UBC Theses and Dissertations

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UBC Theses and Dissertations

Effective competition and corporate disclosure : a critical study Devji, Razahussein Mohamedhussein Merali 1968

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EFFECTIVE COMPETITION AND CORPORATE DISCLOSURE A CRITICAL STUDY by RAZAHUSSEIN M, D E V JI B. Sc. (Econ)», University of London, 1961 Barrister-at-Law, Honourable Society of Middle Temple, London, 1962 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION In the Faculty of Graduate Studies We accept this thesis as conforming to the required staricTardT THE UNIVERSITY OF BRITISH COLUMBIA September, 1968 I n p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l -f i l m e n t o f t h e r e q u i r e m e n t s f o r a n a d v a n c e d d e g r e e a t t h e U n i v e r s i t y o f B r i t i s h C o l u m b i a , I a g r e e t h a t t h e L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e a n d s t u d y * I f u r t h e r a g r e e t h a t p e r m i s s i o n f o r e x -t e n s i v e c o p y i n g o f t h i s t h e s i s f o r s c h o l a r l y p u r p o s e s may be g r a n t e d b y t h e H e a d o f my D e p a r t m e n t o r b y h i s r e p r e s e n t a t i v e s . I t i s u n d e r s t o o d t h a t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l n o t b e a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . F a c u l t y o f Commerce a n d B u s i n e s s A d m i n i s t r a t i o n , The U n i v e r s i t y o f B r i t i s h C o l u m b i a , V a n c o u v e r 8 , B . C . C a n a d a . ABSTRACT E c o n o m i c a c t i v i t y i n t h e U n i t e d S t a t e s a n d C a n a d a i s p r e d o m i n a n t l y p e r f o r m e d b y c o r p o r a t i o n s . T h e y a r e b y f a r t h e l a r g e s t p r i v a t e e m p l o y e r s o f w o r k e r s , t h e b i g g e s t i n v e s t o r s and t h e p r e d o m i n a n t i n s t r u m e n t o f p r o d u c t i o n . T h e y a r e r a p i d l y g r o w i n g i n s i z e , a r e g e n e r a t i n g s u f f i c i e n t f u n d s i n t e r n a l l y t o c a r r y o u t m o s t o f t h e i r e x p a n s i o n p r o g r a m s , and a r e d i v e r s i f y i n g i n t o u n r e l a t e d a c t i v i t i e s . T h e i r a f f a i r s a r e i n c r e a s i n g l y m a n a g e d b y p r o f e s s i o n a l e x e c u t i v e s who h a v e l i t t l e , i f a n y , s t a k e I n t h e r i s k c a p i t a l . T h e s h a r e h o l d e r s , who a r e l e g a l l y p r e -sumed t o e x e r c i s e c o n t r o l o v e r t h e p o w e r s a n d a c t i o n s o f c o r p o r a t e e x e c u t i v e s , a r e n o r m a l l y t o o n u m e r o u s a n d s c a t t e r e d s o a s n o t t o b e i n a p o s i t i o n t o h a v e a s i g n i f i c a n t i n f l u e n c e o n t h e p o l i c i e s o f t h e c o r p o r a t i o n s . The c h a n g i n g r o l e o f t h e c o r p o r a t i o n s h a s l e d t o c o n s i d e r a b l e d i s c u s s i o n a b o u t t h e l e g i t i m a c y o f c o r p o r a t e p o w e r and t h e a c c o u n t a b i l i t y o f c o r -p o r a t i o n s f o r t h e i r a c t i o n s w h i c h a f f e c t o t h e r s s u c h as c o n s u m e r s , w o r k e r s , s u p p l i e r s and t h e p u b l i c . A s p a r t o f t h i s g e n e r a l a c c o u n t a b i l i t y , t h e q u e s t i o n i s r a i s e d a b o u t t h e t y p e a n d e x t e n t o f i n f o r m a t i o n t h a t c o r p o r a t i o n s s h o u l d b e r e q u i r e d t o d i s c l o s e t o p e r s o n s a n d g r o u p s who S a v e no c o n t r a c t u a l r e l a t i o n s h i p w i t h t h e s e c o r p o r a t i o n s . M a n y b u s i n e s s m e n , a c c o u n t a n t s , p o l i t i c a l t h e o r i s t s , e c o n o m i s t s , a n d l a w y e r s h a v e p u t f o r w a r d t h e i r v i e w s a b o u t c o r p o r a t e d i s c l o s u r e w h i c h d i f f e r w i d e l y f r o m one a n o t h e r . A p r i n c i p l e r e a s o n f o r t h e d i v e r g e n t v i e w s a b o u t c o r p o r a t e d i s -c l o s u r e i s t h a t t h e y u s e d i f f e r e n t f r a m e s o f r e f e r -e n c e s t o b a s e t h e i r a r g u m e n t s . f o r o r a g a i n s t d i s -c l o s u r e o f m o r e i n f o r m a t i o n t h a n i s a t p r e s e n t p r o v i d e d b y c o r p o r a t i o n s . T h i s s t u d y i s a n a t t e m p t t o u s e t h e n o r m a t i v e m o d e l o f ' E f f e c t i v e C o m p e t i t i o n ' a s a g u i d e f o r t h e t y p e a n d e x t e n t o f d i s c l o s u r e t o be made b y c o r p o r a t i o n s . A n e x a m i n a t i o n o f c u r r e n t l i t e r a t u r e o n c o m p e t i t i o n s u g g e s t e d t h a t t h e l i n e s o f d e m a r c a t i o n f o r t h e n o r m a t i v e m o d e l o f ' E f f e c t i v e C o m p e t i t i o n 1 c a n be d e f i n e d b y r e v i e w i n g t h e n a t i o n a l o b j e c t i v e s o f t h e U n i t e d S t a t e s a n d C a n a d a w h i c h f o r m t h e f r a m e w o r k f o r t h e m o d e l a n d b y e x a m i n i n g t h e m a i n c h a r a c t e r i s t i c s i n t h e economy w h i c h r e f l e c t t h e s t r u c t u r e o f t h e m o d e l . T h e I n f o r m a t i o n a l r e q u i r e m e n t s o f t h e m a i n a c t o r s i n t h e economy n a m e l y c o n s u m e r s , e m p l o y e r s , w o r k e r s , c r e d i t o r s , i n v e s t o r s , g o v e r n m e n t - r u n c o r p o r a t i o n s , f o r e i g n f i r m s d e a l i n g w i t h t h e c o u n t r i e s a n d v a r i o u s g o v e r n -m e n t a g e n c i e s whose a c t i o n s h a v e a d i r e c t e f f e c t o n o t h e r a c t o r s - f o r m t h e b a s i s o f s p e c i f i c r e c o m -m e n d a t i o n s made a b o u t t h e t y p e a n d e x t e n t o f d i s -c l o s u r e t h a t s h o u l d be r e q u i r e d f r o m c o r p o r a t i o n s o p e r a t i n g i n C a n a d a . ACKNOWLEDGEMENT S T h e a u t h o r w o u l d l i k e t o e x t e n d h i s a p p r e c i a t i o n t o a l l t h o s e who a s s i s t e d i n t h e p r e p a r a t i o n o f t h i s t h e s i s : i n p a r t i c u l a r t o P r o f e s s o r B r i a n B u r k e f o r h i s c o n t i n u o u s s u p p o r t a n d a s s i s t a n c e , t o P r o f e s s o r s W i n i a t a a n d N i c o l s f o r t h e i r a d v i c e and g u i d a n c e , a n d f i n a l l y t o my w i f e , A s h r a f , f o r h e r a s s i s t a n c e i n p r e p a r a t i o n o f t h e m a n u s c r i p t . TABLE OF CONTENTS Chapter Page I INTRODUCTION 1 Purpose of the study 5 Limitation of the study 6 Plan of thesis 7 II RELATIONSHIP BETWEEN NATIONAL OBJECTIVES AND THE NORMATIVE MODEL OF EFFECTIVE COMPETITION 8 Disagreement regarding the present state of the economy 8 Perfect Competition Defined 11 Pure Monopoly Defined 13 National Objectives 18 Summary 32 i l l MAIN CHARACTERISTICS OF EFFECTIVE COMPETITION 33 Brief Outline 33 Choice of Suitable Nomenclature 33 Aim of Definition 37 Main Characteristics 41 (a) Structure 41 (b) Conduct 51 (c) Performance 55 Shortcomings i n Defining Effective Competition Summary IV INFORMATIONAL REQUIREMENTS OF EFFECTIVE COMPETITION 65 Brief Outline 65 Major Weaknesses of Economic Analysis 66 A Proposal 67 Informational Requirements of Various Actors i n the Economy A. Consumer B. Employer 74 C. Worker 75 D. Creditor 78 E. Investor 80 F. Government-run Corporation 82 G. Foreigner 83 H. Government Agencies 83 An Informed Public Summary 62 63 71 71 90 93 Chapter Page V CORPORATE DISCLOSURE 94 B r i e f Outline 94 Importance of Modern Corporation 95 Accountants' Views about Corporate Disclosure Economists' Views about Corporate Disclosure Inadequacy of the Present Level of Disclosure Recommendations 106 Summary 126 99 103 105 IV SUMMARY OF THE MAIN FINDINGS OF THE STUDY 1 2 7 CHAPTER I INTRODUCTION M o d e r n l a r g e c o r p o r a t i o n s i n t h e U n i t e d S t a t e s a n d C a n a d a show l i t t l e r e s e m b l a n c e t o t h e o w n e r - o p e r a t o r c o m p a n i e s f o r m e d t o g a i n t h e b e n e f i t o f l i m i t e d l i a b i l i t y w h i c h was g i v e n b y t h e p a s s i n g o f t h e C o m p a n i e s A c t s a r o u n d t h e m i d d l e o f t h e n i n -t e e n t h c e n t u r y . U n l i k e t h e i r p r e d e c e s s o r s w h i c h w e r e e s s e n t i a l l y p a r t n e r s h i p s , a l m o s t a l l t h e p r e s e n t l a r g e c o r p o r a t i o n s h a v e a p e r p e t u a l e x i s t e n c e - b o t h i n l a w a n d r e a l i t y - a n d a r e m a n a g e d b y p r o f e s s i o n a l e x e c u t i v e s a p p o i n t e d b y B o a r d s o f D i r e c t o r s , who d e -p e n d f o r t h e i r e x i s t e n c e o n t h e p a t r o n a g e o f t h e s e e x e c u t i v e s . ' ' ' T h e e x e c u t i v e s h a v e i n c r e a s i n g l y become i n d e p e n d e n t o f t h e s h a r e h o l d e r s w h o , u n d e r l a w , a r e t h e o w n e r s o f t h e c o r p o r a t i o n s a n d a r e p r e s u m e d t o e x e r c i s e c o n t r o l o v e r t h e p o w e r s o f t h e e x e c u t i v e s . T h i s i n d e p e n d e n c e h a s b e e n s t r e n g t h e n e d b y t h e a b i l i t y o f l a r g e c o r p o r a t i o n s t o k e e p u n d e r t h e i r c o n t r o l s u f f i c i e n t f u n d s , b y way o f c a p i t a l c o s t a l l o w a n c e s a n d r e t a i n e d e a r n i n g s , t o i n i t i a t e e x p a n s i o n o f t h e 1 J . K . G a l b r a i t h , T h e New I n d u s t r i a l S t a t e ( B o s t o n : H o u g h t o n M i f f l i n C o . , 1 9 6 7 ) , p . 2 . - 2 -existing corporations and absorption of r i v a l cor-porations. As a result of these changes, there i s a wide gap between the legal interpretation of the rights and r e s p o n s i b i l i t i e s of corporations and the economic factors which determine the powers of corporations * In consequence, nearly a l l study of the corporations has been concerned with i t s deviations from i t s legal or formal image. This image - that of an association of persons into an autono-mous legal unit with a d i s t i n c t legal personality that enables i t to carry on business, own property and contract debts - i s highly normative* I t i s what a corporation should be. When a modern corporation disenfranchises i t s stockholders, grows to gargantuan size, expands into wholly unrelated a c t i v i t i e s , i s a monopsony where i t buys and a monopoly where i t s e l l s , something i s wrong. While the all-pervasive influence of the modern corporations i n the s o c i a l , p o l i t i c a l and economic a c t i v i t i e s of the United States and Canada 4 xs recognized, there i s no consensus of opinion as to the nature of responsible behavior expected from these corporations, and the types of controls that should be exercised to countervail the growing powers 2 Ibid, pp. 72-85. 3 Ibid, p. 73. 4 See Edward S. Mason, The Corporation i n Modern Society (Harvard University Press, 1959), PP. 2-9* - 3 -o f t h e p r o f e s s i o n a l e x e c u t i v e s who r u n t h e s e c o r p o r a -t i o n s . T h e q u e s t i o n o f d i s c l o s u r e o f i n f o r m a t i o n b y c o r p o r a t i o n s f o r m s a p a r t o f t h e t o t a l q u e s t i o n o f c o r p o r a t e b e h a v i o r . M a n y p o l i t i c i a n s a n d e c o n o m i s t s a d v o c a t e d i s c l o s u r e o f ' m a t e r i a l ' i n f o r m a t i o n b y c o r p o r a t i o n s . H o w e v e r , t h e y o f t e n f a i l t o d e f i n e w h a t i s ' m a t e r i a l ' i n f o r m a t i o n , t o whom i s t h i s i n -f o r m a t i o n ' m a t e r i a l ' , a n d why s u c h ' m a t e r i a l ' i n -f o r m a t i o n s h o u l d b e d i s c l o s e d . F o r e x a m p l e , i n f o r m a -t i o n a b o u t a p a r t i c u l a r p r o c e s s o f p r o d u c t i o n a d o p t e d b y a c o r p o r a t i o n i s v e r y ' m a t e r i a l ' t o a r i v a l c o r p o r a t i o n . S h o u l d t h e c o r p o r a t i o n w h i c h h a s i n -v e s t e d a l a r g e amount o f money t o d e v e l o p t h i s p a r t i c u l a r p r o c e s s r e v e a l the i n f o r m a t i o n a b o u t t h e p r o c e s s t o i t s r i v a l ? T h e r e i s no a g r e e m e n t a b o u t t h e c r i t e r i a t h a t s h o u l d b e u s e d t o d e t e r m i n e t h e t y p e s o f i n f o r m a t i o n t h a t s h o u l d be d i s c l o s e d , the m a n n e r i n w h i c h i t s h o u l d be d i s c l o s e d , a n d t h e p a r t i e s t o whom i t s h o u l d be d i r e c t e d . A c c o u n t a n t s a n d b u s i n e s s m e n h a v e g e n e r a l l y t a k e n a ' l e g a l i s t i c ' v i e w o f d i s c l o s u r e , c o n v e y i n g a c e r t a i n s e t o f i n f o r m a t i o n t o t h e p e r s o n s u n d e r c o n -t r a c t u a l o r l e g a l r e l a t i o n s h i p s , w h i c h s t i p u l a t e d i s -c l o s u r e o f t h i s s e t o f i n f o r m a t i o n . T h e i r v i e w i s p a r t l y b a s e d o n t h e p r e m i s e t h a t d i s c l o s u r e o f a d d i t i o n a l i n f o r m a t i o n t o t h e s t i p u l a t e d p e r s o n s , a n d o f c o r p o r a t e i n f o r m a t i o n t o t h e p e r s o n s n o t a t p r e s e n t - 4 -r e c e i v i n g s u c h i n f o r m a t i o n u n d e r c o n t r a c t o r l a w , s h o u l d b e b a s e d m a i n l y o n t h e c o s t - b e n e f i t r e l a t i o n -s h i p t o t h e f i r m r e q u i r e d t o d i s c l o s e s u c h i n f o r m a t i o n . H o w e v e r , many p o l i t i c i a n s a n d e c o n o m i s t s v i e w m o d e r n c o r p o r a t i o n s a s a m e d i u m u s e d b y p r i v a t e i n d i v i d u a l s t o c a r r y o u t p r o d u c t i v e a n d i n v e s t m e n t a c t i v i t i e s . T h e s e a c t i v i t i e s a f f e c t t h e l i v e l i h o o d a n d c o m f o r t of a l a r g e number o f p e r s o n s who a r e n o t c o n t r a c t u a l l y r e l a t e d t o t h e s e c o r p o r a t i o n s . T h e r e f o r e , c o r p o r a t e d i s c l o s u r e s h o u l d be g e a r e d t o t h e n e e d s o f t h e s o c i e t y w i t h i n w h i c h t h e c o r p o r a t i o n s a r e a l l o w e d b y l a w t o o p e r a t e . What s h o u l d b e t h e b a s i s f o r c o r p o r a t e d i s -c l o s u r e i s n o t a s e t t l e d q u e s t i o n . I t c a n n o t b e s e t t l e d u n t i l some a g r e e m e n t i s r e a c h e d o n t h e r o l e t h a t t h e m o d e r n c o r p o r a t i o n s h o u l d p l a y i n t h e s o c i a l , p o l i t i c a l a n d e c o n o m i c a c t i v i t i e s o f t h e c o u n t r y u n d e r r e v i e w . T h i s r e q u i r e s a n u n d e r s t a n d i n g o f t h e i n -t r i c a t e f o r c e s i n t h e s o c i e t y w i t h i n w h i c h m o d e r n c o r p o r a t i o n s o p e r a t e , a n d t h e s t r u c t u r e o f p o w e r w i t h i n t h e s e c o r p o r a t i o n s . A s a s t a r t i n g p o i n t , t h e r e i s g e n e r a l a g -r e e m e n t among t h e c i t i z e n s o f t h e U n i t e d S t a t e s a n d C a n a d a t h a t ' p r i v a t e e n t e r p r i s e 1 i s t h e m o s t s u i t a b l e m e t h o d o f e c o n o m i c a c t i v i t y t o • a c h i e v e t h e s o c i a l a n d 5 p o l i t x c a l o b j e c t i v e s o f t h e p e o p l e o f t h e s e c o u n t r i e s , 5 ; • M a r k S . M a s s e 1 , C o m p e t i t i o n a n d M o n o p o l y -L e g a l a n d E c o n o m i c I s s u e s ( B r o o k i n g s I n s t i t u t i o n , 1 9 6 2 ) , p . 2 . - 5 -Almost a l l the economists agree that the system of p r i v a t e e n t e r p r i s e can f l o u r i s h only i f independent market f o r c e s are allowed to p r i n c i p a l l y r e g u l a t e the a c t i v i t i e s of i n d i v i d u a l s and to determine the returns to each f a c t o r of production f o r i t s con-t r i b u t i o n . T h i s f a i t h i n the competitive system of p r i v a t e e n t e r p r i s e i s r e f l e c t e d i n the United States C o n s t i t u t i o n and innumerable laws passed to preserve competitive f o r c e s i n the economy. Purpose of the studyi The purpose of the study, i s to examine whether the c h a r a c t e r i s t i c s of " E f f e c t i v e 7 Competition' can provide c r i t e r i a f o r the type and extent of d i s c l o s u r e to be made by co r p o r a t i o n s . More s p e c i f i c a l l y , the o b j e c t i v e s of the t h e s i s a r e i 1. To determine whether a normative model of E f f e c t i v e Competition can be devised. 2. To explore the i n f o r m a t i o n a l requirements of such normative model of E f f e c t i v e Competition. 3. To examine the importance of corporate d i s c l o s u r e to the f u n c t i o n i n g of E f f e c t i v e Competition* 4. To make s p e c i f i c recommendations as to the type and extent of corporate d i s c l o s u r e r e q u i r e d by the normative model of E f f e c t i v e Competition. See the Supreme Cburt's opinion i n Northern P a c i f i c Railway Co. v. U. S. 356 U.S. 1, 5 (1958). 7 For a d e f i n i t i o n of ' E f f e c t i v e Competition', please see Chapter I I I . - 6 -L i m i t a t i o n of the study; Disclosure i s a method of conveying c e r t a i n information to s p e c i f i e d groups of persons. The substance of the information i s dependent on what i s to be done with the information received. As regulators of the competitive system i n the United States, the J u s t i c e Department and the Federal Trade Commission require c e r t a i n i n -formation about corporate a c t i v i t i e s . The study does not cover i n d e t a i l the present and p o s s i b l e f u t u r e a c t i v i t i e s of these regulatory a u t h o r i t i e s . I t i s recognized that d i s c l o s u r e of i n -formation by corporations does not n e c e s s a r i l y lead to the e f f e c t i v e c o n t r o l over the powers of the corporations. However, the type and extent of cor-porate d i s c l o s u r e recommended l a t e r i n the study may enable those empowered with the r e g u l a t i o n of economic a c t i v i t i e s i n the United States and Canada to devise methods to achieve maximum b e n e f i t from the e x i s -tence of large corporations, without subjecting the e n t i r e population to the whims of a few executives w i t h i n large corporations. The thesis i s confined to the informational aspects of the broader question of the r o l e the modern corporation should play i n the s o c i a l , p o l i t i c a l and economic development of the United States and Canada. I t does not cover d e t a i l e d discussion on the adminis-t r a t i v e procedure by which the recommended type and e x t e n t o f d i s c l o s u r e t o be a c h i e v e d . P l a n o f t h e s i s : T h e t h e s i s i s d i v i d e d i n t o s i x c h a p t e r s , i n c l u d i n g a n i n t r o d u c t o r y a n d a c o n c l u d i n g c h a p t e r . C h a p t e r I I r e v i e w s t h e s o c i a l , p o l i t i c a l a n d e c o n o m i c o b j e c t i v e s of t h e U n i t e d S t a t e s a n d C a n a d a w h i c h f o r m t h e f r a m e w o r k w i t h i n w h i c h t h e n o r m a t i v e m o d e l o f E f f e c t i v e C o m p e t i t i o n h a s t o be d e v i s e d . C h a p t e r I I I e x a m i n e s t h e m a i n c h a r a c t e r i s -t i c s o f t h e n o r m a t i v e m o d e l o f E f f e c t i v e C o m p e t i t i o n . C h a p t e r I V e x p l o r e s t h e i m p o r t a n c e o f t h e f l o w o f i n f o r m a t i o n t o t h e p a r t i e s f u n c t i o n i n g u n d e r t h e n o r m a t i v e u m b r e l l a o f E f f e c t i v e C o m p e t i t i o n . C h a p t e r V d i s c u s s e s t h e r o l e o f m o d e r n c o r -p o r a t i o n s i n t h e f r a m e w o r k o f E f f e c t i v e C o m p e t i t i o n , w i t h s p e c i a l r e f e r e n c e t o t h e t y p e a n d e x t e n t o f i n f o r m a t i o n t h a t c o r p o r a t i o n s o p e r a t i n g i n C a n a d a s h o u l d p r o v i d e t o f a c i l i t a t e movement o f t h e economy t o w a r d s t h e n o r m a t i v e m o d e l o f E f f e c t i v e C o m p e t i t i o n . F i n a l l y , C h a p t e r V I s u m m a r i z e s t h e m a i n f i n d i n g s o f t h e s t u d y . CHAPTER II RELATIONSHIP BETWEEN NATIONAL OBJECTIVES AND THE NORMATIVE MODEL OF EFFECTIVE COMPETITION Brief Outlinei This chapter examines the theoretical models of perfect or pure competition and pure mono-poly to f i n d out whether they can be used to explain the present state of the economy i n the United States and Canada, as well as predict the future. The study reveals that a different normative model i s necessary. An attempt i s made to build a framework describing the national objectives of the United States and Canada within which the normative model has to be devised. Disagreement Regarding the Present State of the Economy There i s considerable disagreement among economists, lawyers and businessmen as to whether the present set-up of the economy of the United States i s competitive. Many leading businessmen who are active i n the market contend that competition among sel l e r s to win the support of buyers i s very active, although the form"'" taken i s different from, and more complex than, that of price competition emphasized x For an interesting review see Joel Dean, "Competition - Inside Out," (Harvard Business Review, Vol. 32 , No. 6, Nov.-Dec. 1954), pp. 63-72. - 9 -i n t r a d i t i o n a l economic theory* Noting the economic progress made by the United States, and e s p e c i a l l y advances recorded since the Second World War, many 2 economists have argued that the American economy i s more competitive than appears on the s u r f a c e . They clai m one i s deceived by j u s t looking at large cor-porations who administer p r i c e s of t h e i r goods, and at powerful trade unions who c o n t r o l the labour market. John Kenneth G a l b r a i t h , i n h i s most re c e n t 3 book, The New I n d u s t r i a l State^ confirms that the present economic system of the United States achieves most of the goals such as high standard of l i v i n g , low unemployment, f a i r l y s t a b l e p r i c e s , and economic growth that are t r a d i t i o n a l l y a s c r i b e d to competition. However, he does not agree that the goals are achieved because the economy i s competitive i n the sense that independent market forces p i v o t i n g around the sovereignty of the consumer determine the type of products manufactured, and by whom they are manuf ac tured„ I am a l s o concerned to show how, i n t h i s l a r g e r context of change, the f o r c e s inducing human e f f o r t have changed. This a s s a u l t s the most maje s t i c of a l l economic Adolf A. B e r l e , The 20th Century C a p i t a l i s t Revolution (New York: Harcourt Bruce & Co. 1959), David L i l i e n t h a l , Big Business. A New Era (New York; Harper, 1953), Kaplan on Brookings Study. HBR 1955. G a l b r a i t h , op. ext. - 10 -assumptions, namely that man i n his economic a c t i v i t i e s i s subject to the authority of the market. Instead, we have an economic system which, whatever i t s formal ideological b i l l i n g , i s i n substantial part a planned economy. The i n i t i a t i v e i n deciding what i s to be produced comes not from the sovereign consumer who, through the market, issues the instructions that bend the produc-tive mechanism to his ultimate w i l l . Rather i t comes from the great producing organization which reaches forward to control the markets that i t ' is presumed to serve and, beyond, to bend the cus-tomer to i t s needs. And, i n so doing, i t deeply influences his values and bel i e f s .... One reason why there i s disagreement about how competitive, i f at a l l , the American economy i s , i s because economists and lawyers relate the exis-ting conditions to different norms or standards attached to competition. Between the theoretical limits of perfect or pure competition and pure mono-poly, there i s a broad spectrum of different con-ditions designated as 'hard' competition, 'soft' competition, ' f a i r ' competition, 'unfair' competition, 'passive' competition, 'active' competition, 'mono-p o l i s t i c ' competition, 'workable' competition, 'effective' competition and 'effective' monopoly.~* To add to the confusion, the legal definition of competition as enunciated i n many anti-trust law cases d i f f e r s considerably from the economic de f i n i t i o n of competition.^ 4 Ibid., p. 6. 5 Massel, OP. c i t . . pp. 186-191. 6 Massel, Ibid., pp. 11-14. - 11 -T h e t h e o r e t i c a l c o n c e p t o f p e r f e c t c o m -p e t i t i o n was d e v i s e d b y e c o n o m i s t s , p r i m a r i l y as a n a n a l y t i c a l t o o l t o e x p l a i n how v a r i o u s f o r c e s i n a n e c o n o m y o p e r a t e . I t was n o t m e a n t t o r e p -r e s e n t t h e c o n d i t i o n s p r e v a i l i n g i n t h e economy a t a n y g i v e n t i m e . P e r f e c t C o m p e t i t i o n D e f i n e d P e r f e c t c o m p e t i t i o n i s a s t a g e o f " e q u i l i -b r i u m " t o w h i c h t h e economy r e v e r t s p r o v i d e d t h e f o l l o w i n g c o n d i t i o n s a r e f u l f i l l e d . 1 . T h e number o f s e l l e r s i n t h e m a r k e t i s l a r g e . 2 . A l l s e l l e r s p r o d u c e i d e n t i c a l g o o d s f o r r e s a l e . 3 . The number of b u y e r s d e s i r i n g t o p u r -c h a s e t h e g o o d s i s l a r g e . 4 . E x c e p t f o r p r i c e , t h e s e b u y e r s a r e i n -d i f f e r e n t , a s t o p u r c h a s i n g f r o m one s e l l e r o r a n o t h e r . 5 . T h e s e b u y e r s h a v e p e r f e c t k n o w l e d g e a s t o w h a t i s a v a i l a b l e i n t h e m a r k e t a n d a t w h a t p r i c e . 6 . T h e s e l l e r s a r e i n s u f f i c i e n t m a r k e t p r o x i m i t y t h a t t h e r e i s no a d d i t i o n a l t r a n s p o r t c o s t i n v o l v e d a s b e t w e e n s e l l e r s . 7 . A s t h e b u y e r s a r e p r e s u m e d to h a v e p e r -f e c t k n o w l e d g e o f i d e n t i c a l p r o d u c t s o f f e r e d i n t h e m a r k e t , a d v e r t i s i n g a n d o t h e r s a l e s p r o m o t i o n t e c h -- 12 -niques are non-existent* 8. Entry i n t o , and e x i t from, the market are easy and inexpensive. 9. M o b i l i t y of the f a c t o r s of production i n the market i s u n r e s t r i c t e d . 10. The consumers and the s e l l e r s are r a t i o n a l i n t h e i r a n a l y s i s of what i s i n t h e i r r e s p e c t i v e i n t e r e s t * ^ In such a c o n d i t i o n of p e r f e c t competition, the s e l l e r i s faced with a p r i c e determined by the f o r c e s of supply and demand f o r the product o f f e r e d by a l l the s e l l e r s i n the market. As he i s one of a large number of s e l l e r s , he cannot i n f l u e n c e the p r i c e at which his product s e l l s i n the market. I f he increases h i s p r i c e above the market p r i c e , then a l l the buyers d i v e r t t h e i r purchase to other s e l l e r s o f f e r i n g at the market p r i c e . There i s no i n c e n t i v e f o r him to lower h i s p r i c e below the mar-ket p r i c e as he can s e l l a l l he can produce at the going market p r i c e . In such a s i t u a t i o n of p e r f e c t competition, the reward to the s e l l e r i s dependent on how e f f i -c i e n t l y he u t i l i z e s the f a c t o r s of production under h i s c o n t r o l , as compared to the e f f i c i e n c y of h i s competitors. I f he i s l e s s e f f i c i e n t than h i s corn-Paul A. Samuelson, Economics - An I n t r o -ductory A n a l y s i s (New York; McGraw-Hill Book Go., S i x t h E d i t i o n , 1964), pp. 38, 472-473* p e t i t o r s , then he i s forced out of the market. I f he i s more e f f i c i e n t than his competitors, then he benef i t s by r e c e i v i n g p r o f i t i n addition to the average r e t u r n on c a p i t a l established by the market. Thus competitive forces under perfect competition r e s u l t i n the best possible a l l o c a t i o n of economic resources, the maximum possible aggregate produc-t i o n and b e n e f i t to producers according to t h e i r pro due t i v i t y . Pure Monopoly Defined As a polar t h e o r e t i c a l bench mark, eco-nomists devised the concept of puce monopoly. The conditions of pure monopoly are; 1* There i s only one s e l l e r of a product i n the market, 2 , There i s no acceptable s u b s t i t u t e for the product. 3 , The s e l l e r i s i n a p o s i t i o n to prevent the buyers or others from making the product or i t s s u b s t i t u t e . Under pure monopoly, the s e l l e r faces a f a l l i n g demand curve. I t i s normally more prof-i t a b l e f o r him to stop production when marginal cost equals marginal revenue, but before h i s g average cost stops f a l l i n g . • Thus the resources under the co n t r o l of the s e l l e r are not u t i l i z e d I b i d , p. 549. - 14 -t o t h e f u l l a n d t h e b u y e r s p a y a p r i c e f o r t h e p r o d u c t w h i c h i s h i g h e r t h a n t h e m a r k e t p r i c e t h a t w o u l d h a v e p r e v a i l e d u n d e r p e r f e c t c o m p e t i -t i o n . P u r e m o n o p o l y i s d e p l o r e d b e c a u s e i t l e a d s t o m i s a l l o c a t i o n o f r e s o u r c e s a n d b e c a u s e t h e i m -p e r s o n a l p o w e r o f t h e m a r k e t i s r e p l a c e d b y t h e u n c o n t r o l l e d p o w e r o f t h e m o n o p o l i s t . T h e s e a r e e x t r e m e c o n d i t i o n s w h i c h h a v e n o t p r e v a i l e d f o r a n y l e n g t h o f t i m e i n a c t u a l 9 m a r k e t s . B u t t h e y h a v e b e e n u s e d a s d e v i c e s t o a n a l y z e t h e p r e v a i l i n g m a r k e t s a n d t o e x a m i n e how c l o s e t h e m a r k e t s a r e t o t h e d e s i r e d n o r m o f p e r -f e c t c o m p e t i t i o n . H o w e v e r , i n t h e 1930 's, J o a n R o b i n s o n " ^ a n d E d w a r d H . Chamber l i n ^ q u e s t i o n e d t h e d e s i r a b i l i t y o f g e a r i n g t h e economy t o w a r d s 12 t h e n o r m o f p e r f e c t o r p u r e c o m p e t i t i o n . A c c o r -d i n g t o C h a m b e r l i n , t h e n o r m a t i v e s t a g e o r p e r f e c t c o m p e t i t i o n e n t a i l i n g p r o d u c t i o n o f i d e n t i c a l g o o d s was n o t o n l y n o t a t t a i n a b l e b u t n o t d e s i r e d b y t h e 13 p e o p l e o f t h e U n i t e d S t a t e s . Once t h e economy g M a s s e l , o p . c i t . , p . 