PRICE FIXING AND MARKET ALLOCATION1896-98

U.S. vs. Addyston Pipe and Steel Company, et al

The Addyston Group: Cast Iron Pipe

Company Location Capacity (tons/year)

Addyston Pipe and Steel

Cincinnati, OH 45,000

Dennis Long and Co. Louisville, KY 45,000

Howard-Harrison Iron Co.

Bessemer, AL 45,000

Anniston Pipe and Foundry

Anniston, AL 30,000

South Pittsburgh Pipe Works

South Pittsburgh, TN 15,000

Chattanooga Foundry Chattanooga, TN 40,000

TOTAL 220,000

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” competitionAddyston 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 citiesPay 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 outsidersBonuses 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, 6th 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, 2nd ed., Cambridge: MIT Press, pp. 139-44.

Breit, William E. and Kenneth G. Elzinga. (1989) The Antitrust Casebook, 2nd ed., New York: Dryden Press, pp. 17-23.

Neale, A. D. (1970) The Antitrust Laws of the U. S. A. 2nd ed., London: Cambridge University Press, pp. 33-34.