This book has been made possible by the efforts of all those on the Subcommittee staff who worked on the preparation of the administered price hearings and the subsequent economic reports. The list may be found in the Note on page 241. Appreciation is expressed to Dr. John M. Blair, Chief Economist of the Subcommittee, for his assistance in the conception and planning of the work and for his editorial suggestions and contributions. Thanks must be extended to Dr. Walter S. Measday of the Subcommittee's economic staff, who made substantial contributions to the bakery chapter. They and Dr. E. Wayles Browne, Jr., statistical expert for the Subcommittee, were generous with their time and suggestions in critical scrutiny of the final manuscript.
Monopoly also leaves its heavy imprint upon small business. In many industries, the activities of small independent units have been almost extinguished; in others, they are "contained" to "fringe" areas of an industry's activities, such as highly specialized fabrication, custom-designed products, and the like.
In the ethical drug industry, for example, the large companies have almost totally pre-empted the sale of prescription drugs through retail pharmacies; increasingly the business of the smaller companies has been limited to sales to institutional buyers purchasing in the competitive generic-name market. In automobiles, the genuinely small manufacturer is limited to the production of parts and components, and even this market is shrinking with the disappearance of the independent auto makers. In the steel industry the little fellow is usually a nonintegrated fabricator whose material must be purchased from one of the major mills with whom he also competes in the marketplace.
The surest protection to competition, and thus to the consumer's interest, is the existence of a large number of producers none of whom has an appreciable share of the market. Even when an industry desires to achieve "price stabilization," as price-fixing is sometimes euphemistically called, if that industry is made up of many independent units its attempts at price-fixing will be short-lived or impossible. The women's garment trade is a case in point. For years that industry marketed its products on the basis of specific price lines, with "house dresses" at the foot of the price ladder. To the consumer's gain and the manufacturers' continuing distress, the house dress branch persisted in upgrading its product but selling at house dress prices. On occasion the manufacturers met and reached a common agreement on the price lines to be followed and the quality to be put into each of these lines. After one such meeting a number of the manufacturers immediately returned to their offices and notified their customers that they would maintain their former low prices and further upgrade the quality of their merchandise. Thus, with each producer acting according to his own independent best interests the industry remained as fiercely competitive as ever.
It is this free spirit of individualistic behavior which gives to the public the benefits of competitive enterprise, namely, lower prices and better quality. It is this same spirit which earns the enmity of monopoly for its unsettling and disturbing impact upon established ways of doing things, not to speak of the disrupting consequences on monopolistic pricing and profits.
The effect of monopolistic power on the small businessman is well illustrated by the wholesale bread industry. The baking of bread and related products is an important area of economic activity; in 1958 this industry shipped nearly 4 billion dollars worth of merchandise at wholesale prices. The bread industry by nature has been one of the provinces of the small businessman. The official 1958 Census of Manufactures showed that there were 5300 separate wholesale baking companies.
Despite the large number of independent companies, however, only four firms accounted for 22 per cent of the market, and the eight largest held 37 per cent. These market shares were much larger than in 1947 when there were nearly 6000 separate firms. The big companies have been getting bigger very rapidly, while the small ones have been going out of business by the hundreds. A number of small bakers who appeared before the Subcommittee in 1959 described from their own experiences the practices which explain what the statistics show.
Central to the problem is the fact that the large companies have their operations spread out over many local markets. They can keep the price of bread high in some areas and make substantial profits—profits that can be used in other areas to finance competitive practices which are ruinous to the independent bakers there.
In virtually all of the major cities of the country independent bakers have experienced the aggressive tactics of their well-heeled larger competitors. At the present time the penetration is extending to communities of more moderate size, and more and more small bakers are succumbing to the new economic order in the industry. Even where large-company entry into a particular market has not yet occurred, the independent bakers feel insecure. They are familiar with the competitive practices used by the major companies in nearby markets, and often personally know small bakers who have been destroyed by engaging in competitive warfare with the newcomers. It is not difficult to understand why submission to the price policies of their large competitors may be viewed as the better part of a dangerous—perhaps suicidal—valor.