3 . J o a n R o b i n s o n , T h e E c o n o m i c s o f I m p e r f e c t C o m p e t i t i o n ( L o n d o n : M a c m i l l a n & C o . L t d . , 1933JT 1 1 E d w a r d H , Chamber l i n , T h e T h e o r y o f M o n o -p o l i s t i c C o m p e t i t i o n ( C a m b r i d g e : H a r v a r d U n i v e r s i t y P r e s s , 1933). 1 ? P o r a d i s t i n c t i o n b e t w e e n p e r f e c t a n d p u r e c o m p e t i t i o n , s e e C h a m b e r l i n , I b i d (1963 E d i t i o n ) , p . 6, 1 3 I b i d , p . 214. - 15 -p r o g r e s s e d beyond the s u b s i s t e n c e l e v e l , the t e n d e n c y o f t h e p e r s o n s i n t h e economy was t o spend th e d i s c r e t i o n a r y income on v a r i e t i e s of goods w h i c h may be c l o s e o r remote s u b s t i t u t e s f o r one a n o t h e r * C h a m b e r l i n a d v o c a t e d i n c o r p o r a -t i o n o f s u c h r e a l i t i e s i n n o r m a t i v e t h e o r i e s o f b e h a y i o r t o w h i c h t h e economy was t o be g e a r e d * The e x p l i c i t r e c o g n i t i o n t h a t p r o d u c t i s d i f f e r e n t i a t e d b r i n g s i n t o t h e open the p r o b l e m o f v a r i e t y and makes i t c l e a r t h a t p u r e c o m p e t i t i o n may no l o n g e r be r e g a r d e d as i n any s e n s e an " i d e a l " f o r p u r p o s e s o f w e l f a r e e c o n o m i c s . I n many c a s e s i t would be q u i t e i m p o s s i b l e to e s t a b l i s h i t , e v e n s u p p o s i n g i t t o be d e s i r a b l e * R e t a i l s h o p s , f o r example, c o u l d n o t a l l be l o c a t e d on the same s p o t , and p e r s o n a l d i f f e r e n c e s between a c t o r s , s i n g e r s , p r o f e s s i o n a l men, and b u s i n e s s men c o u l d not be e l i m i n a t e d . But even where p o s s i b l e , i t would n o t be de-s i r a b l e t o s t a n d a r d i s e p r o d u c t s beyond a c e r t a i n p o i n t * D i f f e r e n c e s i n t a s t e s , d e s i r e s , Incomes, and l o c a t i o n s of b u y e r s , and d i f f e r e n c e s i n t h e u s e s w h i c h t h e y w i s h t o make o f commodities a l l i n d i c a t e t h e need f o r v a r i e t y and the n e c e s s i t y o f sub-s t i t u t i n g f o r the c o n c e p t of a " c o m p e t i t i v e i d e a l " and i d e a l - i n v o l v i n g b o t h monopoly and c o m p e t i t i o n . S i n c e C h a m b e r l i n p u t f o r w a r d h i s t h e o r y o f m o n o p o l i s t i c c o m p e t i t i o n as a norm t o w h i c h t h e e x i s t i n g c o n d i t i o n s o f the market s h o u l d be com-p a r e d and towards w h i c h t h e economy s h o u l d be i n -f l u e n c e d , t h e r e have been many attempts t o s e t up o t h e r norms d e p i c t i n g 'optimum' c o m p e t i t i v e con-4 C h a m b e r l i n , I b i d , p. 214. I t a l i c s a d ded. - 16 -d i t i o n s . P e r h a p s t h e m o s t p o p u l a r o n e h a s b e e n ' W o r k a b l e C o m p e t i t i o n ' w h i c h was f i r s t p u t f o r -w a r d b y J o h n M a u r i c e C l a r k i n 1940.'''^  I t h a s b e e n w i d e l y u s e d b y t h e U n i t e d S t a t e s D e p a r t m e n t o f J u s t i c e i n A n t i - t r u s t c a s e s a n d became a s u b j e c t o f c l o s e s c r u t i n y b y t h e U . S . A t t o r n e y G e n e r a l ' s C o m m i t t e e . A l t h o u g h ' w o r k a b l e ' o r ' e f f e c t i v e ' " ' ' 7 c o m -p e t i t i o n a s a n o r m h a s r e c e i v e d s u b s t a n t i a l s u p p o r t f r o m many J u d g e s t r y i n g a n t i - t r u s t c a s e s , t h e r e i s no a g r e e m e n t among e c o n o m i s t s w h e t h e r i t i s t h e ' o p t i m u m ' t h a t s h o u l d be u s e d a s t h e g o a l o f t h e economy o f t h e U n i t e d S t a t e s . T h i s d i f f e r e n c e o f o p i n i o n i s n o t a t a l l s u r p r i s i n g b e c a u s e a l l t h e n o r m a t i v e c o n c e p t s o f c o m p e t i t i o n o t h e r t h a n p e r -f e c t c o m p e t i t i o n o r p u r e m o n o p o l y , a r e b a s e d o n v a l u e j u d g e m e n t s a b o u t s o c i a l , p o l i t i c a l a n d e c o n o m i c g o a l s o f t h e c o u n t r y . T h e m a j o r g o a l s o r o b j e c t i v e s o f t h e p e o p l e o f t h e U n i t e d S t a t e s h a v e n o t b e e n c o n c i s e l y a n d c o m p r e h e n s i v e l y d e -f i n e d i n a n y l e g a l d o c u m e n t , m a n i f e s t o o r c h a r t e r . A J J o h n M a u r i c e C l a r k , " T o w a r d a C o n c e p t o f W o r k a b l e C o m p e t i t i o n , " (The A m e r i c a n E c o n o m i c R e v i e w . V o l . X X X , N o . 2, J u n e 1940J. x ^ R e p o r t o f t h e A t t o r n e y G e n e r a l ' s Com-m i t t e e t o S t u d y t h e A n t i - t r u s t L a w s , 1955. 17 E f f e c t i v e C o m p e t i t i o n i s a t p r e s e n t w i d e l y u s e d i n p l a c e o f W o r k a b l e C o m p e t i t i o n . See J . M . C l a r k , " C o m p e t i t i o n , a d y n a m i c p r o c e s s , " p . I X , U . S . A t t o r n e y G e n e r a l ' s C o m m i t t e e , o p . c i t . p * 3 2 0 . These n a t i o n a l g o a l s a r e s c a t t e r e d i n the U. S. C o n s t i t u t i o n , the v a r i o u s l e g i s l a t i v e A c t s l i k e the Sherman A c t o f 1890, t h e Robinson-Patman A c t of 1913, and t h e i n n u m e r a b l e c o u r t d e c i s i o n s on c i v i l l i b e r t y , b u s i n e s s p e r f o r m a n c e , p r i v a t e p r o p e r t y and o t h e r p l e t h o r a of a c t i v i t i e s . Some of t h e s e n a t i o n a l g o a l s a r e i n c o n s i s t e n t w i t h one a n o t h e r . F o r exam-p l e , one r e a s o n why c o m p e t i t i o n i s d e s i r e d i s t o d i r e c t t h e a l l o c a t i o n o f r e s o u r c e s to the most e f f i c i e n t u s e . L o g i c a l l y , t h i s r e s u l t s i n the e v e n t u a l e l i m i n a t i o n o f any f i r m t h a t does not u t i l i z e t h e r e s o u r c e s under i t s c o n t r o l e f f i c i e n -t l y . I t appears t h a t p u b l i c p o l i c y t h r o u g h the Robinson-Patman A c t i s d e s i g n e d t o p r o t e c t s m a l l b u s i n e s s e s from the market f o r c e s o f c o m p e t i t i o n i n which l a r g e c o r p o r a t i o n s s n j o y e x t r a b e n e f i t s due 18 t o t h e i r s i z e , f i n a n c e s o r c o n t r o l over the market. To t a k e a n o t h e r example, e f f e c t i v e c o m p e t i t i o n r e -q u i r e s t h a t i m p e r s o n a l market f o r c e s be a l l o w e d t o o p e r a t e f r e e l y , n o t o n l y w i t h r e s p e c t t o p r i c e s , b u t t o l e v e l and c o n d i t i o n s of employment. The p r e s e n t t e n d e n c y i n the U n i t e d S t a t e s i s to remove the u n c e r t a i n t y o f market f o r c e s from t h e l a b o u r scene by p r o v i d i n g s e c u r i t y of employment, g u a r a n -19 t e e d a n n u a l wages and o t h e r s i m i l a r s t i p u l a t i o n s . M a s s e l , op. c i t . , p. 35. I b i d , p. 33. - 18 -N a t i o n a l O b j e c t i v e s From the m y r i a d o f pronouncements of s o c i a l , p o l i t i c a l and economic g o a l s o f t h e U n i t e d S t a t e s , t h e i m p o r t a n t g o a l s a r e d i s c u s s e d below. Many o f t h e s e a r e of an economic n a t u r e . I t can be ar g u e d t h a t economic g o a l s a r e n o t the o n l y ones a s o c i e t y p o s s e s s e s , and may be i n c o n f l i c t w i t h o t h e r g o a l s o f a s o c i a l o r p o l i t i c a l n a t u r e . T h i s i s not de-n i e d . However, any n o r m a t i v e s t a n d a r d o f com-20 p e t i t i o n i n v o l v e s m o s t l y economic f a c t o r s w h i c h can o n l y be s t i p u l a t e d i f t h e economic o b j e c t i v e s 21 o f t h e s o c i e t y a r e e n u n c i a t e d c l e a r l y . A t p r e s e n t the main n a t i o n a l o b j e c t i v e s o f t h e U n i t e d S t a t e s and Canada a r e : 1. E f f i c i e n t U t i l i z a t i o n o f R e s o u r c e s : I t i s r e a l i z e d t h a t t h e economic r e s o u r c e s of t h e U n i t e d S t a t e s - o r f o r t h a t m a t t e r of any c o u n t r y - a r e not u n l i m i t e d . T h e r e f o r e , i t i s e s s e n t i a l t h a t t h e s e r e s o u r c e s a r e us e d i n t h e most e f f i c i e n t way. The t r a d i t i o n a l A merican f a i t h i n c o m p e t i t i o n t o a c h i e v e t h i s aim i s r e f l e c t e d i n the U n i t e d S t a t e s Cons-t i t u t i o n w hich e n d o r s e s p r i v a t e e n t e r p r i s e . The Sherman A c t of 1890 i s a n o t h e r r e f l e c t i o n of t h e Throughout t h i s c h a p t e r , t h e word "com-p e t i t i o n " i s us e d to de n o t e t h e e f f o r t o f two o r more p a r t i e s to s e c u r e the custom of a t h i r d p a r t y by the o f f e r of t h e most f a v o u r a b l e terms. See Web-s t e r ' s T h i r d New I n t e r n a t i o n a l D i c t i o n a r y , p. 464. ^ F o r a d e f e n c e of u s i n g economic g o a l s , - 19 -f a i t h the A m e r i c a n s h a v e p l a c e d i n c o m p e t i t i o n t o a c h i e v e t h e a i m o f e f f i c i e n t a l l o c a t i o n o f r e s o u r c e s . T h e S h e r m a n A c t was d e s i g n e d t o b e a c o m p r e h e n s i v e c h a r t e r o f e c o n o m i c l i b e r t y a i m e d a t p r e s e r v i n g f r e e a n d u n f e t t e r e d c o m p e t i t i o n a s a r u l e o f t r a d e . I t r e s t s o n t h e p r e m i s e t h a t t h e u n r e s t r a i n e d i n t e r -a c t i o n o f c o m p e t i t i v e f o r c e s w i l l y i e l d t h e b e s t a l l o c a t i o n o f o u r e c o n o m i c r e s o u r c e s , t h e l o w e s t p r i c e s , t h e h i g h e s t q u a l i t y a n d t h e g r e a t e s t m a t e r i a l p r o g r e s s , w h i l e a t the same t i m e p r o v i d i n g a n . e n v i r o n m e n t c o n d u c i v e t o t h e p r e s e r v a t i o n o f o u r demo-c r a t i c a n d s o c i a l i n s t i t u t i o n s . ^ I t h a s b e e n a r g u e d b y some e c o n o m i s t s t h a t c o m p e t i t i o n i s n o t a p r e r e q u i s i t e t o t h e e f f i c i e n t a l l o c a t i o n o f r e s o u r c e s . A c c o r d i n g t o t h e m , t h e S o v i e t - t y p e o f e c o n o m i c s y s t e m b a s e d o n c e n t r a l e c o -n o m i c p l a n n i n g l e a d s t o b e t t e r u t i l i z a t i o n o f e c o -n o m i c r e s o u r c e s . W h e t h e r t h e A m e r i c a n p r i v a t e e n -t e r p r i s e s y s t e m o r t h e S o v i e t - t y p e o f c e n t r a l p l a n -n i n g b y t h e S t a t e l e a d s t o m o r e e f f i c i e n t u t i l i z a -t i o n o f e c o n o m i c r e s o u r c e s h a s n o t b e e n c o n c l u s i v e l y 23 r e s o l v e d . H o w e v e r , t h e S o v i e t - t y p e o f c e n t r a l e c o n o m i c p l a n n i n g i s r e j e c t e d p e r se b y t h e U n i t e d s e e C . E . F e r g u s o n , A M a c r o e c o n o m i c T h e o r y o f W o r k -a b l e C o m p e t i t i o n ( D u r h a m , N . C . : D u k e U n i v e r s i t y P r e s s , 1964). 22 T h e U . S . S u p r e m e C o u r t ' s o p i n i o n i n N o r t h e r n P a c i f i c R a i l w a y C o . v . U . S . 356 U . S . 1.5 119587. 23 F o r i n t e r e s t i n g c o m p a r i s o n s s e e A l l a n G . G r u c h y , C o m p a r a t i v e E c o n o m i c S y s t e m s ( B o s t o n : H o u g h t o n M i f f l i n C o . , 1966). - 20 -S t a t e s b ecause i t c o n f l i c t s w i t h o t h e r n a t i o n a l g o a l s of p r i v a t e i n c e n t i v e w h i c h a r e d i s c u s s e d below. 2. Reward f o r I n d i v i d u a l I n i t i a t i v e : The l o g i c b e h i n d t h e p r i v a t e e n t e r p r i s e system i n t h e U n i t e d S t a t e s i s t h a t i n d i v i d u a l i n i t i a t i v e and h a r d work s h o u l d be r ewarded. The p r o m i s e of p r i v a t e g a i n e n c o u r a g e s i n d i v i d u a l s t o u n d e r t a k e new, and o f t e n 24 r i s k y v e n t u r e s . The m a t e r i a l achievement of h a r d work i s c o n s i d e r e d t o be an i m p o r t a n t i n d i c a t o r of s u c c e s s i n l i f e . W i t h i n t h e c o n f i n e s o f law, Americans a r e f r e e t o spend t h e i r w e a l t h i n any way t h e y c h oose. T h i s a s s u r a n c e o f u n r e s t r i c t e d c o n -t r o l o v e r p r i v a t e w e a l t h s e r v e s as an i m p o r t a n t i n -c e n t i v e f o r i n d i v i d u a l i n i t i a t i v e . 3. P e r s o n a l Freedom: Freedom o f the i n d i v i d u a l t o speak, t o w o r s h i p and t o own p r i v a t e p r o p e r t y i s e n s h r i n e d i n t h e C o n s t i t u t i o n . Americans have by t r a d i t i o n been s u s p i c i o u s o f government i n t e r f e r e n c e i n r e g u l a t i n g t h i s freedom. However, w i t h t h e r i s e o f " b i g b u s i n e s s " and " b i g l a b o r " , t h i s t r a d i t i o n a l o p p o s i t i o n has been m o d i f i e d , e s p e c i a l l y i n the c a s e of r e g u l a t i n g c o m p e t i t i v e f o r c e s . The r e l a t i o n s h i p between c o m p e t i t i o n and p e r s o n a l freedom has changed w i t h t h e t i m e s . A t one time p e r s o n a l freedom meant absence o f government i n t e r f e r e n c e . C u r -r e n t l y i t has a much b r o a d e r c o n n o t a t i o n . 2 4 R o b e r t S o l o , Economic O r g a n i z a t i o n s and S o c i a l Systems (New Y o r k : The B o b b s - M e r r i l l Co. I n c . 196717"^ - 21 -I t has t a k e n on e l e m e n t s o f economic and p o l i t i c a l freedom. I t r e l a t e s t o immunity f r o m p r i v a t e as w e l l as governmental i n t e r -f e r e n c e . I t i s r e c o g n i z e d t h a t v a r i o u s freedoms do r e q u i r e some government r e -s t r i c t i o n s w h i c h l a y down the g e n e r a l r u l e s of t h e game. T h e r e f o r e , t h e r e i s l i t t l e s u p p o r t t o d a y f o r t h e c o n t e n t i o n t h a t g o v e r n -ment s h o u l d not i n t e r f e r e w i t h the l i b e r t y of i n d i v i d u a l b u s i n e s s m e n t o e n t e r i n t o c o n -t r a c t s w h i c h w i l l r e s t r i c t c o m p e t i t i o n . I n -s t e a d , t h e r e i s a f e e l i n g t h a t such r e s t r i c -t i o n s may a f f e c t the freedom o f o t h e r s who want t o e n t e r a market and of consumers who would l i k e to make t h e i r own c h o i c e s . 2 5 W h i l e t h e i n t e r v e n t i o n by government i n t h e economic sphere has been on t h e i n c r e a s e , e s p e c i a l l y s i n c e t h e Second World War, the economy o f t h e U n i t e d S t a t e s i s s t i l l f a r from b e i n g government c o n t r o l l e d . P r i v a t e e n t e r p r i s e i s s t i l l t he m a i n s t a y of t h e Am e r i -can economic system. 4. D i s p e r s i o n o f Economic Power: By t r a d i t i o n , p e o p l e i n the U n i t e d S t a t e s a r e opposed t o c o n c e n -t r a t i o n of power, be i t p o l i t i c a l o r economic. When i t has been found n e c e s s a r y t o endow the F e d e r a l L e g i s l a t u r e and the E x e c u t i v e w i t h power, v a r i o u s d e v i c e s o f c h e c k s and b a l a n c e s a r e d e s i g n e d t o e n s u r e the p r o p e r e x e r c i s e of t h i s power. Those h o l d i n g power a r e s u b j e c t e d t o p e r i o d i c s c r u t i n y by the p e o p l e who have d e l e g a t e d t h i s power. T h i s s c r u t i n y may be by way of e l e c t i o n s o r p u b l i c h e a r i n g s . 25 M a s s e l , op. c i t . , p. 14. - 22 -W i t h t h e r i s e of l a r g e b u s i n e s s c o r -p o r a t i o n s h a v i n g power o v e r the l i v e l i h o o d o f thousands o f employees and s u p p l i e r s , and o f t e n p o s s e s s i n g b u y i n g powers l a r g e r t h a n t h o s e o f i n -26 d i v i d u a l S t a t e s , many Americans have opposed t h i s c o n c e n t r a t i o n o f economic power. I n d u s t r i a l power s h o u l d be d e c e n t r a l i z e d . I t s h o u l d be s c a t t e r e d into-many hands so t h a t t h e f o r t u n e s of the p e o p l e w i l l n o t be dependent on the whim o r c a p r i c e , t h e p o l i -t i c a l p r e j u d i c e s , t h e e m o t i o n a l s t a b i l i t y o f a few s e l f - a p p o i n t e d men. The f a c t t h a t t h e y a r e n o t v i c i o u s men b u t r e s p e c t a b l e and s o c i a l minded i s i r r e l e v a n t . T h a t i s t h e p h i l o s o p h y and the command of the Sherman A c t . I t i s founded on a t h e o r y of h o s t i l i t y t o t h e c o n c e n t r a t i o n i n p r i v a t e hands o f power so g r e a t t h a t o n l y a government o f t h e p e o p l e s h o u l d have i t . 2 ' D e s p i t e t h i s t r a d i t i o n a l o p p o s i t i o n t o con-c e n t r a t i o n of economic power, t h e Supreme C o u r t , under the Sherman A c t , has l a t e l y been r e l u c t a n t t o b r e a k up l a r g e c o r p o r a t i o n s s o l e l y on ac c o u n t of s i z e . Under the 'Rule o f Reason' d o c t r i n e , t h e p l a i n t i f f i s r e q u i r e d t o e s t a b l i s h t h a t the d e t r i m e n t a l e f f e c t of the r e l a t i v e s i z e of the f i r m compared to the t o t a l market i s such as t o impede c o m p e t i t i o n . The economic argument b e h i n d t h i s l i n e of t h i n k i n g i s t h a t l a r g e f i r m s b e n e f i t the economy by s t a b i l i z i n g the employ-ment c o n d i t i o n s , by e n c o u r a g i n g t e c h n o l o g i c a l i n n o v a -0 A Andrew Hacker ( E d ) , The C o r p o r a t i o n Take-o v e r (New Y o r k : Anchor Books, 1965), p. 11. 27 J u s t i c e D o u g l a s , U. S. v . Columbia S t e e l Co. 334 U. S. 495, 536 (1948). ^ U, S. v . Al^uminium Co. o f A m e r i c a , 148 F 2d 416 (CCA-2d 1945). - 23 t i o n t h r o u g h heavy o u t l a y s i n r e s e a r c h and d e v e l o p -ment, and by u n d e r t a k i n g r i s k y v e n t u r e s . T h e r e f o r e , u n l e s s the d i s a d v a n t a g e s a s s o c i a t e d w i t h monopoly o r monopsony power a r e e s t a b l i s h e d , t h e l a r g e f i r m 29 s h o u l d not be c o n v i c t e d b e c a u s e of i t s s h e e r s x z e . •5. H i g h and S t a b l e Employment: F o l l o w i n g t h e h i g h l e v e l o f unemployment d u r i n g t h e d e p r e s s i o n y e a r s o f t h e 1930's, b o t h t h e U n i t e d S t a t e s and t h e C a n a d i a n government a r e committed by l e g i s l a t i o n t o do a l l i n t h e i r power t o promote maximum employment. B o t h governments have f r e q u e n t l y u t i l i z e d f i s c a l and monetary p o l i c i e s as c o u n t e r - c y c l i c a l d e v i c e s t o m a i n t a i n ' h i g h ' l e v e l s of a g g r e g a t e demand and em-p l oyment. T h e r e i s no agreement among e c o n o m i s t s as t o what l e v e l o f employment i s ' h i g h ' . I n b o t h c o u n t r i e s , t h e r a t e o f employment o v e r t h e l a s t twenty y e a r s has r a n g e d f r o m a low o f around 2 p e r 30 c e n t t o a h i g h o f o v e r 7 p e r c e n t . I n c o m p a r i s o n , the employment r a t e i n F r a n c e , West Germany, Sweden, Norway and J a p a n has n o r m a l l y been l e s s t h a n 2 p e r 31 c e n t . Under the c i r c u m s t a n c e s i t i s not r e s o l v e d c See Brown Shoe Co. of U. S. 370 v . 346 (1962) i n w h i c h t h e Supreme C o u r t approved a merger on t h e b a s i s t h a t t h e merged f i r m may s t r e n g t h e n com-p e t i t i o n a g a i n s t a l a r g e r c o m p e t i t o r . 3 0 See U. S. S t a t i s t i c s on employment and Dominion B u r e a u o f S t a t i s t i c s p u b l i c a t i o n s , Canada. 31 The d e f i n i t i o n f o r "unemployment" used by t h e Dominion Bureau of S t a t i s t i c s , Canada, d i f f e r s from t h e d e f i n i t i o n used by the H. M . S t a t i s t i c a l O f f i c e , London. However, t h i s d i f f e r e n c e i n d e f i n i t i o n s does - 24 -as t o what l e v e l o f unemployment s h o u l d be c o n -s i d e r e d s a t i s f a c t o r y f o r the U n i t e d S t a t e s and Canada. However, b a s e d on v a r i o u s s t u d i e s made 32 t o r e l a t e t h e unemployment l e v e l t o p r i c e s t a b i l i t y , the Economic C o u n c i l o f Canada c o n s i d e r s 3 p e r c e n t a maximum a l l o w a b l e l e v e l o f unemployment. We b e l i e v e t h a t , over t h e medium-term f u t u r e , economic p o l i c i e s s h o u l d be a c t i v e l y d i r e c t e d towards a c h i e v i n g a t a r g e t o f a 97 p e r c e n t r a t e of employment ( o r a r a t e o f unemployment of not more than 3 per c e n t ) . T h i s o b j e c t i v e has i m p o r t a n t i m p l i c a t i o n s f o r o t h e r o b j e c t i v e s - such as the main-tenance o f r e a s o n a b l e p r i c e s t a b i l i t y and a v i a b l e b a l a n c e - o f - p a y m e n t s p o s i t i o n and an e f f e c t i v e c o m b i n a t i o n o f p o l i c i e s w i l l be r e q u i r e d t o a c h i e v e t h e s e v a r i o u s o b j e c t i v e s i n a c o n s i s t a n t f a s h i o n . 3 3 The n a t i o n a l g o a l i s n o t o n l y f o r h i g h b u t f o r s t a b l e employment. T h i s r e q u i r e s the government t o a v o i d c y c l i c a l economic d i s t u r b a n c e s and to main-t a i n a g g r e g a t e demand a t f a i r l y h i g h l e v e l . 6. Economic Growth: A h i g h l e v e l of economic growth has assumed an i m p o r t a n t p o s i t i o n among the n a t i o n a l n o t i n v a l i d a t e t h e s t a t e m e n t t h a t t h e r a t e of em-ployment i n the U. S. and Canada was h i g h e r than i n t h e west of Europe d u r i n g t h e l a s t twenty y e a r s . See D a v i d C. Smith,"The Canadian F u l l -Employment G o a l " i n J o hn J . D e u t s c h and o t h e r s ( E d ) , The C a n a d i a n Economy ( T o r o n t o : The M a c m i l l a n Co. of Canada L t d . , 1965), pp. 53-62. 33 Economic C o u n c i l o f Canada, F o u r t h A n n u a l Review. "The Canadian Economy from t h e 1960's t o t h e 1970's, S e p t . , p. 4. - 25 -o b j e c t i v e s of b o t h t h e U n i t e d S t a t e s and Canada. I t " e s s e n t i a l l y i n v o l v e s a b a s i c c o n c e r n w i t h p r o d u c t i v i t y growth - t h a t i s , t h e growth o f o u t -put i n r e l a t i o n t o t h e r e s o u r c e s u s e d to p r o d u c e 34 i t . " A l t h o u g h the i n t r i c a t e r e l a t i o n s h i p o f f a c -t o r s c o n t r i b u t i n g t o p r o d u c t i v i t y growth i n Canada i s not f u l l y g r a s p e d by t h e C o u n c i l , i t has s e t a t a r g e t o f 5 p e r c e n t a n n u a l growth i n a c t u a l p h y s i -35 c a l o u t p u t as a n a t i o n a l o b j e c t i v e . The growth o f t h e economy i s d e s i r e d n o t o n l y t o accommodate the a n n u a l i n c r e a s e i n p o p u l a -t i o n b u t t o r a i s e t h e s t a n d a r d o f l i v i n g o f t h e e x i s t i n g p o p u l a t i o n . Economic growth r e q u i r e s i n -v e s t m e n t i n t e c h n o l o g i c a l l y advanced c a p i t a l e q u i p -ment, i n t r a i n i n g of s k i l l e d w o r k e r s , and t h e c r e a t i o n o f a c l i m a t e c o n d u c i v e t o r i s k - t a k i n g and i n n o v a t i o n s . 7. R e a s o n a b l e P r i c e S t a b i l i t y : B o t h the U n i t e d S t a t e s and t h e C a n a d i a n governments a r e p a r t i c u l a r l y c o n c e r n e d about the c o n t i n u i n g tendency of p r i c e s t o i n c r e a s e . Between 1953 and 1963 the a v e r a g e a n n u a l i n c r e a s e s i n consumer p r i c e s and i n p r i c e s of a l l goods and s e r v i c e s p r o d u c e d i n Canada were 1.4 p e r c e n t and 2.0 per c e n t r e s p e c t i v e l y , but t h e r e have been some moderate y e a r - t o - y e a r v a r i a t i o n s around 36 t n i s r a t e . A c c o r d i n g to fche C o u n c x l , p r i c e s s h o u l d 3 4 I b i d , p. 5. 3 5 I b i d , p. 6. - 26 -n o t be a l l o w e d t o r i s e f a s t e r than t h e 1953-1963 r a t e . The a c c e p t a n c e of t h i s r i s e i n p r i c e s i s b a s e d on the b e l i e f t h a t the o t h e r n a t i o n a l ob-j e c t i v e s o f a h i g h l e v e l o f employment and a h i g h r a t e o f growth i n e v i t a b l y r e s u l t i n some i n c r e a s e i n d o m e s t i c p r i c e s . But the government i s a n x i o u s t o see t h a t t h e r i s e i n consumer p r i c e s does n o t r e a c h a h i g h l e v e l o f say, 4 per c e n t , as t h i s may r e s u l t i n C a nadian e x p o r t s b e i n g o u t - p r i c e d i n the o v e r s e a s m a r k e t s , by c o m p e t i t o r s whose p r i c e s on c u r r e n t and p o t e n t i a l l y e x p o r t a b l e goods a r e n o t r i s i n g as f a s t as t h a t o f the Canadian e x p o r t e r s . 8. E q u i t a b l e D i s t r i b u t i o n o f R i s i n g Incomes: I t i s the p ronounced aim o f t h e C a nadian Government t o see t h a t t h e r i s i n g income of t h e c o u n t r y i s e q u i t a b l y d i s t r i b u t e d among d i f f e r e n t f a c t o r s of 37 p r o d u c t i o n . T h i s has p r o v e d t o be 'a v e r y com-38 p l e x m a t t e r , d e f y i n g s i m p l e f o r m u l a t i o n ' . S h o u l d t h e r e t u r n to e a c h f a c t o r of p r o d u c t i o n be l e f t t o market f o r c e s or s h o u l d t h e s e f o r c e s be tampered w i t h to a s s i s t any p a r t i c u l a r f a c t o r i n r e c e i v i n g a b i g g e r r e t u r n ? No e a s y answers can be g i v e n . Con-c e d i n g t h a t market f o r c e s do not always l e a d t o a 3 7 I b i d , p. 8. 3 ^ I b i d , p. 8. - 27 -s o c i a l l y d e s i r a b l e l e v e l o f income, the g o v e r n -ment has used p r o g r e s s i v e income tax and w e l f a r e s u b s i d i e s t o i r o n out l a r g e d i s p a r i t i e s i n n e t income. 9. A s s i s t a n c e t o S p e c i a l Groups o r I n t e r e s t s : A l -though a s s i s t a n c e to s p e c i a l groups o r i n t e r e s t s c a n n o t t r u l y be c a l l e d a n a t i o n a l o b j e c t i v e , the government o f the U n i t e d S t a t e s has over the y e a r s a s s i s t e d one group o r a n o t h e r f o r p a r t i c u l a r r e a s o n s , m a i n l y on e t h i c a l grounds o f f a i r p l a y and a ' j u s t * s o c i e t y . A l t h o u g h the b a s i c c o n c e p t of the l a b o u r u n i o n i s t o p r e v e n t c o m p e t i t i o n among i t s members, i t has been exempted from t h e p r o v i s i o n s of the Sherman A c t w h i c h i s d e s i g n e d t o p r e v e n t r e s t r a i n t s i n c o m p e t i t i o n . T h i s exemption i s d e s i g n e d t o en-c o u r a g e the u n i o n s t o have s u f f i c i e n t s t r e n g t h and power t o be a b l e t o b a r g a i n e f f e c t i v e l y w i t h power-f u l e m p l o y e r s . The a g r i c u l t u r a l i n d u s t r y i n the U n i t e d S t a t e s has n o t been s u b j e c t e d to open c o m p e t i t i o n s i n c e t h e d e p r e s s i o n days o f t h e 1930's w h i c h r u i n e d many f a r -mers. On the b a s i s t h a t a g r i c u l t u r e i s a b a s i c i n -d u s t r y w h i c h s h o u l d be e n c o u r a g e d t o t h r i v e , minimum p r i c e s f o r most o f the s t a p l e c r o p s and minimum i n -come per a c r e a g e a r e g u a r a n t e e d by the U n i t e d S t a t e s a g r i c u l t u r e a u t h o r i t i e s . T h i s s p e c i a l a s s i s t a n c e has n o t encouraged the a g r i c u l t u r e i n d u s t r y t o be as - 2 8 -e f f i c i e n t as some b e l i e v e i t c o u l d have been i f i t were s u b j e c t e d t o c o m p e t i t i v e f o r c e s . The p r o b l e m now f a c e d by t h e government i s to p r o v i d e s u f f i c i e n t p r o t e c t i o n t o the a g r i c u l t u r a l i n d u s t r y w i t h o u t im-p a i r i n g t h e f o r c e s w h i c h encourage e f f i c i e n c y i n t h e i n d u s t r y . S i n c e th e l a t e n i n e t e e n t h c e n t u r y when many f i r m s s t a r t e d becoming b i g and p o w e r f u l , t h e p u b l i c p o l i c y has been to p r o t e c t s m a l l businessmen from t h e 'hard' o r ' p r e d a t o r y ' c o m p e t i t i v e p r a c t i c e s o f l a r g e f i r m s . The F e d e r a l T r a d e Commission A c t o f 1914 was p a s s e d w i t h an i n t e n t t o p r o t e c t s m a l l b u s i n e s s m e n f r o m d i s c r i m i n a t o r y p r a c t i c e s o f supp-l i e r s who g i v e s p e c i a l p r i c e and s e r v i c e a l l o w a n c e s t o l a r g e f i r m s . S e c t i o n 5 of t h e A c t d e c l a r e s : U n f a i r methods o f c o m p e t i t i o n i n commerce, and u n f a i r o r d e c e p t i v e a c t s o r p r a c t i c e s i n commerce, a r e d e c l a r e d u n l a w f u l . As a f u r t h e r encouragement t o s m a l l b u s i n e s s e s , some S t a t e s have imposed s p e c i a l s a l e s t a x e s on c h a i n g r o c e r y s t o r e s and department s t o r e s . I n Canada, the Income Tax A c t imposes a c o n s i d e r a b l y lower r a t e o f t a x on b u s i n e s s e s whose a n n u a l p r o f i t s do not ex-39 c e e d $35,000. However t h i s s u p p o r t to s m a l l b u s i n e s s has n o t been c o n s i s t e n t l y a p p l i e d , and has been p a r t l y n e u t r a l i z e d by o t h e r a n t i - t r u s t or a n t i - m e r g e r p r o v i -s i o n s . F o r example, a m a n u f a c t u r e r i s s u b j e c t e d t o ^ C a n adian Income Tax A c t , 1968. - 29 a n t i - t r u s t l a w s i f h e s e t s r e s a l e p r i c e s f o r i n -d e p e n d e n t d i s t r i b u t o r s ( u n l e s s p e r m i t t e d b y s t a t e l a w ) . B u t he c o m m i t s no o f f e n c e i f he s e l l s a t a f i x e d p r i c e t h r o u g h h i s own c h a i n o f s u b s i d i a r i e s a c t i n g a s d i s t r i b u t o r s . T h i s n a t u r a l l y e n c o u r a g e s v e r t i c a l i n t e g r a t i o n w h i c h i n v a r i a b l y h u r t s s m a l l i n d e p e n d e n t b u s i n e s s m e n . T h e l i s t o f n a t i o n a l o b j e c t i v e s d i s c u s s e d a b o v e i s by n o means e x h a u s t i v e . T h e r e a r e many o t h e r o b j e c t i v e s l i k e n a t i o n a l s e c u r i t y , s u r p a s s i n g t h e r a t e o f g r o w t h o f t h e S o v i e t - t y p e o f e c o n o m i c s , s p e c i a l a i d t o t h e u n d e r p r i v i l e g e d b o t h i n s i d e a n d o u t s i d e t h e U n i t e d S t a t e s , w h i c h h a v e p r e o c c u p i e d t h e g o v e r n m e n t a t o n e t i m e o r a n o t h e r . E v e n t h e o b j e c t i v e s d i s c u s s e d a b o v e a r e n o t a l w a y s c o n s i s t e n t w i t h o n e a n o t h e r . T h e a i m s o f h i g h a n d s t a b l e em-p l o y m e n t a n d r a p i d e c o n o m i c g r o w t h f o l l o w i n g t e c h -n o l o g i c a l i n n o v a t i o n may b e a c h i e v e d by e n c o u r a g i n g l a r g e p r o g r e s s i v e c o r p o r a t i o n s t o t a k e o v e r s m a l l i n e f f i c i e n t f i r m s . A s t h i s c o n f l i c t s w i t h t h e o t h e r n a t i o n a l o b j e c t i v e s o f p e r s o n a l f r e e d o m f r o m e c o n o m i c c o n c e n t r a t i o n o f power a n d e n c o u r a g e m e n t t o i n d i v i d u a l i n i t i a t i v e , p u b l i c p o l i c y i s o p p o s e d t o s u c h m e r g e r s . I n one a r e a , m e r g e r s , t h e Supreme C o u r t h a s l e d t h e w a y , n o t o n l y i g n o r i n g e f f i c i e n c y b u t r e p u d i a t i n g i t a s a n a n t i - t r u s t o b j e c -t i v e t o be w e i g h e d w i t h o t h e r f a c t o r s i n r e a c h i n g d e c i s i o n s . The a s s u m p t i o n , a n d r e c e n t l y t h e a d m i t t e d a s s u m p t i o n , h a s t h u s s h i f t e d away f r o m a n i n t e r e s t i n t h e g r e a t e r - 30 -e f f i c i e n c y o f h i g h l y c o m p e t i t i v e markets t o an i n t e r e s t i n t r a d i t i o n a l c o m p e t i t i o n , i r r e s p e c t i v e o f e f f i c i e n c y . ^ Whenever one n a t i o n a l g o a l o r o b j e c t i v e has been i n c o n f l i c t w i t h a n o t h e r , t h e government has had t o make a c h o i c e b a s e d on economic f a c t o r s and p o l i t i c a l e x p e d i e n c y . I t has o f t e n been f o u n d t h a t a p a r t i c u l a r s e t of p o l i c i e s cannot i n c o r p o r a t e a l l t h e n a t i o n a l o b j e c t i v e s . A c h o i c e i s o f t e n made as to w h i c h o b j e c t i v e s s h o u l d be g i v e n p r i o r i t y . I n th e c a s e o f Canada, t h e g o a l o f r a p i d and s u s t a i n e d economic growth has i n t h e l a s t twenty y e a r s been r e l e g a t e d t o second p l a c e i n p r e f e r e n c e t o f u l l em-41 ployment and p r i c e s t a b i l i t y . G i v e n the n a t i o n a l o b j e c t i v e s d i s c u s s e d above, many e c o n o m i s t s have a t t e m p t e d to d e v i s e a n o r m a t i v e system o f c o m p e t i t i o n which can f u l f i l l most, i f n o t a l l , t h e s e g o a l s . The emphasis i s on a c o m p e t i t i v e system i n p r e f e r e n c e t o a s t a t e - p l a n n e d system because the predominant o p i n i o n i n t h e U n i t e d S t a t e s and Canada i s t o p r e s e r v e the c o m p e t i t i v e system a t arty c o s t . The c o m p e t i t i v e economic system w i t h d i s p e r s i o n of power i s c o n s i d e r e d a major f o u n -R i c h a r d E . Low ( E d ) , The Economics o f A n t i - t r u s t - C o m p e t i t i o n and Monopoly (Englewood C l i f f , N. J . : P r e n t i c e H a l l , 1968), p. 34 q u o t i n g »U. S. v . Van Groany Co. 384 U. S. 270 (1966)" and "Brown Shoe Co. o f U. S. 370 U. S. 294 (1962)" as a u t h o r i t i e s f o r 'admitted assumption'. 