Vapulah

I: Alcoa

Before World War II, the aluminum company of America Alcoa was the only domestic U.S. producer of aluminum ingot from ore. It faced some competition from recyclers who produced aluminum ingot from scrap aluminum. Alcoa owed its dominant position to licenses that allowed it to use a low – cost production technique under patent protection, bit it maintained its position after the basic patent expired in 1909. In a suit alleging monopolization of the aluminum ingot market the government accused Alcoa of purchasing bauxite deposits beyond its own needs to deny potential competitors access to material necessary for the production of aluminum ingot. The government also alleged that Alcoa had signed contracts with public utilities designed to prevent competitors from purchasing low – cost electric power production of aluminum ingot requires a great deal of electric power. In the view of the courts the government did not succeed in proving that Alcoa had acted to preserve its monopoly.

But the courts did find that Alcoa had monopolized the aluminum ingot industry in violation of section 2 of the Sherman act. The critical factor was Alcoa’s continual expansion of capacity.

It was not inevitable that it should always anticipate increases in demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened and to face every new comer with new capacity already geared into a great organization, having the advantage of experience trade connections and the elite of professional.

Discussion: This case began before the United States entered world war II. The U.S. government constructed a number of ingot plants during the war, and at the end of the war it sold the plants to various producers to promote competition.

This case shows the use of capacity expansion to maintain market position. Bat it raises disturbing policy question. Throughout this period, aluminum faced competition from other metals. There was no demonstration that Alcoa had earned more than a normal rate of return on its investment. What would Alcoa have had to do to avoid being found guilty of monopolization? Should it have restricted output, raised its price, and attracted new firms to the market? What sorts of signals does this decision send of business?