Small Enterprise and Oligopoly A Study of the Butter, Flour, Automobile, and Glass Container Industries HAROLD G. VATTER OREGON STATE COLLEGE CORVALLIS, OREGON, PRINTED AT THE COLLEGE PRESS. 1955. OREGON STATE MONOGRAPHS STUDIES IN BOTANY No. 1. Tuberales of North America, By Helen M. Gilkey, Ph.D., Professor of Botany; Curator of Herbarium $0.50 No. 2. Developmental Morphology of Alpova, By S. M. Zeller, Ph.D., Plant Pathologist .35 No. 3. Paleoecology of Two Peat Deposits on the Oregon Coast, By Henry P. Hansen, Ph.D., Professor of Botany ....... ..... .50 No. 4. Moss Flora of the Willamette Valley, Oregon, By Clara J. Chapman, M.S., Graduate Assistant, and Ethel I. Sanborn, Ph.D., Professor of Botany .50 No. 5. Floral Anatomy of the Santalaceae and Some Related Forms, By Frank H. Smith, Ph.D., Associate Professor of Botany, and Elizabeth C. Smith, Ph.D. .50 No. 6. Septoria Disease of Gramineae in Western United States, By Roderick Sprague, Ph.D., Pathologist 1.50 No. 7. Clavaria, the Species Known from Oregon and the Pacific Northwest, By Maxwell S. Doty, Ph.D., Department of Botany, Northwestern University .75 No. 8. The Marine Algae of the Coos Bay-Cape Arago Region of Oregon, By Ethel I. Sanborn, Ph.D., Professor of Botany and Pa leo­ botany, and Maxwell S. Doty, Ph.D., Department of Botany, Northwestern University .75 No. 9. Northwestern American Plants, By Helen M. Gilkey, Ph.D., Professor of Botany, Curator of Herbarium .75 No. 10. Species of Selenophoma on North American Grasses, By Roderick Sprague, Ph.D., Pathologist, and A. G. Johnson, Ph.D., Pathologist, U. S. Department of Agriculture .75 STUDIES IN ECONOMICS No. 1. The Salmon Canning Industry, By D. B. DeLoach, Ph.D., Professor of Agricultural Economics .50 No. 2. An Analysis of the State Milk Laws Designed to Effect Economic Control of the Market Milk Industry, By E. L. Rada, B.S., Research Assistant in Agricultural Economics, and D. B. DeLoach, Ph.D., Professor of Agricultural Economics .50 No. 3. The Oregon Fiber-Flax Industry, with Particular Reference to Marketing, By E. L. Rada, M.S., Research Assistant, and D. B. DeLoach, Ph.D., Professor of Agricultural Economics .50 No. 4. Small Enterprise and Oliogopoly, By Harold G. Vatter, Ph.D., Associate Professor of Economics 1.00 STUDIES IN EDUCATION AND GUIDANCE No. 1. A Functional Curriculum in Professional Forestry, By Earl George Mason, Ed.D., Professor of Forestry .75 No. 2. Forest Management Education in Oregon By Walter Fraser McCulloch, Ed.D., Professor of Forest Management, with a Foreword by Kenneth P. Davis, Ph.D., Dean, School of Forestry, Montana State University 1.00 No. 3. Selected Procedures in Teaching High School Biology, By E. Irene Hollenbeck, M.S., Teacher of Biology, Salem, Oregon, and Elmo N. Stevenson, Ed.D., President of Southern Oregon College of Education .75 No. 4. An Adult Education Program for Orissa, India By William Cyril Osgood, Ed.D., Missionary, Hatigarh, Balasore, Orissa, India 1.00 STUDIES IN ENTOMOLOGY No. 1. A Review of the Genus Eucerceris (Hymenoptera : Sphecidae), By Herman A. Scullen, Ph.D., Professor of Entomology .50 (Continued on inside back cover) Small Enterprise and Oligopoly A Study of the Butter, Flour, Automobile, and Glass Container Industries By HAROLD G. VATTER Associate Professor of Economics Oregon State College OREGON STATE COLLEGE CORVALLIS, OREGON, PRINTED AT THE COLLEGE PRESS. 1955. OREGON STATE MONOGRAPHS Studies in Economics Number 4, August 1955 Published by Oregon State College Corvallis, Oregon ii TABLE OF CONTENTS Page Foreword iv Introduction 1 Industrial Evolution and Interfirm Relationships 1 Contemporary Theory and the Small Firm 4 Nature and Objectives of the Present Study 6 Materials and Methods 9 Differentiation in Market Opportunity : Creamery Butter Industry 13 Origins of Factory Butter Production 13 Procurement of Raw Material 14 Differentiation of. Firms : Centralizer and Local 16 Differentiation and the Quality of Cream 18 Price Discrimination in the Raw Material Market 19 Comparative Costs : Centralizers and Locals 20 Marketing : Early Differentiation in Structure 21 Locals, Centralizers, and the Marketing Function 23 Cooperative Marketing and the Small Creamery 24 Subordination of Locals to Large-Scale Marketing Agencies 27 Recent Innovations and the Local Creamery 30 Small Enterprise Mortality : Commercial Wheat Flour Milling 33 Introduction 33 Economic Background of the Minneapolis Industry 35 Beginnings of Interfirm Differentiation 37 Formation of the Leading Minneapolis Group 41 Market Maturation, Elimination of Small Mills, and Expansion of the Minne- apolis Group, 1900-1920 43 Buffalo 44 Differentiation in Marketing 47 The Southwest 48 Excess Capacity, Stabilization, Consolidation, and Enlargement of the Small