legal-history
Did the American Tobacco Company engage in predatory pricing practices? What evidence was presented that lead the court to conclude they hadn&#39;t?
<p>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.</p>
<p>For some context, let's start with the following:</p>
<blockquote>
<p>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.</p>
<p>In 1881, two years after W. Duke, Sons &amp; 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 &amp;
Ginter rejected the machine almost immediately.</p>
<p>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’.</p>
</blockquote>
<p>This seems to be accepted fact based on Googling.</p>
<p>Source: <a href="https://en.wikipedia.org/wiki/American_Tobacco_Company" rel="nofollow noreferrer">https://en.wikipedia.org/wiki/American_Tobacco_Company</a></p>
<p>I then found this article</p>
<blockquote>
<p>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 &amp; Myers Tobacco Company (L&amp;M),
and P Lorillard Company.</p>
</blockquote>
<p>Source: <a href="https://tobaccocontrol.bmj.com/content/11/suppl_1/i62" rel="nofollow noreferrer">https://tobaccocontrol.bmj.com/content/11/suppl_1/i62</a></p>
<p>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.</p>
<p>But this other article offered much more specific evidence.</p>
<blockquote>
<p>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 &quot;Trust.&quot;</p>
<p>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
&quot;Trust.&quot;</p>
</blockquote>
<p>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 <em>high</em> barriers to entry because it would require a cost structure capable of producing very low prices.</p>
<p>Here's some specific evidence about prices</p>
<blockquote>
<p>But while the &quot;Tobacco Trust&quot; enjoyed &quot;economies,&quot; what became of the
tobacco consumer and of the &quot;Trust’s&quot; competitors? Did American
Tobacco simply act like a &quot;classical&quot; monopolist by restricting output
and raising price? Or did American act like a &quot;predatory&quot; monopolist
and use its market power to lower prices, and, consequently, drive its
competition from the market?</p>
<p>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.</p>
</blockquote>
<p>For example, consider this sample of prices of a variety of American Tobacco’s product categories:</p>
<p><a href="https://i.stack.imgur.com/LZbcc.png" rel="nofollow noreferrer"><img src="https://i.stack.imgur.com/LZbcc.png" alt="" /></a></p>
<p>(Prices are cited in the article. I've combined them here for convenience.)</p>
<p>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.</p>
<blockquote>
<p>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:</p>
<p>&quot;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.&quot;
(Italics added.)34</p>
<p>Circuit Court Judge Noyes, while concurring with Judge La­combe in
American Tobacco’s guilt, also appeared to concur in the economic
issues involved.</p>
<p>&quot;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.&quot;35</p>
<p>It was Judge Ward (dissent­ing), however, who crystallized the
economic issues in the case.</p>
<p>&quot;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.</p>
<p>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.&quot; (Italics
added.) 36</p>
<p>&quot;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.&quot;</p>
</blockquote>
<blockquote>
<p>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 &quot;dragooned&quot; competitors, Judge Coxe joined Judges
Lacombe and Noyes in concurring that Ameri­can Tobacco violated the
Sherman Act!</p>
</blockquote>
<p>This article further argues that the real reason the ATC was convicted of violating the Sherman Anti-Trust act was as follows:</p>
<blockquote>
<p>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:</p>
<p>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….</p>
<p>&quot;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.&quot;38 (Italics added.)</p>
<p>It was irrelevant to inquire into the benefits of the combination,
argued Judge Lacombe. It was &quot;not material&quot; 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 &quot;immaterial.&quot; The only issue that
was material was that:</p>
<p>&quot;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.&quot;39 (Italics added.)</p>
<p>And, thus, the three judges (with Judge Ward dissenting) ruled that
the American Tobacco Company must be divested.</p>
</blockquote>
<p>Source: <a href="https://fee.org/articles/antitrust-history-the-american-tobacco-case-of-1911/" rel="nofollow noreferrer">https://fee.org/articles/antitrust-history-the-american-tobacco-case-of-1911/</a></p>
<p>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.</p>
<p>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?</p>

<h2>Yes, it does discuss it and it was an undisputed fact at trial</h2>
<p>The Supreme Court judgement is <a href="https://supreme.justia.com/cases/federal/us/221/106/" rel="nofollow noreferrer">here</a>.</p>
<p>The court confined its decision to only facts that were undisputed at trial. At the end of page 221, they state:</p>
<blockquote>
<p>There is no dispute that, as early as 1893, the president of the American Tobacco Company, by authority of the corporation, approached leading manufacturers of plug tobacco and sought to bring about a combination of the plug tobacco interests, and upon the failure to accomplish this, ruinous competition, <strong>by lowering the price of plug below its cost</strong>, ensued. As a result of this warfare, which continued until 1898, the American Tobacco Company sustained severe losses aggregating more than four millions of dollars. The warfare produced its natural result not only because the company acquired during the last two years of the campaign, as we have stated, control of important plug tobacco concerns, but others engaged in that industry came to terms. We say this because, in 1898, in connection with several leading plug manufacturers, the American Tobacco Company organized a New Jersey corporation styled the Continental Tobacco Company for &quot;trading and manufacturing,&quot; with a capital of $75,000,000, afterwards increased to $100,000,000. The new company issued its stock and took transfers to the plants, assets, and businesses of five large and successful competing plug manufacturers.</p>
</blockquote>
<p>So predatory pricing did occur but it was only one factor in the “restraint of trade” that led to the breakup. The antitrust act, as interpreted at that time, outlaws monopolies even if they do not abuse their monopoly power.</p>
