UNITED STATES v. VON'S GROCERY CO.
Legal provision: Clayton
Argument of Richard A. Posner
Chief Justice Earl Warren: Number 303, United States, Appellant, versus Von's Grocery Company et al.
Mr. Richard A. Posner: Mr. Chief Justice, Your Honors.
This case was brought by the government in 1960, under Section 7 of the Clayton Act and it involves a challenge to a merger that year of two major grocery chains in Los Angeles, Von's Grocery Company and Shopping Bag Food Stores.
After a preliminary relief was denied and after extensive discovery proceedings were conducted, the matter came on for trial before Judge Carr in the Southern District of California.
The parties agree that the relevant product market in this case, the line of commerce, was the sale of groceries and related products by grocery stores and supermarkets and that the relevant geographical market, the section of the country, was the Los Angeles Metropolitan Area, consisting of Los Angeles and Orange County's.
So the sole contested issue was whether the effect of the merger maybe substantially to lessen competition or to tend to create a monopoly in the relevant market and on this the judge after the conclusion of the trial and having heard the evidence of both parties, held that the government had not proved that the merger might have this effect and he therefore ordered the complaint dismissed.
We are here on direct appeal under the Expediting Act --
Justice Byron R. White: And there was no issue of the effect on primary lined up or is it just -- someone with headers?
Mr. Richard A. Posner: On primary line competition?
I don't understand.
Justice Byron R. White: In the journeys you have -- the effect on any -- on the supplier?
Mr. Richard A. Posner: Oh, on supplier's product to grocery stores, no.
None, just on the -- the only competitive effects have to do with competition in the retail sale of grocery products.
This is an important case in the administration of the merger statute for two reasons.
First, this Court's decision will provide guidance to the enforcement of this law in the nation's largest industry and the industry which has the most direct and immediate concern to every American family.
And second, that we think that this case perhaps more than any previous case before this Court, with possible exception of the Brown Shoe case, tests whether Section 7 is in fact, as its framers intended it to be an effective preventive remedy against anticompetitive practices and effects and before I begin my argument, let me offer a brief summary of the government's legal theory.
We rest our case on four propositions.
First, that Section 7's basic concern is with preventing the emergence of highly concentrated or oligopolistic markets, the kind of markets which breed anticompetitive business behavior.
Second, we think that in light of this prophylactic statutory purpose, a merger that occurs in a market which is still competitive in its behavior but which appears to be turning the corner into a situation of oligopoly it seems to be crystallizing as an oligopolistic market that deserves very close scrutiny under the statute.
And I'll explain that this was precisely the situation in Los Angeles on the eve of the merger where in this large market of 4000 competing concerns, eight had among them almost two-fifths of total sales and this is the level which students of industrial organization had deemed oligopolistic.
And furthermore, and very relevant here, this market share of the major firms had been increasing steadily for a substantial period of time before the merger and as we point out in our reply brief, this trend towards ever increasing concentration has continued steadily and uninterruptedly since the merger.
Now third, where in such a -- such an industrial setting a merger unites two leading sellers in the market, two of the handful major firms which have emerged with significant market shares and in doing so, the merger has contributed substantially to the concentration movement.
We think the statute requires that it'd be forbidden in the absence of a clear contrary showing -- a clear rebuttal to the government's case.
And I'll explain when I get to that point, the kinds of evidence that we think is admissible and relevant in rebutting the government's case.
I'll explain that the merger of Von's and Shopping Bag which united the third and sixth largest firms in this major local market, was the kind of merger which eliminates a -- one of the few market leaders and thereby substantially increases its concentration.
That's the kind of merger that should be forbidden unless the defendants can come back with some -- with a strong showing that the merger -- that the merger is in fact unlikely to have adverse effects.
And then finally, I'll try to show that appellees have not sustained their burden of rebuttal of the government's case.
Let me begin then by describing the relevant market, its history and structure and behavior on the eve of the merger.
Now, the Los Angeles Metropolitan Areas, Los Angeles and Orange County's, constitute a vast retail grocery market where the total sales of grocery stores and supermarkets run about two and a half billion dollars a year, which incidentally is as much as for example, the entire retail shoe industry in the United States.
This is just one local market, a local market which really dwarfs some whole industries that had been involved in previous Section 7 proceedings.
Now in a retail market of this size, one expects to and does find a large variety in number of competing grocery concerns and the District Court found that there were 4000 separate companies at the time of the merger and these are -- covered a considerable range in type of operation.
At the top you had the large supermarkets, for example, Safeway -- large supermarket chains like Safeway which is a large national chain, which has in Los Angeles many supermarkets throughout the Area, each one of them might do a substantial buy-in like perhaps $5 million a year.
These chains had Dun and Bradstreet's top financial rating which enabled them to at least base in shopping centers.
They had their own warehousing and trucking facilities so they could buy direct without going through middleman and these large chains which as I'll explain, included Von's and Shopping Bag, were able to advertise in the Citywide Media, the newspapers, because they had enough stores scattered throughout the Area.
Now at the other end of the scale, one has hundreds and perhaps thousands of very small stores, delicatessens, the corner grocery which in Los Angels are called Mom and Pop Stores.
These are often very small and with antiquated facilities and appointments, and inadequate parking space, but between these extremes, there's very large and a very small firms.
The evidence shows that there are -- there is a range, small chains prosperous independent operators and the record also shows that there is a certain mobility, an upward and downward mobility in this market that small firms can wax large.
They can acquire stores and build themselves into chains and then very often or sometimes a chain may over-expand and get into trouble and go broke.
There is new entries in this market.
There are new companies or enterprising businessmen who come in and then there are very many who leave.
The record clearly shows a long steady decline in the number of firms operating there.
Now, given this -- with this large variety and mobility of competitors in this market, there's unquestionably a certain competitive format.
Now, the District Court found that competition among the grocery stores and supermarkets, the Los Angeles Metropolitan Area is vigorous and we don't dispute that finding on this appeal.
Now at -- that the appellees seem to think that once we make this concession, once we agree that there was competition in this market at the time of the merger and for the few years thereafter which are covered in this record, we're out of court.
It seems to me that their brief is substantially devoted to the proposition that this was indeed a competitive market.
And we think this really is the beginning rather than the end of the Section 7 analysis because the Section 7 is really to be an effective preventive against the lessened competition which is associated with highly concentrated industries.
You can't force the government to wait in intervening in a merger movement until the market has ceased to be competitive.
The point for intervention is that point where the market while still competitive is becoming concentrated where there are signs that -- it is beginning to crystallized in a wrong sort of way and while we don't dispute the proposition that it may be very difficult in many cases to know when a market is in danger where its competitive structure is in jeopardy, we think this is a very clear case for finding that the market was in this state at the time of the merger that it was in a dangerous transitional phase towards undue concentration.
And hence it had reached a point in development where mergers have to be very carefully scrutinized to make sure that they are not moving the market towards this undesirable state.
Now the factors on which we rely for this initial proposition here that this market was in danger, if you will, on the eve of the merger is that the market share of a small group of large firms have been increasing steadily for the period of time covered in this record prior to the merger.
For example, in 1948, the eight largest firms had had 34% of total sales in development market and by 1958, that figure had reached 41%.
The share of the 16 largest firms had increased from 42 to 53%, the share of the 20 largest from 44 to 57%.
Now perhaps I should remark parenthetically at this point why throughout this proceeding, the government in presenting market share statistics has focused on particular years, 1948, 1954, 1958 and 1963.
The reason is simply that these were years in which the Census Bureau conducted a business census.
Now, market share statistics obviously can't be derived and are not reliable unless you have a sum total against which you compare the shares of an individual firm or group of firms.
You have to have what statisticians call a universe.
And in this case of course, the appropriate universe for computing the percentage shares of these major firms are total sales of the grocery stores and supermarkets in Los Angeles.
And since there are 4000 of them and many of them very small, and since the sum total is in the neighborhood of two billion or more, it's very difficult to gather these reliable universe figures.
Now, I don't think anyone disputes the fact that the Census Bureau is equipped to make these determinations, but once you leave census years for which you do have those determinations, you embark on a sea of uncertainties.
You are left with gross estimates and projections and guesses and samples of various sort and appellees have relied on some years, not census years, to show various market shares and we just want to remind the Court of the fundamental unreliability of market share statistics which don't have this census universe.
Now, having said that let me hasten to add that appellees own figures in general confirm the government's census data, showing this increase in concentration up to the time of the merger.
They have a table which is at page 2788 of the record which shows that between 1950, which was the first -- first year in that table and 1958, the share of the eight largest firms in this market increased from 33 to 39%.
Now, their table shows a falling off of some extent in 1959, but that was a year in which a strike closed the major chains in Los Angels while leaving the smaller stores open for a month and this caused a large diversion of business to these smaller fellows and distort the year's statistics on market share.
So however you look at it, the trend towards higher and higher levels of concentration is clear and as we point out in our relied -- in our reply brief, again using census figures, this trend continued after the merger until 1963, which is the last census year.
Justice Byron R. White: What would be the extent that you --
Mr. Richard A. Posner: Well, it's a little difficult to compute precisely because the Census Bureau had split the Los Angeles Metropolitan Area into Los Angeles County and Orange County.
But the figures show, for example in Los Angeles County, an increase from approximately 25 to -- give it to you precisely; Of the four largest firms between 58 and 63 in Los Angeles, their share arose from 24.6% to 30.3% and that would be the eight largest from 39 around it or from 40 to 43, and that of the 20 largest from 55 to 61.
