# Petition for Writ of Certiorari — General Foods Corp. v. Federal Trade Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385603_1381%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1968 - **Citation:** 391 U.S. 919 ## Text oo is LT ER AST CI © BUPREME COURT, U, Ek | | , ALSD : No 1250 MAR 20 1968 ; Bay Fe, cuen ” INTHE:- . _o upreme Court of the nied States Oc TOBER ERM, 1967 GENERAL Foops Corporation, Petitioner e Vv. FEDERAL TRADE CoMMISSIoN, Respondent PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT Roserts B. OWEN ‘701 Union Trust Building Washineten,_D. C.— 20005- Attorney for Pgtitioner, . General Foods Corporation. Of Counsel: | “8 GERALD P. Norton G. JOSEPH VINING . Covineton & BURLING 701 Union Trust Building Washington, D. C. 20005 Kenpaut M. Coir 250 North Street White Plains, New York es Subetees as TABLE OF CONTENTS OPINIONS BELow re Se euavadesadsedeeueavesouss¢s Scawntbee- oe JURISDICTION .........-. fiamkeweneeesae erqcessosvege eover 2 _ QUESTIONS PRESENTED .........ecsccccccceeeecees Leecweeee 2° “SravTuTe INVOLVED .........0eecceeees steutenesonedes we («*S STATEMENT .......... levavedwesevesseWecdseneces eoeguceds 3 I. The Issue of Substitute Products i lis eka peanepeeaanenerede. aie B. Fhe Opeions Belew .ncicicccecvcccvecvecs ceeve II. The Issue of Entry Barriers Be TD Eb cKadekeceaccceccovienciveecssuscevs 12 B. The Opinions Below ...-........ veietenevesseees 12 III. The Issue of Operating Efficiencies Pe A. The Facts ........ Weliveckers aan yvignevidninn aad 14 B. The Opinions Below ..........---+-+eeeeees ieee 15° _ REASONS FOR GRANTING THE WRIT ...........-.-.0seeeeees TI. On rue Important LegaL AND Economic QUESTION OF’ THE RELEVANCE OF POTENTIAL COMPETITION FROM CLOSE SussTITUTE Rropucts, THE RULE ANNOUNCED BELOW ConFuicts Wits Prior Houpines 6r THis Court AND Wirn Acceptrep EcoNoMic DocTRINE ............+5. II. THe RELIANCE OF THE CouRT BELOw on A NoveL As- STRACT RvuLE—THar Entry Barriers-May° Be An- ALYZED WitrHout REGARD TO THE CHARACTER OF IDEN- TIFIED POTENTIAL EnTRANTs—Is INCONSISTENT WITH ACCEPTED ECONOMIC PRINCIPLES AND-> WITH THE DECTI- | SIONS OF THIS COURT ................. ie ae rionaies III. Taw Lower TriBuNALs’ RELIANCE UPON ACHIEVEMENT - - OF OPERATING EFFICIENCIES AS AN AFFIRMATIVE GROUND FOR PROHIBITING A CONGLOMERATE MERGER Is a RADICAL DEPARTURE FROM THE ACCEPTED GOALS OF ANTITRUST ' PoLicy CFE RESELLER VL ICES RSE SOR LEE @m@sreeeeeee¢0 Asvuenk A—OPINION AND qe UDGMENT OF THE Court oF AP- ’ PEALS APPENDIX B—OPINION AND ORDER OF THE FEDERAL TRADE ' CoMMISSION APPENDIX C—PETITIONER’ s Morton AND » Sinennieen AFFIDAVIT IN THE Court or APPEALS 18 26 30 ii at Table of Contents Continued " CITATIONS Ais Cases: . ? eA _ Page Burlington Truck Lines Inc. v. United States, 371 U.S..156 SE snkeuh2nches bedhe bnew see hbekedeeeaabesceeeee 23 Consolidated Foods Corp. v. FTC, 380 U.S. 592 (1965) ineee* 23 Federal Trade Commission v. Procter & Gamble Co., 63 F.T.C. , [1963-65 Transfer Binder] Trape ‘Rec. REP. { 16,673 (FTC 1963), rev’d, 358 F.2d 74 (6th Cir. 1966), rev’d, 386 EE CUNT ince ekceenas o06eeensedenteexdia 4-6, 10, 16, 18, 21, 53.95, 27, "99 NLRB v. Metropolitam Life a Co., 380. U. S. 438 (1965) evens 23 SEC v. Chenery Corp., 332 U.S. 194 CED davwesednentesss 23 United States v. Continental Can Co., 378 U.S. 441 (1964) ..20,21 © United States v. El Paso Gas Co., 376 U. S.651 (1964)-. .18, 21, 23, 25 United States v. Penn-Olin Co., 378 U.S. 158 (1964) ....18, '20, ‘21, 23, 24, 25 Statutes: Clayton Act, 38 Stat. 730,:as , amended, 6: US.C. § 12 et. seq.? | "Eee a ia. aan eee er ee mie .3,4,10 Ge ¢ eee Payer er ere unease eeesaneusune 2,6 _ Judicial Code, 28 USC. oiate Cp) eveeseccesecvececees. = Miscellaneous: : aan ‘Barn, Barrters To New Comperirion (1956) ........... 19, 25, 26 BAIN, INDUSTRIAL ORGANIZATION (1959) .0...........000 08. 17; 19 , Book, MERGERS AND MARKETS (6th ed. 1968) ........... 16, 22, 29 en BRIEF For THE FEDERAL TRADE Commission, FTC v. Procter & Gamble Co., 386 U.S. 568 (1967) ...... Sn eniaiaasbadens ‘27 CouNCcIL oF Economic Apvisors ANNUAL REPORT, in Economic REPORT OF THE PRESIDENT (1965) ...........cceccecceces 20 Elman, Clorox and Conglomerate Mergers, 36 ANTITRUST LJ. * ee SEE cavdadaadawebecceweunees cukwieséceses nike 27, 29 Hale & Hale, More on Mergers, 5 J. Law & Econ. 119 (1962).. 