One of the case histories presented to the Subcommittee bears eloquent testimony to the methods used to destroy the small businessman. The witness was a businessman who had taken over a bakery in Meadville, Pennsylvania, from his father-in-law in 1944. At that time the business had sales of $150,000 a year. By 1950 the witness had built sales up to nearly one million dollars a year. In August 1958 his company closed its doors. This was not only a disaster to the owner; it left employees without jobs and deprived the home town of what in that area was a substantial payroll. The sequence of events is instructive.
As soon as this baker began to expand his share of the local market, he attracted the attention of two competitors, Ward and Continental, among the largest finns in the industry. Both served the market from plants in Youngstown, Ohio, some 60 miles away.
The first move was from Ward Baking Company, which in 1948 made inquiries about buying out the smaller firm. The owner set a price of $240,000 and, according to his testimony, was assured by Ward that this was fair enough. Thereupon he forwarded to Ward information on his routes, costs, customers—everything, in short, that might be of interest to a competitor. Called to New York to complete the sale, the witness was informed that the price would only be $160,000, which he refused to accept:
They informed me then, of course, that if they wanted that bakery badly enough there were other ways to get it, and they cited, for instance, price cutting in a market; and they illustrated a bakery, ...I am pretty sure it was in South Bend where they brought the price of bread down as low as 5¢ a loaf in that market until this particular baker was out of business. [Hearings, Administered Prices, Bread, Part 12, p. 6435.]
The evidence indicates that the witness was subjected to just such a price squeeze after his refusal to sell out. The wholesale price of bread baked in Youngstown was raised several times; by September 1958 it sold in Youngstown and most localities served by the Youngstown bakeries for 15.6 cents a pound. But in the market area served by the witness, the price of his major competitors' bread, shipped from the Youngstown bakeries, did not go up. The wholesale price was 13 cents a pound in 1950, and, in the words of the witness, "That 13 cents price prevailed right up to August 19, 1958, when I closed my doors." The testimony of the major company witnesses before the Subcommittee established the fact that it costs at least half a cent a pound to ship bread 50 miles. Thus, solely on the basis of costs, the price of the major brands would be expected to be higher in northwestern Pennsylvania than in Youngstown where it was baked. Since this was not the case, we can guess that the failure to raise prices in the marketing territory of the independent, while they were being raised in other areas supplied out of Youngstown, was part of a deliberate competitive strategy by his large rivals. Significantly, within two weeks after this independent went out of business, these companies raised their prices substantially in the very territory where for nearly a decade there had been no price increases.
In addition to price discrimination, this independent baker was subjected to harassment by two labor unions, the Teamsters (which had organized his drivers) and the Bakery and Confectionary Workers (representing his plant personnel). Both of these unions had been expelled from the AFL-CIO because of corrupt leadership. Several years ago Senator McClellan, in a series of hearings, exposed the close ties which existed between top officials of the leading bakery companies and the very union leaders whose activities led to the expulsion actions.
In 1950 two Teamster officials were sent up from Pittsburgh to handle current negotiations for the Meadville local. They demanded terms which were higher than those prevailing at the Youngstown bakeries, stating that Ward and Continental would not negotiate until the Meadville independent baker had first agreed to the new terms. When the latter insisted that he could not compete if his pay scale were raised above those of his competitors, the answer of the Teamster representatives, according to the small baker, was simple and direct: "If you can't compete, get out of business. We don't want to do business with small fellows anyway." But the baker's drivers remained loyal to him and dropped out of the Meadville Teamster local.
Then a strange thing happened. The business agent of the Teamster local was appointed to serve simultaneously as business agent for the Bakery and Confectionery Workers' local! The pattern of union harassment continued, this time through the bakers' organization. Finally, when the plant workers, like the deliverymen, made evident their loyalty to and support for their employer, the national office of the Bakery and Confectionery Workers simply deprived the Meadville local of the power to do its own bargaining. Responsibility for negotiating the Meadville contract was taken away from the Meadville local and given to the Youngstown local.
In 1955 the Meadville baker was approached by Continental Baking Company in regard to selling the business. He provided the president of Continental with all available information on route sales and the like, but was then informed that Continental was no longer interested in the transaction. At the time the Meadville baker operated a profitable depot or agency at Jamestown, N.Y., with a number of house-to-house retail routes. Two of his supervisors who wished to go into business for themselves agreed to purchase the agency. Soon thereafter, within three months after the baker's conversations with Continental, the two former supervisors sold the Jamestown routes to a subsidiary of Continental.