Justice William O. Douglas: That's 20?
Mr. Richard A. Posner: 20, yes.
Justice William O. Douglas: Does your market in Los Angeles [Inaudible]
Mr. Richard A. Posner: Excuse me?
Justice William O. Douglas: The relevant markets complain with what Los Angeles may [Inaudible]
Mr. Richard A. Posner: The relevant market includes the two counties.
The census figures for 1963 split them to show them independently.
Now, my second point in showing that this was a market which at the time of the merger was urging an oligopoly was becoming dangerously concentrated.
It has to do with the level of concentration that had been reached at this time, and which we think was a formidable level of concentration where the leading firms had large market shares, bearing in mind that we're talking about a market of some $2-2.5 billion dollars in sales where even a 1% share is $25 million dollars which is no mean total for a firm to have.
And furthermore, in appraising these market share figures, we ask you to bear in mind that the appellees have urged throughout this proceeding that the economies of scales, economists discussed them in the grocery industry, are not great.
If you can be an efficient grocery company without having, without being an enormous enterprise with a great many chains, a small chain or even a single large supermarket operation should be efficient and so this was a market which could have supported a great many small firms without any large firms.
Justice Potter Stewart: It's hard to be efficient on small firms have to join some sort of cooperative buying arrangements.
Mr. Richard A. Posner: Yes, that's true and when they do so, they're able to buy some of their products at any event at the same price of the chain, but we don't attach anticompetitive significance to belong into a cooperative.
That's -- that is not a form of conglomeration or aggregation which has the anticompetitive implications of a merger because each member of the cooperative, sets his own prices and is an independent firm.
Now using the table which the District Court uses in its opinion, let me review the market positions of the major chains in 1958, using 1958 figures because that was the last year before -- the last census year before the merger.
Number one in this market was Safeway, a large national chain.
It had a $160 million in sales in 1958, and this gave it an 8% market share.
Number two was a local chain, Ralphs with a 6.4% share.
Von's was third, with 4.7%.
Shopping Bag was sixth with 4.2% and that was based on sales of $85 million.
The four largest firms had a total of 23.5%, and the eight largest, 39%, the ten largest, 44%, the 12 largest, 49.
Justice William J. Brennan: Is this combination put the combination first?
Mr. Richard A. Posner: Yes.
On a basis of this 1958 figures Von's and Shopping Bag had an 8.9% share, it was larger than Safeway's.
Justice Hugo L. Black: How about 1963?
Mr. Richard A. Posner: We don't know in 1963 because the census doesn't breakdown sales by individual firms.
We know the four largest, we -- there's no evidence in the record as to the actual position of Von's that year.
Justice Byron R. White: Do you know what the trend in is since 1958, at least the latest percentage figures in that essentially.
Mr. Richard A. Posner: We know the trend in terms of the group of four firms at the top.
We don't have a very good idea of the personal fortunes of Von's in this market.
There is -- the District Court made an estimate, that in 1960 -- that is when the merger actually took place, Von's market share was 7.5% which would put it slightly behind Safeway.
Justice Byron R. White: Is that -- is that a finding or it's finding that --
Mr. Richard A. Posner: It is a finding and again we point out that its reliability is impossible to verify because the universe on which this percentage was computed was based on guess work projection rather than on actual data gathered --
Justice Byron R. White: What's the -- what Safeway's history since 1958?
Mr. Richard A. Posner: I don't know Safeway's history since 1958.
Justice Byron R. White: Does it shares go up or down? You don't know?
Mr. Richard A. Posner: I don't know, It's share over a longer period of time, going back to 1948 has been down.
As we -- we've point out in our brief, Safeway, many years ago, had this Los Angeles area blanketed with stores.
I think at one point it had a thousand stores.
Many of them were very small.
I think this is an experience which is overtaken a lot of major grocery chains in this country like A & P.
When supermarkets became the vogue and became a very convenient means of shopping, some of these older chains were caught napping and they had a great many stores which were no longer very desirable.
And they would then make efforts to consolidate to get rid of stores to replace them with supermarkets and Safeway has gone through this kind of transitional stage and in the course of it its market share has apparently for not -- for not some --
Justice Byron R. White: It varies with Ralphs though -- if there is [Inaudible]
Mr. Richard A. Posner: We don't know, Ralphs would have been third on the basis of 1958 figures.
I think it was still third according to the appellees' estimate in 1960 where is today, we don't -- this record doesn't show.
Justice Byron R. White: Do you think the [Inaudible]
Mr. Richard A. Posner: That's right, the 1960 -- the census doesn't break down.
It doesn't identify the firms which were up top 4 or top 8, and it also doesn't release individual firm figures.
Justice Byron R. White: When was that --
Justice William O. Douglas: You get those sales from government's agents?
Mr. Richard A. Posner: Yes.
The way we -- the way the sales were obtained was that the government agents went to these companies and asked to look at their books or to have and make a computation of sales which were then checked.
You see, there's no real problem in getting sales for particular firms, that's not a problem.
The problem is in computing a percentage in market share by comparing the sales which you've gotten from the firm with a -- with the entire market.
And this is a market which has so many firms that it's difficult to compute this in reverse and that --
Justice Tom C. Clark: And that [Inaudible] about 83%, an increase of [Inaudible] which you --
Mr. Richard A. Posner: You could tell -- you would have to know something about whether the overall market was expanding or decreasing.
Justice Byron R. White: Well, could you -- did you say to synthesize the total market figures for 1963?
Mr. Richard A. Posner: Yes, but the record doesn't have figures for the individual firms in 1963.
Justice Byron R. White: When did the record close in this [Inaudible]
Mr. Richard A. Posner: There is some evidence, I believe as late as 1963.
Justice Byron R. White: 1964, 1963 or 1964?
Mr. Richard A. Posner: Evidence?
I think the last evidence is -- I'd say -- let me explain this.
The census data is not part of the record and we didn't rely on it as being in the record.
When the appellees in their brief cited some trade articles from 1955 and 1966 containing evidence for alleging that competition was becoming even more vigorous in this market, we thought it would be helpful to bring to the Court's attention some evidence tended in the opposite direction which being census data is -- of unquestioned reliability.
This Court has taken judicial notice of census data in antitrust cases, but we don't suggest that this data gives a firm indication of where of the particular fortunes of these individual firms.
Justice William J. Brennan: Well, did I understand you say anyway Mr. Posner that the trend toward concentration in terms of increased percentage of the market, without regard to where these changes individually fit, you did have statistics of this report.
That in other words, the first eight, or the first ten, of the -- you've been telling us eight had this percentage ten, the first 20 had that and so forth?
Mr. Richard A. Posner: Yes, there's no (Voice Overlap) -- there's no question -- pardon?
Justice William J. Brennan: But my question is where -- how up-to-date is that?
Mr. Richard A. Posner: That goes through 1963, because the Census made a copy to a special tabulation of the top 4, 8 -- I suppose down to 20 firms in 1963.
Justice William J. Brennan: And your point is that's not so significant where the respective firm stand in the first eight or ten.
As it is, that there's an increased concentration --
Mr. Richard A. Posner: Yes, well --
Justice William J. Brennan: In the sense of proportion of the market with those first eight or ten shares, is that it?
Mr. Richard A. Posner: Yes, absolutely, there maybe some shifting around in the rank of these firms probably --
Justice Byron R. White: Well Mr. Posner, wouldn't you agree though that it's the -- if between 1958 and 1963, the top 20 firms changed 100% that there might be some question about the -- whether there was any damage to the competition.
Mr. Richard A. Posner: As I think --
Justice Byron R. White: If none of the top 20 in 1963 were among the top 20 in 1958, it would be somewhat difficult to say that the competition was negative in that --
Mr. Richard A. Posner: Yes, I think that's true.
Justice Byron R. White: [Inaudible]
Mr. Richard A. Posner: I think if you had that kind of mobility, it would suggest a very competitive situation but no --
Justice Byron R. White: So what is the situation as among these firms, are they all in the same firms, they're like that?
Mr. Richard A. Posner: The leading -- I don't think the record contains complete information on this.
Some firms have built their way up to the top 20 over the period covered in the record from 1948 to 1958.
I know of no disastrous drops in firm fortunes.
There have been some firms in the top 20 which have gone bankrupt but they didn't split sundry into little firms, they were instead acquired by large chains from outside of the market.
So that the structure of concentration was (Voice Overlap) --
Justice Byron R. White: So you think roughly that the record would sustain the top 20 firms in 1963 or roughly the top 20 firms in 1958 or --
Mr. Richard A. Posner: I would not --
Justice Byron R. White: -- holds to it?
Mr. Richard A. Posner: There's no -- there's certainly no contrary indication but -- and I'm sure that it would be in this record.
I'm sure appellees would have presented that evidence as if -- because they did urge -- they did emphasize the fact that there had been some departures from the ranks of the top 20.
So I'd say that the record does support the conclusion that there has been substantial stability among the leading firms.
Justice Byron R. White: Among the leading firms and if they're -- and if the share of the top 20 that's increasing is the share of the same firms roughly --
Mr. Richard A. Posner: Roughly the same firms, yes.
