Conglomerate Subsidization of Advertising Expenditures: Some Empirical Evidence

• Published date: 01 December 1974
• Date: 01 December 1974
• DOI: http://doi.org/10.1177/0003603X7401900408
• Subject Matter: Article

CONGLOMERATE

SUBSIDIZATION

OF

ADVERTISING

EXPENDITURES:

SOME

EMPIRICAL

EVIDENCE

by

PETER

C. Rmsz·

In

recent years, conglomerate subsidization, the shifting

of resources by

large

multiproduct, multimarket firms

to

achieve market position and power,

has

been cited as a poten-

tially anticompetitive effect of conglomerate mergers. Al-

though differences of opinion exist as to the frequency

and

competitive dangers of subsidization, little empirical

evidence exists. The purpose of this article is to

report

re-

sults of

an

empirical investigation of conglomerate subsidiza-

tion of advertising expenditures in one

major

industry, food

and

kindred products.

Corwin Edwards was one of the first to become alarmed

by the conglomerate

trend

and

its

potentially deleterious

effects on competition.' Edwards argued

that

amultiproduct,

multimarket firm probably would

not

attempt

to maximize

the profits of each of

its

products

nor

would

it

consider

any

particular

market as an individual

unit

in formulating busi-

ness policy.

In

summary, he maintained

that

the "length of

its

purse"

would allow the large conglomerate to outbid, out-

spend, or outlose a smaller firm in

any

market

without

diffi-

culty.

Edwards'

basic thesis has been

restated

by Mueller who

maintained

that

a firm operating across several different

•Visiting associate professor, School of Management, Boston

University.

1Edwards, "Conglomerate Bigness as a Source of Power,"

in

Business Concentration

and

Price Policy, 332-34, 336, 344, 351 (1955).

For

an earlier comment on the possible dangers of conglomerate

mergers, see

Federal

Trade

Commission, The Merger Movement, A

Summary Report, 59 (1948).

761

762

THE

ANTITRUST

BULLETIN

product or geographic markets is

not

subject to the kinds of

disciplinary forces encountered in a single market," Mueller

further

argued

that

if

amultimarket firm possesses power in

one or more markets, the profits derived therefrom will be

used to subsidize the attainment of market position

and

power elsewhere. Similarly,

Blair

suggested

that

as a con-

glomerate grows, the importance of any given product or

product line to the firm decreases and, therefore, the number

of products

it

could afford to sell

at

abnormally low prices

would in all probability increase,"

Much of the

early

discussion of conglomerate subsidiza-

tion focused on the potential dangers of price subsidization.

Specifically,

it

was held

that

the conglomerate firm, because

of

its

widespread market power, could drastically reduce

prices in

anyone

area

until competitors were driven from

the

market in

the

classic result of a

predatory

pricing

2Hearings on Economic Concentration Before the Subcomm. on

Antitrust

and Monopoly of the Senate Comm. on the Judiciary, 2d

Session, pt. 5,

at

1865 (1966) (testimony of Willard Mueller) [herein-

after

cited as Concentration Hearings].

sBlair, The Conglomerate Merger in Economics and Law, 46

Geo. L.

J.

688 (1958).

For

athorough discussion of

the

allegedly

harmful

effects of the conglomerate movement, see Lorie

and

Halpern,

Conglomerates: The Rhetoric and the Evidence, 13

J.

L. &Econ.

149-66 (1970).

The question of conglomerate power also came up in

the

Procter

and

Gamble-Clorox merger. See

FTC

v. Procter and Gamble, 386

U.S. 568 (1967).

For

later restatements with some

important

reser-

vations see also Steltzer, The Conglomerate:

An

Agglomeration of

Views Reviewed, Conglomerate Mergers

and

Acquisitions: Opinion

&Analysis, 44 St.

John's

L. Rev. 13-14 (Special ed. 1970) ; Dirlam,

Observations on Public Policy

r.owar£!

Conglomerate Mergers, id.

at

197-98.

For

a

later

restatement of Edwards' basic thesis in which

he expands the idea to the possibility of subsidization through an

intensified sales effort, see Edwards, The Changing Dimensions of

Business Power, id,

at

425, 431-32.

For

secondary comment

and

an

alleged example of conglomerate subsidization being used as a strategy

for

expanding

market

share, see National Commission on Food Market-

ing, The Structure of Food Manufacturing, Technical

Study

No.8

(Washington: U.S. Government

Printing

Office,

1966), p. 101 [herein-

after

cited as NCFM,

No.8].