41 Economic C o u n c i l o f Canada. F i r s t A n n u a l Review 1964, p. 6. d a t i o n o f t h e p o l i t i c a l d e m o c r a t i c system w h i c h i s prevalent i n b o t h t h e c o u n t r i e s . A c c o r d i n g t o E . V. Rostow, c o m p e t i t i v e c a p i t a l i s m i s a n e c e s s a r y element o f a d e m o c r a t i c s o c i e t y . U n l e s s t h e members o f an o p p o s i t i o n c a n make a l i v i n g w i t h o u t t h e p e r m i s s i o n o f the government; u n l e s s t h e y c an f u n c t i o n as a p o l i t i c a l p a r t y , o b t a i n n e w s p r i n t and p r e s s e s , h i r e m e e t i n g h a l l s , p u b l i s h f r e e l y ; u n l e s s t h e y c an have a c c e s s t o t e l e v i s i o n w i t h o u t c o m p l e t e dependence on t h e g o o d w i l l and s p o r t i n g i n s t i n c t s o f t h e government i n power, t h e i r oppo-s i t i o n i s bound t o be a f e e b l e , meaning-l e s s f o r c e , e x i s t i n g o n l y by s u f f e r a n c e . C a p i t a l i s m i s a v i t a l p a r t o f the p r i c e of l i b e r t y . 4 2 Based on p a s t e x p e r i e n c e w i t h d i f f e r e n t t y p e s of c o m p e t i t i v e systems, the n o r m a t i v e model of com-p e t i t i o n i s n o t e x p e c t e d t o f u l f i l l a l l t h e n a t i o n a l o b j e c t i v e s . I t i s r e c o g n i z e d t h a t t h e n a t i o n a l ob-j e c t i v e of e q u i t a b l e d i s t r i b u t i o n of income c a n n o t be s o l e l y a c c o m p l i s h e d t h r o u g h the market f o r c e s g e n e r a t e d by c o m p e t i t i o n ; the tax system i s d e s i g n e d p a r t l y t o a c h i e v e t h i s end. S p e c i a l p r o v i s i o n s made t o p r o t e c t l a b o u r u n i o n s , f a r m e r s , s m a l l b u s i n e s s e s and o t h e r s , r u n c o u n t e r t o t h e o p e r a t i o n s of market f o r c e s ; t h e s e a r e r e c o g n i z e d as e x c e p t i o n s to t h e c o m p e t i t i v e system. The government has s e t up c e r t a i n minimum s t a n d a r d s o f q u a l i t y o f p r o d u c t , l a b e l l i n g , p a c k a g i n g , and m a r k e t i n g t o e n s u r e t h a t u n f a i r ad-va n t a g e i s n o t ta k e n o f the l a c k o f knowledge among b u y e r s . Some s t r a t e g i c i n d u s t r i e s l i k e w ater, power, 4 2 Eugene V. Rostow, P l a n n i n g f o r Freedom (New Haven: Y a l e U n i v e r s i t y P r e s s , 1959), p. 32. - 32 -e l e c t r i c i t y , g a s , c i t y t r a n s p o r t , r a i l r o a d s a n d s o c i a l i n f r a s t r u c t u r e s l i k e d e f e n c e , h i g h w a y s , e d u c a t i o n , a n d m e d i c a r e a r e f r e q u e n t l y e x c l u d e d f r o m t h e p r i v a t e e n t e r p r i s e s y s t e m . T h e y a r e r u n b y g o v e r n m e n t d e p a r t m e n t s o r s t a t u t o r y b o a r d s a n d a r e s u b j e c t e d t o p e r i o d i c s c r u t i n y . W i t h i n t h e e c o n o m i c a n d l e g a l f r a m e w o r k s e t u p t o s e r v e a s t h e r u l e s o f t h e game, a n a t t e m p t w i l l be made t o d e v i s e a n o r m a t i v e m o d e l o f c o m p e t i t i o n d e s i g n e d t o f u l -f i l l m o s t o f t h e n a t i o n a l o b j e c t i v e s . Summary: T h e m a i n c o n c l u s i o n s o f t h e c h a p t e r a r e a s f o l l o w s : 1 . E c o n o m i s t s a n d l a w y e r s d i s a g r e e o n how c o m -p e t i t i v e , i f a t a l l , t h e A m e r i c a n economy i s , b e c a u s e t h e y r e l a t e t h e e x i s t i n g c o n d i t i o n s t o d i f f e r e n t n o r m s o r s t a n d a r d s a t t a c h e d t o c o m p e t i t i o n . 2 . T h e t h e o r e t i c a l c o n c e p t s o f p e r f e c t a n d p u r e c o m p e t i t i o n a n d p u r e m o n o p o l y c a n n o t b e u s e d t o e x p l a i n p r e v a i l i n g c o n d i t i o n s a n d p r e d i c t t h e f u t u r e , m a i n l y b e c a u s e t h e y a r e b a s e d on c o n d i t i o n s w h i c h h a v e n o t p r e v a i l e d f o r a n y l e n g t h o f t i m e i n t h e e c o n o m i c s o f t h e U n i t e d S t a t e s a n d C a n a d a . 3 . A n y a t t e m p t t o d e v i s e a n o r m a t i v e m o d e l o f E f f e c t i v e C o m p e t i t i o n r e q u i r e s a n e x a m i n a t i o n o f t h e n a t i o n a l o b j e c t i v e s of t h e U n i t e d S t a t e s a n d C a n a d a . T h e s e a r e d i s c u s s e d i n t h e c h a p t e r . CHAPTER I I I MAIN CHARACTERISTICS OF EFFECTIVE COMPETITION B r i e f O u t l i n e : I n t h i s c h a p t e r , an a ttempt i s made t o d e f i n e t h e n o r m a t i v e model o f E f f e c t i v e C o m p e t i t i o n w i t h i n t h e framework o f t h e n a t i o n a l o b j e c t i v e s d i s -c u s s e d i n t h e l a s t c h a p t e r . C h o i c e o f S u i t a b l e N o m e n c l a t u r e The n a t i o n a l o b j e c t i v e s and s p e c i f i c ex-c e p t i o n s t o the f r e e e n t e r p r i s e system, d i s c u s s e d i n t h e l a s t c h a p t e r , s e r v e as the " r u l e s o f the game" w i t h i n which the n o r m a t i v e system of c o m p e t i -t i o n has t o be d e v i s e d . V a r i o u s names have been s u g g e s t e d f o r t h i s n o r m a t i v e system o f c o m p e t i t i o n . C h a m b e r l i n d e v i s e d ' M o n o p o l i s t i c C o m p e t i t i o n ' as a norm f o r p u b l i c p o l i c y . T h i s name has been c r i t i c i z e d on the ground t h a t i t reminds the r e a d e r of t h e mono-p o l i s t i c element i n t h e economy. 'Workable Com-p e t i t i o n 1 was f i r s t p u t f o r w a r d by John M. C l a r k i n 1940 as a norm which i s a t t a i n a b l e w i t h i n t h e s e t o f o b j e c t i v e s and c o n d i t i o n s p r e v a l e n t a t any 1 2 g i v e n t i m e . I n h i s l a t e s t book on c o m p e t i t i o n , 1 C l a r k , 1940, op. c i t . John M. C l a r k , C o m p e t i t i o n as a Dynamic P r o c e s s (Washington: B r o o k i n g s I n s t i t u t i o n , 1961). - 34 -C l a r k has us e d ' E f f e c t i v e C o m p e t i t i o n ' as a p r e -f e r r e d s u b s t i t u t e f o r 'Workable C o m p e t i t i o n ' f o r the f o l l o w i n g r e a s o n s : 1. The name i s ' p o s i t i v e ' i n t h a t i t i s r e f l e c t i v e o f what i s d e s i r a b l e as a m a t t e r o f p u b l i c p o l i c y . 2. The word ' e f f e c t i v e ' is s u g g e s t i v e o f d e s i r e d p e r f o r m a n c e o r r e s u l t s . The use of ' E f f e c t i v e C o m p e t i t i o n 1 as a norm i s a l s o e n d o r s e d by t h e U n i t e d S t a t e s A t t o r n e y G e n e r a l ' s N a t i o n a l Committee t o s t u d y t h e A n t i -3 t r u s t Laws. I n t h i s s t u d y , ' E f f e c t i v e C o m p e t i t i o n ' i s u s e d as a n o r m a t i v e s t a t e d e s i r e d by the U n i t e d S t a t e s and Canada, and towards t h e a t t a i n m e n t o f whi c h p u b l i c p o l i c y s h o u l d be g e a r e d . Many e c o n o m i s t s r e v i e w i n g 'Workable' or ' E f f e c t i v e ' c o m p e t i t i o n as a norm have atte m p t e d to d e f i n e i t i n a few words. T h e i r d e f i n i t i o n s have e i t h e r been i n c o m p l e t e or vague. F o r example, C. E . F e r g u s o n has d e f i n e d 'Workable C o m p e t i t i o n ' as f o l l o w s : An economic system i s w o r k a b l y com-p e t i t i v e i f t h e r e i s no f e a s i b l e change i n i n d u s t r i a l and u n i o n s t r u c t u r e t h a t . would make t a r g e t attainments^aore l i k e l y , g i v e n the p r o b a b i l i t y l i m i t s imposed upon our knowledge by i t s o r i g i n i n em-p i r i c a l r e s e a r c h . 3 R e p o r t of t h e A t t o r n e y G e n e r a l ' s Committee, op. c i t . , p. 322. 4 See George J . S t i g l e r , " E x t e n t and Bases of Monopoly", American Economic Review, P a p e r s and P r o -c e e d i n g s XXXII (1942), pp. 2-3. ^ F e r g u s o n , l o c . c i t . , p. 80. - 35 -W h i l e t h i s d e f i n i t i o n may s a t i s f y the p s y -c h o l o g i c a l need o f a p e r s o n , i t does n o t a s s i s t him i n f i n d i n g t h e c h a r a c t e r i s t i c s of t h i s n o r m a t i v e s t a t e . J o h n M. C l a r k ^ gave up d e f i n i n g ' E f f e c t i v e C o m p e t i t i o n 1 i n a few s e n t e n c e s . Any t h e o r i s t a t t e m p t i n g t o d e f i n e ' E f f e c t i v e C o m p e t i t i o n ' meets w i t h t h e f o l l o w i n g d i f f i c u l t i e s : 1. A t a time when ' P e r f e c t C o m p e t i t i o n ' was con-s i d e r e d as an u n a t t a i n a b l e i d e a l b u t towards w h i c h th e p r e v a i l i n g economy s h o u l d be s t e e r e d , i t was q u i t e e a s y t o d e f i n e t h i s n o r m a t i v e c o n c e p t . Based on a s e t o f assu m p t i o n s about a l a r g e number o f b u y e r s , homogeneous p r o d u c t , p e r f e c t i n f o r m a t i o n , ease o f e n t r y and e x i t , m o b i l i t y o f f a c t o r s , and p r o f i t m a x i m i z a t i o n , an optimum model of ' P e r f e c t C o m p e t i t i o n ' can be l o g i c a l l y d e v i s e d which e s s e n -t i a l l y d e p i c t s the c o s t - p r i c e r e l a t i o n s h i p . S i m i -l a r l y , a t h e o r e t i c a l model of 'Pure Monopoly' can be d e v i s e d on the b a s i s o f c e r t a i n a s s u m p t i o n s . However, d e v i s i n g the model of ' E f f e c t i v e C o m p e t i t i o n ' poses many c o m p l i c a t i o n s and pr o b l e m s . ^ The e x i s t i n g c o n d i t i o n s t h a t c o n s t i t u t e c o m p e t i t i o n , w h i c h form t h e b a s i s of t h e model, a r e too complex t o be c o m p a r t m e n t a l i z e d i n t o a s e t o f a few ob-s e r v a t i o n s o r hy p o t h e s e s w h i c h a r e c o n c i s e and C l a r k 1961, l o c . c i t . , p. 14. See Churchman, P r e d i c t i o n and O p t i m a l - 36 -meaningful. Further, the importance given to each of the forces in the economy to f u l f i l l the national objectives is dependent on the judgement of the theorist, which i s based mainly on subjective evalua-tions. Thus, given the economic conditions of a country and the objectives desired by the people, i t is not unusual to find two theorists devising completely different models to attain the objec-tive s. 2. There is a wide disparity between what economists consider as competition and what lawyers define as competition. Economists normally consider the power over the market by way of control on price and en-try enjoyed by any firm, as a crucial factor in determining whether an industry is competitive. The lawyers are restricted in their definition to what is defined as 'competition' or 'restrictions to com-petition* in the legal statutes. Sections 1 and 2 of the Sherman Act of 1890 define what is con-sidered as anti-competitive and therefore i l l e g a l . Section 1 Every contract, combination in the form of trust or otherwise, or conspiracy, Decision (Englewood C l i f f s , N. J.: Prentice Hall, l96l) pp. 339-357, discussing theoretical models in Social Science, also Karl R. Pepper, The Logic of S r-i^ntific Discovery (New York: Harper & Row, T959), pp. 27-48, for inductive and deductive testing of theories. i n r e s t r a i n t o f t r a d e o r commerce among t h e s e v e r a l s t a t e s , o r w i t h f o r e i g n n a t i o n s , i s d e c l a r e d t o be i l l e g a l . S e c t i o n 2 E v e r y p e r s o n who s h a l l m o n o p o l i z e , o r a t t e m p t t o m o n o p o l i z e , o r c o m b i n e o r c o n s p i r e w i t h a n y o t h e r p e r s o n o r p e r s o n s , t o m o n o p o l i z e a n y p a r t o f t h e t r a d e o r commerce among t h e s e v e r a l s t a t e s , o r w i t h f o r e i g n n a t i o n s , s h a l l be g u i l t y o f a m i s d e m e a n o r . T h e s e c l a u s e s a r e t o o s w e e p i n g i n t h e i r w o r d i n g s a n d , i f t a k e n l i t e r a l l y , c a n o u t l a w a l l i n t e r s t a t e commerce - f o r e v e r y c o n t r a c t i s i n r e s t r a i n t o f t r a d e . T h e i m p o r t a n t p o i n t i n t h e l e g a l a t t e m p t t o r e g u l a t e a n t i - c o m p e t i t i v e f o r c e s i s t o a t t a c k t h e a c t i o n s o f t h e f i r m s i r r e s p e c t i v e o f w h e t h e r t h e u l t i m a t e r e s u l t e n h a n c e s o r r e s t r i c t s c o m p e t i t i o n . I t i s i m p o r t a n t t o r e c o n c i l e t h e e c o n o m i c a n d l e g a l a p p r o a c h e s t o E f f e c t i v e C o m p e t i t i o n a s l a w i s a n i n s t r u m e n t t o r e g u l a t e t h e p r a c t i c e s o f f i r m s a n d i n d i v i d u a l s t o w a r d s t h e g o a l o f E f f e c t i v e Com-p e t i t i o n . T h i s r e c o n c i l i a t i o n r e q u i r e s t h e f o r m u l a -t i o n o f a c o n c i s e d e f i n i t i o n o f E f f e c t i v e C o m p e t i t i o n b y t h e t h e o r i s t w h i c h t a s k , w i t h t h e a v a i l a b l e m e t h o d o f a n a l y s i s , i t i s n o t e a s y f o r t h e t h e o r i s t to d o . A i m o f D e f i n i t i o n T h e a b s e n c e o f a s h o r t a n d c o n c i s e d e f i n i -t i o n o f E f f e c t i v e C o m p e t i t i o n d o e s n o t mean t h a t L o w , o p . c i t . , p . 13 - 38 -i t i s n o t a m e a n i n g f u l c o n c e p t . The aim o f d e f i -n i t i o n i s t o draw a l i n e o f d e m a r c a t i o n between what i s p e r t i n e n t and what i s n o t . A d e f i n i t i o n i s b r o u g h t about by c r e a t i n g a c l a s s o f o b j e c t s w i t h common p r o p e r t i e s , t h e r e b y t h e s e o b j e c t s a r e made d i s t i n c t f r o m t h o s e l a c k i n g t h e c h a r a c t e r i s t i c a t t r i b u t e s . I n e x t r e m e l y s i m p l e and c o n c r e t e s i t u a t i o n s i t may be ea s y t o s p e c i f y t h e s e a t t r i b u t e s , b u t i n c a s e s of even moderate c o m p l e x i t y a p e r f e c t d e f i n i t i o n i s d i f f i c u l t t o a t t a i n . I t s h o u l d c o n t a i n n e i t h e r too few nor too many p r o p e r t i e s , o n l y t h o s e o f c o n s t i t u t i v e n a t u r e ; i t ought t o be w i t h o u t a m b i g u i t y and i t must a v o i d c i r c u l a r r e a s o n i n g . Y e t , the c h i e f c r i t e r i o n o f a good d e f i n i t i o n i s i t s power of d e m a r c a t i o n - t h a t i s t h e a b i l i t y t o s e p a r a t e c l e a r l y o b j e c t s b e l o n g i n g t o t h e d e f i n e d c a t e g o r y from o t h e r o r s i m i l a r ob-j e c t s t h a t do n o t b e l o n g t o i t . F o l l o w i n g t h e p r o c e d u r e adopted by s u c h n o t a b l e e c o n o m i s t s as Corwin D. Edwards, ^  Mark S. M a s s e l , 1 1 12 13 Stephen H. S o s n i c k , and J o h n M. C l a r k , the l i n e s o f d e m a r c a t i o n f o r E f f e c t i v e C o m p e t i t i o n a r e drawn by e m p h a s i z i n g t h e main c h a r a c t e r i s t i c s of the norma-t i v e model. These a r e d e r i v e d by o b s e r v a t i o n s and a b s t r a c t i o n s from r e a l c o n d i t i o n s . They a r e t h e ones 9 R i c h a r d M a t t e s i c h , - A c c o u n t i n g and A n a l y -t i c a l Methods (Homewood, 111.: R i c h a r d D. I r w i n I n c .. 1964), p. 18. I t a l i c s i n t h e o r i g i n a l . l ® Corwin D. Edwards, M a i n t a i n i n g C o m p e t i t i o n (New Y o r k : McGraw H i l l Book Co., 1949), pp. 9-11. X L M a s s e l , op. c i t . , pp. 186-235. 12 Stephen H. S o s n i c k , "A C r i t i q u e o f Con-c e p t s o f Workable C o m p e t i t i o n . " ( Q u a r t e r l y J o u r n a l o f Economics, V o l . 72, 1958), pp. 389-391. 13 C l a r k , 1961, op. c i t . . pp. 465-490. - 39 -w h i c h have been f r e q u e n t l y seen to have e x i s t e d when many of t h e n a t i o n a l o b j e c t i v e s were b e i n g f u l -f i l l e d . T h e i r p r e s e n c e o r i n t r o d u c t i o n has improved 14 t h e c o m p e t i t i v e c o n d i t i o n s o f t h e market. F o r sake o f c l a r i t y and c o n v e n i e n c e , t h e main c h a r a c t e r i s t i c s a r e d i v i d e d i n t o t h e f o l l o w i n g t h r e e c a t e g o r i e s : A. S t a n d a r d s of S t r u c t u r e : These a r e m o s t l y c h a r a c -t e r i s t i c s e x t e r n a l t o t h e f i r m . They i n c l u d e s u c h i n d i c a t o r s as t h e numbers of b u y e r s and s e l l e r s i n t h e m arket, t h e g e o g r a p h i c a l d i s t r i b u t i o n o f s u p p l y and demand, t h e d i f f i c u l t i e s of e n t r y i n t o t h e market, the i n d e p e n d e n c e o f f i r m s i n the market, and t h e t y p e and d e g r e e o f v e r t i c a l i n t e g r a t i o n w h i c h e x i s t . I n e s s e n c e , t h e y c o n s t i t u t e the environment w h i t h i n w h i c h t h e f i r m o p e r a t e s . T h i s a r e a i s most s u s c e p -t i b l e t o a l t e r a t i o n s b y p u b l i c p o l i c y . I t has o f t e n been a r g u e d ^ t h a t the p e r f o r -mance o f t h e f i r m i s the o n l y c r i t e r i o n by which the c o m p e t i t i v e n e s s o f the economy s h o u l d be j u d g e d . C o n v e r s e l y , an e nvironment c o n d u c i v e t o E f f e c t i v e C o m p e t i t i o n does n o t g u a r a n t e e t h a t the f i r m w i l l 16 behave i n a c o m p e t i t i v e manner. T h i s argument has 14 M a s s e l , op. c i t . , p. 193. See F e r g u s o n , op. c i t . . pp. x v i i - v i x . 16 The word " c o m p e t i t i v e " i s d e f i n e d i n W e bster's T h i r d New I n t e r n a t i o n a l D i c t i o n a r y as under ( p . 4 6 4 ) O f , o r r e l a t i n g t o c o m p e t i t i o n . P r o duced by, based on, r e s u l t i n g from, o r c a p a b l e - 40 -b e e n c o n v i n c i n g l y r e p u d i a t e d b y n o t a b l e e c o n o m i s t s l i k e C o r w i n E d w a r d s , S t e p h e n S o s n i c k , a n d J o h n M . C l a r k who h a v e d r a w n f r o m p r a c t i c a l e x p e r i e n c e t o d e m o n s t r a t e t h a t t h e p e r f o r m a n c e o f t h e f i r m i s q u i t e s e n s i t i v e t o t h e e x t e r n a l e n v i r o n m e n t w i t h i n w h i c h i t o p e r a t e s . The c o n c e p t s o f w o r k a b i l i t y w h i c h h a v e p r o p o s e d c r i t e r i a f o r s t r u c t u r e , o r c o n d u c t o r p e r f o r m a n c e , o r c o m b i n a t i o n t h e r e o f , t h e r e f o r e , a r e n o t c o m p a t i b l e . P e r f o r m a n c e i s w h a t i s o f u t m o s t i m p o r t a n c e h e r e , a n d w h e t h e r p e r f o r m a n c e i s s a t i s f a c t o r y c a n be j u d g e d o n l y w i t h p e r f o r m a n c e c r i t e r i a . B u t i m p r o v a b l e , f o r t u i t o u s , o r p a s s i n g p e r f o r -mance c a n b e a d e q u a t e l y j u d g e d o n l y b y a d d i n g s t r u c t u r e a n d c o n d u c t c r i t e r i a . The c o n -d i t i o n s a d o p t e d a s s u f f i c i e n t f o r w o r k a b i l i t y w i l l p r o m i s e s a t i s f a c t o r y p e r f o r m a n c e o n l y i f t h e y i n c l u d e d i m e n s i o n norms o f s t r u c t u r e , c o n d u c t , a n d p e r f o r m a n c e . 1 7 B . S t a n d a r d s o f C o n d u c t : T h i s c a t e g o r y r e l a t e s t o t h e c o n d u c t o r b e h a v i o r o f t h e f i r m s i n t h e m a r k e t . I t i n c l u d e s s u c h a t t r i b u t e s a s c o l l u s i o n among t h e c o m p e t i t o r s r e g a r d i n g p r i c e o r v o l u m e o f o u t p u t , t h e m e t h o d o f d e t e r m i n i n g p r i c e s i n t h e i n d u s t r y , d i s -c r i m i n a t i o n i n p r i c e s a n d s e r v i c e s t o d i f f e r e n t s i z e o f f i r m s , m e t h o d o f p o o l i n g p a t e n t s among c o m p e t i t o r s , a n d t h e r e s p o n s e o f f i r m s t o p r o f i t a b l e o p p o r t u n i t i e s . T h e s e a t t r i b u t e s a r e b y n o means e x h a u s t i v e . A s t h e y c a n b e p r o v e d b y e v i d e n c e , t h e y h a v e b e e n u s e d w i d e l y o f e x i s t i n g i n r i v a l r y o f e c o n o m i c e n -d e a v o u r a n d w i t h o u t t h e p r e s e n c e o f m o n o p o l y o r c o l l u s i o n . S o s n i c k , o p . c i t . , p . 3 9 9 . - 41 -i n d e t e r m i n i n g c a s e s under t h e Sherman A c t and t h e Robinson-Patman A c t . C. S t a n d a r d s o f P e r f o r m a n c e : Performance of a f i r m , an i n d u s t r y o r a market i s t h e most c r u c i a l c r i t e r i o n i n j u d g i n g whether t h e b e n e f i t s a t t r i b u t e d t o E f f e c -t i v e C o m p e t i t i o n a r e b e i n g a c h i e v e d . C o n c e p t u a l l y , t h e u l t i m a t e judgement about t h e e f f e c t i v e n e s s o f c o m p e t i t i o n i n a market s h o u l d be i t s p e r f o r m a n c e . How c o m p e t i t i v e a r e the p r i c e s , t h e p r o d u c t i o n , t h e i n n o v a t i o n s , and t h e consumer c h o i c e s ? The p r i n c i p a l s i g n i f i c a n c e of i n d i c a t o r s o f s t r u c t u r e and b e h a v i o r i s the l i g h t t h e y throw on e x p e c t a t i o n s of p e r f o r m a n c e . *° The t h r e e c a t e g o r i e s of s t r u c t u r e , c o n d u c t , and p e r f o r m a n c e , a r e not m u t u a l l y e x c l u s i v e . As t h e y a r e c l o s e l y i n t e r r e l a t e d , an e v a l u a t i o n of t h e c o m p e t i t i v e n e s s o f any f i r m s h o u l d r e q u i r e a s t u d y o f a l l t h e c h a r a c t e r i s t i c s d i s c u s s e d below. M a i n C h a r a c t e r i s t i c s A. S t r u c t u r e : 1. C o n c e n t r a t i o n : One of the most i m p o r t a n t c h a r a c -t e r i s t i c s d e t e r m i n i n g t h e e nvironment f o r E f f e c t i v e C o m p e t i t i o n i s the r e l a t i v e c o n c e n t r a t i o n of s e l l e r s , b u y e r s , and s u p p l i e r s w i t h i n a market. I t has been o b s e r v e d t h a t , o t h e r t h i n g s b e i n g e q u a l , a market w i t h a l a r g e number of f i r m s and of r e l a t i v e l y even s t r e n g t h M a s s e l , op. c i t . . p. 2214. - 42 -tends to be more competitive than a market dominated by one or a few very large firms with the r e s t of the small f i r m s depending on the goodwill of these large f i r m s . However, there i s no a p r i o r i formula to i n -dicate the minimum number of firms that should be i n the market before i t becomes e f f e c t i v e l y competitive. This depends very much on the type of industry, the stage of growth of the i n d u s t r y , the importance of economies of scale i n the industry, the importance of t e c h n o l o g i c a l innovation to the industry, and the r e l a t i v e s i z e of the market held by say the 'Big Five* i n the industry. A rough guidance i s provided by some a n t i - t r u s t cases i n which r e l a t i v e s i ze was 19 used to determine monopolistic power. Any discussion of the r e l a t i v e s i z e of the f i r m requires defining the t o t a l s i z e of the market f o r the product which the f i r m i s producing. What products are substitutes f o r one another so as to be included i n the same market? What i s the c r o s s -e l a s t i c i t y of demand between the products? Should C a d i l l a c s be included i n the same market as Volks-wagens? Should the copper and say p l a s t i c industry be included i n one market because many of t h e i r pro-19 See U. S. v. Al_uminium Co. of America 148 F 2d 416 (CCA 2d 1945). ' In the Matter of Crown Zellerbach Corp.. F.T.C. Docket 6180 (1957). A tabu-l a t i o n of the market "held to be i l l e g a l " i s contained i n G. E. Hale and Rosemary D. Hale, Market Power: Size and Shape Under the Sherman Act (1958) footnote pp. 120-121. - 43 -ducts are i n c r e a s i n g l y serving as substitutes f o r one another? The answer to these and many other s i m i l a r questions w i l l determine the t o t a l s i z e of the market and the r e l a t i v e share of each of the firms i n the market. The United States Supreme Court dealing with A n t i - t r u s t cases has not come up with consistent answers. In the famous Cellophane 20 Case the Supreme Court interpreted the market f o r wrapping m a t e r i a l broadly to include f l e x i b l e wrap-ping materials which might be construed as s u b s t i -tutes f o r cellophane. On the other hand, i n the 21 General Motors Case. the Court applxed a p a r t i c u -l a r l y narrow concept of the market, declaring that paints used by automobile manufacturers are of a s p e c i a l type and should not be included i n the broad category of paints f o r a l l purposes. Despite these apparently c o n f l i c t i n g views of what constitutes a market, economic analysis can be used to determine cross e l a s t i c i t i e s of demand between products and, by s e t t i n g up c e r t a i n demarcation l i n e s which are broadly agreed by p o l i c y makers, a f a i r assessment of the s i z e of the market can be made. Even i f the t o t a l market for the product i s defined, and the r e l a t i v e s i ze of the market held by _ U. S. v. Aluminium Co. of America 44 F. Supp 97 (S.D. N.Y. 1941), 148 F 2d 416 (C.C.A. - 2d 1945); 91F Supp 333 (S.D. N.Y. 1950). U. S. v. E. I . du Pont de Nemours 960 353 U. S. 586 (1957). - 44 -the larger firms known, the c h a r a c t e r i s t i c of con-cen t r a t i o n cannot by i t s e l f give a complete answer to the question whether the market i s e f f e c t i v e l y com-p e t i t i v e . I t has to be r e l a t e d to other c h a r a c t e r i s -t i c s . 