1

1	UNITED STATES FEDERAL TRADE COMMISSION
2	and
3	UNITED STATES DEPARTMENT OF JUSTICE
4
5
6	SHERMAN ACT SECTION 2 JOINT HEARING
7	UNDERSTANDING SINGLE-FIRM BEHAVIOR:
8	BUSINESS HISTORY SESSION
9	BUSINESS STRATEGY SESSION
10	Thursday, October 26, 2006
11
12
13	HELD AT:
14	UNITED STATES FEDERAL TRADE COMMISSION
15	HEADQUARTERS BUILDING, ROOM 532
16	600 PENNSYLVANIA AVENUE, N.W.
17	WASHINGTON, D.C.
18	9:30 A.M. TO 4:00 P.M.
19
20
21
22
23
24	Reported and transcribed by:
25	Susanne Bergling, RMR-CLR

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1	MODERATORS:
2	KENNETH L. GLAZER
3	Deputy Director, Bureau of Competition
4	Federal Trade Commission
5	and
6	EDWARD D. ELIASBERG
7	Attorney, Antitrust Division
8	U.S. Department of Justice
9
10	PANELISTS:
11	Morning Session:
12	Tony Allan Freyer
13	Louis Galambos
14	James P. May
15	George David Smith
16
17	Afternoon Session:
18	Jeffrey P. McCrea
19	David J. Reibstein
20	David T. Scheffman
21	George David Smith
22
23
24
25

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1	C O N T E N T S
2
3	MORNING SESSION (BUSINESS HISTORY SESSION):
4
5	Introduction
6	Presentations
7	Tony Allan Freyer
8	Louis Galambos
9	James P. May
10	George David Smith
11	Moderated Discussion
12	Lunch Recess
13
14	AFTERNOON SESSION (BUSINESS STRATEGY SESSION):
15
16	Introduction
17	Presentations
18	Jeffrey P. McCrea
19	David J. Reibstein
20	David T. Scheffman
21	George David Smith
22	Moderated Discussion
23	Conclusion
24
25

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1	P R O C E E D I N G S
2	- - - - -
3	MR. GLAZER: Good morning. My name is Kenneth
4	Glazer, and I am the FTC's Deputy Director for the
5	Bureau of Competition. I am one of the moderators for
6	this morning's session. My co-moderator is Ed
7	Eliasberg, Antitrust Division, U.S. Department of
8	Justice.
9	A couple of housekeeping matters before we get
10	started. First of all, please turn off all cell phones,
11	BlackBerries or other electronic devices or turn them to
12	vibrate. The men's room is immediately to the left,
13	through the double doors you just came through; the
14	women's room is to the left on the far side of the
15	elevator banks.
16	One safety tip, in the unlikely event the
17	building alarms go off, please proceed calmly and
18	quickly as instructed, and you must leave the building
19	through the stairway, which is to the right, which is
20	the Pennsylvania Avenue side. After leaving the
21	building, please follow the stream of FTC people. They
22	have practiced this many times. You will all go to the
23	Sculpture Garden, which is across the intersection of
24	Constitution Avenue.
25	Finally, we request that you not make comments

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1	or ask questions during the session. Thank you.
2	This morning's panel is entitled Business
3	History, and as the title suggests, we will be turning
4	the clocks back today and looking at some of the
5	landmark monopolization cases in the past, not the
6	recent past, as in the Microsoft case, but antitrust's
7	deep past, milestone cases such as Standard Oil, Alcoa,
8	American Tobacco and AT&T. Like the ghosts of Christmas
9	past, the ghosts of antitrust past continue to haunt us
10	in good ways and bad.
11	We have come a long way since those cases, to be
12	sure. In many ways, antitrust in the Sherman 2 area,
13	the area of unilateral conduct, is still coming to grips
14	with the issues faced by the courts in those cases,
15	which dealt with the industrial giants of their day.
16	Think, for example, of Learned Hand's Alcoa
17	decision and how to this day his enigmatic
18	pronouncements in the Alcoa case are still invoked and
19	debated. Think of "monopoly thrust upon it," "superior
20	skill, foresight, and industry," and "the successful
21	competitor, having been urged to compete, must not be
22	turned upon when he wins."
23	Take Standard Oil. One historian's view of the
24	record in that case, the Standard Oil case, led to a
25	complete rethinking of the whole area of predatory

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1	pricing. Anyone who thinks history is unimportant
2	should look at John McGee's article on Standard Oil and
3	the impact it had on the case law.
4	To help us understand this critical part of our
5	antitrust heritage, we are honored today to have with us
6	four distinguished business and legal historians. Our
7	panelists this morning are Jim May from the Washington
8	College of Law at American University; George Smith from
9	the Stern School of Business at New York University;
10	Louis Galambos from the Johns Hopkins University; and
11	Tony Allan Freyer from the School of Law at the
12	University of Alabama.
13	Ed, do you have any introductory comments you
14	would like to make?
15	MR. ELIASBERG: Thanks, Ken.
16	Let me just second how important the Antitrust
17	Division thinks it is for us to take a look back at
18	these major monopolization cases of the past, so with
19	that, let me turn it back to you again so we can get
20	started.
21	MR. GLAZER: Thanks, Ed.
22	So, at this point, let me introduce our first
23	speaker. Jim May is a law professor at the Washington
24	College of Law at American University, where he teaches
25	antitrust, U.S. legal history. He was an attorney with

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1	the Antitrust Division and senior staff assistant to the
2	National Commission for the Review of Antitrust Laws and
3	Procedures. He is the author of many law review and
4	other articles on the historical foundation of U.S.
5	antitrust law. He is about a year away from completing
6	a book entitled Standard Oil Company Versus United
7	States, the Supreme Court, and the Foundations of a New
8	American Society, which will be published by the
9	University Press of Kansas.
10	Complete biographical information for each of
11	the four speakers can be found on the FTC and DOJ
12	Antitrust Division Sherman Act Section 2 web sites.
13	Now, I will turn it over to Professor May.
14	DR. MAY: Well, I am very pleased to be here
15	this morning with everyone and to be part of this very
16	distinguished panel, and I want to thank Ed and Ken and
17	Jack and Jim and everyone who has been responsible for
18	pulling this session together.
19	This morning we are talking about insights to be
20	gained from historical scholarship, and I am not going
21	to talk at length about that, but certainly we know that
22	there are many. There are benefits for better
23	understanding the past in its own terms, some having
24	considerable value, but also better insight in our
25	thinking about modern day issues. History often