Miller, 1920-1940 51 New Entry and Small Enterprise : The Automobile 66 Introduction 66 Entry in the Period of Rapid Growth 67 Maturation, Oligopoly, and Closure of Entry 70 Theoretical Aspects of the Entry Problem 73 Special Conditions of Entry After World War II 77 Stabilization and Dependent Enterprise : The Glass Container Industry 81 Introduction and General Characteristics 81 Small Enterprise : A Definition 83 Stabilization, Suppression of Entry, and Dependent Enterprise 84 Capacity Control and Dependent Small Enterprise 89 Production Capacity and Intergroup Quota Rivalry 92 Interfirm Relationships Under a Stabilization Program 96 Summary : Toward a Theory of Small Enterprise 100 Testing the Working Hypothesis 100 Functional Characteristics of Small Business 109 Survival of the Small Manufacturer 111 Conclusion 116 iii FOREWORD This monographic study of the small firm in dominant-group industries is a condensed presentation of an analysis originally submitted in partial fulfillment of the requirement for the degree of doctor of philosophy at the University of California (Berkeley). Although certain of the chapters, notably those on the butter and flour milling industries, and the general theoretical discussion, have been substantially shortened, it is hoped that the manuscript as a whole has been strengthened as a result of a painstaking abbreviation process. The study represents a good many years of investigation into the small business problem, years in which my indebtedness to others has been great. Among those, mention should be made of Professors J. M. Clark and Paul Brissenden at Columbia University, who first encouraged me to undertake research into the problems of the small firm. Acknowledgment is also due those at the University of California who had an important part in shaping the present project. The late Professor Leo Rogin directed the initial stages of this investigation. Subsequently, Professor Joe S. Bain devoted many hours to a careful critique of every aspect of the manuscript as it moved toward completion. Others who made significant contributions were Pro­ fessors Robert Brady, William Fellner, and Henry E. Erdman. iv I INTRODUCTION 1. INDUSTRIAL EVOLUTION AND INTERFIRM RELATIONSHIPS Widespread contemporary discussion of the problems of small enter­ prise has already penetrated the sphere of public policy, and, following the usual historical sequence, is currently beginning to cause a stir in academic circles. Attention to the special status of the small concern has generally been oriented toward the modern predicament of what is more popularly termed our "free enterprise system." Our awareness of that predicament was immeasurably sharpened during the harsh years of the early 1930's, and it was precisely this impetus which gave rise to a reconsideration of our traditional conceptions of the role played by the small entrepreneur. The great depression placed entrepreneurship on trial, and in the quest for explanations of its apparent delinquency, we probed widely and deeply into our economic organism. More searching questions than formerly came to be asked regarding the economic evolution of our industrial markets. The competitive status of the smaller producer, in modern industry, to which the present work is primarily devoted, is understandable only in the setting of the general pattern of industry. Hence, the advances in certain aspects of the general theory of business enterprise in recent years are pertinent to the problem here under consideration. Central to the economic setting of small enterprise is the developing concentration of production and centralization of control. This is the overriding secular factor of economic history which has induced the wide­ spread reconsideration of conventional theories of monopoly and competition so characteristic of economic analysis over the last two decades. The work of describing the growth of concentration, begun so well by Berle and Means with the publication of The Modern Corporation and Private Property in 1933,1 was carried forward by the Federal Government through the National Resources Committee's Structure of the American Economy,2 the investigations of the Temporary National Economic Committee, and the Congressional committees on small business. Although the facts of increasing concentration and centralization have been questioned by some, the signifi­ cant controversy revolves around the implications of such facts for the functioning of industry and for the theory of business enterprise. More specifically, the dominance of the large corporation in so many of our industrial markets has brought into sharper focus the problem of the place of the smaller producer in such markets. A closer scrutiny of the 1 Berle, A. A., and Means, G. C.,