Trade associations are often the biggest obstacles to competitive markets, especially when those organizations use their influence to change public policy in their favor.
Dana Foarta, Steven Callander, and Takuo Sugaya make a case that political influence is correlated with market power. But market power can come from two sources: one is individual dominant firms or firms in very concentrated markets. The other is cartels. The correlation between political power and market concentration is actually fairly weak, but cartelized markets do not need to be concentrated. They do need to be organized.
The threat of harm from a cartel is greater than the threat from a single firm. Cartels can be formed by a simple agreement, while dominant firms are typically born from years of innovation, predation, or good luck. Further, cartels can be more harmful to the extent they are not engaged in joint research or other beneficial organizational activity. When we look at the actions of a firm such as Google, we see long lists of both good and bad things. By contrast, when we look at a cartel, the list of bad things almost always dominates.
The cartels with the most political influence are often trade or professional associations. Both are often comprised of large numbers of small firms, although larger firms participate as well. Accounting for the anticompetitive uses of political power requires attention to both dominant firms and these associations. This was a serious blind spot for influential Supreme Court justice Louis D. Brandeis, who directly or indirectly contributed much to this debate. While he was strongly opposed to large firms, he vigorously supported trade association activities that were far more pernicious.
One example is “fair trade,” or resale price maintenance (RPM), a practice by which small retailers tried to protect themselves from larger price-cutting firms. The Supreme Court’s 1911 Dr. Miles decision involved an attempt by the National Retail Druggists’ Association (NARD) to promote standard form contracts that prohibited discounting the drugs. NARD’s membership included 90% of American retail pharmacies. Some lower courts initially approved. John D. Park & Sons, the defendant in Dr. Miles, was a discounter, or “aggressive cutter” in the terminology of the day. It sold drugs at lower prices than the NARD contracts stipulated. When the Supreme Court condemned RPM, then attorney Brandeis spearheaded a vigorous campaign to either overrule Dr Miles or else permit states to approve RPM. The campaign continued after Brandeis went on the Supreme Court in 1916, and resulted in the Miller-Tydings Act in 1937. NARD’s success in obtaining fair trade legislation made it the most powerful American trade association of its time. The Act permitted individual states to approve RPM agreements within their borders. It was repealed in 1975 after severe criticism that it harmed consumers by denying them the benefits of competitive retail pricing – a view that was already reflected in the influential 1955 Report of the Attorney General’s Committee to Study the Antitrust Laws.
“Within these areas, anticompetitive effects of trade and professional association activities outnumber those of single dominant firms by a very large margin.”
Brandeis’s trade association protectionism was also reflected in other ways. In 1934 Osmond Fraenkel and Clarence Lewis published a collection of Brandeis’ papers under the title The Curse of Bigness. That book, unfortunately no longer in print, contained two of Brandeis’ Supreme Court dissents. The first was in New State Ice Company vs. Liebmann (1932) and the second in Liggett v. Lee (1933).
In New State Ice, the Supreme Court struck down an Oklahoma statute that compelled sellers of ice to acquire a license by showing the “public convenience and necessity” of an additional seller. The statute had been passed at the behest of the National Association of Ice Industries, a trade association that was organized into separate state chapters. At the time the Association’s members controlled 84 percent of the ice commercially produced in the United States. The defendant had been fined for selling ice without a license. The Association objected to unlicensed ice “peddlers,” who worked for firms that had more substantial equipment and sold ice over a larger geographic range. The Association was gradually losing its clout, however. First came the larger producers that threatened the Association’s smaller and more local producers. The Association also objected to lower-cost methods of distribution that threatened its members. For example, a 1925 FTC Report on Trade Associations noted an Association rule that made it “unethical” for a truck delivering ice cream to sell ice as well.
