I started reading about the history of the American Tobaccco Company to try to understand more about why they were convicted of violating the Sherman Anti-Trust Act of 1890.
For some context, let's start with the following:
James Buchanan Duke's entrance into the cigarette industry came about in 1879 when he elected to enter a new business rather than face competition in the shredded pouched smoking tobacco business against the Bull Durham brand, also from Durham, North Carolina.
In 1881, two years after W. Duke, Sons & Company entered into the cigarette business, James Bonsack invented a cigarette-rolling machine. It produced over 200 cigarettes per minute, the equivalent of what a skilled hand roller could produce in one hour, and reduced the cost of rolling cigarettes by 50%. It cut each cigarette with precision, creating uniformity in the cigarettes it rolled. Public stigma was attached to this machine-rolled uniformity, and Allen & Ginter rejected the machine almost immediately.
Duke set a deal with the Bonsack Machine Company in 1884. Duke agreed to produce all cigarettes with his two rented Bonsack machines and in return, Bonsack reduced Duke’s royalties from $0.30 per thousand to $0.20 per thousand. Duke also hired one of Bonsack’s mechanics, resulting in fewer breakdowns of his machines than his competitors’.
This seems to be accepted fact based on Googling.
I then found this article
The profits resulting from this monopoly power in the cigarette markets led American Tobacco to move into the markets for other tobacco products, subsidising the same types of aggressive pricing and marketing strategies that eventually gained it a significant share of these markets as well. Perhaps most important among these strategies were the “fighting brands”—very low priced cigarettes and other tobacco products, including some priced below manufacturing costs—that were used to drive competitors from the market.1 These and other anti-competitive practices eventually led to the 1911 breakup of American Tobacco Company under the Sherman Antitrust Act. Four tobacco giants emerged from the breakup: American Tobacco Company (ATC), RJ Reynolds Tobacco Company (RJR), Liggett & Myers Tobacco Company (L&M), and P Lorillard Company.
Thus it sounds like predatory pricing was a central part of both how the ATC grew their business and drove others out of business. It also sounds like this an important part of why they were judged to be in violation of the Sherman Anti-Trust Act.
But this other article offered much more specific evidence.
Though American Tobacco did acquire many firms in all phases of the tobacco business between 1890 and 1911, the total number of their acquisitions must be put in perspective. While over 200 acquisitions appears high—and creates the impression that only a few independent tobacco firms remained—the tobacco industry contained thousands of independent firms in the period under consideration. While American Tobacco did the great bulk of much of the tobacco industry in a few large manufacturing plants, thousands of smaller independent firms sold their products at a profit in the open market in competition with the "Trust."
For example, as many as 300 independent cigarette manufacturers may have existed in 1910. Similarly, while the Trust produced a great percentage of the nation’s output of smoking tobacco in fewer than 25 plants, there were as many as 3,000 plants manufacturing smoking tobacco in 1910. In addition, the Trust accounted for only about seven of the nation’s estimated 70 snuff manufacturing plants. And finally, the American Cigar Company operated just 29 manufacturing operations in 1906, while the cigar industry contained upwards of 20,000 independent firms.1s Thus, the tobacco industry contained thousands of firms in spite of the acquisition activities of the "Trust."
But low barriers to entry should mean there was room for competition. In other words, if the American Tobacco Company was really driving out competitors by predatory pricing, the industry would have high barriers to entry because it would require a cost structure capable of producing very low prices.
Here's some specific evidence about prices
But while the "Tobacco Trust" enjoyed "economies," what became of the tobacco consumer and of the "Trust’s" competitors? Did American Tobacco simply act like a "classical" monopolist by restricting output and raising price? Or did American act like a "predatory" monopolist and use its market power to lower prices, and, consequently, drive its competition from the market?
Actually, there is little evidence that American Tobacco followed either monopolistic-like conduct: they neither restricted outputs nor raised prices, nor engaged—as a general rule—in predatory pricing practices designed to eliminate their competition.
For example, consider this sample of prices of a variety of American Tobacco’s product categories:
(Prices are cited in the article. I've combined them here for convenience.)
This at a minimum establishes the ATC did not raise prices unfairly. But were they predatory? The courts seem to agree prices were not the deciding factor.
