Freeman

ARTICLE

Antitrust History: The American Tobacco Case of 1911

MARCH 01, 1971 by D. T. ARMENTANO

Dr. Armentano is Assistant Professor of Eco­nomics at the University of Hartford in Con­necticut. This article is a chapter from his forth­coming book, The Myth of Antitrust

A long accepted assumption in the area of government and busi­ness relations is that the "classic" monopoly cases of antitrust his­tory clearly demonstrate the need for, and justify the existence of, the antitrust laws. The impression created by almost all the textbooks on this subject is that the busi­ness monopolies or "trusts" in­dicted in the past were—as the textbook theory suggests—actu­ally raising prices, lowering out­puts, exploiting suppliers, driving competitors from the market through predatory practices, and, generally, lowering consumer wel­fare. Ironically, few if any of these same texts provide the stu­dent of antitrust with the necessary empirical information that might allow an independent judg­ment as to the relative conduct and performance of these "mo­nopolies." For the most part, the student is asked to accept the judgment of the author, without being permitted to scrutinize the "brief for the defendant." Such one-sidedness is the kind of poor economic history that leads, in­evitably, to poor public policy.

The following is a brief history of the American tobacco industry, and particularly of the American Tobacco Company, prior to the fa­mous antitrust decision of 1911.1 Unlike many previous accounts, this one will attempt to explain and evaluate the conduct and per­formance of the American Tobacco Company in the full context of the tobacco industry between 1890 and 1907. While this history might be interesting for its own sake, the ultimate purpose is to demon­strate that the court decisions against the American Tobacco Company prior to 1911 did not turn on any sophisticated economic analysis of that firm’s market con­duct or performance. The firm was eventually found guilty of violat­ing the Sherman Act, but the de­cision was not a consequence of any serious evaluation of the eco­nomic costs and benefits of the firm’s activities in the market place.

Cigarettes in America

Although cigarettes appeared in America in the early 1850′s, and were unpopular enough with the government to rate their own spe­cial penalty tax of up to $5 per thousand by 1868, there was hard­ly what could be termed a ciga­rette manufacturing industry be­fore the 1880 period.2 Up to that point, the cigarette business had been concentrated in the New York City area where many small firms employed cheap immigrant labor to "hand roll" mostly Turkish blends of tobacco. But the raw material was relatively expensive, and the hand rolling operation was relatively inefficient and cost­ly. Besides, there appeared to be great popular reluctance to ac­cept the small cigarettes. Conse­quently, the outputs and markets were severely limited. Total output of all "manufactured" cigarettes was never more than 500 million in any one year prior to 1880.

But the rather rapid shift in public taste to Virginia blends of tobacco, the slow adoption of ma­chinery for manufacturing ciga­rettes, and the extensive use of ad­vertising to popularize particular brands or "blends" of tobacco, changed the industry radically be­ginning in the 1880′s.

The use of rapidly improving machines that manufactured cig­arettes quickly drove down the costs of manufacture and placed a profit premium on mechanization. Labor costs alone were reduced from 85 cents per thousand with­out machines to 2 cents per thou­sand with machines.34 A few leased cigarette machines—par­ticularly the "Bonsack" machine — could, in a matter of days, gen­erate the entire yearly output of cigarettes. Thus, almost overnight, the optimum size of an efficient cigarette firm increased many-fold, and almost the entire indus­try emphasis shifted to creating or expanding demand for particu­lar blends of "manufactured" cig­arettes. Advertising and market­ing expenditures began in earnest in the late 1880′s, and it was not at all surprising to find only five large firms doing most of the trade in manufactured cigarettes by 1889. Though there were hundreds of small cigarette producers (most­ly hand-rolled varieties) in that period, the firms of Goodwin and Company, William S. Kimball, Kinney Tobacco, Allen and Binter, and the W. Duke & Sons Company came to dominate the young in­dustry and did an estimated 90 per cent of total domestic ciga­rette sales.5 While an ex­pert "hand roller" could make ap­proximately 2,000 smokes a day, a properly operating cigarette ma­chine could make 100,000.

