Revisiting the Federal Trade Commission’s July 1966 hearings on vertical integration by cement companies (pages 30-40) is a step back to a point when
DON MARSH, EDITOR
Revisiting the Federal Trade Commission’s July 1966 hearings on vertical integration by cement companies (pages 30-40) is a step back to a point when government seemed small in environmental and workplace regulation, but big in antitrust monitoring. Hearing testimony and comments echo a recurring theme in antitrust dialog: Past measures to maintain an industry’s competitive balance do not necessarily align with the present economy.
The hearings stemmed from the FTC’s Economic Report on Mergers & Vertical Integration in the Cement Industry. Published in April 1966, it tracked sweeping changes the cement industry had seen in the postwar era Û rapid plant-capacity expansion, bulk-versus-bag distribution, and the emergence of ready mixed concrete as the highest-volume market. The document embraced economic theory whose later detractors would include a Ronald Reagan Supreme Court justice nominee.
Testimony from the FTC hearings suggests that in the mid-1960s, the federal government was concerned about a) the concentration of cement companies’ leverage from one market to the next and how it impacted independent ready mixed producers; and, b) the potential domino effect of a forward integration trend that had been confined to large and medium-sized markets accounting for less than 10 percent of U.S. powder consumption. The hearings predated by four to six years the Clean Air Act, Clean Water Act and Occupational Safety and Health Act. With little surprise, the hearings did not address how cement and concrete production and delivery efficiencies could yield best management practices for operators destined to contend with the Environmental Protection Agency, Occupational Safety and Health Administration, and other regulatory agencies.
The FTC’s 1960s antitrust policy is discussed in an August 2005 study titled Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices. Authors Ali Horta¡su and Chad Syverson, both of the University of Chicago and National Bureau of Economic Research, examine the cement and concrete business from 1964 through 1997. They note that the FTC brought 15 antitrust cases during the 1960s against powder companies that had acquired ready mixed producers, with each ending in concrete asset divestiture. Those rulings led to a sustained lull in merger activity through the 1970s, as did Wall Street Journal-cited January 1967 FTC guidelines, which called for regulators to challenge deals involving a cement company and one of a market’s top four ready mixed producers, or a producer consuming 50,000 bbl. or more cement annually.
Horta¡su and Syverson note that the guidelines were dropped in 1977; virtually all vertical merger challenges had stopped by 1980; and, in 1985, the FTC explicitly eased enforcement policy regarding cement and ready mixed vertical mergers. The agency observed in the Federal Register that changes in economic thinking led to the latter action. Presumably contributing to the policy switch were scholars like Robert Bork, author of The Antitrust Paradox: A Policy at War With Itself, who challenged the naive foreclosure theory exemplified in the FTC’s cement report.
According to Horta¡su and Syverson, Bork and contemporaries argued that in cases of fixed-proportions technology Û as cement is for ready mixed concrete Û a monopolist upstream producer cannot raise profits by monopolizing its downstream market. Thus, vertical mergers would only occur if there are efficiency gains.
Cementing Relationships does not cover the past decade’s accelerated pace of vertical integration in cement, aggregates and concrete. If the authors revisit this business, they will see a smaller universe of integrated and independent producers Û many seeking efficiency gains to stay ahead of safety and environmental regulations and, through fair market play, improve their returns in the absence of some marginal operators a well-intentioned FTC might once have wanted to protect.
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