Now in reciting these market share figures that we have on the basis of 1958 sales, I don't mean to suggest that this market had reached the tightly oligopolistic, highly concentrated stage of -- say, the Philadelphia Bank case, where two firms had 44% of the market, but there was -- there were -- I might say the storm warnings of oligopoly clearly off in this industry because when you have a market in which eight firms have more than a third and almost two-fifths of the total sales, this is already a level which economists and students of industrial organization who classify, who study markets over long range, consider oligopolistic, consider at the threshold at least of oligopoly.
So let me move from the background of the merger here to the merger itself.
The parties to the merger Von's and Shopping Bag were two of the leading firms, as I've already mentioned in this large market with 4.7 and 4.2% of total sales.
They had all the attributes of the major chains in this market.
They had their own warehouse unit, distribution facilities, they at -- they were two of the handful of chains who advertised in the major media, the Citywide Newspapers, and they were two of only seven chains whose prices were carried in a book that was widely distributed in this area called the competitive survey.
And this was a list of some 3000 shelf items, and the prices charged for each of them by seven chains, the theory being that these were the major companies in the market and these were the people whose prices you ought to know before you set your own.
Combined these merging firms had as I said, based on 1958 figures, almost 9% of total sales larger than any other firm and this was based on the total combined sales of a $185 million.
Now despite, if these figures, the -- or despite what I've said about these merging companies, there has been a suggestion in this case that this was really just a merger of small local firms.
Now Von's as a result of this acquisition, became a publicly held corporation whose shares are now traded on the New York Stock Exchange.
It's not in indiciam of local ownership.
It is moreover approximately the nation's 16th largest grocery chain now, and bearing in mind that this is a $50 billion industry and moreover and very significantly the parties have stipulated that Von's and Shopping Bag before the merger competed effectively with Safeway, a national chain with total sales are in the billions and which was the -- at the time of the merger, the largest firm in this market.
Von's as a result of this acquisition was catapulted head focusing on this local market of the major national chains that operate there like A & P, and Food Fair and Acme and so on.
So, in this particular pond, this very large local market, Von's became a very large frog.
And we think that so far as the policies of Section 7 go, they are concern with preserving competition in submarkets, not just in considering the nation as a whole, the size of this firm definitely raises the gravest antitrust questions.
And I might also mention in discussing the circumstances of this merger, the suggestion that Shopping Bag was in some sense in trouble and that's why I've made the -- quite sold that to Von's.
Now, there's no contention that this was a failing company or that it was anywhere near failure, it was making money, but nevertheless, its ownership felt that Shopping Bag's management was thin and that the company ought to be making more money and its ratio of profits to sales and profits to assets was lower than Von's for example.
Now it's clear certainly that one can't justify every merger merely on the ground that the acquired firm had some management difficulties.
Many of the largest corporations in this country certainly have had periods in which they were having some management difficulties and they weren't making quite as much money as they'd like to and perhaps even were sustaining loses, although that is not the situation here and there are many ways in which a company's management can be renovated and improved without being acquired by its major competitor.
And there's absolutely nothing in this record to indicate that the only way out for Shopping Bag, the only avenue of relief from its management difficulties which had somewhat impaired its profitability, was to be acquired by Von's.
Now finally to the impact of this merger; it eliminated a major competitive factor in this market.
I've already mentioned the party stipulation that Shopping Bag competed effectively with Safeway, the largest chain and there's no doubt that Shopping Bag was one of the majors in this market, it was regarded as such by those who watch the market, by those who distributed these price surveys.
So we are not concerned here with the merger, either between small firms or merger which takes out of the markets, nothing more than an insignificant run of the mine, marginal operator.
This merger removed as an independent competitor, one and perhaps half dozen or seven or eight firms which had emerged as the market's leaders and in doing so, the merger had a dramatic immediate effect on the structure of concentration in this market.
The Von's share -- the two largest firms, based as throughout on the 1958 figures, rose from 14 to 17%, and that of the three largest from 19 to 23%, of the four largest from 24 to 28%, and of the eight largest from 39 to 42.
And if we go back to 1948 to trace the growth and concentration in this market over a long period of time, suggestion of Professor Box, preceded the share of the eight largest rose from 34% in 1948 to 42% after the merger on the basis of the 1958 figures, and this we think is a very substantial increase.
Now having reviewed the government's evidence here let me try to suggest why we think that this is enough proof that a merger may have the prescribed competitive effects.
And when -- and in discussing this critical issue, I'll try to -- at the same time, a deal with appellees suggestion that standards which the government is proposing here really constitute a rigid and sweeping per se rule which would stifle business growth by a wholly preventing mergers.
I said earlier that I thought that appellees had based much of their argument and this is certainly a theme that pervades the District Court's opinion.
On the -- on a demonstration which was quite unnecessary, a view of our concession on this point, that this was indeed a vigorously competitive merger -- excuse me, vigorously competitive market both for the merger and after the merger.
They apparently then and so reasoning confined Section 7 to either policing industries which have already would come oligopolistic or prevent perhaps with preventing mergers which -- in a competitive market stifle competition so that whereas the day before the merger, there was lots of vigorous competition -- a day or a year or two after the merger, that competition has been stifled.
And they point as the proper applications of this Section 7, the previous cases in this Court which are by and large involved highly oligopolistic markets in Continental Can, in Rome Cable and in the bank cases, and even in Brown Shoe, the local shoe markets wherein a number of cases are rather concentrated to firms who might have 40% of the market.
In these cases however, the most vigorous merger enforcement couldn't prevent, couldn't head off oligopoly.
It's much too late for that.
The most you could do by vigorous enforcement of the Merger law was to keep open the possibility that if the merger rule was blocked for these large firms, natural economic forces might eventually push the market towards a less concentrated state.
Now in this case, we're invoking a more truly perhaps preventive, and maybe even a more constructive application of Section 7 and it's the rule that we think Congress particularly had in mind because Congress realized this theme is clear in the legislative history that many markets and industries in this country had become highly concentrated, a fate which Congress attributed in large measure to the inadequacy of existing law to deal with mergers.
And they plainly didn't want this kind of thing to be repeated in those markets and industries which weren't yet concentrated.
This means that the law is particularly concerned with what happens in markets which were still competitive.
Now this -- of course, it doesn't mean that all mergers are all horizontal mergers in such markets are bad, are forbidden because they might be the beginning of an undesirable trend.
Justice William J. Brennan: Now what was the standard you suggest Mr. Posner?
Mr. Richard A. Posner: We suggest focusing upon markets where -- while they're still competitive, they've began to turn the corner to oligopoly.
Concentration in industries --
Justice William J. Brennan: But then you mentioned 40% earlier as something on the economist field.
Mr. Richard A. Posner: Yes.
Justice William J. Brennan: What -- it's potentially or is in fact oligopolistic with it?
Mr. Richard A. Posner: Well I think economist would feel that in a market's that concentrated -- there's a chance that they'll have less than competition, but it's by no means certain --
Justice William J. Brennan: Well are you suggesting that we'd take some mathematical determination of that kind?
Mr. Richard A. Posner: No, we don't suggest that.
We have not rested our case entirely on the showing that this was a market in which the eight largest firms had 40%.
We suggest it's also important to look at the history of this concentration if it's been increasing, there's reason to believe that the 40% is not a stable level but then it's going to get worse, had it been declined from a higher level, there might be less reason for concern.
We do think that in this market, and without trying to set forth any precise quantitative test that it's clear in this market that it was entering a danger zone.
Now even in such a market to --
Justice William J. Brennan: Well, I confess I am still not quite clear as to what standard is you think ought to be applied.
Mr. Richard A. Posner: Well, we think the Court has to make two determinations in a case of this sort.
The first is, has the market so far departed from the atomistic state, the fragmented model?
That you can fairly say that there's a danger in concentration.
Justice Byron R. White: When is that?
Mr. Richard A. Posner: Well, it can't be fixed precisely.
No -- you have a spectrum here, on the one hand, obviously you have markets which are very itemized and markets which are highly concentrated.
No one can say what is the critical dividing point.
We are helped in this case by the fact that the market had reached a point of the kind that economists have regarded as a fairly reasonable dividing point and also, by the fact that this concentration had been increasing steadily over the years.
And we also pointed out in our brief, that the behavior of these firms was beginning to at least suggest the rudiments of oligopolistic behavior and that these firms had picked out -- the major firms had picked each other out as the rivals to be watched.
This -- this testimony that they were very conscious of what these other large firms which are -- and felt they had to remain competitive with them.
Now, if the first part of this standard is satisfied and if it's agreed that we have a market here which was in danger, which was becoming concentrated, we --
Justice William J. Brennan: May I interrupt this one?
Mr. Richard A. Posner: Sure.
Justice William J. Brennan: Danger, what do you mean?
Substantially -- how?
Mr. Richard A. Posner: A danger that if mergers are allowed to continue, this market within the foreseeable future will reach a state so clearly concentrated that there's no substantial hope for -- the digger of competition.
Now even in such a market, we don't mean to suggest that all mergers are proscribed.
We're not concerned here with a merger between two of the small firms in this market, the relatively small firms.
We're primarily interested in mergers which combine two of the majors in a market where a few firms have clearly emerged --
Justice Byron R. White: Mr. Posner, you say this market had turned the corner of the -- on the appellee, could you give me just say a brief run down on what the government's theory is in terms of what consequences flow from being able to label some market as oligopolistic?
I mean what -- I take it that it involves the idea that the fewer the competitors the less the competition?
Mr. Richard A. Posner: Well, this Court has assumed and has said many times that in a situation in a market where a very few firms have very large market shares, the prospects are for that well as the Rome Cable case said, hollow policies have mutual advantage rather than competition will emerge.
