Robert bork and vertical integration: leverage, foreclosure, and efficiency

• Author: Herbert Hovenkamp
• Position: Ben V. & Dorothy Willie Professor of Law and History, University of Iowa
• Pages: 983-1001

ROBERT BORK AND VERTICAL INTEGRATION:

LEVERAGE, FORECLOSURE, AND EFFICIENCY

H

ERBERT

H

OVENKAMP

*

Vertical integration occurs when a firm produces or uses something inter-

nally that it might otherwise purchase from or sell to others. For example, an

automobile manufacturer that produces its own engines is vertically integrated

“upstream” into a source of supply. If it also owns some of its retail sales

stores, it is said to be vertically integrated “downstream” into distribution.

Robert H. Bork wrote extensively about vertical integration, and defended

it as nearly always procompetitive. When Bork began to write about vertical

integration in the 1950s, the courts feared that a vertically integrated parent

company might “force” its subsidiary to deal with the parent. Bork noted that

this analysis improperly assumed a market limited to the subsidiary.

1

The al-

ternative theory of vertical integration that Bork presented a quarter century

later in his seminal book, The Antitrust Paradox, was beguilingly simple: If

vertical integration creates efficiencies, then a vertically integrated firm would

have cost advantages over unintegrated rivals. This might deter entry, but only

as a result of increased competition. And, if vertical integration did not create

any efficiencies, then it would not impede entry. Either way, vertical integra-

tion would not harm the competitive process. Bork drew similar conclusions

about all forms of vertical integration, including vertical mergers and vertical

integration by contract—mainly exclusive dealing, resale price maintenance,

and tying.

* Ben V. & Dorothy Willie Professor of Law and History, University of Iowa. Thanks to

Professor Kenneth G. Elzinga for commenting on a draft.

1

Robert H. Bork, Vertical Integration and the Sherman Act: The Legal History of an Eco-

nomic Misconception, 22 U. C

HI

. L. R

EV

. 157, 186 (1954) [hereinafter Bork, Vertical Integra-

tion] (referring to United States v. Lehigh Valley R. Co., 254 U.S. 255 (1920)).

983

984

A

NTITRUST

L

AW

J

OURNAL

[Vol. 79

I. BORK AND THE HISTORICAL TREATMENT OF

VERTICAL INTEGRATION

One might imagine a close relationship between the rise of large integrated

firms in the United States and the growth of legal hostility toward vertical

integration. The development of vertically integrated firms occurred much

earlier, however, and generally in a policy regime that was relatively benign.

Standard Oil, Ford Motor Company, United States Steel, International Har-

vester, and other vertically integrated firms all developed prior to the 1920s. A

1911 antitrust decree broke up Standard Oil but said little about Standard’s

vertical integration.

2

For two decades following that decision, the lower courts

were favorably inclined toward vertical integration in the petroleum industry.

3

In 1920, the Supreme Court refused to condemn a vertical merger involving

United States Steel.

4

International Harvester, which became the largest pro-

ducer of agricultural implements in the early 20th century, initially acquired

and operated its own coal mines, steel mills, railroads, and forest land for

producing lumber.

5

Bork began writing about vertical integration and antitrust policy upon

graduating from law school at the University of Chicago in 1953. His first

article on the subject, Vertical Integration and the Sherman Act, published a

year later, noted a recent increase in antitrust attacks on vertical integration,

but argued that these attacks had been happening since the early 1900s.

6

At

the time Bork was writing, there was plenty of judicial hostility toward verti-

cal integration. But Bork considerably overstated his case about the period

prior to the 1930s. He found a few early decisions that condemned vertical

integration as predatory or monopolistic when the defendant was a dominant

firm, and extrapolated from those.

7

For example, United States v. Corn Prod-

ucts Refining Co. introduced the “price squeeze” theory of harm. The court

2

Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 76–77 (1911). See George Ellery

Hale, Trust Dissolution: “Atomizing” Business Units of a Monopolistic Size, 40 C

OLUM

. L. R

EV

.

615, 624 (1940).

3

See, e.g., United States v. Standard Oil Co. of N.J., 47 F.2d 288, 299, 309–11 (E.D. Mo.

1931).

4

United States v. U.S. Steel Corp., 251 U.S. 417, 442 (1920). Henry Ford managed to escape

antitrust liability, notwithstanding vertical integration to seemingly paranoid levels. He even

grew his own soybeans for the production of plastic horn buttons for the Model T. G.E. Hale,

Vertical Integration: Impact of the Antitrust Laws upon Combinations of Successive Stages of

Production and Distribution, 49 C

OLUM

. L. R

EV

. 921, 922 (1949).

5

See F

ED

. T

RADE

C

OMM

’

N

, C

AUSES OF THE

H

IGH

P

RICES OF

F

ARM

I

MPLEMENTS

672–75

(1920); see generally International Harvester, F

ORTUNE

, Aug. 1933, at 21.

6

Bork, Vertical Integration,supra note 1, at 157 n.2 (1954) (citing Hale, supra note 4, at

923; Comment, Vertical Forestalling Under the Antitrust Laws, 19 U. C

HI

. L. R

EV

. 583, 584

(1952); Alfred E. Kahn, A Legal and Economic Appraisal of the “New” Sherman and Clayton

Acts, 63 Y

ALE

L.J. 293, 341 (1954)).

7

United States v. Am. Tobacco Co., 221 U.S. 106 (1911); United States v. Corn Prods. Ref.

Co., 234 F. 964 (S.D.N.Y. 1916), appeal dismissed, 249 U.S. 621 (1919); United States v. East-