2. Opportunity f o r Entry: Even i f the firms i n a market are few enough to be able to charge prices higher than those possible under perfect competition, an important point taken i n t o account by the e x i s -t i n g firms while considering to charge higher p r i c e s i s whether such high p r i c e s w i l l a t t r a c t other large firms producing d i f f e r e n t products to enter i n t o the market for the product i n the hope of earning 'mono-poly' p r o f i t s . This w i l l i n turn depend on whether i t i s r e l a t i v e l y easy to enter the market. I f there are no s u b s t a n t i a l b a r r i e r s to entering a market, strong monopoly elements w i l l probably not endure. High p r o f i t s or opportunities to enter the market with lower costs w i l l a t t r a c t newcomers. S i m i l a r l y , i f the members of an industry f e l t that i t was easy f o r others to enter the market, they would be less i n c l i n e d to f i x prices since more p r o f i t a b l e p rices would make the market more i n v i t i n g to outsiders.22 whether entry into a p a r t i c u l a r industry i s r e l a t i v e l y easy or d i f f i c u l t i s dependent on a number of f a c t o r s l i k e long-run cost curves i n the industry, product d i f f e r e n t i a t i o n w i t h i n the industry, and sp e c i a l r e s t r i c t i o n s imposed by patents, s p e c i a l group discounts and other s i m i l a r devices. Massel, op. c i t . , p. 199. I - 45 -The long-run cost curves which the new en-trants have to face a f t e r the i n i t i a l period, are considered of v i t a l importance i n determining the 23 opportunity f o r entry by new firms. I f there i s no long-run cost advantage to an e x i s t i n g f i r m , then new firms may decide to r i s k the i n i t i a l losses, or loss of p r o f i t s involved i n entering a new market, i n the hope of being able to compete e f f e c t i v e l y i n the long run. Besides the long-run cost r e l a t i o n s h i p , an important f a c t o r i n determining entry i n a market i s the extent of f i x e d costs i n c a p i t a l equipment and technological know-how required to enter a new market. I f the f i x e d costs of entering a new market are high l i k e i n an automobile industry - the opportunity for entry i s very much r e s t r i c t e d . However, t h i s high i n i t i a l cost has not proved an insurmountable problem i n the case of many i n d u s t r i e s because poten-t i a l or new entrants are mostly b i g corporations or conglomerates w i t h access to s u f f i c i e n t funds to enter large scale i n d u s t r i e s . Product d i f f e r e n t i a t i o n i s not only a deter-minant of the t o t a l e f f e c t i v e market for the product but influences the opportunities for entry i n t o a market. I f the product d i f f e r e n t i a t i o n has been c a r r i e d too fa r so that each segment of the t o t a l mar-2^ see Report of the Attorney General's Com-mittee, o p . c i t . , pp. 326-327. - 46 -ket c o n s t i t u t e s a market i n i t s e l f , then there i s a greater opportunity f o r a r e l a t i v e l y small but s p e c i a l i z e d f i r m to enter a p a r t i c u l a r segment of the market, although a s u b s t a n t i a l part of the larger market may be dominated by a few very large f i r m s . In another respect, product d i f f e r e n t i a t i o n i n consumer goods may r e s t r i c t entry i n t o the market. When the consumers have been pursuaded through heavy a d v e r t i s i n g that a p a r t i c u l a r brand of product i s d i f f e r e n t from, and superior to, the r e s t of the products which can be considered as s u b s t i t u t e s , i t i s d i f f i c u l t for a new f i r m to enter the market with a s u b s t i t u t e product. But t h i s d i f f i c u l t y should not be exaggerated as buyers are quite susceptible to of f e r i n g s of superior q u a l i t y products at competitive p r i c e s . The monopoly powers given for a f i x e d period of seventeen years by patents have served as r e s t r i c -24 tions to entry i n t o some i n d u s t r i e s . The a t t i t u d e to granting of patents i s one of ambivalence. The advantages of granting patents to encourage inven-tions and innovations are recognized. However, some firms have used t h i s r i g h t to further monopolistic 2 4 See U. S T v. General E l e c t r i c 82F Supp. 753 (D. G. N. J ~ 1945). - 47 -i n t e r e s t s . There have been many instances of firms not using the processes or products patented but at the same time preventing competitors from using them. Patents which are not intended to be used by the paten-tee have been exchanged between col l u d i n g competitors to discourage p o t e n t i a l entrants from taking advantage of these patented processes on the expiry of the patent. P a r t l y f o r these reasons, the Supreme Court has r e c e n t l y taken an unsympathetic a t t i t u d e to such firms f i l i n g s u i t s against those who have i n f r i n g e d 25 such patents. There are many other types of r e s t r i c t i v e p r a c t ices adopted by the e x i s t i n g firms to prevent, or make extremely d i f f i c u l t , entry by new fi r m s . Dis-t r i b u t o r s are tempted by higher discounts to handle 2 6 only the products of the f i r m i n the industry. I t i s submitted that public p o l i c y should be geared to increase opportunities of entry by discouraging firms from using r e s t r i c t i v e t a c t i c s to prevent new entrants i n t o the market. This r e -quires not only examining the r e l a t i v e strength of the e x i s t i n g firms but observing how t h i s strength i s u t i l i z e d i n preventing entry by new firms. 7 5 See Sigmun Tinberg,"Equitable R e l i e f Un-der the Sherman Act" (Un i v e r s i t y of I l l i n o i s Law Forum V o l ! 1950 Winter), pp. 629, 645. From 1941 to 1945 patents were not upheld i n 80 per cent of cases i n the C i r c u i t Court of Appeals and the Sup-reme Court. ^ See In the Matter of American O p t i c a l Co. 28 F.T.C. 169 ( l ^ W T - 48 -3. Independence of R i v a l s : Not only should there be s u f f i c i e n t number of firms to create e f f e c t i v e competitive conditions, but these firms should be independent of one another. I f they are indepen-dent of one another, then each of them i s free to take f u l l advantage of any opportunity open to i t , i r r e s p e c t i v e of the consequence.s of i t s a c t i o n on the competitors. Whether the f i r m w i l l i n i t i a t e changes w i l l depend on i t s b e l i e f about the speed and extent of r e a c t i o n of i t s competitors. I f there are many f i r m s , each c o n t r o l l i n g a small part of the market, the a c t i o n of one f i r m i s u n l i k e l y by i t s e l f to induce others to follow the move because the ef-f e c t of the move by the i n i t i a t i n g f i r m w i l l be d i f -fused i n the market. In such a case, the firm i s more l i k e l y to i n i t i a t e changes i n the market, making i t more competitive. Some of the formal requirements to ensure independence of competitors are covered by Sections 7 and 8 of the Clayton Act, which regulate i n t e r -corporate stock a c q u i s i t i o n s and i n t e r l o c k i n g d i r e c -t o r s h i p s . These formal requirements are not by themselves s u f f i c i e n t to guarantee independence of actions by competitors. Many of the c o l l u s i v e prac-t i c e s r e s u l t from informal agreements negotiated at c o c k t a i l p a r t i e s and on golf courses. These are hard to detect and l e g i s l a t e against. I t i s submitted that the most e f f e c t i v e way to prevent the independent firms - 49 -from c o l l u d i n g on p r i c e s or market i s to make i t a t t r a c t i v e enough, through s t r u c t u r a l changes, f o r any of them to reap higher benefits by not c o l l u d i n g 27 with others. According to John M. Clark i t i s not e s s e n t i a l for a l l the firms i n the market to be acting i n t h e i r own i n d i v i d u a l i n t e r e s t . I f a few reasonably strong firms have the perspectives and the market s i t u a t i o n s that lead them to i n i t i a t e aggressive ac-t i o n , then i t sets the pace f o r the others to f o l l o w . 4. I n t e g r a t i o n : In order to view the structure i n i t s proper perspective, i t i s not only necessary to examine the r e l a t i v e s i z e and strength of the firms producing the product i n question, but i t i s essen-t i a l to look at the r e l a t i o n s h i p of these firms with t h e i r suppliers of m a t e r i a l s , d i s t r i b u t o r s and cus-tomers. I f one large f i r m i n the market controls the t o t a l source of raw m a t e r i a l required by the firms to produce the product f o r the market, then t h i s par-t i c u l a r f i r m i s i n a s t r a t e g i c p o s i t i o n to decide to whom to supply the raw m a t e r i a l - thus c o n t r o l l i n g entry to the industry; at what p r i c e t o supply the raw m a t e r i a l - thus i n f l u e n c i n g the minimum p r i c e that the competitors w i l l charge for the f i n a l product; and on vhat terms to supply the raw m a t e r i a l . In 1945, Alcoa was prosecuted by the A n t i - t r u s t D i v i s i o n Clark, 1961, OP. c i t . , p. 470. - 50 -f o r using i t s power as the sole producer of v i r g i n 28 ingot to squeeze the competitors out of the market. In order to promote e f f e c t i v e competition i t i s e s s e n t i a l to ensure that the firms i n the mar-ket have a l t e r n a t i v e s both i n the case of suppliers of the raw materials and as buyers for t h e i r f i n i s h e d products. This may require opening up the l o c a l mar-ket to f o r e i g n s e l l e r s of raw materials who may act as a l t e r n a t i v e s to the monopolist l o c a l s u p p l i e r . 5. P r o f i t Incentive: I t i s often ignored that the basic tenet of competition i s to encourage an i n -d i v i d u a l or a f i r m to take c e r t a i n actions to achieve p r i v a t e gain which at the same time b e n e f i t s the en-t i r e community - through investment, r i s e i n i n -come or economic growth - and i s i n conformity with p u b l i c p o l i c i e s . This requires that the taxation sys-tem should be such as to leave s u f f i c i e n t funds i n the hands of the i n d i v i d u a l s who take the i n i t i a t i v e of earning more through competitive forces. 6. Consumer Sovereignty: In order to foster e f f e c t i v e competition i t i s necessary for the consumer to r e -ceive o f f e r s of a l t e r n a t i v e products which are sub-s t i t u t e s one for another for his requirements. The t o t a l decision of a l l the present and p o t e n t i a l buyers U. S. v. Aluminium Co. of America 148 F 2d 416 (C.C.A. - 2d 1945). - 51 -determines which of the products w i l l be produced and what are the maximum prices which the consumers are prepared to pay f o r them. Undoubtedly, these d e c i -sions are not made i n the abstract and are influenced by a host of information received by the buyers through d e s c r i p t i v e l i t e r a t u r e , the press reviews and advertisements. These media often attempt to i n -fluence the dec i s i o n of the buyers, but the f i n a l d e c i s i o n r e s t s with the consumer. This i s known as Consumer Sovereignty. 7. Market Information: In order to ensure that the consumer exercises h i s judgment properly, i t i s e s s e n t i a l that the information that he receives i s not misleading or i n c o r r e c t . This e n t a i l s set-t i n g up laws regarding misrepresentation, bribery of the press, l a b e l l i n g and packaging the product. The informational requirements of E f f e c t i v e Competition are discussed i n the next chapter. B. Conduct: This category covers c h a r a c t e r i s t i c s which r e l a t e to the firms' actions, dealings, or t a c t i c s . These include the r e l a t i o n s h i p s on p r i c e , q u a l i t y , d i s t r i b u t o r s h i p s , market areas which the firms est-a b l i s h with one another as buyers, s e l l e r s or com-p e t i t o r s . Some of the main c h a r a c t e r i s t i c s are: 1. P r i c i n g P o l i c y : The p r i c i n g p o l i c y of a f i r m i s dependent on a complex set of f a c t o r s , including the - 52 -uniqueness of the product and the extent to which i t can be substituted by other products i n the market, the s i z e of the f i r m compared to the s i z e of com-p e t i t o r s i n the market, the share of the market which the fir m i s c o n t r o l l i n g , the antic i p a t e d res-ponse of competitors as to changes i n prices i n i -t i a t e d by the f i r m and the r e l a t i v e ease with which new firms can enter the market and unprofitable firms 29 can leave the market. In the l i m i t i n g case of perfect competition, the f i r m has no c o n t r o l over the p r i c e a t which i t can s e l l the product. At the other extreme, the mono-p o l i s t has s u b s t a n t i a l c o n t r o l over the p r i c e f o r i t s product. Most of the firms i n the r e a l market are i n between these two extremes. There are many v a r i a -t i o n s of p r i c i n g p o l i c y adopted by firms i n d i f f e r e n t i n d u s t r i e s . I f the market i s dominated by one or a few very large f i r m s , there i s a tendency f o r one large f i r m to act as a leader i n p r i c e , with the r e s t of the firms following t h i s leadership. This under-standing to follow the leadership of one f i r m does not require any formal contract or agreement. For fear of r e p r i s a l s , the smaller firms tend not to d i s -30 turb the established p r i c e . 2 9 Clark, 1961, ou. c i t . , pp. 363-386. 3 0 I b i d , pp. 283-286. - 53 -This p r i c e administration which normally leads to p r i c e r i g i d i t y i s not conducive to e f f e c t i v e competition. I t u s u a l l y prevents the benefits of competition from being passed on to the consumers. I f such a s i t u a t i o n i s prevalent, competitive forces should be i n j e c t e d i n t o the market. A climate more stimulating to e f f e c t i v e competition might be introduced i n such a market i n several possible ways, i n c l u d i n g ; new entry, i f large p r o f i t s were being made; p r i c e d i s c r i m i n a t i o n ; v a r i a t i o n s i n the pro-duct or i n other terms of the bargain; a change i n the structure of the market, by an increase i n the number of s e l l e r s ; or u t i l i z a -t i o n of other competitive devices such as product, service and customer r e l a t i o n s im-provement and more e f f e c t i v e s e l l i n g . 3 1 32 According to John M. Clark, the spur to e f f e c t i v e p r i c e and other forms of competition i s created by a s i t u a t i o n i n which the demand functions of a si n g l e f i r m are more e l a s t i c than those of groups or i n d u s t r i e s - that i s , those that include the products of competitors. I f the p r i c e e l a s t i c i t y of demand f o r the product of the f i r m i s greater than one, the lowering of the pri c e w i l l r e s u l t i n a net increase i n t o t a l revenue. As long as the f i r m does not expect immediate p r i c e reductions by competitors, the advantage to the f i r m i s to lower i t s p r i c e , to the l e v e l where marginal revenue equals marginal cost. R e p o r t of the Attorney General's Committee, 1955, p . 332. 3 2 Clark, 1961, OP. c i t . - 54 -In these terms the requirement of e f f e c t i v e competition i s that some one of these v a r i a n t opportunities for a p r o f i t a b l e increase i n a firm's market share, viewed i n some one of these per-spectives, should appear favourable enough to one or more f irms to induce them to improve t h e i r o f ferings to t h e i r elastomers. That t h i s should lead to defensive reactions by the industry or trade i n general; and that t h i s should go on u n t i l p r o f i t s f o r the bulk of the firms - not i n c l u d i n g the very strongest or the weakest - approximate the minimum necessary supply p r i c e of c a p i t a l and enterprise.3s 2. Market: The extent of the market being covered by the important producers of the product i s an im-portant i n d i c a t o r of the effectiveness of competition. In the extreme case, two or a few firms carve out the t o t a l market i n t o sub-markets which are the exclusive t e r r i t o r i e s of each of the f i r m s . This i s us u a l l y accompanied by an understanding as to the p r i c e to be charged i n each of the markets. A more usual case i s the establishment of predominancy by each of the large firms i n these sub-markets, with the tendency by a l l the firms not to disturb the pattern of the d i v i s i o n of the market. Pub l i c p o l i c y should guard against such d i v i s i o n s of the markets. 3. Marketing: Marketing i s another potent instrument used by some firms to prevent e f f e c t i v e competition. There are so many forms of r e s t r i c t i v e marketing methods 33 I b i d , p. 480. - 55 -prac t i c e d that i t i s not possible to cover them a l l i n t h i s study. Some of the common methods are: a) The establishment of exclusive dealers i n a sub-market which prevents price competition of the product between wholesalers. b) The franchise system which prevents dealing i n competitive products i n return f o r s p e c i a l services provided by the f i r m providing the franchise. c) The t y i n g contracts which force the d i s -t r i b u t o r s to s e l l a l l the products of the f i r m , even i f the s e l l i n g of some of the products i s r e l a t i v e l y unprofitable to the f i r m . Such contracts prevent the d i s -t r i b u t o r s from maximizing t h e i r returns. While many of these r e s t r i c t i v e marketing pr a c t i c e s tend to lessen e f f e c t i v e competition, some of them are practised to provide s a t i s f a c t o r y ser-v i c e to customers or to prevent cut-throat com-p e t i t i o n . They should be examined i n the l i g h t of a l l the surrounding circumstances and can serve as i n d i c a t o r s of the a t t i t u d e of the firms towards e f f e c t i v e competition,, C. Performance: The e n t i r e discussion on public p o l i c y i n -fluencing the environment w i t h i n which the fir m - 56 -operates and the conduct of the f i r m i s based on the assumption that these forces are l i k e l y to bring about the desired performance i n the f i r m , which r e f l e c t s the working of e f f e c t i v e competitive forces i n the market. In the end, performance of the f i r m i s the most important c r i t e r i o n to judge whether competitive forces are active i n the market. The main i n d i c a t o r s of performance are: 1. P r o f i t Levels: In economic a n a l y s i s , i t i s demon-strated that there i s a tendency f o r the average p r o f i t of a l l the firms i n the market to equal the p r i c e of c a p i t a l and management, as the market i s made more competitive. On the other hand, a monopolist earns 'high' p r o f i t because he i s i n a p o s i t i o n to e x p l o i t the market. Although some economists making e m p i r i c a l studies have disputed t h i s a n a l y s i s , i t i s generally true that p r o f i t l e v e l s tend to be lower the more 34 e f f e c t i v e the competition i s i n the market. I t not only forces the firms to reduce t h e i r costs but i n -duces them to pass the be n e f i t s of these cost savings to the consumers whose goodwill and patronage are e s s e n t i a l f o r the progress of the firms. Extreme Concentration i s consistent with strong competitive pressure f o r e f f i c i e n t production, but i t i s not favourable to the 34 See N. R. C o l l i n s and L. E. Preston, "Concentration and Price-Cost Margin" (Journal of I n d u s t r i a l Economics, J u l y , 1966). H. M. Mann, 'Seller Concentration, Barriers to Entry and Rates of Return i n T h i r t y Industries 1950-60," Review of Economics and S t a t i s t i c s . Aug. 1966 48 (3). - 57 -kind of competition that makes for r a p i d and adequate d i f f u s i o n of the benefits.35 2. Innovation and Progressiveness: Continuous i n -novation leading to higher p r o d u c t i v i t y i s an impor-tant requirement of economic growth, e s p e c i a l l y i n an economy which has attained ' f u l l employment', Once the economy has reached a high stage of sophis-t i c a t i o n , technological innovation requires a large outlay of c a p i t a l and manpower which can only be undertaken by comparatively large firms. The a p p l i c a t i o n of modern science to i n -d u s t r i a l technology, he (Galbraith) asserts has brought i t about; ( i ) that a much longer time span i s required between the i n i t i a t i o n of a manufacturing project and the a c t u a l flow of the product on to the market, since the necessary research and development, the de-signing of complicated s p e c i a l i z e d machinery and raw materials, the construction of the s p e c i a l i z e d plant and machinery, the bringing together of a balanced team of s p e c i a l i z e d workers, etc . a l l take time; ( i i ) that a much larger scale of investment i n complicated plant and machinery i s often required f o r a s i n g l e modern i n d u s t r i a l p r o j e c t ; ( i i i ) that c a p i t a l equipment and raw materials have to be i n c r e a s i n g l y s p e c i a l i z e d for t h e i r p a r t i -c u l a r uses; and ( i v ) that s i m i l a r l y manpower has to be i n c r e a s i n g l y s p e c i a l i z e d i n i t s s k i l l s and p r o f e s s i o n a l t r a i n i n g , with the consequence that the i n d u s t r i a l s t r u cture i s i n c r e a s i n g l y i n f l e x i b l e . The r e s u l t i s a system which commits very large amounts of resources for a very long time ahead to an i n f l e x i b l e and complicated pattern of pro-duction. 36 There appears to be an apparent c o n f l i c t between 3 5 C l a r k , 1 9 6 1 , op. c i t - . , p. 481 J . E. Meade "Is 'The New I n d u s t r i a l State' I n e v i t a b l e ? " (The Economic Journal, V o l . LXXVIII No. 310, June 1968), pp 372. - 58 -the requirement of a large number of firms to generate competition and the large outlay of c a p i t a l and man-power required f o r technological innovation, which cannot normally be undertaken by small firms r e l y i n g mainly on meagre p r o f i t s earned i n a competitive mar-ket. The t r a d i t i o n a l analysis of perfect competition does not incorporate i n the model changes i n technology which are d e l i b e r a t e l y undertaken at great expense i n 37 the hope of earning higher p r o f i t s . G a l b r a i t h i s of the opinion that large firms i n the United States are innovative and progressive because they have a f i r m g r i p over the market, and therefore can plan ahead. F i r s t and foremost, these developments make i t i n e v i t a b l e that planning should replace the market. The large corporation producing motor cars no longer simply follows the market; i t plans f a r ahead what type of car i t w i l l produce, i n what q u a n t i t i e s i t w i l l produce i t and at what pr i c e i t w i l l s e l l i t . . . . T h i r d , the techno-structure has devised means of c o n t r o l l i n g , or at l e a s t g r e a t l y i n -f l u e n c i n g , the wants of consumers. To be successful i n i t s planning i t i s necessary not only to design i t s future products but also to plan ahead the quantities to be pro-duced and the prices at which they w i l l be s o l d . This i s possible only i f the consumers' wants are moulded by advertisement and other s e l l i n g techniques so that the planned quantities are i n f a c t sold at the planned p r i c e s . Professor G a l b r a i t h maintains that, w i t h i n l i m i t s , the modern i n d u s t r i a l corporation has managed to c o n t r o l demand i n t h i s way. This he terms the "revised sequence"! In the orthodox mar-ket economy consumers come i n the market wi t h given preferences, and t h e i r demands guide G a l b r a i t h , 1967, op. c i t . . pp. 319-320. - 59 -producers what to produce. In the "revised sequence" producers decide what s h a l l be pro-duced and then mould consumers' tastes to take up these products. This claim of G a l b r a i t h that the conditions conducive to modern technological innovation are i n -consistent with the conditions for competition, i s disputed by many leading economists l i k e John M. 39 40 41 Clark, J . E. Meade, and A. D. H. Kaplan. They contend that continuous innovation i s not the ex-c l u s i v e province of large f i r m s . Competitive forces induce r e l a t i v e l y more innovation because the innova-t i v e f i r m , by producing a superior product or a s i m i l a r product at a lower p r i c e , has a chance i n the competitive market to benefit from such innovations. The dynamic i n d u s t r i e s and trades are those i n which techniques and products are changing r a p i d l y , also those i n which youthful expan-sion i s going on, the two conditions being l i k e l y to occur together. Here i t i s natural that there should be marked difference between firm s , advantages being gained by those most successful i n taking the lead, and the responses of the others are not l i k e l y to be f u l l y ^2 successful i n equalizing t h e i r market p o s i t i o n . So f a r , no conclusive evidence has been made a v a i l a b l e to e s t a b l i s h the f i r s t hypothesis that only Meade, op. c i t . , pp. 372-373. Clark, 1961, op. c i t . Meade, op. c i t . , p. 382. Kaplan, og.-ca.t. Clark, 1961, op. c i t . , p. 477. - 60 -that only large firms are r e l a t i v e l y more innovative and the second hypothesis that r e l a t i v e l y more i n -novation i s p o s s i b l e only i f the market i s con-t r o l l e d by large corporations. The use of innovation and progressiveness of a f i r m as an i n d i c a t o r of competitiveness has met with great d i f f i c u l t i e s . The speed with which an industry i s growing i s not a d i r e c t economic i n d i c a t o r of the s t a t e of competition within i t . An i n d u s t r y may be a c t u a l l y i n d e c l i n e and yet be a c t i v e l y e f f e c t i v e l y competitive. For example, an i n d u s t r y may d e c l i n e because the demand f o r i t s products i s d e c l i n i n g and yet there may s t i l l be competitive r i v a l r y for shares of the remaining market. Rate of growth, however, i s often important i n deter-mining the s i g n i f i c a n c e to be attached to other f a c t o r s , and p a r t i c u l a r l y to numbers and reasonable opportunity f o r e n t r y . 4 ^ 3. Capacity-Output R e l a t i o n s : One i n d i c a t o r of pure monopoly i n a b s t r a c t theory i s the excess c a p a c i t y of a f i r m . In p r a c t i c e , however, there are many other reasons f o r excess capacity i n an i n d u s t r y . There may be a temporary depression i n the i n d u s t r y ; the product of the i n d u s t r y may be going out of s t y l e ; excess capacity may be due to past investment e r r o r s i n the i n d u s t r y or to a n t i c i p a t e d increases i n demand. Therefore, excess capacity i s not a very r e l i a b l e i n -d i c a t o r of the competitiveness of an i n d u s t r y . 4 3 For i n t e r e s t i n g studies, see Mason, op., c i t . , pp. 141-165. 4 4 Prr-"r*- r>f th& Attorney General's Com-mittee, op. c i t . , p. 328. - 61 -4. Freedom of Consumer Choice: Unlike the t h e o r e t i c a l benchmark of perfect competition which revolves around the concept of producing homogeneous product, E f f e c -t i v e Competition requires product d i f f e r e n t i a t i o n to enable the consumer to choose from a v a r i e t y cf products offered by competitors i n the market. This freedom of consumer choice i s often taken for granted i n any discussion of competition, but i t i s important to recognize i t . Customer competence i s generally e i t h e r taken f o r granted or dismissed as outside the sphere of economic a n a l y s i s . But we have seen that i t i s a p r e r e q u i s i t e to healthy competi-t i o n and does not take care of i t s e l f i n an age of new products and applied science, but affords many problems of p o l i c y and implemen-t a t i o n . The recognition of these problems and of the i n e v i t a b l e differences i n success i n d i f f e r e n t parts of the economic f i e l d form part of the assumption necessary to r e a l i s t i c t hinking about c o m p e t i t i o n . ^ ' 5. Wasted Resources i n S e l l i n g A c t i v i t i e s : Some economists have argued that, with p r i c e competition no longer of great importance among o l i g o p o l i s t s , these f i r m s 'waste' economic resources i n heavy, and often unnecessary, a d v e r t i s i n g . This i n d i c a t o r requires agreement on via at i s 'informative' ad v e r t i s i n g and thus 'useful' and what i s 'persuasive' adve r t i s i n g and thus 'unnecessary'. I t also requires some agreement on whether ad v e r t i s i n g increases t o t a l aggregate demand for a l l the products i n the economy. 4 5 Clark, 1961, op. c i t . . p. 466. - 62 -Other Indicators of Performance There are many other i n d i c a t o r s of per-formance l i k e labour conditions i n the f i r m , and the firm's c o n t r i b u t i o n to n a t i o n a l defence which have been put forward from time to time. But they are not precise enough to be used to gauge the per-formance of the f i r m . The review of the major c h a r a c t e r i s t i c s of E f f e c t i v e Competition as a normative model does not give a f i r m i n d i c a t i o n of the causal r e l a t i o n s h i p between these c h a r a c t e r i s t i c s . I t i s recognized that the performance of the firms i n the market i s the f i n a l i n d i c a t o r of whether the market i s competitive. The performance of a f i r m at a p a r t i c u l a r time may be the r e s u l t of a number of cross currents which are d i f f i c u l t to i d e n t i f y and almost impossible to f i t i n t o meaningful causal r e l a t i o n s h i p s . Shortcomings i n Defining E f f e c t i v e Competition Admittedly, the normative concept of E f f e c -t i v e Competition i s not simple and precise to be used as a reference i n d i c a t o r to judge whether a p a r t i c u l a r industry or market i s competitive. This i s mainly because the economy to which i t r e l a t e s i s a whirlwind of complex sets of forces moving i n a l l d i r e c t i o n s . Any attempt t o - s i m p l i f y the model w i l l r e s u l t i n the tools of analysis being clear but not e f f e c t i v e to carry out any meaningful examination of the r e a l economy. "Workable" or " e f f e c t i v e " competition supplies no formula which can substitute for judgment. I t suggests leads to data of s i g -n i f i c a n c e , and a means of organizing the data bearing on the question whether a given market of i t s e l f i s s u f f i c i e n t l y competitive i n i t s structure and behavior to be c l a s s i f i e d as workably competitive. And i t provides some benchmarks or c r i t e r i a , representing somewhat d i f f e r e n t points of vantage f o r the process of making that judgment. 