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1	provides a useful point of comparison or contrast or a
2	source of additional questions and perspectives we might
3	not consider otherwise, and it can help to inform modern
4	decision-making in a variety of ways.
5	Historical writing comes from people from a
6	variety of different disciplines and backgrounds, as
7	well as a variety of personal perspectives, business
8	historians, legal historians, intellectual historians,
9	economists, legal scholars, and others, and all of this
10	work can be very valuable to take into account and to
11	compare one with another.
12	When we talk about the potential value of
13	looking back at early episodes and periods of antitrust
14	law in particular, as Ken has said, there is much to be
15	learned, and particularly much convincing to convince
16	people in the antitrust field that looking at the
17	Standard Oil story may, in fact, be of some value in
18	thinking about antitrust law, where it has been, how it
19	got here and where we are today.
20	Now, in his landmark book, The Antitrust
21	Paradox, in 1978, Judge Robert Bork famously remarked
22	that one of the uses of history is to free us from a
23	falsely imagined past. Understanding antitrust's past
24	better allows us to understand more clearly how many of
25	the ideas that are currently in the mainstream first

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1	came to be established in antitrust law. At the same
2	time, for example, historical understanding, I think,
3	provides insight into how early antitrust thinking was
4	not merely a less sophisticated early form of
5	neoclassical economic thought, how variations from
6	modern economic analysis that we find in earlier
7	antitrust analysis do not merely reflect the power of
8	"non-economic" concerns uninformed by any systematic
9	theoretical approach, and a look to the past also can
10	give us insight into how much of early antitrust debate,
11	legislation, lawyering, and judicial decision-making was
12	influenced by a different kind of theoretical outlook,
13	an outlook that embraced as a part of, and not simply
14	alongside of, its economic analysis, simultaneous
15	concerns for individual opportunity, freedom of
16	contract, efficiency, economic progress and prosperity,
17	fair distribution of wealth, and political freedom, all
18	to be promoted through a process of largely
19	"non-discretionary" judicial decision-making, it was
20	still widely thought, in the late 19th and early 20th
21	Centuries.
22	Such an outlook, still widely if not universally
23	influential at the time of the Standard Oil decision, of
24	course, today runs deeply counter to antitrust thinking
25	across the entire spectrum of antitrust opinion. Modern

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1	antitrust thinking assumes the inevitability of
2	trade-off choices among these various values and is
3	influenced strongly by a modern economic paradigm or
4	paradigms distinctly different from the broader
5	theoretical outlooks most familiar in the late 19th and
6	early 20th Century lawyers and judges.
7	Okay, but that having been said, I want to talk
8	about something else this morning, and that is a
9	different set of issues arising in connection with the
10	rise of the Standard Oil combination and the federal
11	antitrust case brought to challenge it. This is a very
12	big topic, indeed, and a very great deal has been
13	written about it, and in the very brief time I have this
14	morning, I am just going to try to suggest some of the
15	most important themes in the historical record and in
16	the scholarship assessment. If we have time this
17	morning in the discussion period to go into more depth
18	as to some of these points, I will be happy to try to do
19	so.
20	Okay, well, with regard to the ascent of
21	Standard Oil and the challenge to it by the Federal
22	Government, well, to begin with just a single small
23	refining plant established in Cleveland, Ohio in the
24	mid-1860s, John D. Rockefeller and his associates,
25	within a remarkably short period of time, came to

11

1	dominate both trade in refined petroleum products and
2	the long distance pipeline transportation of crude oil.
3	Exactly how that was accomplished was a subject of
4	considerable controversy in the late 19th and early 20th
5	Centuries, and it has continued to be ever since.
6	As we know, Standard rose to dominance before
7	the era of the automobile, and thus, its main product in
8	the era that we are talking about was not gasoline, but
9	was kerosene for illumination in homes and businesses,
10	but there were other important products as well, such as
11	lubricating oil and naphtha.
12	Now, within just a few years of Rockefeller's
13	entry into oil refining, he and his associates were
14	heavily involved, along with the railroads that were
15	serving the oil fields of Northwest Pennsylvania, in
16	efforts to establish cartels to reduce production and
17	raise and stabilize prices.
18	By 1871 -- oh, here, I have a few pictures
19	that -- this is in 1870. This was Standard Oil's
20	refining operation. It obviously got bigger and much
21	more substantial as time went on.
22	Now, in the 1860s, on to the 1870s, we have
23	these efforts to cartelize refining as well as rear it,
24	but by 1871 as well, Rockefeller had embarked on a
25	successive campaign to acquire what is called the

12

1	competing refiners in Cleveland, Ohio, and not long
2	thereafter, disenchanted with the possibilities for
3	desirably organizing the oil industry through
4	cartelization, Rockefeller and his associates made
5	determined and successful efforts to acquire the
6	refiners in other parts of the country as well.
7	Now, coordination of the operations of the
8	various acquired firms was achieved first through the
9	trust arrangements of 1879 and 1882, and then more
10	effectively, through the 1899 establishment of the
11	Standard Oil Company of New Jersey as a holding company.
12	Transportation of crude oil to refineries and of
13	refined products to market was a crucial dimension of
14	the early oil business, and early on, transportation of
15	both crude oil and refined products was by rail, and
16	critics charged that the railroads had charged Standard
17	Oil much lower freight rates than they charged
18	Standard's competitors, thereby giving Standard what was
19	seen as an unfair competitive advantage.
20	Later on, with the development of long distance
21	crude oil pipelines that were pioneered by a consortium
22	of crude oil producers in the late 1870s, this newer
23	mode of transport became the most important method for
24	transporting crude oil, and Standard made determined and
25	successful efforts to dominate it.

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1	With the discovery of the major new oil field on
2	the Ohio-Indiana border, Standard Oil for the first time
3	made significant investment in oil lands and crude oil
4	production in the late 1880s. Standard Oil aggressively
5	expanded forward as well into retail marketing, and as
6	of the 1890s, this would have been a ubiquitous site in
7	America, the horse-drawn Standard Oil wagons filled with
8	kerosene from which the local grocery, et cetera, would
9	be getting their fill.
10	Now, during the decades following the
11	establishment of the first Standard Oil refinery, the
12	combination expanded the size of its individual
13	refineries to achieve economies of scale, found other
14	ways to cut costs, developed an effective managerial
15	hierarchy that included talented executives who joined
16	Standard Oil after their own firms were acquired and
17	developed new by-products from petroleum, yet John D.
18	Rockefeller and Standard Oil faced growing public and
19	private criticism and in the fear for their dominance
20	and for the abusive tactics they were thought to use,
21	and as a result, Standard Oil ultimately was challenged
22	in numerous states before the federal case was
23	litigated.
24	In 1882, the trust itself -- the 1882 trust
25	itself was dissolved. In the 1890s, in the wake of a