The name of James B. Duke is almost synonymous with ciga­rettes and the rapid rise of the to­bacco industry in this country. Though a relative newcomer to the cigarette industry (he entered in 1882), Duke quickly pushed his firm into industry leadership by rapid mechanization of all his op­erations and, accordingly, huge ad­vertising schemes to increase de­mand for his increased outputs.6 He took huge newspaper ads and rented billboard display space to push "Duke of Durham" and "Cameo" brands; he placed re­deemable coupons inside his new and improved cigarette boxes to popularize "Cross Cut" and "Duke’s Best"; and he enticed job­bers and retailers with special bonus plans and gimmicks if they would handle and stress his prod­ucts. This unusual marketing ap­proach was extremely successful, and by 1889 Duke’s cigarette firm had over 30 per cent of industry output and was netting almost $400,000 a year on gross sales of $4.5 million. Duke’s firm was the largest and most profitable firm in the manufactured cigarette in­dustry, and appeared to be grow­ing much more quickly than its rivals could or would.

Consolidation in 1890

In January of 1890, the five leading cigarette firms came to­gether to form the American To­bacco Company and installed J. B. Duke as President. Although competition between the leading firms had been severe in the late 1880′s, there is little evidence that the combination was the direct conse­quence of a "destructive trade war" as some accounts relate? Rather, it was an almost inevita­ble consequence of the economics of the cigarette industry in 1890.

Potentially, the cigarette indus­try appeared immensely profitable. The price of leaf tobacco, the raw material, was historically very low (about 4 cents per pound); the cost of manufacture—even with less than optimal utilization of equipment—was extremely low; and the existing market prices for cigarettes were already high enough to allow adequate profits. Two things alone remained to cloud the potential profits picture of the industry: maximum utiliza­tion of the largest, most efficient machinery to drive the costs per unit down to an absolute mini­mum; and an elimination or reduction in total advertising expenditures as a per cent of total output or sales.

Merger provided both of the last-mentioned economies. Con­solidation would allow concentra­tion on those blends of tobacco that could be produced most effi­ciently. Consolidation would also allow great economies of scale to be realized in advertising expend­itures. Thus, production and sell­ing expenditures could be lowered per unit of output, and profits could grow accordingly. A combination or "trust" of small ciga­rette firms was, thus, a natural and predictable economic arrange­ment since it was clearly more ef­ficient than a decentralized mar­ket structure.

Diversification

Between 1890 and 1907, Ameri­can Tobacco or the "Tobacco Trust" diversified into a number of related industries. Diversifica­tion was to be expected since ciga­rettes, although extremely profit­able, represented only 3 to 5 per cent of the entire tobacco industry in 1890.8 In addition, the public’s changing tastes obsoleted particular brand names and even whole products rapidly and, thus, made any specialization extremely dan­gerous.9 Furthermore, there was a distinct prejudice against ma­chine-made cigarettes and sales simply did not expand as rapidly as anticipated. While American Tobacco had produced slightly more than 3 billion cigarettes in 1893, they produced only 3.4 bil­lion in 1899 and less than 3 billion annually between 1900 and 1905; American’s production of ciga­rettes in 1907 was only 3.9 billion. Even more importantly, Ameri­can’s share of domestic cigarette sales declined from over 90 per cent when the firm was formed in 1890 to 74 per cent in 1907."

For the most part, American Tobacco’s diversification and growth in the tobacco industry was accomplished through the di­rect purchase of existing firms with cash or stock. It is estimated that American may have bought as many as 250 firms between 1890 and 1907.11 A very few of these purchases were competitive ciga­rette manufacturers—though the bulk of them were not. Most of these cigarette purchases were made, apparently, to acquire a successful brand-name, since brand-name loyalty was the great­est asset of any tobacco firm.12 The bulk of American Tobacco’s pur­chases, however, were firms pro­ducing noncigarette tobacco prod­ucts. For example, diversification into firms that made smoking to­bacco, snuff, plug chewing tobac­co, and cheroots was begun as early as 1891. These tobacco prod­ucts were noncompetitive with cigarettes and with each other, and had their own particular mar­kets and used their own particular kind of leaf tobacco."

In 1898, after many years of competitive low-price rivalry,14 American purchased the leading plug manufacturers, including, at a later date, the large and impor­tant Liggett & Myers Company. They were subsequently organized into the Continental Tobacco Com­pany, partially owned and com­pletely controlled by Duke and American Tobacco interests.

