annenberg media ♪ annenberg media ♪ ford's model t seemed like the perfect car. it never wore out, never went out of style. how could it be beat? the tva and other electric companies bought hundreds of mlions of dollars worth of eipment every year. what lengths would the manufacturers of this equipment go to to make sure that the price was right? for 40 years, regulation protected the airline industry from the hazards of competition. have 25 years of deregulation been an improvement? to paraphrase calvin coolidge, the business of america is big business. large and crucial industries

are dominated by a few powerful companies, which have grown with the economy and rewritten the rules of competition. what are the economic and legal rules these companies live by? what has big business done for and to the consumer? "whatever happened to price competition?" with the help of economic analyst richard gill, we'll examine these questions on this edition of "economics u$a." i'm david schoumacher.

there's no business bigger than the auto business. if you've shopped for a car recently, this is a familiar sight. it looks like real competition, a variety of products at a variety of prices. but is what you see what you get? it was when you bought one of henry ford's model ts. henry ford didn't invent the car, and he didn't invent the assembly line, but he brought the two together and gave america its first mass-produced and mass-purchased car. ford was an inventor and mechanic by trade, and no effort was spared to improve the car and to improve the process by which it was built. the tin lizzie looked like the same car year after year, but ford's mechanical genius made it run better

each year than the year before. his industrial genius made it cheaper to build and to buy. he paid the highest wages in industry -- $5 a day. and he made a car that his workers and other working people could afford to buy. ford's vision was to produce the perfect car, inexpensive and durable, looks didn't count. ford said the customer could get a model t in any color he wanted "as long as it was black!" richard strout of the christian science monitor owned a model t and remembers. they were lovely little cars. they were 7 feet high, and they were as angular as an awning, i would say. and they would take you anywhere. schoumacher: it seemed as though ford had devised the perfect competitive product. it took a beating, but it never wore out. it kept getting cheaper, and it was never out of style. henry ford had american drivers eating out of his hand.

model ts weren't the only cars on the road back then. americans also were driving pierce-arrows and stutz bearcats and duesenbergs, as well as the chevrolets, oldsmobiles, buicks, ancadillacs built by ford's number-one competitor, general motors, headed then by alfred p. sloan. according to alfred sloan, the primary object of the corporation is to make money, not just to make motorcars. sloan realized he couldn't sell his cars cheaper than ford, so he gambled that people wanted more from their cars than a ride d that they'd pay more for the color, variety, and options th they could get only fro. henry ford may have known cars, but alfred sloan knew people, and he knew the '20s. hen♪ are ya havin' any fun?ars, ♪ what ya gettin' outta livin'? ♪ ♪ what good is what you've got if you're not havin' any fun? ♪

♪ are ya havin' any laughs? ♪ are ya gettin' any lovin'? ♪ if other people do so ♪ can ya have a little fun? schoumacher: to link his cars with the national mood, sloan made advtising as much a gm products thchy. professor leo riffo of george washington university has written about the car and the era. shrewd, in some sense manipulative advertising, suggesting that an automobile represents youstatus and your personality -- it's not just a way to get around -- aided the appeal. and of course, the possibility that you could trade in your old car and buy a chevy on time made it much more possible for gm to challenge ford. they had better looks and convenience, yes. well, what more is there in life than those two things? william knudsen, who headed the chevrolet division, who had worked for ford, recognized that there was a stigma, as he put it,

in using cheap goods that look cheap. there would be an opportunity to sell the chevrolet by making it look a little classier than the model t. the chevy wouldn't look cheap as the model t was beginning to do. the chevy would make you proud, make you stand out! schoumher: for a while, henry ford stood his ground with the model t. the man whose name meant efficiency around the world couldn't believe that americans could choose gm's style over ford's substance. he said, why should he go to the trouble of providing a self-starter after all? and why should he have a rear-view mirror in the car? the joke was at the time, why have a rear mirror in a ford car, because whatever was behind you would pass you soon anyway. schoumacher: what was passing the ford was the chevy. by the time the depression started in 1929, sloan and gm had overtaken ford.

