sunlight and sunset at the federal trade commission

SUNLIGHT AND SUNSET AT THE FEDERAL TRADE COMMISSIONAuthor(s): F. M. SchererSource: Administrative Law Review, Vol. 42, No. 4 (FALL 1990), pp. 461-487Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/40709647 .

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461

SUNLIGHT AND SUNSET AT THE FEDERAL TRADE

COMMISSION F. M. Scherer*

Die Strahlen der Sonne vertreiben die Nacht, zernichten der Heuchler erschlichene Macht.

(The sun's rays expel the night and destroy the hypocrite's surreptitious power.)

- Mozart, The Magic Flute (1791)

Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.

- Louis D. Brandeis (1913)|

I. INTRODUCTION

Absent another of the many reversals that have marked its history,

the Federal Trade Commission during the 1980s may have ush- ered in the end of an era. A principal element of the Commission's original mission was to collect and disseminate information about the functioning of American industry. Disregarding this historical charge, Reagan Administration appointees cut back the Commission's information-gathering activities to the point of near obliteration. This ar- ticle explores the rationale of the Commission's early "sunshine" mandate, reviews the tumultuous events accompanying that mandate's exercise, and examines the denouement of the 1980s.

* Professor of Business and Government, John F. Kennedy School of Government, Harvard University. The author was director of the FTC's Bureau of Economics between 1974 and 1976. He thanks Thomas McCraw and William Kovacic for helpful criticism.

|L. Brandeis Other People's Money And How The Bankers Use It 62 (1914).



462 42 ADMINISTRATIVE LAW REVIEW 461

II. THE BEGINNING OF AN ERA: THE BUREAU OF CORPORATIONS

When it was established in 1914, the Federal Trade Commission inherited the office accommodations and personnel of a pre-existing agency, the Bureau of Corporations, whose creation had in turn been recommended by a still earlier investigative body, the U.S. Industrial Commission.1 Specific impetus for the Bureau's formation in February 1903 came from Theodore Roosevelt, who had assumed the Presi- dency 17 months earlier. Roosevelt's philosophy toward "the trust problem" was mirrored in the Bureau's mandate. In his first formal pronouncement on the matter, articulated in a January 1900 message to the New York State Legislature, Roosevelt proposed legislation through which the trusts could be "put . . . fully at the service of the State and the people."2 This was to be done by making public details on the trusts' operations: "It is therefore evident that publicity is the one sure and adequate remedy which we can now invoke. There may be other remedies, but what these others are we can only find out by publicity, as the result of investigation. The first requisite is knowledge, full and complete."3 In his first address to Congress as President (on December 3, 1901), Roosevelt used almost the same words:

The mechanism of modern business is so delicate that extreme care must be taken not to interfere with it in a spirit of rashness or ignorance.

. . . Publicity is the only sure remedy which we can now invoke. What further remedies are needed in the way of governmental regulation, or taxation, can only be determined after publicity has been obtained. . . . The first requisite is knowledge, full and complete - knowledge which may be made public to the world.4

It is not well known that Roosevelt's New York State legislative message and much of his proposed New York Business Companies Act were drafted by a Cornell University economist, Jeremiah Jenks.5 Jenks was perhaps the nation's best-read student of the trust problem. In Jenks' view, many of the trusts' worst abuses thrived in an environment of secrecy:

It seems to be established by practically universal experience that the

'Final Report of the United States Industrial Commission (Feb. 10, 1902), quoted in Annual Report of the Commissioner of Corporations 4 (June 30, 1914).

2T. Roosevelt, 15 Works 43 (National ed. 1926). Hd. at 47. On Charles Francis Adams, whose philosophy of railroad regulation

was a precursor to Roosevelt's views, see T. McCraw, Prophets of Regulation 23- 24(1984).

4Addresses and Presidential Messages of Theodore Roosevelt, 1902-1904, at 294, 296(1904).

"See 2 The Letters of Theodore Roosevelt 1106 (E. Morison ed. 1951); J. Jenks, The Trust Problem 6-8, and note at 244 (1900).



FALL 1 990 Sunlight and Sunset at the FTC 463

greatest evils of the industrial combinations spring from acts that can be kept secret or that cannot, at any rate, be fully established in the eyes of the public.6

A remedy which would strike directly at the most crying evils of the industrial combinations is publicity, which has been so often advocated during the past year. Publicity regarding the organization of a business, which should compel promoters to show clearly to investors the basis on which a large corporation or a combination of corporations is organized, would certainly put careful investors into a position to protect themselves.

. . . More frequent reports regarding the condition of a business . . . will still further protect stockholders against the corrupt practices of directors. . . .

The publicity also which should show with a reasonable degree of detail the profits of the larger combinations would, in case of the abuse of their power, so stimulate competition against them, either actually or poten- tially, that consumers would to a great degree be protected against exces- sive increase in prices.

At the same time the laborer . . . would be enabled to make his demands at times when it would be wise to grant them, and would avoid the mistakes too frequent at present, of striking . . . when his employer's losses are such that he stands ready to close his establishment if any excuse is offered him.7

During its eleven years of activity, the Bureau of Corporations compiled and published special reports on the beef industry, petroleum transportation, the Standard Oil Company, the cotton trade, the American Tobacco Company, corporate income taxation, water transportation, the steel industry, the timber and lumber industries, water power development, and the International Harvester Company.8 In addition to informing the public and creating a record used by histo- rians even today, several of its reports laid the groundwork for precedent-setting antitrust cases, and others instigated changes in regulatory mechanisms.9

6Jenks, The Trusts: Facts Established and Problems Unsolved, 15 QJ. Econ. 46, 73 (1900). Similar views about the beneficence of publicity were shared by Alfred Mar- shall, the leading British economist of the time. See G. Stigler, The Economist as Preacher and Other Essays 43 (1982).

7J. Jenks, supra note 5, at 222-24. 8Annual Report of the Commissioner of Corporations, supra note 1, at 37-

43. 9W. Hamilton & I. Till, Antitrust in Action (1941) (Temporary National

Economic Comm. Monograph No. 16), observe at p. 23 that the Department of Justice Antitrust Division employed an average of only five attorneys during the Roosevelt administration, when United States v. Standard Oil Co., 173 F. 177 (E.D. Mo. 1909), modified, 21 U.S. 1 (1911), and United States v. American Tobacco Co., 164 F. 700 (S.D.N.Y. 1908), rev'd, 221 U.S. 106 (1911), and other precedent-setting cases were prepared and tried. It seems unlikely that the Division could have done its work successfully without the framework provided by Bureau of Corporations research. The author is indebted to William Kovacic for this insight.




III. THE FEDERAL TRADE COMMISSION ACT

The Supreme Court's Standard Oil10 and Tobacco11 decisions in 1911 raised to prominence the question of what directions antitrust should take in the future. The 1912 Presidential campaign pitted against Re- publican incumbent William Howard Taft, whose support had dwin- dled precipitously, Democratic candidate Woodrow Wilson and, for the newly created Progressive Party, former president Theodore Roo- sevelt. On antitrust, the issues were drawn sharply between Roosevelt and Wilson. Roosevelt had come to believe that large-scale business organizations offered such important efficiencies that they were in- evitable, and during his second term as President, he unsuccessfully recommended legislation that would have given the Bureau of Cor- porations power formally to rule on the validity of contracts and combinations in restraint of trade before they were effected, thereby providing business firms with advance assurance of legality when a favorable decision was rendered.12 This approach was carried over into the 1912 campaign.13 Advised by Louis Brandeis,14 Wilson adopted what appeared to be a quite different position. He would create a strengthened Bureau of Corporations not to regulate the large industrial consolidations, but to continue its investigatory role and to become even more active in advising Department of Justice efforts to dissolve monopoly positions. As the edited summary of his campaign speeches put it:

The third party says that the present system of our industry . . . has come to stay. . . . [a]nd the only thing that the government can do ... is to set up a commission to regulate them. . . .

If the government is to tell big business men how to run their businesses, then don't you see that big business men have to get closer to the government even than they are now? Don't you see that they must capture the government, in order not to be restrained too much by it? ...

. . . What I want to do is analogous to what the authorities of the city of Glasgow did with tenement houses. I want to light and patrol the cor- ridors of these great organizations in order to see that nobody who tries to traverse them is waylaid and maltreated.15

'»Standard Oil Co. v. United States, 221 U.S. 1 (1911). "United States v. American Tobacco Co., 221 U.S. 106 (1911). X2See E. Jones, The Trust Problem in the United States 328 (1921); & W.