Shortly after, in March, 1899, the Union Tobacco Company—manu­facturer of the famous Bull Dur­ham smoking tobacco—was pur­chased. The American Snuff Com­pany was then organized in March, 1901, with a paid in capital of 23 millions, and the stock was paid out to the three leading, for­merly independent, snuff manufac­turers. The American Cigar Com­pany was also formed in 1901, and became the largest firm in that sector of the tobacco market. In addition, American purchased lic­orice firms, bag firms, box firms, firms that made cigarette machin­ery, tin foil, and processed scrap tobacco.

By 1902, American Tobacco was manufacturing and selling a com­plete line of tobacco and tobacco-related products—including over 100 brands of cigarettes—and over 60 per cent of the nation’s smoking and chewing tobacco, about 80 per cent of the nation’s snuff, and 14 per cent of its cigars. And when the newly organized Consolidated Tobacco Company, Continental Tobacco Company, and the American Tobacco Company all merged in October, 1904, to form the new American Tobacco Company, the last phase of the di­versification and consolidation of tobacco properties was complete. The American Tobacco Company was now a major factor in all phases of the tobacco industry do­mestically and internationally (al­though relatively weak in cigars), and its position would be main­tained (and even increased in plug chewing tobacco) until dissolu­tion by the courts in 1911.

The 1890-1910 Period: Acquisitions

Though American Tobacco did acquire many firms in all phases of the tobacco business between 1890 and 1911, the total number of their acquisitions must be put in perspective. While over 200 ac­quisitions appears high—and cre­ates the impression that only a few independent tobacco firms re­mained—the tobacco industry con­tained thousands of independent firms in the period under consid­eration. While American Tobacco did the great bulk of much of the tobacco industry in a few large manufacturing plants, thousands of smaller independent firms sold their products at a profit in the open market in competition with the "Trust."

For example, as many as 300 in­dependent cigarette manufactur­ers may have existed in 1910;15 similarly, while the Trust pro­duced a great percentage of the nation’s output of smoking tobacco in fewer than 25 plants, there were as many as 3,000 plants man­ufacturing smoking tobacco in 1910.  In addition, the Trust ac­counted for only about seven of the nation’s estimated 70 snuff manufacturing plants.17 And fi­nally, the American Cigar Com­pany operated just 29 manufac­turing operations in 1906, while the cigar industry contained up­wards of 20,000 independent firms.1s Thus, the tobacco indus­try contained thousands of firms in spite of the acquisition activi­ties of the "Trust."

Entry and Economies of Scale

The major reason for the num­bers of rival sellers is not difficult to discover. With or without the "Trust," entry into tobacco manu­facture was relatively easy. The raw material was available to all at the going market rates and the Trust itself owned no tobacco land whatsoever. Anyone who wanted to compete could purchase the available raw materials and at­tempt to sell his product in the open market. In addition, the Trust possessed neither discrimi­natory transportation rates or re­bates" nor any superior production method protected by patent.2° Thus, it was not surprising to find many independent firms in an in­dustry where neither the raw ma­terial nor the efficient means of production were, or could have been, "monopolized."

The major reason for the Amer­ican Tobacco’s policy of acquisi­tions is not difficult to discover either: it made economic sense. For example, much emotional non­sense has been made of the fact that American acquired firms and, subsequently, shut them down.21 The crucial point, of course, is that American concentrated to­bacco production—and particu­larly cigarette production with only two large plants in New York and Richmond—to achieve quite obvious and substantial scale econ­omies.22 Most of the acquired fa­cilities were mechanically ineffi­cient, and had been acquired only to secure the immensely more valuable competitive brand name. Once acquired the product itself could be produced more efficiently in American’s own modern and efficient facilities. Thus, it made good sense and good economics to close down marginal manufactur­ing operations, and no tears need be shed for the "dismantled fac­tories." There is no evidence that any of the former owners shed such tears since American Tobac­co’s terms (stock in the Trust or cash) were admitted to be gen­erous to all concerned. Thus, the plants were not acquired just to shut them down.

Other Economies Achieved

Other economies of the acquisi­tion policy were achieved in im­portant though not so obvious ways. For example, American’s huge production made the owner­ship of its own foil, box, and bag firms almost mandatory, and the advantages and savings to be re­alized by accurate and continuous deliveries of these products made economic sense. Its acquisition of MacAndrews & Forbes and Mell & Rittenhouse, the two leading manufacturers of licorice paste, was predicated on possible econo­mies and on the very real fact that the Japanese-Russian War threat­ened Near East licorice supplies and, consequently, American To­bacco’s expansion of plug tobac­co." Independent foil, box, and bag firms still remained in the market place, and at least 4 other manufacturers sold licorice paste independent of the American To­bacco firms. There is also no evi­dence that American’s paste firms refused to sell to anyone who wanted licorice at the going mar­ket prices. Thus, this aspect of the vertical integration of Amer­ican Tobacco was economically logical and certainly cannot be condemned as necessarily restrain­ing trade.

