Essay Introduction

In this extract from a statement before the Senate Trade Policies Committee in 1948, John M. Hancock addresses the legal paradoxes facing American business regarding pricing. He critiques the governmental assumption that identical prices among competitors are automatic evidence of conspiracy or illegality. Hancock argues the opposite: that aggressive competition naturally drives prices to a common level as sellers compete for customers. The essay highlights the regulatory trap where a businessman can be accused of collusion, profiteering, or "cut-throat competition" simply for reacting to market forces, regardless of his price decisions.

The Freedom to Compete

by John M. Hancock

IT is recognized that aggressive competition may result in a virtual identity of prices. It is also suggested that an unlawful price conspiracy will achieve price identity. Yet the Committee will discover that a considerable part of the present uncertainty flows from the insistence of government and particularly administrative officials in assuming that where substantial price identity is found there must have been a conspiracy in fact.

This is sometimes put in terms of saying that where competitors sell at about the same prices the result is the same as though there had been a conspiracy and that there must be some illegality. Any such theory is not only a calumny on American business, it is also a conclusion contrary to fact. It assumes without realism that the lower price level produced by competition would be identical with the higher price level produced by collusion.

No one can assume—the lawyers prefer to say infer—that the competitive hammering of prices to a common level betokens conspiracy instead of competition, any more than the fact that most men wear collars and ties is the basis for a proper inference that they have conspired to do so.

The lawful conduct of one businessman may be made unlawful by the independent acts of his competitors over whom he has no control. This is no more realistic than to say that all of the citizens of one community are either righteous or criminal, depending upon what people in other towns in the same state might do.

Editorial Comment: Apparently, a seller now

1. is guilty of collusion if he sells at the same price as competitors, in recognition of the fact that consumers in a free market will refuse to pay more to one seller than to another for virtually the same thing;
2. is guilty of profiteering if he raises his price to avoid the charge of collusion;
3. is guilty of "cut-throat competition" if he lowers his price to avoid the charge of collusion.

About the Author

John M. Hancock is a partner in Lehman Brothers. "The Freedom to Compete" is extracted from his statement before the Senate Trade Policies Committee, November 9, 1948.

Attribution

Hancock, John M. "The Freedom to Compete." In Essays on Liberty, Vol. 1, 158-159. Irvington-on-Hudson, NY: The Foundation for Economic Education, Inc., 1952.