Letwin, Law and Economic Policy in America 244-247 (1965). l3£.g., "We should enter upon a course of supervision, control, and regulation of

these great corporations - a regulation which we should not fear, if necessary, to bring to the point of control of monopoly prices. ..." Roosevelt, The Trusts, the People, and the Square Deal, 99 The Outlook 649, 655 (Nov. 1911).

ì4See T. McCraw, supra note 3, at 81-82, 109-12. 15W. Wilson, The New Freedom, 196, 201-02, 207 (1913).



FALL 1990 Sunlight and Sunset at the FTC 465

Wilson won the election, and after dealing successfully with tariff reform and creation of the Federal Reserve system, he turned to the trust question. In an address to Congress on January 20, 1914, he reiterated his belief that "private monopoly is indefensible and intol- erable."16 To carry his objectives forward, he proposed the establishment of a new interstate trade commission, successor to the Bureau of Corporations. Making clear the difference between his approach and that of candidate Roosevelt, he argued:

The opinion of the country would instantly approve of such a commission. It would not wish to see it empowered to make terms with monopoly or in any sort to assume control of business, as if the Government made itself responsible. It demands such a commission only as an indispensable instrument of information and publicity, as a clearing house for the facts by which both the public mind and the managers of great business under- takings [shall] be guided, and as an instrumentality for doing justice to business where the processes of the courts or the natural forces of correc- tion outside the courts are inadequate to adjust the remedy to the wrong in a way that meets all the equities and circumstances of the case.17

A Trade Commission bill (H.R. 12,120) introduced two days later by Representative Henry Clayton was rejected in committee as incon- sistent with the President's views. (The parallel bill that became the Clayton Antitrust Act was more successful.) On March 14, Represen- tative J. Harry Covington of Maryland introduced a revised bill (H.R. 14,631), which was referred to committee, amended, resubmitted as H.R. 15,613, and passed by voice vote of the House on June 5, 1914. The commission authorized under the Covington bill would have substantial powers of investigation, could mandate for the corporations under its jurisdiction uniform or comparable methods of accounting, and was "[t]o make public, from time to time, the information received by it in such form and to such extent as the commission shall by regulation prescribe."18

Meanwhile, a parallel Senate bill (S. 4,160) introduced by Senator Francis C. Newlands of Nevada had been amended within the Inter- state Commerce Committee.19 Added to the originally contemplated investigatory powers was authority to "prevent corporations from using unfair methods of competition in commerce" and also to investi- gate foreign trade practices.20 The "unfair methods" amendment was a major change from President Wilson's proposal, stimulating extended debate on the Senate floor. In a key colloquy joining the issues, Senator Newlands offered to return to his original concept, without control of unfair methods:

161 The Messages and Papers of Woodrow Wilson 50 (1924). "Id. at 52-53. 18H.R. 15,613, 63rd Cone., 2d Sess. 8 4(e), 51 Cong. Rec. 9,910 (1914). 1951 Cong. Rec. 11,086(1914). 20S. 4160, 63rd Cong., 2d Sess. §§ 5 & 3(h), 51 Cong. Rec. 1 1,087 (1914) (substitute

for H.R. 15,613).




[I]t seems to me ... we should confine our present exercise of legislation ... to the appointment of an interstate trade commission and the merger in such commission of the Bureau of Corporations, such commission to have simply powers of publicity, inquest, and recommendation; particularly in view of the fact that the Bureau of Corporations ... is instructed by the law to withhold from the public facts ascertained by public officers unless the President gives his assent to publication.21

Senator Albert B. Cummins of Iowa argued in reply that:

I agree with you regarding the weakness in the organization of the Bureau of Corporations. But publicity is of no value unless the facts that are discovered can be compared with some rule of conduct which the law has laid down for the government of the corporations. It is bringing the force of public opinion to bear upon corporations to induce them or compel them to obey the law, and if you have no law, publicity is of minor importance.22

Concerned that the substantive provisions of what became the Clay- ton Act were in jeopardy and perhaps preoccupied by more important events across the Atlantic Ocean,23 President Wilson was persuaded by Brandeis and an aide to support a trade commission bill conferring power to regulate unfair methods of competition.24 The conflicting House and Senate bills were rewritten again in conference committee, which reported out a measure including the unfair methods provision. Explaining his acquiescence in that more regulatory approach, House bill draftsman and conference committee member J. Harry Covington of Maryland stated that in the compromise measure, " there has been substantial and, in many instances, precise adherence" to the House version's information-gathering provisions.25 He reconciled the ' 'unfair methods" language with his own approach and that of President Wilson:

There is not now found within the extent of the well-defined doctrine of . . . "unfair methods of competition" any attempt to make terms with monopoly or ... to regulate production or enforce by orders the main- tenance of fixed prices. Neither is there lurking within the doctrine any authority to declare lawful or harmless for the future the general plan of organization or operation of any particular corporation engaged in commerce.26

Or as Representative Raymond B. Stevens of New Hampshire, a key actor in the conference committee, stated:

[T]his trade commission bill will do three things of importance and benefit to the American people. First it will gather for the use of future Congresses

2151 Cong. Rec. 11,093 (1914) (statement of Sen. Newlands). 22Id. (statement of Sen. Cummins). ™See B. Tuchman, The Guns of August 179-80, 338-39 (1982). 2ASee T. McCraw, supra note 3, at 122-24; M. Urofsky, A Mind of One Piece:

Brandeis and American Reform 90-91 (1971). 2551 Cong. Rec. 14,925 (1914). 2Hd. at 14,927.




more accurate and complete information about the big business interests of the country. Secondly, it will give to the Department of Justice in the enforcement of the antitrust law the benefit of its investigations and its more expert knowledge of business conditions. Last, and to my mind the most important one, it will give to this commission the power of preventing in their conception and in their beginning some of these unfair processes in competition which have been the chief sources of monopoly.27

After only one more speaker was heard, the House passed the conference committee bill, which had already been approved by the Senate. Thus, the (renamed) Federal Trade Commission came into being, a creature of compromises that would prove nettlesome in ensuing decades.

IV. EARLY COMMISSION ACTIVITIES

The Federal Trade Commission assimilated into its structure the leadership and staff of its predecessor, the Bureau of Corporations. At first investigatory functions were located primarily in the Economic Department, which later became the Economic Division and still later the Bureau of Economics. ''Sunlight" work proceeded along several fronts.

In 1914 the Commission inherited from the Bureau of Corporations a plan to survey, for the most part using publicly available data and voluntary industry submissions, some hundred industries whose output, along with that of the dozen or so industries already studied in detail, comprised roughly 90 percent of total U.S. manufactured goods production.28 The objective was "to have at hand and immediately accessible the most important material and the prime facts on the leading subjects, industries and corporations with which the Commission is likely to have to deal."29 This program was not carried out, apparently at first due to resource constraints and later because the Com- mission staff was commandeered en masse to assist in the World War I price control effort.

The function taken over most directly from the Bureau of Corpo- rations was full-scale investigation, usually following a request from Congress, of industries believed to have some sort of performance problem. The published output of such studies filled roughly ten linear feet of bookshelves in my office as Bureau of Economics Director in 1 974-76. 30 Important early studies focused on grain and cotton fu- tures trading, the prices of farm machinery, the fertilizer industry,

27 Id. at 14,941. 28Kronstein, Reporting of Corporate Activities, 38 U. Det. L. Rev. 589, 593 (1961). 29Memorandum by Division of General Investigation head E. S. Bradford, quoted

in Kronstein, supra note 28, at 592. :<0For a list of early investigations and reports, see Appendix I Investigations by the

Commission, 1915-39, 8 Geo. Wash. L. Rev. 708 (1940). See also Boyle, Economic Reports and the Federal Trade Commission: 50 Years' Experience, 24 Fed. B.J. 489, 492-97 (1964).




kitchen appliances, the costs of bread baking in independent and chain store establishments, the milk industry, the structure and financing of public utilities, and the meat packing industry. A study of the radio broadcasting industry influenced passage of the Radio Act of 1927, predecessor to the Federal Communications Act of 1934. Congres- sional action leading to the Public Utility Holding Company Act of 1935 was guided by the Commission's massive public utility investigation.31 The FTC's "blue sky" work and its disclosure of securities issue abuses by Samuel Insull and other electric and gas utility holding company organizers played a role in heightening Congress' perception of a need for securities industry regulation, leading to the Securities Act of 1933.32

