of business, tonnage, a con-
tract, that has to do with steel, you immediately have competition. The fact
that each of those cor^Danies has announced prices to the public certainly pre-
vents them from charging any price that they might choose to charge."

(Extract from page 342 of Verbatim Record of Proceedings on January 27,
1940):

"Mr. Fairless. What I did say, Mr. Chairman, was this, that if all steel com-
panies — if all steel companies — had basing points and posted their base prices,
which is to begin with a competitive situation, but if they did post their prices
and they did quote in respect to steel tonnage in a territory, or any territory,
and they used the nearest basing point and applied the base price that had been
puV)li'?hed by the company that governed or controlled that basing point, and
added all the charges, extras and all the transportation charges, tliere would be
obviously uniform price arrived at, but that doesn't mean that that would not
still be a competitive price so far as competition is concerned, because the basis
to begin with, the base price, was competitive, bound to be competitive."

Various statements made by Mi. Ballinger and Mr. Wooden at the hearing on
January 30. 1940 seem to me ito convey the impression that the testimony of Mr.
Adams and myself was contrary to and not in support of the pamphlet on the
basiner point practice, submitted to the Committee by United States Steel Cor-
poration as Exhibit No. 1418. That is not correct, and I hope that you and each
other member of the Committee will read this pamphlet in its entirety before
reaf*hing any conclusion.

Mav I request that this letter be made a part of the record of the Temporary
National Economic Committee?

Respectfully yours,

Benjamin F. Fairless, Pred lent.

BFF:MRW

Copy to: Mr. Willis J. Ballinger, Director of Studies, Federal Trade Commis-
sion, Washington, D. C.

CONCENTRATION OF ECONOMIC POWER 247

Federal Trade Commission,

Washington, February 6, 1940.
Hon. Joseph C. O'Mahoney, Chairman,

Temporary National Economic Committee, United States Senate,

Washington, D. C.

Dear Senator O'Mahoney: The letter of Mr. B. F. Fairlcss, president of
the United States Steel Corporation, to you under date of February 1, 1940, has
come to my attention through a copy which he sent to Mr. Ballingcr. The
statement is noted that various comments by Mr. Ballinger and me at the hearing
of January 30 imply that Mr. Fairless' tetimony was contrary to, and not in
support of, the Corporation's pamphlet submitted to the Committee as Exhibit
141S. Such a conclusion is now challenged by the Corporation.

There arc other portions of Mr. Fairless' testimony to which attention should
be called, as well as those set forth in his letter. Taken collectively, they support
the challenged conclusion. They also support the comments of Mr. Ballinger
to which exception is specifically taken.

The Corporation's letter quotes from Mr. Fairless' testimony on page 341 of
the verbatim record that it was not correct to say that he had agreed with Mr.
Gregg, a vice-president of the Corporation, wh o had said that if the basing-point
system "were universally followed, there would be no competition in so far aa
one element of competition is concerned, namely, price." Yet Mr. Fairless had
previously testified, as shown on page 317 of the verbatim lecord, as follows:

"We will concede, if that is the point we are trying to make, that if base
prices as announced were followed in every transaction, and that the nearest
basing point to the consumer governed, and that the rail freight was added
from that point, and the delivered price arrived at in that manner, there
wouldn't be any competition in the Steel Industry. It would be a one price
industry pure and simple."

Mr. Fairless had also testified that "As I read from the record, Mr. Gregg said
substantially what I have just said." (Page 318 of verbatim record.)

By contrast with the foregoing, Mr. Fairless now quotes from his testimony on
page 318 of the verbatim record, as follows:

"The basing point system works 100% every day, 24 hours of every day
.but it doesn't result in uniform prices because that isn't the reason that the
system is in vogue or practice."

Although Mr. Fairless made that claim, the Corporation, in its prepared statement
to the Committee, quoted from a report of the NRA that "the outstanding
characteristic of the basing point system is the fact that it puts rival producers on
a footing of price equality with each other in all the consuming points over a wide
area." (Exhibit 1418, page 37.) Mr. Fairless testified that this was "a true
statement", although claiming at the same time that this did not preclude com-
petition in such areas. (Page 318 of verbatim record.)

Taking these several quotations together, they amount to saying that if the
basing point system is working 100% there would be no price competition, but
that although the system works 100%, 24 hours of every day, it does not result
in uniform prices. They amount to saying also that the system is not intended to
produce uniform prices although that is its outstanding characteristic.

