Vertical Integration and the Sherman Act: The Legal History of an Economic Misconception

OF VERTICAL INTEGRATION' has been developing,yunder the Sherman Act for better than forty years, opinions as to what that law is, and what it has been, are still confused.In part, this confusion reflects the state of the law; in part, it springs from a misreading of the cases.This paper represents an attempt to reorder this area of the antitrust law; it is an attempt to discern a consistent doctrine concerning vertical integration running through the cases, and to evaluate the worth of that doctrine in terms of the purposes of the Sherman Act.The current predominant view of the case law appears to be that prior to 1940 vertical integration had not been attacked as such, and that the Sherman Act does not, and did not, condemn such integration except when it is used to extend monopoly from one level of production to another. 2 This paper reaches completely contrary conclusions.First, the recent attacks upon vertical integration are not something new in the law.Rather they are merely a spectacular bringing to fruition of a way of thinking, an attitude, that goes back to the earliest cases.Second, the Sherman Act, "new" or "old," has not condemned vertical integration only where there was monopoly at one level of operation (horizontal monopoly).Where the courts have thought abusive practices traceable to t Research Associate, Antitrust Project, University of Chicago Law School. 1 Vertical integration exists when a firm "transmits from one of its departments to another a good or service which could, without major adaptation, be sold in the market."Adelman, Integration and Antitrust Policy, 63 Harv.L. Rev. 27 (1949).2 Hale, Vertical Integration, 49 Col. L. Rev. 921, 923 (1949), states that it was not until recent times that vertical integration was attacked as such.Similarly, Vertical Forestalling under the Antitrust Laws, 19 Univ.Chi.L. Rev. 583, 584 (1952), states: "Prior to 1940 vertical integration had been condemned under the Sherman Act only where found to be an integral part of horizontal monopoly or where used as a means of extending horizontal control to new levels."Kahn, A Legal and Economic Appraisal of the "New" Sherman and Clayton Acts, 63 Yale L. J. 293, 341 (1954), states: "The 'new' Sherman Act, like the 'old,' condemns vertical integration only when it represents a device for extending monopoly power from one stratum to another."These views run counter to some of the decided cases, which will be discussed later, and also seem to overlook the possibility that the early cases may have developed the rudiments of a law about vertical integration as such-which is all we have even yetdespite the fact that such integration was usually presented to the courts simultaneously with questions of horizontal control.