However, the biggest and ultimately fatal threat came from the newly emergent electric refrigerator. In a 1922 address, the President of the Ice Industries Association described the electric refrigerator as a “menace.” He noted that “a machine will render a more satisfactory service than we can hope to with ice.” But the refrigerator was simply too formidable a competitor, and the Association ultimately abandoned its efforts, conceding that consumers wanted “the automatic refrigerator and will buy it as soon as the family budget will permit.”
In Liggett, Justice Brandeis dissented from a Supreme Court decision overturning a Florida statute that taxed multi-store retailers in proportion to their number of stores, beginning with two stores and increasing up to fifteen. The chain stores had been a target of populists because they underpriced single-store competitors. Populist demagogue Huey Long was a fierce campaigner against them, proclaiming that he would “rather have thieves and gangsters than chain stores in Louisiana.” The campaign to raise the chains’ costs through taxation culminated with Texas Representative Wright Patman’s proposal to tax them out of existence. It was supported by a variety of trade groups who formed as the “National Antichain Store League.”
The trade associations’ ultimate Congressional victory over multistore retailers was the Robinson-Patman Act, passed in 1936. It was intended to forbid large distributors and retailers from obtaining lower wholesale prices than smaller firms were paying, or else to prevent suppliers from selling to large buyers at lower prices than smaller retailers paid. Representative Patman, who sponsored the Bill, candidly admitted that his Committee had simply turned drafting over to Henry B. Teegarden, General Counsel for the US Wholesale Grocer Association. The statute was so badly drafted that it did not even cover what many smaller retailers regarded as the most threatening practice, which was the larger stores’ vertical integration into supply and distribution. The statute applied only to “sales,” and required that both the higher priced and the lower price transaction be a sale. As a result, it failed to reach large grocers who integrated vertically by establishing their own dairy or meat suppliers or providing their own warehouse or shipping. A transfer from a firm to its own subsidiary was not a “sale” under the Act.
The Brandeisian battles against discounters and technological innovation ultimately failed. They were overrun by consumer choice. Hundreds of other trade and professional association ventures proved more durable, although over the years many have been set aside by the Supreme Court. For example, in Goldfarb v. Virginia State Bar, the Supreme Court struck down a bar association rule that specified minimum prices for a variety of routine legal services, and in Bates it struck down a ban on lawyer advertising. Most recently, it used the antitrust laws to condemn a state dental association’s rule that forbade non-dentists from whitening teeth. These cartels facilitated by professional associations are among the most pernicious in antitrust because those promulgating them often have a legal monopoly in their respective states, strict limitations on new entry, and the power to exclude as an enforcement mechanism. For example, prior to the Supreme Court’s decision, a non-dentist cosmetologist in North Carolina who whitened teeth commercially was committing “unauthorized practice” of dentistry, and was subject to a penalty.
Nor did the lost battles of the Brandeis era put an end to other anticompetitive ventures by powerful trade associations. For example, associations of gasoline retailers obtained legislation outlawing self-service gasoline in order to restrict gasoline sales by convenience stores. Today, most of these bans have been repealed, with two exceptions, Oregon and New Jersey. According to one study, the bans increase the average price of gasoline in those states from 3 to 5 cents by denying consumers the right to pump their own gas. In another case, car dealer associations have organized against Tesla’s direct distribution of automobiles, which is cheaper than the use of brick-and-mortar automobile dealers. That particular battle reflects a long history of anticompetitive campaigns to protect the traditional turf of the independent auto dealer. One could go on with this list, but suffice it to say that a large literature exists addressing the competitive problems associated with trade and professional associations.
Which kind of political power is more prevalent, the dominant firm or the cartel? I am not aware of a study that makes that comparison. However, aside from the laws of anticompetitive practices themselves, two large bodies of antitrust law deal with anticompetitive, protectionist legislation. One is the so-called Noerr-Pennington doctrine, which deals with anticompetitive petitions to the government. The other is the “state action” doctrine, which addresses anticompetitive state and local legislation. Within these areas, anticompetitive effects of trade and professional association activities outnumber those of single dominant firms by a very large margin.
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