Throughout this period in Meadville, as in many other communities across the nation, there was heavy mortality among the independent grocery stores in the face of chain-store supermarket expansion. Over four or five years, more than half of the town's small grocers went out of business. The witness testified that, with this development, he was forced to turn to the business of baking private-label bread for grocery chains. But even here he ran into difficulties. Time after time he would enter into a private-label agreement, only to have the deal bested in one way or another by the national wholesale bakers operating in his area.
One example of the methods used relates to the matter of "stale returns." In selling his own brand of bread, a baker regularly agrees to take any unsold merchandise back from the retailer; thus the retail store pays only for the bread it actually sells. In supplying private-label bread to a chain grocery, on the other hand, the wholesale baker normally operates on a "no returns" basis. Indeed, the major companies explained to the Subcommittee that this policy is one of the principal reasons why they can sell private-label loaves to grocery chains at lower prices than those charged for their regular brands. On occasion, however, the Meadville independent baker found that when he was negotiating a private-label agreement, his major competitors would undercut him by offering to meet his price and at the same time to allow full credit for the return of unsold bread. This is the sort of competition which no independent baker, operating in a single market area, can hope to meet. After being subjected to this kind of competition from the major companies for a period of nearly three years, the witness stated in his own words, "I simply closed the doors; I had nothing to offer."
This story of the Meadville baker whose business was destroyed is told not merely because it describes what happened to one individual. Instead, it is typical of the experiences related to the Subcommittee by small businessmen all over the country. It dramatically suggests the reasons why small producers, unable to stand up under the pressures directed against them by the giants of the industry, are disappearing from the American scene.
Baking is an industry which singularly lends itself to localized operation and control. Bread is a product that must be sold soon after it is produced. At the same time, shipping it any distance is relatively expensive. Thus, bread is produced by plants within each of the narrow geographical markets within which it is consumed.
Both small and large bakers agreed that there are no technological advantages possessed by the national multi-plant baking companies over locally owned single-plant businesses. The president of the industry's largest company, Continental, asserted: "I would say that, by and large, the average independent can outoperate Continental. ...I would say that his costs are lower than our costs, and I think that is borne out by the fact that independents make a higher percentage of profit." [Hearings, op. cit., p. 6196.] The presidents of both General Baking and Ward testified that their plants are no more efficient, and in some cases much less efficient, than well-managed locally owned baking plants. The witness representing Campbell-Taggart Associated Bakeries, today the second largest and consistently the most profitable of the major companies, stressed the fact that his company's success rests upon a foundation of autonomous local management in each of its plants, with a minimum of central office advice or control.
Even small plants—with capacities of, say, 30,000 pounds per shift or less—can be operated efficiently. In 1958 nearly two-thirds of Campbell-Taggart's plants were relatively small operations, and fifteen of the seventeen plants operated by Southern Bakeries, another of the more profitable companies, were in the small-size category. And both of these companies operated predominantly in areas of low bread prices. This supports the considerable evidence in the record that in this industry operating efficiency does not increase directly with the size of the plant—that, indeed, the reverse may be true.
Throughout the hearings the small independents reiterated their belief that they could easily hold their own under conditions of "free and reasonable competition." Their basic complaint was that these conditions no longer existed in most areas insofar as bread baking was concerned. The Subcommittee's inquiry disclosed a vast network of discriminatory practices in the industry which, in the aggregate, have had a serious impact upon the ability of these smaller units to survive.
One of the most common devices used by the large baking companies is plant discrimination. This involves charging widely differing prices for the same bread produced in different plants of a company. The existence of this type of discrimination was amply demonstrated in figures on plant prices as of September 1, 1958—data provided to the Subcommittee by the major baking companies themselves. The Campbell-Taggart plant in Des Moines, Iowa, for example,—was selling the same bread at the same time for 16 cents. The same company's plant in Cedar Rapids—less than 100 miles away—was selling the same bread at the same time for 16 cents. Continental's bread baked at Omaha, Nebraska, sold for 13 cents a pound; not too far away, at the Sioux City, Iowa plant, the price was 16 cents. These cases were not exceptional; examples can be multiplied many times over in every part of the country and for each of the major baking companies.