Now we don't for a moment suggests that this market had reached that point, but the trend in the market was such that if there isn't vigorous, governmental intervention in the merger movement in that market, it's going to reach that point of high concentration.
Justice Byron R. White: As a -- and what?
High concentration and what?
Mr. Richard A. Posner: High concentration is very likely though admittedly not certain to result in a diminished vigor of competition.
Justice Byron R. White: Well see -- price competition is diminishing in the price competition?
Mr. Richard A. Posner: I think the basic theory would be the price competition is much less likely.
If you have firms that are so large that a price cut by one is going to eat into the other fellow's market share so substantially that he's got to retaliate.
As soon as firms make this kind of calculation as to their major rival's response, they're not likely to be price initiated.
Now it's possible, and in fact it's very common in these industries, that rivalry is channeled into other non-priced direction such as very heavy advertising, in the soap industry for example.
But this kind of competition, in itself may have bad consequences.
It may make a very difficult for small firms to come into the market.
They can't match these huge advertising expenditures.
This is the end of the --
Justice Byron R. White: Of course, you don't suggest that sale in Los Angeles do you, about new entry?
Mr. Richard A. Posner: Let me take up that point then.
We don't suggest today that entry is difficult, but we do think that this factor of entry doesn't offset the adverse effects of this merger and in two – the entry can be relevant in two respects in evaluating the effects of the merger.
First, if you had a lot of entry, it may be that no firm and no small group of firms can obtain a large market share.
The influx of new competitors keeps eroding their share.
Now this -- this factor is fairly not relevant here because the history of this market for many years shows that concentration has increased, that the dominant firms have obtained ever larger shares of the market.
The reasons --
Justice John M. Harlan: And you're saying new firms haven't become dominant themselves?
Mr. Richard A. Posner: It is -- I don't think any new firm has reached that high into the top 20 but firms have grown -- that is there is successful entry, but it's more than over balanced by exit, by bankruptcy, by acquisitions because though you have new firms coming in, you have many more firms exiting and that's why year-after-year the number of firms in the market decreases and the market share of the top echelons increase.
That's one element of entry.
The other is, it is theorized that the threat of new entry constitutes a restraining influence on the behavior of the monopolist or an oligopolist.
The theory goes that he's afraid to raise his price, say the monopolist, he's afraid to raise his price too high because that will make it very attractive for other firms to come in and take his business away from him.
Justice Tom C. Clark: You don't have the business firms [Inaudible]
Mr. Richard A. Posner: I believe we don't have statistics on a number of firms that have come in.
We have the difference between the number who come in and the number who leaves which is the net decline for a year.
It is clear I think from this record, that many of the firms would do come in, do so on a marginal basis.
It's a lot easier to open a small grocery store or delicatessen than it is to open a $2 million a year supermarket.
Justice Tom C. Clark: The entries decline abridgment?
Mr. Richard A. Posner: We don't know whether entry has been declined but the total number of firms has been declining which suggest that the balance of exit and entry very much favors exit of lots of firms.
Now with regard to this possibility that when the day comes, if it does come, that this market is highly oligopolistic.
It is conceivable that no entry might exercise some kind of control on how these powerful firms exercise their power and they may be somewhat limited by theory that it may abuse their power or exploit their power, it will be -- it will invite new companies to come in.
All I can say about is that is -- that it is a highly speculative possibility which presupposes that if this market is allowed to become more and more concentrated.
The difficulty eventually will remain unchanged and I think that's very unlikely.
I think if the day comes that two or three chains have very large shares of this market have hundreds of supermarkets spread throughout the area, have preempted the choice locations, or have blanketed the area with advertising, it seems to me entry by new firms will be substantially less likely and less and the prospects would be less inviting.
That's why we don't think that in this case, appellees have successfully rebutted our affirmative case by their references to entry.
Chief Justice Earl Warren: Mr. Alsup.
Argument of William W. Alsup
Mr. William W. Alsup: Mr. Chief Justice, and may it please the Court.
It always happens to me when I prepare a little outline and I never get to use it.
I would like to answer a number of questions which have been posed.
The last question from Justice Clark was whether or not we have statistics on new entries and the answer was -- if he did not believe we do.
The -- excuse me to say I've argued this case many times at night, I didn't think I would have -- I could take my voice in the day time.
Justice Tom C. Clark: Always argue better after the argument? [Attempt to Laughter]
Mr. William W. Alsup: We have considerable evidence concerning new entries.
As a matter of fact there were 260 new entries as I recall in 1960.
There was a net decline of a 132 stores.
Now counsel attached considerable importance to the number of decline.
The number of stores have declined over the years, but it seems important to me that we look at what did we lose by the decline?
Now the 1960 staff report to the Federal Trade Commission, pointed out that there was a decline in the number of stores from 19 -- nationwide, from 1939 to 1954 of over a 120,000.
That every stores to the Federal Trade Commission in that group that went out saw less than 50,000 gross sales a year and when we look at our Exhibit D, which is in the record at 2529, records (Voice Overlap) --
Justice William J. Brennan: That's part of the [Inaudible]
Mr. William W. Alsup: It's volume five Your Honors.
Justice Hugo L. Black: Thanks to Justice Brennan.
Mr. William W. Alsup: This is a letter from the State Board of Equalization and all of these are not all closings because the number -- they count as a closing or transfer from one to another.
The figures there are simply astounding.
They show 69 closings in the year 1960 of grocery stores selling no more than $10,000 a year.
They show 98 closings of grocery stores with total sales of less than 20,000 a year.
They show 269 closings with sales under 150,000 a year.
Now even if you assumed that operator could make as much as 10% return as against the 1.5 to 2%, for the average supermarket or chain, assuming he could make 10% that would net that man only $5000 a year.
I might add that the 1960 staff records the Federal Trade Commission or did plan out with oligopolistic client that talk about, was in stores doing less than 50,000 a year, nevertheless stores with sales of 50,000 to 299 increased from 32,000 to 95,000.
Those with sales of 300,000 -- excuse me, to 999,000 increased from 1400 to 15200.
And those with sales of 1 million and over increased from 59 to 6242 in this 15-year period the Federal Trade Commission was talking about.
Obviously, the decline in numbers of which the government is concerned here, was in the stores which they themselves in their brief, at page 31, refer to as technologically and competitively obsolete.
But despite the decline in the numbers of stores in the Los Angeles County, the fact is and the Court found, each household in the Los Angeles Metropolitan area, has a choice from three to ten stores within convenient shopping distance.
Justice Tom C. Clark: What significance do you put on the exits?
Mr. William W. Alsup: On the exits?
It's my feeling Mr. Justice Clark that I attach to the competitive market, is not only ease of entry and that's demonstrated by this record, but also ease of exit.
The entrepreneur opts to be able to sale and get out of the business if in so doing he does not injure, he's not likely to injure competition.
I attach no real significance to the decline in a number of technologically obsolete grocery store.
In that connection, I might mention Justice Clark that counsel referred to the fact that Safeway's market shares declined over the years and that's true.
And they say that because they were converging from small stores to supermarkets and non on recurring factor they say.
Well I don't see it why the convergence would reduce Safeway's market share.
As a matter of fact, Godfery Lepore and Chainstorage points out in 1959.
AMP had 15,000 grocery stores in the United States and did $1 billion gross business.
In 1962, they have 4000 and they did 5 billion a year in business.
Now, the Federal Trade Commission staff report to which I've referred points out that AMP's market share has remained constant nationwide and at roughly 10% of the market.
They say the Safeway decline is a nonrecurring factor.
We demonstrate and the record shows, Safeway's market share declined because of the vigorous small competitors who are aggressive who have taken the market share away from Safeway and there are certainly nothing here in this record which would indicate that that's a nonrecurring factor.
Justice Byron R. White: But if the -- what do you say about the identity of the top eight and the top 20 firms in the last 15 years?
Mr. William W. Alsup: There's a considerable change Mr. Justice White.
The top 20 in 1958, three were Fox Markets, I believe it was rated eighth or ninth.
McDaniel's Market which held the 11th position and the Airway Market which held the 20th position.
In 1961, all three of those firms were in bankruptcy.
Seven of the top 20 firms in 1960, were either not in existence at all or had only one store in 1952.
Another person who understands the economics much better than I did do, despite having served once with the temporary Master in Economic Committee on which Justice Douglas served, had pointed out that this shift in range is every fifth as much a valid indication of the workability of competition as concentration ratios themselves.
Now our counsel makes much of the fact that --
Justice Byron R. White: Well, how about the -- what about the public served in 1958, have served the top eight [Inaudible]
Mr. William W. Alsup: Excuse me, I -- I can't honestly say with the exception of Fox, that there's been any change in the identity of the top eight firms in 1958 as compared to 1963.
Justice Byron R. White: And does the top 20 through 1958 and 1963?
Mr. William W. Alsup: Top 20 from 1958 had considerable change primarily due to the bankruptcies of Fox, McDaniel's and [Inaudible]
Justice Byron R. White: It's not at the top eight?
Mr. William W. Alsup: Not at the top eight Your Honor.
But there were changes in market shares of the top eight.
Justice Byron R. White: Yes, among themselves or --
Mr. William W. Alsup: Among themselves on the basis of the 1958 statistics that counsel relied upon, if this merger had taken place in 1958 instead of 1960 then Von's would have ranked first ahead of Safeway in terms of market share with 8.9.