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1	challenge to the participation of Standard Oil's Ohio
2	trust, a challenge brought by the Attorney General of
3	Ohio. This then led in 1899 to the establishment of the
4	Standard Oil Company of New Jersey as the new holding
5	company. Seven years later, during the administration
6	of President Theodore Roosevelt, the antitrust suit was
7	brought.
8	Now, Standard's market position we have to look
9	at in two different parts with regard to the export
10	trade and the domestic trade. In the late 19th Century,
11	most refined petroleum that was produced in the U.S. was
12	sold overseas, and of that oil, Ron Chernow in his
13	recent book Titan estimates that in the late 1880s,
14	nearly 80 percent of the refined oil purchased overseas
15	came from Standard Oil.
16	With regard to domestic trade in oil, by the
17	late 1870s, Standard's share of refined oil production
18	within the United States was close to 90 percent. It is
19	estimated that Standard's market share of crude oil
20	production in the United States was a share of one-third
21	achieved in 1898. Most of those market shares declined
22	in subsequent years.
23	Okay, well, what about the antitrust challenge?
24	And one of the things that is always great about this
25	period, the cartoons of the period, here is the classic

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1	fear of Roosevelt swinging his big stick to bust the
2	trusts, here facing down a symbol of Standard Oil in
3	this period of the octopus.
4	Okay, well, I am going to largely skip over the
5	Government's position except to say that the Government
6	charged a conspiracy that allegedly had started in
7	1870 -- oh, the case was filed on November 15th of 1906,
8	so we are just short of three weeks away from the great
9	centennial of the filing of this case, so hopefully
10	there will be both a Division and FTC celebration in
11	just a few weeks.
12	Okay, the Government's primary emphasis in its
13	case was a merger-to-monopoly theory. The predatory
14	pricing and other bad acts conduct was much less
15	prominent, although also included in the case.
16	Now, let us talk about the case in hindsight
17	just a little bit, okay? Here is a young John D.
18	Rockefeller in the early days of the conspiracy, okay?
19	Here are some other things stressed in the case: Market
20	shares, profits, alleged increases in prices of
21	principal products, okay? But I want to go quickly
22	through this.
23	Now, the remedy in the case, of course, was
24	breaking up Standard Oil. This is not an exact diagram
25	of how the breakup worked, neither accurate in its

16

1	verticality nor in the number of units involved, but it
2	is the best I have. So, in any case, what are we left
3	with in the scholarship today about Standard Oil as we
4	think about the case in hindsight? A couple of key
5	things to note.
6	What was right about the Government's position
7	in the case? How might the case be approached
8	differently today, informed by historical as well as
9	economic learning? Some things seem clear. A modern
10	Sherman Act case would be unlikely to focus on a
11	defendant's market intelligence gathering or the
12	operation of bogus independents, as the Government did,
13	in part, and likely would place less reliance on
14	evidence of increased profitability. Analysis of merger
15	activity, predatory pricing and barriers to entry would
16	be more sophisticated today than it was in the earlier
17	years of the 20th Century, although merger to monopoly
18	essentially would remain at the heart of the case. More
19	consideration would be paid today to potential economies
20	of scale and other efficiencies, and in hindsight, more
21	careful attention would be paid to the question of what
22	would be an appropriate remedy in the case.
23	I have things I can say about the remedy, but we
24	are short on time. I will save that for the discussion
25	session in case there are questions about that.

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1	Okay, now, what about the scholarship on the
2	rise of Standard Oil and the question of remedy? Well,
3	it is very striking the degree to which -- there is
4	actually some vigorous disagreement about what we would
5	think might be some very basic issues, such as was
6	Standard Oil, in fact, a monopolist? And if a monopoly
7	had been achieved, a monopoly of what? Pointing to
8	increasing output and falling prices for refined
9	petroleum products in the late 19th Century, Dominic,
10	Arendt and Connell, for example, has concluded that
11	Standard Oil never reached or set monopoly prices, even
12	when it had a high market share, and "Standard was a
13	large competitive firm in an open competitive market," a
14	position that has been strongly challenged by, for
15	example, Professor Scherer in a draft paper he presented
16	in an earlier hearing session in this series.
17	Elizabeth Granitz and Benjamin Klein in their
18	1996 article contend that entry into refining was made
19	easy in the late 19th Century and assert that "although
20	Standard earned a significant share of industry profits
21	on its dominant refining operations, it was petroleum
22	transportation and not refining that was monopolized,"
23	and that "the profits earned by Standard in refining
24	should be thought of as merely a share of the monopoly
25	profits from the transportation cartel." Others

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1	continue to believe that at least until the early years
2	of the 20th Century, it was possible to acquire monopoly
3	power in the sale of refined petroleum products and that
4	Standard Oil did so.
5	What is the state of thinking about the sources
6	of Standard Oil's profits? Today we have not one but a
7	number of prominent interpretations. Let me just say a
8	real brief word about some of these, and then maybe I
9	can expand later.
10	One is economies of scale or other efficiencies.
11	Alfred Chandler, an eminent business historian, has
12	declared that oil refining is a prime example of an
13	industry in which cost advantages of scale critically
14	shape the growth of firms and determine the structure of
15	the industry. He notes that the Standard Oil Company
16	was one of the first enterprises in the world to exploit
17	the economies of scale by making the three key
18	interrelated investments in production, market and
19	management.
20	Others have pointed to other varieties of
21	efficiency achieved by Standard Oil as significant
22	contributors to its success. On the other hand, others
23	have questioned at least the magnitude of some of the
24	efficiencies claimed by Standard Oil.
25	A second explanation has again focused,

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1	understandably, on the large number of mergers and
2	acquisitions, either coerced or uncoerced, that Standard
3	Oil is seen to have engaged in.
4	Another major area that Ken already alluded to,
5	of course, is predatory pricing, and it was noted by the
6	United States in the briefs but not central to its
7	theory of the case, it was famously debunked by John
8	McGee in his 1958 article reflecting the influence of
9	Aaron Director at the University of Chicago. McGee we
10	know declared the claims of predatory pricing in the
11	Standard Oil case were neither in theory nor by direct
12	evidence, but scholarly commentary since McGee's article
13	has been split on whether Standard Oil may ever have
14	engaged in predatory pricing, and, if so, how much this
15	may have contributed to its acquisition or maintenance
16	of monopoly power.
17	Okay, Elizabeth Granitz and Benjamin Klein, in
18	the article we mentioned previously, have presented a
19	much discussed thesis embracing a raising rivals' cost
20	interpretation of Standard's power, and this
21	interpretation is, as we know, that it was
22	transportation, not refining, that could be monopolized.
23	The railroads wanted some help with enforcing a cartel
24	among railroads. They had an incentive to want Standard
25	Oil to have a large volume of shipments that could be

20

1	moved around among the railroads to enforce compliance
2	with the railroads' cartel agreement, so that the
3	railroads were happy to let Standard Oil be in a more
4	dominant position in refining to serve that function. I
5	am happy to talk about that more at greater length, too.
6	Okay, now, I think that we do not need much
7	convincing to think that people in the antitrust field
8	look to Standard Oil in a variety of ways, as a symbol,
9	and as a detailed case record to be examined as new
10	theories of antitrust action become prominent; thus, as
11	Aaron Director had articulated a very different approach
12	to predatory pricing, it is not entirely surprising that
13	John McGee comes up with an article looking back at
14	Standard Oil and drawing an explicit moral, which is we
15	cannot get Standard Oil wrong, says Professor McGee,
16	because it can be taken to stand for the wrong
17	proposition, that what we should be looking out for is
18	unilateral abusive conduct by dominant firms, and if we
19	got it wrong in the first place about Standard Oil, we
20	should not be paying that much stress to that behavior.
21	We should be worried about group behavior than
22	unilateral behavior.
23	Similarly, at a time when theories of raising
24	rivals' costs have become prominent in antitrust law, we
25	get an article reflecting those ideas and trying to