American’s integration into dis­tribution also realized economies. With the virtual elimination of the middleman, the jobbers not unhealthy margin could be realized by the tobacco manufacturer.24 Wholly owned retail establish­ments could also push particular brands more effectively and be­come an important advertising and marketing innovation. American Tobacco’s United Cigar Stores, the most famous and effective tobacco product’s retail chain—with over 1,000 stores by 1910 and at least 300 in New York City alone—were certainly important in this respect.

There were still other more sub­tle economies. A certain amount of inefficient cross-hauling or cross-freighting was automatically eliminated since American Tobac­co could fill orders for finished tobacco products from a number of different manufacturing locations.25 In those modernly equipped factories labored nonunion help, and this saved American from 10 to 20 per cent on its wage ex­penses vis-a-vis most of its com­petitors which employed Tobacco Workers Union labor.2° The To­bacco Trust could demand prompt settlement of all outstanding ac­counts (30 days), while it was quite common for smaller manu­facturers to wait two to four months for payment.27 It could employ fewer salesmen per prod­uct since many of its brands were long established; orders could even be filled by mail without agents of any sort.28 And, lastly, it could employ, and did employ, some of the keenest managerial talent in the industry,29 and they proceeded to implement and extend the potential economies already discussed above.

Consumers and Competitors

But while the "Tobacco Trust" enjoyed "economies," what became of the tobacco consumer and of the "Trust’s" competitors? Did American Tobacco simply act like a "classical" monopolist by re­stricting output and raising price? Or did American act like a "predatory" monopolist and use its mar­ket power to lower prices, and, consequently, drive its competi­tion from the market? Actually, there is little evidence that Amer­ican Tobacco followed either mo­nopolistic-like conduct: they nei­ther restricted outputs nor raised prices, nor engaged—as a general rule—in predatory pricing prac­tices designed to eliminate their competition.3° For example, Amer­ican Tobacco’s cigarettes (per thousand, less tax) sold for $2.77 in 1895, $2.29 in 1902, and $2.20 in 1907; fine cut (per pound, less tax) sold for 27 cents in 1895, 33 cents in 1902, and 30 cents in 1907; smoking tobacco sold for 25 cents (per pound, less tax) in 1895, 26.7 cents in 1902, and 30.1 cents in 1907; plug sold for 15.5 cents (per pound, less tax) in 1895, 27.7 cents in 1902, and 30.4 cents in 1907; and little cigars sold for $4.60 (per thousand, less tax) in 1895, $4.37 in 1902, and $3.60 in 1907.31 In the same period (1895-1907), the price of leaf tobacco per pound rose from 6 to 10.5 cents.32 Thus, the pricing record indicated above on tobacco products was accomplished during a period when the price of the essential raw material had increased about 40 per cent.

Predatory practices are expen­sive, and it is not usually profita­ble to attempt to eliminate com­petition through this technique. This would be especially true in an industry where entry was rela­tively easy, where nonprice com­petitive factors were crucial, and where there were hundreds—even thousands—of competitive sellers already in existence. Such a gen­eral policy on the part of Amer­ican Tobacco would have been fool­ish and foolhardy, and no such gen­eral policy was attempted. Although there may have been some isolated instances where price-cutting played an important part in merg­er or consolidation,33 such prac­tices were not the rule.

But some additional facts complicate an easy interpretation of this "war." In the first place, it was not established that American started the "plug war." Sec­ondly, the price reductions were limited to only a few "fighting brands"; while American Tobacco lost money on plug, all the large independent plug manufac­turers continued to earn a profit. Lastly, plug sales increased from 9 million pounds in 1894 to 38 million pounds in 1897. See Tennant, The American Ciga­rette Industry, p. 29.

