The business of america is big business. Large and crucial industries are dominated by a few powerful companies which have grown with the economy and rewritten the rules of competition. What are the economic and legal rules these Companies Live by . What has big Business Done for and to the consumer . Whatever happened to price competition . With the help of economic analyst richard gill well examine these questions on this edition of economics u a. Im david schoumacher. Theres no business bigger than the auto business. If youve shopped for a car recently this is a familiar sight. It looks like real competition a variety of products at a variety of prices. But is what you see what you get . It was when you bought one of henry fords model ts. Henry ford didnt invent the car, and he didnt invent the assembly line, but he brought the two together and gave america its first massproduce and masspurchased car. Ford was an inventor and mechanic by trade, and no effort was spared to improve the car and to improve the process by which it was built. The tin lizzie looked like the same car year after year but fords mechanical genius made it run better each year than the year before. His industrial genius made it cheaper to build and to buy. He paid the highest wages in industry 5 a day. And he made a car that his workers and other working people could afford to buy. Fords vision was to produce the perfect car inexpensive and durable, looks didnt count. Ford said the customer could get a model t in any color he wanted as long as it was black Richard Strout of the Christian Science monitor owned a model t and remembers. They were lovely little cars. They were 7 feet high, and they were as angular as an awning, i would say. And they would take you anywhere. Schoumacher it seemed as though ford had devised the perfect competitive product. It took a beating, but it never wore out. It kept getting cheaper, and it was never out of style. Henry ford had american drivers eating out of his hand. Model ts werent the only cars on the road back then. Americans also were driving piercearrows and Stutz Bearcats and duesenbergs, as well as the chevrolets, oldsmobiles, buicks, ancadillacs built by fords numberone competitor, General Motors headed then by alfred p. Sloan. According to alfred sloan, the primary object of the corporation is to make money not just to make motorcars. Sloan realized he couldnt sell his cars cheaper than ford so he gambled that people wanted more from their cars than a ride d that theyd pay more for the color, variety, and options th they could get only from gm. Henry ford may have known cars but alfred sloan knew people and he knew the 20s. Are ya havin any fun . What ya gettin outta livin . What good is what youve got if youre not havin any fun . Are ya havin any laughs . Are ya gettin any lovin . If other people do so can ya have a little fun . Schoumacher to link his cars with the National Mood sloan made advtising as much a gm procts thchy. Professor leo riffo of George Washington university has written about the car and the era. Shrewd, in some sense manipulative advertising suggesting that an automobile represents youstatus and your personality its not just a way to get around aided the appeal. And of course, the possibility that you could trade in your old car and buy a chevy on time made it much more possible for gm to challenge ford. They had better looks and convenience, yes. Well, what more is there in life than those two things . William knudsen, who headed the Chevrolet Division who had worked for ford, recognized that there was a stigma, as he put it in using cheap goods that look cheap. There would be an opportunity to sell the chevrolet by making it look a little classier than the model t. The chevy wouldnt look cheap as the model t was beginning to do. The chevy would make you proud make you stand out schoumher for a while henry ford stood his ground with the model t. The man whose name meant efficiency around the world couldnt believe that americans could choose gms style over fords substance. He said, why should he go to the trouble of providing a selfstarter after all . And why should he have a Rearview Mirror in the car . The joke was at the time why have a rear mirror in a ford car, because whatever was behind you would pass you soon anyway. Schoumacher what was passing the ford was the chevy. By the time the depression started in 1929, sloan and gm had overtaken ford. The model t was history. Ford brought out a new car the model a, that offered colors and options like gm cars did but it was too late, ford had to settle for second place then for third place behind the new company of former gm executive walter chrysler. We live in a world of change but not all that much has changed in the Auto Industry since General Motors pushed ford from command. Gm is still in first and consumers still watch the advertising and choose among cars that vary more in color and cachet than in costs. When economists talk about supply and demand, theyre usually talking about price competition. But the battle between General Motors and ford wasnt over who had the lowest price. We asked economic analyst richard gill if that holds for the rest of the economy. What you have in the case of the american Automobile Industry especially in recent years is competition between a relatively small number of firms. We