16- Hearings Before the Subcommittee on Antitrust and Monopoly _of the Senate Committee on the Judiciary, pursuant to 8. ’ Res. 40, 89th Cong., Ist Sess., pt. 2 (1965) .............4.. 17 -KAYSsEN. & TURNER, ANTITRUST at) ) 17, 26 PEnRosE, THE THEORY OF THE GROWTH OF THE Firm (1959) .. 16 REPORT OF THE ATTORNEY GENERAL’S NATIONAL CoMMITTEE, To cet Srupy rHe ANTITRUST Laws (1955) .............0c.e00e- 20 " Turner, Conglomerate Mergers and Section 7 of. the Clayton : Act, 78 Harv. L. Rev. 1313 (1965) ................. 15, 16, 17, 26, 27, 28, 29 IN THE | Supe Court of the nited Stats OcToBER TERM, 1967 i’ > No. GENERAL Foops Corporation, Petitioner Vv. FEpERAL TRADE ComMISSION, Respondent PETITION FOR A WRIT OF CERTIORARI.TO THE UNITED. STATES COURT OF APPEALS FOR THE | THIRD CIRCUIT al Petitioner prays that a writ of certiorari issue to ‘review a final judgment of the United States Court of Appeals for the Third Circuit entered in this case on December 21, 1967: , OPINIONS BELOW The opinion of the Court of Appeals is amnian at 386 F.2d 936 (1967) and appears at Appendix A to ‘this petition. The final order and opinion of the Fed- eral Trade Commission (Dkt. 8600) is reported at — F.T.C. —, [1965-67 Transfer Binder] TRADE Rea. Rep. 2 _ £17,465 (FTC 1966), oni at Appendix. B to this — hey =? igi a Y JURISDICTION . The judgment of the Court of Appeals was entered -on December 21, 1967, and appears at Appendix A - to this Petition. The jurisdiction of this ‘Court is invoked under 28 U.S.C. § 1254(1) (1964) and Sec- tion 11(c) of the Clayton Act, as amended, iW U.S.C. § 21(¢) (1964). . QUESTIONS PRESENTED 1, Where a relevant ‘‘product submarket”’ has been selected in a conglomerate merger case, may the eco- nomic effect upon that submarket of close substitute products being developed and marketed by numerous aggressive and well-financed rivals be treated as legally irrelevant -in determining whether the merger niay | substantially lessen competition within the submarket ? 2. Where the record in a conglomerate merger case Shows the existence of numerous identified potential ' competitors of great size and strength in close economic proximity to the relevant submarket, may a reviewing . '. court of appeals properly conclude that the merger is illegal on the basis of an abstract conclusion (different from that of the Federal Trade Commission below) that the merger raised entry barriers, without any de- termination whether, in light of.the character of the potential competitors, their competitive influence upon the relevant submarket was lessened or whether they might actually be deterred from entry ?. 3. Is an increase in efficiency in the operations of an acquired firm as a result of a conglomerate merger an affirmative reason for invalidating the merger under the antitrust laws? QQ STATUTE INVOLVED > Section 7 of the Clayton Act, 64 Stat. 1125 (1950), ~ 15 U'S.C..§ 18 (1964), ameriding 38 Stat. 731 (1914), provides in pertinent part as follows: ‘‘No corporation engaged in commerce y shall: - tages’’ accruing to 8.0.8. and its customers from GF'’s ~ “‘stream-lined”’ and ‘‘market-centered distribution sys- tem,’’ including “‘warehousing by the most efficient time and labor-saving devices,’’ ‘‘distribution by the most advantageous rate of transportation,’’ coordina- tion of invoicing, credit arrangements, and other phases __ - of purchase order processing, and other ‘‘obvious econ- 6b O°: omies of seale.”” (See, €.9., Brief for the Commission in the Court of Appeals, pp. 12-13, 20-21, 45, 48, D0-97, citing R. 1097a-98a, 1392a.). Taking advantage. of these ‘‘handling and transportation economies,’’ Com- mission counsel said, a retailer could obtain 8.0.8. pads at a lower unit price (id. at pp. 13, 21, citing R. 1059a, 1304a) and: was “‘enabled to run his business more economically by holding his investment in inven- tory to a minimum” (id. at pp. 18, 21, citing R. 375a- Ta, 1053a-54a). The Commission and the Court of | Appeals accepted these propositions as fact and found that all these cost Savings resulted from