Why does the practice exist? The first explanation that comes to mind is difference in production costs. But the cost data secured by the Subcommittee and the testimony presented in the hearings made it clear that differences in production costs were not sufficient to explain the price differentials. Indeed, in some cases the evidence indicated that costs of production had little relationship to the prices charged. Frequently, plants of a large concern operating in the same general area and with similar labor and other costs had widely differing prices.
It was not so much costs as the state of competition that was cited as the cause of the price differentials. The position of the large companies was that they were "meeting competition" in each local area. According to the president of Continental, "We have different competitive situations in every city, and, going back to the remark I made earlier, we either have to match existing prices or go out of business." The president of General Baking Company pointed out, "But competition is again the thing that we have to take into consideration in determining a price to sell on the market. We can't price standard white bread over the market." Strangely enough, the major companies insisted that low prices in almost any given market could be traced to small independent bakers who derived all of their sales income within that market. As the president of Ward stated, "In every one of these [low-price] towns there are independent bakers who have established this price for one reason or another, whether it is keeping it low to keep out competition or whether it is a fair price based on their cost figures."
The small, independent bakers saw things differently. To them, a price structure had been imposed on the bread industry under which all of the financial resources of their larger competitors were being marshaled to drive them out of business. This viewpoint was expressed by the spokesman for a leading association of independent bakers. He stated that independents have two great fears with respect to their major competitors. The first is "Spotted destructive pricing. The use of underpricing in one market, while maintaining normal prices in others. The corporation with a large number of plants can easily stand a loss for a long time in a certain percentage of its units while making a profit in others." The second, "a danger which could accelerate and which we also fear, is a practice called waltzing or private price battles between two or more large companies with the independent in the middle." Here the spokesman for the independents was referring to the fact that while the major companies never engage each other in any large-scale competitive battles, they may sometimes engage in isolated tests of strength in one or two local markets. Regardless of the purpose, however, the effect is still the destruction of the independent businessman in such markets.
In a sense both sides were right. Where competition was minimal or nonexistent, the large companies had no check upon their impulse to charge what the traffic would bear. However, in local areas where small baking establishments still survived, they were prepared to meet the competition—and then some. The point is that this is a game which only the large company, with a wide distribution of regional plants, can play effectively. Losses that may be incurred in Des Moines can be made up by gains in Cedar Rapids. But if you happen to have only one plant, and that is in Des Moines, you will be in for some hard sledding.
Closely allied to plant price discrimination is "route price discrimination." This concerns the sale of a product at points on routes radiating out from its place of manufacture at prices lower than that which prevails where it is made. Obviously there is no "cost defense" here. It costs half a cent to move a loaf of bread 50 miles, and yet a number of charts placed in the record showed that prices for bread are frequently lower in outlying communities than in the cities where it is made.
Continental, for example, has a plant in Columbus, Ohio which sold bread wholesale at 16.4 cents a pound. A big truck trailer carries the bread to what is known as a "loading station" at New Lexington, 55 miles away. At the loading station the bread is transferred into smaller delivery or route trucks. One of these trucks goes to Parkersburg, West Virginia, a distance of over 120 miles from where the bread is baked. But in Parkersburg the bread sold for 15.2 cents.
One of the most striking examples of route price discrimination concerns General Baking Company's operations in the Philadelphia area. In the city, itself, General is the leading producer; the bread baked in Philadelphia sold wholesale in that city at 18.8 cents. Trucks carry it to Reading, Allentown, and Easton, all about 55 miles north of Philadelphia. In each, the bread was a cent cheaper. The delivery truck moving out of Easton transports the bread farther out to Stroudsburg, where it was sold two cents cheaper. The Allentown truck in turn moves out to such smaller communities as Ashville, Snyder, and Tamaqua, where the wholesale price was also two cents less.
The same pattern of price variations appears south of Philadelphia. At the time of the Subcommittee's investigation, the cheapest places to buy bread baked in Philadelphia were such distant localities as Stroudsburg or the Eastern Shore of Maryland. The most expensive place to buy it was in the city of Philadelphia, within a few blocks of the bakery! When asked for an explanation of this state of affairs, officials of the large companies explained again that they were merely meeting "competitive conditions." But what were the "competitive conditions"? The variation in Continental's prices in Columbus, Ohio, and Parkersburg, West Virginia, is suggestive. Prices were high in Columbus, where Continental's competition in the wholesale bread market consisted primarily of General, Ward, and American, all among the largest baking companies in the nation. Prices were low in the Parkersburg area. When asked to comment, the president of Continental explained: "In the Parkersburg-Marietta area there are four bakers. ...All we are doing is meeting their price." Significantly, all four of these bakers were small independents.
