CHAPTER I

STATEMENT OF THE PROBLEM

THE SUGGESTION IN THE PRESIDENT'S MONOPOLY MESSAGE

In his message to Congress which resulted in the establishment of the Temporary National Economic Committee, President Roosevelt reviewed some of the problems facing American industry and offered for consideration some recommendations relative to the strengthening and enforcement of antitrust laws. Under the suggestions for improvement of antitrust procedure the President said:

A revision of the existing antitrust laws should make them susceptible of practical enforcement by casting upon those charged with violations the burden of proving facts peculiarly within their knowledge. Proof by the Government of identical bids, uniform price increases, price leadership, higher domestic than export prices, or other specified price rigidities might be accepted as prima facie evidence of unlawful actions.1

The purpose of this study is to explore the possibilities of one of these suggestions-that concerning higher domestic than export prices. It was felt that the ramifications of the problem would only be revealed by a broad study which would offer a cross-section picture of the export pricing policies of many industries. For without such a study, the perspective required for the formulation of practicable and convincing recommendations to the Congress, if the evidence reveals a need for such action, would be lacking.

For this reason the Department of Commerce has undertaken a study of business practices with regard to pricing for export. It was considered desirable to enlarge the scope of the study beyond what was specified in the monopoly message. It seemed inadequate merely to uncover instances of firms in industries charged with monopolistic practices selling at lower prices to export customers than to domestic customers. For that procedure would assume the basic point at issue; that is, that the ability to practice price discrimination among national markets is necessarily an attribute of monopoly power. Therefore, a comparative study of domestic and export pricing policies of a representative sample of American industry has been attempted. The study embraces firms in industries with many independent business units and firms in industries with few business units; large firms and small; some firms which export a large proportion of their production and others which export only a small percentage of their output; firms with branch plants abroad and firms with only American factories. The emphasis of the study is upon a comparison of domestic and export prices and price policy and the reasons or explanations for any differences which may come to light. It was also expected that some of the characteristics of the price system under which American business operates would be revealed by the investigation.

1 S. Doc. 173, 75th Cong., 3d sess., Strengthening and Enforcement of Antitrust Laws, p. 7. 257769-40-No. 6- -2 3

THE SCOPE AND LIMITS OF THE STUDY

The precise nature of the problem to which this study is devoted may be more clearly understood by noting the following limitations upon its scope.

(a) It is concerned only with goods produced in the United States and with the prices in the American market at which those goods are sold to domestic and foreign customers. The prices of similar goods produced by foreign branches of the firm, or by independent foreign factories, or the price in the foreign market are entirely irrelevant. The study is not concerned with the price the foreign consumer pays for similar goods which were not produced in the United States, or with the prices at which American products are finally offered to the foreign consumer after ocean shipment, payment of duty, retailer's mark-up, etc., have been added to the manufacturer's price. It is concerned only with the producer's prices to similar types of customers under similar conditions of sale. Of course, there are many difficulties involved in obtaining truly comparative prices, the discussion of which is postponed to a later section.

(b) The field survey was limited to manufactured products; nonprocessed agricultural or mineral products are not considered in the report.

(c) The differences between domestic and export prices which are herein considered are only those differences which are the result of decisions of the manufacturers. Price differences which arise from domestic governmental policy or from differences in distribution service costs not controlled by the manufacturer are evidently irrelevant to the problem. For example, a Government subsidy on exports, an excise tax that is levied on production for domestic consumption but not on exports, drawbacks of duty paid on imported raw materials which are exported after processing, a lower inland freight rate from factory to seaboard on export shipments than on domestic business, might all make the price to an export customer lower than the price to a domestic customer. But as these factors would not make any difference in the net price received by the manufacturer, they are not part of the problem under consideration. In brief, it is the manufacturer's net prices from domestic and export customers which are to be compared.

THE RELATION OF DIFFERENT EXPORT AND DOMESTIC PRICES TO THE MONOPOLY PROBLEM

A brief discussion of the theory of dumping has been injected at this time to show why a study of the practice is relevant to the problems confronting the Temporary National Economic Committee. The most careful writers on the subject have concluded that monopoly is a prerequisite for dumping and it is, therefore, pertinent to inquire whether "higher domestic than export prices might be accepted as prima facie evidence of unlawful actions." The many important questions revolving around the meaning of monopoly and competition must be deferred until the differences between domestic and export pricing policies have been surveyed.