the merger. (App. A, pp. 6, 18-19; App. B, pp: 210a-11a, 217a, 222a, 237a, 238a.) ee 3 at B. The Opinions Below | The majority of the Commission relied expressly upon the alleged operating efficiencies which were or could be achieved by the 8.0.8. business as a result of the acquisition as a basis for holding the acquisition unlawful under Section 7. (App. B, pp. 210a-11a, 217a, 222a.) - Commissioner Elmar dissented. He said: “The Commission also includes, as a ground for holding this merger unlawful, purported cost sav-- ings accruing to 8.0.8. through - efficiencies in’ warehousing and distribution. . .. Economic effici- encies should not be a ground for the invalidation of a merger. Indeed, the. promotion of competi-. tion has for one of its goals the achievement of edter efficiency. ‘See Turner, Conglomerate ° ergers.and Section 7 of the Clayton Act, 78 Harv. L, REV. 1313, 1323-28,” (App. B, p. 261a). ) . The Court of Appeals disagreed with Commissioner _ Elman and sustained the Commission majority. (App. A, pp. 6, 18-19.) : ": _ a6 REASONS FOR GRANTING THE WRIT. None of the three questions raised in this case was ‘raised by the facts in Clorox, but each is a question which is likely to arise in many conglomerate situations in the future. ‘Thus Clorox did not involve the eco- nomic and legal significance of substitutional competi- tion as.a factor existing outside of, but exerting a competitive influence within, the relevant. product . market. But most products are subject to some de- gree of substitutional competition, and the question of the significance of such competition may often be crucial in conglomerate cases. .Similarly, although in Clorox there were no identified potential competitors ° other than the acquiring company, it is to be expected that in many conglomerate cases, as here, there will be other identifiable potential competitors exerting an influence upon the market after the acquisition, and i in “such cases the question of the significance of the char- .. acter of those competitors will arise: ‘Finally, while in Clorox: no increases in genuine economic efficiency were involved, genuine increases in efficiency of the kind involved in- this case will in all probability be | encountered in many conglomerate cases’ In these respects the resolution of. the questions presented in ' - this case—the first true conglomerate case to reach this Court’—is likely to have a broad — in the merger field in the future. - Cf, BoGK, MERGERS AND MArKers 159 (6th mi 1968). 11 See Turner, Conglomerate Mergers and Section 7 of the Clay- ton Act, 78 Harv. L. Rev. 1313, 1315 (1965) ; Hale & Hale, More on Mergers, 5 J. Law & Econ. 119, 125- (1962); Penrose, THE THEORY OF THE GROWTH OF THE Fire 129-30 (1959). 12 Ag emphasized by . Commissioner Elman below, the Clorox ac- - quisition was analogous to a horizontal merger because Procter #as a potential competitor of Clorox. See p. 4, supra. Here there was no such prior economic relationship | between the, acquiring and the acquired companies. Lo o 9’ 17 The importance of framing intelligent rules with re- spect to conglomerate mergers (which have become the principal vehicle for the sale of capital assets in the United States economy. today “) cannot bé overempha-. sized: Unduly severe interdiction of conglomerate mergers can and, will stifle the opportunities and in- centives of potential new innovative enterprises which are considering formation and entry into particular markets. Undiscriminating merger rules may thus actually raise entry barriers so as to protect and pre- _ Serve existing oligopoly power “ and, in addition, lead to an increase in general concentration.” It is therefore important for this Court in this case to insure that the rules which are to.govern conglomerate mergers for the immediate future are designed to enhance rather than to inhibit competition. ~ a 18 See Hearings Before the Subcommittee on Antitrust and Monopoly of the Senate Committce on the Judiciary, pursuant to S. Res. 40, 89th Cong., 1st Sess., pt. 2, at 516 (1965). 