Antitrust policy and market forces as determinants of industry structure: Case histories in beer and distilled spirits

• Author: Stanley I. Ornstein
• Published date: 01 June 1981
• DOI: 10.1177/0003603X8102600204
• Date: 01 June 1981
• Subject Matter: Article

The Antitrust Bulletin/Summer

1981

Antitrust policy and market forces as

determinants

of

industry structure:

case histories in beer and

distilled spirits

BY STANLEY I. ORNSTEIN·

281

The primary goal of government horizontal merger cases is to

stop or reduce a trend toward concentration. The courts have

repeatedly interpreted such trends as tending to reduce competi-

tion, a situation section 7 (amended) of the Clayton Act is

intended to stop. IIt has long been noted that the vigorous

enforcement

of

section 7, as interpreted by the courts, has all but

halted horizontal mergers by leading firms," This has forced

leading firms in a given product-line to expand internally. Al-

though external growth through horizontal merger has been

• Associate Research Economist, Graduate School of Management,

University

of

California, Los Angeles.

AUTHOR'S NOTE: This study was supported by the California State

Office

of

Alcohol and Drug Abuse and the Research Program in

Competition and Business Policy, UCLA.

1Brown Shoe Co. v. United States, 370 U.S. 294 (1962); United

States v. Philadelphia National Bank, 374 U.S. 321 (1963); United

States v. Pabst Brewing Co.,

384.

U.S. 546 (1966).

2George Stigler, "The Economic Effects of the Antitrust

Laws,"

Journal

of

Law and Economics, 9 (October 1966), pp. 225-258.

©

19S1

by Federal LegalPublications, Inc.

282 The antitrust bulletin

curtailed, it is not clear whether the government's goals have been

fulfilled; that is, whether competition has been preserved by

halting a rising trend in concentration in its incipiency.

The purpose

of

this article is to examine the trend in concen-

tration in one industry, beer, that has been subject to repeated

antitrust actions under section 7, and compare that trend to

changes in distilled spirits, an industry with little section 7

litigation. The industries were chosen because

of

their obvious

similarities in production, distribution, and marketing, but wide-

ly differing histories in antitrust actions and changes in industry

structure. The main question addressed is, what has affected

industry structure most strongly, antitrust action or market

forces? 3

Determinants

of

industry structure

A widely held view is that once an industry becomes concen-

trated it is practically immune to further changes without govern-

ment-directed dissolution

of

the leading firms. Dominant firms in

the mature phase

of

an industry's life cycle are thought to be

3Other studies have examined the effects of the antitrust laws in

broader terms using large samples. The studies closest to the spirit

of

this study are those

of

Stigler and Elzinga. Stigler compared changes in

concentration ratios in seven industries in the United States

and

England

(which had no effective antitrust laws)

and

found section 2

of

the

Sherman Act was a modest deterrent to concentration in five of the

seven industries. No attempt was made to measure the effectiveness

of

section 7(amended) other than to note the declining importance

of

horizontal mergers since 1950. Elzinga evaluated the effectiveness

of

the

remedy imposed in 39 section 7 cases filed from 1955 to 1960. Using

three

criteria-the

extent

of

independence of the acquired firm after

relief, the viability of the spun-off firm,

and

the time from acquisition

to

dissolution-Elzinga

concluded most section 7 cases were unsuccess-

ful. Whether they served to stop any alleged trend toward concentration

was not examined. Stigler, supra note 2; Kenneth Elzinga,

"The

Anti-

merger Law: Pyrrhic Victories?" Journal

of

Law and Economics, 12

(April 1969), pp. 43-78.

Industry structure :283

virtually impossible to dislodge." Highly concentrated mature

industries are said to be protected by high barriers to entry,

stemming from product differentiation, economies

of

scale, capi-

tal requirements, and absolute cost advantages.

But how do industries become concentrated? According to the

government, one

of

the primary causes

of

high concentration is

horizontal merger. According to economic theory industry struc-

ture is a function

of

optimal firm size relative to the size

of

the

market: the larger optimal firm size relative to the size

of

the

market the higher concentration, and vice versa. Thus, changes in

concentration are determined by relative changes in optimal firm

size and the size

of

the market. For example, if the size

of

the

market is changing, say due to changes in market segmentation,

number

of

buyers, product innovation, or buyers' tastes, and

these market changes are not offset by changes in optimal firm

size, then concentration will change.

Optimal firm size is attained by internal

and/or

external firm

growth, firm shrinkage, or simply reorganization

of

existing

resources. Whether firms attain optimal size by internal or

external growth is

of

little consequence in the long run. In the

short run it is

of

great consequence since the private and social

costs

of

growth will generally be quite different between internal

and external growth. Mergers are thus not a cause

of

concentra-

4A leading advocate for this position is Williamson who argues:

(I)

smaller firms and new entrants in concentrated, mature industries

are more fearful of leading firms because of predatory retaliation when

market share is gained at the expense

of

dominant firms; and (2)

dominant firms in such industries internalize the uncertainty of competi-

tion through internal decision-making processes, thereby insulating

themselves from the competitive actions of rivals. Neither argument is

logically compelling but a third argument that Williamson offers is: the

market for managers is not perfectly or even very elastic, i.e., good

managers are in short supply. Since managers can be competed away, I

would amend this to say it is more likely managerial team effects that

give uniqueness to certain dominant firms. Oliver Williamson, Markets

and Hierarchies: Analysis and Antitrust Implications, New York: The

Free Press, 1975, pp. 217-218.