It will be recognized that the practice referred to in the President's message, quoting lower prices for export than for domestic customers,

is what is generally called "dumping." The use of that term has been avoided as far as possible because, both in its legal definition and general connotation, it includes much more than will be discussed in this study. But it can correctly be said that we are here dealing with one type of dumping that which rests upon the sole decision of the producer or seller. This type of dumping may be defined as international price discrimination and includes differences between domestic and export prices in either direction, i. e., higher as well as lower export prices.

Familiarity with economic writing on this type of dumping would reveal the relation between dumping and the monopoly problem and make it clear why evidence of the practice might establish a presumption that a monopolistic situation exists. Prof. F. W. Taussig has stated the relationship as follows:

Sales at lower prices are made to foreigners not only sporadically, but for long periods and systematically. This phenomenon would seem to be explicable only on the ground of monopoly. Where there are competing producers, no one of them will steadily accept lower prices than the other. Each will be desirous of selling in the most advantageous market. There will be dumping of the sporadic sort only, by one of the competitors or by several of them, at times when the total output is not easily carried off at remunerative prices. The more effective is competition, the more standardized the article, the less likely is even sporadic dumping. On the other hand, the more removed the conditions are from those of smooth-working competition--to the degree that there is influence from brands, specialities, quasimonopoly, complete monopoly-the more is there likely to be departure from a uniform market price, and the more likely is it that discrimination and dumping appear.2

Another explanation of this line of reasoning is given in the widely known monograph on dumping by Prof. Jacob Viner.

In the * * summary of export dumping, it was made apparent that dumping on other than a sporadic basis was typically, if not invariably, confined to monopolistic producers' combinations. This conforms with theoretical expectations. First, dumping is most likely to appear to be profitable in the case of industries using large plant and expensive machinery, so that the fixed charges are an important part of the total costs of production. For such industries maintenance of output at near maximum capacity is most urgent on financial, and sometimes on technological, grounds. It pays such industries to accept additional orders at any price which more than covers the direct costs, if these orders are not othewise obtainable, and if full production cannot be maintained without them. But it is in industries having these characteristics that, apart from natural and legal monopolies, monopolistic organization is most likely to be attempted, mainly in order to escape the danger of destructive competition.

Once monopoly control has been achieved in the domestic market, it may pay, if domestic orders do not fully occupy the productive facilities, to bid for orders in other markets at prices lower than those exacted at home. If cutthroat competition results from this policy, it will at least be confined to markets in which the dumping organization is not vitally interested. The mere fact of monopoly control in the domestic market will make it probable that the prices exacted in that market will be above the competitive level in outside markets, and that foreign orders will be obtainable only if the prices quoted to prospective foreign purchasers are lower than the domestic prices. Monopoly in the domestic market would appear for another reason to be essential if continued dumping is to be profitable. If there is competition in the domestic market, the concern which dumps a portion of its output in foreign markets in order to reduce the supply and maintain or raise the prices in the domestic market must bear by itself all the sacrifice involved in the export at reduced prices and must share with

2 F. W. Taussig, Some Aspects of the Tariff Question, Cambridge, 1915, p. 208.

all its domestic competitors the advantage accruing from the reduction in the domestic supply. Under these circumstances a concern will have as muchor nearly as much-to gain from price cutting in the domestic market as from export dumping. It is only to a monopoly that export dumping has attractions greater than those of moderate domestic price cutting.

It is on grounds such as these that it has been held by many economists that dumping as a systematic and continued practice must normally be confined to monopolies.

The essence of this argument is that unless there is some type of monopolistic restraint in the domestic market, some restriction upon the normally competitive pricing mechanism, it will not be to the economic advantage of any single producer to accept the loss or lower profit involved in selling to foreign customers at less than the domestic market price. For if the producer must make a price concession to sell his total output, an offer of a lower price in the domestic market would be just as effective in clearing his stocks as would the offering of lower prices for export shipments. But when some monopolistic element of whatever character is injected into the domestic marketsome factor which prevents price from performing its usual function in a competitive market-then excess stocks may be accumulated or productive capacity remain idle. Under such circumstances the export price may be reduced in order to clear excess stocks or to employ unused capacity. This could occur whether the export markets were competitive or monopolistic.