4 See, e.g., Turner, Conglomerate Mergers and Section 7 of the Clayton Act, 78 Harv. L.:Rev. 1313, 1317-18 (1965) (‘‘There are thus strong reasons for not making the prohibitions of section 7 so extensive as to damage seriously the market for capital assets, or so broad as to interfere materially with mergers that are pro- competitive in their facilitation of entry and expansion that would otherwise be subject to serious- handicaps.’’ p. 1318.); KaysEn & TURNER, ANTITRUST PoLicy 127-29 (1959). : “18 See Bain, INDUSTRIAL ORGANIZATION’ 204, 206-07 (1959); _ Turner, supra n. 14, 78 Harv. L. Rev. at 1326-27. 18 I. On THE ImPoRTANT LEGAL AND ECONOMIC QUESTION OF THE RELEVANCE OF POTENTIAL COMPETITION FroM CLOSE SUBSTITUTE PRopUCTS, THE RULE ANNOUNCED BELOW ConFLIcTs WITH Prior HoLp- INGS OF THIs CoURT AND WITH ACCEPTED ECONOMIC DoctRINE In prior merger cases this’ Court has repeatedly recognized a fundamental economic and legal principle ~ which is applicable here. In United States v. El Paso Gas Co., 376 U.S. 651 (1964), and in United States v. Penn-Olin Co., 378 U.S. 158 (1964)—and of‘course in ‘the Clorox case as well—this Court recognized that with respect to a particular market there may be ex- ternal forces at work which, though they exist outside the market, may have a decisively important procom- | petitive influence upon the behavior of firms. within the market. In each of the three cited cases the ex- ternal force involved was ‘‘potential competition’’ in the form of one or more extra-market firms whose potential entry tended to restrain the exercise of _ Oligopoly power. within the-market. In each case the - Court considered it decisively important to determine whether the challenged transaction had either elimi- nated or reduced the influence of potential competition | to such a degree that competition within the market had been substantially smnenes within tlie ne of Section 7. This case involves a -peesinsly comparable eltre- market force—namely, the emerging competition of ‘ substitute products being developed and sold by numer- ous aggressive rivals with well-established reputations for marketing judgment and success. In addition to acting as a restraining influence upon the market be- havior of steel-wool pad manufacturers, they are actu- 19 ally drawing business away from that submarket at a rate which foreshadows the demise of‘the submarket itself..° The tribunals below have flatly held that these economic realities are legally irrelevant for Section 7 ° purposes. ._In so doing they have adopted a principle which squarely conflicts with the cited decisions of this Court. Economically, of course, there is no difference be- tween the restraining influence of ‘potential entry into a given market and the influence of emerging substitu- _ tional competition. Both these forms of potential competition create, for firms within the market, the threat that their customers will leave them if they try to take advantage of imperfectly competitive condi- tions.” The threat of a shift of customers to a substi- tute product will act as a restraining influence upon | the exercise of oligopoly power within a submarket im exactly the same way as the threat of a shift of custo- mers to a new entrant. ° Indeed, if anything, substitute products constitute a more immediate and effective’ restraint because they are already in existence.” The economic equivalence of these two forms. of potential competition has long been recognized by authoritative commentators from both the economic and legal disci- ‘plines. See sites oF EcoNoMIC ADVISORS ANNUAL 16 The affidavit i in support of GF’s motion in the Court of Ap- _ peals (supra n. 5; App. C, p. 4) establishes that sales of steel wool” scouring devices are now falling at the rate of 4-7% per year. See | also R. 157a, 534a, 1565a. ’ 17 As noted by Professor Bain, the availability and dueneus of substitutes—i.e., the degree of «product differentiation’’—is as much a dimension of markét structure’ as the ‘‘condition of entry.’’ Entry and substitutibility are two of ‘‘the most’ important condi- tioning influences on market performance. ”” Balin, INDUSTRIAL OR- GANIZATION 211-14, 264 (1959). 18 Cf, BAIN, BARRIERS TO New ComPETITION 10-11 (1956). . 