The FTC's six-volume meat packing report in 1919 evoked a more hostile response. The meat packers were angry over accusations (in hindsight, questionable)33 that they were extending their monopoly power to other stages of the food industries, and they detected social- ism in the Commission's proposal that cattle and refrigerator cars and stockyards be nationalized and operated as government monopolies. Their wrath was transmitted to Capitol Hill through influential Con- gressmen.34 FTC oversight of the packing industry was effectively eliminated through passage in 1 92 1 of the Packers and Stockyards Act, which transferred exclusive responsibility to the Department of Agri- culture. Repercussions continued, however. A plan by President Cal- vin Coolidge to transfer the entire Economic Division to safer hands in the Department of Commerce was thwarted by the quiet intervention of influential Midwestern populist senators.35 From 1926 to 1928, the FTC's annual appropriation bill included riders prohibiting the Commission from undertaking investigations except when antitrust vi- olations were alleged, or in response to concurrent resolutions from both houses of Congress. In January 1933, the House Appropriations Committee, observing that the Economic Division would complete its last congressionally authorized study (its famous chain store investi-

es** T. McCraw, supra note 3, at 151. *2See Stevens, The Federal Trade Commission's Contribution to Industrial and Economic

Analysis: The Work of the Economic Division, 8 Geo. Wash. L. Rev. 545, 564 (1940); Oppenheim, Foreword, 8 Geo. Wash. L. Rev. 249, 272-73 (1940); and M. Green, B. Moore, Jr., & B. Wasserstein, The Closed Enterprise System 369 (1972).

The resulting Securities and Exchange Commission also has important "sunlight" functions, but they emphasize the disclosure of information directly by corporations without the intervening staff analyses and data processing that characterized most FTC information-providing activities.

33Aduddell & Cain, Public Policy Toward "The Greatest Trust in the World," 55 Bus. Hist. Rev. 217(1981).

i4See, e.g., T. McCraw, supra note 3, at 150; Kovacic, The Federal Trade Commission and Congressional Oversight of Antitrust Enforcement, 17 Tulsa L. J. 587, 623-25 (1982).

35Drawn from an oral history seminar on the Commission presented by former Commissioner Everette Maclntyre in 1975.



FALL 1 990 Sunlight and Sunset at the FTC 469

gation)36 by July, slashed the Commission's appropriation by half, in effect eliminating all support for the division.37 The cut was largely restored by the incoming Congress, but caution engendered by reac- tions to the meat packing industry report limited for a considerable period the Commission's flexibility in carrying out the mission it had inherited from the Bureau of Corporations.

The original Covington bill would have given the proposed trade commission power "[t]o require, by regulations duly made, uniform or comparable methods of accounting by the corporations or associa- tions subject to the jurisdiction of the commission."38 This language disappeared from the final version, which, however, authorized the Commission in Section 6(b) to require submission by corporations of annual or special reports "in such form as the Commission may prescribe."39 Although its mandate was less than clear, the Commission devoted early efforts to encouraging American corporations to adopt more uniform accounting standards. Two 1916 FTC publications, "Fundamentals of a Cost System for Manufacturers" and "A System of Accounts for Retail Merchants," were important contributions. In 1917 the Commission staff cooperated with the American Institute of Accountants and the Federal Reserve Board to publish Uniform Ac- counting, a volume that sought to set uniform standards for corporate financial disclosure and auditing.40 Cost and profit analysis work for the World War I price control effort interrupted these efforts, which later became the domain of the Securities and Exchange Commission and a private body (most recently, the Financial Accounting Standards Board).

After the war, the Commission's quest to compile and publish systematic information on industry performance took a new turn. Prompted by congressional concern over inflation and the high cost of living, the Commission began gathering monthly data on output, prices, costs, and orders from basic industries such as coal and steel. Certain companies resisted, stalemating the data collection program

™The chain store reports were used as ammunition by Congress in passing the Robinson-Patman Act of 1936, whose effects are believed by most scholars to have been anticompetitive and counter-productive. See, e.g., the survey in F. Scherer & D. Ross, Industrial Market Structure and Economic Performance 508-16 (3d ed. 1990).

"Stevens, supra note 32, at 552. :i8H.R. 15,613, 63rd Cong., 2d Sess. §4(d), 51 Cong. Rec. 9,910 (1914). ^'Federal Trade Commission Act, Ch. 311, 38 Stat. 717, 721 (1914). The

"such form" language also appeared in the original Covington bill. 40See D. Hawkins, Financial Reporting Practices of Corporations 28 (1972).

According to Hawkins, it was "the most comprehensive and authoritative document related to corporate financial disclosure and balance sheet audits yet published in the United States."




over seven years of litigation.41 In the 1930s the Commission resumed a similar but more limited effort, but eventually, through a 1938 Bu- reau of the Budget ruling, responsibility for gathering sales, order, and inventory data was concentrated in the Census Bureau while the FTC retained jurisdiction over income statement (i.e., profit and loss) and balance sheet data collection.42

V. DEVELOPMENTS FOLLOWING WORLD WAR II

Having escaped several close calls at the hands of Congress and the courts, and with an infusion of new talent,43 the (renamed) Bureau of Economics returned with revived enthusiasm to its sunlight tasks after World War II. Among the more important qualitative studies, a report on a perceived (but in historical hindsight, modest) postwar merger wave helped prod Congress into passing the 1950 Celler-Kefauver Act;44 a masterful report on the antibiotics industry precipitated major antitrust actions;45 and a pathbreaking study of the international petroleum cartel, by identifying CIA intervention in Middle Eastern oil politics, stirred up problems at the White House.46 Other early postwar studies dealt with international cartels in phosphate, copper, sulphur, electrical equipment, steel, fertilizers, and alkali.

Analytic Industry Studies As economists with more thorough training in modern theory and

statistical methodology were drawn to the Commission during the 1 960s

4lFederal Trade Commission v. Claire Furnace Co., 285 F. 936 (D.C. Cir. 1923), rev' d on procedural grounds, 274 U.S. 160 (1927). The lower court's decision went against the Commission on the argument that "production" was not interstate commerce and therefore not within the Commission's jurisdiction. See generally Mac- Chesney, Investigatory and Enforcement Powers of the Federal Trade Commission, 8 Geo. Wash. L. Rev. 581 (1940). Affirmation of the Commission's survey authority came in United States v. Morton Salt Co., 338 U.S. 632, 647-51 (1950).

42See Boyle, supra note 30, at 502. 43It is remarkable by modern standards that Dr. Francis Walker remained the FTC's

chief economist for a quarter century, from 1914 through 1940. See Stevens, supra note 32, at 555, and Boyle, supra note 30, at 492. Between 1970 and 1989, eight individuals served as "permanent" chief economist.

"Federal Trade Commission, The Merger Movement: A Summary Report (1948). Cf. F. Scherer & D. Ross, supra note 36, at 154 (showing postwar merger activity to be modest compared to the merger waves of 1899-1903, the late 1920s, and the late 1960s).

45Federal Trade Commission, Economic Report on Antibiotics Manufac- ture (June 1958).

46Senate Select Committee on Small Business, 82d Cong., 2d Sess., The International Petroleum Cartel (Comm. Print 1952) (Staff report of the Federal Trade Commission). At White House insistence, all early copies of the report were suppressed, and publication occurred only when the offending passages had been deleted.

The investigation also posed more unusual dangers. According to a conversation with former FTC Chairman Paul Rand Dixon, the head of the investigating team was found dead of mysterious circumstances in a New York City subway station.



FALL 1 990 Sunlight and Sunset at the FTC 47 1

and 1970s, Bureau of Economics studies began to address questions in ways that shed new light on broader economic phenomena. For example, a side-by-side study of marketing expenditures in two phar- maceutical product classes provided some of the first systematic in- sights into what are now called "first mover" advantages.47 In particular, it was shown that intensive advertising did not per se build strong product differentiation and market positions. Rather, strong market positions resulted from a successful innovative act, sometimes but not always reinforced by intensive advertising. Another study illuminated the conditions under which electrical equipment manufacturers were successful in their attempts to raise prices through collusion during the 1950s and 1960s.48 A third line of analytic studies showed how clumsy government intervention in markets can lead to deficient performance, e.g., with the petroleum price controls imposed during the 1970s,49 local government occupational licensing laws,50 and advertising restrictions on opticians.51 From this last set of inquiries grew an increasingly important Commission activity, the regulatory intervention program.

When I joined the Federal Trade Commission staff as chief economist in 1974, 1 discovered a problem in the Industry Analysis group - the direct heirs of the Bureau of Corporations tradition. When investigations were carried out using the subpoena and other compulsory process powers granted under Federal Trade Commission Act Section 6, they frequently bogged down as target firms resisted compliance and pursued blocking actions in the courts. The typical start-stop-start pattern of such inquiries caused considerable productivity loss. To combat the problem, I took two initiatives.