4" Even i f the desirable c h a r a c t e r i s t i c s i n the standards of structure and conduct are introduced through p u b l i c p o l i c y , there i s no guarantee that the performance of the f i r m w i l l be such as to enable the country to achieve most of i t s national o b j e c t i v e s . The b e l i e f of many economists - based on the s t a t i s -t i c a l law of p r o b a b i l i t y - i s that, given the en-vironment which i s conducive to e f f e c t i v e competition, the emerging r e l a t i o n s h i p between the firms and the average performance of the f i r m w i l l enhance the n a t i o n a l objectives which l o g i c a l l y emanate from E f f e c t i v e Competition. Some recent studies have con-firmed a p o s i t i v e c o r r e l a t i o n between structure con-ducive to e f f e c t i v e competition and desired performance of the f i r m ; 4 7 between concentration plus b a r r i e r s to 48 entry and the earning of abnormal p r o f i t s . Summary: The p r i n c i p a l points i n the chapter are as 4^ Report of the Attorney General's Committee, op. c i t . , p. 337. 47 C o l l i n s and Preston, op. c i t . A Q Mann, OP. c i t . - 64 -follows: 1. Considering the complex sets of forces that a f f e c t the economy, i t i s not possible to give a short and meaningful d e f i n i t i o n of the normative model of E f f e c t i v e Competition. 2. The l i n e s of demarcation f o r the d e f i n i t i o n of E f f e c t i v e Competition are drawn -by discussing the c h a r a c t e r i s t i c s i n the economy which co n s t i t u t e the normative model of E f f e c t i v e Competition. These c h a r a c t e r i s t i c s are divided i n t o the categories of ' s t r u c t u r e 1 , 'conduct', and 'performance'. CHAPTER IV INFORMATIONAL REQUIREMENTS OF EFFECTIVE COMPETITION B r i e f Outline The main c h a r a c t e r i s t i c s of the normative model of E f f e c t i v e Competition, discussed i n the l a s t chapter, are not a l l self-generating and s e l f - r e g u l a -t i n g , The desired environment and forces have to be created to generate and preserve those c h a r a c t e r i s -t i c s which are conducive to the normative model. This necessitates conveyance of information about the state of a f f a i r s to the various actors i n the economy namely consumers, employers, workers, c r e d i t o r s , i n -vestors, government-run corporations, government agen-c i e s and foreigners having commercial dealings with the United States and Canada, who form an i n t e g r a l part of the model, and vdaose actions have a bearing on the competitiveness of the economy. An attempt i s made i n t h i s chapter to o u t l i n e the kinds of decisions these actors normally make, and the types of informa-t i o n necessary to make these decisions. The major weaknesses of economic analysis i n the handling of the informational requirements of each of the actors i n the economy are also discussed. i - 66 -Major Weaknesses of Economic Analysis The t r a d i t i o n a l t o o l s of economic ana l y s i s normally used to analyze the competitiveness of an economy are s t a t i c i n nature i n that they do not give proper recognition to the processes by which the com-p e t i t i v e forces i n the economy are brought about. The dynamic forces r e s u l t i n g i n E f f e c t i v e Competition are not a l l self-generating and s e l f -r e g u l a t i n g . The desired environment and forces have to be created and preserved. The standards of con-duct have to be regulated to achieve the desired ob-j e c t i v e s . I f the performance of the majority of the firms i s not conducive to the f u l f i l l m e n t of the n a t i o n a l o b j e c t i v e s , then the forces of the environ-ment and the conduct have to be re-examined to f i n d i n consistencies or weaknesses. This search f o r de-f i c i e n c i e s i s a continuous process. I t i s also necessary to examine and incorporate into the model new forces generated by changing business p o l i c i e s and p r a c t i c e s , which are l i k e l y to enhance competition. A l l t h i s presupposes that the various actors w i t h i n the economy - be they consumers, employers, workers, c r e d i t o r s , i n vestors, government-controlled business organizations, or those responsible to generate and maintain the forces a s s i s t i n g competition - are endowed with s u f f i c i e n t information to i n i t i a t e the desired moves. A major weakness of the economic tools used - 67 -to analyze competition i s that they do not explain c l e a r l y the processes by which the informational requirements of each of the actors i n the economy are met. The e n t i r e model of competition i s based on actions/taken by various actors i n the economy which lead to the desired r e s u l t s . I t i s recognized that the i n i t i a t i o n of the action i s based on r e c e i p t by an actor of c e r t a i n information which enables him to form c e r t a i n expectations about the future. Based on h i s estimate of the f u t u r e and the steps t h a t may be taken by other actors, he i n i t i a t e s c e r t a i n moves which he believes to be i n h i s own i n t e r e s t . Thus any move i s a r e s u l t of c e r t a i n information received by the actor and h i s assessment of the s i t u a t i o n based on the information c u r r e n t l y received, and on the past experience of the actor. This informational aspect of competition i s v i r t u a l l y ignored i n t r a d i t i o n a l economic a n a l y s i s . In explaining the forces leading to 'Perfect Competi-t i o n " , economists assume that the actors possess 'per-f e c t knowledge' of the conditions i n the market. A consumer buys from the cheapest source because he knows the type of products being offered by a l l the s e l l e r s and the prices at which they are being offered. As a l l the consumers buy from the cheapest source, there can be only one p r i c e f o r the product. The wor-ker i s assumed to know about the wages being offered by a l l the employers. Re works for a firm which offers - 68 -the highest return for h i s s e r v i c e s . The buyer of raw materials knows what i s being offered i n the market and at what p r i c e . He n a t u r a l l y buys from the cheapest source. A p o t e n t i a l investor i s assumed to have perfect knowledge of the various opportunities f o r investment. Being a r a t i o n a l man, he invests i n a p r o j e c t whose present value i s the highest. Who provides the required sets of information? How are they transmitted? What c r i t e r i a should be used to judge the adequacy of information? What i s the e f f e c t on the model i f 'perfect information' i s not received? What i s 'perfect information 1? These questions are not tackled i n most of the economic text books dealing with competition. x Any adequate theory of economic adjustment, whether i t be i n terms of the maintenance or the attainment of an e q u i l i b r i u m p o s i t i o n , must represent entrepreneurs as taking investment decisions on the basis of expectations about the relevant future circumstances. This indeed would probably be admitted; what commonly f a i l s to|be recognized, however, i s that the p o s s i b i l i t y of forming r e l i a b l e expectations i s not independent of the p a r t i c u l a r market conditions which define the model employed. In saying that expectations or b e l i e f s are r e l i a b l e I imply that they are grounded on adequate information or evidence. I t i s the a v a i l a b i l i t y to entre-preneurs of t h i s information which I now wish to demonstrate, i s a function of the nature of the p a r t i c u l a r form of economic organization or sys-tem w i t h i n which they are presumed to operate. I f the defining conditions of our model are such as to preclude t h i s a v a i l a b i l i t y , as I 1 See Samuelson, op. c i t . , which makes no mention of the informational requirements. - 69 -believ e to be the case with perfect competition, then we cannot hope to obtain a proper under-standing of the process of economic adjustment or of the fac t o r s which w i l l influence i t s success or f a i l u r e . This lack of emphasis on the informational requirements of competition has been an important f a c t o r i n the i n a b i l i t y of many economists to explain c l e a r l y the process of competitive forces which leads to the desired r e s u l t s . Economists are quick to point out the main c h a r a c t e r i s t i c s of E f f e c t i v e Com-p e t i t i o n but f a i l to provide e f f e c t i v e remedies i f some or a l l the c h a r a c t e r i s t i c s are absent from the « economy. This f a i l u r e to explain the process and suggest e f f e c t i v e remedies has made i t more d i f f i c u l t for those responsible f o r generating and preserving competitive forces, to take timely decisions. A Proposal The author i s of the opinion that providing 'timely' information of 'material s i g n i f i c a n c e ' to the actors i n the economy w i l l improve the competi-t i v e process leading the economy towards the desired o b j e c t i v e s . In order to enable the a u t h o r i t i e s con-cerned with the regulatory a c t i v i t i e s of competitive environment to act d e c i s i v e l y without loss of time, a c e r t a i n set of information should be made a v a i l a b l e What information i s 'of material s i g n i f i c a n c e ' ? To G. B. Richardson, Information and Invest-ment ^  A Study i n the Working of the Competitive Economy (Oxford U n i v e r s i t y Press, 1960), p. 29. - 70 -whom i s i t of mate r i a l s i g n i f i c a n c e ? What i s the e f f e c t of such public disclosure of information on various actors i n the economy? What i s the b e n e f i t of such information and by whom i s the bene f i t r e -ceived? What i s the cost of providing such informa-tion? A l l these questions are quite legitimate and can only be answered i f the frame of reference i s made c l e a r . I t i s asserted that E f f e c t i v e Competition as a normative model i s the most e f f e c t i v e means to achieve most of the na t i o n a l objectives discussed i n Chapter I I . The model i s a dynamic one and requires continuous adjustments to deal with changing conditions i n the market. The main c h a r a c t e r i s t i c s of E f f e c t i v e Competition discussed i n Chapter I I I provide a guide as to which information i s 'material' to a t t a i n and preserve E f f e c t i v e Competition. I t i s assumed that the d i s c l o s u r e of a set of information which a s s i s t s i n the attainment of E f f e c t i v e Competition, r e s u l t s i n net benefit to the society, although such a d i s -closure may be detrimental to a p a r t i c u l a r person or group i n the economy. This assumption i s based on a premise, frequently used i n welfare economics, that a move i s desirable i f i t s benefits to the majority of persons i n the society f a r outweigh the losses suffered by a minority i n the society. The des i r a -b i l i t y of the move i s not changed even i f the benefited - 71 -3 majority does not compensate the injured minority. The c h a r a c t e r i s t i c s discussed i n Chapter I I I r e f l e c t the actions of various actors i n the economy, namely; consumers, employers, workers, c r e d i t o r s , i n -v e s t o r s , government-run corporations, foreign firms dealing with the home country and the various govern-ment agencies whose actions have a d i r e c t a f f e c t on the other actors. The actions taken by these actors are dependent on the information they receive about the state of the economy i n general and about the actions of other actors i n the economy i n p a r t i c u l a r . I t i s generally assumed that an actor w i l l make a more r a t i o n a l decision i f he i s furnished with r e l i a b l e information about the fa c t o r s on which his d e c i s i o n i s based.^ Informational Requirements of Various Actors i n the Economy To create an environment conducive to E f f e c -t i v e Competition, each of the actors needs to be furnished with c e r t a i n types of information. The i n -formational requirements of each of the actors are discussed below: A. Consumer: A consumer i s a person (or a firm) that u t i l i z e s economic g o o d s . T h e s e goods are normally J See Ferguson, 1964, op. c i t . . Chapter I . 4 For a deta i l e d a n a l y s i s , see Y. I j i r i , The Foundations of Accounting Measurement, A Mathematical, Economic and Behavioral Inquiry (Englewood C l i f f s , N.J. P r e n t i c e - H a l l , 1967), pp. 149-164. 5 See Webster's Third New Internat i o n a l Dic-t i o n a r y , p. 490. - 72 -purchased from others. As a r a t i o n a l man, he attempts to purchase h i s requirements from a s e l l e r who gives him the best offerings i n p r i c e , q u a l i t y of product, terms of payment, and a f t e r -sales s e r v i c e s . In order to make an objective com-parison he seeks to obtain the following information from a l l the s e l l e r s : 1 . P r i c e : P r i c e of a product i s probably the oldest and most common type of information a v a i l a b l e i n the market economy. As t h i s information forms the basis of any transaction i n the market, i t i s made a v a i l a b l e to a p o t e n t i a l buyer. P r i c e plays an important part i n determining the sources of supply and the use of substitute products. 2. Product: Information about the product i s im-portant for the conclusion of a transaction. I f the product i s of a non-technical nature, then i t i s often purchased on the basis of appearance, taste or smell. For chemical or t e c h n i c a l products, further information i s provided and, i f found necessary, t e s t s are c a r r i e d out. Information on product i s impor-tant to the buyer to compare prices of substitutes and to determine which of the s i m i l a r products i s a v a i l a -ble at the lowest p r i c e . Information on the product u s u a l l y i n d i c a t e s the time of d e l i v e r y of the product. 3. Payment: Sometimes during the negotiation of the - 73 -contract f o r s a l e , terms of payment are e i t h e r d i s -cussed or made c l e a r . By terms of payment i s meant the method and timing of payment. Most of the pur-chases of goods and services i n the market are i n return f o r payment of money. Payments are often made at the time of the transfer of goods. However, sale on c r e d i t basis i s quite common i n almost a l l the i n d u s t r i a l l y advanced co u n t r i e s . Information about terms of payment i s important to the buyer to determine the quantity of goods he can purchase at any p a r t i c u l a r time. I t i s quite common to f i n d a comparatively higher priced product purchased be-cause the terms of payment are more a t t r a c t i v e . I t i s common knowledge that the purchase of a house i n Canada i s determined more by the attractiveness of monthly payments than by the sale p r i c e . 4. Cost of Service: For many technical products, the cost of a f t e r - s a l e s service i s of great importance. The p o t e n t i a l buyer wishes to know what warranty period i s covered f o r the product and what are the charges f o r replacement parts and speci a l i z e d services provided by the s e l l e r . This information i s normally provided i n advance of the purchase. As the s e l l e r cannot a n t i c i p a t e the type of repair required, he normally gives information about the p r e v a i l i n g rates f o r services - e i t h e r on hourly or job b a s i s . Although the above-mentioned types of informa-- 74 -t i o n are intended p r i m a r i l y f o r the p o t e n t i a l buyer, they become common knowledge i n the market. They are used by competitors and others to adjust t h e i r own p o s i t i o n s i n the market. A l l of them are taken i n t o account i n judging the competitiveness of the f i r m . B. Employer: An employer i s "an owner of a f i r m , or a f i r m , t i i a t employs personnel for wages or s a l a r i e s . 1 ' He normally employs these personnel to produce goods and services f o r sale i n the market. His informational requirements are: 1 . Information about h i s own enterprise: He has, or should have, f u l l access to a l l the information about h i s own business e n t e r p r i s e . The types of i n -formation i n which he should be p a r t i c u l a r l y i n t e r e s t e d include his cost of production f o r the product, the a l l o c a t i o n of t h i s cost between the various f a c t o r s of production, the s e l l i n g p r i c e f o r the product, the trend i n sales of the product, and the net worth p o s i -t i o n of the business e n t e r p r i s e . 2. Information about other firms i n the market^ In order to judge the competitiveness of his own product, he i s i n t e r e s t e d to know about the p r i c e , the q u a l i t y , the terms of payment and the a f t e r - s a l e s services which h i s competitors are o f f e r i n g f o r t h e i r products which have a high degree of s u b s t i t u t a b i l i t y for the 6 Webster's Third New International Dictionary, op. c i t . , p. 743. - 75 -product of the employer. These kinds of informa-t i o n can be obtained from the market wi th compara-t i v e l y l i t t l e e f f o r t or expense. To enable him to judge h i s e f f i c i e n c y com-pared to his competitors who may be using d i f f e r e n t processes of production, he requires information about the competitors' cost of production f o r the product, and t h e i r d i v i s i o n between the d i f f e r e n t f a c t o r s of production. At present, most of the firms do not give these types of information by product. In the next chapter, s p e c i f i c recommen-dations are made f o r the disclosure of these types of information by corporations. Besides producing the product f o r the market, he normally plans f o r the future. He has to decide whether he w i l l produce more or less of the product i n f uture. He also has to decide whether there w i l l be any changes i n the l i n e and mix of products at present produced by his enter p r i s e . To f a c i l i t a t e his d e c i s i o n on these matters, he requires informa-t i o n about the trend of the market f o r the products under review. I t helps him considerably i f he manages to get information about the plans of h i s e x i s t i n g and p o t e n t i a l competitors, but t h i s informa-t i o n i s not normally a v a i l a b l e u n t i l a f t e r the plans have been put in t o e f f e c t . C. Worker: A worker i s a person who i s employed by - 76 -7 another person or a f i r m for a wage. In most cases h i s main, i f not the only, source of l i v e l i -hood i s the pay packet he gets at the end of the day, or the week, or the month. As h i s economic progress and promotion prospects are c l o s e l y t i e d w ith the progress of the f i r m , he i s n a t u r a l l y i n t e r e s t e d to know the rate of progress of h i s em-ploying f i r m as compared with the rate of progress of competing firms i n the market, and i n i n d u s t r i e s producing other types of goods and servi c e s . Some important i n d i c a t o r s of the rate of progress of a f i r m are: 1 . Trend i n Sales: He i s inte r e s t e d to know whether the sales of h i s f i r m - both i n physical volume and i n monetary terms - are on the increase, and whether the rate of increase i s greater than the average f o r the product i n the market. 2. Trend i n P r o f i t Margins: He i s very much i n -terested to know how the p r o f i t a b i l i t y of his f i r m compares with the p r o f i t a b i l i t y of competitors i n the market. I f h i s f i r m i s not making as much p r o f i t as the competitors, then he should be con-cerned to look at the reasons f o r t h i s comparative i n e f f i c i e n c y . However, i f h i s f i r m i s making a higher p r o f i t than the competitors, then he i s i n a better p o s i t i o n to ask fo r a r a i s e i n wages. I b i d . , p. 2634. - 77 -3. P r o d u c t i v i t y and C a p i t a l Investments: Produc-t i v i t y i s defined as "the phy s i c a l output per u n i t g of productive e f f o r t . " The term i s often used to demonstrate "the degree of effectiveness of indus-t r i a l management i n u t i l i z i n g the f a c i l i t i e s f or 9 pro due t i o n . " Attempts to measure and compare p r o d u c t i v i t y between firms or fa c t o r s have met with great d i f f i -c u l t y , mainly because there i s no consensus on the items that should be included. D i f f e r e n t systems of weighing the items entering i n t o indexes of p r o d u c t i v i t y w i l l often produce d i f f e r e n t r e s u l t s . Like any index number, such measures need to be i n -terpreted with caution and with reference to a r e s t r i c t e d context. P a r t i c u l a r care should be used when i t i s desired to i s o l a t e and measure the p r o d u c t i v i t y of separate fa c t o r s of production that contribute j o i n t l y to the same end product. I t i s recognized that there i s generally a p o s i t i v e c o r r e l a t i o n between the p r o d u c t i v i t y of the fact o r s of production i n a f i r m and the p r o f i t a b i l i t y of the f i r m . I t i s also asserted that, i n many i n -d u s t r i e s , the p r o d u c t i v i t y of a l l the factors can be increased by increased a u t o m a t i o n , w h i c h oft* requires heavy outlay i n c a p i t a l equipment. ° I b i d . , p. 1810. 9 I b i d , p. 1810. ^ E. L. Kohler, A Dictionary for Accountants (Englewood C l i f f s , N. J . : Prentice H a l l Inc. 1963 E d i t i o n ) , p. 398. 1 1 For a d e f i n i t i o n , see Webster's Dictionary. op. c i t . , p. 148. - 78 -4. Innovation: Innovation means "the in t r o d u c t i o n of something new as the d r i v i n g force i n p r a c t i c a l 12 economic advance." Under the present i n d u s t r i a l s t r u c t u r e , i t has been noticed that those firms that have been innovative have normally earned higher rates of p r o f i t s compared to those firms that have not been innovative. Innovation, which normally requires large c a p i t a l investments, i s one i n d i c a t o r of the progres-siveness of the f i r m . In short, the worker i s interested to know the progress made by his f i r m i n comparison with the competitors. Under the present r e g u l a t i o n , he i s not e n t i t l e d as a worker to receive the types of informa-t i o n that may a f f e c t h i s l i v e l i h o o d . D. Creditor: A c r e d i t o r i s a person or a f i r m to 13 whom a debt i s owed. Re i s c l a s s i f i e d as a short-term c r e d i t o r i f the debt i s repayable during the current year. I f the debt i s not repayable during the current year, then he i s c l a s s i f i e d as a long-term c r e d i t o r . One of the most important items of informa-t i o n required by the short-term c r e d i t o r i s the l i q u i d i t y of the debtor f i r m . Several measures l i k e Current Ratio,''"4 and Acid Test R a t i o , x ^ are used to determine 1 2 I b i d , p. 1166. 13 Kohler, op. c i t . , p. 152. 1 4 I b i d , p. 155. 1 5 I b i d , p. 21. - 79 -the l i q u i d i t y of a f i r m . In a d d i t i o n , he i s i n -terested to know about the p r o f i t a b i l i t y and the c a p i t a l structure of the debtor f i r m . The long-term c r e d i t o r i s i n many ways i n a s i m i l a r p o s i t i o n to the shareholder of the debtor f i r m . He i s p r i m a r i l y concerned with the p r o f i t a b i l i t y of the debtor f i r m . The shareholders, long-term c r e d i t o r s , general p u b l i c , and employees are concerned wi t h the projected p r o f i t a b i l i t y of the f i r m as a measure of i t s a b i l i t y to d i s t r i b u t e dividends, pay i n t e r e s t and repay c a p i t a l on long-term debt, set f a i r p r i c e with a f a i r p r o f i t , pay f a i r wages, and continue to be f i n a n c i a l l y v i a b l e . A p r o j e c t i o n of p r o f i t i s based upon the record of the past p r o f i t -a b i l i t y of the company as presented i n the Income Statement, the Statement of Sources and Applications of Funds, and condensed i n the extended h i s t o r i c a l analysis of r a t i o s . This base must be adjusted f o r the a n t i c i -pated change i n the future environment, i n which the f i r m w i l l operate. I t must be recognized that no f i n a l method has been devised to p r e d i c t the future, but, on the other hand, i t i s accepted that a l l well-managed firms w i l l prepare a comprehensive and d e t a i l e d operating, c a p i t a l and f i n a n c i a l budget fo r the coming year, and many firms w i l l pre-sent an estimate of the firm's f i n a n c i a l needs and p r o f i t a b i l i t y f o r a f i v e or ten-year period i n the f u t u r e . These plans, i f a v a i l a b l e , would m a t e r i a l l y a s s i s t groups of outsiders i n decisions about the company, so long as they were made aware of t h e i r inherent l i m i t a t i o n s . Besides the projected p r o f i t a b i l i t y of the f i r m , the long-term cr e d i t o r i s interested to know about the c a p i t a l structure pf the f i r m and the a c t i v i t i e s of the f i r m . 1 6 C. L. M i t c h e l l , M.B.A., C.A., Disclosure TJQ F i n a n c i a l Statements, an unpublished paper, Uni-v e r s i t y of B r i t i s h Columbia, June 1967. - 80 -E. Investor: An investor i s a person (or a firm) "that seeks to commit funds for long-term p r o f i t with a minimum of r i s k . " ^ The two main types of investors those i n v e s t i n g i n the shares of a corporation, and those i n v e s t i n g i n the c r e a t i o n of a new enterprise or the expansion of an e x i s t i n g one - should be treated separately because t h e i r informational r e -quirements are d i f f e r e n t . 1. Investment i n the shares of a corporation: A person considering purchase of shares of a corporation should examine a host of f a c t o r s i n c l u d i n g the pro-jected p r o f i t a b i l i t y of the corporation, the proba-b i l i t y d i s t r i b u t i o n of expected return i n the f u t u r e , the c a p i t a l structure of the corporation, the trend of the market fo r the product which the corporation produces, the q u a l i t y of management, and generally the performance of the corporation compared to other 18 corporations producing s i m i l a r products. Most of the information about past performances i s a v a i l a b l e from f i n a n c i a l statements published by these corpora-"L/ Webster's Dictionary, op. c i t . , p. 1190. In t h i s study, an 'investor' i s not synonymous to a 'speculator'. 18 For a f u l l e r treatment see J . B. Cohen and E. D. Zinborg, 'Investment Analysis and P o r t f o l i o Management' (Homewood, I l l i n o i s : Richard D. Irwin Inc., 1967), pp. 219-248. - 81 -tions o f f e r i n g shares to the p u b l i c . Some corporations make forecasts for a future period of normally one year. The u n a v a i l a b i l i t y of information about future plans of a corporation makes i t d i f f i c u l t f o r f i n a n c i a l ana-l y s t s to make predictions about the future p r o f i t a b i l i t y of the corporation. In many cases, these t e n t a t i v e p r e d i c t i o n s form the basis of judgment fo r the purchase of shares of the corporation. On many occasions, f i n a n c i a l analysts have expressed t h e i r d i s s a t i s f a c t i o n at the type and extent of information supplied by corporations, which form the basis of t h e i r recommendations to t h e i r c l i e n t s 119 about the purchase or sale of shares. I t i s sub-mitted that the recommendation i n the next chapter about the type and extent of corporate disclosure w i l l obviate many of the d i f f i c u l t i e s at present faced by f i n a n c i a l analysts i n t h e i r evaluation of corporations. 2. Investment i n a new undertaking, or the expansion of an e x i s t i n g undertaking; Any person considering investment i n an undertaking to produce a product f o r the f i r s t time requires information about many factors i n c l u d i n g the probable size of the market for the product, the trend of the market, the shares of the market held by large firms, product d i f f e r e n t i a t i o n practiced i n See N. E. Crane, "Security Analyst Looks at Annual Reports," Journal of Accountancy. V o l . 105, March 1958, pp. 31-36. Also L. R. Khan, "Inadequacies of Finan-c i a l Reports," F i n a n c i a l World. V o l . 