the model t was history. ford brought out a new car, the model a, at offered colors and options like gm cars did, but it was too late, ford had to settle for second place, then for third place behind the new company of former gm executive walter chrysler. we live in a world of change, but not all that much has changed in the auto industry since general motors pushed ford from command. gm is still in first, and consumers still watch the advertising and choose among cars that vary more in color and cachet than in costs. when economists talk about supply and demand, they're usually talking about price competition. but the battle between general motors and ford wasn't over who had the lowest price. we asked economic analyst richard gill if that holds for the rest of the economy. what you have in the case of the american automobile dustry, especially in recent years, is competition between a relatively small number of firms.

we don't have a monopoly, which means a single firm in control of the industry. we don't have pure competition, which means thousands of firms selling identical products. we have a few firms in control, what economists call an oligopoly. now, in general, oligopolistic firms like to avoid price competition. people can get hurt that way. and this automobile story brings out two ways firms can avoid price competition -- one, by fiddling around in various ways with the special features and gadgetry associated with their product, what economists call "product differentiation." and two, by advertising and trying to convince consumers that their special version of this product is necessary for their survival, or at least for their personal or social success. now, this kind of competition raises all sorts of problems for the economic analyst. when you have product differentiation, for example,

each firm does have a monopoly of its particular product. only general motors can sell a cadillac, only ford a lincoln continental, or whatever the latest brand names haen to be. as monopolists in this limited sense, it can be argued that their prices, costs, and profits may be all too high. still, these companies are subject to competition, and after all, consumers do seem to like having such a wide variety of choice available to them. in a sense, that's exactly how gm was able to overcome ford's early advantage. or take advertising. obviously businesses use advertising to convince consumers that their products have special qualities, different personalities, really, trying in this way to increase consumer demand for them. of course, when my competitor also does this, he is trying to increase the demand for his product at the expense of mine. how much advertising is self-canceling like this? how much contributes useful information

about the products involved? clearly, these aren't easy questions to answer, though it must be said that there are other ways of avoiding price competition that are far more dubious than those we have been discussing. it could have been a novel. a newspaper reporter, a crusading senator, and federal prosecutors teaming up to solve the biggest crime, in dollar amounts, ever committed, and put the powerful criminals behind bars. the scene of the crime was here in philadelphia, but the story started in knoxville, tennessee. the tennessee valley authority was a national symbol of progress, bringing electricity to millions who had lived without light. general electric was one of its primary suppliers anone of the nation's industrial giants. in 1959, julian granger waa rt with the knoxville news-sentinel. it was a saturday, saturday night, i was coming in on the late shift at the knoxville news-sentinel. i went to my box,

and i pulled out all the news releases and so forth. and there was the weekly, or bi-weekly, news release of the tennessee valley authority. and i went through it -- the rainfall in the valley. it was mundane stuff. and i got around to the second page, and lo and behold, this thing jumped out at me. "on this bidding, allis-chalmers, "general electric, and pennsylvania transformer quoted identical prices of $112,712." schoumacher: close parentheses, and that was it? so i went back to my desk, thought about it for a while, and then i called red wagner. i told him, i seem to recall telling him, "i can't believe this, red. you know, how could you have identical bids?" and he began to unload on me. he says, "the real story "is down in chattanooga, where the head of purchasing is paul fahey."

so i did, i went down there. and paul fahey had a stack of -- it was on ruled paper -- but he had case after case after case after case of identical bidding on contracts. now these are sealed bids, you understand. these are sealed bids, they come in a sealed envelope. but the biggest and the most interesting things were the electrical contracts from big firms like general electric, westinghouse, allis-chalmers. i don't think anybody really knew what the hell we had. schoumacher: the tva wasn't usually front-page news, but tennessee happened to be the home state of senator estes kefauver. kefauver had made his name nationally with televised hearings investigating organized crime. adopting a coonskin cap as his trademark, he had waged two popular but unsuccessful campaigns for president.