20 REPoRT, in PRESIDENT’s ECONOMIC REporT 132 (1965)”; REPORT OF THE ATTORNEY GENERAL’S NATIONAL CoM-. MITTEE TO StuDY THE ANTITRUST LAws 322 (1955). — And in United States v. Continental Can Co., 378 U.S. 441 (1964), this Court itself recognized the legal’ and economic significance 6f emerging substitutional ‘‘inter-’ industry competition’’ for Section 7 purposes.” “* 19‘*Tn many industries, a .high concentration of output among a small number of firms is not inconsistert with high active com- petition, especially where there is also a fr of small firms, where entry of new firms is easy, or where there exists active competition from substitute products.’’ (Emphasis added.) 20 The Report states as follows: ‘‘In evaluating the market forces which together would char- acterize effective competition, the rivalry of close substitutes which may, for other purposes, be classified as belonging in other industries has, in varying degree, the same kind of effect as that of competing producers of the same or differentiated products or services classified within the same industry. Tech- nical advanee has often made the rivalry of close substitutes quite effective:’’ In United States v. Penn-Olin Co., 378 U.S. 158, 176 (1964), this Court quoted’ with approval. the Report’s exposition of restraints on oligopoly power, including its reference to existing rivals as well as potential entrants: ‘The basic characteristic of fective competition in the eco- . nomie sense is that no one seller, and no group of sellers act- . ing in concert, has the power to choose its level of profits by giving less and charging more. - Where there is workable com- petition, rival sellers, whether existing competitors or new or potential entrants into the field, would keep this power in check by offering or threatening to offer effective inducements ..”? (Emphasis added.) 21 The Court pointed out that the ‘‘possibility’’ of ‘‘customer | diversion’’ to a substitute product ‘‘over the long run acts as a deterrent against attempts by the dominant members of either industry to reap the possible benefits of their position by raising prices above the-competitive level or engaging in other comparable practices.’ 378 U.S. at 465-66. ; 21 Disregarding this Court’s clear effort in Clorox and earlier cases to make legal analysis conform to economic analysis, the tribunals below have declared that the highly significant economic fact of emerging substitu- tional competition is legally irrelevant for Section 7 purposes. They have held in effect that, no: matter how clear the impact of such substitutional competition, the competitive consequences of a conglomerate merger are to be determined by treating such competition as ', though it did not exist.2? This novel legal fiction is completely at odds with the realistic economic princi- ples followed by this Court.in Clorox and earlier merger cases. As indicated by Commissioner Elman in his strong dissent in this.case, the rule adopted below constitutes ‘‘a long step’’ in the wrong direction in an” *? The findings upon which the Commission based its selection of the relevant product submarket—for instance, that steel wool manu- facturers did not take the nascent substitutional competition into account in their pricing decisions at the time of the merger—are in no way inconsistent with the facts bearing on the future re- - straining influence of potential competition from substitute product . _ Manufacturers. Indeed, Commissioner Elman agreed with the majority’s choice of the steel wool pad submarket. . It was the size and experience of the companies engaged in the substitutional com- petition; the degree of their investment and their announced ex- pectations ; the vigor of the innovation and the likelihood of long- run consumer response to it-—all established in the Record—which convinced Aommissioner Elman that adequate and increasing re- straints upon the exercise of oligopoly power in the steel wool submarket remained and that the merger had not lessened com- petition. These were the precise criteria for the evaluation of pros- peetive poteritial competition announced by this Court in the cases cited above. E.g., FTC v. Procter & Gamble Co., 386 U.S. 568, 580 (1967) ; United States v. Continental Can Corp., 378 U.S. 441, 452, 455 (1964); United States v. Penn-Olin Co., 378 U.S. 158, 174 (1964) ; United States v. El Paso Gas Co., 376 U.S.