A cryptic note passed from one businessman to a competitor on a golf course or at an airport bar . . . a secret gathering of plotters at a trade associaiton meeting . . . these are the settings for the stereotyped price-fixing conspiracy.
This week the four U.S. companies that make lead antiknock additives for gasoline go on trial, accused by the government of rigging prices in a very different way.
A complaint by the Federal Trade Commission against Ethyl Corp., E.I. du Pont de Nemours & Co. and two other antiknock additive manufacturers accuses the companies of systematically matching each others' prices for years in a neat, anticompetitive game of follow-the-leader that has assured high profits for all the players.
To the embattled FTC, the case is an attempt to lengthen the reach of the antitrust laws to a number of industries where a few strong firms peacefully coexist by avoiding price competition.
"This case is a first," says Alfred F. Dougherty Jr., director of the FTC's Bureau of Competition. "We are challenging a modern form of price fixing."
To the antiknock manufacturers -- Ethyl, Du Point, PPG Industries Inc. and Nalco Chemical Co. -- the case is an unprecedented attempt by a government agency to tell an industry how to conduct its business. F. D. Gottwald Jr., chairman of Ethyl, says the FTC is attacking business practices used throughout U.S. industry for many years, practices that have never before been considered outside the law. If the FTC succeeds, he says, it would be handed a license to roam at will.
On this one point, the FTC and its adversaries agree: What happened in the antiknock industry has been common practice. Too common, the FTC complains. By publicizing price changes well in advance and by sticking to quoted prices, the companies were able to reassure each other that no one was "cheating" by trimming list prices to win new customers, the agency contends. It also attacks the policy of "delivered" pricing in the industry, in which customers pay the same regardless of the costs of shipping from the manufacturers' plants.
Its remedy is as controversial as its complaint: a sharp restriction on the kinds of public statements the companies could make on their price changes.
The FTC reasons that given less information about competitors' prices, the companies would feel less secure in maintaining their own. There would be a strong incentive to price products closer to costs, for fear of losing business.
If the FTC wins its case, the companies would be free to quote new prices to potential customers, but only on the day the price change takes effect. No long-range "signaling" should be permitted, the FTC argues. Companies could also negotiate future price increases on specific products with potential customers.
But a company would be forbidden to communicate price information to anyone outside the company and its customers.
The companies denounce this as an unconstitutional violation of their right of free speech. "This will not be sustained by the courts," predicts Ethyl's Gottwald.
The FTC concedes the case "may raise first amendment questions." The publication of price information is a form of commercial speech, which, if not as sacrosanct as political speech, for instance, has been given at least a limited constitutional protection, legal authorities have noted.
But the record is mixed. Courts have upheld a "free speech" right in the planting of "For Sale" signs on lawns, advertising of prices for routine legal services, newspaper advertising by an abortion clinic and the price advertising of prescription drugs. A constitutional protection for commercial speech was not upheld in some other cases, such as "ambulance chasing" ads by attorneys looking for accident victims who might file negligence complaints, and advertising by a utility to promote the use of electricity.
The basic question, however, is whether the legal pricing practices of Ethyl, Du Pont, PPG and Narco are "unfair competition" because of the structure of the industry.
The FTC argues that the industry is an "oligopoly" dominated by a few sellers. Evidence of the companies' sales has been kept confidential, at least until the trial is under way. Wall Street analysts of the industry conclude that Ethyl and Du Point each have about 35 percent of the U.S. market, with Nalco and PPG sharing another 15 percent.
Critics of the FTC's case say the agency is close to beating a dead horse. U.S. production of lead antiknock compounds has been declining steadily since the early 1970s, when the auto industry began to install catalytic converters on exhaust pipes to meet clean air requirements. Lead additives foul the converters, thus lead-free gasoline has been required in most new cars for years.
According to industry figures, the U.S. production of lead additives has declined from a peak of over 1 billion pounds annually around 1970 to an estimated 470 million pounds this year. The current price is just under $1.00 a pound.
Ethyl and Du Pont are also leaders in worldwide production and outside the U.S., business is growing nicely. In 1979, the industry's foreign sales exceeded domestic sales for the first time.
The FTC has focused on a four-year period beginning in 1973 when there were 18 separate price increases in the industry.
"Each price increase for each company was effective in the same amount on the same day -- and antiknock compound prices approximately doubled in that period," said Dougherty. During the same period, consumer prices rose only 36 percent, while industrial prices rose about 54 percent.
In theory, says Dougherty, there should have been active price cutting as overall sales declined. Instead, "there was virtually no discounting and profits appear to have been high." He quotes Ethyl's Gottwald as saying last year that antiknock compound operating profits have increased since 1970 "in the face of declining volumes."
The companies' defenders say the FTC in this case is rushing into a complex, fuzzy area of business conduct where Congress has feared to tread, and Congress -- not the FTC -- has the responsibility for establishing antitrust policy.
Stanley Robinson, an attorney writing about the case in the Columbia Law Review in January, said Congress through the years has had good reason to duck the price issues raised in the Ethyl case. "I suspect this is because our lawmakers fear that the cure might be worse than the disease," said Robinson.
The industry's pricing practices may improve competition, he argued. Advance information on price increases can stimulate new orders, as can the "most favored customer" policies providing the same minimum prices to all buyers.
If price increases for antiknock compounds have generally been the same across the industry, isn't that simply because there are only a few firms selling nearly identical products? Would the FTC's rules really change anything? If the FTC is able to label such practices as illegal "unfair competition", where will the line be drawn next, asks Robinson.
The lawyers arguing over the Ethyl case are not the only ones interested in the FTC's future course. Dougherty, the chief promoter of the Ethyl case, recently announced his resignation from the agency protesting that the long congressional attack on the FTC had weakened its backbone for confronting new, controversial antitrust policy issues.
Michael Pertschuk, the FTC chairman, says Dougherty is wrong; the commission hasn't lost its nerve, as time will prove.
The Ethyl case, now in the hands of FTC judge Ernest G. Barnes, will be one of the major guideposts for the agency's future.