Thus, the existence of a two-price system would be indicative of some impediment to competition in the domestic market. A situation that would conform to this picture is that of a group of producers having a tacit or explicit agreement with regard to price in the domestic market but no such agreement with foreign producers as to export prices. The monopoly price so established yields an abnormal return in the sense that some of the producers would accept additional business at lower prices if it could be obtained without upsetting the existing price situation in the domestic market. As there is no restriction on competition in foreign markets, a competitive export price is established which is lower than the monopoly price in the domestic market. Such is the basic type of situation that is generally conceived to lead to the practice of dumping. The primary purpose of this study is to see if the facts in the business world conform to this theoretical picture.

From this picture it can be seen why economists have insisted that another fundamental factor, in addition to an element of monopoly in the home market, is required to make dumping possible. This factor is protection of the home market, for in order for the domestic monopoly to be effective, the competitively priced products in the foreign markets, originating either at home or abroad, must be prevented from breaking the domestic monopoly price. It is generally conceived that high protective tariffs are the commonest and most effective means of excluding competitively priced goods from the home market. But freight costs, if they are large in proportion to the value of the product, may be equally restrictive. Besides, the manufacturer may have agreements with distributors, even with those in the foreign market restricting them from reshipping the goods to the United States.*

Jacob Viner, Dumping: A Problem in International Trade, Chicago, 1923, pp. 94-95. See Gottfried Von Haberler, The Theory of International Trade, New York, 1936, p. 301.

CHAPTER II

EARLIER STUDIES OF EXPORT PRICING POLICIES

There is considerable evidence that for many years American industry has sold its products abroad at other than domestic prices. That evidence, however, is not very satisfactory in revealing the extent of the practice, the magnitude of price differentials, or the economics of the problem. While a few official inquiries were made, the information disclosed is not sufficient to answer the questions of major interest. But as to the mere existence of price differentials for some products there can be no doubt.1

One of the earliest notices of exporting at lower than domestic prices in official publications was made in regard to the steel industry and its effect upon shipbuilding in a monthly statistical bulletin formerly issued by the Treasury Department.

The progress of work on shipbuilding in the United States has likewise been retarded, because makers of steel materials required a higher price from the American consumers than they did from the foreign consumers for substantially similar products. Of course, American exporters have to get foreign contracts in competition with foreign plate makers, who are excluded from our domestic market. In addition to this, American export plate makers are interested in preventing the establishment of plate manufacturing in their customer nations abroad, and to that end bid low enough to discourage foreign nations from entering the field for producing their own plate at home. The progress of domestic maufacturers of iron and steel goods may likewise be handicapped by the sale of iron and steel in their unmanufactured state at so much lower a price to foreigners than to domestic consumers as to keep the American competitor out of foreign markets generally. The natural limit to such a policy of maintaining a higher level of prices for these materials at home than abroad is found in the restriction of domestic consumption and in the import duty. If restriction of consumption at home does not operate to prevent the short-sighted policy of discrimination against domestic development of manufacturing industries, the other contingency is more or less sure to arise, namely, the demand for a reduction of the tariff on unfinished iron and steel, in order to equalize the opportunity of makers of finished products in foreign markets. To this policy the domestic consumer is usually ready to lend himself, thus making a powerful combination of interests to set limits to the rise of domestic prices of iron and steel materials.2

The first attempt at a systematic study of the problem was made by the staff of the Industrial Commission and presented in its report "Foreign and Domestic Prices of American Products."

The report stated that, "In view of the frequent assertion that exporters of American-made goods often sell them in foreign countries at lower prices than are obtained for similar goods at home, the Industrial Commission has endeavored to secure from the business interests of the United States a full and frank statement covering the efforts

1 Jacob Viner, Dumping: A Problem in International Trade, Chicago, 1923, pp. 80-90. "Monthly Summary of Commerce and Finance," August 1900, p. 250, Bureau of Statistics, Treasury Department. Report of the Industrial Commission, 1901, vol. XIII, pp. 725-760.

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