21

1	compare them to the extensive record in the Standard Oil
2	case in the Granitz and Klein article, and again,
3	drawing an explicit moral, saying the Standard Oil case
4	tells us that this is a valid kind of theory, but
5	warning -- take it only so far and not further. Take it
6	only so far as situations where there is a horizontal
7	agreement upstream, and worry about the horizontal
8	combination aspect, not the vertical aspect.
9	Well, I will stop there since I am about out of
10	time. There is much for us to mine and give serious
11	consideration given the scholarship on Standard Oil and
12	the federal challenge to it, and historical scholarship
13	relating to American business, the economy and antitrust
14	law in general, and again, I thank you very much for
15	organizing this event and look forward highly to
16	discussing these possibilities.
17	(Applause.)
18	MR. GLAZER: Thank you very much, Professor May.
19	Our next speaker is George Smith. He is a
20	Clinical Professor of Economics and International
21	Business at the Stern School of Business at New York
22	University. Among the courses he teaches at Stern is
23	U.S. business history. He is the author of From
24	Monopoly to Competition: The Transformations of Alcoa,
25	1888 to 1986, and was co-author with Frederick Dalzell

22

1	of Wisdom From the Robber Barons. He has a book coming
2	out again called The Concise History of Wall Street.
3	Professor Smith?
4	DR. SMITH: Thank you. Good morning. I am
5	delighted to be here.
6	I am not going to repeat what Jim said about the
7	value of history. As an economist, or at least someone
8	who teaches economics, I am going to assume that you
9	already understand that, but suffice it to say that I am
10	going to deal with the case history here, and one of the
11	things that historians bring to the party is that
12	through our studies, we get very much involved in what
13	we would call "the nonrational" or "the extraeconomic"
14	aspects of policy and its enforcement, and we also worry
15	about the consequences of particular decisions and
16	actions and can reflect on those. It is hard to
17	generalize from one case study, but an accumulation of
18	case studies over time might be useful in guiding policy
19	in the future.
20	This is the Alcoa case, which, of course, is a
21	famous, if not notorious, case in antitrust law, and I
22	am also going to assume that all of you at some point in
23	your education have read, if not in its entirety, at
24	least some excerpts from the decision written by Judge
25	Learned Hand. My understanding is that the Alcoa case

23

1	is a staple of law school education.
2	The Alcoa case, of course, describes one of the
3	important boundaries of the law in antitrust with
4	respect to size and power and market dominance, and it
5	is important for that reason. I am going to take you a
6	little bit through the Alcoa history, the history of the
7	case, but I want to focus most importantly on the
8	remedies and some of the consequences of the remedies.
9	Let's begin with Alcoa in 1937. This is Alcoa's
10	market share in 1937. It is pretty good, you know,
11	having 100 percent of the market in your core
12	businesses, aluminum production, extracted from aluminum
13	oxide, or alumina, also a big capital-intensive
14	business. Alcoa also controlled the critical imputs, in
15	this case the bauxite ore and alumina, at 100 percent
16	market share, in what we quaintly describe as the U.S.
17	market. Remember the days when the U.S. market was the
18	only relevant market? Right? Alcoa had 100 percent,
19	that is pretty good!
20	It also had robust positions in downstream
21	markets in various aluminum semifabricated and end
22	products, as you can see from the table on the right.
23	Suffice it to say that Alcoa was a sitting duck for the
24	antitrust lawyers in the second Roosevelt Administration
25	who were mounting a rather frontal assault on big

24

1	business in the late 1930s.
2	Alcoa is, of course, one of the great
3	Chandlerian firms, and like Standard Oil, managed to do
4	business by not only achieving economies of scale and
5	scope but by bringing the prices of its product
6	consistently down in order to expand its markets. In
7	that sense, it was a rather good and benign monopoly.
8	Some of the practices it engaged in, in order to
9	build that monopoly, would now be considered to be
10	somewhat dubious if not outright illegal, but the
11	company managed during a period of time -- when it had
12	what looked like a controlling patent in the aluminum
13	smelting process -- to achieve substantial scale
14	economies and was integrated completely from the
15	extraction of the ore from the mines all the way down to
16	the production of end products, which was a completely
17	self-sufficient enterprise, and in the process, Alcoa
18	created substantial barriers to entry that nobody was
19	able to penetrate in the production of primary aluminum.
20	Alcoa secured its position with the help --
21	although not exclusively -- of some exclusive contracts
22	with suppliers of scarce inputs, like hydropower,
23	bauxite, alumina, and developed its own research and
24	development capabilities with respect not only to the
25	technology, but also the science of metallurgy, and

25

1	built one of the great industrial laboratories in the
2	first half of the 20th Century.
3	Alcoa also relied, of course, on the U.S.
4	Government to keep tariff protection high enough to
5	restrain imports, and it established operations in
6	Canada, which proved to be very useful for managing
7	relations with cartels, European cartels, which strictly
8	divided markets along national lines and relegated the
9	North American market to the Canadian company, a market
10	that was, in fact, serviced by Alcoa.
11	During the period of time that Alcoa was
12	building its monopoly, it was constantly reducing its
13	costs and prices in order to establish markets and built
14	its markets largely by taking share away from other
15	metals, other substances, copper, nickel, iron and
16	steel. By World War I, there were no new entrants in
17	primary production. One French firm had attempted to
18	enter, but when World War I broke out, it left the
19	field.
20	It is not that Alcoa was left alone. Alcoa was
21	always in the cross-hairs of the Department of Justice
22	and later on the FTC. In 1911, it was subject to an
23	antitrust investigation, and Alcoa agreed to cancel all
24	its exclusive supply contracts, to refrain from directly
25	participating with foreign cartels. The Canadian

26

1	subsidiary continued to do so but apparently with the
2	blessing of the Justice Department for some years to
3	come. Alcoa also agreed to refrain from such downstream
4	practices as price discrimination, and market
5	allocations of aluminum products.
6	In the 1920s, Alcoa went through a rather
7	lengthy and continuous investigation from the Federal
8	Trade Commission. Reports were written, but no action
9	was taken, but this led to an awful lot of bad
10	publicity, and then Alcoa was subject to a lot of
11	private antitrust suits from customers, the most
12	important of which was a case known as Baush v. Alcoa,
13	which went through two trials, two sets of appeals, and
14	wound up being settled out of court. It was a
15	price-squeezing issue.
16	In 1937, Alcoa was charged with violating the
17	Sherman Act, it reflected a big policy shift in the
18	Roosevelt Administration, the second Roosevelt
19	Administration. Alcoa at that time, as I mentioned
20	before, was a real sitting duck for the Justice
21	Department. It was a monopoly, it had a poor public
22	image, it had the misfortune of being closely tied to
23	Andrew Mellon, who was a great scapegoat for the Great
24	Depression. The accumulation of antitrust
25	investigations over a period of time had also made it a

