¹ Chandler, Alfred D. Jr, The Visible Hand: The Managerial Revolution in American Business (Cambridge, Mass., 1977), 297–298, 315–316.Google ScholarStigler, George J., “Monopoly and Oligopoly by Merger,” American Economic Review 40 (May 1950), 23–34.Google Scholar The most thorough study of the consolidation movement in a single industry is Eichner, Alfred S., The Emergence of Oligopoly: Sugar Refining as a Case Study (Baltimore, 1969).Google Scholar

² Porter, Patrick G., “Origins of the American Tobacco Company,” Business History Review 43 (Spring 1969), 59–76.CrossRefGoogle Scholar The analysis is based on the following primary sources: U.S. Bureau of Corporations, Report on the Tobacco Industry, 3 volumes (Washington, D.C., 1909–1915)Google Scholar, hereafter cited as Report; U.S. Supreme Court, Briefs and Records, United States v. American Tobacco Co., 221 U.S. 106 (1911), vols. 3–5, hereafter cited as Transcript; selected issues of Commercial and Financial Chronicle 66–70 (1898–1900), hereafter cited as CFC; selected issues of New York Times 45–48 (1896–1899), hereafter cited as NYT; selected issues of St. Louis Post-Dispatch 47–50 (1896–1899), hereafter cited as SLPD; and selected issues of St. Louis Globe-Democrat 24 (1899), hereafter cited as SLGD. Two other contemporary accounts of the tobacco trust are Jacobstein, Meyer, “The Tobacco Industry in the United States,” Columbia University Studies in History, Economics and Public Law 26 (New York, 1907), 101–39Google Scholar, and Mayo, Earl, “The Tobacco War,” Frank Leslie's Popular Monthly 15 (March 1903), 517–526.Google Scholar

³ Brief accounts are presented in the following secondary sources on the tobacco industry: Corina, Maurice, Trust in Tobacco (London, 1975), 58–60Google Scholar; Durden, Robert F., The Dukes of Durham, 1865–1929 (Durham, N.C., 1975), 68–69Google Scholar; Seager, Henry R. and Guliek, Charles A. Jr., Trust and Corporation Problems (New York, 1929), 152–153Google Scholar; Tennant, Richard B., The American Cigarette Industry (New Haven, 1950), 29–30Google Scholar; and Winkler, John K., Tobacco Tycoon: The Story of James Buchanan Duke (New York, 1942), 102–105.Google ScholarMcGee, John S., “Predatory Price Cutting: The Standard Oil (N.J.) Case,” Journal of Law & Economics 1 (October 1958), 137–169CrossRefGoogle Scholar; and Telser, L.G., “Cutthroat Competition and the Long Purse,” Journal of Law & Economics 9 (October 1966), 259–277.CrossRefGoogle Scholar In addition to the articles by McGee and Telser, the economic literature on predatory pricing includes; Dewey, Donald, The Theory of Imperfect Competition: A Radical Reconstruction (New York, 1969), 122–141Google Scholar; Elzinga, Kenneth G., “Predatory Pricing: The Case of the Gunpowder Trust” Journal of Law & Economics 13 (April 1970), 223–240CrossRefGoogle Scholar; Koller, Roland H. II, “The Myth of Predatory Pricing: An Empirical Study,” Antitrust Law & Economics Review 4 (Summer 1971), 105–123Google Scholar; Leeman, Wayne A., “The Limitations of Local Price-Cutting as a Barrier to Entry,” Journal of Political Economy 64 (August 1956), 329–332CrossRefGoogle Scholar; and Yamey, B.S., “Predatory Price Cutting: Notes and Comments,” Journal of Law & Economics 15 (April 1972), 129–142.CrossRefGoogle Scholar A valuable summary and critique of the burgeoning discussion of such tactics in the law reviews is contained in McGee, John S., “Predatory Pricing Revisited,” Journal of Law & Economics 2 (October 1980), 289–330.CrossRefGoogle Scholar

⁴ Chiefly Tarbell, Ida M., The History of the Standard Oil Company, vol. 2 (New York, 1904), 60–62.Google Scholar MeGee, “Predatory Price Cutting,”137–169.

⁵ McGee, Ibid., 141. Telser, “Cutthroat Competition,” 266.

⁶ Telser, Ibid., 260–268.