The Lower Court Decision

The comments concerning Amer­ican Tobacco’s efficiency and price policy related above are certainly not original. Amazingly, the same sort of comments can be discovered in a reading of the Circuit Court decision (U.S. v. American Tobac­co, 164 Federal Reporter, 1908) that first determined that American Tobacco had violated the Sherman Act. Although Circuit Judge Lacombe found American guilty of violating the Sherman Act, he stated, with respect to the economic issues involved that:

"The record in this case does not indicate that there has been any in­crease in the price of tobacco products to the consumer. There is an absence of persuasive evidence that by unfair competition or improper practices in­dependent dealers have been dra­gooned into giving up their individual enterprises and selling out to the principal defendant…. During the existence of the American Tobacco Company new enterprises have been started, some with small capital, in competition with it, and have thriven. The price of leaf tobacco—the raw material—except for one brief period of abnormal conditions, has steadily increased, until it has nearly doubled, while at the same time 150,000 addi­tional acres have been devoted to tobacco crops and the consumption of leaf has greatly increased. Through the enterprise of defendant and at a large expense, new markets for American tobacco have been opened or de­veloped in India, China, and else­where." (Italics added.)34

Circuit Court Judge Noyes, while concurring with Judge La­combe in American Tobacco’s guilt, also appeared to concur in the economic issues involved.

"Insofar as combinations result from the operation of economic prin­ciples, it may be doubtful whether they should be stayed at all by legis­lation…. It may be that the present anti-trust statute should be amended and made applicable only to those combinations which unreasonably re­strain trade—that it should draw a line between those combinations which work for good and those which work for evil. But these are all legislative, and not judicial, questions."35

It was Judge Ward (dissent­ing), however, who crystallized the economic issues in the case.

"So far as the volume of trade in tobacco is concerned, the proofs show that it has enormously increased from the raw material to the manufactured product since the combinations, and, so far as the price of the product is concerned, that it has not been in­creased to the consumer and has varied only as the price of the raw material of leaf tobacco has varied.

The purpose of the combination was not to restrain trade or present competition… but, by intelligent economies, to increase the volume and the profits of the business in which the parties engaged." (Italics added.) 36

"A perusal of the record satisfied me that their [American Tobacco) purpose and conduct were not illegal or oppressive, but that they strove, as every businessman strives, to increase their business, and that their great success is a natural growth resulting from industry, intelligence, and econ­omy, doubtless largely helped by the volume of business done and the great capital at command."37

Yet, although three of the four Circuit Court judges admitted that there was evidence to indi­cate that American Tobacco was efficient, had not raised prices, had expanded outputs, had not de­pressed leaf prices, and had not "dragooned" competitors, Judge Coxe joined Judges Lacombe and Noyes in concurring that Ameri­can Tobacco violated the Sherman Act! Clearly the conduct and eco­nomic performance of the defend­ant had nothing to do with the decision. American Tobacco was convicted in spite of its economic record because its mergers and ac­quisitions inherently restrained trade between the now merged or acquired firms, and that violated the Sherman Act as interpreted in 1908. Judge Lacombe made the majority’s position explicit:

every aggregation of individu­als or corporations, formerly inde­pendent, immediately upon its forma­tion terminated an existing competi­tion, whether or not some other com­petition may subsequently arise. The act as above construed Sherman Act prohibits every contract or combina­tion in restraint of competition. Size is not made the test: two individuals who have been driving rival express wagons between villages in two con­tiguous states, who enter into a com­bination to join forces and operate a single line, restrain an existing com­petition….

"Accepting this construction of the statute, as it would seem this Court must accept it, there can be little doubt that it has been violated in this case… the present American Tobac­co Company was formed by subse­quent merger of the original company with the Continental Tobacco Com­pany and the Consolidated Tobacco Company, and when that merger be­came complete two of its existing competitors in the tobacco business were eliminated."38 (Italics added.)

It was irrelevant to inquire into the benefits of the combination, argued Judge Lacombe. It was "not material" to consider subse­quent business methods or the effect of the combination on pro­duction or prices. The fact that American Tobacco had not abused competitors, tobacco growers, or consumers was "immaterial." The only issue that was material was that:

"Each one of these purchases of existing concerns complained of in the petition was a contract and com­bination in restraint of competition existing when it was entered into and that is sufficient to bring it within the ban of this drastic statute."39 (Italics added.)

And, thus, the three judges (with Judge Ward dissenting) ruled that the American Tobacco Company must be divested.