114, No. 17 October 26, 1960, pp. 64-68. - 82 -the market, brand l o y a l t y , prices charged by pro-ducers, t h e i r cost of production, the break=even sales f i g u r e , and the ease of getting raw materials f o r the manufacture of the product. Some types of information l i k e product d i f f e r e n t i a t i o n , brand l o y a l t y , p r i c e s charged by producers and the ease of getting raw materials f o r the manufacture of the product, can be obtained by carrying out i n v e s t i g a t i o n s i n the market! However, most of the remaining information required to i n j e c t competitive conditions i n the mar-ket i s not a v a i l a b l e to the p o t e n t i a l entrant i n the market. The s p e c i f i c recommendations i n the next chapter attempt to ease the d i f f i c u l t i e s faced by a new entrant i n the market. A person (or a firm) considering expansion of an e x i s t i n g undertaking has considerable informa-t i o n about the trend of the market, u n i t cost of h i s own product and the p r o f i t a b i l i t y of the industry. Being i n business f o r a long time, he gets a f a i r l y good idea of the cost of production of h i s competitors and the brand l o y a l t y for the product. I t i s sub-mitted that he w i l l a l l o c a t e h i s c a p i t a l resources more r a t i o n a l l y and e f f i c i e n t l y i f he has accurate information about a l l the factors on which a new en-tran t seeks information. F. Government-run Corporation: A government-run corporation producing goods and services f o r sale to - 83 -the p u b l i c i s , i n many ways, i n a s i m i l a r p o s i t i o n to a p r i v a t e corporation. However, i n the area of p r i c e and p r o f i t s , i t might be subjected to greater scrut i n y and c o n t r o l . In some cases, a major aim of a corpora-t i o n i s to cover i t s costs. This aim frequently forms the basis of i t s p r i c i n g p o l i c y . G. Foreigner: In any consideration of the e f f e c t i v e competitiveness of the economy, the p o s s i b i l i t y of a person buying from, or s e l l i n g t o , a foreign person plays an important p a r t . In the case of the United States, purchases from countries other than 'communist countries' are p r a c t i c a l l y u n r e s t r i c t e d , provided the buyer pays import duty. Canada allows importation of consumer goods from p r a c t i c a l l y a l l countries of the world. In the case of machineries, importation i s allowed provided s i m i l a r machines are not r e a d i l y a v a i l a b l e from a Canadian manufacturer. Information about buyers and s e l l e r s of products i n any country can be normally obtained by approaching the chamber of commerce or government trade agencies of the foreign country. Foreigners are i n c r e a s i n g l y interested i n inve s t i n g i n the United States and Canada. They are int e r e s t e d i n re c e i v i n g information on a l l the fa c -tors considered i n case of the l o c a l i n v e s t o r s . H. Government Agencies: Among the many Canadian government agencies dealing with trade and commerce, the important ones f o r the purpose of t h i s study r e -- 84 -q u i r i n g information are: 1. The Department of I n t e r n a l Revenue requires i n -formation about 'taxable income' of a l l the persons and firms carrying out productive a c t i v i t i e s . This information i s supplied by a l l the persons who are subject to tax and a l l the firms, whether they make p r o f i t s or not. 2. "Canadian corporations, p r i v a t e and p u b l i c , whose gross revenues exceed $500,000 or whose assets ex-ceed $250,000 (excluding c e r t a i n f i n a n c i a l i n s t i t u -t i o n s , u t i l i t i e s and some other firms) are required, since 1962, to f i l e returns under the Corporations 20 and Labour Unions Returns Act." The information received under the Act i s used mostly for s t a t i s t i -c a l purposes and i s d i s c l o s e d to the public i n aggre-gate form. The information, as presented to the p u b l i c i s of very l i m i t e d use. The usefulness of CALURA i s now mostly fo r economic a n a l y s i s , and even i n t h i s respect there i s room for improvement.21 3. Other Agencies: Under the Companies Investiga-t i o n Act, 1960, a government department has been set up to maintain the competitive structure i n the economic system by taking actions against combina-tions that prevent or lessen unduly competition and mergers or monopolies that may operate to the d e t r i -20 M. H. Watkins and others, Foreign Owner-hio and Structure of Canadian Industry, (Ottawa: P r i v y o u n c i l O f f i c e , 19687, p. 179. I b i d . , p. 180. s C  21 - 85 -ment of the p u b l i c . The department normally acts as a r e s u l t of information about r e s t r a i n t s of competition r e -ceived from various sources. I t does not receive regular information about a l l the firms operating i n Canada. CALURA was meant to provide s u f f i c i e n t information on a regular basis on which the depart-ment may act, but a subsequent amendment to the Act 22 l a r g e l y n u l l i f i e d t h i s i n t e n t i o n . I t i s submitted that the department carrying out the su r v e i l l a n c e f u n c t i o n requires the fol l o w i n g types of information, i n addi t i o n to the types of i n -formation discussed above. A. Assets owned by a fi r m : In order to examine the c h a r a c t e r i s t i c s and r e l a t i v e strengths of the firms i n the market, i t i s e s s e n t i a l to have information about the assets owned by each of the firms i n the market. This information, along with other informa-t i o n p e r t a i n i n g to sales and p r o f i t l e v e l s , can be used to determine whether any change i n the structure or conduct i s necessary to i n j e c t competitive forces. B. Sales or turnover: The sales figure for a pro-duct of a f i r m i s an important i n d i c a t o r of the con-centration of the market. I f the sale made by one f i r m constitutes say 90 per cent of the t o t a l market I b i d , p. 180. - 86 -fo r a product, then the market cannot be c a l l e d e f f e c t i v e l y competitive. Conversely, i f there are many firms i n the market, each of which produces a small share of the market, then there i s a greater l i k e l i h o o d for the market to be e f f e c t i v e l y com-p e t i t i v e . To make the information on sales meaning-f u l , i t i s important that a separate sales f i g u r e by product be given by a f i r m engaged i n the manu-facture of many types of products. This obviously requires a broadly agreed d e f i n i t i o n of what i s a 'product'. No attempt i s made i n t h i s study to 23 provide such a d e f i n i t i o n . The turnover of a f i r m r e f l e c t s the speed at which the current assets - e s p e c i a l l y inven-t o r i e s - of the f i r m are being sold. I f the p r o f i t margin per sale i s known, then the t o t a l p r o f i t i s dependent on how f a s t the current assets are turned over i n a year. This information i s often used as an i n d i c a t o r of the e f f i c i e n c y of the f i r m , com-pared to other firms i n the market handling s i m i l a r products. Under the 1967 Companies Act of the United Kingdom, a l l companies are required to state t h e i r turnover, analyzed according to "classes of business". The approximate contribution of each class to the For a discussion on product see Clark, 1961, pp. c i t . , pp. 98-102. - 87 -o v e r - a l l p r o f i t must be stated. The Act does not give a d e f i n i t i o n of 'class of b u s i n e s s ' . 2 4 Kohler gives a second d e f i n i t i o n of turnover as the " r a t i o of sales to net worth (equity turnover), i t being understood that the comparison i s a c t u a l l y 25 between the asset equivalent of net worth and s a l e s . " This i s often used as an i n d i c a t o r of how e f f i c i e n t the management of a f i r m i s i n u t i l i z i n g loan and c r e d i t f a c i l i t i e s a v a i l a b l e at a predetermined rate of i n t e r e s t , to give a better return to i t s equity holders. G. Cost of Production: In order to determine whether the firms are earning abnormally high p r o f i t s , i t i s e s s e n t i a l to know the cost of production f o r the pro-duct. This cost may not be the same fo r a l l the fir m s . Due to economies of scale or technological innovation, some firms may have a lower cost of production than others and therefore may be earning higher p r o f i t s . This i s not precluded by the e f f e c t i v e l y competitive process. What cannot be to l e r a t e d i s the charging of a p r i c e much higher than the average cost of production, s o l e l y on the basis of c o n t r o l over the market gained by a few firms behaving i n a monopolistic manner. For a meaningful comparison, the amount 26 a l l o t t e d to cost of production should be segregated See J . F. Flower, A.C.A., "Accounting i n B r i t a i n and the .New companies Act," Canadian Chartered Accountant, V o l . 92, Number 2, February 1968, p. 115. 2 5 Kohler, op. c i t . , p. 503. 2 6 For a d e f i n i t i o n see Kohler, I b i d , p. 148. - 88 -i n t o m a t e r i a l s , labour, overhead. The method of a l l o c a t i n g overhead costs to periods and to classes of output should be c l e a r l y s p e c i f i e d . D. P r o f i t l e v e l s : The term ' p r o f i t ' i s used i n Accountancy as "a general term f o r the excess of revenue, proceeds, or s e l l i n g p r i c e over r e l a t e d 27 cost s . " I t i s a r e s i d u a l item-after 'revenue' i s matched with 'costs'. I t i s u s u a l l y preceded by a q u a l i f y i n g word or phrase s i g n i f y i n g the i n c l u s i v e -ness of the o f f s e t t i n g expense or cost, as 'gross' or 'net' of these expenses. The phrase 'Net Income' i s at present preferred to 'Net P r o f i t " . The p r o f i t margin per u n i t of product i s a good i n d i c a t o r of how competitive i s the f i r m i n the industry. This information about a l l the firms i n the market throws l i g h t on whether the market i s e f f e c t i v e l y competitive. For a meaningful comparison, i t i s e s s e n t i a l to know on what basis the f i r m has a l l o t t e d i t s costs and what expenses are deducted at d i f f e r e n t stages before a r r i v i n g at the f i n a l f i g u r e of 'Net Income'. This requires some uniformity i n accounting p r a c t i c e s . E. Control of r i v a l s : To f u l f i l l the requirement of independence of competitors o f f e r i n g s i m i l a r pro-ducts i n the market, i t i s important to have informa-I b i d , p. 398. - 89 -ticm about the r e l a t i o n s h i p of these f i r m s . Indepen-dence requires that the actions of these firms are not d i r e c t e d or influenced by a common source. This necessitates information about the shareholders of these f i r m s . Information about i n t e r l o c k i n g D i r e c t o r -ships i s also required. Any c o l l u s i v e contracts made eit h e r d i r e c t l y or through a common supplier of raw mat e r i a l should also be d i s c l o s e d . S p e c i f i c recom-mendations about what a corporation should d i s c l o s e are made i n the next chapter. F. V e r t i c a l Integration: An important argument be-hind E f f e c t i v e Competition i s that the fir m w i l l be induced by s e l f i n t e r e s t to u t i l i z e the resources under i t s c o n t r o l most e f f i c i e n t l y and pass on a part of the benefits of t h i s e f f i c i e n c y to the consumers by way of lower prices or better services. This assumes that a l l the firms i n the market have an even chance of purchasing the fa c t o r s of production at competitive p r i c e s . Some firms attempt to neu t r a l i z e the forces of E f f e c t i v e Competition by c o n t r o l l i n g t h e i r sources 28 of supply or t h e i r channels of d i s t r i b u t i o n . While there i s nothing inherently objectionable i n dealing with a sole supplier or a d i s t r i b u t o r , t h i s method i s For a more d e t a i l e d discussion of V e r t i -c a l Integration see Kaplan, op. c i t . , pp. 208-218; F r i e d r i c h Kessler and Richard N. Stern, "Competition, Contract, and V e r t i c a l Integration," Yale Law Journal, V o l . 69 (November, 1959), p. 1. - 90 -often used to push the competitors out of the mar-29 ket. Thus i t i s the market power and not economic e f f i c i e n c y which determines which firms w i l l remain i n the market. Therefore, information about v e r t i c a l i n t e g r a t i o n should be disclose d to enable the authori-t i e s concerned to i n s t i t u t e any s t r u c t u r a l changes i n the market. G. Marketing Methods: Marketing methods adopted by the firms often serve as good i n d i c a t o r s of the com-p e t i t i v e tendencies of the industry. Large markets are carved out i n t o small markets by exclusive dealer-ships or franchises. The methods used by p a r t i c u l a r firms to s e l l t h e i r products are common knowledge i n the market. What i s not disclosed are the c o l l u -sive arrangements made between the competitors to r e s t r i c t the e f f e c t s of competition. Any such s p e c i a l arrangement should be disclose d to the p u b l i c . An Informed Pu b l i c Besides the information given to the poten-t i a l buyers which become pu b l i c knowledge, some types of information r e l a t i n g to assets, sales, cost of sales, and net income are disclosed by firms to t h e i r shareholders. This disclosure i s based on a contrac-T T t s- v- Aluminum Co. of America, 148 F 2d 416 (CCA - 2d, 1945T7" - 91 -t u a l r e l a t i o n s h i p between the corporation as a l e g a l e n t i t y and i t s shareholders. I f the corporation o f f e r s shares to the p u b l i c , then i t i s required by 30 law to d i s c l o s e c e r t a i n sets of information to the pub l i c by way of Prospectus and Annual Reports. In ad d i t i o n , many government agencies require a corpora-t i o n to provide them with c e r t a i n information about 31 the a c t i v i t i e s of the corporation. I t i s submitted that E f f e c t i v e Competition as a normative model requires the disclosure of con-siderably greater information discussed under the major categories above. This d i s c l o s u r e should be made not only to the p a r t i e s under e x i s t i n g or poten-t i a l c ontractual r e l a t i o n s h i p s but also to the general p u b l i c i n c l u d i n g competitors, p o t e n t i a l entrants to the market, investors i n other corporations, p o t e n t i a l i n v e s t o r s , employees and consumers. I t i s submitted that an e s s e n t i a l requirement of E f f e c t i v e Competition i s an informed p u b l i c . The pub l i c should be made aware of the opportunities a v a i l a b l e to them to u t i l i z e the f a c tors under t h e i r c o n t r o l i n the most e f f i c i e n t manner. An informed public i s also e s s e n t i a l to carry out e f f e c t i v e l y the program of public p o l i c y designed 32 to a t t a i n and preserve E f f e c t i v e Competition. 30 See J . S. Z i e g e l , Studies i n Canadian Company Law, 1967, pp. 476-506. 31 Eg. Corporation and Labour Unions Return Act, 3 2 G a l b r a i t h , 1961, op. c i t . . pp. 215-218, argues that mature corporations have succeeded i n con-- 92 -Competition can be influenced by the mechanisms f o r disseminating information regarding p r i c e s , c o s t s , and q u a l i t i e s , as w e l l as data concerning supply and de-mand. With such information customers have f u l l freedom of choice among the of f e r i n g s of various s e l l e r s . The same data permit s e l l e r s to s i z e up the com-p e t i t i v e s i t u a t i o n more e f f e c t i v e l y . Without such information pockets of^ monopoly or monopsony can develop. I t i s recognized that the a v a i l a b i l i t y of extensive information about a l l the firms i n the mar-ket can encourage the firms to enter i n t o c o l l u s i v e arrangements, f i x i n g p r ices at a l e v e l which does not encourage any f i r m to i n i t i a t e a competitive move. There have been many cases of such arrangements made foll o w i n g information about prices and turnover supp-34 l i e d to trade associations. However, such a poten-t i a l danger of misuse of information i s not a s u f f i -c i e n t ground f o r nondisclosure of a d d i t i o n a l informa-t i o n discussed above. Other means should be devised to minimize t h i s danger of misuse of information. v e r t i n g the market i n t o a planned one because the con-sumers who are subjected to such planning are not aware that the economy i s planned. 33 Massel, op. c i t . , pp. 204. 34 See Carpet Manufacturers - CCH Trade Cases Par 56, 079 (1941), Battery Separator - CCH Trade Cases, Par 56, 154 (1941). - 93 -Summary The p r i n c i p a l points i n the chapter are as f o l l o w s : 1. The c h a r a c t e r i s t i c s of the normative model of E f f e c t i v e Competition are not a l l self-genera-t i n g and s e l f - r e g u l a t i n g . The desired en-vironment and forces have to be created to generate and preserve these c h a r a c t e r i s t i c s . 2. A major weakness of the t r a d i t i o n a l economic to o l s used to analyse competition i s that they do not explain c l e a r l y the processes by which the informational requirements of each of the actors i n the economy are met. 3. The informational requirements of each of the actors i n the economy, namely: Consumer, Employer, Worker, C r e d i t o r , Investor, Government-run corporations, Foreigner and various Govern-ment Agencies i s reviewed. The importance of having an 'informed p u b l i c ' i s emphasized. CHAPTER V CORPORATE DISCLOSURE B r i e f Outline In the l a s t chapter, the major informational requirements of the normative model of E f f e c t i v e Com-p e t i t i o n were discussed. Apart from the generally known information about p r i c e , product, d e l i v e r y time, terms of payment, and i n t e r e s t rates which i s d i v u l -ged to a t t r a c t sales, and the information about assets, p r o f i t s , and dividends given to a l i m i t e d group of persons under contractual r e l a t i o n s h i p s , there seems to be no b u i l t - i n system i n the economy to provide the other types of information required f o r E f f e c t i v e Competition. The tendency of the firms i n the economy i s not to divulge more information than i s absolutely necessary to a t t r a c t customers and e f f e c t sales and gain the necessary general commercial support. This i s based on an apparent conviction of businessmen that secrecy i s an important asset of the f i r m which should be u t i l i z e d to f u r t h e r i t s own i n t e r e s t s . Therefore, public p o l i c y should be aimed at fo r c i n g the actors i n the economy to provide the a d d i t i o n a l - 95 -information required f o r E f f e c t i v e Competition. A f t e r reviewing the importance of modern cor-porations , s p e c i f i c recommendations about the type and extent of corporate disclosures are made i n the present chapter. Importance of Modern Corporation By f a r the most important influence i n the economy of the United States and Canada i s exercised by the modern corporation. I t i s the largest p r i v a t e employer of workers, the biggest investor and the predominant instrument of production. The r o l e of the corporation has changed d r a s t i c a l l y since corporate status with l i m i t e d l i a b i l i t y was l e g a l l y sanctioned around the middle of the nineteenth century. Seventy years ago, the corporation was s t i l l confined to those i n d u s t r i e s r a i l r o a d i n g , steamboating, steel-making, petroleum recovery and r e f i n i n g , some mining - where, i t seemed, production had to be on a large scale. Now i t also s e l l s groceries, m i l l s g r a i n , publishes newspapers and provides public e n t e r t a i n -ment, a l l a c t i v i t i e s that were once the province of the i n d i v i d u a l proprietor or the i n s i g n i f i c a n t f i r m . The largest firms deploy b i l l i o n s of d o l l a r s worth of equip-ment and produce hundreds of products. The f i v e hundred largest corporations pro-duce close to half of a l l the goods and services that are a v a i l a b l e annually i n the United States. This change i n the r o l e of the corporation Galb r a i t h , 1967, op. c i t . , pp. 1-2. - 96 -has Led to considerable discussion about the place of the corporation i n the s o c i a l , p o l i t i c a l , economic 2 and l e g a l framework of the United States and Canada. More s p e c i f i c a l l y , the argument centres around the legitimacy of corporate power and the a c c o u n t a b i l i t y of corporations f o r t h e i r actions which a f f e c t others such as consumers, employees, suppliers and the pub-l i c . As part of t h i s general a c c o u n t a b i l i t y i s the question of disclosure of information by corporations. What type of information should corporations disclose? To whom should corporations disclose? What purpose i s served by such disclosure? What c r i t e r i a should be used to judge the adequacy of disclosure? Accountants' Views About Corporate Disclosure The answers to these and other questions r a i s e d regarding corporate disclosure depend mainly on the i n t e r p r e t a t i o n given to the ro le of the cor-poration i n society. The Accounting Associations and many of the business organizations have attempted to r e s t r i c t t h e i r i n t e r p r e t a t i o n to the l e g a l frame-work w i t h i n which the corporation takes i t s roots and operates. In Canada, various P r o v i n c i a l Corporations See A. A. Berle, "Economic Power and the Free Society;" W. H. Perry, " I r r e s p o n s i b i l i t i e s i n Metrocorporate America;" G. C. Means, " C o l l e c t i v e Capitalism and Economic Theory;" i n Andrew Hacker (Ed), Thg Corporation Take-Over (New York: Anchor Books, 1965). A c t s r e q u i r e a c o r p o r a t i o n t o f i l e an A nnual R e t u r n i n t h e Companies R e g i s t r y g i v i n g i n f o r m a t i o n about t h e p a i d - u p c a p i t a l , t h e s h a r e h o l d e r s and t h e D i r e c -3 t o r s o f t h e C o r p o r a t i o n s . C o r p o r a t i o n s o f f e r i n g t h e i r s h a r e s t o t h e p u b l i c a r e r e q u i r e d t o i s s u e a p r o s -p e c t u s and t o submit F i n a n c i a l Statements a n n u a l l y w h i c h s h o u l d i n c l u d e the Income Statement, the B a l a n c e S h e e t , t h e Statement o f R e t a i n e d E a r n i n g s , the A u d i -4 t o r ' s R e p o r t and t h e D i r e c t o r ' s R e p o r t . The Accoun-t i n g A s s o c i a t i o n s have d e v i s e d c e r t a i n ' G e n e r a l l y A c c e p t e d R u l e s ' which s h o u l d be f o l l o w e d by a l l t h e a c c r e d i t e d a c c o u n t a n t s a n d a u d i t o r s w h i l e p r e p a r i n g a c c o u n t s and f i n a n c i a l s t a t e m e n t s , b u t t h e s e r u l e s a r e n o t b a c k e d by any l e g a l s a n c t i o n s . Under t h e Income Tax A c t and the C o r p o r a t i o n s and Labour U n i o n R e p r e s e n -t a t i o n A c t (CALURA), c o r p o r a t i o n s i n Canada a r e r e -q u i r e d t o submit c e r t a i n i n f o r m a t i o n f o r tax and s t a t i s t i c a l p u r p o s e s , r e s p e c t i v e l y . A p a r t f r o m t h e t y p e and e x t e n t o f d i s c l o -s u r e r e q u i r e d by law, t h e r e i s h a r d l y any agreement among a c c o u n t a n t s as t o what a d d i t i o n a l i n f o r m a t i o n s h o u l d be d i s c l o s e d and t o whom i t s h o u l d be d i s c l o s e d . 3 Z i e g e l , op. c i t . , pp. 476-506. 4 Z i e g e l , I b i d . 5 See C. G r i f f i t h and T. W i l l i a m s , "Measuring Adequate D i s c l o s u r e , " J o u r n a l of A c c o u n t i n g , V o l . 109, A p r i l 1964. - 98 -The accountants have generally confined t h e i r d i s -cussion of disclosure to the e f f e c t on the actions of present and prospective i n v e s t o r s , of providing more or less information of a f i n a n c i a l nature.^ Following the l e g a l r e l a t i o n s h i p , they have assumed that the primary r e s p o n s i b i l i t y of the corporation i s to i t s stockholders and that the c r i t e r i a f o r d i s c l o s u r e should be based on t h i s r e l a t i o n s h i p . However, many progressive accountants have warned the Accounting Associations of the detrimen-t a l e f f e c t of t h i s r e s t r i c t i v e , and often u n r e a l i s t i c a t t i t u d e to disclosures by corporations. Rappaport has suggested the f o l l o w i n g four basic objectives for external corporate reporting: 1. The managements of large business corporations have a reporting o b l i g a t i o n to those seg-ments of society affected by t h e i r decisions i . e . i n v estors, employees, consumers, supp-l i e r s , l o c a l communities and the p u b l i c at lar g e . 2. Those groups with a legitimate i n t e r e s t i n the corporation should be provided with information e s s e n t i a l to a r r i v i n g at r a t i o n a l judgments concerning the equitable sharing of corporate b e n e f i t . 3. In the i n t e r e s t of economic progress, those groups which are responsible for a l l o c a t i n g resources i n our economy should be provided 6 See B u l l e t i n No. 20 of the Canadian I n s t i t u t e of Chartered Accountants, J u l y 1964. - 99 -with information which w i l l promote e f f i c i e n t a l l o c a t i o n . 4. In the i n t e r e s t of sustaining our basic values, information which i s l i k e l y to influence s o c i a l l y desirable behavior and discourage undesirable behavior should be reported, e.g. c a l l i n g a ttention to monopoly p r o f i t s to preserve p l u r a l i s m i n the i n d u s t r i a l sector of our economy.? A standard argument put forward by the accoun-tants i s that they cannot l e g a l l y force t h e i r c l i e n t firms to d i s c l o s e more than what i s required under law. A d d i t i o n a l d i s c l o s u r e may also make the accoun-tants vulnerable under law to s u i t s by shareholders and others. The l a t t e r part of t h i s study includes recommendations to strengthen the hands of accoun-tants i n f o r c i n g t h e i r c l i e n t s to d i s c l o s e a d d i t i o n a l information. P o l i t i c a l Theorists' Views About Corporate Disclosure P o l i t i c a l t h e o r i s t s generally tend to look at the question of corporate disclosure as a part of the o v e r a l l question of legitimacy of corporate power. Many t h e o r i s t s argue that the exercise of power can only be legitimate i f i t i s representative. That power may be rendered legitimate by demonstrating i t s representative q u a l i t y has been one of the foundations of democratic theory. Where power i s exercised by - and w i t h i n - government agencies and voluntary associations, i t can u s u a l l y be shown that 7 A. Rappaport, " E s t a b l i s h i n g Objectives f o r Pub-l i s h e d Corporate Accounting Reports," Accounting Review. V o l . 39, 1964, pp. 951-962. See Arthur M. Louis, "The Accountants are Chan-ging Their Rules," For tune. June 15, 1968. - 100 -o f f i c i a l s are elected by constituents who have consented to the use of authority and who cast equal votes i n determining the personnel and p o l i c i e s that are to p r e v a i l . Authority may be delegated rather than d i r e c t , and consent may be t a c i t rather than a c t i v e but the presumption remains that power i n p u b l i c and p r i v a t e l i f e has a representative base.9 When corporations were granted the status of l e g a l e n t i t i e s , i t was assumed by the l e g i s l a t u r e tha t the source of power was the entrepreneur who combined with one or more others to carry business i n a manner which could not be done by a single person. For purposes of s c h o l a r l y i n q u i r y , the corporation has a sharp l e g a l image. I t s purpose i s to do business as an i n -d i v i d u a l would but with the added a b i l i t y to assemble and use the c a p i t a l of several or numerous persons. In consequence, i t can undertake tasks beyond the reach of any s i n g l e person. And i t protects those who supply c a p i t a l by l i m i t i n g t h e i r l i a -b i l i t y to the amount of t h e i r o r i g i n a l i n -vestment, i n s u r i n g them a vote on the s i g -n i f i c a n t a f f a i r s of the e n t e r p r i s e , de-f i n i n g the powers and the r e s p o n s i b i l i t i e s of d i r e c t o r s and o f f i c e r s , and giving them access to the courts to redress grievance. Apart from i t s a b i l i t y to mobilize c a p i t a l and i t s lessened a s s o c i a t i o n with the a c t i v e l i f e of any i n d i v i d u a l , the corporation i s not deemed to d i f f e r f u n c t i o n a l l y from the i n d i v i d u a l proprietorship or partnership. I t s purpose, l i k e t h e i r s , i s to conduct business on equitable terms with other businesses and make money for the owners. I t was recognized that the entrepreneur may delegate some of t h i s power to a subordinate, but the sub-ordinate remains accountable to the entrepreneur. y Hacker (Ed), op. c i t . , pp. 6-7. 1 0 G a l b r a i t h , 1967, op. c i t . , p. 72, I t a l i c s supplied. - 101 -As the entrepreneur was normally a s u b s t a n t i a l i n -vestor i n the business, he was considered an un-questioned authority i n the exercise of corporate power which was regulated by the market forces. With the r i s e of the 'mature 1 1 1 corpora-12 tLons run by the 'technostructure', the base of corporate power has changed considerably. In prac-t i c e , the shareholder has l i t t l e say i n the running of corporations. Corporate power i s exercised by pr o f e s s i o n a l executives who have r e l a t i v e l y l i t t l e stake i n the r i s k c a p i t a l of the corporation. They v i r t u a l l y appoint those members to the Board of 13 Directors who w i l l support t h e i r p o l i c i e s . Many of the large corporations have numerous shareholders, each holding a small proportion of the t o t a l out-standing stock. The pr o f e s s i o n a l executives are p r a c t i c a l l y free from c o n t r o l by the shareholders. This separation of ownership from c o n t r o l i s on the increase, according to studies c a r r i e d out by R. J . Lerner.^ 4 1 1 I b i d , p. 71. 1 2 I b i d , p. 92. 1 3 I b i d , pp. 83-84. l ^ R. J . Lerner, "Ownership and Control i n the 200 Largest Non-Financial- Corporations, 1929 and 1963," American Economic Review 1966 56 (4), pp. 777-787. - 102 -I t s p r i n c i p a l f i n d i n g i s that manage-ment c o n t r o l among the 200 largest non-f i n a n c i a l corporations has almost doubled i n incidence since 1929. In that year 44 per cent of the "200 l a r g e s t " and 58 per cent of t h e i r assets were management con-t r o l l e d ; i n 1963, 84.5 per cent of the "200 l a r g e s t " of that year and 85 per cent of t h e i r assets were so c o n t r o l l e d . Manage-ment c o n t r o l increased s u b s t a n t i a l l y w i t h i n each of the three major i n d u s t r i a l groups ( i n d u s t r i a l s , p u b l i c u t i l i t i e s and trans-p o r t a t i o n companies) and became the over-whelming predominant type of corporate c o n t r o l w i t h i n each group. In a d d i t i o n to the s h i f t i n the base of cor-porate power, the re g u l a t i o n of t h i s power by market forces has become less e f f e c t i v e due to many factors i n c l u d i n g the sheer size of mature corporations, o l i g o p o l i s t i c tendencies of the market and the i n t e r -vention by the government i n the market to regulate employment and income. With these d r a s t i c changes i n the base and exercise of corporate power, i t i s argued by some p o l i t i c a l t h e o r i s t s that the whole structure on which corporate legitimacy and power are based should be changed to make the corporations more democratic. As a part of t h i s democratization process, adequate d i s -closure of the a f f a i r s of the corporations should be made to the p u b l i c . 