For one, an attempt was made to conduct a major industry study without use of compulsory process. The first pilot effort, focusing on the international competitiveness of the American steel industry, seems to have been a substantial success, appearing just as the industry plunged into crisis owing to escalating imports.52

47R. Bond & D. Lean, Sales, Promotion, and Product Differentiation in Two Prescription Drug Markets (Feb. 1977) (FTC Bureau of Economics staff report). See generally F. Scherer & D. Ross, supra note 36, at 580-92.

48D. Lean, J. Ogur, & R. Rogers, Competition and Collusion in Electrical Equipment Markets: An Economic Assessment (July 1982) (FTC Bureau of Eco- nomics staff report).

49C. Roush, Jr., Effects of Federal Price and Allocation Regulations on the Petroleum Industry (Dec. 1976) (FTC Bureau of Economics staff report).

50J. Phelan, Regulation of the Television Repair Industry in Louisiana and California (1974) (FTC Bureau of Economics staff report).

51R. Bond, J. Kwoka, J. Phelan, & I. Whitten, Effects of Restrictions on Adver using and Commercial Practice in the Professions: The Case of Op- tometry (1980) (FTC Bureau of Economics staff report).

52R. Duke, R. Johnson, M. Mueller, D. Qualls, C. Roush, Jr., 8c D. Tarr, The United States Steel Industry and Its International Rivals: Trends and Factors Determining International Competitiveness (Nov. 1977) (FTC Bureau of Economics staff report).




Second, in an action that unknowingly emulated the 100-industry program carried by Bureau of Corporations personnel into the newly founded FTC, each Industry Analysis staff member was asked to iden- tify some important industry and, using published sources and voluntary cooperation from industry members, prepare during his or her nonproject time an analytic study. Some economists were less than enthusiastic about this de facto workload increase, but many rose to the challenge, producing valuable reports on the sugar industry, the brewing industry, sulfuric acid, the electric lamp industry, first mover advantages in the cigarette industry, and the economics of semicon- ductor production, among others.

A third initiative was unsuccessful, but illustrates the intersecting problems faced in carrying out the FTC's originally contemplated sunlight mission. The crucially important automobile industry was visibly losing ground to more innovative international rivals, yet no serious government study of the industry's competitive structure and performance had been made for two decades. Proposing a major investigation using inter alia compulsory process, I wrote:

The auto industry is of course a formidable subject for investigation. I believe an investigation is feasible if and only if it is carefully planned and focused - i.e., a rifle shot rather than a shotgun approach. We know enough about the industry to ask the right questions. . . . The temptation to discover everything and pursue all interesting leads will have to be resisted. If we answer most of the questions posed in this memorandum and combine our answers with what is already publicly known, the Commission will be able to present an extremely informative and valuable report to the public and to make a well-informed decision on whether further antitrust action is warranted.53

As expected, the FTC's subpoenas were resisted. But contrary to original hopes, the FTC staff let its demands for information proliferate unreasonably, strengthening the auto makers' will to resist and weak- ening its case for enforcement by the federal courts. As a result, the study became hopelessly bogged down and was abandoned in 198 1.54

Quantitative Data Collection

Just before World War II broke out, the Commission again ad- dressed what it perceived to be one of its historical missions - collecting, processing, and publishing systematic statistical information on the structure and performance of industries. In a preliminary effort, it collected financial statistics for 1939 and 1940 from some 780 cor-

5:iF. Scherer, Memorandum to the Federal Trade Commission: Proposed Investi- gation of the Automobile Industry (May 11, 1976).

54See FTC Officially Ends Its Antitrust Probe of Auto Industry, Wall St. J., May 14, 1981, at 3, col. 2. Earlier that year, the Commission had changed its approach from compulsory to voluntary compliance. For a retrospective by a staff member, see Kwoka, Market Power and Market Change in the U.S. Automobile Industry, 32 J. Indus. Econ. 509 (1984).




porations, classified to 80 industry categories. As part of the war effort, it expanded the survey to several thousand corporations and, adding Office of Price Administration records, it published a report on the profitability of 4,107 companies, classified by industry, for the years 1941-45.55 Beginning in 1947, it collaborated with the Securities and Exchange Commission in publishing a Quarterly Financial Report (QFR) on the profitability of manufacturing corporations. At first, the SEC assembled the data for corporations with listed securities from the 1 0- K and 10-Q reports required of such enterprises. The Federal Trade Commission used its compulsory process powers to obtain comple- mentary data from a stratified sample of nonpublic corporations. In 1971, responsibility for the complete survey passed to the Federal Trade Commission, leading to greater data homogeneity and simpler administration. The industry coverage was also extended to the mining, retail trade, and wholesale trade sectors.

In 1969, the Commission initiated a new kind of data collection program. It and the Department of Justice share responsibility for en- forcing the nonregulated industry merger control provisions of the Celler-Kefauver Act.56 Following a merger wave surpassed in magni- tude only by its 1899-1903 precursor, the enforcement agencies found themselves hard-pressed to assemble through ad hoc measures the data they needed to determine whether particular transactions warranted a challenge. The Commission therefore used its compulsory process powers to require Pre-Merger Notification Reports, containing sales and other data finely subdivided by product category, from companies with assets or sales exceeding $250 million acquiring targets with assets or sales of $10 million or more.57 In 1976 the Hart-Scott-Rodino Act gave the program explicit statutory authorization, extended its coverage, and specified mandatory waiting periods between preliminary notification and consummation of notified mergers.58 Unlike the practice in many other FTC information-gathering programs, the pre- merger notification data are kept confidential, available only to the FTC and Department of Justice staff. Efforts by state Attorney Gen- erals to obtain access to aid the enforcement of state antimerger programs were rebuffed by the Federal Trade Commission and ultimately by the federal courts.59

ò5See FTC Ann. Rep. (June 30, 1942); Federal Trade Commission, Report on Wartime Costs and Profits for Manufacturing Corporations, 1941 to 1945 (Oct. 1947).

5(iAnti-Merger Act, Ch. 1184, 64 Stat. 1125 (1950). "Federal Trade Commission Resolution, Merger Notification Program, 34 Fed.

Reg. 7592 (1969). 5815 U.S.C. § 18a (1976 & Supp. 1990). Implementing regulations were published

in 43 Fed. Reg. 33,450 (1978) (codified at 16 C.F.R. §§ 801, 802, 803) and amended periodically thereafter.

b9See FTC Denies Access to Texaco-Getty Materials; States Comment on Merger, Antitrust 8c Trade Reg. Rep. (BNA) No. 1 169, at 926 (May 10, 1984); Mattox v. Federal Trade




The preponderantly "conglomerate" merger wave of the 1960s and early 1970s added new challenges for the FTC's sunlight mission. Through the disclosure efforts of the Securities and Exchange Com- mission and the FTC's Quarterly Financial Report program, rich data on corporate sales, profitability, and financial structure are made available to the public (for corporations with publicly traded securities) and in industry aggregate form (for private companies covered by the QFR reports). However, as corporations became increasingly diversified through merger, whole-company financial reports revealed less and less about developments within the individual industries occupied by the companies. In 1950, 111 of the 200 largest manufacturing companies operated in ten or fewer four-digit industries. In 1968, only 54 companies were that narrowly specialized.60 By 1975, 59 percent of the average Top 200 manufacturing corporation's sales were derived from manufacturing lines other than the firm's most important line.61 Among the consequences of this diversification, a Federal Trade Com- mission staff report observed, was "information loss" that thwarted the transparency required for markets to allocate resources efficiently:

How, for example, can a potential entrant into the production of syn- thetic rubber, road-building equipment, refrigerators, TV sets, specialty meats, railroad locomotives, men's shirts, or a multitude of other products determine the profit position of firms producing these products? The output of these products is controlled almost exclusively by large, diversified firms. These companies tend to publish their sales and profit data on an aggregated, corporate basis; consequently, accurate data relating to the profitability of such product lines are not available from public sources.62

At an earlier point, the staff report stated: "Above-normal profits and any attendant resource misallocation can continue for a longer period of time if such information is hidden within conglomerate corporations. Above-normal or monopoly profits may not act as a trigger to new entry if their presence is unknown."63 Thus, the information whose importance to efficient resource allocation Jeremiah Jenks stressed,64 once available through the efforts of Jenks, Theodore Roosevelt, the FTC, and the SEC, was deteriorating in quality.