Mr. Fairless' letter also cites his testimony on page 319 of the verbatim record
to the effect that the fact that basing point prices "are not maintained, or are
maintained, or are reduced so many dollars one time and more or less dollars
at another time is in no way in relationship to the basing point system." He
testified that such "is our contention and I would like to make that clear if I can."
He further testified that "our contention is that breaks in prices are not a break-
down to any degree of the so-called basing point system," and that "the basing
point system was in effect and worked just as well when sheets and other flat
rolled products sold for $8 a ton under the market as it did when sold definitely
on the market."

Such contentions are equivalent to saying that the system whose outstanding
characteristic is to put rival producers on a footing of price equality everywhere
works just as well when steel products are sold far below the equal delivered
prices which the system contemplates. They are the equivalent of saying that
while reductions below the market price of the system have no relationship to the
system itself, nevertheless, the system is in effect and works just as well when
prices are being made below the market price reflected by the system. If, iu

292918— 41— No. 42 11

J 48 CONCENTRATION OF ECONOMIC POWER

ifact, price reductions have no relation to the system, it would follow that the
•system, as such, tends to maintain prices on a higher level.

In the concluding parts of Mr. Fairless' letter, his testimony on pages 341 and
342 of the verbatim record is cited, to the effect that competition exists even where
producers make identical bids and that as long as the base price is competitive
the whole basing point system is competitive, notwithstanding that it produces
identical delivered prices. This position cannot be reconciled with Mr. Fairless'
testimony on page 317 that if delivered prices were arrived at by adding rail
freight from the governing basing point to the announced base price "there
wouldn't be any competition in the Steel Industry." Nevertheless, the position
that the system is competitive is the main theme and thesis of the Corporation's
pamphlets submitted to the Committee as Exhibits 1418 and 1410.

Since you were not present when Mr. Fairless gave his testimony, it would be
desirable, as he suggests, that his entire testimony be considered, and not only the
portions which he and I have called to your attention. There is not the slightest
objection to having Mr. Fairless' letter made a part of the record, as he requests,
but may I not ask that this letter of comment be similarly received?
Respectfully yours,

(Signed) Walter B. Wooden,
Walter B. Wooden,

Attorney.

Copy to: Mr. Benjamin F. Fairless, President, United States Steel Corporation,
New. York, New York.

INDEX

Page

"Acceleration principle" 14

Adams, A. C, cited 102, 145-146

Basing-point system:

Alternatives to 78-88

Competition and 92-93

Effects of 1-4, 56, 58-60, 88-89, 106, 123

Historical material 41-43

Observance of, degree of 105-106, 142-148

Operation of 1-5/31-41,63-78,92, 110-148

Reasons for 2, 24-25, 45-50, 58, 69-70, 75, 88-89, 107-1 10, 123

Violation of 1-2,7, 106

Bids, identical 51-52, 55, 107, 143-144, 146

Bope, Col. Henry P., cited . 108

Business cycles and demand 11, 14-15,

26, 28, 47-48, 56-58, 62-63, 79, 87, 88, 125-136, 132
Capacity:

Computation of - 61

Concentration of 58-61, 86-87

Distribution of — 20, 85

Excessive:

Amount of 25-27, 56-57, 61-63, 85, 87, 131-132

Causes of 62-63, 130

Effects of 3,56-58, 132

Capital. {See Capitalization; Investment; Capacity; Equipment.)

Capitalistic system: and competition -.^_.. 6, 9, 125-126, 130, 139-140

Capitalization . 127, 129, 134-135

Chamberlin, Edward, Theory of Monopolistic Competition: cited 25, 44, 129

Chicago basing-point ^ 42, 60

"Chiseling" 7-8

Collaboration among steel producers 92-110

Competition:

Amount of 28, 31, 50-53, 8J-86, 89 106,118,120-129,146

Characteristics of — • 92-93

Effects of ^ - 5-7, 71

"Imperfect" --__: 44-47, 129

"Perfect": characteristics of 11-12,

43-44, 46-47, 49, 52, 55, 68, 74-75, 78-82, 90, 120-126

Regulation of 8

Restoration of: effects 5, 135

Restraint of:

Evidences of :..■ .. 92-107, 115, 118

Necessity for 5, 28, 49

Substitution and 15-16

Costs:

Additional (variable) 11, 22-23

Assembly 16-17,45, 133

Average l 23-24

Characteristics of: 11, 22-25, 29-30, 45, 47-48, 56

Fixed (overhead) 11-12,19,22,47-49,134-135

Transportation.. 16-17, 36,60-61, 70, 110, 121, 133

Cross-hauling:

Causes of 114

Measure of ^ 76-7?