Thus, there is real price competition in a market where a giant firm is faced by a few tiny rivals, but it is conspicuously absent when the giants face each other alone. Where the small independent bakers have been weeded out of the business, prices remain high. But in communities where the independent baker has built up an established reputation for his product, prices are driven down sharply by the large companies in an effort to capture the market. It is therefore not surprising that most of the independent bakers appearing before the Subcommittee felt that their own future survival was highly problematical.
Other forms of discrimination are prevalent in the bread industry. When a large company plans the invasion of a new market, it has to take into account the fact of sales resistance. Local loyalties have been developed for the independent baker in the community; often his product has won an established reputation for quality. To overcome whatever consumer resistance may exist, the grocers are induced to give prominent display to the new product with free bread or fixtures. The latter often consist of new bread racks or a new paint job for the store front. The large multi-plant firm can, of course, make these financial investments, recovering its outlay later or in another community. Indeed, temporary losses on business are usually regarded as a necessary cost for invading a new market.
One example of this behavior cited in the hearings concerned the efforts of the American Bakeries Corporation to break into the Topeka, Kansas market in 1955. According to witnesses, the company gave away thousands of loaves of free bread over a period of time—bread placed in customers' cars, free merchandise offered to grocers, supplies of baked goods to institutions, and so forth. Local bakers had complained to the Federal Trade Commission, but the agency's field investigators apparently decided that American's activities were simply "promotional." As one witness commented, "It is not promotion and it is not a one-shot promotion, and even if it was, giving a grocer a month's free bread is a little vicious. That is worse than cutting the price. That is giving it away."
Another device, perhaps peculiar to the bread business, is "stales clobbering." In the baking industry stale bread which is unsold is customarily returned to the baker, and the grocer is reimbursed for his stale returns. Obviously, it is to the baker's interest to sell as much as possible but to hold stale returns to a minimum. On the other hand, it is generally accepted in the trade that consumers are influenced by the "pile psychology"; that is, they tend to select a loaf from the largest pile on the grocery shelf. Thus a conflict is created. Though the baker wishes to keep stale returns to a minimum, he feels he must maintain a respectable pile on the grocer's bread rack to entice the customers. The large pile also has another advantage; it crowds the wares of the smaller independents off the shelves.
A typical example was described by an independent baker from Hastings, Nebraska. Campbell-Taggart—under the name Rainbo Baking Company—had acquired a plant in Grand Island, Nebraska, from which it began to enter the Hastings market in 1955. One of the practices utilized was "slugging" the market with more merchandise than could possibly be sold, both to attract consumers and to force rival merchandise off the limited shelf spaces available. As a result, the witness stated,
Our percentage of stale or returned merchandise was running approximately 4.9 per cent which is a normal percentage of returns. In 1955 when the Rainbo Bread Co. began operating the Grand Island plant, our stale returns jumped to 5.7 per cent; in 1956 to 9.3 per cent; in 1957 to 9.5 per cent. The reason for the increase in returned merchandise is due to the fact that the Rainbo Bread Co. put merchandise in the stores in large quantities, more than could ever possibly be sold. We were forced to increase the amount of merchandise that we put in the stores, otherwise we would lose sales and rack space to this concern. [Ibid., p. 6476]
This witness had one plant. If he lost money there, he lost money in his whole business. Compare this to Campbell-Taggart's position. The spokesman for that company told the Subcommittee, "In 1958 none of our bakeries lost money." But then he had an afterthought:
Wait a minute, I'm sorry. I might have to make an exception in the case of Grand Island. ...I would have to check the record, because if they made any money they just barely did. They have been in the red. I sometimes forget about Grand Island. [Ibid., p. 6301]
This game tends to be one-sided. The larger companies are financially able to squeeze the independents by flooding the grocery stores with their brands and absorbing the losses on stales. The small baker is in a dilemma. He can match the practices of his bigger competitors or lose volume. In either event, he is bound to suffer. If he tries to match piles with the bigger companies, his stale returns will increase drastically and his profits will be reduced to a minimum. If he remains aloof from this form of competitive activity, his sales volume falls.