-651, 660 (1960). As noted, the majority of the Commission and the Third Circuit viewed these economic facts as legally irrelevant and re- fused to consider them. 22 area where it is particularly important that the legal rules be evolved with caution. In view of the fact that - conglomerate cases are necessarily going to turn pri- marily upon the question of the role of potential com- petition, itis .of great. amipertancé that this: _— re- solve the qreee in this case.” II. THe RELIANCE oF THE s Courr BeLow on A Novel Asstract RuLE—THAT Entry Barriers May Be ANALYZED WITHOUT REGARD TO THE CHARACTER OF IDENTIFIED POTENTIAL ENTRANTS—Is INCONSISTENT WitTH ACCEPTED. ECONOMIC PRINCIPLES AND WITH THE DEcISsIONS OF THIS Court As previously noted, the Commission maj jority’s find- ing that barriers to entry. into the steel wool submarket had been raised to ‘‘virtually insurmountable heights’’ was challenged as untenable, both by the dissenting opinion and by GF on appeal, in view of the size and strength of the identified potential competitors. The Third Circuit did not advert to this challenge. Instead _ it held in effect that the applicable test was not whether entry barriers had been raised too high (i.e., to the Commission majority’s ‘‘virtually’ insurmountable heights’’), but whether they had been raised at all. The character of the potential competitors, and whether 28 Cf. Bock, Mercers & Markets 159 (6th ed. 1968). ‘‘The resolution of this issue concerning the relevance of substitute prod- ucts and active rivals is, therefore, critical to the future status. of . mergers of the General Foods-S.0.8. type.’’ 2 Since the Commission majority refused to consider the in- fluence of potential competition in the form of substitute products, its conclusion that oligopoly power had been substantially in- creased and competition thus substantially lessened in the steel wool submarket would be legally insufficient even if its finding as to entry barriers were valid: 23 an increase in‘entry barriers had substantially affected their restraining influence, went unmentioned.’ The test thus applied by the Third Circuit not only departs from the theory adopted’ by the Commission below* but, more importantly, is in conflict with the — basic criteria for the appraisal of potential competition , announced by this Court in United States v. El Paso Gas Co., 376 U.S. 651 (1960), United States v. Penn- Olin Co., 378 U.S. 158 (1964), and Cloroz, and with authoritative economic teaching on the use of entry barrier analysis in merger cases. a The opinions of this Court in Penn-Olin, El Paso, ' and Clorox make clear that tribunals must evaluate _ the strength and character of potential competitors in estimating their impact upon market behavior. For example, in El Paso the Court held that the effect of a potential competitor on: competition in a market “is determined_by the nature or extent of that market and by the nearness of the absorbed com- pany to it, that company’s eagerness to enter that market, its resourcefulness, and so on.”? 376 U.S. at 660. (Emphasis added.) In Penn-Olin the Court stated: **Potential competition, insofar as the threat sur- vives ... may compensate in part for the imper- 75 It is a settled rule in this Court, as most recently reiterated by - Mr. Justice Harlan concurring in Consolidated Foods Corp. v. FTC, 380 U.S. 592, 601 (1965), that a court of appeals may not sustain a decision of-an administrative agency on a theory different from that articulated by the agency. See Burlington Truck Lines Inc. v. United States, 371 U.S. 156, 168-69 (1962) ; accord, NLRB v. Metropolitan Life Ins. Co., 380 U.S. 488, 443-444 (1965) ; SEC v. Chenery Corp., 332-U.S. 194, 196 (1947). 24 fection characteristic of ‘actual competition in the ‘great majority of competitive markets .. .’’ ‘... The existence of an aggressive, well equipped and well financed corporation engaged in the same _or related lines of commerce waiting anxiously to enter an oligopolistic market would be a substan- tial incentive to competition which cannot be underestimated.’’ 