dont have a monopoly which means a single firm in control of the industry. We dont have pure competition which means thousands of firms selling identical products. We have a few firms in control what economists call an oligopoly. Now, in general, oligopolistic firms like to avoid price competition. People can get hurt that way. And this automobile story brings out two ways firms can avoid price competition one, by fiddling around in various ways with the special features and gadgetry associated with their product, what economists call product differentiation. And two, by advertising and trying to convince consumers that their special version of this product is necessary for their survival, or at least for their personal or social success. Now, this kind of competition raises all sorts of problems for the economic analyst. When you have product differentiation, for example each firm does have a monopoly of its particular product. Only General Motors can sell a cadillac, only Ford A Lincoln continental, or whatever the latest brand names happen to be. As monopolists in this limited sense, it can be argued that their prices, costs, and profits may be all too high. Still, these companies are subject to competition and after all, consumers do seem to like having such a wide variety of choice available to them. In a sense thats exactly how gm was able to overcome fords early advantage. Or take advertising. Obviously businesses use advertising to convince consumers that their products have special qualities, different personalities, really, trying in this way to increase consumer demand for them. Of course, when my competitor also does this he is trying to increase the demand for his product at the expense of mine. How much advertising is selfcanceling like this . How much contributes useful information about the products involved . Clearly, these arent easy questions to answer, though it must be said that there are other ways of avoiding price competition that are far more dubious than those we have been discussing. It could have been a novel. A newspaper reporter a crusading senator, and federal prosecutors teaming up to solve the biggest crime, in dollar amounts, ever committed and put the powerful criminals behind bars. The scene of the crime was here in philadelphia but the story started in knoxville, tennessee. The Tennessee Valley authority was a National Symbol of progress, bringing electricity to millions who had lived without light. General electric was one of its primary suppliers anone of the nations industrial giants. In 1959, Julian Granger waa rt with the knoxville newssentinel. It was a saturday, saturday night i was coming in on the late shift at the knoxville newssentinel. I went to my box and i pulled out all the News Releases and so forth. And there was the weekly or biweekly news release of the Tennessee Valley authority. And i went through it the rainfall in the valley. It was mundane stuff. And i got around to the second page and lo and behold, this thing jumped out at me. On this bidding allischalmers general electric,and pennsylvania transformer quoted identical prices of 112,712. Schoumacher close parentheses and that was it . So i went back to my desk, thought about it for a while and then i called red wagner. I told him, i seem to recall telling him, i cant believe this, red. You know, how could you have identical bids . And he began to unload on me. He says, the real story is down in chattanooga, where the head of purchasing is paul fahey. So i did, i went down there. And paul fahey had a stack of it was on ruled paper but he had case after case after case after case of identical bidding on contracts. Now these are sealed bids, you understand. These are sealed bids, they come in a sealed envelope. But the biggest and the most interesting things were the electrical contracts from big firms like general electric, westinghouse allischalmers. I dont think anybody really knew what the hell we had. Schoumacher the tva wasnt usually frontpage news, but tennessee happened to be the home state of senator estes kefauver. Kefauver had made his name nationally with televised hearings investigating organized crime. Adopting a coonskin cap as his trademark he had waged two popular but unsuccessful campaigns for president. Then in 1959 kefauver took on a new crusade against a different kind of organized crime antitrust violators. Kefauver announced that he was going to hold hearings in knoxville. Uh, the word i heard was that the Justice Department decided well, they better get moving. Schoumacher robert bicks was the assistant attorney general who oversaw the Justice Departments investigation of tvas identical bids. We came across part by accident a very Small Company in the industry, and an official that was known to somebody in the antitrust division who told the story with regard to one particular product in a meeting after his company had been subpoenaed to produce data. Building on that, when he told the story about conspiracy in a series of meetings there, the first one or two cases were put together. Schoumacher the first few confessions prompted more executives to come forward, executives from big firms like ge, westinghouse, and allischalmers. Soon prosecutors began to unveil the intricate design of the conspiracy. They used assumed names, registered under false names called each other