5 Lerner, I b i d , as summarized i n American Economic Association, The Journal of Economic Ab-s t r a c t s , Sept. 1966, p. 533. - 103 -Yet we are so inured to the notion that business i s p r i v a t e that we have not yet faced the f a c t that the only respectable, democratic s o l u t i o n to the problem of the loss of c o n t r o l i s to b u i l d new external c o n t r o l s , with the government as the instrument of popular con-t r o l , e i t h e r d i r e c t l y through o v e r - a l l p u b l i c r e g u l a t i o n of a continuing sort or i n d i r e c t l y through reconstructing of business i n s t i t u t i o n s . The basic problem, then, i s to f i n d ways to hold economic decision-makers to account for t h e i r actions and to ensure that t h e i r de-c i s i o n s are made i n conformity with community v a l u e s . 1 " Economists' Views About Corporate Disclosure Economists have been i n general agreement with the arguments of corporate power put forward by p o l i t i c a l t h e o r i s t s , but t h e i r case f o r corporate d i s c l o s u r e i s based on the economic implications of large corporations. As a s t a r t i n g point, the impor-tance of corporations i n the modern economy i s em-phasized. Nothing so characterizes the i n d u s t r i a l system as the scale of the modern corporate ent e r p r i s e . In 1962 the f i v e largest cor-porations i n the United States, with combined assets i n excess of $36 b i l l i o n , possessed over 12 per cent of a l l assets used i n manu-f a c t u r i n g . The f i f t y largest corporations had over a t h i r d of a l l manufacturing assets. The 500 largest had w e l l over two-thirds. Corporations with assets i n excess of $10,000,000, some 2,000 i n a l l , accounted f o r about 80 per cent of a l l the resources used i n manufacturing i n the United States. In the mid-nineteen-fif t i e s , 28 corporations provided approximately 10 per cent of a l l employment i n manufacturing, mining and re-t a i l and wholesale trade. Twenty-three Michael D. Reagan, The Managed Economy (New York: Oxford U n i v e r s i t y Press, 1963), p. 218. - 104 -corporations provided 15 per cent of a l l the employment i n manufacturing. In the f i r s t h a l f of the decade (June 1950 -June 1956) a hundred firms received two-t h i r d s by value of a l l defence contracts; ten firms received one-third. In 1960 four corporations accounted f o r an estimated 22 per cent of a l l i n d u s t r i a l research and development expenditure. Three hundred and eighty-four corporations employing 5,000 or more workers accounted f o r 85 per cent of these expenditures; 260,000 firms employing fewer than 1,000 accounted for only 7 per cent. 7 I t i s c l e a r from these s t a t i s t i c s that cor-porations are not j u s t a passing phase as Adam Smith 18 had envisaged but are here to stay. From a l l i n -d i c a t i o n s , large corporations w i l l increase t h e i r hold over the market, and w i l l extend t h e i r already 19 large influence i n the p o l i t i c a l and s o c i a l f i e l d s . With the market forces not strong enough to regulate corporate power, many economists b e l i e v e that a d d i t i o n a l forces should be in j e c t e d i n t o the economy to regulate the performance of the corpora-tions to achieve the na t i o n a l objectives. As the nat i o n a l objectives are taken to be achieved with less costs under the normative model of E f f e c t i v e Competition, i t i s submitted that the c h a r a c t e r i s t i c s of t h i s model should be used as guides to the type and extent of disclosure required from corporations. G a l b r a i t h , 1967, op. c i t . , p. 75. Adam Smith, op. c i t . Reagan, 1963, op. c i t . . p. 235, - 105 -Inadequacy of the Present Level of Disclosure That the present l e v e l of corporate d i s -c l o s u r e , e s p e c i a l l y In the case of Canada, i s gro s s l y inadequate i s not disputed by the majority of accoun-tants , economists and progressive businessmen. The recent Watkins Report on Foreign Ownership and the Structure of Canadian Industry makes some pertinent 20 observations on t h i s unsatisfactory s i t u a t i o n . The d i s c l o s u r e by corporations of t h e i r a f f a i r s and operations i s of great impor-tance to a broad spectrum of i n t e r e s t s i n so c i e t y , i n c l u d i n g shareholders, c r e d i t o r s , prospective i n v e s t o r s , employees, su p p l i e r s , consumers, governments and others. In-formed discussion and the analysis of the issue r a i s e d by the m u l t i - n a t i o n a l corpora-t i o n depend on the quantity and q u a l i t y of relevant information a v a i l a b l e to the public and the government. In s p i t e of a decade of intense concern about these issues, and i n s p i t e of recent additions to knowledge, a ^\ s u b s t a n t i a l data gap remains to be f i l l e d . The nature of corporate disclosure re-quirements i n Canada s i g n i f i c a n t l y reduces the quantity of information a v a i l a b l e to the p u b l i c . The most serious problem with r e -spect to the issue of foreign ownership and c o n t r o l , i s the extent to which f o r e i g n -owned firms are r e l i e v e d of the necessity of public disclosure by v i r t u e of t h e i r status as private companies. In the nature of the case, that i s , the f a i l u r e of private companies regardless of s i z e to d i s c l o s e , i t i s impossible to deter-mine p r e c i s e l y even the number of large p r i v a t e companies i n Canada. 2 0 M e l v i l l e H. Watkins and others, Foreign Ownership and the Structure of Canadian Industry. Jan. 1968. 2 1 I b i d , p. 166. 2 2 I b i d , p. 169. 23 : 5 I b i d , p. 171. - 106 -Far too l i t t l e i s known i n Canada about the operations of large corporations, both Canadian-owned and foreign-owned, which often dominate the i n d u s t r i e s i n which they operate. Without adequate information, i t i s d i f f i c u l t to formulate p o l i c y . One of the most i n s i d i o u s forms of monopoly power i s the monopoly of know-ledge. The p r i v i l e g e s that accrue from i n -corporation must be matched by obligations to d i s c l o s e f u l l y and widely to the v a r i e t y of i n t e r e s t s on whom the a c t i v i t i e s of corporations impinge.2^ The blame f o r t h i s state of a f f a i r s must properly be put at the door of Canadian govern-ment for not i n s i s t i n g on public d i s c l o s u r e . -) Information f o r purposes of public d i s -closure i s grossly inadequate and the f e d e r a l government should leave no stone unturned to r e c t i f y t h i s s i t u a t i o n . 6 Recommendations Based on the c h a r a c t e r i s t i c s of E f f e c t i v e Competition, the f o l l o w i n g s p e c i f i c recommendations on disclosures are made, with respect to corporations operating i n Canada. 1. Which type of corporations should disclose? Under the present Canadian Company Law, only those corpora-t i o n s o f f e r i n g shares to the public are required to submit Annual F i n a n c i a l Statements to the Registrar General. As about 60 per cent of the largest Canadian companies are private i n that they do not o f f e r t h e i r shares to the p u b l i c , they are exempt from d i s c l o s i n g 2 4 I b i d , pp. 356-357. 2 5 I b i d , p. 173. 2 6 I b i d , p. 185. - 107 -t h e i r f i n a n c i a l a f f a i r s to anyone but t h e i r share-holders, and tax a u t h o r i t i e s . The informational requirements of E f f e c t i v e Competition necessitate disclosures to the p u b l i c by a l l the corporations. The consumption, productive and investment a c t i v i t i e s of persons and firms are dependent on what i s happening i n the market. As the movement of p r i c e i s no longer a s u f f i c i e n t i n d i c a t o r of the state of supply and demand i n the market, a host of other types of information i s required by consumers, producers and i n v e s t o r s . Disclosure by a l l corporations w i l l also provide a better basis f o r the use of a n t i - t r u s t and other regulatory devices to gear the economy to the desired ends. 'Under the 1967 Companies Act of the United Kingdom, a l l corporations with minor ex-ceptions are required to d i s c l o s e c e r t a i n types of f i n a n c i a l information to the public by f i l i n g t h i s 27 information annually i n the Companies Registry. The Watkins Report recommends changes i n the Canadian law to require a l l corporations to disclose c e r t a i n f i n a n c i a l information to the public by f i l i n g with the R e g i s t r a r General. 27 See J . F. Flower, ACA "Accounting i n B r i t a i n and the New Companies Act." Canadian Chartered Accoun-tant V o l . 92 No. 2 February 1968, p. 113. also Lord Jenkins and others, Report of the Company Law Committee. Cmnd. 1749, 1962, pp. 94-98, 1413147, 351-352. - 108 -The protection of the p u b l i c , and the a b i l i t y of i n d i v i d u a l members thereof t o make informed decisions i n t h e i r dealings with corporations, required disclosure to the p u b l i c , and not simply to shareholders, of basic f i n a n c i a l information about i n -d i v i d u a l firms.28 In p r i n c i p l e , d i s c l o s u r e should be gotten from private companies under com-pany law without issue of shares to the p u b l i c , that, i s , there could be " d i s -c l o s i n g " p r i v a t e companies. 2. To Whom Should Corporations Disclose? Under the present Canadian law, exempt priv a t e companies are required under contractual o b l i g a t i o n to d i s c l o s e to t h e i r shareholders. Those public companies o f f e r i n g shares to the pub l i c are required by law to issue a prospectus and to f i l e annual accounts with the Registrar General. To promote e f f e c t i v e competition i n the economy, i t i s e s s e n t i a l that c e r t a i n ' s t r a t e g i c ' information should be made av a i l a b l e to a l l the par-t i c i p a n t s i n the economy, and not j u s t the sharehol-ders. I t i s recognized that t h i s disclosure to the pub l i c may r e s u l t i n the management or auditors of corporations being made l i a b l e i n law for damages re-30 s u i t i n g from misrepresentation i n such information. 1 Watkins Report, op. c i t . , p. 168. 2 9 I b i d , p. 176. -3 0 See Louis, Fortune, 15th June, 1968, op. c i t . , pp. 177-180. - 109 -This problem can be p a r t l y solved by r e q u i r i n g the corporations to submit c e r t a i n s t r a t e g i c information to the Registrar General, who i n turn makes i t a v a i l a -ble for p u b l i c inspection without guaranteeing i t s 31 accuracy. 32 3. 'Strategic' Information: Based on the normative model of E f f e c t i v e Competition, -the following types of corporate information are considered ' s t r a t e g i c ' fo r the attainment of n a t i o n a l objectives. The l i s t i s not exhaustive, and may be a l t e r e d once more i n -formation i s a v a i l a b l e about the r e l a t i o n s h i p of the structure of the economy to the performance of the corporations functioning w i t h i n the economy: a) Income Statement: The Income Statement of a cor-poration i s used by the present and prospective share-holders, long-term c r e d i t o r s , employees and general public to project the p r o f i t a b i l i t y of the corpora-t i o n . I t i s also used as an i n d i c a t o r of how e f f i -c i e n t l y the management of the corporation i s u t i l i z i n g the resources under i t s c o n t r o l . Comparisons are made between firms i n the same industry and between i n -d u s t r i e s . Any meaningful comparison requires segre-gating current income from past income and using s i m i -l a r bases f o r valuation of assets. At present, firms „ See U . K. Companies Act, 1967, op. c i t . ; Watkins Report, op. c i t . , p. 173. 32 The word " S t r a t e g i c " i s purposely used to emphasize a plan of action designed to f u l f i l l - 110 -use many types of methods of valuing inventory. Assets are u s u a l l y recorded at cost (less deprecia-tion) and the 'cost of sales' contains a part which i s based on t h i s h i s t o r i c a l cost valuation of assets. I t i s now recognized by the American Accounting Asso-c i a t i o n that t h i s method of va l u a t i o n i s u n s a t i s f a c -33 tory. To provide meaningful comparisons of the p r o f i t a b i l i t y of d i f f e r e n t firms i n the industry, 'operational' income should be segregated from 'holding' 34 gain. Valuation based on h i s t o r i c a l cost should not be used to compare the p r o f i t a b i l i t y of two fir m s . The author prefers the incorporation of 'business 35 p r o f i t ' as defined by Edwards and B e l l , b) Balance Sheet: The Balance Sheet i s 'a, statement of f i n a n c i a l p o s i t i o n of any economic u n i t , d i s c l o s i n g as at a given moment of time i t s assets, at cost, depreciated cost, or other indicated value, i t s 36 l i a b i l i t i e s , and i t s ownership.' The o r i g i n a l pur-pose behind the preparation of the Balance Sheet was to show the 'Net Worth" cf the f i r m . Under the present n a t i o n a l objectives through the normative model of E f f e c -t i v e Competition. For d e f i n i t i o n , see Webster's Third New In t e r n a t i o n a l Dictionary, p. 2256. 33 See American Accounting Association, A State-ment of Basic Accounting Theory (American Accounting Asso-c i a t i o n , 1966J". 34 E. 0 . Edwards and P. W. B e l l , The Theory and Measurement of Business Income (Los Angeles: U n i v e r s i t y of C a l i f o r n i a Press, 1961), p. 73. 3 5 I b i d , p. 97. Kohler, ep. c i t . . p. 53. - I l l -system of recording assets at a c q u i s i t i o n costs less depreciation, the Balance Sheet no longer r e f l e c t s what i s the present 'worth' of the f i r m ; i t has there-fore been relegated to a secondary place while asses-37 sing the p r o f i t a b i l i t y of a f i r m . This i s unfor-tunate as the Balance Sheet, i n a modified form, can prove a u s e f u l document to be used i n conjunction with say the Income Statement and the Flow of Funds State-ment to assess the e f f i c i e n c y and p r o f i t a b i l i t y of a f i r m . There i s at present no agreement as to what basis of v a l u a t i o n should be used i n place of, or i n ad d i t i o n t o , ' h i s t o r i c a l cost'. But the modern trend 3 8 i s to use the 'Market Value' b a s i s , and the author agrees with i t . The chief features of the recent trend are (1) the much stronger emphasis put upon market or replacement values, and, i n conn-ectio n with t h i s , (2) the a r t i c u l a t e d i s -t i n c t i o n between gains derived from holding assets, on one side, and from operating pro-f i t s on the other. The subordination of the cost basis i n favour of the assigning of current values r e s u l t s from a s h i f t i n the objective of accounting, a s h i f t away from the c u s t o d i a l aspect of documentable evidence to-ward the goal of f a c i l i t a t i n g managerial de-c i s i o n s as w e l l as decisions about managers. One has become p a i n f u l l y aware that while t r a d i t i o n a l accounting has always stressed pure c u s t o d i a l c o n t r o l i t neglects too much 37 See W. Paton and A. L i t t l e t o n , An I n t r o -duction to Corporate Accounting Standards (Iowa C i t y : American Accounting A s s o c i a t i o n , 1940). B. Graham, D. L. Dodd, and S. C o t t l e , Security A n a l y s i s . P r i n c i p l e s and Technique. 1962, pp, 202-223. 3 8 See Edwards and B e l l (1961), op. c i t . ; R. T. Sprouse and M. Moonitz, A Tentative Set of Broad Accounting P r i n c i p l e s f o r Business Enterprises, 1962. - 112 -the c o n t r o l of e f f i c i e r l c y . This becomes most obvious i f we remind the reader that the income statement shows only how large or how small the p r o f i t (or loss) i s , but f a i l s to i n d i c a t e what the p r o f i t could have been i f c e r t a i n investments or d i s -investments (e.g. decrease of inventory), c e r t a i n more r e a l i s t i c p o l i c i e s , or more e f f i c i e n t management had been chosen. Ob-v i o u s l y , such an i n d i c a t o r can hardly be attained by switching from the cost to the current value b a s i s . But a s h i f t towards market values i s a f i r s t step i n the d i r e c -t i o n of an accounting f o r "decision-making" purposes; i t leads to a closer connection between the " i s " of the balance sheet and income statement and the "ought to be" of the budgeting system. I t enables accoun-t i n g to provide information for evaluating actions of the past to the benefit of the future.3" c) Statement of Retained Earnings: This r e f l e c t s the accumulated net income, less d i s t r i b u t i o n s to stock-holders and transfers to pa i d - i n c a p i t a l accounts. I t i s the amount of p r o f i t ploughed back i n t o the f i r m . Under present Canadian Company Law, cor-porations o f f e r i n g shares to the public are required to submit a statement of retained earnings to a l l the stockholders. As t h i s information i s usef u l to assess the 'net worth' of a f i r m , i t i s recommended that a l l corporations should d i s c l o s e the information about r e -tained earnings, showing c l e a r l y what amount has been appropriated. d) Statement of F i n a n c i a l A c t i v i t i e s : The Statement i y Mattesich, 1964, op. c i t . , p. 166. I t a l i c s i n o r i g i n a l . - 113 -of F i n a n c i a l A c t i v i t i e s , commonly ref e r r e d to as the Statement of Source and A p p l i c a t i o n of Funds, i s "a condensed report of how the a c t i v i t i e s of the b u s i -ness have been financed, and how the f i n a n c i a l r e -sources have been used, during the period covered by 40 the Statement. I t shows more c l e a r l y than the I n -come Statement, from what sources the f i r m receives cash and how t h i s cash i s used by the f i r m by way of dividends or plant expansion. Many ordinary share-holders cannot comprehend why the f i r m i s short of cash f o r payment of dividends even i f i t has earned s u b s t a n t i a l net p r o f i t s ; conversely, how can a f i r m commit such large amounts i n plant expansion or takeover of other companies at a time when i t has not made large p r o f i t s ? The Statement of F i n a n c i a l A c t i v i t i e s i s designed to answer these questions by segregating 'accrued' p r o f i t s from a c t u a l r e c e i p t s and disbursements of cash. Although not required by law to be submitted to stockholders, there i s a steady increase i n the number of firms that provide t h i s statement to i t s stockholders as part of published 41 accounts. I t i s being widely used by f i n a n c i a l ana-l y s t s and others to project the future growth of f i r m s . See Perry Mason, "Cash Flow" Analysis and the Funds Statement, Accounting Research Study No. 2, American I n s t i t u t e of C.P.A. "s, New York, p. 90. 4 x See the Canadian I n s t i t u t e of Chartered Accountants, F i n a n c i a l Reporting; i n Canada. Eighth E d i t i o n , 1967. - 114 -I t i s recommended that a l l corporations should be required to dis c l o s e t h i s statement, e) Key F i n a n c i a l Ratios: F i n a n c i a l analysts and prospective investors have used some key f i n a n c i a l r a t i o s to judge the p r o f i t a b i l i t y of a f i r m , or an industry. These r a t i o s are a l s o of v / i t a l importance to a f i r m i n v e s t i g a t i n g whether to enter a p a r t i c u -l a r i n d u s t r y . The key f i n a n c i a l r a t i o s commony used 42 are: P r o f i t a b i l i t y Ratios: Return on Shareholders' equity. Return on operating assets. Turnover of operating assets. Operating c o n t r i b u t i o n margin. Fixed costs to sales. Risk Ratios: Working c a p i t a l r a t i o . Non current l i a b i l i t i e s to t o t a l assets. Shareholders; equity to t o t a l assets. Other Ratios: Net income per common share. Book value per common share. Once these r a t i o s are a v a i l a b l e over a period of years, t h i s information can be used by d i f f e r e n t p a r t i e s i n the economy to make the factors under t h e i r c o n t r o l more productive by d i v e r t i n g them to those areas i n which the return i s expected to be the highest, See C. L. M i t c h e l l , "Disclosure i n Finan-c i a l Statements," an unpublished report, U n i v e r s i t y of B r i t i s h Columbia, June 1967, p. 63. For an a l t e r n a t i v e set of r a t i o s , see W. H. Beaver, " A l t e r n a t i v e Accounting Measures As Predictors of F a i l u r e s , " The Accounting Review. V o l . X L I I I , No. 1, Jan. 1968, pp. 113-122. - 115 -Such a move i s bound to make the economy more com-p e t i t i v e . f ) Separate Information by Products or Departments: Modern corporations are i n c r e a s i n g l y d i v e r s i f y i n g t h e i r a c t i v i t i e s into non-related products or b u s i -nesses. This d i v e r s i f i c a t i o n i s made ei t h e r to spread the r i s k s or to avoid the r i s k of a n t i - t r u s t or a n t i -merger s u i t s . I t i s no longer unusual to f i n d d i v e r -s i f i c a t i o n such as an e l e c t r o n i c s company engaged i n 43 t o u r i s t development p r o j e c t s , or a railway company 44 engaged i n r e a l estate business. Under the present accounting regulations, a corporation i s not required to prepare separate f i n a n c i a l statements f o r each of i t s products or de-partments. A consolidated f i n a n c i a l statement i s frequently prepared i n which a l l the a c t i v i t i e s under the umbrella of the corporation are merged together showing, among other items, the 'Net Income' f o r the e n t i r e operation. This information i s p r a c t i c a l l y meaningless to a person assessing the prospects of entering a p a r t i c u l a r product market. I t i s recommended that a l l corporations should be required to provide information on costs 43 See William S. Rukeyser, " L i t t o n Down to Earth," Fortune. A p r i l , 1968, p. 139. 44 See the Prospectus of Canadian P a c i f i c Investments Lt d . , Sept. 1967. - 116 -and p r o f i t s by products or departments. I t i s r e a l i z e d that t h i s w i l l require concise d e f i n i t i o n s to be agreed for 'product' and 'department', and w i l l 45 e n t a i l extra work by corporate accountants. However, the information supplied on a product or departmental basis can act as a spur to new investments i n pro-f i t a b l e i n d u s t r i e s , thus generating competitive forces i n the market. Under the United Kingdom Companies Act, 1967, a l l companies are required to provide turnover f i g u r e s by 'classes of business', but the term i s not de-fi n e d i n the Act. g) Turnover: The importance of information on the turnover of a corporation was emphasized i n the l a s t chapter. Every corporation should be required to di s c l o s e to the public information on monetary turnover by product or department. b) Advertising and personal s e l l i n g expenditures: The a d v e r t i s i n g industry i n the United States and Canada i s one of the f a s t e s t growing i n d u s t r i e s . Between 1939 47 and 1966, t o t a l a d v e r t i s i n g expenditures i n the 4~* For the point of view of the management, see Robert K. Mautz, " F i n a n c i a l Reporting by Conglorn-erate Companies," F i n a n c i a l Executive, Feb. 1968, pp. 5Z-b3, 4 6 See pp. 68-69. Advertising i s defined to include expen-ditures i n recognized media (radio, newspapers, maga-zines t e l e v i s i o n , out-door a d v e r t i s i n g , and d i r e c t m a i l ) , - 117 -United States increased from $2 b i l l i o n to $16.5 b i l l i o n , or by about 725 per cent. During the same period, personal consumption expenditures increased from $67 b i l l i o n to $465 b i l l i o n , or by about 600 per cent. A d v e r t i s i n g expenditures c o n s t i t u t e about 48 3.56 per cent of t o t a l consumer spending. The large and increasing outlay i n a d v e r t i -sing by large corporations has been the subject of controversy among p o l i t i c i a n s , economists and business-men. Economists generally argue that a d v e r t i s i n g , as practiced today, does not promote a d d i t i o n a l sales and i s therefore 'wasteful'. They also argue t h a t ad-v e r t i s i n g i s a potent a i d used by large corporations to discourage entry by new firms i n the market. 1. Advertising can make products appear d i f f e r e n t enough from those of a competi-tor that consumers w i l l buy the advertised product i n preference to the non-advertised one; the advertiser can therefore capture s u b s t a n t i a l market shares. 2 . Large companies have a v a i l a b l e more resources to devote to consumer a d v e r t i s i n g and promotion than do smaller ones. 3. Small companies without funds for sub-s t a n t i a l budgets w i l l h e s itate to enter h e a v i l y advertised f i e l d s . 4 . Advertising thus becomes a b a r r i e r to entry into n a t i o n a l markets by new small business f i r m s ; economic concentration r e s u l t s . 5 . The large^ompanies i n the market, not faced by prospects of new competition can point of purchase materials, transportation a d v e r t i s i n g , the cost of corporate a d v e r t i s i n g departments and some miscellaneous items. 4 8 See Jules Backman, "Advertising i n the 1970 1s" H , i c ^ , s s Horizons, V o l . X I , No. 2 , A p r i l 1968, pp. 7-14. - 118 -charge higher p r i c e s than otherwise, both to recover promotion costs and to earn monopoly p r o f i t s . ^ Some economists have argued that a d v e r t i s i n g increases the u n i t cost of production which the con-sumer has to pay. Therefore, a specific tax on adver-t i s i n g expenditure should be imposed. F i r s t , a s u b s t a n t i a l tax on advertisement. Of course, much advertisement of an informative nature Is necessary and desirable. But much advertisement i s not of the kind. A tax on ad v e r t i s i n g would increase the incentive for firms to seek markets by cu t t i n g prices and ac-costs rather than by persuasive bamboozlement. Based on the b e l i e f that the high l e v e l of ad v e r t i s i n g i n the detergent industry of the United Kingdom was ' s o c i a l l y u n d e s i r a b l e 1 , the Monopolies Commission i n 1967 asked an immediate 40 per cent across-the-board reduction i n detergent promotion expenditures, coupled with a 20 per cent reduction i n detergent p r i c e s . The movement In the United States i s towards some c o n t r o l on adv e r t i s i n g expenditures. Relying on an unpublished study made i n 1966 by W. S. Comanor and T. A. Thomas,"^ which showed 'monopoly' p r o f i t s earned by the s i x i n d u s t r i e s that spent more than 6 per cent 49 Alex Graner, A Report Prepared f o r the Association of National Advertisers. See Meade, op. c i t . , p. 389. William S. Comanor and Thomas A. Wilson, "Market Structure, Advertising and Market Performance" an unpublished study, Harvard U n i v e r s i t y , 1966. - 119 -of sales on a d v e r t i s i n g , Donald Turner, head of the Department of J u s t i c e A n t i - t r u s t D i v i s i o n made the fol l o w i n g proposals on advert i s i n g expenditures: 1. P r o h i b i t or " d r a s t i c a l l y l i m i t " discounts granted, f o r purchases of network t e l e v i s i o n time, even i f t h i s means higher network p r o f i t margins f o r large purchasers than f o r small. 2. I f mergers are permitted to take advantage of su b s t a n t i a l economies of scale, the defense of those mergers should not extend to promotional econo-mies . 3. Impose for a period of time an absolute or percentage l i m i t a t i o n on promotional expenditures by a fi r m or firms that have obtained market power through v i o l a t i o n s of the Sherman Act ... even though the promotional ex-penditures as such were and are law-f u l . i 4. Expand the law on f a l s e and mis-leading a d v e r t i s i n g to deal with the omission of information as i n an example c i t e d where a noiseless app-liance may 'use considerably more e l e c t r i c i t y and wears out faster than r i v a l models' . 5. Provide new sources of consumer information, eit h e r with governmental e f f o r t s i n the d i r e c t i o n of the Con-sumer Reports type of a c t i v i t i e s or f i n a n c i a l support f o r pri v a t e organi-zations of t h i s type.52 In 1967, Turner's proposals were applied by the Federal Trade Commission i n an actio n against Proctor & Gamble to d i v e s t i t s e l f of Folger's Coffee. -* Donald Turner, Speech made by Donald Turner i n 1966 and quoted by Jean C. Halberman, 'Can Advertising B u i l d a Monopoly?', Business Horizons, V o l . XI, No. 2, A p r i l 1968, p. 87. 