Here is another form of competitive activity in which there is no real gain to the public. The studied creation of mountains of stale bread serve no useful end to society; nor is there any social benefit to be derived by catering to the fiction that the height of the pile is an indication to the consumer of the freshness of the bread.
The record of the Subcommittee also shows that special discounts to preferred customers is a common practice in the bread industry. Instead of cutting prices across the board, the large baker often attempts to maximize profits through selective price reductions. In this fashion he hopes to keep captive the retail grocers with large volume, but to withhold the price cut from those retailers lacking real bargaining power. The chief beneficiaries in this practice are, of course, the national chains.
A dramatic illustration of the problem occurred during the Subcommittee's hearings. An independent with a single supermarket in Pomona, California, submitted a sworn statement relating his failure, over a ten-year period, to secure discounts approximating those granted to supermarkets operated by the national chains. When the Subcommittee began hearings on bread, he was suddenly showered with attention; representatives of both Langendorf and Interstate informed him he was eligible for a 5 per cent discount. Prior to this time, however, he had been repeatedly informed that a minimum of five retail outlets was necessary to secure a discount. In contrast, throughout this period the chains were given a 7½ per cent discount, and some reportedly were getting 10 per cent. Indeed, the Subcommittee's hearings show that the large bakers plied the big retail chains with offers of ever better discounts; and the latter, concerned about possible attack under the Robinson-Patman Act, actually became reluctant to accept the ever increasing discounts.
"Money under the table" is a phrase used in every industry for the granting of pecuniary favors for which no record is kept. According to one of the larger independents operating in Michigan, this phrase is inadequate for the bread business. To indicate its diversity, he preferred to speak of money "over the table" and "under the table" and then, as an afterthought, included "and through the table." Often these cash payments are made ostensibly for prominent display space or a "preferred rack position." This practice, which is both widespread and growing, is really a form of commercial bribery. Since these payments are secret, seldom appearing on an invoice, it is virtually impossible to counteract them effectively.
The existence of phoney "promotional allowances" was openly acknowledged by R. A. Jackson, president of Ward Baking Company. Paul Rand Dixon, Chief Counsel to the Subcommittee, placed into the record a "contract" for eight promotions of Ward products by National Food Stores; the allowances were $610 per promotion, for a total of $4880. The strange thing was that this "contract" contained nothing at all about specific performances to be fulfilled by the customer.
Counsel for the Subcommittee asked Mr. Jackson, "Could you tell us exactly what sort of promotional services you paid nearly $5000 for and what was the duration of this contract?" Mr. Jackson's answer was direct and honest: 'In effect, it is nothing more than a discount, to meet competition." Later, agreeing that no promotional services were expected, he reiterated, "But the name 'promotional' is a misnomer, so to speak, because in the final analysis it is nothing more than a discount." [Ibid., p. 6277] Indeed, the only disagreement on this point came when payments of this type were referred to as "money under the table." The Ward vice-president assured the Subcommittee that there was nothing "under the table" about it either for Ward or its customers—"It is on our books and on their books."
The use of these secret payments sets loose a vicious cycle that imperils the survival of the independent baker. Grocers who are approached with cash offers are immediately tempted to playoff one baking company against another. The force of competitive rivalry places the small baker, with his limited resources, at a distinct disadvantage; with the best will in the world, he can scarcely hope to match the secret inducements of his larger competitors.
Other discriminatory practices involve tampering with the loaf. In some markets the larger bakers sell a "fighting brand" of bread. Sometimes referred to as a "secondary loaf," this bread is made from a leaner formula and sold under a different brand name. Often it is expanded with air to give it the appearance of a standard loaf. Its price is, of course, lower and the consumer thinks he is getting a special bargain.
The situation occurs in reverse when the large baker meets the prevailing price in the market, but offers a larger loaf. This is frequently employed as a temporary device when a large baker plans the invasion of a new territory. After a short time, when he becomes established as an important factor in the market, he abandons the practice and few consumers are aware of the change.
