Cement Manufacturers Agree to Cooperate on Pricing Summary

  • Last updated on November 10, 2022

Formation of the Association of American Portland Cement Manufacturers, a short-lived trade association, marked the beginning of manufacturers’ concerted efforts to cooperate on pricing to avoid harmful competition.

Summary of Event

In the century following the close of the American Civil War, three great waves of mergers—combinations of two or more previously independent enterprises into a single enterprise—swept the American economy. The first wave, which took place from 1899 to 1904, accounted for the disappearance of nearly thirteen hundred firms, a figure almost matched by the second wave, which commenced about 1926 and collapsed about five years later. A more modest wave with two crests washed over the business community between 1945 and 1955. Mergers are an ancient part of business history. The significance of these three waves was that each contributed substantially to the emergence of large enterprises that exercised salient or dominant positions within their industries and often within the economy as a whole. Association of American Portland Cement Manufacturers Antitrust legislation Cement manufacture Mergers;U.S. [kw]Cement Manufacturers Agree to Cooperate on Pricing (1902) [kw]Manufacturers Agree to Cooperate on Pricing, Cement (1902) [kw]Pricing, Cement Manufacturers Agree to Cooperate on (1902) Association of American Portland Cement Manufacturers Antitrust legislation Cement manufacture Mergers;U.S. [g]United States;1902: Cement Manufacturers Agree to Cooperate on Pricing[00270] [c]Manufacturing and industry;1902: Cement Manufacturers Agree to Cooperate on Pricing[00270] [c]Trade and commerce;1902: Cement Manufacturers Agree to Cooperate on Pricing[00270] Wilson, Woodrow Fetter, Frank A.

Although “bigness” has often been favored in the United States, the power that attends it has also been suspect. Power, particularly of business enterprises, therefore has been held to close scrutiny, as close as varying political climates have allowed. Accordingly, from the time of an initial upsurge of American industrial and financial expansion late in the nineteenth century, antimonopoly or antitrust campaigns have marked the nation’s economic growth. The evolution of the peculiarly American institution of antitrust laws is marked by the Sherman Antitrust Act of 1890, Sherman Antitrust Act (1890) the Clayton Antitrust Act of 1914, Clayton Antitrust Act (1914) the Robinson-Patman Act of 1936, Robinson-Patman Act (1936)[Robinson Patman Act] and the Celler-Kefauver Act of 1950. Celler-Kefauver Act (1950)[Celler Kefauver Act] Each sought to patch weaknesses in earlier laws and to strike at new variations on restraints of trade. The portland cement industry, of modest size but with a strategically important role in the economy, fell subject to all these acts.

Named for its resemblance to Isle of Portland stone, portland cement was a British invention patented by Joseph Aspdin in 1824. Its manufacture spread to France in the 1840’s, to Germany a decade later, and by 1875 to several plants in Pennsylvania. The superiority of portland cement to natural cement was demonstrated at the Philadelphia Centennial Exposition in 1876, and portland cement began developing its own market shortly afterward. Businessman José Francis de Navarro secured American patent rights in 1888 and established his own mill in Coplay, Pennsylvania. Plants proliferated, first in the Lehigh Valley of Pennsylvania and then elsewhere, spurred by Frederick Ransome’s development of the rotary kiln. Imports of portland cement exceeded domestic production until the mid-1890’s, but the unprecedented industrial surge that brought the American economy into the premier position in the world also propelled the expansion of American portland cement producers.

Economists have argued that characteristics of the cement industry naturally predispose its operators toward collusive or cooperative behavior rather than competition. Its product is standardized; only the advertising and sales services of the mills differentiate one brand of portland cement from another. To average informed buyers, cement is cement. In addition, portland cement mills share relatively constant costs per additional unit and relatively large fixed, or overhead, costs. Mills tend to be widely separated geographically or in small clusters. Their product is of low value per pound, making transportation charges relatively high in comparison with price. Demand for cement tends to be “inelastic”—that is, unresponsive to changes in price.

Although the maintenance of free and fair competition is a basic tenet of American belief and public policy, it had a ruinous ring in the cement trade at the opening of the twentieth century and during the price wars and mergers of the next few years. The structure of the industry, as outlined above, led firms to cut prices in attempts to gain market share.