at home rather than at the office, used unmarked envelopes. As identical bids became suspect they developed a rather complex formula known colloquially as phase of the moon, whereby, to avoid detection, the bids were disparate, subject to a formula which enabled a rotating low bidder, so that everybody ended up with the agreedupon percentage of the business, the theory being that detection would be wellnigh impossible. What was it, in the simplest terms, that the conspirators were conspiring to do . Trying to raise the prices at which their products were sold and make sure that each of them got what it believed to be a fair share of the market. In other words they rigged the bids. Its hard to understand. The electric Equipment Industry was an oligopoly. The executives knew that their companies could control the industry without elaborate and illegal arrangements. Why would they risk losing their jobs and going to jail . We asked edwin rome, a philadelphia lawyer, who argued the conspirators cases in court. They were driven to do what they did by reason of being devoted to the company. If this was what the company wanted them to do, they thereupon did it, just as they drove a car withth somber colors and wore darkcolored striped ties and appropriate clothes to the office and so on. This, too, was another way in which in their understanding of it the corporate mentality worked. What do you think was in the minds of these captains of industry . Why would they be motivated to take these shortcuts . I guess the upside was raising the prices and what was thought to be a comparatively easier comfortable, morerectabifefor the executives. You really didnt have to worry how much business you we going to have at yeaend. Youd agree ont in january. The verdicts sent a message competition ishe economys most basic value. Businesses andxecutives who try to shortircuitompetition with conspiracies and agements woulnot beea witlightly. We asked our economic analyst richard gill why executives from these rms woulwant to risk fines anjail sentences trying to fix prices . Well, the Electrical Industry case was fairly extreme, but if businessmen do engage in illegal pricefixing from time to time, its probably because setting prices in an industry dominated by a few firms is inherently difficult. Say you have these five or six big firms. I set a nice, comfortable price and then you come along and set a price just under mine and take away all my business. Suddenly we are in a price war. And, of course, as far as the producers are concerned, its ruinous to everyo. In fact, economists have sometimes argued that in the fewfirm the oligopoly Situation Companies will have to cling to whatever theirurrent price is. Suppose a company is selling electrical transformers for 10000 apiece. It is selling this quantity at this price. Before it raised thaprice, itouldave onsir, what wouldy rivals do . What if theyeft their transformers at the going price . Then i would be underbid my sales would drop off sharply. On t other hand, if i try to cut my price and undeid my rivals that could lead to a price war. Alprices would plummet downward with little gain in sales volume for anybody. Of course, oligopolists do change their ices particularly during inflationary periods. But they have to do it carefully gierly, one might say. And this raises a kind of philosophic problem. If firms gingerly meet together and fix these prices then they are iniolation of the antitrust laws and can be fined and their executives thrown in jail. If, on the other hand, they gingerly form a tacit understanding that firm a will be the price leader and that it will set prices for the whole industry taking the interests of its rivals into account thene ofteget simireconomic results yet s all perctly legal. Of course, there is still another way to bring order into e oligopolistic price process ha the goverent set prices for you. The Airline Industry has been deregulated since 1978. And its truethat under deregulatio fas ome att pr e seats, unequaes, delays saty issues. Ishis undrst of complaints justified . Has regulation been a success . What people may forget is that the Airline Industry is an oligopoly dominated by just a few big carriers. T it was an oligopoly with a diffence. For its fit 50 years a federal agency the civil aeronautics board,not the market set the fares and the routes. With one minor exception the cil aeronautics board had not permitted one single new competitor to come in, to compete with the domestic lines and price competition was strictly prohibited. Southwest airlines had to go through an agony of wsuits and administrative proceedings in order to gestarted three and a half years because the incumbents didnt want us to be able to compete. Duri that time, i got a ttle deessed about e system thinking the system might fail. I mean, all we wanted to do was offer more flights at lower fares with a better quality of service and it didnt seemo me that that was too inimical to the wellbeing of, of america. Consumerists and antitrust people were beginning to realize that this was a cartel to protect the industry from competition. And the final demonstration of this was, who was it that was in favor of regulation . Easy the airlines and their unions. You would walk into a congressmans office and his eyes would get real big and hed say arent you the smallest