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Economies of Scale in Tobacco Manufacture, 1897–1910

Published online by Cambridge University Press:  03 March 2009

Malcolm R. Burns
Malcolm R. Burns
Affiliation:
Assistant Professor of Economics, University of Kansas, Lawrence, Kansas 66045.
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Abstract

The survivor technique is applied to a virtually complete set of plant and output data to determine the extent of scale economies in the plug, smoking, snuff, and fine-cut branches of the tobacco industry between 1897 and 1910. The data indicate that the relative cost advantage of large tobacco factories was substantial, with facilities of minimum efficient size often requiring market shares approaching 10 per cent of U. S. output. These results support one of the principal themes of The Visible Hand—that the realization of scale economies motivated the consolidation movement in American manufacturing at the turn of the century.

Type
Articles
Information
The Journal of Economic History , Volume 43 , Issue 2 , June 1983 , pp. 461 - 474
Copyright
Copyright © The Economic History Association 1983

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References

1 Chandler, Alfred D. Jr, The Visible Hand: The Managerial Revolution in American Business (Cambridge, Massachusetts, 1977), pp. 297–98.Google Scholar

2 Ibid., pp. 315, 336.

3 Ibid., pp. 290–92, 382–91.

4 United States v. American Tobacco Co., 221 U. 5. 106 (1911). The trust was actually several corporations during its 20-year history, including the American, Continental, and Consolidated Tobacco Companies, and the American Snuff Company. All but the latter were reorganized into a new American Tobacco Company in 1904. The discussion uses “American Tobacco” and “trust” interchangeably and distinguishes them from American Snuff when necessary.Google Scholar

5 U. S. Bureau of Corporations, Report on the Tobacco Industry, 3 vols. (Washington, D. C., 1909–1915), vol. 2, pp. 304–11; vol. 3, p. 2; hereinafter cited as Report.Google Scholar

6 On cigarettes, see Porter, Patrick O., “Origins of the American Tobacco Company,” Business History Review, 43 (Spring 1969), 59–76. The type of analysis presented here has been performed on the ëomparatively limited data for cigarettes. The results show the existence of significant economies of scale in the cigarette branch and are available from the author on request.Google Scholar

7 The plant and output data are taken from the following primary sources: Report, vols. 1–3; U. S. Supreme Court, Briefs and Records, United States v. American Tobacco Co., 221 U. S. 106 (1911), vol. 5, Government Exhibit 84, hereinafter cited as Transcript; Commercial and Financial Chronicle, 94 (January 27, 1912), 280–85, hereinafter cited as CFC; and a defense exhibit of the R. J. Reynolds Tobacco Co. in United States v. American Tobacco Co., 328 U. 5. 781 (1946)Google Scholar, as summarized in Nicholls, William H., Price Policies in the Cigarette Industry (Nashville, 1951), Table 10, p. 37.Google Scholar

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9 The discussion in this paragraph is based on Report, vol. 1, pp. 266–67Google Scholar, and Jacobstein, Meyer, “The Tobacco Industry in the United States,” Columbia University Studies in History, Economics and Public Law, 26 (1907), p. 92–93. The quotations appear respectively in Jacobstein, p. 92, and Report, vol. 1, p. 267.Google Scholar

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12 One imperfection protecting inefficient facilities could be transportation costs. See Haddock, David D., “Basing-Point Pricing: Competitive vs. Collusive Theories,” American Economic Review, 72 (06 1982), 289–306. Transport expenses, however, did not constrain the realization of plant scale economies in the turn-of-the-century tobacco industry. According to the U. S. Bureau of Corporations, freight costs were less than 8 per cent of the net wholesale price (excluding excise taxes) received by American Tobacco on finished products between 1900 and 1910.Google ScholarReport, vols. 3, pp. 51 (Table 5), 55 (Table 6), 87 (Table 21), 89 (Table 22), 129 (Table 44), 131 (Table 45), 139 (Table 48), 141 (Table 49), 155 (Table 53), 157 (Table 54). Reflecting these small magnitudes, the trust located all but one of its factories in or near the major leaf-growing regions of the southeastern United States, despite large consumer markets in the west.Google Scholar