The Federal Trade Commission had two other reasons for reme- dying the situation. Sharply criticized by an American Bar Association panel and "Nader's Raiders" for squandering its resources on unim-

Comm'n, 752 F.2d 1 16 (5th Cir. 1985); Lieberman v. Federal Trade Comm'n, 598 F. Supp. 669 (D. Conn. 1984), rev'd, 111 F.2d 32 (2d Cir. 1985).

(i0FTC Bureau of Economics, Report on Conglomerate Merger Perfor- mance: An Empirical Analysis of Nine Corporations 64 (Nov. 1972) [hereinafter Conglomerate Merger Report].

(HF. Scherer & D. Ross, supra note 36, at 91-92. '^Conglomerate Merger report, supra note 60, at 93. ™Id. MCf. note 7 supra.




portant cases,65 it began developing case selection procedures rooted inter alia in quantitative indicia of industry performance. At the same time, economic theories that provided a foundation for much antitrust enforcement came under increasing attack. Sherman Act monopoli- zation law and Celler-Kefauver Act merger actions implicitly assume that the quality of an industry's performance depends upon its structure: the more concentrated the structure, the more monopolistic the performance. In a series of articles, Harold Demsetz showed that the statistical studies implying a positive relationship between seller concentration and monopolistic price-raising might actually be revealing that large firms in monopolistically structured industries were simply more efficient than their smaller rivals.66 The trouble was, Demsetz's assertions were based upon data of very poor quality. In order to subject them to rigorous testing, statistics on individual firm market shares and profitability in an array of narrowly defined industries were needed.67 But since real-world firms operated in a diversity of industries and made public only performance data aggregated across their various lines, the data were not available.

The FTC's response to this set of challenges was to initiate two new comprehensive data collection programs: the Corporate Patterns Sur- vey and the annual Line of Business report program. Both encoun- tered intense opposition from American industry.

The Corporate Patterns survey, formally implemented in July 1975, sought information on the thousand largest manufacturing corporations' sales for 1972, disaggregated to the "five-digit product" level - that is, according to a Census Bureau classification with approximately 1,200 subdivisions. Collecting such data was not a totally new activity for the FTC. A nearly identical survey of 1950 sales had been carried out in the early 1950s without significant opposition, and the disaggregated data were published in 1972.68 Data at an even finer (seven-

6òReport Of The ABA Commission To Study The Federal Trade Commission (Sept. 15, 1969), published in 1 J. of Reprints for Antitrust L. 8c Econ. 883, 891 (1969) [hereinafter ABA Report]; M. Green, B. Moore, Jr., & B. Wasserstein, supra note 32, at 333.

66Demsetz, Industry Structure, Market Rivalry, and Public Policy, 16 J. Law 8c Econ. 1 (1973); Demsetz, Two Systems of Belief About Monopoly, in Industrial Concentra- tion: The New Learning 164, 175 (H. Goldschmid, H. Mann, & J. Weston, eds. 1974) [hereinafter Industrial Concentration].

67See Weiss, The Concentration - Profits Relationship and Antitrust, in Industrial Concentration, supra note 66, at 225-26. For a more extended analysis, see F. Scherer 8c D. Ross, supra note 36, at 430-35.

68Federal Trade Commission, Statistical Report: Value of Shipments Data by Product Class for the 1,000 Largest Manufacturing Companies of 1950 (1972). Data on aircraft company sales were suppressed, apparently for national se- curity reasons. Results aggregated by industry were published in an earlier volume, Federal Trade Commission, Report on Industrial Concentration and Prod- uct Diversification in the 1,000 Largest Manufacturing Corporations: 1950 (1957).

An effort to update the 1950 study in 1962 was thwarted by prohibitory language




digit) level of disaggregation were obtained routinely from individual merging companies under the Pre-Merger Notification program. Pre- paring the data for submission could not have been burdensome for the companies. The FTC devised its survey so that companies could simply tally and report statistics they had already gathered for the 1972 Census of Manufactures.69 Why 390 companies chose to file motions to quash the program can only be speculated. A likely explanation is that the FTC's acceptance of economic theories relating elevated profitability and prices to high seller concentration caused business leaders to see a danger of new antitrust suits if the Commission, embarking upon the most activist period of antitrust enforcement in its history, possessed such comprehensive information on industry structure. The Business Roundtable, which took a special interest in the FTC's new statistical programs, may also have served to catalyze what otherwise would have been disorganized opposition. The main substantive basis asserted for companies' opposition to the program was an allegation that, since the Census forms and file copies from which the data might be compiled were confidential under Census law, the FTC had no right to seek Census-based information, and recompiling the data de novo would have been prohibitively costly.

The Line of Business survey was a much more ambitious enterprise. It sought from 471 large corporations not only sales data, but stand- ardized cost, profit, and asset information broken down into 261 manufacturing and 14 nonmanufacturing industry categories defined by the Commission staff. Subsequent experience revealed that the average survey respondent reported on eight manufacturing lines and 1.4 nonmanufacturing lines, while some of the most diversified companies reported on more than 50 lines. Annual data collection was planned, and income statement and balance sheet summaries aggregated to the industry category level were to be published so that a clear picture of trends within particular industries would be presented to the public. The collection of such disaggregated profitability data was neither new to the Commission nor patently outside the Commission's originally intended mandate. Information on the costs and profits of individual Standard Oil Company refineries and on the cigarette, smoking tobacco, cigar, and snuff branches of the American Tobacco Company was published in Bureau of Corporations reports. Construing the language of what became FTC Act Section 6(b) in the debate over the FTC's formation, Senators Pomerene and Smoot engaged in the following colloquy: Mr. Pomerene. Now, then, what is wrong in having this commission desig-

in the Commission's fiscal year 1964 appropriations bill. See Boyle, supra note 30, at 501.

<i9The data reposing in Census Bureau files are confidential, not transferable in disaggregated form to other government agencies.




nate, for instance, the manufacturers of harvesting machinery, and say that class shall make a report of a given kind; that manufacturers of jewelry shall make reports of a given kind, and so forth? Mr. Smoot. That would be perfectly true if the commission only designated one class of business, but under this same provision they have the power to designate 50 classes of business.

And under the provision all 50 of those must have a uniform system of annual reports. Mr. Pomerene. ... Of course if one line of business is entirely different from another line of business and the kind of information which the commission would require was different . . . they can determine that there shall be a blank of a given kind in the one line of manufacture and a blank of another kind for another line of manufacture.70

Smoot went on to state his preference for a uniform system (like the FTC's Line of Business approach) rather than a line-by-line approach.

Numerous objections were raised by the 180 companies that filed motions to quash the Commission's August 20, 1975, order seeking Line of Business reports for 1974. It was argued that the Commission lacked statutory authority and recognizable need for such a program and that proper procedures had not been followed. Although the Commission undertook to keep individual company submissions confidential from both the public and its own enforcement staff, opponents claimed that the confidentiality provisions were inadequate and, even if rigorously followed, that statistical techniques could be used to isolate individual company data from published aggregations. A per- vasive objection was that compliance with the program would be ex- cessively costly. And even if high costs were incurred to prepare the data, opponents argued, the intrinsic difficulties of Line of Business reporting were said to be so great that the data received would have little or no economic meaning.71

Most of these objections involved matters with no clear right or wrong answer, and thus, on which reasonable observers could disagree. In such disputes, the Commission's position was strengthened by solid Congressional support, expressed both in individual statements and appropriations, for its new data collection programs.72 Among other things, recognizing that the Office of Management and Budget had signalled the likelihood that it would use its statistical reports clearance authority to block the Line of Business program, Congress in late 1973 attached a rider to the Alaska Oil Pipeline Bill transferring FTC survey clearance authority from OMB to the General Accounting Office,

7()51 Cong. Rec. 11,110(1914). 7 'For the most pointed joining of this last issue, see Scherer, Segmental Financial Reporting: Needs and Trade-offs, and Benston, The FTC's Line of Business Program: A Benefit Cost Analysis, The Segment Reporting Debate, in Business Disclosure: Government's Need to Know 3, 58 (H. Goldschmid ed. 1979).