An unusual case of preferential price treatment disclosed in the Subcommittee hearings was that granted by Ward Baking Company to the Grand Union grocery chain. In 1959 Ward entered into a contract to supply Grand Union's private-label bread and bakery products ("Freshbake" bread and "Nancy Lynn" baked goods). No firm prices were specified; instead, Ward agreed that the prices charged Grand Union would be 20 per cent under prevailing chain-store retail prices in the market in which they were sold, regardless of what the prevailing retail prices were. In other words, where the chain-store private-label price was 18 cents a loaf, Ward supplied Grand Union stores at 14.4 cents a loaf wholesale. If the prevailing retail price was 14 cents a loaf, Ward's price to Grand Union was 11.2 cents.
Such an arrangement had two very strange effects. In the first place, the Grand Union stores supplied by Ward were almost completely insulated from changes in the local chain-store market price. Regardless of what happened to chain-store prices in the market, Grand Union continued to receive its 20 per cent margin on baked goods. In the second place, the arrangement prevented Ward from expanding the sales for its own TipTop bread in any market where it also supplied Grand Union stores, for any price reduction on its own products would lead to competitive reductions by chain stores in the area, and these would be matched by Grand Union. This would necessitate decreases in Ward's wholesale prices on Grand Union's private-label goods in order to maintain Grand Union's contractual margin. Under this arrangement a major baking company is, in effect, subsidizing one of its own principal competitors. And it subsidizes in such a fashion as to forestall any action on its part to increase its own share of the market at the expense of its competitor's.
None of these discriminatory practices is either new or unique to the bread industry. Their danger stems from the fact that they widen the gap between big and small units and virtually guarantee the extinction of the smaller firms. As many of the independents pointed out, they had no fear of their ability to survive on the basis of their efficiency under conditions of free and honest competition. The real threat created by monopoly power in the bread industry is the temporary establishment of such competitive conditions that all but those with sizable financial resources go under. Once this is accomplished, the rest is easy; an administered price structure becomes established in the industry. As R. Norman Jordan of the Jordan Bakers in Topeka summed up the whole situation:
The independent in that market is in a pretty unfavorable situation because he has only one bakery from which to draw his profit, and if the national wholesalers concentrate on him, he will either operate at no profit or a loss for so long as his finances permit. Then eventually close his doors or sell out at the best price he can get. [Ibid., p. 6453 ff.]
Why, it was asked, had the small bakers not invoked the sanctions of the Robinson-Patman Act which is aimed precisely at such discriminatory practices? Or the "unfair methods of competition" provision contained in the Federal Trade Commission Act? On this point Mr. Jordan provided some interesting information:
We have a file of correspondence, directed to these FTC offices that must weigh 6 pounds. We reported to FTC investigators many of the questionable practices in which American Bakeries Corp. and Continental Bakeries were engaged. Finally one investigator came to Topeka and saw a few of the grocers whom we had listed for him. ...Most of the grocers we listed and felt he should see were not contacted. We suppose that this man did not have time or was not sufficiently interested. At any rate he reported later that he could not find out much. We went into such unfair competitive activities with the FTC again, and they eventually sent another man to see some of the grocers listed. He too seemed unable to find out anything.
A major problem, of course, is the difficulty encountered by a Government investigator in securing proof of violation. As Mr. Jordan remarked,
We realize that the grocers who accept free bread for two weeks or more or accept money or rebates probably do not choose to discuss these things with an FTC man, because they are afraid that they are guilty of some offense or they don't want to let down the baker who makes the offer or they don't want the revenue department to get interested.
Nor can the complainant himself be of much help. Normally, it is easy enough to ascertain the nature of the offense on an informal basis from a good customer; it is quite another thing to ask him to supply a signed affidavit on the subject. Mr. Jordan put the problem quite simply when he remarked that an independent baker could hardly say to a good customer: "You remember what you said yesterday. Now I want you to sign that, because the FTC says they have to have an affidavit to that effect." [Ibid., p. 6463.]
On one occasion the FTC, after its investigation, informed this complainant that the violation appeared to be a "one-shot competitive event." But Mr. Jordan told the Subcommittee, "If that is so, then the one shot has lasted four and a half years, because American Bakeries is still offering money, free bread, discounts, and the same things they started in January of 1955." [Ibid., p. 6454.]