27

1	likely target. So, it was charged with the usual
2	kitchen sink of antitrust violations in 1937, but as
3	luck would have it, Alcoa wound up with a trial judge
4	that it liked, Judge Caffey, in the U.S. District Court
5	for the Southern District of New York, and this is where
6	some of the interesting stories begin.
7	It turns out Alcoa had a superb trial lawyer
8	named William Watson Smith who led the defense of its
9	case. He was an older gentleman who had read the law --
10	that is how he learned the law -- and he and Judge
11	Caffey seemed to have bonded very nicely in the
12	courtroom. Irving Lipkowitz, who was the economist for
13	the DOJ at the time, and who sat through the entire
14	trial, described the situation as follows: "The judge
15	and Mr. Smith were the old guys. They had wisdom. They
16	had judgment. And we had a bunch of kids over here,
17	scurrying around..." Right! He also recalled that
18	Smith was very prone to calling the DOJ lawyers boy
19	scouts during the trial, and the Judge never bothered to
20	intervene.
21	The Judge, however, as this trial went on -- it
22	turned out to be the longest trial in Anglo-American
23	history -- the Judge got rather angry and impatient, and
24	I think he essentially blamed the Justice Department for
25	this trial. In any case, Alcoa was able systematically

28

1	to refute -- through their expert witness and company
2	witnesses and through its own presentation of the case
3	-- all of the behavioral charges brought by the Justice
4	Department, and Arthur Vining Davis, the Alcoa chairman,
5	delivered rather stunning, persuasive testimony over a
6	period of time. In the end, the Judge, of course, ruled
7	in favor of Alcoa on the grounds that it had built a
8	good business, it had brought prices down, and it, in
9	fact, fell within the rule of reason as a benign, good
10	trust.
11	Of course, the Justice Department announced its
12	intention to appeal, and Judge Caffey said, great, get
13	it out of my room courtroom! That is what they did. Of
14	course, the appeal languished during World War II, when
15	the Government had no interest in disturbing the
16	operations of businesses that were supplying critical
17	war material, but in 1944, the appeal was heard
18	following an Act of Congress, which enabled the U.S.
19	Court of Appeals in the Second Circuit to hear the case
20	in lieu of the Supreme Court because too many of the
21	Supreme Court Justices had conflicts of interest in this
22	case.
23	In the meantime, a number of important things
24	happened in the industry environment. As the war geared
25	up in 1941 -- as the United States was preparing for

29

1	war, it became apparent that Alcoa, as dominant as it
2	was in the industry, was not going to be able to meet
3	aluminum demand for military operations, and so the
4	Government financed the building of primary aluminum as
5	well as fabricated aluminum plants, and effectively
6	doubled U.S. aluminum capacity between 1941 and 1943.
7	Alcoa, of course, built and managed all these
8	plants, but at the same time, it opened the door for new
9	entrants in primary production. And as the war wound
10	down, it was quite clear that Alcoa managers were
11	anticipating that they were going to face some
12	competition in all sectors of the aluminum markets.
13	Then there was the great opinion written by
14	Learned Hand in 1945 (I have extracted some of the
15	quotes here), in which he entirely rejected the idea
16	that the monopoly of Alcoa had been thrust upon them or
17	was inevitable, and he also rejected the doctrine of the
18	rule of reason. It was quite clear that Learned Hand,
19	through some rather sophisticated economic thinking,
20	determined that Alcoa simply had too much market power
21	and was thereby forestalling possibilities for
22	innovation and long-term price competition.
23	He writes in his opinion in very beautiful
24	prose, "It was not inevitable that it [Alcoa] should
25	always anticipate increases in the demand for ingot and

30

1	supply them, to keep doubling and redoubling its
2	capacity. We can think of no more effective exclusion
3	of competitors than progressively to embrace every
4	opportunity as it opened, and to face every newcomer
5	with new capacity already geared into a great
6	organization, having the advantage of experience, trade
7	connections and the elite of personnel."
8	Now, I teach in a business school. This is what
9	we try to teach our students how to do!
10	"Having proved that 'Alcoa' had a monopoly of
11	the domestic ingot market, the plaintiff had gone far
12	enough; if it was an excuse that 'Alcoa' had not abused
13	its power," and he found no evidence that it had, "it
14	lay upon 'Alcoa' to prove that it had not. But the
15	whole exercise is irrelevant anyway, for there is no
16	excuse for 'monopolizing' a market that the monopoly has
17	not been used to extract from the consumer more than a
18	'fair' profit." It was all beside the point! The whole
19	decision can be reduced to this single paragraph.
20	And then, in what seems on the surface like a
21	wildly nostalgic passage -- although I think in
22	retrospect I would argue that what he was really trying
23	to do was establish what the thinking of Congress was in
24	1890 when it passed the Sherman Act -- Judge Hand says,
25	"Congress did not condone 'good trusts' or condemn 'bad'

31

1	ones; it forbade them all," which is saying if you want
2	to change the law, change the law, change it, but I
3	cannot do anything about it. "It is possible to prefer
4	a system of small producers, each dependent for his
5	success upon his own skill and character," and so forth.
6	Now, from the point of view of Alcoa, of course,
7	this looked like a superb exercise in reductionist
8	reasoning, and Leon Hickman, who was an attorney on the
9	case for the defense, a gentleman in his nineties when I
10	interviewed him, looked back at this case and said, "I
11	can see why Judge Hand felt that no matter how we got to
12	where we were, that it was not in the public interest.
13	If you kept that in mind, then you worked back from
14	that. 'What do I pin on them?' The fact that we were
15	the first in every market that we opened up.
16	"But suppose that we had acted as a monopoly is
17	supposed to act, and we simply sat back and took our
18	profits and had not developed the market? You would say
19	now that there is a monopoly of action. There is a
20	great need for new markets and the uses for aluminum and
21	you are not meeting it. So, in a way, from his
22	approach, we had no escape. He'd get us either way."
23	What was the remedy? Well, obviously one
24	potential remedy was to break up the company, but
25	fortunately, there were all these government plants