378 U.S. at 174. (Emphasis added.) | : ~ And in Clorox the Court noted : ‘*[ T]he barriers to entry by a firm of Procter’s size and with its advantages were not. significant.’’ ° as U.S. at 581* (Emphasis added.) © But the Third Cireuit here made no effort to ‘oeliniin | the strength of the identified ‘potential entrants in de- termining whether competition within the steel wool . submarket had been affected by this conglomerate. merger.” Quite the contrary, the court looked -to whether entry barriers had been raised in the abstract, and assumed that oligopoly power within the market had been increased ‘‘to the extent’’ that the barriers had ‘been raised. (App. A, p. 21) The court failed to ask the crucial question which makes entry barrier ‘_ analysis relevant.to an estimation of niarket power— whether, in the words of Penn-Olm, ‘‘the threat [of 26 In Clorox, Procter was ‘‘virtually the only’’ potential entrant. See 63 F.T.C. at —, [1963-65 .Transfer Binder] TrApe Ree. Rep. { 16,673 at 21,584 (FTC 1963). Its potential competition ‘was, of course, eliminated by the merger. 27 There were ample facts in the Record to permit such an evalua- - tion. R. 53la-32a, 580a-8la, 618a, 631a, 887a, 895a, 914a, 1469a- 79a; RX 1; R. 1480; RX 2, R. 1490a; RX 3, R. 1499a; RX 4, R. 1509a-10a; R. 1632a, 1652a, 1664-65a; 1682-83, 1690a, — 1740a-41a, 1962a-94a, 1993-94a. 23 wotentiial competition] survives”’ the raising of entry : barriers. Obviously an increase in entry ' heetions does not per- mit an oligopolist to take advantage of his market power unless it significantly deters potential entrants from entering. A mere comparison of the height of entry barriers after a conglomerate merger with their height before tells nothing. In simplistic terms, raising a barrier by 100%, which would certainly be a ‘‘sub- stantial’’ increase; will not protect an oligopolist from potential rivals. who can easily surmount, the new Weight. Conversely, a small increase which might be . regarded by the Third Circuit as ‘insubstantial’? could free oligopoly power if it resulted: in barring the im- portant potential entrants. Economic texts explicitly recognize that the effect of entry barriers varies with © the character of the potential entrants,” and the in- | structions of this Court in Penn-Olin, El Paso, and Cloroz reflect this accepted understanding, The Third Circuit’s mistaken view of entry’ barriers as a self- sufficient index.of competitive conditions. is thus in conflict with both law and economics. ¢ 28 See, e.g., BAIN, BARRIERS TO New ComPETITION 7-10 (1956) : ‘‘The condition of entry is measured by the long-run gap between minimal cost and price which the most favored firms can reach without attracting entry—but whose entry and how much? ... It is not realistic to assume that all potential entrants a are alike either in their capacity to enter or with respect to the gap which will just induce them to enter... . If the condition of entry refers to the condition for the induce- ment to. entry of successive -finite numbers of firms it should also logically refer to the size of each entry. .. . [TJhe condi- tion of entry to an ‘industry . . Tefers to advantages which established. firms in an industry ‘have over potential entrant firms. ...’’ 26 And it is no small error. Applied as a genéral rule it could have a widespread economic impact. It could arbitrarily ‘prohibit. conglomerate mergers which do not in fact change market structure, and validate ° mergers which do in fact eliminate restraint on oligop- oly power. Either result would be anticompetitive. III. The Lower TriIBUNAtS’ RELIANCE Upon ACHIEVE- . MENT OF OPERATING EFFICIENCIES AS AN AFFIRMA- TIVE GROUND FOR PROHIBITING A CONGLOMERATE Mercer Is A RApICAL DEPARTURE FROM THE At CEPTED GOALS OF ANTITRUST POLICY. ‘ In concluding that this conglomerate merger had an anticompetitive effect, the Third Circuit and the Com- ‘mission majority relied principally upon evidence that © GF could achieve cost savings in transporting and ware- housing soap pads (‘‘distributional efficiencies’’) and ° in advertising and promoting them. Their finding - that GF could operate more eomenpaany was the crux of their decision. Reliance upon