In general, the institution of a Government investigation in a particular market appears to have a salutary effect for a brief period. As another witness stated: "We received temporary relief from this kind of competition during the time the Federal Trade Commission was investigating our market, but just as soon as the Federal agency was not observing our market, the same practices commenced again." [Ibid., p. 6466.] Obviously, this kind of relief can, at best, occur only at infrequent intervals. It is axiomatic both in the Federal Trade Commission and in the Antitrust Division that staff cannot be spared for repeated investigations of the same complaint; the agency's scanty resources must be deployed in other industrial areas which too long have been free of Government scrutiny.
The administered price character of the bread industry in most markets today is revealed by the Subcommittee's price survey. This disclosed a remarkable absence of competitive pricing in most major cities. Prices changed infrequently, and when they did, the change was almost invariably in one direction—upward. Price reductions were noticeably absent except in those small and medium-sized cities where there were still some "troublesome" independents who resisted being driven out of their home markets.
Another important indicator is the way in which price changes occur. Ordinarily, the dominant firms in a market raise their prices simultaneously; or if a single firm takes the lead, the others follow within a day or two. The mechanism by which prices change may vary from time to time and place to place. The most direct method, of course, is outright collusion. There is evidence of collusion in several Department of Justice cases against bread companies in various local markets. Thus, in a case arising in western Tennessee, Campbell-Taggart's local manager testified, "I have drank coffee with my competitors at the Pig 'n Whistle," and went on to describe how he, Continental's plant manager, and various local bakers reached agreement on price changes.
In other cases the price leader may simply notify his competitors of his intentions to raise prices. Many instances of this practice are contained in the files of the Subcommittee. A typical example is a letter, dated June 4, 1957, from the Los Angeles plant manager of Interstate Bakeries to the San Jose manager for Langendorf United Bakeries, both companies being among the eight largest in the nation. The letter from the Interstate manager informed his competitor that Interstate's prices would be raised on June 10 by specified amounts for different products. On June 10, both Interstate and Langendorf raised their prices by identical amounts.
In still other cases, neither collusion nor notification appears necessary. The price leader simply increases his prices. His competitors learn of this almost immediately from their route drivers and then raise their own prices to the leader's level. This procedure is common in most of the major bread markets of the country. When the president of Continental was asked whether he had ever failed to follow a competitor's price increase in a major market he replied, "St. Louis is the last that I recall. It was three or four years ago." The president of General Baking Company could not recall any instance in which his firm had failed to follow an increase initiated by one of the other major companies, although he did mention three instances (none later than 1948) in which competitors had failed to follow General's lead. Ward's president found it equally difficult to recall any instances in which any of the major companies failed to follow one another up the price ladder. The Campbell-Taggart spokesman could not remember any such cases either, although he felt sure that there had been some. After checking his company's records, however, he subsequently wrote to the Subcommittee:
I am unable to cite any specific instances during the last few years where one of our subsidiary companies failed to meet a competitor's price increase with the result that such increase had to be rescinded. ...Of course, one reason. ...is because there have been very few instances of that type. [Ibid., p. 6652.]
It seems clear that the major bakers have adopted the rationale employed by other industries that practice administered pricing. When prices are raised, it is "to meet competition." The files of the Subcommittee are full of examples, in the form of letters from plant managers to regional and company headquarters officials requesting approval for price increases, which show the extent of the administered pricing rationale:
As of Thursday, August 7, our competitors in the Seattle area increased the price of their bread, and. ...we are raising the price of our bread effective August 11 in order to meet the competitive situation.
This is to advise that Interstate Baking Company, in the Greater Chicago area, made the following changes in the wholesale price of their bread products this morning. ...I recommend on our following bread products we meet this competitive increase.
Learned in market this morning that Ward has notified its customers of new wholesale prices effective Tuesday, September 2, 1958, as follows. ...Request authority to follow this competition in Metropolitan New York City market including north Jersey on Wednesday, September 3.
There are indications that Ward will increase the price of white bread, rye, wheat, and package rolls on Thursday, September 25, 1958. May I have approval to meet this price increase?
We have been notified by one of our local competitors that they plan to [increase] some of their wholesale bread prices effective on Wednesday, February 12, 1958. If this happens we will meet their price. [Ibid., pp. 6599-6651.]
Like the steel producers the large bakers regard themselves as "competitive" only when their prices are just as high as those of their brethren in the industry.