We have the actual sales figures for 1959 and for the first six months of 1960 which we can project that in the case of Safeway's market share in 1960 was 7.9 or 8%.
Von's market share was 7.5.
Justice Byron R. White: But you do say that the -- I gather that 1958 to 1963 the top eight remain the same -- then they say there the total market shares.
Mr. William W. Alsup: There total market share declined Your Honor.
Justice Byron R. White: Declined over these five years?
Mr. William W. Alsup: Yes Your Honor.
Justice Byron R. White: Now where is that?
Mr. William W. Alsup: Exhibit A Your Honor, page 2788.
Justice Hugo L. Black: Page what?
Mr. William W. Alsup: 2788, Mr. Justice Black.
Justice William J. Brennan: Now that's in Volume what, 6?
Mr. William W. Alsup: I'm sorry, that carries only to 1960.
It does indicate the change between 1958 and 1960.
Top three as a consequence of this merger increased from 19% to 21.5%.
The top eight, from 41 -- I'm sorry, 35.8 to 41.3.
Top 20, from 54.3 to 53.9 there was a decline.
Justice Byron R. White: These are the only figures from 1963?
Mr. William W. Alsup: We did not have them Mr. Justice White.
They were not available.
We put into evidence however, what we did have as of March 1964.
I think Justice Clark inquired what was the latest date that evidence was introduced concerning this case.
There's a stipulation in the record concerning certain facts, including number of stores and so forth and that was introduced in March of 1964.
Justice Byron R. White: Where is that?
It doesn't relate to this question of the relative shares --
Mr. William W. Alsup: It does not relate to the question of relative shares Mr. Justice White because we did not have that.
Now, Mr. Posner very correctly said and I agree with him 100%, that market shares are not reliable unless we have a reliable universe by which to determine the measurement.
And I couldn't agree more but in the reply brief which was served upon us on Friday afternoon, that's exactly but counsel for the government have done for us.
They say that the market share of the leading concerns has increased on the basis of some new census figures just made available to them.
But those are census figures just for Los Angeles County, not the aggrieved section of the country which is Los Angeles and Orange County.
Justice Byron R. White: Suppose they have it both?
Mr. William W. Alsup: The do not, they say in their brief Your Honor.
So that shouldn't make any difference anyway because Orange County accounts for only 10% of the total grocery sales for the two.
So, it really doesn't make any difference if we change the universe.
With that respect and we suggest that makes a great deal of difference.
For example of what Von's 64 stores after the merger with Shopping Bag.
In 1960, only four were located in Orange County.
Alexander's which was one of the top 20, and this is demonstrated for the record in the affidavits, had 15 stores in 1960 and only one of them in Orange County.
Hughes Markets, I forgot the exact figure but it's 12 to 14 markets in 1960, none of them in Orange County and the same thing as to of Shopper's Markets.
So when you increase the market share -- if a firm for example had 2% market share in Orange County, that in -- the L.A. Metropolitan area consisting of both counties, but no stores in Orange County, then obviously if you eliminate Orange County as part of your universe, we're going to increase concentration.
We just don't think that is the proper approach to this problem.
Justice Tom C. Clark: Who took over the majority of the 14 independents between 1961 to 1964 that merged?
Mr. William W. Alsup: The ones referred to in the appendix of their Mr. Justice Clark?
Justice Tom C. Clark: I see here on the first page of their reply brief, they said between 1961 to 1964, 14 independent supermarket operations of small chains.
Mr. William W. Alsup: Well, this is another case of inaccuracy that always results Mr. Justice Clark when you take statistics from the Federal Trade Commission without knowing a mark of facts.
There is a list of the so-called 14 independent markets taken over or concerns, has contained in the appendix at page 5 of their reply brief.
Justice Tom C. Clark: That's it.
Mr. William W. Alsup: The first name listed is an acquisition of Alpha Beta by Acme.
That was a market extension merge and presumably that didn't changed concentration.
The third one shows an acquisition by Food Giant Markets of nine McDaniel's Stores in 1961.
The McDaniel's was in bankruptcy in 1961.
It was not in existence in 1964 and yet the chart shows down in 1964, Food Giant took over seven McDaniel's Markets.
Well the facts are and everyone in the industry in Los Angeles knows, Food Giant agreed to buy this nine McDaniel's Markets out of bankruptcy in 1961 and then wanted to get out of the deal, and that fought and fought.
And finally, it was stuck with taking seven of the nine in 1964 that there's a double counting, then may show an acquisition by Mayfair Markets of a single Eurway Store.
That again was an acquisition out of bankruptcy when Eurway went under.
It shows an acquisition by Mayfair of a single store from Alpha Beta.
Well that's a single store acquisition from one of the leading ten chain -- by one of the leading ten chains from one of the leading ten chains, and I don't see how that changed it's concentration.
Moving down and just charge it out of the record, I hope I may tell what is common knowledge in the industry.
It shows in acquisition by Ralphs Grocery Company of Imperial Supreme Markets.
Imperial Supreme Markets was a discount store and Ralphs was interested in finding out that it'd be worthwhile again into the discount business.
It took over that store for a few months and then disposed of it.
The next acquisition of course is a market extension by Food Fair taking over the back -- the remaining stores of bankrupt Fox Markets.
Most of the Fox Markets went to single store operators and smaller chains but Food Fair got the Nuclease.
Justice Tom C. Clark: Food Fair is not in the 1915, isn't it?
Mr. William W. Alsup: That's a -- pardon Your Honor?
Justice Tom C. Clark: Food Fair is not in the first ten, isn't it, in 1958?
Mr. William W. Alsup: Food Fair was not doing business prior -- in this area at all Mr. Justice Clark, prior to its coming in and taking over the remaining Fox Markets out of the bankruptcy --
Justice Tom C. Clark: That's where they've got --
Mr. William W. Alsup: That's right.
Justice Tom C. Clark: That's where it goes.
Mr. William W. Alsup: Same with Kroger, same with Acme.
Justice Tom C. Clark: They all started that year.
Mr. William W. Alsup: I think the Food Fair was really 1963 but before that for several months, they had been operating for the bankruptcy trustee, the markets, while I guess their entry was in 1962.
The Kroger acquisition of Market Basket I believe was late 1962.
Justice Tom C. Clark: That's their first entry.
Mr. William W. Alsup: That's their first entry.
Justice Tom C. Clark: They had two entries by large nations in those two years.
Mr. William W. Alsup: Yes, three as a matter of fact in the three years.
And then when you look at the --
Justice Tom C. Clark: Acme is the other one?
Mr. William W. Alsup: Yes.
Then you look down further and see Albertsons getting Greater All American.
As evidenced in the record that All American started out in 1953, grew rapidly, had financial problems and believe me they did and they sold out to Albertsons which are not previously done business in this market.
Justice William J. Brennan: Is Albertsons the largest national chain?
Mr. William W. Alsup: It's a western chain Mr. Justice Brennan.
It's in Idaho, Washington, Utah and now California.
Chief Justice Earl Warren: Well recess and then resume.
Mr. William W. Alsup: -- 47 and 48, at page 3079 of the record Mr. Justice Brennan, Volume 6 --
Justice William J. Brennan: What's the volume --
Mr. William W. Alsup: Volume 6.
I guess I almost needed a caddie to help me bring the record up to the -- the Court.
That indicates that records of the State Board of Equalization show the 19 -- in 1960, 128 grocery stores were opened in the L.A. Metropolitan area by concerns which apparently were new entrants.
In the same year, there were a 119 openings by concerns operating at least one other store.
The next finding I think is of particular significance, 18 of the 30 government industry witnesses who are called to testify in this case and ten of the defendant's industry witnesses commenced their present business subsequent to the year 1948.
Unlike Philadelphia Bank Mr. Justice Brennan, these industry witnesses gave solid reasons in our opinion to support their conclusions that this merger was not likely at all substantially to lessen competition or tend to create a monopoly.
Justice Byron R. White: Would you feel that the government's position requires this Court to take issue with -- that we agreed to take issue with any findings of the District Court other than just solve them a conclusion about effect on competition?
Mr. William W. Alsup: I'm not sure it would Justice White --
Justice Byron R. White: Do you think you agreed on the basic facts of --
Mr. William W. Alsup: No, I did not think so.
Justice Byron R. White: Well, you may not be but do you -- the government and you have any disagreement with regard to any of the findings of the District Court?
Mr. William W. Alsup: As I recall our brief Mr. Justice White, the only finding they took issue with, in addition to the ultimate conclusion, was finding 80 which appears at pages 3087 and 3088 of the record, Volume 6.
I think their brief states that this finding was prepared by counsel, it was not mentioned --
Justice Byron R. White: Which finding is this eight --?
Mr. William W. Alsup: 80.
It said that finding was prepared by counsel, it was not mentioned in the Court's opinion.
But they do not mentioned as if the Court had a full two-day hearing to settle the findings in which objections, numerous objections were raised for the government to many findings including this one and the Court made this finding.
Mr. Justice Brennan, you inquired whether the merger made Von's first.
On the basis of 1958 figures, assuming their accuracy, the answer would be yes.
They would then have had 8.9 if the merger had taken the place then instead of two years later, that's finding 74, record 3084.
But on the basis of 1960 figures when the merger did take place, Safeway had 8% and Von's had 7.5%.
Now, the government criticizes our use of other than census figures.
But the fact is, the figures we used were obtained by the FBI -- and from the 38 leading chains in the area and turned over to us by the government pursuant to court order.