then in 1959, kefauver took on a new crusade against a different kind of organized crime, antitrust violators. kefauver announced that he was going to hold hearings in knoxville. uh, the word i heard was that the justice department decided, well, they better get moving. schoumacher: robert bicks was the assistant attorney general who oversaw the justice department's investigation of tva's identical bids. we came across, part by accident, a very small company in the industry, and an official that was known to somebody in the antitrust division, who told the story with regard to one particular product in a meeting, after his company had been subpoenaed to produce data. building on that, when he told the story about conspiracy in a series of meetings there, the first one or two cases were put together. schoumacher: the first few confessions prompted more executives to come forward,

executives from big firms like ge, westinghouse, and allis-chalmers. soon prosecutors began to unveil the intricate design of the conspiracy. they used assumed names, registered under false names, called each other at home rather than at the office, used unmarked envelopes. as identical bids became suspect, they developed a rather complex formula known colloquially as "phase of the moon," whereby, to avoid detection, the bids were disparate, subject to a formula which enabled a rotating low bidder, so that everybody ended up with the agreed-upon percentage of the business, the theory being that detection would be well-nigh impossible. what was it, in the simplest terms, that the conspirators were conspiring to do? trying to raise the prices at which their products were sold,

and make sure that each of them got what it believed to be a fair share of the market. in other words, they rigged the bids. it's hard to understand. the electric equipment industry was an oligopoly. the executives knew that their companies could control the industry without elaborate and illegal arrangements. why would they risk losing their jobs and going to jail? we asked edwin rome, a philadelphia lawyer, who argued the conspirators' cases in court. they were driven to do what they did by reason of being devoted to the company. if this was what the company wanted them to do, they thereupon did it, just as they drove a car withth somber colors and wore dark-colored striped ties and appropriate clothes to the office and so on. this, too, was another way in which, in their understanding of it, the corporate mentality worked. what do you think was in the minds of these

captains of industry? why would they be motivated to take these shortcuts? i guess the up-side was raising the prices and what was thought to be a comparatively easier, comfortable, morerectabifefor e execut. you really didn't have to worry how much business you we going to have at yeaend. you'd agree ont in january. the verdicts sent a message -- businessesndxecutives whoy's try srt circuit competition with conspiracies and agreements woulnot beea witlightly. we asked our ecomic analysricl why executives from these rms would want to risk fines weanjail senncesmic analysricl trying to fix prices? well, the electrical industry case was fairly extreme, but if businessmen do engage in illegal price-fixing from time to time, it's probably because setting prices in an industry dominated by a few firms is inherently difficult. say you have these five or six big firms.

i set a nice, comfortable price and then you come along and set a price just under mine and take away all my business. suddenly we are in a "price war." and, of course, as far as the producers are concerned, it's ruinous to everyo. in fact, economists have sometimes argued that in the few-firm -- the oligopoly -- situation, companies will have to cling to whatever theirurrent price is. suppose a company is selling electrical transformers for $100 apiece. its selling is quantity at this price. before it raised thaprice, itouldave onsider, what wouldy rivals do? then i would be underbid, transformers at the going price? my sales would drop off sharply. on t other hand, if i try to cut my pce and undeid my rivals, that could lead to a price war. alprices would plummet downward, with little gain in sales vome for anybody. of course, oligopolists do change their ices,

particularly during inflationary periods. t they have to do it carefully, gierly, one might say. and this raises a kind of philosophic probm. if firms gingerly meet together and fix these prices, then they are iniolation of the antitrust laws and can be fined, and their executives thrown in jail. if, on the other hand, they gingerly form a tacit understanding that firm "a" will be the price leader and that it will set prices for the whole industry, taking the interests of its rivals into account, en we ofteget simireconomic ress of course, there is yet 'sstill another wayl. to bring order into e oligopolistic price process -- ha the goverent set prices for you. the airline industry has been deregulated since 1978. and it's true that uno fas ome ,att pre? ng e seats,

unequaes, ys, ishis undrst of comaints stified? has regulation been a success? what people may forget is that the airline industry is an oligopoly dominated by just a few g carriers. t it was an oligopoly with difference. for its fit 50 years, a fedel agency, the civil aeronautics board, , set the res and the routes. with one minor exception, the cil aeronautics board had not permitted one single new competitor to come in, to compete with the domestic lines, and price competition was stctly prohibited. soutest airlines had to go through an agony of lawsuits anadministrative proceedings souin order to get started thrthree and a half yearsits because the incumbents didn't want us to be able to compete. duri that time, i got a little deessed aboue system