T1See Kovacic, supra note 34, at 644-45.




which was considered more responsive to Congressional desires.73 On the more factual question of reporting cost, the FTC played its

cards carefully. Early objections to the program suggested that individual companies might have to spend as much as a million dollars to prepare a single year's form. In tentatively denying motions to quash a 1973 pilot version of the Line of Business survey, the Commission invited companies to submit affidavits identifying inconsistencies between company records and FTC information requests and describing in detail how the compliance cost estimates were compiled. An analysis of the thirty-one responses with quantitative details revealed that, after misunderstandings were corrected and certain data requests were cut back, the average cost per complying company could be reduced to $24, 000. 74 For the originally contemplated sample of 425 corporations, the total compliance cost would be $10.2 million.75

After preliminary skirmishes in the Southern District of New York and Delaware federal district courts, the Line of Business and Cor- porate Patterns enforcement proceedings were consolidated in the District of Columbia. The district court's decision supported the Fed- eral Trade Commission on all counts,76 and the FTC was sustained on appeal in 1978.77 Recalcitrant corporations were ordered to file their reports.

The first aggregated Line of Business reports, for 1974 and 1975, were ready for publication in September 1981. Reports for 1976 and 1977 were published in May 1982 and April 1985 respectively. The disaggregated underlying data provided the basis for a series of statistical analyses, shedding new light on such long-standing questions as

73Mineral Leasing Act of 1920, Amendment, Pub. L. No. 93-153, 87 Stat. 576, 593 (1973). See also FTC Gains Additional Authority as Nixon Signs Pipeline Legislation, Antitrust 8c Trade Reg. Rep. (BNA) No. 639, at A-l (Nov. 20, 1973), and, on earlier developments, OMB Promised Approval of FTC's Line-of- Business Proposal, Memo Shows, Antitrust & Trade Reg. Rep. (BNA) No. 631, at A-14 (Sept. 25, 1973).

74FTC Bureau of Economics Staff Memorandum, 1974 Form LB Revision (June 1975), published in Federal Trade Commission, Statistical Report: Annual Line of Business Report: 1974, 363-67 (Sept. 1981).

75This estimate bears comparison with the estimate by Senator Newlands (overlooked by the FTC staff in 1975) that a comprehensive financial data reporting program by the contemplated trade commission would cost the affected companies $20 million per year. To this, Senator Henry F. Lippitt of Rhode Island commented:

I want to say . . . that there was no piece of evidence that was given by any witness before the committee that impressed me so much. I have thought of it over and over again, and the more I have thought of it and the more I have considered it with reference to [the costs of litigating an antitrust case] . . . the more I believe that it [$20 million] is a very moderate figure indeed.

51 Cong. Rec. 11,111 (1914). At the time, a dollar had five times the consumer purchasing power it retained in

1974. ™In re FTC Corporate Patterns Report Litiff., 432 F. Supp. 274 (D.D.C. 1977). 77Appeal of FTC Line of Business Report Litig., 595 F.2d 685 (D.C. Cir. 1978),

cert, denied, 439 U.S. 958 (1978).




the links between market structure and profitability,78 how research and development affects productivity growth,79 and the success (or lack thereof) of conglomerate mergers consummated during the 1960s and early 1970s.80

Although the Federal Trade Commission appeared to have won its corporate reporting war, guerrilla attacks continued to target the Commission's traditional Achilles' heel - delay. Preliminary maneu- vering and the main substantive litigation had delayed the receipt of data for 1974 by four years - too long for the aggregated reports to be of substantial use in business or government agency decision-making. In late 1981, two large private companies, Hallmark and Deering- Milliken, sued to block publication of the aggregated 1974 and 1975 data, arguing that their confidential data could be isolated from the greeting card and textile products aggregates.81 The reports, already prepared for publication, were delayed until the FTC agreed in a ten- tative compromise to suppress detailed data for those industries. Mean- while, a Congress that had become much less supportive of the FTC82 abrogated its 1973 Alaska Pipeline Act expedient, returning through the 1980 Paperwork Reduction Act responsibility for clearing FTC survey programs to the Office of Management and Budget beginning in April 1981 . Six companies thereupon made an unsuccessful attempt to have OMB block issuance of the 1974 and 1975 Line of Business survey reports on the premise that publication would prejudice OMB's ability to evaluate subsequent surveys.83 And in 1980, four of those companies filed motions to quash the survey for 1977 and later sued, protesting revised Line of Business confidentiality guidelines that permitted access by outside researchers to the individual company data.84 Further delays in the publication of the 1977 report ensued.

^Consistent with Demsetz's predictions, market share proved to be a far more important determinant of profitability than overall industry concentration. Higher profits were found to flow from large market shares partly because of scale economies and partly because of product differentiation advantages. Industry leading firms were found to play a crucial discretionary role in price setting, especially in high scale economy industries. See especially Ravenscraft, Structure-Profit Relationships at the Line of Business and Industry Level, 65 Rev. Econ. & Stat. 22 (1983); Kwoka & Ravenscraft, Cooperation v. Rivalry: Price-Cost Margins by Line of Business, 53 Economica 351 (1986).

79Scherer, Inter-industry Technology Flows and Productivity Growth, 64 Rev. Econ. & Stat. 627 (1982).

80D. Ravenscraft & F. Scherer, Mergers, Sell-Offs, and Economic Effi- ciency (1987).

SiSee FTC: Watch, Sept. 25, 1981, at 1 1, and Nov. 6, 1981, at 11. S2See Kovacic, supra note 34, at 589-92, 652-58; Kovacic, Congress and the Federal

Trade Commission, 57 Antitrust L. J. 869 (1989); and Weingast and Moran, Bureau- cratic Discretion or Congressional Control? Regulatory Policymaking by the Federal Trade Commission, 91 Ï. Pol. Econ. 765 (1983).

8*Six Corporations Seek OMB Assistance To Block FTC Disclosure ofLB Reports, Antitrust 8c Trade Reg. Rep. (BNA) No. 1030, at A-14 to A-15 (Sept. 3, 1981).

84Aluminum Co. of America v. FTC, 589 F. Supp. 169 (S.D.N.Y. 1984).




VI. SUNSET

Nineteen eighty-one brought a new, far more serious threat to the FTC's sunlight activities - the inauguration of a President pledged to get government off the backs of business. The Reagan Administra- tion's Transition Team recommended in January 1981 that the FTC's budget be cut by twenty-five percent over a period of three years and that,85 if an evaluation of the Line of Business program did not show substantial benefits in relation to costs, the program should be termi- nated.86 It also urged that studies of the effects of government regulation on the competitive marketplace be elevated in priority relative to studies of imperfections within the private sector. That this advice would be taken seriously was demonstrated when the head of the transition team, James C. Miller III, was named FTC chairman and another member, Robert D. Tollison, was chosen to head the Bureau of Economics.

The first sunlight program to fall was an annual statistical report on mergers and acquisitions that the FTC had begun in 1 969 and continued throughout the 1970s. According to Chairman Miller, there were two main grounds for cancelling the program - the possibility of sav- ing $70,000 per year and a belief that "virtually identical data are available in the private sector. ... in a more timely fashion."87 The rationalization was wrong on at least four counts. First, the FTC "large merger" series could have been maintained using Pre-Merger Notifi- cation data with an annual effort of only several staff person weeks. Second, although abundant data on mergers and acquisitions are available from private sources, they do not extend nearly as far back in time as the FTC large merger series, which was continuous from 1948 and has been linked to data series beginning in 1895.88 Nor do they link readily to the FTC data, so that a continuous merger series can be extended. Third, only the FTC data series included acquisitions by sizable nonpublic corporations (identified using the FTC's Quarterly Financial Report survey). Fourth, and perhaps most important, only the FTC large merger series consistently distinguished among horizontal, vertical, and conglomerate acquisitions so that one could tell whether the incidence of horizontal mergers (posing the greatest likelihood of antitrust violation) was rising or falling. Since these criticisms were brought to the Commission's attention in congressional hearings, a cynical interpretation might be that the Commission's leadership,

^Conclusions and Recommendations from Federal Trade Comm'n Transition Team Report Submitted to Reagan Adm'n [sic], reprinted in Antitrust & Trade Reg. Rep. (BNA) No. 999, at G-l, G-3 (Ian. 29, 1981) [hereinafter Conclusions and Recommendations].

mId. at G-2. 87James C. Miller III, Testimony before the Subcommittee on Monopolies and

Commercial Law of the House Comm. on the Judiciary, at p. 3 of the prepared statement (lune 3, 1982) (available at the Administrative Law Review office).

8SSee F. Scherer & D. Ross, supra note 36, at 154.



FALL 1 990 Sunlight and Sunset at the FTC 48 1

perceiving that horizontal merger activity was accelerating but that the Reagan antitrust agencies were unlikely to combat such mergers aggressively, killed the bearer of bad news.