⁷ See Porter, “Origins of the American Tobacco Company.” The market share was computed from Report 2, 94–96 (note a), and U.S. Department of Agriculture, “First Annual Report on Tobacco Statistics,” Statistical Bulletin No. 58 (Washington, D.C., 1937), 90, Table 14. Chandler, The Visible Hand, 385. Report 1, 41, 139, 224–225, 340, 376–378, 393–394 and Report 2, 37–38. United States v. American Tobacco Co., 221 U.S. 106, 181–182(1911).

⁸ Report 1, 68, 71, 74, 99, (Table 10, note a), 181, 188. The market share was calculated from Report 1, 99 (Table 10 – Butler and National Tobacco Works divisions), 365 (Table 49). The use of nationwide shares seems appropriate because nothing in Report 1 suggests the existence of transportation barriers that would have created regional markets for chewing tobacco.

⁹ The conflict is discussed at length in Report 1, 95–97, 326, 349, and Report 2, 111–112, 316. See, also, Durden, The Dukes of Durham, 63–66. Report 3, 46, 51 (Table 5). Transcript 4, 350–351 (testimony of James B. Duke), and U.S. Industrial Commission, Report on Trusts and Industrial Combinations (Washington, D.C., 1901), vol. 13, 319Google Scholar (testimony of James B. Duke). The loss estimates computed from these sources are not identical, and the reason for the discrepancy is unknown. The figure presented in the text is the smaller figure for 1895–1898, which appears in Report 2. The higher loss estimate is $4,100,000 from Report 3. Otherwise the numbers may be used with some confidence because the principal plug factories of the trust did not manufacture additional types of tobacco products before 1898. See Report 1, 99, Table 10 (Butler and National Tobacco Works divisions). Hence the Bureau's loss calculations were not dependent on an arbitrary assignment of fixed costs to multiple outputs.

¹⁰ At the Sherman Act trial in 1908, James B. Duke testified that Drummond started the plug war by cutting the price of an inexpensive brand in the American Tobacco stronghold of Philadelphia. Transcript 4, 350–351. This claim is obviously self-serving, and it cannot be verified from an objective source of information. The fighting brands of Liggett & Myers and Drummond were called Scalping Knife and Crossbow, respectively. Report 1, 97; Report 2, 316; and Transcript 4, 350 (testimony of James B. Duke). SLPD, March 2, 1896, 1. Liggett & Myers manufactured 137,000,000 cigarettes in 1898, or 3.1 per cent of U.S. output. The Drummond Tobacco Company produced cigarettes at an annual rate of 178,000,000, or 4.0 per cent of the market, prior to American's acquisition. There is no record of any other independent cigarette firm with a comparable output during this period. See Report 1, 97, 325 (Table 36}, 326, 327 (Table 37), 332, and Report 3, 154.

¹¹ Report 1, 96, and CFC (February 18, 1899), 333. NYT, March 4, 1896, 12.

¹² Report 2, 111, 316; Mayo, “The Tobacco War,” 519, and Transcript 4, 422 (testimony of James B. Duke). An incomplete record of average prices for tobacco leaf during the late nineteenth and early twentieth centuries is contained in U.S. Department of Agriculture, Yearbook of Agriculture (Washington, D.C., 1931), 700, Table 178.Google Scholar

¹³ CFC, November 5, 1898, 955; Report 1, 98–99, 349, 365. See, also, CFC, April 23, 1898, 810, and NYT, March 26, 1898, 10.The only price data available at the end of the conflict are the average prices received on plug sales by American Tobacco. Its net price less tax increased from 12.2 cents per pound in 1897 to 16.7 cents in 1898. This gain of 36.9 per cent reflects primarily higher prices for Battle Ax, because the Bureau did not include the operations of the firms absorbed by Continental Tobacco in the trust's price and profit data until 1899. See Report 3, 51, Table 5. The incorporation of the Continental Tobacco Company isdescribed in SLPD, December 11, 1898, 18. CFC, October 1, 1898, 688. Transcript 4, 352.

¹⁴ Report 2, 319. The two largest independent manufacturers that were not absorbed by Continental in 1898 were Liggett & Myers and R.J. Reynolds. These firms produced 26,318,000 pounds (14.4 per cent of the market) and 4,059,420 pounds (2.2 per cent) of chewing tobacco, respectively, in 1897. Report 1, 100,103–104, 365 (Table 49), 383 (Table 52), 392 (Table 53).