carrier in america . Yeah. How many airplanes do you have . Oh, weve got 10. And you want the industry to be deregulated . Youre goi to get wiped out. I said, we dont ink so. But give us a chance to be wiped out. Give us that chance to be wiped out. Schoumacher so deregulation it was and president carter appointed professor kahn as chief deregulator. At first, Airline Deregulation was a game with only winners. There were lower fares for passengers higher profits for wellestablished airlines, and new airlines for amtious entrepreneurs. Then, in the mid80s, there started to be losers, too. Twa, panam, eastern, peoples express, braniff. Braniff International Airlines tonight is out of business. Schoumacher in the era of deregulation, big airlines were inviting targets for competitors with low fares low costs, and flashy advertising. Getting you there on time is our way of, uh, being faitul. You had western, which flew in the west. You had eastern, which flew in the east and, you know, east was east and west was west and ner the planes would meet. They simply did not compete with one another and it was ordained that way. So you can get confused by thinking that less carriers means less competition. Actually since deregulation, the number of competitive routes has increased enormously asompared to what it was prior to deregulation. And its having carriers flying against one another on a given rou that produces competitio not how many carriers there are volumetrically inhe ud states of america. Where would fares be today if we had not reguted . What deregulation did was effectively replace the reductions in fares that had been generated by technical change because technical change had been slowing by the time deregulation came in as the industry became more mature and what it did was lower fares through competition. Probably the principal source of dissatisfaction generally regarded by the public as a failure because the public doesnt understand economics is that traveling experience is much less pleasant. For Airline Deregulation to work asfficiently as possible you must have capacity at airports for new carriers and existing carriers to compete for entry to expand, plus you are able to make use of runway capacity and airspace capacity. This has not been done. There has been significant congestion at airports. What this does is prevent as much competition from developing at the airport you have restrictions on gates. All these things impede the competitive process but they also impede the level of service. That is, with congestion there are delays. People then blamethe carriers for this probm. But this is something that coue fixed if we had what was calle peakoad or congestion pricing at airports, or if we had efficient investment iruays, improvemen in aiTraffic Control. In a sense, the failure of Public Policy to keep up with that has undeined, really the performance and benefits of deregulation. It was a success of deregulation, not a failure, that planes are 70 to 75 full and all that goes with that. Weve given people of modest means a quality price option that they didnt have before. The virtually unanimous opinion of economists, thbusissommunity op wbeliinitstaiins en gucenoumiar bigusesspaerofgopolyaiits markece ane gornmedes who succee anwho ils. The ofoveraneanofisisweedcomic anyses what this exence withireregulatios ught by many measures airline degulation has been a huge success. Compared with 20 years ago air fas are rtually flat. Look athe red line in the gra. And when you adjust for inflation, the fact that most other prices have risen, ticket prices have fallen by almost half. You can see that shown by the blue line. Two other measures of success three times as many passengers are flying now than in the early 1980s, and the Airline Industry employs twice as many people. Many of the concernsthat were voiced in the early days of deregulation have not materialized. Seing aside the risk of terrorism Airline Safety has actually improved, not deteriorated as many had feared. Moreover, while a number of airlines have gone out of business, the industry has not become dominated by a few large carriers. Quite the contrary. The smaller upstart airlines such as southwest, jetblue, and air tran are doing well while the Large Airlines such as united and us air are in trouble. Probably the single biggest complaint about flying these days is congestion. Flyingn an airplane feels no better than a glorified bus ride. However packed airplanes and overcrowded airports are not symptoms of the failure of deregulation, rather, they are the consequence of itsuccess. The problem is that the feral, state, and local governments in the u. S. Have not upgraded and expanded airports and air Traffic Control systems to meet the spectacular increase in demand triggered by deregulation. This edition of economics u a has been a guided tour of some of americas oligopolies a region of big business nonprice competition, anpricemakers a kind of Twilight Zone in ourconomy where the usual rules of competition work a little differently. Theres not much price competition re because, as every good oligopolisknows, that only leads to uncertainty and lower profits. Much safer to fight over convenience and style. Its a zone that makes up a good chunk of any map of our economy, a good place to know your way around. This is david schoumacher