In late 1981, the first budget prepared by the new Reagan team indicated that QFR coverage of the retail trade sector would be eliminated, that the FTC General Counsel's office would no longer enforce compliance with QFR survey requests, and that eventually the QFR was to be transferred to the Census Bureau.89 In a subsequent inter- view, the Bureau of Economics Director said transfer of QFR to Census was "quite logical . . . because the FTC makes almost no use of the data."90 His choice of the present tense verb "makes" was apt, since in the past, the Bureau of Economics staff had made extensive use of the data, e.g., for reports requested by Congress on changing profit margins in the fluid milk, brewing, meatpacking, and bread industries and in retail food chains.91 Moreover, the Commission overlooked a use of QFR data that would have allowed it to illuminate an important new trend in the American economy. In 1981 and 1982, leveraged buyouts were entering a period of explosive growth. "Going private" transactions exceeded $2 billion for the first time in 198 1.92 With total coverage of nonpublic manufacturing, mining, and trade corporations whose assets exceeded $10 million, the QFR program was uniquely positioned to analyze the financial structures and performance out- comes of LBOs. Nevertheless, the QFR was transferred to the Census Bureau in January 1983, and the opportunity was lost.93

As the most controversial FTC data gathering program and one that retained important Congressional support, the Line of Business program required more delicate handling. In the fall of 1981, Chairman Miller announced that its budget would be cut back sharply and that no surveys following the one for 1977 would be undertaken until a thorough réévaluation had been completed. In 1982, as the Line of Business program staff was preparing and revising a benefit/cost analysis, public comments were solicited.

89FTC: Watch, Oct. 23, 1981, at 2. Cf FTC: Watch, Oct. 8, 1982, at 12, reporting a Federal court's decision to fine Potamkin Cadillac Co. for refusing to comply with the survey. On an earlier attempt by the Office of Management and Budget to transfer the QFR to the Census Bureau, see Antitrust & Trade Reg. Rep. (BNA) No. 631, at A-14(Sept. 25, 1973).

90QFR Program May Be Switched from FTC to Bureau of Census, Antitrust & Trade Reg. Rep. (BNA) No. 1050, at 259 (Feb. 4, 1982).

91FTC Bureau of Economics, Report on Food Chain Profits (1975); A. Mas- son & R. Parker, Economic Report on Price and Profit Trends in Four Food Manufacturing Industries (1975) (FTC Bureau of Economics Staff Report).

92W. T. Grimm & Co., Mergerstat Review: 1983, at 71 (1984). 93Research using the data was underway at the Census Bureau in 1990, but its

progress was retarded by financial and logistic constraints FTC industry analysis staff would not have faced. There are also significant corporate veil problems. When a manufacturing or trade company is acquired by a financial shell holding company, Census staff apparently classify the resulting entity as a financial enterprise and hence exclude it from their sample.




Disagreement over the program's annual compliance cost to companies remained. The staff repeated its 1974 estimate of $24,000 per company, supported by similar estimates from 1977 Commission on Federal Paperwork and FTC staff surveys.94 Fifty-two companies re- sponding to the invitation for public comments (not sworn, as in the 1973 analysis) submitted estimates ranging from a high of $516,300 (Eaton Corporation) downward to $1,500 (Akzona).95 The average of the company estimates was $57,000 with Eaton included and $44,000 without.

The staff tried to estimate the program's benefits in four categories: better FTC case selection, improved decision-making in other federal agencies, more efficient private sector decisions, and the value of basic research using Line of Business data. This attempt to quantify the unquantifiable was unsuccessful. FTC policy planning staff had in fact tried to use the Line of Business data in selecting possible enforcement targets, but in each such analysis, the breakfast cereal and automobile industries, the foci of failed FTC actions, appeared among the most promising targets.96 Nor were claims of more enlightened structural case selection likely to convince FTC officials whose transition team report had concluded that "the economic rationale for such cases is extraordinarily weak and does not command widespread support."97 The invitation for public comment yielded little evidence of perceived benefits by business firms, especially due to the six to eight year lags in data publication.98 A Line of Business staff analysis estimating Jenks- like benefits from better-informed entry decisions99 was turned on its head by the Bureau of Economics leadership. They argued that by encouraging entry into high-profit situations, better information was likely to discourage potential innovators from taking risks, thereby reducing economic growth and imposing costs on the private sector estimated at $176 million.100 In dismissing the claims that Line of Busi- ness data permitted valuable basic research, the Bureau leadership re- lied largely upon a singularly negative survey from a consultant hired

94 YTC Bureau of Economics, Benefits and Costs of the Federal Trade Commission's Line of Business Program: Staff Analysis 163 (Sept. 1982).

95/rf. at 172. The second highest estimate was $150,000, from Singer Corporation. 9(iAs the Bureau of Economics leadership put it in their rebuttal memorandum,

"Purely structural cases, such as represented by cereal- and oil-industry-type investigations, have not faired [sic] well administratively or in courts." R. Tollison, R. Higgins & W. Shughart II, Benefits and Costs of the FTC's Line of Business Program: Recommendations of R. Tollison, R. Higgins, and W. Shughart II 26 (Jan. 20, 1983) [hereinafter LB Recommendations]. 97 Conclusions and Recommendations, supra note 85, at G-l.

98 A collection of letters is reproduced, along with potential user survey tabulations, in FTC Bureau of Economics, Evaluation of the Benefits of the Federal Trade Commission's Line of Business Program (Feb. 1984).

"C/. note 7 supra. IOOLB Recommendations, supra note 96, at 49-50.




by three law firms leading the opposition to the Line of Business program.101

After further delays and hearing testimony from six outside economists, the Commission voted 4-1 on April 11, 1984, not to resume Line of Business data collection.102

What remained then of the Commission's sunlight activity was the program of studies, and especially industry studies, traditionally con- ducted by the Industry Analysis group in the Bureau of Economics. It was one of the few Commission activities praised by the 1969 Ameri- can Bar Association study team:

The economic staff of the FTC, in its normal inquiries and studies perti- nent to the work of the Commission, assembles much vital factual information on U.S. industries not generally available to the public; moreover, the economic staff is so strategically located and so occupied with analyses of factual industrial situations that it should be peculiarly sensitive to new industrial developments and the data and techniques required for analyz- ing them. For this latter reason, and others, the fundamental economic research falling in the broad field of industrial organization, as well as the study of specific industries and trade practices, is a proper function of the FTC's economic staff.103

However, a more critical view was taken by the Grace Commission's FTC task force, which concluded in 1983 that $4.9 million could be saved over a three-year period by cutting back economic policy analysis unrelated to investigations, adjudications, or rules.104 It found that studies of collusion in electrical equipment product lines, steel industry subsidies, health planning, and the like were "unrelated to the FTC's

101 Compare Benston, The Validity of Profits-Structure Studies with Particular Reference to the FTC's Line of Business Data, 75 Am. Econ. Rev. 37 (1985) with Scherer, Long, Martin, Mueller, Pascoe, Ravenscraft, Scott, & Weiss, The Validity of Studies with Line of Business Data: Comment, 77 Am. Econ. Rev. 205 (1987). Cf. the statement from H. Michael Mann, Bureau of Economics director between 1971 and 1973: "It is clear, it seems to me, that if debate about appropriate policy and intelligent case selection is ever to resolve itself, it will not be done by resort to theorems derived from 'pure thought.' We desperately need to test propositions empirically. And reliable results depend importantly on good data. ... It is in this regard that the LB Program is crucial." 3 FTC Bureau of Economics, Benefits and Costs of the Federal Trade Commission's Line of Business Program: Comments of Consultant Reviewers 18 (Sept. 1982).

W2FTC Votes to fettison Line of Business Program, Antitrust & Trade Reg. Rep. (BNA) No. 1160, at 729 (Apr. 12, 1984). See also Termination of LB Program Sparks Angry Response from Capitol Hill, Antitrust & Trade Reg. Rep. (BNA) No. 1 161, at 761 (Apr. 19, 1984).