5 3 I b i d , p. 91. - 120 -However, not a l l economists are of the opinion that a d v e r t i s i n g creates economic concen-t r a t i o n . ... the b a r r i e r to entry created by large f i n a n c i a l requirements f o r adver-t i s i n g i s weak. The r e l a t i o n s h i p between adv e r t i s i n g i n t e n s i t y and high economic concentration i s non-existent. There appears to be no l i n k between ad v e r t i s i n g i n t e n s i t y and p r i c e increases. Intensive advertisers appear to have moderately higher p r o f i t rates than other companies. The record shows c l e a r l y that a d v e r t i s i n g i s h i g h l y competitive, not anti-competitive. Economists hold such divergent views about the r e l a t i o n s h i p of ad v e r t i s i n g to competition, p a r t l y because s u f f i c i e n t information i s not divulged by corporations to c o r r e l a t e a d v e r t i s i n g with i n d i -cators of E f f e c t i v e Competition. I t i s submitted that separate information on adver t i s i n g and personal s e l l i n g , given by a l l corporations, can prove of im-mense value to economists and others i n t h e i r studies on the r e l a t i o n s h i p between say advertising and monopoly p r o f i t s , a d v e r t i s i n g and economic concentra-t i o n , and advertising and u n i t cost of production. Such information on ad v e r t i s i n g can be used to formu-l a t e p u b l i c p o l i c y towards a d v e r t i s i n g expenditures incurred by corporations. Jules Backman, Advertising and Com-p e t i t i o n (New York: New York U n i v e r s i t y Press, 1967). - 121 -1. Research and Development Expenditures: Research and Development i s an area of corporate a c t i v i t y which has grown very f a s t , e s p e c i a l l y since the Second World War. In 1962, the United States incurred about $17.5 b i l l i o n on Research and Development, of which nearly $6 b i l l i o n was undertaken by corporations. The t o t a l expenditure on Research and Development was about three times the t o t a l expenditure i n 1953. In 1962, the per capita expenditure on Research and Develop-ment was $93.7 i n the United States, $33.5 i n the United Kingdom, $20.3 i n the Netherlands, $23.6 i n France, $20.1 i n Germany and $14.8 i n Belgium. I t i s generally recognized that the compara-t i v e l y larger expenditure on Research and Development incurred by the United States has been an important f a c t o r i n the r a p i d economic growth of the country. To achieve the n a t i o n a l objectives of a higher stan-dard of l i v i n g and economic growth, public p o l i c y should ensure that technological innovation i s con-tinuously undertaken. In those areas where corpora-tions are not innovative, the government should step i n and undertake basic research. The decision r e -garding the areas r e q u i r i n g a d d i t i o n a l research by the government, may be l e f t with a body such as the Economic Council of Canada. . See James Brian Quinn, "Technological Competition: Europe vs U. S.'J Harvard Business Re-view, V o l . 44, No. 4, J u l y - Aug. 1966, p. 119. - 122 -This action on the part of the government requires information on the amount spent by corpora-tions on Research and Development and the areas i n which corporations are carrying out these a c t i v i t i e s . Therefore, corporations should d i s c l o s e the amounts spent on Research and Development and the areas i n which the amount was spent. I t i s submitted that d i s c l o s u r e of such information to the public at large may make the public r e a l i z e the importance of corpora-tions and may encourage these corporations to spend the amount more wisely, i n the d i r e c t i o n of basic research. j . S t a t i s t i c s on Employees and Their Remuneration: Employees form an important part of a cor-poration. Their l i v e l i h o o d often depends on how the corporation i s functioning. They should be informed of the proportion each of the factors of production receives from the t o t a l corporate revenue. Further, the trend i n the employment rate i s an important i n d i c a t o r of the growth or contrac-t i o n of the economy. A l l the actors i n the economy are i n t e r e s t e d to know whether there i s a net increase i n employment by corporations, who are the biggest p r i v a t e employers of workers. k. I n t e r l o c k i n g Shareholding and Directorships: E f f e c t i v e Competition requires that competing cor-porations act independently of one another. This i n -- 123 -dependence of a c t i o n can be promoted by p r e v e n t i n g c o l l u s i o n between competing c o r p o r a t i o n s t h r o u g h i n t e r l o c k i n g s h a r e h o l d i n g s and d i r e c t o r s h i p s . T h i s r e q u i r e s i n f o r m a t i o n on the p e r s o n s or c o r p o r a t i o n s who, i n r e a l i t y , own t h e s h a r e s o f the c o r p o r a t i o n . T h i s i n f o r m a t i o n i s not o f t e n a v a i l a b l e as s h a r e s a r e p u r c h a s e d i n the names of nominees. For example, the p u b l i c i n B r i t a i n was shocked when i t was d i s -c o v e r e d t h a t t h e I m p e r i a l Tobacco Company had f o r many y e a r s s e c r e t l y owned 36 per c e n t o f t h e e q u i t y o f G a l l a g h e r s , i t s p r i n c i p a l c o m p e t i t o r . " ^ Under the 1967 U. K. A c t , a c o r p o r a t i o n must g i v e f u l l d e t a i l s o f i t s s h a r e h o l d i n g s i n com-p a n i e s i n which i t owns more t h a n 10 per c e n t of t h e e q u i t y ; i n a d d i t i o n , i t must d i s c l o s e t h e names o f p e r s o n s who own more t h a n o n e - t e n t h o f i t s own e q u i t y . Such a d i s c l o s u r e t o t h e p u b l i c i s l i k e l y t o d i s -c ourage c o l l u s i o n among c o m p e t i t o r s , t h u s f u r t h e r i n g c o m p e t i t i o n . I t i s s u b m i t t e d t h a t t h e p u b l i c s h o u l d a l s o be i n f o r m e d whether any p e r s o n i s h o l d i n g D i r e c -t o r s h i p s o r o t h e r a d v i s o r y p o s t s i n competing c o r p o r a -t i o n s . 1. P a t e n t s : A n t i - c o m p e t i t i v e c o n d i t i o n s a r e sometimes b r o u g h t about e i t h e r by n o t u s i n g a p a t e n t , and a t the same time p r e v e n t i n g o t h e r s - f r o m u s i n g i t , or by ex-Fo w l e r , OP. c i t . , pp. 114-115 - 124 -changing patents with competitors. To discourage the abuse of monopoly powers granted by patents, d i s c l o s u r e should be made of those patents which have not been used for say two years. The p u b l i c should also be informed of those patents which have been exchanged, g i v i n g the reasons f o r such exchange. m. Non-business Contributions and Investments: I t i s common knowledge that large corporations have con-t r i b u t e d f a i r l y large sums to those organizations and p o l i t i c a l p a r t i e s who have generally tended to further the i n t e r e s t s of corporations i n general and contribu-t i n g corporations i n p a r t i c u l a r . In the United King-dom, corporations have been large contributors to the Conservative Party p o l i t i c a l campaigns. Under the present system, Directors are not required to seek permission from shareholders f o r such p o l i t i c a l con-t r i b u t i o n s . Many p o l i t i c i a n s and economists fear that corporations may abuse t h i s power by contributing to those organizations who further the i n t e r e s t of such corporations by not seeking l e g i s l a t i o n to break up th e i r monopoly powers. I t i s submitted that a l l cor-porations should be required to disclose to the public d e t a i l s of such non-business contributions and invest-ments made by corporations. Under the new Act, a l l the companies i n the United Kingdom are required to di s c l o s e such information. - 125 -n. Expectations and Plans of Corporations: The various actors i n the economy are not only concerned with the past performance of corporations, but are in t e r e s t e d to know what are t h e i r plans f o r the future. Many of the corporations are reluctant to di s c l o s e t h e i r plans or forecasts for the future on the grounds that: 1) These plans or forecasts, based on a host of assumptions about the future, are neces s a r i l y t e n t a t i v e and subjective. Dis-closure of such information may give a f a l s e a i r of c e r t a i n t y to the e x i s t i n g and p o t e n t i a l shareholder. 2) The di s c l o s u r e of such plans or forecasts may jeopardize the competitiveness of the corporation, i n r e l a t i o n to others. 3) The disclosure of such subjective informa-t i o n may make the corporation l i a b l e f o r damages incurred by an outsider who r e l i e d 57 on such information to his detriment. While no s p e c i f i c recommendation i s being made on t h i s point, every e f f o r t should be made to encourage corporations to d i s c l o s e t h e i r plans and forec a s t s , at lea s t f o r a period of one year. Some corporations are disclosing,such information, and the number i s on the increase. ^ A. M. Lewis, op. c i t . . pp. 177-180. ^ 8 Canadian I n s t i t u t e of Chartered Accountants, F i n a n c i a l Reporting i n Canada, Eighth E d i t i o n , 1967. - 126 -Methods of Disclosure: At present, the p r i n c i p a l method of corporate d i s c l o s u r e used by public com-panies, i s the Annual Report which normally contains the Income Statement, the Balance Sheet, the State-ment of Retained Earnings, the Auditor's Report, the Directors' Report and often the Chairman's Report. The a d d i t i o n a l information recommended i n the study should be incorporated i n the Annual Report. The present 'non-disclosing' corporation should be required to f i l e a l l the recommended i n -formation with the Registrar General, at lea s t once i n twelve months. Summary: The p r i n c i p a l points i n the chapter are as fol l o w s : 1. The change i n the r o l e of the corporation has led to considerable discussion about i t s place i n the s o c i a l , p o l i t i c a l , economic and l e g a l framework of the United States and Canada.' 2. Accountants, p o l i t i c a l t h e o r i s t s and economists give d i f f e r e n t i n t e r p r e t a t i o n s to the r o l e of the corporation i n society. This i s r e f l e c t e d i n t h e i r differences i n views about the type and extent of disc l o s u r e desired from the., corporation. 3. Based on the informational requirements of Ef f e c -t i v e Competition, s p e c i f i c recommendations on disclosure are made, with respect to corporations operating i n Canada. CHAPTER VI SUMMARY OF THE MAIN FINDINGS OF THE STUDY Modern corporations i n the United States and Canada perform a large and growing proportion of economic a c t i v i t i e s . They are by far the largest p r i v a t e employers of workers, the biggest investors and the predominant instrument of production. They are r a p i d l y growing i n s i z e , and are expanding t h e i r operations i n unrelated a c t i v i t i e s . A major propor-t i o n of financing of expansion programmes i s obtained from large funds i n t e r n a l l y generated by these cor-porations. Thus, modern corporations have become v i r t u a l l y independent of t h e i r shareholders f o r f i n a n -cing of major operations. Most of the large corporations are managed by pr o f e s s i o n a l executives who have l i t t l e , i f any, stake i n the r i s k c a p i t a l . They normally arrange f o r appointments of persons on tiie board of d i r e c t o r s who w i l l be sympathetic to t h e i r actions. The share-holders, who are l e g a l l y presumed to exercise c o n t r o l over the powers and actions of corporate executives, are normally too numerous and scattered to be i n a p o s i t i o n to have a s i g n i f i c a n t influence on the p o l i -cies of the corporations. - 128 -The d r a s t i c change i n the r o l e of the cor-porations has led to considerable discussion about the place of the corporations i n the s o c i a l , p o l i t i c a l , economic and l e g a l framework of the United States and Canada. More s p e c i f i c a l l y , the argument centres around the legitimacy of corporate power and the a c c o u n t a b i l i t y of corporations for t h e i r actions which a f f e c t others such as consumers, workers, s u p p l i e r s , and the p u b l i c . As part of t h i s general accounta-b i l i t y i s the question of d i s c l o s u r e of information by corporations. There i s no consensus of opinion on the type and extent of corporate d i s c l o s u r e desired because d i f f e r e n t p a r t i e s look at the problem from diverse angles. Accountants and businessmen generally take a ' l e g a l i s t i c ' view of corporate d i s c l o s u r e , con-veying a c e r t a i n set of information to the persons under contractual or l e g a l r e l a t i o n s h i p s , which s t i p u -l a t e d i s c l o s u r e of t h i s set of information. Their view i s p a r t l y based on the premise that d i s c l o s u r e of a d d i t i o n a l information to the s t i p u l a t e d persons, and of corporate information to the persons not at present r e c e i v i n g such information under contract or law, should be based mainly on the cost-benefit r e -l a t i o n s h i p to the f i r m required to d i s c l o s e such information. P o l i t i c a l t h e o r i s t s generally tend to look at the question of corporate d i s c l o s u r e as a part of the o v e r a l l question of legitimacy of corporate - 129 -power. They argue that the exercise of power can only be legitimate i f i t i s representative. As the powers of corporate executives are not representative, they should be required to d i s c l o s e to the p u b l i c a c t i v i t i e s of the corporations which they manage. Based on the d i s c l o s u r e of corporate information, c o r r e c t i v e actions can be taken by the approp-r i a t e government agencies. Economists generally agree with the arguments fo r corporate d i s c l o s u r e put forward by p o l i t i c a l t h e o r i s t s , but base t h e i r case on the economic i m p l i c a t i o n s of large corpora-t i o n s . They argue that large corporations can, and do, influence the external market forces that are presumed to regulate corporate power. Therefore, a d d i t i o n a l forces should be i n j e c t e d i n t o the economy to achieve the n a t i o n a l o b j e c t i v e s . The nature of these a d d i t i o n a l regulatory forces can be determined by some knowledge about the a c t i v i t i e s of corporations, which can be gained through corporate d i s c l o s u r e . An attempt i s made i n t h i s study to examine whether the c h a r a c t e r i s t i c s of 'Effective Competition' can provide c r i t e r i a f o r the type and extent of d i s -closure to be made by corporations. Published l i t e r a -ture on the subject of competition by leading American and Canadian economists and lawyers i s reviewed to determine whether a normative model of E f f e c t i v e Com-p e t i t i o n can be devised. As the model i s a normative one, i t i s based on value judgements about the objec-- 130 -t i v e s that i t i s meant to accomplish. The n a t i o n a l economic objectives of the United States and Canada are discussed and used as a framework w i t h i n which the normative model was devised. D i f f i c u l t i e s have been experienced i n d e f i n i n g E f f e c t i v e Competition i n a few sentences. However, the l i n e s of demarca-t i o n are drawn by discussing i n d e t a i l those charac-t e r i s t i c s i n the economy which p r e v a i l under the nor-mative model of E f f e c t i v e Competition. I t i s recognized that the c h a r a c t e r i s t i c s of E f f e c t i v e Competition are not self-generating and s e l f - r e g u l a t i n g but have to be created and preserved. These c h a r a c t e r i s t i c s are the r e f l e c t i o n s of various actors i n the economy, namely consumers, employers, workers, c r e d i t o r s , i n v e s t o r s , government-run cor-porations, f o r e i g n firms dealing with the United States and Canada, and government agencies whose ac-tions d i r e c t l y a f f e c t the positions of other actors i n the economy. The actors take decisions on the basis of information they receive about the state of the economy i n general and the a c t i v i t i e s of other actors i n p a r t i c u l a r . The type of information r e -quired by each of the actors i s reviewed. Based on the review of the informational r e -quirements of the actors, s p e c i f i c recommendations are made i n respect of corporations operating i n Canada, about the type and extent of disclosure that i s con-s i s t e n t with the normative model of E f f e c t i v e Com-p e t i t i o n . The study recommends that a l l corporations whether o f f e r i n g shares to the pu b l i c or not should d i s c l o s e the fo l l o w i n g types of ' s t r a t e g i c ' information to the p u b l i c . a. Income Statement - on market value basis b. Balance Sheet c. Statement of Retained Earnings d. Statement of F i n a n c i a l A c t i v i t i e s e. Key F i n a n c i a l Ratios f . Separate Information by Products or Departments g. Turnover h. Advertising and Personal S e l l i n g Expenditures i . Research and Development Expenditures j . S t a t i s t i c s on Employees and Their Remuneration k. I n t e r l o c k i n g Shareholdings and Directorships 1. Patents m. Non-business Contributions and Investments The study does not go in t o methods of d i s -closure of such s t r a t e g i c information. Recognizing that corporations i n Canada are subject to d i f f e r e n t laws, depending on the province of t h e i r incorporation, the instruments of achieving recommended corporate d i s -closure may form a subject of further research. I t i s r e a l i z e d that the s p e c i f i c recommenda-tions about corporate disclo s u r e made i n t h i s study, go f a r beyond what i s considered as 'adequate' d i s -closure by accountants and businessmen. They w i l l - 132 -question the d e s i r a b i l i t y of r e q u i r i n g corporations to d i s c l o s e such information, and the costs involved i n such d i s c l o s u r e . I t i s submitted that the people of the United States and Canada w i l l receive greater benefits under the system of E f f e c t i v e Competition. The normative model requires d i s c l o s u r e of the recommended sets of information from corporations who play an a c t i v e part i n the economic development of these countries. Those persons who do not wish to d i s c l o s e such information are not forced to do so, because the acquiring of corporate status i s not compulsory. However, those who wish to take advantage of corporate status should be required to pay a p r i c e for i t , p a r t l y by way of corporate d i s c l o s u r e . - 133 -BIBLIOGRAPHY I . Books American Accounting A s s o c i a t i o n , A Statement of Basic Accounting Theory. 1966. Andrews, P h i l l i p s , W. S. on Competition i n Economic Theory, (New York: St. Martin's Press, 1964). Backman, J u l e s , Advertising and Competition, (New York: New York U n i v e r s i t y Press, 1967). Bain, Joe S., B a r r i e r s to New Competition, (Cambridge: Harvard U n i v e r s i t y Press" 1956) . Baxter, William T., and Davidson, Sidney (eds.), . . Studies i n Accounting Theory. (Homewood, I l l i n o i s : Richard D. Irwin, Inc., 1962). Berl e , A. A. J r . , Economic Power and the Free Society. Fund f o r the Republic. (1957) . Power Without Property, (New York: Harcourt, Bruce & Co., 1959). Boulding, Kenneth G., Economic Analysis. (New York: Harper & Row, 4th Ed., 1966). Bovet, E r i c D., The Dynamics of Business Motivation: I t s Impact on the Economic Climate, (Washington: Spartan Books, 1963). Canadian Income Tax Act, 1968, Thirty-Seventh Ed., C. C. H. (Canadian Limited, 1968). The Canadian I n s t i t u t e of Chartered Accountants, F i n a n c i a l Reporting i n Canada, Eighth E d i -t i o n , (Toronto: 1967). B u l l e t i n 20, J u l y , 1960. Chambers, Raymond J . , Accounting Evaluation and Economic Behavior, (Englewood C l i f f s , N. J . : Pren-t i c e -HalXr^9T677 Chamberlin, Edward, The Theory of Monopolistic Corn-p e t i t i o n , (Cambridge: Harvard U n i v e r s i t y Press, 8th ed., 1962). - 134 -Chamberlin, Edward H. (ed), Monopoly and Competition and Their Regulation. (New York: St. Martin's Press, 1954J". Cheit, E a r l F. (ed) , The Business Establishment, (New York: John Wiley & Sons, 1964). Churchman, Charles West, P r e d i c t i o n and Optimal De-c i s i o n . (Englewood C l i f f s , N. W.: P r e n t i c e - H a l l , 1961). Clark, John M., Competition as a Dynamic Process, (Washington: Brooklings I n s t i t u t i o n , 1961). Cohen, J . B. and Zinberg, E. D., Investment Analysis and P o r t f o l i o Management. (Homewood, I l l i n o i s : Rich-ard D. Irwin, Inc., 1967). Coutts, W. B., A.C.A., Accounting Problems i n the O i l and Gas Industry. C.I.C.A" (Toronto: 1963). Deutsch, John J . and others, The Canadian Economy -Selected Readings, (Toronto: The MacMillan Co. of Canada Ltd. Rev. Ed. 1965). Downig, Jack, The Competitive Process. (London: G. Duckworth, 1958~J. Economic Council of Canada F i r s t Annual Review, (Ottawa: Queens P r i n t e r s , 1964). Fourth Annual Review, The Canadian Economy from the 1960's to the 1970's, (Ottawa: Queens P r i n t e r s , Sept. 1970). Edwards, Corwin, D., Maintaining Competition, (New York: McGraw-Hill Book Co. 1949). Big Business and the P o l i c y of Competition, (Cleveland: Press of Western Reserve U n i v e r s i t y , 1956). Edwards, E. 0 . and B e l l , P. W., The Theory and Measure-ment of Business Income, (University of C a l i f o r n i a Press 1961). E e l I s , Richard, The Government of Corporation, (The Free Press of Glencoe, 1962). Erhard, Ludwig, Prosperity through Competition, (Lon-don: Thames and Hudson, 195"8). Ferguson, Charles E., A Macroeconomic Theory of Wor-kable Competition, (Durham, N. C.: Duke Un i v e r s i t y Press, 1964). - 135 -Ga l b r a i t h , John Kenneth, American Capitalism The Con-cept of Countervailing Power, (Boston: Houghton M i f f l i n Company, Rev. Ed. 1956). The New I n d u s t r i a l State. (Boston: Houghton M i f f l i n Company, 1967). Graham, B., Dodd, D., and C o t t l e , S., Security Anal-y s i s . P r i n c i p l e s and Technique, (New York: McGraw-H i l l Book Company, Inc., 1962). Grughy,. A l l a n G., Comparative Economic Systems, (Boston: Houghton M i f f l i n Co., 1 9 6 6 7 . Hacker, Andrew (ed), The Corporation Take-Over t (New York: Anchor Books, 1 9 6 5 7 . Hale, G. E. and R. D., Market Power: Size and Shape Under the Sherman Act, ("Boston: L i t t l e Brown, 1958). Heflebower, R. B. and Stocking, G. W., Readings In I n d u s t r i a l Organization and Pu b l i c Policy,(Homewood; 111.: Richard D. Irwin Inc., 1 9 5 8 7 T I j i r i , Y., The Foundations of Accounting Measurement, A Mathematical, Economic, and Behavioral Inquiry, (Englewood C l i f f s , N. J . : P r e n t i c e - H a l l Inc. 1967). Kaplan, A. D. H., Big Enterprise i n a Competitive System, (Washington: Brookings I n s t i t u t i o n Rev. Ed., 1964). Keynes, John Maynard, General Theory of Employment In-t e r e s t and Money, (London: Macmillan & Co. L t d ~ 1936). Kohler, E r i c L., A Dictionary f o r Accountants, (Engle-wood C l i f f s , N. J . : P r e n t i c e - H a l l Inc. 3rd ed., 1963). L i l i e n t h a l , David, Big Business. A New Era, (New York: Harper, 1953). Lord Jenkins and Others, Report of the Company Law Committee, Cmnd 1749 (U.K. H.M.S.O., June 1962). Louis, Arthur M., The Accountants are Changing the Rules, (Fortune, June 15, 196877 Low, Richard E. (ed), The Economics of A n t i - t r u s t . Competition and Monopoly" (Englewood C l i f f s ; N.J.: P r e n t i c e - H a l l , 1968). Mason, Edward S., The Corporation i n Modern Society, (Harvard U n i v e r s i t y Press, 1 9 5 9 7 . Massel, Mark S., Competition and Monopoly: Legal and Economic Issues, (Washington: Brookings I n s t i t u t i o n , 1962). 136 Mattesich, Richard, Accounting and A n a l y t i c a l Methods, (Homewood, 111.: Richard D. Irwin Inc., 1964). Moonitz, M. and L i t t l e t o n , A. C.., S i g n i f i c a n t Accounting Essays. (Englewood C l i f f s , N. J . : P r e n t i c e - H a l l , 1965). Mund, V. A., Open Markets, an E s s e n t i a l of Free En-t e r p r i s e . (New York: Harper, 1948). Paton, W. A. and L i t t l e t o n , A. C., An Introduction to Corporate Accounting Standards. Xlowa C i t y : American Accounting A s s o c i a t i o n , 1964). Popandreou, A. G. and Wheeler, J . T . , Competition and I t s Regulation. (New York: Prentice-Ha11, 1954). Popper, K a r l R., The Logic of S c i e n t i f i c Discovery, (New York: Harper & Row, 1959). Raegan, Michael D., The "Managed Economy, (New York: Oxford U n i v e r s i t y Press, I960). Richardson, G. B., Information and Investment, A Study i n the Working of the Competitive Economy, (Oxford U n i v e r s i t y Press, 1960). Robinson, Joan, The Economics of Imperfect Competi-t i o n . (London: Macmillan & Co., 1933). Rostow, Eugene V., Planning f o r Freedom, the Pu b l i c Law of American Capitalism, (New Haven: Yale Uni-v e r s i t y , 1959). Samuelson, Paul A., Economics, (New York: McGraw-H i l l Book Co., Inc., F i f t h E d i t i o n , 1961). Scitovsky, Tibor, Welfare and Competition, (London: A l l e n & Unwin, 195277" Smith, Adam, An Inquiry Into the Nature and Causes of The Wealth of Nations, 1776, (London: Matheuw & Co. 1964) Solo, Robert, Economic Organizations and S o c i a l Systems, (New York: The Bobs-Merrill Co. Inc., 1967). Sprouse, Robert T. and Moonitz, Maurice, "A Tentative Set of Accounting P r i n c i p l e s for Business Enterprise," Accounting Research Study No. 3, (New York: American I n s t i t u t e of C e r t i f i e d P ublic Accountants, 1962). Stocking, George Ward, Workable Competition and A n t i -Trust P o l i c y , (Nashville: Vanderbilt U n i v e r s i t y gress, 1961 - 137 -T r i f f i n , Robert, Monopolistic Competition and the General E q u i l i b r i u m Theory. (Cambridge: Harvard U n i v e r s i t y Press^ 1940). United Kingdom Companies Act,(1967). U. S. Dept. of Commerce, Business Advisory Council, E f f e c t i v e Competition - Report, (Washington: 1952) Watkins, M e l v i l l e H. and Others, Foreign Ownership and the Structure of Canadian Industry. (Privy Coun-c i l , Jan. 1968) . Worthy, James G., Big Business and Free Man. (New York: Harper & Brothers, 1959). Z i e g e l , Jacob S., Studies i n Canadian Company Law, (Toronto: Butterworths, 1967). - 138 -I I UNPUBLISHED PAPERS Comanor, W. S. and Wilson, T. A., "Market Structure, Advertising and Market Performance," an unpublished study, Harvard U n i v e r s i t y , 1966. Grauer, Alex, A Report Prepared f o r the Association of National A d v e r t i s e r s . M i t c h e l l , C. L., "Disclosure i n F i n a n c i a l Statements, U n i v e r s i t y of B r i t i s h Columbia, June, 1967. I l l ARTICLES Anderson, W. R., "Should a Company T e l l ? " Disclosure of information to Employees. The Accountant. V o l . CXIV, No. 4504, A p r i l 18, 1961, pp. 403-407. Asch, P., "Industry Structure and Performance, Some Empirical Evidence," Rev, of Soc. Eco.. Sept. 1967. B i r d , Ronald, "The Use of Published Accounts: The Viewpoint of an Economist." The Accountant. V o l . CXXXIV. Boettinger, Henry M., "Big Gap i n Economic Theory," Harvard Business Review. V o l . 45 No. 4, July-Aug. 1967. Backman, J u l e s , "Advertising i n the 1970's" Business Horizons. V o l . XI, No. 2, A p r i l 1968. Champion, George, "Creative Competition" Harvard Business Review. V o l . 45 No. 3, May-June, 1967. C o l l i n s , N. R. and Preston, L. E., "Concentration and Price-Cost Margin," Journal of I n d u s t r i a l Economics. C o l l i e r , Abram T., "Business Leadership and a Creative Society" Harvard Business Review. V o l . 46, No. 1, Jan.-Feb. 1968. Dale, Ernest, "Management Must Be Made Accountable." Harvard Business Review, V o l . 38, No. 2, March-April, i960. Dean, J o e l , "Competition-Inside and Out" Harvard Business Review, V o l . 32, No. 6, Nov.-Dec. 1954. Drucker, Peter F., "Big Business and the National Purpose" Harvard Business Review, V o l . 40, No. 2, March-April, 1962, pp. 49-59. - 139 -F l e i s c h e r , Arthur, J r . , "Corporate Disclosure Inside Trading," Harvard Business Review, V o l . 45, No. 1, Jan.-Feb. 1967. Flower, J . F., A.C.A., "Accounting i n B r i t a i n and The New Companies Act," Canadian Chartered Accountant, V o l . 92, No. 2, Feb. 1968. Goss, A l f r e d , "Meeting the Competition of Giants," Harvard Business Review, V o l . 45, No. 3, May-June, T967. G r i f f i t h , C. and Williams, T.,- "Measuring Adequate Disclosure," Journal of Accounting,. V o l . 109, A p r i l , 1960. Halberman, Jean C., "Can Adv e r t i s i n g B u i l d a Monopoly?" Business Horizons, V o l . XI, No. 2, A p r i l , 1968. Henderson, Hazel, "Should Business Tackle Society's Problems?" Harvard Business Review, V o l . 46, No. 4, July-Aug. 1968. K e e l , R. 0. A., " F i n a n c i a l Reporting and the World Economy With P a r t i c u l a r Reference to Reporting to Outsiders" The Accountant. V o l . CXLVII, No. 4590, Nov. 24, 1962, pp. 673-681. Lerner, R. J . , "Ownership and Control i n the 200 Largest Non-Financial Corporations, 1929 and 1963," American Economic Reviews, 1966. Mann, H. M., " S e l l e r Concentration, Ba r r i e r s to Entry and Rates of Return i n T h i r t y Indus t r i e s , 1950-60" Review of Economics and S t a t i s t i c s , Aug. 1966, 48(3). Mautz, R. E.,"Financial Reporting by Conglomerate Companies" F i n a n c i a l Executive. Feb. 1968. Meade, J . G., "Is "The New I n d u s t r i a l State" Inevitable?' The Economic Journal. V o l . LXXVIII, No. 310, June 1965. Parkinson, Bradbury B., " S c i e n t i f i c Disclosure, In-formation f o r Shareholders and the P u b l i c " The Accountant. V o l . CXIII, No. 3926, March 18, 1950, pp. 287-291. Quinn, J . B., 'Technological Competition: Europe v. U. S." Harvard Business Review. V o l . 44, No. 4 July-Aug. 1966. Rukeyser, W. S., "Litton Down to Earth', Fortune, A p r i l 1968 - 140 -Tinberg, Sigman, "Equitable R e l i e f Under the Sherman Act" U n i v e r s i t y of I l l i n o i s Law Forum. Winter, 1950. Trumbell, Sendell P., "Disclosure as a Standard of Income Reporting" The Accounting Review. V o l . XXVIII, No. 4, Oct. 1953, pp. 471-481. Scanlon, John J . , "How Much Should a Corporation Earn?" Harvard Business Review, V o l . 45, No. 1, Jan.-Feb. 1967. Sosnick, Stephen H., "A C r i t i q u e of Concepts of Workable Competition" Quarterly Journal of Economics, V o l . 72, 1958. Walker, R. G., "The Misinformed Employee" Harvard Business Review. V o l . XXVI, No. 3, May 1948, pp. 267-281. - 141 -IV LAW CASES In the Matter of American O p t i c a l Co.. 28 FTC 169 (1939). In the Matter of Crown Zellerbach Corp. FTC Docket 6T80 (1957). Northern P a c i f i c R l y . Co. v. U.S. 356 U.S. 1.5 (1958). U. S. v. Aluminum Co. of America. 148 F 2d 416 (CCA - 2d 1945). U. S* v. Aluminum Co. of America 44 F Supp. 97 ISTD. N.Y. 1941) 148 F 2d 416 (CCA - 2d 1945) 91 F Supp 333 (S.D. N.Y. 1950) U. S. v. Columbia St e e l Co. 334 U.S. 495, 536 (1948) U. S. v. E. I . du Pont de Nemoirs & Co. 353 U.S. 586 Tl957)~ U. S., v. General E l e c t r i c 82F Supp 753 (D.C. N.J. 1949) 

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