because the incumbents didn't thinking the system might fail. i mean, all we wanted to do was offer more flights at lower fares with a tter quality of service, and it didn't seem to me that that was too inimical to the wellbeing of, of america. consumeris and antitrustpeople e that this was a cartel to protect the industry from competition. and the final demonstration of this was, who was it that was in favor of regulation? easy -- the airlines and their unions. you would walk into a congressman's office and his eyes would get real big and he'd say, "aren't you the smallest carrier in america?" "yeah." "how many airplanes do youave?" "oh, we've got 10." "and you want the industry to be regulated? you're goi to get wiped out." i said, "we don't ink so. "but give us a chance to be wiped out. give us that chance to be wiped out." schoumacher: so deregulation it was, and president carter appointed professor kahn

as chief deregulator. at first, airline deregulation was a game with only winners. there were lower fares for passengers, higher profits for well-established airlines, at first, airline deregulation was a game with only winners. and new airlines for ambitious entrepreneurs. then, in the mid-'80s, there started to be losers, too. twa, pan-am, eastern, people's express, braniff. braniff international airlines tonight is out of business. schoumacher: in the era of deregulation, big airlines were inviting targets for competitors with low fares, low costs, and ashy advertising. getting you there on time is our way of, uh, being faitul. you had western, which flew in the west. you had eastern, which flew in the east, and, you know, east was east and west was west

and never the planes would meet. they simply did not and it was ordained that way. so you can get confused by thinking that less carriers means less competition. actually since deregulation, the mber of competitive routes has increased enormously asompared to what it was prior to deregulation. anit's having carriers flying against one another on a given route that produces competition, not how many carriers there are volumetrically where would fares be today if we had not regulated? what deregulation d was effectively replace the reductions in fares that had been generated by technical change -- because technical change had been slowing by the time deregulation came in as the industry became more mature -- and what it did was lower fares through competition. probably the principal source of dissatisfaction -- generally regarded by the public as a failure because the public doesn't understand economics --

is that traveling experience is much less pleasant. for airline deregulation to work asfficiently as possible, you must have capacity at airports for new carriers and existing carriers to compete for entry to expand, plus you are able to make use of runway capacity and airspace capacity. this has not been done. there has been significant congestion at airports. what this does is prevent as much competition from developing at the airport, you have restrictions on gates. all these things impede the competitive process, but they also impede the level of service. that is, with congestion, there are delays. people then blame the carriers for this probm. but this is sothing that cou be fixed if we had whatas calle peakoaor congestion pricing at airports, or if we had efficient investment iruays, improvemenn aitraffic control. in a sense, the failure of public policy

to keep up witthat has deined, really, the performance and benefits of deregulation. it was a success of deregulation, not a failure, that planes are 70% to 75% full and all that goes with that. we've given people of modest means a quality price option that they didn't have before. the virtually unanimous opinion of economists, what ts exence withireregulatio.the ofovers

s ughts. by many measures, airline degulation s been a huge success. compared with years ago, air fares are rtually flat. look athe red line in the graph. and when you adjust for inflation, the fact that most other prices have risen, ticket prices have fallen by almost half. you can see that shown by the blue line. two other measures of success -- three times as many passengers are flying now than in the early 1980s, and the airline industry employs twice as many people. many of the concernsthat d in the early days of deregulation have not materialized. setting aside the risk of terrorism, airline safety has actually improved, not deteriorated, as many had feared. moreover, while a number of airlines have gone out of business, the industry has not become dominated by a few large carriers. quite the contrary. the smaller upstart airlines such as southwest, jetblue, and air tran are doing well, while the large airlines

such as united and us air are in trouble. probably the single biggest complaint about flying these days is congestion. flying on an airplane feels no better about flying these days than a glorified bus ride. howevepackedirplanes and overcrowded airpor are not symptoms of the failure of deregulation, rather, they are the consequence and oof itsuccess.rpor e problem is tt the feral, state, and local goverents in the u.s. have not upgraded and expanded airports and air traffic controsystems to meet the spectacular increase in demand triggered by deregulation. this edition of "economics u$a" hasa region of big business,me onon-price competition,s, anprice-makers, a kind of twilight zone in our economy where the usual rules of competition work a little differently. there's not much price competitiore because, as every good oligopolist knows, that only leads to uncertainty and lower profits. much safer to fight over convenience and style.

it's a zone that makes up a good chunk of any map of our economy, a good place to know your way around. this is david schoumacher.

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