¹⁵ In the absence of predatory tactics, one would expect a firm contributing, say, 25 per cent of a trust's future earnings to receive approximately 25per cent of its capitalization. No prospective member would accept a drastically smaller share because it could earn even greater amounts by remaining the one firm that does not join the combination. Stigler, “Monopoly and Oligopoly by Merger,” 25–26. Rivals would prevent the candidate from receiving more than 25 per cent of the new securities for the same reason. CFC, October 1, 1898, 688, and Report 2, 104–108, 111–112; Jacobstein, “The Tobacco Industry,” 118; Tennant, The American Cigarette Industry, 28–29; and Nicholls, William H., Price Policies in the Cigarette Industry (Nashville, 1951), 26.Google Scholar

¹⁶ CFC, October 1, 1898, 688, and CFC, October 15, 1898, 787–788. SLPD, April 18, 1899, 10. Mr. Liggett's opposition to the trust continued beyond the grave. He died during the winter of 1897–1898, and his will providedthat his stock could not be sold to American Tobacco without the consent of 75 per cent of the heirs. See, NYT, March 26, 1898, 10. On the existence of prior efforts to bring Liggett & Myers into the plug combination, see Report 1, 100.

¹⁷ CFC, October 1, 1898, 688.

¹⁸ Ibid., October 22, 1898, 841.

¹⁹ The price of Horse Shoe was reduced from 60 to 50 cents per pound. SLPD, October 9, 1898, 11.

²⁰ See note 13 above; SLGD, April 18, 1899; 7; and CFC, April 29, 1899, 771. Houthakker, H.S. and Taylor, Lester D., Consumer Demand in the United States: Analyses and Projections, 2nd edition (Cambridge, Mass., 1970), 66.Google Scholar

²¹ SLPD, October 30, 1898, 5, and Report 1, 20, 224.

²² The history of the Union Tobacco Company is presented at length in Report 1, 4, 73–76, and Report 2, 116–117. Apparently no detailed account has yet been written about Ryan's colorful business career. The discussion in the text is taken from the Dictionary of American Biography, vol. 16 (New York, 1946), 265–268, hereafter cited as Biography.

²³ Brief descriptions of the business careers of Brady, Dolan, and Widener are presented in Biography 2, 581–582; Biography 5, 355–356; and Biography 20, 185–186, respectively. NYT, October 26, 1898, 3, and NYT, October 28, 1898, 9. Report 1, 69, 74, 327 (Table 37), 332. The alleged instance of predatory pricing is described in Jacobstein, “The Tobacco Industry,” 104–105. However, Jacobstein's account is not documented and there is no mention of this event in the Report. As discussed in note 10 above, Drummond and Liggett & Myers evidently led the independent manufacturers with outputs of approximately 178,000,000 and 131,000,000 cigarettes, respectively, in 1898. The production of five other competitors acquired by American Tobacco between 1899 and 1903 is presented in Report 1, 332–334. Only one of them, the Wells-Whitehead Tobacco Company, sold more cigarettes than National during its last year of independent operation. However, Wells-White head was not organized until 1900. See Tilley, Nannie May, The Bright Tobacco Industry, 1860–1929 (Chapel Hill, 1948), 604.Google Scholar

²⁴ NYT, October 26, 1898, 3.

²⁵ Butler was originally associated with the Kinney Tobacco Company, which was merged into American Tobacco in 1890. He had served the trust as a director (1890–1897), Secretary (1890–1894) and First Vice-President (1895–1897).See Report 1, 65; Transcript 3, 405–406 (testimony of William H. Buder); Transcript 5, 342–344, Government Exhibit 42; and CFC, December 3, 1898, 1162, NYT, November 26, 1898, 12; December 1, 1898, 12, and SLPD, December 1, 1898, 11. The Continental factories were the Finzer and National Tobacco Works divisions. See Report 1, 179, 188; NYT, December 2, 1898, 3, 8.

²⁶ The assets of the Union Tobacco Company were reviewed at some length in Report 2, 116–117, without any mention of other properties. The only contrary indication appears in the following excerpt from SLPD, November 23, 1898, 5: “The [Union] company is now in possession of and is operating plants doing a business which shows a dividend on the total capitalization.” The reference to “plants” may be solely to the factory of the National Cigarette & Tobacco Company. NYT, December 13, 1898, 1. SLPD, December 17, 1898, 3; and Heimann, Robert K., Tobacco and Americans (New York, 1960), 161.Google ScholarReport 1, 74, 99 (Table 10), 387, 393 (Table 53). Report 2, 116–117. Comparable values are presented in NYT, December 13, 1898, 1; CFC, December 17, 1898, 1264; and CFC, December 24, 1898, 1310. NYT, December 13, 1898, 1.