32

1	sitting there from World War II, and Judge Hand thought
2	this might be a good remedy, and Stuart Symington, who
3	had been the CEO of Emerson Electric and eventually a
4	Senator from Missouri, was head of the Surplus Property
5	Board, and through a lot of painful negotiations, he
6	managed to persuade Alcoa to allow the Government to
7	sell off these plants in a fire sale into two would-be
8	competitors, Kaiser and Reynolds Corporations, so that
9	they could establish themselves as fully integrated
10	aluminum producers. And part of the deal was that Alcoa
11	would license critical patents in technology to these
12	companies, free of charge.
13	In a subsequent court ruling, Aluminum Limited,
14	which was Alcoa's Canadian affiliate, was effectively
15	spun off as the shareholders in both companies had to
16	unwind their position in one or the other, so that there
17	would be no longer any issues about participating in
18	cartels.
19	Now, my concern in writing the book was to look
20	at the impact of this decision on Alcoa's behavior, and
21	here is where things get really interesting. There were
22	a number of consequences to the remedies which I think
23	are worth thinking about today. There is no question
24	that once this oligopolistic industry structure was
25	established, there was a lot greater competition in

33

1	developing new products, especially end products. This
2	was largely due to the efforts of Reynolds, which had a
3	particularly high sensitively to end markets, so all
4	kinds of new aluminum products appeared, everything from
5	baseball bats to aluminum cans in which you drink your
6	beer and your soda pop, and aluminum siding and so
7	forth, and that was probably an okay thing.
8	But it is also quite clear when reading the
9	testimony of congressional hearings that throughout this
10	period, aluminum prices, both for primary aluminum and
11	probably many downstream products, might have been
12	higher than they needed to be, because Alcoa always had
13	to keep a pricing umbrella over its less efficient
14	competitors to ensure that they stayed in business.
15	Alcoa worried about this a lot, and there was lots of
16	internal documentation of this. Alcoa had an economist
17	named Stanley Malcuit who wrote extensively about how
18	Alcoa conducted its pricing operations. The idea was to
19	keep prices low enough to ensure that demand would grow
20	but high enough at the same time to ensure that the
21	competition would stay in business, and these prices
22	were administered through conventional oligopolistic
23	price signaling.
24	A couple of things that probably people did not
25	understand very well was that the Alcoa Laboratories,

34

1	which had been a great scientific laboratory -- very
2	productive in advancing the fundamental science in
3	metallurgy and its related chemistry -- saw its focus
4	change after the war. The laboratory replaced its
5	scientists with more engineers, focused on short-term
6	process and product engineering. It withdrew from the
7	academic community -- where it had traditionally worked
8	closely with universities, participated in conferences,
9	gave papers and so forth -- and it became more
10	secretive.
11	It began to rely more on trade secrets as
12	opposed to patents to protect its technology, and it is
13	quite clear that although Alcoa had a store of
14	fundamental knowledge it could draw on by the 1950s, by
15	the mid-1960s, early 1970s, that fundamental knowledge
16	was pretty well depleted, and Alcoa and the industry as
17	a whole became less technologically innovative.
18	And finally, the management of Alcoa during this
19	period spent probably an inordinate amount of time, if
20	not most of its time, worrying about complying with the
21	antitrust remedies. Alcoa remained under court
22	jurisdiction all the way through 1957, and the business
23	of Alcoa's top management was to make sure that the
24	company was in compliance, and so long-term planning and
25	fundamental thinking about resource allocation took a

35

1	back seat to these considerations, and there is some
2	question as to whether that was, again, good or bad for
3	the industry.
4	I think the larger question I would raise here
5	and something I hope we can discuss subsequent to the
6	presentations today -- is how much do policy-makers and
7	attorneys who bring cases or actions think about the
8	second and third-order consequences of remedies? I
9	know, obviously, there is a long history of economic
10	analysis and the evolution of economic analysis as it
11	applies to antitrust and the thinking of the FTC and the
12	Department of Justice. But in recent years, as
13	antitrust seems to be increasingly focused on changing
14	firm behaviors as opposed to looking for structural
15	remedies in a global economy, I would just like to
16	suggest that new methods in game theory and futuristic
17	planning scenarios might be better incorporated into the
18	way antitrust lawyers think about remedies and the
19	possibilities of what might occur pursuant to their
20	implementation.
21	So, I will leave it there, and we will turn it
22	over to Lou.
23	(Applause.)
24	MR. GLAZER: I will introduce Lou. Our next
25	speaker is Louis Galambos. He is a Professor of History

36

1	at John Hopkins University, has written extensively on
2	the historical development of America's
3	telecommunications system. His publications include
4	Competition and Cooperation, The Role of Innovation in
5	the Modern Bell System, and Anytime, Anywhere, a study
6	of early wireless development.
7	Professor?
8	DR. GALAMBOS: Now, as you have already figured
9	out, you cannot talk about business history without
10	talking about Alfred D. Chandler, Junior. His books are
11	very long, and so I will try to give you a very short
12	explanation. His books are kind of chest-crushers. If
13	you read them and you fall asleep, they come down on you
14	and hurt, so I will try to give you a little bit on Al
15	and what he did to the history of business.
16	When he started his career after the Second
17	World War, at that time, the dominant historical
18	paradigm for business, which was very closely attuned
19	with the view of the Department of Justice and later the
20	FTC, was provided by Matthew Josephson, who was the
21	author of a very popular book called The Robber Barons.
22	It had a lot of personality, you know, like the columns
23	on the two sides of the Wall Street Journal, a lot of
24	personality there and a lot of quotes. It was published
25	in the depths of the Great Depression, and it focused on

37

1	scoundrels who ran and robbed corporations and the
2	American people.
3	In the years that followed, business historians
4	responded to that by trying to show that the scoundrels
5	were really good guys. This has also been done in
6	women's history, it is called worthy woman history, so
7	the business leaders were really doing a whole lot, and
8	it was great for America, and they were builders, not
9	robbers.
10	Chandler set out to develop a new context for
11	business history, and by the time he retired, he is now
12	Professor Emeritus at the Harvard Business School, he
13	had achieved that. He and his students had established
14	a new context for looking at business.
15	Now, Chandler built and constructed this on the
16	basis of two bodies of theory, one of which you have
17	heard about and one of which you have not. One was a
18	sociological theory stemming from Max Weber through
19	Talcott Parsons' study, and the other is Joseph
20	Schumpeter's theory of modern capitalism. He changed
21	both of these. Probably most people don't read
22	Schumpeter, but they have heard of creative destruction,
23	which you see often in newspapers.
24	I once lived in Texas, where they condemned
25	Joseph Schumpeter because he had once been in a

38

1	socialist government. They never bothered to read him.
2	He was a great friend of capitalism.
3	What Chandler did was he built up a dynamic,
4	comparative history of the role of large corporate
5	enterprise and tracked its progress in the early 19th
6	Century through the end of the 20th, and he used the
7	idea of Schumpeterian entrepreneurship, but he looked to
8	organizational capabilities rather than heroic
9	individuals. The organizations that were successful
10	over the long term, he said, were those that made the
11	vital three-pronged investments in an effective
12	managerial hierarchy, in mass production, and in mass
13	distribution, and most of the large second industrial
14	revolution firms he looked at combined those two
15	functions, combined distribution and mass production.
16	Chandler left no doubt about the positive impact
17	of large enterprise over the long run, and I quote, "the
18	modern industrial enterprise played a central role in
19	creating the most technologically advanced,
20	fastest-growing industries of their day. These
21	industries...were the pace setters of the industrial
22	sector of their economies -- the sector so critical to
23	the growth and transformation of national economies into
24	their modern, urban industrial form."
25	He did this in very careful, meticulous,

