is never used in construction by itself; rather, as when used in concrete production, it functions as a binder of aggregates.22

As the administrative law judge found, portland cement, while classified with other hydraulic 23 cements such as masonry cement, displays distinguishable physical characteristics. Thus, it is markedly heavier than masonry cement.24 Portland cement prices are distinct from those of masonry cement.25 As well, there is no indication in this record that the price of portland cement displays a sensitivity, or responsiveness, to the price of any other type of cement. The production facilities required for the manufacture of portland cement are, as a practical matter, unique for that purpose; 26 and competitors within the industry recognize the product as a separate line of commerce.27 Highly specialized customers, ready-mixed concrete producers, by far account for the greatest quantity of portland cement sales.28 Most significantly, portland cement's end-use as a binder in the manufacture of concrete is, indeed, unique. The administrative law judge determined, and the record is clear, that "[t]here is no practical substitute for portland cement in the manufacture of concrete." 29 In short, the demand for portland cement is a function of the volume of construction activity underway at any given time and is generally inelastic with respect to the price of other related products. This fundamental inelasticity is sufficient, we think, to meet the broad market standard set forth in Brown Shoe, supra. Furthermore, assuming arguendo certain other cement types did manifest some cross-elasticity of demand with portland, the presence of virtually all "practical indicia" of a significant antitrust submarket renders the administrative law judge's determination of this issue patently correct. The facts of record are equally dispositive as to the ready-mixed market. Ready-mixed concrete is produced by combining portland cement with various aggregates, primarily, rock, sand and water. Whether the mixture takes place, in whole or part, in bins and scale hoppers 30 at plant site, or in the revolving-drum trucks so characteristic of the industry, the concrete is mixed to standard strength specifications requiring a given mixture to withstand a specified

* CX 41E.

23 A "hydraulic" cement is one which hardens when combined with water.

"CX 54 at 4; transcript at 2108.

23 Transcript at 2205.

26 CX 41; transcript at 2112, 2209.

* Transcript at 2210, 2313.

As respondent pointed out in its 1966 Annual Report: "Within the eight-state area in which we ship cement, the ready-mixed concrete producers are the largest volume users. Approximately, 60 percent of our total cement production went to the ready-mix concrete industry* "This was contrasted with direct sales of 23 percent to state and federal large volume construction projects Ash Grove's second-largest customer category. CX 181.

"Initial decision at 7. CX 38G; CX 54 at 7; transcript 2104, 2202-03, 2602.

30 Concrete production facilities are specialized and not readily adaptable to other production uses. CX 38F-G.

589-799 - 76-74

pressure level. The product tends to be the single item manufactured and sold by ready-mixers; 31 and sales are made principally to construction contractors and subcontractors.32 While some extremely large construction "pours" are competed for by only multiplant producers, in the main, both large and small ready-mixers are considered by their customers, and themselves, to be in competition. Testimony of record indicates that although price is the primary basis of competition among ready-mixers, fluctuations in price are unrelated to price changes in other building materials.34 In sum, each of these indicia the peculiar characteristics and uses of ready mixed concrete; its unique production facilities, specialized vendors and customers; its pricing unrelated to other products; as well as industry and customer recognition of the market - provide abundant support for delineation of the manufacture and sale of ready-mixed concrete as an appropriate line of commerce.

Respondent's arguments with respect to the geographic component of the portland cement market are no more compelling.35 In essence, respondent contends that the administrative law judge erred in adopting the KCMA as appropriate on the grounds that: (i) not all shipments of portland cement in the KCMA originate there; and (ii) certain firms supplying the KCMA also make shipments to locations outside the delineated area. Both of these contentions are correct; however, the argument they are designed to support fails to adequately consider the controlling standard for geographic market definition, as well as significant evidence of record.

The primary task in defining an appropraite geographic market for Section 7 purposes is to determine where the competitive effect of the particular merger under scrutiny will be "direct and immediate." United States v. Philadelphia National Bank, 374 U.S. 321, 357 (1963). The Supreme Court has observed that "[t]his depends upon the geographic structure of supplier-customer relations.""36 More specifically, the Court has indicated that “*** the 'area of effective competition in the known line of commerce must be charted by careful selection of the market area in which the seller operates, and to which the purchaser can practicably turn for supplies,' * * *” Id., at 359. See United States v. Phillipsburg National Bank and Trust Co., 399 U.S.

CX 38D; CX 43 at 32D-2; Transcript at 2441, 2501, 2514-15.

* CX 38W; Transcript at 1682, 1732, 2449.

13 Transcript at 1818-20, 1863-67, 1922-23, 1937-41, 2504-05, 2522, 2548. Transcript at 1755, 1856.

Respondent apparently concedes the properiety of the KCMA as an appropriate geographic market for ready mixed concrete. See Respondent's Brief on Appeal at 53.

36 United States v. Philadelphia National Bank, 374 U.S. 321, 357 (1963). Indeed, this is particularly true in a vertical merger involving analysis of both supplier and customer product markets.

350, 362 (1970); Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961). Thus, a "pragmatic, factual approach"37 requires consideration of the "demand side" of a market, as well as an analysis of supplier behavior. Only then can the geographic market selected “* * * both 'correspond to the commercial realities' of the industry and be economically significant." (citation omitted) 38

Respondent's endeavor to expand the geographic market adopted by the administrative law judge ignores facts pertaining to very real limitations on the supply options available to portland cement customers. For example, ready-mixers have limited storage capacity for raw materials. As a result, quick delivery from a portland cement supplier is of key importance. The fact that a majority of area suppliers have established production or distribution facilities within the KCMA, at substantial cost, well bears this out. Additionally, apart from crucial time delays involved in shipments from supply facilities more than marginally outside the metropolitan area, the high shipping costs of portland cement, in relation to its low product value per unit weight, soon render incremental distances economically unacceptable.