The affidavit of Gerald Harrison, record 896, indicates the work that he did in collecting actual sales figures.
We say the actual figures obtained by the FBI coupled with a stipulated market of 2.5 billion in 1960 and what they say were Von's-Shopping Bag combined sales of almost 100 million would produce a market share if that's correct, of only 7.2% for Von's and Shopping Bag.
They variously referred to our market share as 8.9%, 9% and almost 10%, but we suggest they can't have it both ways, they've stipulated to the 2.5 billion in area sales.
We know our sale -- the Von's-Shopping Bag sales for less than a 180 million and that does as I say brings down to 7.2%.
Justice Tom C. Clark: So they've been operating -- they didn't just cover the operation [Inaudible] operation?
They've been together now --
Mr. William W. Alsup: Yes they do, Mr. Justice Clark.
A motion for a temporary restraining order was made on March 25, 1960.
That was denied on March 28, 1960 and the merger took place.
The government filed a motion for a preliminary injunction to require that the two firms, be operated as if they were separately and that was denied by order dated June 1960, I don't have the exact date.
They have operated as one unit since June of 1960.
Justice Tom C. Clark: They call this Von?
Mr. William W. Alsup: They now call it Von's-Shopping Bag or Von's' Shopping Bag, I'm not sure.
Now, the question really is what was lost by the merger?
And what was lost was a single local chain which had grown from a one-store operation in 1930 to a 38-store chain in 1960, 36 of those were in the relevant section of the country and had approximately a 4% market share.
What were -- remained as competitors, were five of the sixth largest national chains that's covered in finding 75 to 77, two multi-state chains, Lucky Stores and Mayfair, 17 regional chains, that is local, having ten or more stores and I might add seven of those 17 where new entrants after 1952, 126 other chains and some 3700 single-store operators backed up by huge cooperative buying organizations, Certified Grocers of California and Orange Empire Cooperative.
The origin and the growth of these cooperatives is very interesting, we believe.
It's traced in the findings, at record 3074 to 76, findings 29 to 38.
Before I trace that I would like to mention one thing Mr. Posner said, he said, “Well ever there's no need for these two concerns to merge because we admit both Von's and Shopping Bag before the merger could compete effectively with Safeway” and we certainly did admit that.
There wasn't any question about it, nor is there any question on the basis of this record and the testimony of the industry witnesses are very representative cross-section of whom we think we presented that the single-store operator can compete effectively with Safeway because by a membership and a retailer-own cooperative buying organization, they get these groceries on the shelf just as cheaply as a direct-buying chain.
We say, the single-store operators, the two-store operators, the two to nine store in the regional chains are all substantial competitive factors.
As a matter of fact, one of our witnesses, Mr. W. H. Crawford, who runs a single store in El Monte, surrounded by stores of major chains, and other concerns was I asked, well can you compete effectively with this larger chains on the discount houses?
And he said, “The question is not whether I can compete with them, but whether they can compete with me.”
I think the record fully bears this out, because of their buying expenditures, which put them on terms of equality with a large direct-buying chains, a single-store operator has many advantages which a chain does not and the industry witnesses list these.
It includes personal on the scene management, something which most of them say is much more effective than they can get out of a chain store manager.
It includes greater flexibility.
They can make a change in prices or some policy in a matter of minutes, whereas the chain store manager has to go through channels.
They have an opportunity too and they all testified to this fact, take a more active role in the community affairs, and let's get well-known and develop a loyal patronage.
Justice Byron R. White: Well are you suggesting that would be more vulnerable as it would be -- that the situation would be more vulnerable if you acquired a single-store than if you acquire a chain?
Mr. William W. Alsup: Yes.
And that surprised me Mr. Justice White, that the concession in the government's brief, not a single store, I don't think that would amount to a substantial lessening in an area marked by thousands of competitors.
But it did surprise me that the government would suggest in its brief that if Von's have gone out and purchased the stores of 36, single-store operators, that would be less objectionable than the acquisition of Shopping Bag.
I don't think the record would bear that out.
Justice Byron R. White: Would you take issue with the government on this basic idea that the -- if you are the competitors to less the competition?
Mr. William W. Alsup: I would not take issue with that, no, Mr. Justice White.
Justice Byron R. White: Well you think there's -- there's come a point in the market where there's sufficient concentration that the -- there's a danger of injury to competition from an acquisition by one of the (Voice Overlap) --
Mr. William W. Alsup: I'm sure at some point -- point in time Mr. Justice White that undoubtedly would result. Now, whether it would result in the grocery business, I don't know.
Casing that further --
Justice Byron R. White: You think it's less -- that you think it's less likely that there will be vigorous competition among a few large competitors than among many smaller ones?
Mr. William W. Alsup: Well, generally --
Justice Byron R. White: Do you agree with the government on that?
Mr. William W. Alsup: In general I would agree of what you have just a few large competitors where they might be concerned about their own act in retaliation by the competitors.
There might be a tendency not to engage in vigorous price competition, I wouldn't quarrel with that.
I doubt very much if that whatever occur in the grocery business.
As so many economists and students of the retail grocery business have pointed out it'll mean -- as A & P case, both published in 1959 and others have indicated that if the grocery business ever got to the point where large concerns decided that they wouldn't engage in vigorous price competitions, they were very quickly seized being major concerns.
Ease of entry is one thing which certainly characterizes this market and if the chains contrary to counsel suggesting ever decided that the game of price competition was not worth the candle, I have no doubt they would very soon cease being the leading chains because we have just too many small vigorous, aggressive competitors who can compete on terms of equality with the stores and the major chains, or the chains ever to dare get so complacent --
Justice Byron R. White: So you do say that this concept of the government this has no place in the grocery business?
Mr. William W. Alsup: It does not have but it certainly as applied to the Los Angeles market Mr. Justice White.
I know that market well and I think what distinguishes this market above all other markets, perhaps or at least many of that markets because I'm sure there's strong cooperative elsewhere is the ability of the single-store operator to get his groceries on his shelf, just as cheaply as the large direct-buying chain.
Justice William J. Brennan: Just tell me Mr. Alsup, is that combination of Sparkle and Certified -- that total figure, is that all this market area with 1000 counties, about 3757 (Voice Overlap) --
Mr. William W. Alsup: -- that it is now in this market area Mr. Justice Brennan, they go up as far as Bakersville, I think they even have a few members in (Voice Overlap) --
Justice William J. Brennan: But you say most of them, what's that mean?
Mr. William W. Alsup: The great bulk according to officers.
Justice William J. Brennan: So the 3700 total, if you don't know what that means, 2500 was --
Mr. William W. Alsup: No, it would -- I'm sure but at least 2500 but that would be a speculation.
I do not give the names and addresses of their members.
But I think it's important and the district judge attached great importance to the testimony of Mr. Campbell Stewart, the former president of Certified and at that time a consultant to Certified.
And also, I might add the testimony of the Chairman of the Board of Certified, the great bulk of the Certified Grocers business is made up of the smaller competitors.
If the smaller competitors are hurt, Certified is hurt.
If the major chains could dominate the market, Certified would be most certainly hurt and yet Mr. Stuart testified, he saw nothing anticompetitive in this merger, nothing that would prejudice with competitive opportunities of the smaller grocers.
Now the growth as I said of Certified has really been phenomenal.
It is now the largest retailer-owned cooperative buying organization in the world.
Membership is open to anyone.
That's the result as I said this single-store operator can compete on equal terms.
In 1958 -- 1948, I'm sorry, Certified's wholesale sales to its members were only $87 million.
In 1962, they amounted to $345 million.
The growth of Orange Empire, another major cooperative in the area, has also been spectacular.
It has a thousand members and here again Mr. Justice Brennan, not all can find Los Angeles and Orange County.
In 1945, its wholesale sales to its members were less than $13 million, and in 1962, there were $321 million.
And the various witnesses testified that the services of Orange Empire to their members is every depth the same in quality as a service that Certified give this -- gives its members.
The nature of Certified in the many and varied services, which it provides for its members in addition to getting them their groceries and on prices comparable to those of the chains, is described in its annual report from 1962 which we have placed in the record, it's Exhibit AU.
Justice William J. Brennan: Management services [Inaudible]
Mr. William W. Alsup: Considerable management assistance Mr. Justice Brennan, advertising layout, they have the very modern electronic data processing system.
They keep their member's advised as to possible shortages, a game for them -- advertising allowances by suppliers, a whole range of services in addition to getting them their groceries at proper price.
Justice Byron R. White: Well what percentage does this market did Certified's members sell?
Mr. William W. Alsup: We do not have that figure Mr. Justice White, but it must be very, very substantial.
I have seen figures which indicated that next to A & P and Safeway, nationwide Certified Grocers, wholesale purchasers are greater than any other organization, retailer fine organization.
Justice William J. Brennan: Well, we do know don't we -- the percentage of the two and a half billion n the small retailers among them have.
Mr. William W. Alsup: Yes but that -- we could make a rough approximation Mr. Justice Brennan but --
Justice William J. Brennan: That is why I was asking earlier.
How far -- how many of them Certified and Sparkle represented?
Mr. William W. Alsup: I'd say the great bulk of the smaller operators with the possible exception of small Mom and Pop stores that -- the figure is complicated somewhat Mr. Justice Brennan because some of the leading chains are still members of Certified.
As a matter of fact, the finding is that the great bulk of today's leading regional chains got their start in this area with nothing but one store and a membership in the Certified Grocers.
