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

U.S. vs. Addyston Pipe and Steel Company, et al. Price fixing and Market Allocation 1896-98. The Addyston Group: Cast Iron Pipe. Industry Characteristics and Background. High fixed costs, fluctuating demand, high transportation costs, product homogeneity

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

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  1. U.S. vs. Addyston Pipe and Steel Company, et al Price fixing and Market Allocation 1896-98

  2. The Addyston Group: Cast Iron Pipe

  3. 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

  4. 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

  5. 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.

  6. 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).

  7. 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.

  8. 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.

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