Ostensibly to escape cutthroat competition and stabilize their trade, several operators in Pennsylvania’s Lehigh Valley who produced nearly 60 percent of the trade’s cement founded the Association of American Portland Cement Manufacturers (AAPCM) in 1902. By 1904, members of the organization had resolved to set their prices based on costs in the Lehigh Valley. This effort failed, but in 1907, a new trade organization—comprising sixteen firms headed by the Atlas Company—established a basing point price system. The trade organization failed, but the pricing system stayed in place. That system was similar to those developed in other industries, prominent among them the “Pittsburgh plus” basing point system Pittsburgh plus system of steel prices developed by U.S. Steel.

Under a basing point system, mills quoted delivered prices to dealers as the mill price plus costs of transportation, but transportation costs included in this reckoning were not the actual costs. Instead, they were costs calculated from some given manufacturing area, known as a basing point. Manufacturers agreed to quote delivered prices that were identical, matched to the price from the nearest basing point. The multiple basing point system employed by the cement industry permitted each mill, wherever located, to quote its price to customers anywhere as the lowest delivered price from the nearest designated base point.

Economist Frank A. Fetter, among others, noted that the multiple basing point system was the cement industry’s way of fixing noncompetitive prices. More than 300,000 pages of judicial documentation accumulated between 1916 and 1948 confirmed that the object of the five cement manufacturing “Big Brothers”—Universal, Lehigh, Lone Star, Penn-Dixie, and Alpha—was not to beat “competition” prices but merely to meet them. For decades, industry spokespersons argued that the pricing practices were essential for stability and were arrived at voluntarily. Many economists and lawyers, to the contrary, perceived monopoly price setting aimed at the restraint or elimination of healthy competition.

Significance

Legal probes of the cement industry began in 1916, well into the administration of President Woodrow Wilson. Wilson had already shepherded an unprecedented bundle of reform legislation through Congress, including the Clayton Antitrust Act, which amended—some believed put teeth into—the Sherman Antitrust Act, and creation of the Federal Trade Commission Federal Trade Commission (FTC). The FTC’s functions included investigation aimed at preventing corporate price discrimination among different customers, preventing corporations from holding stock in other corporations if the practice restrained competition, and ending interlocking directorates among companies serving the same markets.

Two major cement industry trade associations were brought under examination. The AAPCM had changed its name to the Portland Cement Association and described itself as a research and advertising organization. After investigation, it was cleared of antitrust law violations. The Cement Manufacturers Protective Association Cement Manufacturers Protective Association (CMPA) was composed mainly of Lehigh Valley producers. It collected and disseminated monthly trade information on production, inventories, freight charges from each basing point, customer credit reports, and specifics on job contracts. A successful 1916 antitrust conviction and fining of nine West Coast mills for price fixing and apportioning markets led logically to antitrust suits against the CMPA and its members in 1919. They were charged with restricting production, fixing prices, and quoting uniform prices for their delivered orders—that is, for employing a multiple point basing system.

The red flag that the CMPA waved in the face of antitrust investigators was implicit in its multiple point basing. By the time of the CMPA’s initial conviction in federal district court (New York) four years later, investigations had shown that purportedly innocent acquisition and circulation of trade information and statistics had resulted in cement supplies that lagged behind demand, thereby producing uniform, noncompetitive prices.

Defeated in court, the CMPA was dissolved. In 1929, however, on the advice of an FTC commissioner, it emerged in another guise, mustering industry leaders under the fresh rubric of the Cement Institute. Cement Institute The Cement Institute promptly appealed the decision against the old CMPA to the U.S. Supreme Court. This was not a singular event, for the fate of eight interrelated cement cases hinged on the Supreme Court’s review, as did the fates of several other industries’ trade associations. Supreme Court, U.S.;antitrust and corporate regulation

By the time the Court considered the Cement Institute’s appeal, however, the reform enthusiasm of the Wilson administration had been supplanted by conservative, probusiness Republican presidencies such as Herbert Hoover’s. These administrations smiled on an unparalleled increase in the number of trade associations, encouraged another wave of mergers, and displayed marked complacency in discovering restraints of trade. The Court showed sensitivity to these conservative tendencies.

In 1925, the Supreme Court reversed the CMPA’s federal conviction for restraint of trade. The Court seemed partially persuaded by evidence from some economists that the cement industry’s standardized product, standard freight rates, similar trade practices, and sales to informed buyers—that is, that the character of the industry—made price uniformity inevitable as a result of unrestrained competition. It is an oddity of antitrust study that uniform prices can result either from collusion or from intense competition among identical producers, competition that results in the lowest sustainable price. The Court concluded that the CMPA’s open collection, dissemination, and discussion of minute details of industry operations was voluntary and involved no concerted action regarding either production or prices, although the Court acknowledged that cement prices were uniform throughout the industry. Critics of the decision noted that market conditions naturally justifying price uniformity did not justify a pricing system that required such uniformity.