The comments concerning American Tobacco’s efficiency and price policy related above are certainly not original. Amazingly, the same sort of comments can be discovered in a reading of the Circuit Court decision (U.S. v. American Tobacco, 164 Federal Reporter, 1908) that first determined that American Tobacco had violated the Sherman Act. Although Circuit Judge Lacombe found American guilty of violating the Sherman Act, he stated, with respect to the economic issues involved that:
"The record in this case does not indicate that there has been any increase in the price of tobacco products to the consumer. There is an absence of persuasive evidence that by unfair competition or improper practices independent dealers have been dragooned into giving up their individual enterprises and selling out to the principal defendant…. During the existence of the American Tobacco Company new enterprises have been started, some with small capital, in competition with it, and have thriven. The price of leaf tobacco—the raw material—except for one brief period of abnormal conditions, has steadily increased, until it has nearly doubled, while at the same time 150,000 additional acres have been devoted to tobacco crops and the consumption of leaf has greatly increased. Through the enterprise of defendant and at a large expense, new markets for American tobacco have been opened or developed in India, China, and elsewhere." (Italics added.)34
Circuit Court Judge Noyes, while concurring with Judge Lacombe in American Tobacco’s guilt, also appeared to concur in the economic issues involved.
"Insofar as combinations result from the operation of economic principles, it may be doubtful whether they should be stayed at all by legislation…. It may be that the present anti-trust statute should be amended and made applicable only to those combinations which unreasonably restrain trade—that it should draw a line between those combinations which work for good and those which work for evil. But these are all legislative, and not judicial, questions."35
It was Judge Ward (dissenting), however, who crystallized the economic issues in the case.
"So far as the volume of trade in tobacco is concerned, the proofs show that it has enormously increased from the raw material to the manufactured product since the combinations, and, so far as the price of the product is concerned, that it has not been increased to the consumer and has varied only as the price of the raw material of leaf tobacco has varied.
The purpose of the combination was not to restrain trade or present competition… but, by intelligent economies, to increase the volume and the profits of the business in which the parties engaged." (Italics added.) 36
"A perusal of the record satisfied me that their [American Tobacco) purpose and conduct were not illegal or oppressive, but that they strove, as every businessman strives, to increase their business, and that their great success is a natural growth resulting from industry, intelligence, and economy, doubtless largely helped by the volume of business done and the great capital at command."
Yet, although three of the four Circuit Court judges admitted that there was evidence to indicate that American Tobacco was efficient, had not raised prices, had expanded outputs, had not depressed leaf prices, and had not "dragooned" competitors, Judge Coxe joined Judges Lacombe and Noyes in concurring that American Tobacco violated the Sherman Act!
This article further argues that the real reason the ATC was convicted of violating the Sherman Anti-Trust act was as follows:
American Tobacco was convicted in spite of its economic record because its mergers and acquisitions inherently restrained trade between the now merged or acquired firms, and that violated the Sherman Act as interpreted in 1908. Judge Lacombe made the majority’s position explicit:
every aggregation of individuals or corporations, formerly independent, immediately upon its formation terminated an existing competition, whether or not some other competition may subsequently arise. The act as above construed Sherman Act prohibits every contract or combination in restraint of competition. Size is not made the test: two individuals who have been driving rival express wagons between villages in two contiguous states, who enter into a combination to join forces and operate a single line, restrain an existing competition….
"Accepting this construction of the statute, as it would seem this Court must accept it, there can be little doubt that it has been violated in this case… the present American Tobacco Company was formed by subsequent merger of the original company with the Continental Tobacco Company and the Consolidated Tobacco Company, and when that merger became complete two of its existing competitors in the tobacco business were eliminated."38 (Italics added.)
It was irrelevant to inquire into the benefits of the combination, argued Judge Lacombe. It was "not material" to consider subsequent business methods or the effect of the combination on production or prices. The fact that American Tobacco had not abused competitors, tobacco growers, or consumers was "immaterial." The only issue that was material was that:
"Each one of these purchases of existing concerns complained of in the petition was a contract and combination in restraint of competition existing when it was entered into and that is sufficient to bring it within the ban of this drastic statute."39 (Italics added.)
And, thus, the three judges (with Judge Ward dissenting) ruled that the American Tobacco Company must be divested.
I'm very confused then as to why other sources are claiming the ATC engaged in predatory pricing practices. It was not just the two I found. Therefore, I would like the following clarified.
Did the cases discuss whether predatory pricing had taken place? If so, what evidence was presented to the court indicating the ATC had not engaged in predatory pricing practices?