Justice William J. Brennan: I supposed membership is not open to anybody.
Mr. William W. Alsup: Membership is open to anyone.
Justice William J. Brennan: It is open?
Mr. William W. Alsup: It is open to anyone.
I should add, whoever applies must make this two-week grocery deposit in advanced and an interest is paid on that deposit, but Certified's annual report indicates very substantial returns in a way of rebates and earnings that are paid back to the members each year.
Now, counsel and we in our briefs have had some argument or whether the market is a hoped lose oligopoly is a state or atomistic as we state, I don't think it's an important matter.
We think under the case and in turn the definition were correct for this atomistic, but I'm certain that this Court is not going to decide the case on the basis of labels such as that.
Justice William J. Brennan: That we did not even do so.
Mr. William W. Alsup: Well, I know Justice Cardozo, I have frequently read his opinions criticizing the tyranny of labels that --
Justice William J. Brennan: The market certainly is not oligopolistic and it certainly doesn't act like one.
Before and after the merger, vigorous price competition has characterized this market.
The findings are clear on that.
In Government Exhibit 24, which is unprinted, shows the advertisements of competitors of Von's and shows a numerous advertisements on many and varying products all the time.
Counsel suggests that major chains were on their way to the so-called interdependent price competition but certainly I think if you look at the Government Exhibit 24 under -- unprinted, you will see it cannot possibly do the case.
They rely upon a statement of Mr. Hayden of the deposition, the former president of Shopping Bag, that we can't get more from our -- for our product and the other fellow, but obviously, Mr. Hayden was referring to shelf and not advertise prices and the advertised prices as you will see from that Government Exhibit 24 range all over the lot.
And the trial court, at least that testimony from the president of Von's, a Mr. Ted Von der Ahe, that there isn't much further that the chains or anyone else can go on price reduction without going on a severe austerity program.
And government counsel inquired of Mr. Von der Ahe at the trial, this is from record 1344, “Based on your experience are rival chains trying to cut prices today?”
Answer, “Certainly, they are.”
Mr. Coyle, no more questions Your Honor.”
Now government witness Palmer, industry witness Palmer, I might add in 1946 at the age of 26, from the total assets of $16,000 entered the grocery business by purchasing a half interest in a small grocery store in Hollywood and now is the president of a four-store chain doing an annual gross business of $6 million a year.
He did complain about Von's price reduction in 1961.
His complaint was still going on in 1963, when Von's “slashed prices permanently on 1000 items”.
He testified that Von's was a better -- or Shopping Bag was a better competitor than Von's because its prices were somewhat higher.
That this witness nevertheless also testified that he could meet the Von's reduced prices and did so meet them, without suffering a loss in their profits.
He just cut his overhead and he also testified that that enabled the grocery stores in this area to become more competitive with the discount houses which as the record shows and our brief points out is a very new, very vital competitive force in this area.
I thank you.
Chief Justice Earl Warren: Mr. Bison.
Argument of Henry J. Bison Jr.
Mr. Henry J. Bison Jr.: Mr. Chief Justice, honorable members of the Court, may it please the Court.
We're here on behalf of the appellees, and we're asking that the judgment of the lower court be affirmed.
We feel that this case is a meritless case.
Nevertheless, notwithstanding, we attach great importance to the effective enforcement of the antitrust laws and most specially Section 7.
We do not want to see these laws dismantled, word by word or page by page.
This is the first instance of our disagreement with the government and we have in our previous case, tendered as a friend of this Court on behalf of the government and with I hope what's pardonable in modesty, we say we come here with clean hands and warm heart for antitrust.
Our disagreement has to do with means, not ends.
Chief Justice Earl Warren: It has to do with what?
Mr. Henry J. Bison Jr.: Means.
Means of accomplishing --
Chief Justice Earl Warren: Where?
Mr. Henry J. Bison Jr.: The protection of the competitive system.
We are in agreement with their mean -- with the end but in disagreement with the means by which they are carrying the statute out in this particular proceeding.
We represent Your Honors the independent grocers and the independent supermarket operators.
Roughly that is -- those stores between one and ten units.
They are all local operators, Your Honor.
They all operate in one market.
Now, they can be significant.
They can be in fact large, in terms of the government's standard here, which has to do with percentage of total sales in a market and depending on the market, depending on how large it is or how small it is, a single-store operator or multi-unit store operator, an independent supermarket operator, can be substantial in a market.
And they are, because we have before us in this case, where the acquiring firm had only 4.7% of that market, and the acquired firm had only 4.2%.
Now, the merged firms, the new firm had 7.5%.
Now there aren't many independent operators in smaller markets.
They can have 7.5% of the market and therefore, this brings us to the point.
I have only a short time remaining and I would like to come to the key issues to what we think this case involves and Your Honors, the key issue here is the standard is wrong.
The standard, the premise for which the government raise this case and by which it pursues it, is wrong and as a result the conclusion is wrong.
Now we say it's wrong and I'd like to offer this conclusion so you can judge the merits of our argument as we move along because I think it's most important that you question everything we have to offer.
We are saying it's wrong because it disagrees with the policy of the statute.
We're saying it's wrong because it will not protect the competition, prevent oligopoly and prevent monopoly par but it will actually be create it.
We are saying this is wrong because it will injure the growth and the development of local independent supermarket operators in competing against larger firms.
We are saying it wrong because it injures local control, which we have in this market, in many markets.
We are saying it's wrong because it may require the disapproval of future mergers by independents having similar market shares.
We are saying it's wrong because it closes the merger route, because it closes the horizontal and many, many of the independent operators have very little interest and very little capability to engage in a conglomerate, a market extension mergers or in a vertical.
They're not only interested in staying within their product market and within their geographic market.
So by applying this very harsh standard, it closes the merger route to them.
They have no alternative.
This forces them to rely on internal expansion and we point it out in our brief Your Honors that if there are many disadvantages to forcing small local operators, small in terms of what you and I would consider it, but large in terms of the government's standard.
And we say that the policy here, the standard of the government is wrong because it is applying a standard in a way that will actually encourage malignant competitive effects.
Now, why do we say these -- the standard is wrong?
Because, we say that market shares in terms of absolute amount, in terms of percentage what a particular operator has in terms of sales is compared with his total market, is not a good tool in every case.
Market share is a tool, and in some cases, a very valuable tool, but it's not the only tool by which the Section 7 case can be judged, and we submit Your Honors that this is a case of first impression because we're dealing here with distribution.
We're dealing here with an industry composed of over 200,000 nationally, over 200,000 food stores.
So it's not always so that every horizontal merger can be judged in terms of Section 7 on the basis of market shares.
And we're attempting to show that if this is done, it's going to undo the purpose that Congress had in passing this law.
Now, we feel that if the tool of market share is used and certainly in establishing a prima facie case that it necessary to show some reasonable relationship between the market shares and the competitive advantage, market power, ability to exclude competitors in the market, these are the indica we're after, not just market shares and we feel there has to be some relationship between market shares and what we're trying to prevent.
It's this, not market shares increase we're trying to prevent, its injuries, probable injuries to competition.
Now, the trouble with the market share theory Your Honors, is that it provides the strictest rule for horizontals because obviously with market shares, you can't deal with the verticals if you were the conglomerate, now what's wrong with that?
Because small business, independent operators, will engage in horizontals almost exclusively where the larger operators with larger capital, better management can go into different market, different product markets and geographic markets.
So we say that in some cases, it depends on the market facts, and on the environment.
In some cases, you need a more extensive market analysis, than just market share and the trouble with this case is the standard is wrong.
Now, we understand, the government seeks a simplified test and we share that view.
There should be some effort made to simplify this Section 7 cases with the record you have before you, but we're not objecting Your Honors, to shortcuts.
We're objecting to wrong cuts and there's no basis for saying that simplified test necessarily requires market shares.
We would like to see in our briefs, our argument here is positive as well as negative because we believe in the law.
We would like to see a broader measure in this case of testing the probability of injury to competition.
I'd like to offer five major points, which we think are better than this market shares test.
One, is there any decisive, competitive advantage shown or any probable decisive competitive that is shown for the merged company, anything in that nature?
Two, what is the effect of the merger on opportunities for entry?
New firms company.
Three, what is the success of small firms in this market?
Number three -- number four, how about the insecurity of leaders, the leaders in the market?
Justice Hugo L. Black: How about what?
Mr. Henry J. Bison Jr.: The insecurity of leaders, are the leaders always at the top, is number one at the top, number two, always remains two, number three and so on.
And we've seen here from the evidence here in connection with Safeway which dropped from 14% to 8%, that there is a great insecurity of leaders and there's a fluidity in this market, a mobility in this market.
Just because you're number one in terms of sales doesn't mean you're going to stay there.
You might find yourself slipping.
So we'd like to offer even potential competition, a new forms, we've got the small convenience stores Your Honor, small convenience stores coming into the market, we've got the discount houses and so on.
So, those are five major --
Justice Hugo L. Black: May I ask you if you suggest that as an exclusive list of factors?
Mr. Henry J. Bison Jr.: No, I do not Your Honor.
No, I don't.
Justice Hugo L. Black: How can we in the final analysis do anymore or a court to do anymore, try the following this -- reach conclusions of the facts --
Mr. Henry J. Bison Jr.: I --
Justice Hugo L. Black: -- as to whether in that judgment -- as to judgments, it -- what is taking place will affect a competition and lessen competition in the market.