Waste through 2, 7, 58, 114-lL'

149

150 INDEX

Page
Daugherty, de Chazeau, and Stratton, Economics of the Iron and Steel

Industry: cited 24,31,34,41,57, 59-60,81, 109, 120, 124

De Chazeau. {See Daugherty, de Chazeau, and Stratton.)

Delivery charges 102-105

Demand:

Business cycles and. (See Business cycles.)

Characteristics of__.' 11-16, 45-46, 62

Elasticity of 1 1-12, 15-16, 23, 29, 46-47, 124-126

Sources of ^^ , _ _ _,,, 13

Depressions. {See Business cycles.)

"Differential," basing-point price • 36

Discrimination. {See Mill net returns, variation in; Price discrimination.)
Distribution: '

Channels of _. 21

Costs of. {See Selling costs.)

Durability and dema"nd 13-14, 125

Employment and steel prices ' 29-30

Equipment, immobility of 19

''Extras" 40-41, 101-102

Fairless, Benjamin F., cited . 102, 105, 106, 116, 124, 142-143, 145, 147

Fetter, Frank A.:

Masquerade of Monopoly: cited, 31, 54, 81

Testimony (T. N. E. C.) J 54-55, 65

F. o. b. mill price system 50, 53, 55, 79-89, 108, 115, 121, 135-139

Absorption'of 2,27,32-34,37-40,43, 68-71, 74-78,89, 113-119

"Phantom" 34-36,43,63-74, 110-114, 116

Gary, Judge, cited 98

Geographic distribution of:

Demand 13-14

Supply .- 16-18,45

Grace, Eugene, cited._-_ 95, 96, 99, 105, 106, 128, 143

Gregg, Robert, cited 93, 124, 142

Hi.story of steel industry 41-43

Hook. Charles R., cited 95

Investment (See also Capitalization) :

Incentives for 20

Requirements, size of 19

Sources of _ 20

Iron Age, cited 96-98

Irvin, W. A., cited 105-107

Lamont, R. P., cited 104-105

Market, perfect 54-55, 121-122

Market inter-penetration 34, 122

Market penetration - 34

Market territories: under assumed f. o. b. prices 83-86

Mill locations, defense of 133-134

Mill net returns, variation in 36-40, 52, 63-78, 87, 89, 116-119, 122-123, 136

Monopoly {see also Competition; Basing-point system, operation of):

Government control, leads to 5-6, 8-9

Indicators of 4, 5, 129

Techiiical conditions and 8

National economy : function of steel industry in 28-30

National Recovery Administration code 43, 94-98, 103, 104, 138, 140, 143

National Recovery Administration: report of committee on basing-point

system, cited 43, 45,

49, 53, 60, 63, 66-68, 75-76, 81, 93, 106, 114, 116-118, 128-129, 147

Natural market territory 37-40, 70

Obsolescence:

Basing-point system and 3, 7

Investment and 20

Open-price system of price-quoting . 49

"Phantom freight" 34-36, 43, 63-74, 110-114, 116

Philadelphia: dominant steel market 41, 109

"Pittsburgh plus" . ._ 1, 8-9, di-32, 42,

59-60, 65, 80, 82, 104, 105, 107-109, 111-116, 122, 133, 138-139, 141

INDEX 151

'Trice absorption" ^ 32

Price agreements and collaboration in steel industry. {See Collaboration.)
Price-cutting:

Incentive to 23-24,49

"Price absorption" 32

Price discrimination 3-'4, 63, 87, 89, 116-119, 122-123, 139

"Price leadership" 7, 48-50, 86, 98-99, 105

Prices of steel, level of 29, 55-56, 58, 126-129

Prices, uniform : as a sign of monopoly . 54

Profits - 25-26, 55-57, 126-129, 135

Psychological factors 24

Riplev, William Z., cited 122

Schwab, Charles M., cited . 115

Selling costs 25,27-28,76-77, 115-116

Sheet-producing mills 83-86, 99

Steel, cited 96, 134-135, 138

Supply, characteristics of : 11, 16-25, 47-49

Switching charges 97, 111

Technology :

Monopoly and 8, 56, 109

Plant design and 18

Progress of 28-29, 57

Thorp, Willard L., cited 61-63, 132

Tower, Walter S., cited 95

Transportation. {See Cross-hauling; Costs; Freight; Water transporta-
tion; Truck deliveries; Delivery charges.)

Treanor, John, cited 5

Truck deliveries --- 73-74, 111

Tube manufacturers 99-101

Vested interests, defense of 130-138

Viner, Jacob, cited 44, 120

Water transportation 36, 70-73, 89, 104-105

Weir, Ernest T., cited 128

Wooden, Walter B., cited 145-146

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