²⁷ Report 1, 74 (quotation); SLPD, December 1, 1898, 11; NYT, November 26, 1898, 12, December 2, 1898, 8. Compare NYT, February 4, 1899, 1; SLPD, February 6, 1899, 1; CFC, February 11, 1899, 284; SLGD, April 18, 1899, 7; and CFC, April 29, 1899, 771. SLPD, February 6, 1899, 1; CFC, February 11, 1899, 284; and Report 1, 74–75.

²⁸ When price is driven below cost, the firm with the largest output will experience the greatest losses, other things being equal. See McGee, “Predatory Price Cutting,” 140. American's market share for 1898 is taken from Report 1, 327, Table 37. Two incidents suggest a cash squeeze at American Tobacco during 1898–1899. First, the trust apparently had some difficulty raising the $3,457,500 cost of the Drummond Tobacco Company in October. NYT, September 27, 1898, 5. Second, when Union was sold to American in March 1899, the trust received $3,000,000 in cash along with the Liggett & Myers option and the stocks of the Blackwells Durham and National Cigarette companies. Several years later, James B. Duke commented on the acquisition as follows: “We got a lot of cash too; I forget now how much. We needed it too.” Transcript 4, 367.

²⁹ CFC, February 4, 1899, 223, and NYT, February 4, 1899, 1.Union's claim of substantial liquid assets is supported generally in Report 1, 75. The maximum estimated loss for one year was $1,378,346 in 1896. See Report 3, 51, Table 5; Report 2, 111; and note 19 above.

³⁰ Compare NYT, February 4, 1899, 1, and CFC, February 25, 1899, 377. See, also, Durden, Dukes of Durham, 68–69 (note 29). CFC, April 8, 1899, 675; SLPD, April 19, 1899, 10; and CFC, April 29, 1899, 771. Report 1, 75. The source of the stock price data is CFC, January 6, 1900, 24. Comparable results were obtained by Corina, Trust in Tobacco, 60, and Winkler, Tobacco Tycoon, 105. See Report 2, 308, Table 102. SLPD, March 30, 1899, 5; CFC, April 1, 1899, 617; and United States v. American Tobacco Co., 221 U.S. 106, 142–143 (1911).

³¹ Report 1, 4. Report 2, 108. SLGD April 18, 1899, 7; and SLGD, April 19, 1899, 7. The source of the stock price data is CFC, January 6, 1900, 25.

³² See Hoyt, Richard C., Dahl, Dale C., and Gibson, Stuart D., “Comprehensive Models for Assessing Lost Profits to Antitrust Plaintiffs,” Minnesota Law Review 60 (June 1976), 1236–1239Google Scholar, and Parker, Alfred L., “Measuring Damages in Federal Treble Damage Actions,” Antitrust Bulletin 17 (Summer 1972), 509–511Google Scholar, and the cases cited therein. Weston, J.Fred and Brigham, Eugene F., Essentials of Managerial Finance, 4th edition (Hinsdale, Ill., 1977), 272–273.Google Scholar

³³ SLPD, October 9, 1898, 11, and Report 1, 181. The transaction is described at length in SLPD, October 9, 1898, 11. The 68 per cent stock ownership of the Drummond family was computed by dividing its cash receipts ($2,354,825) by the total price paid for the Drummond company ($3,457,500). CFC, October 15, 1898, 787.

³⁴ CFC, October 1, 1898, 688. In particular, the price-earnings ratios paid to Finzer, Mayo, Scotten, and Sorg in the formation of the Continental Tobacco Company ranged from 13.21 to 16.72. These figures were computed from the following sources: Report 1, 101 (Table 11), 181; Report 2, 104–108; CFC, October 1, 1898, 688; and CFC, December 10, 1898, 1206; January 6, 1900, 25.

³⁵ CFC July 15, 1899, 128.

³⁶ The number of acquired firms was computed from the list in Report 1, 181–190. The 1910 market shares are presented in Report 3, 2. See also Report 1, 303–308, 343–345, 389–415, and Report 3, 2.