PRICE FIXING AND MARKET ALLOCATION U.S. vs. Addyston Pipe and Steel Company, et al

The Addyston Group: Cast Iron Pipe CompanyLocationCapacity (tons/year) Addyston Pipe and SteelCincinnati, OH45,000 Dennis Long and Co.Louisville, KY45,000 Howard-Harrison Iron Co. Bessemer, AL45,000 Anniston Pipe and Foundry Anniston, AL30,000 South Pittsburgh Pipe Works South Pittsburgh, TN15,000 Chattanooga FoundryChattanooga, TN40,000 TOTAL220,000

Industry Characteristics and Background High fixed costs, fluctuating demand, high transportation costs, product homogeneity Customers are municipalities and utilities for distribution of water and natural gas. Jobs are bid. Geographical location of Addyston group gave it transportation cost advantages over manufacturers in New Jersey, Pennsylvania and New York. Recession severely reduced demand for pipe in early 1890s Firms sought ways to restrict “ruinous” competition Addyston group operated at only 45% capacity in 1896 after recovery had begun

First Agreement 1894 Reserve territory: cities reserved to certain firms  Firms chose cities closer to them than to other firms  Firms paid a “bonus” of $2/ton to cartel for sales to reserve cities Pay territory: all other cities west of NewYork and Pennsylvania and south of Virginia  All member firms bid for business in these cities  Pay “bonus” of $1 to $4 per ton to cartel  Bonus determined by cartel’s transportation cost advantage over outsiders Bonuses paid out to members based on their production capacities

Second Agreement 1895 First agreement failed to “advance the price” in pay area All requests for bids sent to cartel Board. Cartel Board determines price to be bid for the job, reflecting transportation cost advantages. Each cartel member “bids” a bonus amount to be paid to the cartel for winning the job (say, $8/ton) Cartel Board announces winning member on each job, who bids cartel price to end customer. Other members also bid on each job to suggest competition, but bid higher than the cartel price. Bonuses were shared among the cartel members according to their production capacities. See transportation cost graph.

Court Proceedings Philadelphia pipe company underbids cartel for Atlanta job; Atlanta rejects all bids as too high. Secretary of cartel offers to make cartel operations public in return for share of damages. Government sues cartel (1896); loses in district court. On appeal, 6 th Circuit finds for the government (1898).  Judge William Howard Taft writes opinion  “naked” restraints eliminate competition: per se illegal  “ancillary” restraints may be socially beneficial: rule of reason  Perpetually enjoined defendants from maintaining the combination in cast iron pipe.  Established per se illegality of price fixing restrictions later confirmed in Trenton Potteries (Supreme Court, 1927).

Aftermath In May 1898, after Taft’s decision in February, four cartel members merge to form the American Pipe and Foundry Company. In 1899, American Pipe combines with the other two cartel members and other firms to become United States Cast Iron Pipe and Foundry Company. U.S. Pipe has 450,000 tons annual capacity representing 75% of the national market. This “merger to monopoly” would be illegal today, but was not at the time.

Sources Viscusi, W. Kip, John M. Vernon and Joseph E. Harrington, Jr. (1998) Economics of Regulation and Antitrust, 2 nd ed., Cambridge: MIT Press, pp Breit, William E. and Kenneth G. Elzinga. (1989) The Antitrust Casebook, 2 nd ed., New York: Dryden Press, pp Neale, A. D. (1970) The Antitrust Laws of the U. S. A. 2 nd ed., London: Cambridge University Press, pp