Meanwhile, as cement producers sought to acquire mills closer to their markets, mergers continued through the 1920’s and for the next two decades. The trend toward concentration also continued. Major companies, in fact, operated chains of mills. By 1929, the eight leading producers owned half of the industry’s mills and accounted for half of the country’s cement production. Concentration among the largest firms increased slightly for the next two decades, then leveled off after passage of the Celler-Kefauver Act of 1950.

What the Supreme Court left unconsidered in 1929, however, the FTC and the Justice Department pursued—namely, the multiple point basing system. The government had won its first cases against the steel industry’s single base point practices (“Pittsburgh plus”) in 1927 and then turned to multiple point systems. These attacks were interrupted only temporarily by President Franklin D. Roosevelt’s waiver of antitrust actions, sanctification of trade associations (which revived basing point systems), creation of industrial code authorities, and tolerance of price fixing as integral parts of the National Industrial Recovery Act National Industrial Recovery Act (1933) of 1933. In 1937, the FTC targeted the cement industry’s basing system as the key to the industry’s activities in restraint of trade. By 1943, the FTC had filed an order against the Cement Institute that, after some setbacks for the government, reached the Supreme Court in 1948. Speaking for the six-to-one majority, Justice Hugo Black vigorously swept aside a gamut of Cement Institute defenses and outlawed usage of basing point systems, with their freight absorption and “phantom freight” schemes, not only in the cement industry but also throughout American industry. Association of American Portland Cement Manufacturers Antitrust legislation Cement manufacture Mergers;U.S.

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">Edwards, Corwin D. The Price Discrimination Law: A Review of Experience. Washington, D.C.: Brookings Institution, 1959. Overview of political, industrial, and judicial battles at the center of pricing in the U.S. economy includes discussion of the portland cement industry. Extensive bibliographic notes, appendixes, and excellent index.
  • citation-type="booksimple"

    xlink:type="simple">Hovenkamp, Herbert. Federal Antitrust Policy: The Law of Competition and Its Practice. 2d ed. Eagan, Minn.: West, 1999. Covers nearly all aspects of U.S. antitrust policy in a manner understandable to people with no background in economics. Chapter 2 discusses “history and ideology in antitrust policy.”
  • citation-type="booksimple"

    xlink:type="simple">Nelson, Ralph L. Merger Movements in American Industry, 1890-1951. Princeton, N.J.: Princeton University Press, 1959. Brief and scholarly, with intelligent summations of materials confirmed by dozens of tables and charts. Invaluable resource on mergers and trends toward concentration in cement and related trades. Includes bibliographic notes and index.
  • citation-type="booksimple"

    xlink:type="simple">Peritz, Rudolph J. R. Competition Policy in America: History, Rhetoric, Law. Rev. ed. New York: Oxford University Press, 2001. Explores the influences on U.S. public policy of the concept of free competition. Discusses congressional debates, court opinions, and the work of economic, legal, and political scholars in this area.
  • citation-type="booksimple"

    xlink:type="simple">Seager, Henry R., and Charles A. Gulick. Trust and Corporation Problems. 1929. Reprint. New York: Ayer, 1988. Scholarly and interesting, a solid work concerning older events. The portland cement industry’s practices and problems are discussed primarily in chapters 16 and 21. Includes extensive bibliography, table of cases, and index.
  • citation-type="booksimple"

    xlink:type="simple">Stocking, George W., and Myron W. Watkins. Monopoly and Free Enterprise. New York: Twentieth Century Fund, 1951. Wonderful work, still invaluable. Interesting and authoritative, if in places controversial. Chapter 7 addresses the basing point system in the cement industry, and chapter 8 discusses cement trade associations. Ample bibliographic notes, tables of cases, index.
  • citation-type="booksimple"

    xlink:type="simple">Whitney, Simon N. Antitrust Policies: American Experience in Twenty Industries. 2 vols. New York: Twentieth Century Fund, 1958. Clear, authoritative, interesting, and detailed. Chapter 19 concentrates on portland cement industry. Includes more than one hundred tables, including legal cases. Ample bibliographic notes and index.

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