The Supreme Court Decision of 191140

The Supreme Court decision handed down in the American To­bacco case by Justice White in 1911 is a virtual replay of the Standard Oil decision of the same year. Again, White suggests that a "rule of reason" be applied to the undisputed facts concerning the activities of the American To­bacco Company.41 But, again, that "rule of reason" does not include a careful economic analysis of the Tobacco Trust’s conduct-perform­ance in the period under consid­eration. All the Supreme Court did (again) was to detail the history of the tobacco industry be­tween 1890 and 1907,42 and infer from these undisputed facts that the intent and "wrongful purpose" of American Tobacco must have been to acquire a monopolistic position in the tobacco industry." This conclusion was "inevitable," said White,44 and could be "over­whelmingly established" by refer­ence to the following facts: (a) the original combination of ciga­rette firms in 1890 was "impelled" by a trade war; (b) an "intention existed to use the power of the combination as a vantage ground to further monopolize the trade in tobacco," and the power was used, i.e., the "plug and snuff wars"; (c) the Trust attempted to con­ceal the extent of its "control" with secret agreements and bogus independents; (d) American To­bacco’s policy of vertical integra­tion served as a "barrier to the entry of others into the tobacco trade"; (e) American Tobacco expended millions of dollars to purchase plants, "not for the pur­pose of utilizing them, but in order to close them up and render them useless for the purposes of trade"; (f) there were some agreements not to compete between American and some formerly independent tobacco manufacturers." With these "facts" in mind, the conclu­sion was inevitable:

"Indeed, when the results of the undisputed proof which we have stated are fully apprehended, and the wrongful acts which they exhibit are considered, there comes inevitably to the mind the conviction that it was the danger which it was deemed would arise to individual liberty and the public well-being from acts like those which this record exhibits, which led the legislative mind to conceive and enact the anti-trust act…." (Italics added.)46

But, as has been demonstrated in our review of the American Tobacco Company, whether such "acts" are a danger to "individual liberty" and the "public well­being" is a matter of dispute. To inevitably infer, for example, that purchasing plants and closing them down endangers liberty or the public well-being, without an eco­nomic analysis of the costs and benefits of such an action, is an unwarranted and faulty inference. If the agreements to secure these "plants" were voluntarily arrived at, then "individual liberty" was not endangered; if the plants closed down by American Tobacco were inefficient, and if the prod­ucts continued to be produced at larger, more efficient factories, then the danger to the public well­being is not obvious. The same kind of questions can be raised about the rest of the "undisputed facts" and "inevitable inferences" in this case.

Conclusion

Unfortunately, the Supreme Court in the American Tobacco case did not choose to analyze the economic issues involved, nor choose to use the rule of reason as an economic standard to see whether the public well-being had been harmed. Such an analysis, if performed, would have involved a discussion of prices, outputs, econ­omies associated with merger, growth of competitors (especially in cigarette manufacture), and a host of related issues; no such discussion is discovered in this case. American Tobacco was con­victed of violating the Sherman Act because its acts, contracts, agreements, and combinations were of such "an unusual and wrongful character as to bring them within the prohibitions of the law."47 The Circuit Court was directed to devise a plan of dissolving the illegal combination, and "recreating" a new market structure that would not violate the antitrust law.

The fundamental purpose of this study has been to demonstrate that the famous American Tobac­co decision of 1911 did not turn on any sort of sophisticated eco­nomic analysis of actual market conduct or performance. An even wider purpose, however, has been to suggest by example that struc­tural changes a priori prove pre­cious little about consumer welfare and that it is not always safe to assume that "bad" structure leads inevitably to "bad" conduct or "bad" performance. Since the present trend in antitrust think­ing appears to be moving toward an almost complete reliance on structural factors,48 the implicit danger of such an approach should be obvious.

 

***

Obstacle to Progress

THERE IS A NATURAL OBSTACLE to progress in abstract thought, which has often delayed rational inquiry; an erroneous concept or theory may be expressed in terms which embody the error, so that thinking is blocked until the misleading words are discarded from the given context.

ISABEL PATTERSON, The God of the Machine

FOOT NOTES

1 United States v. American Tobacco Company, 221 U.S. 105.

2 For information concerning the cig­arette industry prior to 1911, see Meyer Jacobstein, "The Tobacco Industry in the United States," Columbia University Studies, Vol. 26 (1907); Richard B. Ten­nant, The American Cigarette Industry, (New Haven: Yale University Press, 1950); William H. Nicholls, Price Poli­cies in the Cigarette Industry, (Nash ville: The Vanderbilt University Press, 1951); John W. Jenkins. James B. Duke: Master Builder, (New York: George H. Doren Company, 1927).

