TOBACCO: Thurman Act Decision

The Big Three cigaret companies (American, Liggett & Myers, Reynolds), convicted seven weeks ago of monopoly and conspiracy in restraint of trade (TIME, Nov. 3), were sentenced last week by a Federal judge in Lexington, Ky. Nobody will go to jail. But the judge’s decision put a large segment of U.S. business on notice: competitors who do not use price as a weapon may be “conspiring” to fix prices even if they never actually meet to do so. To a great many lawyers, this is something new under the Sherman Act. One defense counsel called it the “Thurman Act.”

Round-faced, gum-chewing Federal Judge H. Church Ford overruled the Big Three’s motions for a new trial, imposed a $15,000 fine on each company and 13 executives, plus court costs. Sentence will presumably be passed later on the other defendants,* who were included in the charges, but did not stand trial, agreed to abide by the Big Three verdict.

It was a mammoth victory for tall, young Edward H. Miller, chief attorney for the U.S. Justice Department, who switched his own smoke to a 15¢ brand of cigarets called Charing Cross before the trial. His description of how the $1,000,000,000 U.S. cigaret industry operates—the most complete description yet on record—will stand unless the inevitable appeal reverses it.

The antitrust “conspiracy” as he described it was pretty subtle: there were no “Gary dinners,” no tangible agreements between the defendants, not even any secrets—or not necessarily any. Nor was there any of the usual trustbuster’s talk about a plot to gouge the consumer, no doubt because 6½¢ of the consumer’s 15¢ for cigarets goes to the Federal Government v. about 5¢ to the manufacturer.

Ed Miller’s point was simply that the whole cigaret industry from farm to match was controlled by the manufacturers.

The Auction. The Miller outline began at the raw tobacco auction, where, he charged, Big Three operations deprive the individual farmer of all bargaining power. When 1,602,000 farmers bring their produce to the warehouses, Big Three buyers snap up two-thirds to three-fourths of all their burley tobacco, 30-40% of all their flue-cured crop (the rest being mainly exported). In any given auction, said the Government, Big Three buyers fail to bid seriously against each other (though no one will attend a market unless the other two are there). In some cases, they walk ahead of the auctioneer, are awarded their chosen baskets at pre-established prices as soon as their hands are laid upon them. The lightning speed of the auctions is another weapon: farmers are just as bemused by the auctioneer’s chant as are radio listeners when Speed Riggs gives out on The Hit Parade. The manufacturers’ control of these markets, the trustbusters argued, was made still more effective by their ability to stay away at any time, since they maintain 2½-3-year supplies for aging.

Consumer end. The cigaret distributor, the jury was told, is also helpless before the Big Three. He can neither cut prices on his own hook, nor raise them. Each of the Big Three has a “direct list” of some 6,000 wholesalers, and the three lists are almost identical. A wholesaler who shaves prices on one brand loses the accounts of all three. These jobbers in turn, with the help of the manufacturers’ “missionary men,” police the 1,000,000 retail outlets for price cutting. As for the few huge retailers (like A. & P.) who are on the manufacturers’ “direct list.” the Government contended that an elaborate use of advertising allowances makes it worth their while not to undercut the regular retail trade too deeply.

The Government’s case was most eloquent on behalf of the 10¢ brands, which mushroomed in 1932-33 after Reynolds had led the Big Three into a disastrous 1931 price rise. Here the Government’s testimony to the jury was 1) that the Big Three’s control of the auctions enabled them to raise the price of 10 tobacco grades, equalize the average cost to themselves by simultaneously beating down the price of top grades; 2) that by violent concerted price cuts in 1933, plus liberal use of free goods, direct selling, manipulation of credit terms, etc., they succeeded in driving the ten-centers’ share of the market from almost 25% to 6% in five months (last year they were up to 17% again).

Conspiracy? In its main facts, Ed Miller’s description of the industry was fairly familiar to those in it. But his triumph was to convince the jury that the Big Three’s actions were conspiratorial—not, as the defense insisted, simply coincidental. Tobacco men admitted that their prices are the same—but so are the prices of leading brands of chewing gum, magazines, candy, a host of other products.

What kind of monopoly was it, they asked, that would permit Philip Morris, a newcomer in 1933, to increase its share of the market from 37 million to 11 billion cigarets in seven years?

The evidence of conspiracy, the judge pointed out to the jury, was “entirely circumstantial.” Furthermore, Miller himself made much of the fact that his case did not rest upon “any formal…[or even] informal agreement” between the defendants, in the sense of their sitting down around the same table. “It is just like…setting a clock in motion,” he said, “it just grinds on itself.” Ed Miller stressed this industrial automatism because he had no dictaphone records of secret meetings to play for the jury. In so doing, he also hit upon a fundamental characteristic of 20th-century capitalism.

The tobacco industry is a prime example of non-price competition or (as Harvard’s Edward Chamberlin calls it) “monopolistic competition.” Where the initial manufacturing investment is huge and the product standardized, individual companies set their own prices not directly in terms of their own supply and demand, but in terms of the industry’s as a whole. Price is a sort of community-owned snickersnee, drawn when necessary to repel invaders, but not for civil strife. So long as the price is such as to maximize the industry’s profits, each company fights for its individual share (and often, as in the tobacco industry, very fiercely) with less dangerous weapons, such as advertising.

Most important aspect of this sort of competition: it can and very often does exist without any “conspiracy” at all, solely from the similar action of companies with similar problems making similar efforts to maximize profits. In this case, the tobacco jury found a “conspiracy.”

But nobody, not even Thurman Arnold, had any notion of how else the cigaret industry could or should operate. Arnold, whom Max Lerner has placed in the “corrosive detachment” school of economic criticism, merely snorted that “competitive buying presupposes that nobody will tell business how it should be run.” Unless fines can teach a whole industry some new way to make money, there is still no assurance that henceforth tobacco will not be bought and cigarets sold in just about the same way as before.

* Philip Morris, P. Lorillard, Imperial Tobacco, British-American Tobacco and Universal Leaf Tobacco, together with 21 of their subsidiaries and twelve of their top officers.