39

1	historical studies, the first of the United States, then
2	a comparative study with Germany and the United Kingdom
3	added, then finally, near the end of his career, he
4	brought Japan into the picture and a list of other
5	countries.
6	The Chandlerian construct became linked very
7	closely to developments in two other disciplines that I
8	just want to mention. In economics, Richard Nelson and
9	Sidney Winter developed an evolutionary theory of
10	economic change and tried to bring in dynamic elements,
11	all right, as opposed to comparative static or static
12	analysis of the neoclassical kind of equilibrium
13	analysis. Their effort carried them from theory into
14	history, from a discussion of national innovation
15	systems, a great book that you might want to look at,
16	into the sources of industrial leadership. This left
17	them close to the context in which Chandler was working,
18	as did the work done in transactions costs economics by
19	Oliver Williamson and others. Williamson, like the
20	evolutionary economist, was introducing historically
21	particular elements to theory, and when you think about
22	that, you can see that it does strange things to theory
23	when you add history. It was moving it toward a view
24	that had very strong historical elements, just as was
25	Paul David, who is an economist at Stanford, who was

40

1	working on path dependency, which had the same impact.
2	All I am suggesting here is that the context in
3	which scholars, a large number of them, placed and
4	analyzed big business was changing in important ways.
5	The comparative static analysis of industrial
6	organization theory was co-existing at this time with
7	dynamic styles of analysis with important elements of
8	place- and time-related history, and they were all
9	answering that great question that Coase asks, "Why Are
10	There Firms?" If markets are more efficient, why do
11	firms exist at all? A great question, all right, and
12	there were a lot of new answers developing for that.
13	Now, similar changes were taking place at the
14	same time in management studies. Management scholars
15	were now devoting a lot of attention to the environment
16	external to the firm, the aspects of the environment
17	that affect the firm's capabilities, and that yielded
18	innovation over the long term, and everything I am going
19	to talk about touches on this: the difference between
20	long-term analysis and short-term analysis, between what
21	is called static or comparative statics and secular or
22	dynamic analysis of the kind I am talking about. So,
23	they looked at how firms responded to drastic changes in
24	their technological environment.
25	This work added something important to the

41

1	Chandlerian concept, because Al had focused most of his
2	attention on successful firms. (Aside: he was my
3	second mentor; I followed him at Johns Hopkins, took the
4	position that he had, did the same things that he did,
5	so you should be aware of that.)
6	The firms he studied were what are called at the
7	Harvard Business School "Chandler firms". They were all
8	successful, okay? So, they were very carefully
9	selected, all right? And after some of them failed, he
10	did not follow them through. He stopped his history at
11	when they were successful, had a very strong positive
12	element. He also ignored the political history, the
13	administrative state. And scholars at business schools
14	have, since that time, begun to look seriously at the
15	political dimension of the large corporation.
16	Now, at the same time that this was happening,
17	in the seventies and the eighties and the nineties,
18	significant changes were taking place out beyond the
19	academy where academic research was being done by
20	historians, economists and management scholars. The
21	world was changing in a significant way. After the
22	breakdown of Bretton Woods and the decisions by the
23	leading OECD countries to foster relatively free trade,
24	the world entered the second great phase of
25	globalization, and along with that came the third

42

1	industrial revolution, and these two forces changed
2	things in very dramatic ways for the United States and
3	for our view of competition.
4	Now, that, I believe, is the context in which we
5	have to place the antitrust case against AT&T in the
6	1970s and the subsequent developments that have taken
7	place in telecommunications.
8	The Bell System had done all the right things
9	according to the Chandler paradigm. They had done those
10	three things, and really well, okay? They knew that
11	aside from Sweden, they were the best telecommunications
12	system in the world. They told little telephone jokes:
13	that in France, half of the people are waiting for a
14	telephone, and they were right, and the other half, they
15	said, are waiting for a bell tone. They could make
16	these jokes about almost every country. When I went to
17	Italy, and this has been in the recent past, the last
18	time I was in Italy, I was looking for a touchtone phone
19	so I could get on my phone in Baltimore and check
20	messages. After looking around, I went into a good
21	hotel and I used the only touchtone phone I could find.
22	But that still didn't work, and I listened carefully,
23	and could hear da-da-da-da. It was a dial phone with a
24	touchtone top on it. Italy was far behind and our
25	telephone people knew this. They knew that they had

43

1	done all of this and done it extremely well.
2	Bell had not only done that but created a very
3	powerful social ethic to the company; in addition to
4	service, it embraced a network mystique in the Bell
5	System that pervaded the enterprise. Bell Labs was a
6	marvelously creative institution. It had developed
7	crucial elements of the modern telephone technology.
8	And it is significant that Bell is where the transistor
9	came from, out of Bell Labs. This was what created the
10	information age.
11	In the 1970s, American productivity was drifting
12	toward zero. Productivity gains reached zero in the
13	beginning of the 1980s. This helps you understand why
14	we had political change at that time. Productivity
15	increases account for two-thirds of our growth in the
16	20th Century, and they were going to zero, and the
17	Japanese were doing really well, and the Germans were
18	doing really well, and we were doing poorer than the
19	British. Could you believe that? We were doing poorer
20	than the British. So, we were in trouble, economically.
21	So, it was in that context, then, that the case took
22	place.
23	The Bell accomplishments I've mentioned
24	establish a pretty impressive record, and so it helps
25	you understand why AT&T leaders ignored their own

44

1	history, because, in part, that history was not in the
2	Chandler paradigm. When the modern Bell System was
3	being created in the years before World War I and during
4	its subsequent history, AT&T had compromised with public
5	authority, and in my courses, I always distinguish
6	between two kinds of monopolists, dumb monopolists and
7	smart monopolists.
8	AT&T became, under the leadership of Theodore
9	Vail, a smart monopolist. That is why they could
10	maintain that monopoly for such a long period of time in
11	a country that was opposed to it, all right? They did
12	the right things. Their social ethic and their behavior
13	and their performance was extremely important.
14	But at a crucial point in the early 1970's, AT&T
15	forgot about that. It threw down a gauntlet to the DOJ
16	and FTC and said, "We are great, and we want to stay
17	just like we are." The DOJ picked up the gauntlet,
18	brought a suit against AT&T, and by the end of the
19	decade, the company's leaders saw they were losing the
20	case, losing the federal case in Judge Green's court.
21	AT&T settled out of court by breaking up the Bell
22	System.
23	Now, at that crucial point in the development of
24	our telecommunications network, the largest in the
25	world, AT&T's leaders and the Government both shifted