3 Tennant, The American Cigarette In­dustry, pp. 17-18.

4 Jenkins, James B. Duke: Master Builder, p. 66.

5 Tennant, The American Cigarette Industry, pp. 19-25.

6 Jenkins, James B. Duke: Master Builder, pp. 73-84.

7 Nicholls, Price Policies in the Ciga­rette Industry, states flatly that The American Tobacco Company was formed in 1890 following an expensive business war begun by James B. Duke (p. 26). But neither the Report of U.S. Commis­sioner of Corporations, Vol. I (Feb., 1909), which Nicholls indicates was his source, nor the lower court decision against American Tobacco in 1909, ap­peared to bear this out. See William Z. Ripley, Trusts, Pools and Corporations, revised edition (Boston: Ginn & Com­pany, 1916), pp. 269-270; and, see 164 Fed. Reporter 722.

8Even in the 1900-1904 period, ciga­rettes, by weight, represented only 2 per cent of all tobacco products consumed. See Nicholls, Price Policies in the Ciga­rette Industry, p. 7. Cigarettes did not achieve any sort of national popularity until after World War I.

9 Jenkins, James B. Duke: Master Builder, pp. 91-92.

10 U.S. Research and Brief, 221 U.S. 106, Appendix "F", p. 318. Also see Jones, The Trust Problem in the United States, p. 140. Higher percentage figures in some accounts (83 per cent is a common figure for 1907; see Nicholls, Price Policies in the Cigarette Industry) measure Ameri­can’s share of total output rather than output for domestic consumption.

11Tennant, The American Cigarette Industry, p. 27.

12Jenkins, James B. Duke: Master Builder, p. 149.

13Transcript of Record, 221 U.S. 106, Volume I, p. 254.

14It was not established at court that American Tobacco started this price war; see 164 Fed. Reporter 723, and 221 U.S. 160.

15 See Nicholls, Price Policies in the Cigarette Industry, p. 17. Jones mentions 528 independent plants in 1906; see Jones, The Trust Problem in the United States, p. 146.

16 Nicholls, Price Policies in the Ciga­rette Industry, p. 15.

17bid.

18Ibid. p. 13. Also, see Ripley, Trusts, Pools, and Corporations, p. 295.

19 221 U.S. 129.

20 Jacobstein, "The Tobacco Industry in the United States," p. 101.

21 Wilcox, Public Policies Towards Business (Homewood, Illinois: Richard D. Irwin, 1966), says that one of the Ameri­can’s "unfair" methods of competition was buying plants to shut them down (p. 139).

22 Transcript of Record, 221 U.S. 106, Volume I, pp. 208-211.

23 Ibid., pp. 227-231.

24 Tennant, The American Cigarette Industry, pp. 51-52.

25 Jacobstein, "The Tobacco Industry in the United States," p. 126.

26 Ibid., pp. 125-126.

27 Ibid., p. 127.

28 Ibid., p. 128.

29 Ibid., p. 123.

30 Tennant, The American Cigarette Industry, pp. 49-57.

31 U.S. Research and Brief, 221 U.S. 106, Appendix "P," p. 329.

32 Tennant, The American Cigarette Industry, p. 53.

33 The "plug war" (1894-1898) is prob­ably the most famous example. During this "war," American sold plug at a loss until the large independent plug manu­facturers defaulted. The "independents" came together to form the Continental Tobacco Company whose president was James B. Duke.

34 164. Fed. Reporter, pp. 702-703.

35 Ibid., p. 712.

36 Ibid., p. 726.

37 Ibid., p. 728.

38 Ibid., p. 702.

39 Ibid., p. 703.

40 United States v. American Tobacco Company 221 U.S. 105.

41 Ibid., pp. 155, 178-179.

42 Ibid., pp. 155-175.

43 Ibid., pp. 181-184.

44 Ibid., p. 182.

45 Ibid., pp. 182-183.

46 Ibid., p. 183.

47 Ibid., p. 181. (Italics added.)

48 Samuel A. Smith, "Antitrust and the Monopoly Problem: Towards a more Relevant Legal Analysis," Antitrust Law & Economics Review, Volume 2, No. 4 (Summer, 1969), pp. 19-58.

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March 1971

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