efficiency as an affirmative ground for - invalidating a merger is not a minor variation on the basic theme of antitrust policy. As. Commissioner | Elman pointed out in his dissent below, it represents a major departure from accepted antitrust policy, and it flatly contradicts the teaching of commentators ac- cepted as authoritative by this Court.” It is a novel 29 See Turner, Conglomerate Mergers and Section 7 of the Clayton Act, 78 Harv. L. Rev. 1313, 1339 (1965) (‘‘ Economies -'. of seale in production, distribution, research, and the like should in no event be a factor militating against the lawfulness of con- glomerate (or other) mergers’}); Kaysen & TurNeR, ANTITRUST Pouiey 129 (1959) ; Bain, Banarers 10 New Comperrrion 207, 212 (1956) (‘‘[A]s to the sorts of entry barriers which may be legiti-. mately attacked, it was observed that those resting on real economies — ~ 27 rejection of the carefully reasoned premises of the Commission’s own landmark opinion in Clorox,” and of the position taken by the Solicitor General only last year in.his Brief to this Court in Cloroa: | ‘“We would agree with the court of appeals that, in general, advantages afforded by a merger which reflect simply greater efficiency ought not: be a basis for holding the merger illegal ; efficiency is, after all, a prime goal of antitrust.’’ Brief for the Federal Trade Commission at 47, FTC v. Procter & Gamble Co., 386 U.S. 568° (1967). . : Mr. Turner has succinctly summarized the “‘over- powering’’ reasors for rejecting the rule adopted be- low: — ee ‘First, there is the enormous social interest in _ progress and efficiency, which has represented one of the primary bases for the policy of promoting competition as it has in fact evolved. Second, fo forbid mergers that would or might produce sub- - ‘stantial efficiencies would narrow substantially the category of acceptable mergers, thereby drastically of large scale plant and firm (whatever their importance) should . not and probably could -not be removed, because of the adverse. - effects on efficiency: of such removal.’’ (p. 207.) ‘‘That economies of scale in production and distribution do ‘not loom large as the basis of barriers to entry is fortunate for the policy-maker, because there is relatively little that can or should be done about them.’’ (p. 212.)) - } 8 See FTC v. Procter & Gamble Co., 63 F.T.C. —, —, [1963-65 Transfer Binder] Trapp Rea. Rep. | 16,673 at 21,580, 21,585-86 (FTC 1963). Economies of production or physical distribution were not involved in Clorox. Id. at 21,585. See also Elman, Clorox and Conglomerate Mergers, 36 ANTITRUST L.J. 23, 25 (1968) (‘‘The Commission emphasized the character of the particular cost ad- vantages, vis-a-vis potential. entrants, that the merger conferred ’ on Clorox, finding them not to be the kind of ‘efficiencies’? that antitrust policy is intended to encourage. ’’) : td x . ; 28 | 7 : “ weakening the market for capital assets and seri- ously depreciating the price that entrepreneurs could get for their businesses when they wish to dignidate. Such a policy would seriously interfere with maximum exploitation of productive re- sources; and not only might it have adverse long- ~ run effects on.entry. and growth of small business, _ but it. would also be clearly against the interests of small businesses already in being. It can be at least doubted that if Congress had focused-on — the issue, it would have wished:such a result. Third, the protection that this policy would afford to small business, except in the short run, is at best highly conjectural and probably — There is. no doubt that in most instances, certain when efficiencies from integration are S taatiat the same adverse consequences to small business will sooner or later be visited. through interna! expansion by large firms. The last two points are . interrelated: it would hardly be a favor to small ° -businesses threatened -with extinction by expand- ing large rivals: to deprive them of the oppor- tunity. to-sell to large outside firms at the better 2 © - prices the large firms would be willing to pay be- eause of the prospects of achieving efficiencies of integration.’® “Conglomerate Mergers and Section ae