13 See McGee, John S., “Efficiencies and Economies of Size,” in Goldschmid, et al., Industrial Concentration, pp. 70–71.Google Scholar

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15 Report, vol. 1, pp. 201–03.Google Scholar

16 See Report, vol. 1 which contains the definitive history of the tobacco trust. The U. S. Bureau of Corporations recounted numerous instances of price cutting to force smaller competitors into American Tobacco. But it described only one instance where predation crippled an independent manufacturer, and this firm was subsequently purchased by the trust as well. Report, vol. 1, pp. 139, 186.Google Scholar Additional details on the longest and most expensive episode of alleged predatory pricing in the tobacco industry are presented in Burns, Malcolm R., “Outside Intervention in Monopolistic Price Warfare: The Case of the ‘Plug War” and the Union Tobacco Company,” Business History Review, 56 (Spring 1982), 33–53.Google Scholar

17 There is no mention of continued predatory conduct in Report, vol. 2 and Report, vol. 3, published in 1911 and 1915, respectively.Google Scholar

18 The relative advantages and limitations of the various empirical measures are discussed at length in Scherer, , “Economies of Scale,” and McGee, “Efficiencies and Economies,” in Goldschmid, et al., Industrial Concentration, pp. 16–97.Google Scholar

19 See Shepherd, William G., ‘What Does the Survivor Technique Show About Economies of Scale?,” Southern Economic Journal, 34 (07 1967), 113–22CrossRefGoogle Scholar, and Scherer, F. M., Industrial Market Structure and Economic Performance, 2nd. ed. (Chicago, 1980), p. 93.Google Scholar

20 Compare Report, vol. 1, pp. 49–50, and Report, vol. 3, pp. 47, 151. Fine-cut was a finely- shredded form of tobacco that was used primarily for chewing. See Report, vol. 1, p. 240.Google Scholar

21 This process is known as the “rationalization of production,” and it is analyzed in Patinkin, Don, “Multiple-Plant Firms, Cartels, and Imperfect Competition,” Quarterly Journal of Economics, 61 (02 1947), 173–205.CrossRefGoogle Scholar

22 Report, vol. 1, p. 371.Google Scholar

23 CFC, 72 (March 30, 1901), p. 625.Google Scholar

24 CFC, 94 (January 27, 1912), pp. 280, 283; Nicholls, , Price Policies, Table 10, p. 37; and Report, vol. 3, Table 3, p. 49.Google Scholar

25 Report, vol. 1, p. 242.Google Scholar

26 CFC, 94 (January 27, 1912), pp. 280, 283; Nicholls, Price Policies, Table 10, p. 37; and Report, vol. 3, Table 19, p. 84.Google Scholar

27 CFC, 94 (January 27, 1912), pp. 280, 283; and Report, vol. 3, Table 19, p. 84.Google Scholar

28 The organization of the American Snuff Company is described in Report, vol. 1, pp. 142–45.Google Scholar

29 CFC, 94 (January 27, 1912), pp. 280, 282, 285.Google Scholar

30 CFC, 94 (January 27, 1912), pp. 280, 282, and Report, vol. 3, Table 47, p. 138.Google Scholar

31 CFC, 94 (January 27, 1912), p. 282, and Report, vol. 3, Table 42, p. 127.Google Scholar

32 Compare Bain, Joe S., Barriers to New Competition (Cambridge, Massachusetts, 1956), Table 3, p. 72;CrossRefGoogle ScholarSaving, Thomas R., “Estimation of Optimum Size of Plant by the Survivor Technique,” Quarterly Journal of Economics, 75 (11 1961), p. 580;CrossRefGoogle Scholar and Scherer, F. M., Beckenstein, Alan, Kaufer, Erich and Murphy, R. D., The Economics of Multi-Plant Operation: An International Comparisons Study (Cambridge, Massachusetts, 1975)Google Scholar, as summarized by Scherer, , “Economies of Scale,” in Goldschmid, et at., Industrial Concentration, Table 3, p. 26.Google Scholar

33 This literature is reviewed in Scherer, , Industrial Market Structure, pp. 93–95.Google Scholar See also Shepherd, William G., The Economics of Industrial Organization (Englewood Cliffs, New Jersey, 1979), p. 258.Google Scholar