103AßA Report, supra note 65, at 961. Similarly, the first Hoover Commission concluded that "[o]f all its activities, the Commission's investigations have probably had the most substantial impact and enduring value." Hoover Commission, Committee on Independent Regulatory Commissions, Task Force Report on Regulatory Commissions Appendix N, at 123 (1949) (prepared for the Commission on the organization of the Executive Branch of the Government). 104 Grace Commission Advises FTC to Trim Academic Economic Research, Antitrust & Trade Reg. Rep. (BNA) No. 1117, at 1079, (June 2, 1983).




primary function [and] could be done outside the government."105 Although the Grace Commission recommendations probably had

little causal impact, there was in fact a sharp decline in the amount of effort devoted to economic research, from an average of 25 economist workyears in fiscal years 1980-84 to 18.1 in 1986, 15.7 in 1987, 12.1 in 1988, and a budgeted 7.3 in 1989. 106 And much of the effort that remained, an American Bar Association task force remarked critically, 4 'shortchanged inquiry into the structure and conduct of actual industries in favor of more purely academic topics."107

Several developments apparently underlay the declining emphasis on sunlight activities. Perhaps most important, with a leadership that exhibited little sympathy for the Commission's historical missions, the Commission experienced during the 1980s continuing erosion of its support within Congress and, as a consequence, its budget was cur- tailed appreciably. General budget retrenchment under the Gramm- Rudman Act also pinched, especially beginning in 1986. Budget and staffing cuts fell inter alia upon the Bureau of Economics, which found it necessary to reallocate economists from research work to screening and evaluating a greatly increased volume of mergers. By 1989, no traditional industry case study work continued, and virtually all remaining economic research was undertaken only as a part-time activity when staff members' law enforcement duties permitted.108 Interven- tion in regulatory matters also received increased priority, although budgetary pressures forced a decline in the advocacy program from a peak of 7.4 economist years in 1983 to 3.0 in 1989. Two other reasons were adduced by a Bureau of Economics spokesman for the decline of economic research, and especially industry analyses. For one, the training received in most economics graduate programs has become increasingly oriented toward pure economic theory and high-powered statistical analysis. Industry case studies have fallen out of favor. As a result, newly minted Bureau staff members "don't want to do case studies," the spokesman explained. This interacted with a second set

105/d. at 1080. xmReport of the American Bar Association Section of Antitrust Law, Special Committee To

Study the Role of the Federal Trade Commission, 58 Antitrust LJ. 43, 168 (1989) [hereinafter Special Committee Report on FTC].

The Bureau of Corporations had 1 20 employees at the time of its transfer to the Federal Trade Commission in 1914.

I07/d. at 102. 108 A Freedom of Information Act request yielded three memoranda written between

March of 1987 and June of 1988 by Bureau of Economics staff to the Bureau director recounting the history of the Bureau's research efforts and arguing for continuation ofthat activity. Memorandum from Ronald Bond, deputy director, to David Scheffman (Mar. 5, 1987) (Research in the Bureau of Economics); Memorandum from Bill Ro- mano to David Scheffman (Mar. 11, 1987) (Congressionally Requested Research); Memorandum from Ronald Bond to David Scheffman (June 16, 1988) (Research in the Bureau of Economics). According to a Bureau of Economics spokesman, these were not transmitted to the Commission, but served to brief the Bureau of Economics director in attempts to soften the blow of budget cuts.




of factors. Industry case studies are difficult to manage under any circumstances,109 and with a reluctant staff, the managerial challenges are even harder. Most of the Bureau of Economics directors serving during the 1980s had only meager personal interest in industry analysis work, and as a result, the required managerial push was lacking.

VII. CONCLUSION

Gott! welch' Dunkel hier! (God, what darkness here!)

-Beethoven, Fidelio (1814) In Mozart's Magic Flute, the forces of light triumph and the Queen

of the Night is vanquished. In Beethoven's Fidelio, Florestan is rescued from the darkness of his dungeon. But they inhabit the fictional world of opera. In the real world of the Federal Trade Commission, the Queen of the Night appears to have triumphed during the 1980s, end- ing a sunlight tradition that dates back to 1903. The remaining question is, should anyone care?

The American Bar Association's Special Committee to study the role of the Federal Trade Commission apparently did care. It concluded:

[T]he FTC should concentrate on becoming the single most important repository of knowledge about the actual operation of major U.S. industries. Economists at the FTC should be researching these industries, up- dating older studies, and publishing their results. . . .

A focus on the functioning of various industries, and on America's antitrust system, is simply a matter of good stewardship. Absent FTC support, research at the frontiers of economic theory will continue to flourish in universities across the country. On the other hand, modern academic research in industrial organization rarely undertakes the sort of systematic, institutional study of real-world industries and activities that we are sug- gesting for the FTC. If FTC economists do not undertake the task, it is difficult to see who else will.110

I share the Committee's sense of mission and I agree with its judg- ment about the academic alternative. Excellent industry studies have in the past been done in the universities, but such work is no longer fashionable. Moreover, many of the best academic studies were based heavily upon information made available through Federal government investigations, surveys, and antitrust cases. The information compiled in the IBM, Telephone, breakfast cereal, titanium dioxide, ReaLemon and other recent rule of reason cases will fuel a few academic efforts

109This was true also in the mid-1970s. Because antitrust support work was more self-sustaining, I found it essential to allocate most of my time as Bureau director to the industry analysis and statistical programs.

""Special Committee Report on FTC, supra note 106, at 102-03.




for a decade, but after that, without published investigatory materials or new cases, scholars will run out of materials. Absent some compensatory developments, our knowledge concerning the conduct and performance of private sector enterprises possessing ever-changing forms of monopoly power will atrophy.

There are some compensatory developments. As indicated above, one reason for the Line of Business program was the discovery that the links between market structure and performance could not be understood fully without data disaggregated to the individual line of business level. The industrial censuses collect richly detailed information at that level (or more exactly, at the level of individual business establishments). For decades those data lay unutilized because of Cen- sus confidentiality provisions and a tradition hostile to internal research. During the 1980s, a more enlightened policy was adopted, and outside scholars making appropriate confidentiality pledges can obtain access to industrial census and survey materials under a fellowship program jointly supported by the American Statistical Association, the National Science Foundation, and the Census Bureau, or also (with outside grant support) through residency in a specially organized Cen- ter for Economic Studies.111 Physical space and budgetary stringencies limit the amount of research that can be undertaken, and the Census data, although much richer than FTC Line of Business data in many respects, are not well suited for illuminating financial performance in individual industries. Nor is the Census Bureau able to devote as much effort as the FTC once did to ensuring that its data collection is responsive to specific industrial research needs. Nevertheless, the emer- gence of this new facility is an important offset to the demise of the FTC's statistical programs.

Other governmental agencies partially fill the qualitative gap. The Department of Commerce maintains a large industry study effort, but the reports are mostly oriented toward identifying output and em- ployment trends, lacking critical analysis on significant conduct and performance questions. The International Trade Commission pro- duces industry reports packed with useful data, but their analyses char- acteristically follow a mechanical pattern suited mainly to identifying foreign trade impacts, and they shed little light on the conduct of do- mestic enterprises. The Congressional Office of Technology Assess- ment occasionally publishes insightful industry analyses, but its effort along such lines is at best sporadic. The Council on Wage and Price Stability published a series of excellent industry studies during the 1970s, but it has long since vanished from the Washington scene. Thus,

mIn the spring of 1990, the author was an ASA/NSF/Census research fellow, studying the response of U.S. corporations' research and development spending to import competition.




a considerable void has been left where the Federal Trade Commission was once active.

Having a systematic, current, analytic, and critical body of knowledge on the structure, conduct, and performance of U.S. industries is, I believe, important to the effective functioning of government. For better or worse, the Federal government intervenes importantly in the operation of individual industries hundreds of times each year - in safety, environmental, and economic regulatory matters, in decisions to grant or withhold protection from import competition, in special tax questions, in procurement functions, in fostering technological in- novation, and even in antitrust. For antitrust, knowing when not to intervene is as important as knowing when to intervene. Although new-fashioned libertarians would disagree, I cannot believe that such decision-making is less effective when it is well-informed than when it is poorly informed. Crisis often forces intervention decisions to be made quickly, with no time for a careful industry study. To inform the decision-making process, therefore, it is crucial to have a body of systematic knowledge already in existence and regularly updated, along with data bases that can be tapped on short notice to yield insight into special circumstances.

I also believe, with the drafters of the Federal Trade Commission Act, that the regular publication of objective information on industrial conduct and performance helps keep pressure on business enterprises to perform well.

These roles were once performed by the Federal Trade Commis- sion. It is questionable whether Congress should try to rebuild that FTC function, since the agency's performance has been erratic, biased by the mixing of analysis with enforcement, and peculiarly vulnerable to delay tactics by fearful business firm targets. Also, the government's need for sunlight activities sweeps much more widely than the fields of antitrust and consumer protection. The best course of action would be to start with a clean slate, creating a new independent agency like the old Bureau of Corporations, free of law enforcement responsibil- ities and charged with spreading sunlight for the benefit of all government branches, not just one, and for the broader public interest. Messrs. Covington and Newlands had the right idea in the first place.



sunlight and sunset at the federal trade commission

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