Mr. Henry J. Bison Jr.: There is much --
Justice Hugo L. Black: Isn't that about all that you can have?
Mr. Henry J. Bison Jr.: Well Your Honor, some of it --
Justice Hugo L. Black: You mean to suggest, iron clad rigid, factors of --
Mr. Henry J. Bison Jr.: No Your Honor.
I think we should have flexibility.
Justice Hugo L. Black: I'm not saying that's not right.
Mr. Henry J. Bison Jr.: No, I --
Justice Hugo L. Black: It's just -- it's difficult for me to understand what this --
Mr. Henry J. Bison Jr.: I understand, we should have flexibility, because it depends on the market facts involved, it depends on the environment involved.
Justice Hugo L. Black: Suppose the two biggest grocers in the country, the biggest -- I don't know which one, besides this A & P and somebody, who's the other one (Voice Overlap) --
Mr. Henry J. Bison Jr.: Safeway.
Chief Justice Earl Warren: Safeway.
Justice Hugo L. Black: Suppose they will already consolidate tomorrow, would you think it's pretty much difficulty in deciding that case.
Mr. Henry J. Bison Jr.: No Your Honor.
Justice Hugo L. Black: Why?
Mr. Henry J. Bison Jr.: Well, because in that situation, I think we could go down the list of the indica that you might want to consider in connection with it, what the competitive advantage might be over other operators in the markets where they operate, what it would do to new entries, what it would do to small firms and that -- I wouldn't deal in terms of just market shares, I don't say they're not relevant but I say they're not all important.
They don't decide everything.
Justice Hugo L. Black: The lower down that you get however in that list, the more difficult it has become.
Mr. Henry J. Bison Jr.: Exactly Your Honor.
Exactly, the lower down you get, the more careful you've got to be.
Justice Byron R. White: Well, do you -- despite, you think that the number of retailers is going up or going down out there?
Mr. Henry J. Bison Jr.: Your Honor, in some respects, we have a contracting markets because of the supermarket revolution.
Justice Byron R. White: Yes I know, but I didn't ask about the number of stores, I asked about number of competitors.
Mr. Henry J. Bison Jr.: Well, the --
Justice Potter Stewart: On the retailers, on the --
Mr. Henry J. Bison Jr.: I think the result of that is that the number of retailers declining.
I think between 1948 and 1958, we had a hundred thousand very small stores --
Justice Byron R. White: So that you -- do you think the trend is that fewer and fewer competitors sharing the $2.5 billion gross sale?
Mr. Henry J. Bison Jr.: I think the trend has been that Your Honor but I don't --
Justice Byron R. White: Is that what it is now?
Mr. Henry J. Bison Jr.: No, I think we can show that there's a reversal now or you're having more people coming, with different types of operations.
So I think these things have a way --
Justice Hugo L. Black: (Voice Overlap) of grocers, or the retail sale of grocers?
Mr. Henry J. Bison Jr.: Yes.
Justice Tom C. Clark: What was your number five, I am sorry?
Mr. Henry J. Bison Jr.: Number five has to do with new forms of competition.
Justice Tom C. Clark: New form?
Mr. Henry J. Bison Jr.: Such as forms of condition that have existed before like disco houses that had food departments and tandem stores, you know the convenient stores.
There have been many kinds, you have significance, I want to mention some minor -- consider a product differentiation.
Opportunities to make independent decisions, opportunities to use advanced technologies, these are all I think factors that have a lot to do with this.
Now, I just want to say one point before my time runs out.
The government in it's brief on page 44 said we just carefully needed that small firms are not going to be prevented from merger.
Well this is hardly adequate Your Honor because in their term, in their standard, although we think we're small, we're very large when they come to this market share test.
We become very large and certainly, we're larger and with some cases in the appellees here. Now, we think the government means what it says it means.
And we don't think there's going to be any discrepancy between this action and the theory.
We can't assume otherwise.
And we feel that the government means all that its theory, all its standards implies.
And we're very much afraid that they will come when we will be called to the carpet as it were for a very small merger where we think it's small of what -- under their standard, they've been too large.
Now, just summing up, we trust this not inappropriate perhaps let's -- it's not inconceivable that this Court will feel constrained at some day some time, to contain the expansion of this market share standards and to limit its application, we submit Your Honors this is the time and this is the case.
Chief Justice Earl Warren: Mr. Posner.
Rebuttal of Richard A. Posner
Mr. Richard A. Posner: Mr. Justice Black asked Mr. Bison whether he thought a merger of the two largest chains in the nation, A & P and Safeway, would be illegal.
Now it seems to me clear on the basis of the test, he suggested that it would not be illegal.
He named five factors which he thought offers a preferable, more flexible test to the government.
For example, the fact on the opportunities of small firms.
Well if A & P and Safeway merged tomorrow, I'm sure there would be no immediately discernible effect on small firm.
He talked about the emergence of new forms of competition like discount houses, just we point out in our brief are typically leaves two large chains.
Well these new forms of competition if that's a relevant factor here are prevalent throughout the grocery industry and would be a basis under his test of justifying the largest conceivable merger.
He mentioned the effect on opportunities of new entry.
And again, if A & P merged today, tomorrow, there won't be any immediate -- immediately discernable effect on new entry.
And I think same is true with his point about decisive competitive advantage if A & P and Safeway merge their market share over the -- on the national level, I don't know precisely what it is, it would certainly be less than 10% and it would not appear decisive.
In other words, the test that Mr. Bison suggest in the standards which Mr. Alsup has discussed are focused merely on the immediate effects of a merger on its immediate situation, how competitive is the market when the merger occurs and will the merger of itself transform this situation, affect various entry or give the resulting firm a decisive advantage.
And we're -- and our concern and the law's concern is with it -- is with the long range, with the future.
Nothing that appellees have said offsets the fact that there has been a steady increase in concentration in this market which has reached a formidable levels.
There's not -- there's no reason to believe that this trend is about to be reversed and we therefore think that looking to the future, this is a market where mergers between substantial firms in that market pose a real threat and Mr. Bison has expressed the theory of the government standard may someday be invoked, estoppled by this Court to prevent single operators of grocery stores from merging.
On the theory I supposed that there may be some small towns in which a firm which has only one store may have a 4% market share.
Now, we don't think that Clayton Act is meant to deal with markets which are that small with which our communities under the old Section 7 standard, you must establish an economically substantial market.
And this $2.5 billion, Los Angeles retail grocery market was substantial, it's as large as many industries.
And calling these two firms small locally-owned operators can't disguise the fact that by all reasonable standards, these are major corporations with the -- with combined sales of $185 million a year and a merger between them, if it has the competitive effects which the statute proscribes is of -- is certainly substantial enough to be of federal concern under Section 7.
Justice Byron R. White: Mr. Posner, do you accept all the findings of the District Court?
Mr. Richard A. Posner: We accept the findings as to basic facts.
We take issue with those findings which are conlusory or which are cast in conclusory fashion and we take issues specifically with finding number 80, which stated --
Justice Hugo L. Black: On the what?
Mr. Richard A. Posner: Finding number 80, stated that there has been decreasing concentration in the relevant market.
This is based on as I've suggested statistical information which is not completely accurate and moreover, even -- as mentioned earlier, even accepting appellees figures, it's clear that while Safeway perhaps and Ralphs may have suffered some market share diminution.
The largest firms as a group have grown steadily and substantially.
Justice Byron R. White: Well if you agreed with that finding, would -- you wouldn't be here would you?
Mr. Richard A. Posner: I don't think we would because we regard, for purposes of this case, as very significant, the fact not only that this market had reached a level under threshold of oligopoly but that the direction was towards greater and greater levels of concentration.
Justice Byron R. White: So we have to give them the record and disagree with the District Judge before we -- we can agree with you.
Mr. Richard A. Posner: I think the -- we must disagree with the conclusion stated in Finding 80.
I don't think that requires disagreement with --
Justice William J. Brennan: You mean it's not supported by the evidence?
Mr. Richard A. Posner: That finding, we think is clearly erroneous in it so far as it states a conclusion that concentration has been decreasing.
Justice William J. Brennan: But the reason then it affirms the finding that there has been increasing concentration except as we take the statistics you have supplied and we read them themselves as requiring a conclusion.
Mr. Richard A. Posner: That's true, and we suggest that reading -- that even accepting all of defendant statistics, it's still clear except the -- all the statistics on the record.
It's still clear that concentration has in the main increased even though it's conceivable that a few firms have dropped.
So I might mention that that Finding 80, one of the factors which the judge relied on in finding that concentration was decreasing, was his finding that entry is easy.
Now, quite apart from what is clear error, there's an illogicality there because where the entry is -- no matter how easy entry is, the fact of easy entry doesn't mean that concentration --
Justice William J. Brennan: Well, may I say that --
Mr. Richard A. Posner: -- may not be increasing.
Justice William J. Brennan: But do I correctly understand the government's position Mr. Posner depends for its basic premise on this tendency to -- towards concentration on this market?
Mr. Richard A. Posner: That's correct, because you don't --
Justice William J. Brennan: I mean that's the basic premises, isn't it?
Now, if we can agree that this record supports a finding to that effect and I gather -- the government's had [Inaudible]
Mr. Richard A. Posner: If you find that this is not a market which is jeopardized in which there's a danger of increasing concentration, we do not suggest that the merger itself in some other market setting, by reason of the size of the firms would be illegal.