45

1	gears. Now, they paid too much attention to history and
2	too little attention to those two changes that were
3	taking place in the global economy; that is,
4	globalization, with intense competition, and the third
5	industrial revolution.
6	The settlement opted for the Chandlerian
7	vertically integrated model, with AT&T keeping what was
8	then called the Western Electric business and Bell Labs.
9	It sacrificed the so-called Baby Bells -- no babies any
10	longer -- and the local networks. AT&T gave away the
11	mobile phone business it had created! (I have my cell
12	phone on. It is on vibrate, I hope yours are, too.)
13	So, underestimating the changes that would take
14	place from the top to the bottom of the organization,
15	AT&T struggled and then failed to implement a successful
16	strategy. AT&T failed to make the transition to
17	competition and adopted the strategy of convergence,
18	which failed. The market worked, and AT&T recently had
19	a rendezvous with creative destruction, okay? There's
20	AT&T out there, but it is not the historical AT&T we
21	have been discussing.
22	I probably should not be so harsh with AT&T's
23	leaders, because the Government seems to have been
24	similarly unmindful of the changes taking place in the
25	global economy. There was no consideration in the

46

1	antitrust case of the Bell System's efficiency. It was
2	ruled out. There was no consideration of the remarkable
3	innovations that Bell Labs had produced. I was told by
4	somebody at DOJ that if the Government wanted a lab, it
5	could build one -- just like that, as if it did not take
6	30 or 40 years to really create an effective
7	institution. You just build one, you know, if you want
8	one. That was the attitude.
9	There was no consideration of the vast market
10	for telecom equipment that was being thrown open to
11	foreign suppliers. There was no consideration of
12	whether deregulation might not serve the public interest
13	better than structural settlements under the Sherman
14	Act. There was, instead, dedication to a policy that
15	was rooted in the past when the most important market
16	was the American market, when American public policy
17	could be framed almost entirely in matters of the
18	domestic economy.
19	Now, subsequent to that decision -- a very
20	important one, the United States Government seems to
21	have learned faster than did the large integrated
22	corporation or the subdiscipline of business history.
23	The United States changed its antitrust policy in the
24	1980s. There were no more structural cases under
25	Section 2 of the Sherman Act until the Clinton

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1	Administration launched its attack on Microsoft.
2	Fortunately, from my point of view, attention to global
3	competition and a need for the United States to remain
4	competitive in the world economy seems to have modified
5	even the Microsoft settlement in ways that are suited to
6	the world we actually live in.
7	This is a different world from the one that was
8	at the heart of Chandler's history, and business
9	historians have recently begun to come to grips with
10	that. There is an important work by Naomi Lamoreaux,
11	Dan Raff and Peter Temin who are providing a new
12	understanding of business history. This work and
13	related studies are shifting the field and helping us to
14	understand why in the United States we are spinning off
15	and de-integrating firms. As this new synthesis of
16	business history suggests, this is a world economy
17	rapidly being reconstructed by information technology
18	and intense global competition.
19	So, my conclusion is twofold: First, do not
20	ignore your history or you may suffer, as the Bell
21	System did, and Bill Gates almost did, and second, do
22	not get locked into an historical model when major
23	changes in the political economy are taking place and
24	new ideas are needed. And both conclusions bring me
25	back, I believe, to an evolutionary model broadly

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1	conceived.
2	Thank you.
3	(Applause.)
4	MR. GLAZER: Thank you, Professor Galambos.
5	Our last speaker this morning is Tony Freyer.
6	He teaches legal history at the University of Alabama
7	Law School. His publications include Regulating Big
8	Business: Antitrust in Great Britain and American, 1880
9	to 1990, and the recently published Antitrust and Global
10	Capitalism, 1930 to 2004.
11	Professor?
12	DR. FREYER: I want to repeat as my colleagues
13	on the panel, I really feel honored to speak before you
14	today. In that book that was just mentioned, I spent
15	about 13 years interviewing antitrust enforcers around
16	the world as well as business people and drawing on the
17	scholarship of the members of the panel, and so I am
18	grateful to be able to speak and share some thoughts at
19	a program like this.
20	Also, I was really surprised when I got the
21	invitation that there would be attention to business
22	history at an enforcement agency, and so I am really
23	grateful for the opportunity to say something about
24	that.
25	What I would like to begin with is to just think

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1	about what do enforcers need to be aware of when it
2	comes to history, and I would like to suggest a couple
3	of things that historians can provide a view for. One
4	is a sense of change, and one is a sense of choices that
5	either have been forgotten or ignored and that those
6	forgotten sources of change may be useful in
7	appreciating kind of the current situation, whatever the
8	current problem, in this case dominance, might be
9	concerned with.
10	So, to do that, I would just like to give you
11	two quotes, kind of one way to think about what are
12	alternatives to what you have in your mind now as kind
13	of the current enforcement options with regard to
14	dominance, and the first is a quote from Barry Hawk, who
15	we all know is a U.S. merger lawyer who runs the Fordham
16	Antitrust Policy Program that is comparative, and he
17	said, "for good or ill, we shall have to live throughout
18	most of the world with clones of Article 81 and 82.
19	That means dominant firms' behavior will be more closely
20	scrutinized than would be the case if the Sherman Act's
21	Section 2 were the model."
22	Eleven years later, the OECD Journal of
23	Competition Law and Policy published the results of a
24	worldwide survey of all major antitrust regimes. The
25	U.S. antitrust regime's core objectives -- the U.S. core

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1	competition objectives were exceptional in that they
2	combined solely the achievement of greater economic
3	efficiency with promoting and protecting the competitive
4	process. So, what did the other major antitrust regimes
5	do, all of the other except the few such as the United
6	States, they combined the core competition objectives
7	with what were called public interest objectives.
8	So, the United States is basically the outlier
9	when it comes to enforcement in the dominance area, and
10	I would like to just suggest that by comparison, there
11	may be some choices that might be useful to look at to
12	rethink or at least understand our current approach to
13	dominance, but at the same time, one of the things that
14	comes from this comparative perspective is that those
15	regimes, antitrust regimes, have arrived at their
16	enforcement policies, that is, including public
17	interest, because particularly of the business history
18	of their particular countries.
19	All right, what I would like to do, first of
20	all, just to give you just a very quick comparison of
21	two kinds of histories of two antitrust regimes,
22	originally I had grand ideas of giving you Australia and
23	Japan as well as the EU and the United States, but now I
24	am just going to have to give you a couple of thoughts
25	about the EU and the U.S. in particular, and hopefully I

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1	can bring up the Japanese and the Australian material
2	later on in our discussion.
3	What I would like to first of all note is just
4	it is helpful to remember, it has come up in the
5	discussion, that the U.S. did arrive at its antitrust
6	approach because it reflects these ingrained values that
7	are distrustful of established authority. Now, what is
8	the alternative? What is the alternative to ingrained