Respondent's argument does call attention to the behavior of suppliers; however, important facts relating to this aspect of the equation, too, are deemphasized. Thus, while suppliers did sell outside the KCMA, the importance they, themselves, attached to the metropolitan area is noteworthy. For example, Ash Grove's president testified to the importance of the Kansas City market, characterizing it as a market worth protecting.39 Highlighting the significance of the market area to suppliers is the fact that by 1965, four major suppliers in the market, including respondent, had established local distribution terminals in order to expedite delivery to area purchasers. Indeed, two suppliers actually had production facilities in the metropolitan area. In 1966, 79.9 percent of all shipments from local distribution terminals were made to destinations within the defined market; moreover, as the law judge pointed out, in that year “* * * 72.0 percent of all portland cement shipments to all destinations located within the KCMA were made from the Kansas City area mills of Missouri Portland Cement Company and Lone Star Cement Corporation and the Kansas City area terminals of respondent, Universal Atlas Cement Division of U.S. Steel, General Portland Cement Company and Mississippi River Corporation. (CX 77, 78, 80, Tr. 2677, 3135, 3253)."40

Thus, we think a balanced analysis of the "commercial realities" of

37 Brown Shoe Co., v. United States, 370 U.S. 294, 336 (1962).

3 Id. at 336-7.

CX 39E, R.

"Initial Decision at 13-14. We note that a procedure developed recently by Kenneth G. Elzinga and Thomas F. Hogarty, The Problem of Geographic Market Delineation in Anti-merger Suits, 18 Antitrust Bull. 45 (1973),

(Continued)

the portland cement market support the adoption of the KCMA as an appropriate "section of the country" for purposes of this case.

III

In the case of each of the challenged acquisitions, Ash Grove, the acquiring firm, assumed ownership of a firm which, in the course of its business, was a purchaser of one of Ash Grove's principal products portland cement. Acquisitions of customers or potential customers, by suppliers, are categorized as "forward vertical" mergers. The "tying" of a customer to a supplier is always suspect from an antitrust perspective;11 in the event of merger, a permanent tie is established, and the need for analyzing the competitive effect of such a relationship is all the more acute.

When a supplier gains permanent control over the purchasing decisions of a customer, the basic competitive factors of the free market price, quality and service - are no longer choice-determinative.42 As the Supreme Court pointed out in Brown Shoe, "The primary vice of a vertical merger * * * is that, by foreclosing the competitors of either party from a segment of the market otherwise open to them, the arrangement may act as a 'clog on competition,' which 'deprive[s]*** rivals of a fair opportunity to compete.' (citation omitted) 43 The Court further stated: "Since the diminution of the vigor of competition which may stem from a vertical arrangement results primarily from a foreclosure of a share of the market otherwise open to competitors, an important consideration in determining whether the effect of a vertical arrangement 'may be substantially to lessen competition, or to tend to create a monopoly' is the size of the share of the market foreclosed.”+ The foreclosure percentages with respect to both acquisitions of ready-mixers here are of significant proportion. As the administrative law judge found, in 1966, Fordyce consumed 10.2 percent of all portland cement shipments in the KCMA;45 Lee's Summit, a smaller operation,

44

demonstrates the need to assess both supply and demand factors to define a geographic market (noted by the Commission previously in Beatrice Foods Co., 81 F.T.C. 481, 524 n. 6 (1972). Elzinga and Hogarty espouse a concise method of defining geographic markets. According to their analysis, if 75 percent or more of the demand for the product in the selected area is met by suppliers in that area and if 75 percent or more of the supply of the product emanating from the selected area is consumed by users in that area, then the geographic market has been properly defined. To state their test briefly, if little enters an area from outside and little leaves the area from inside, that area is a relevant geographic market.

"See Brown Shoe Co. v. United States, 370 U.S. 294, 330-31 (1962).

As Commissioner Dixon has observed in analysis of a similar factual situation: “A substantial share of custom in a market may be obtained by a supplier through contractual exclusivity, not through competition based on offerings of price, quality or service. Competitors of the acquiring supplier may be competitively disadvantaged through permanent foreclosure of custom once open to competitive bidding.” United States Steel Corp, 74 F.T.C. 1270, 1289 (1968). 43 Brown Shoe Co. v. United States, 370 U.S. 294, 323-24 (1962).

" Id. at 328.

45 Initial Decision at 19. This constituted 14.6 percent of all purchases by ready mixed companies.

46

accounted for 3.1 percent. Yet, while these figures are, indeed, "important considerations" here and can, in no sense, be considered de minimis, there is no per se rule of illegality in testing a vertical merger under Section 7.47 Rather, "[w]hether a particular vertical merger is illegal depends on the facts and the market setting in which it occurs.” 48

Foreclosure manifests a particularly anticompetitive character when it occurs as part of a trend toward forward integration in a concentrated market.49 For example, in such a situation, barriers to entry, often already high, are raised in the supply market. As the percentage of foreclosed transactions grows, less of an open market remains to attract potential competitors of the integrated suppliers. The would-be entrant is thus faced with the choice of: (i) entering at the supply level to compete for a continually shrinking market dominated by oligopolists; (ii) entering at both the supply and customer levels, facing the significantly increased costs integrated entry implies; or (iii) abandoning all thoughts of entering the market. To create this series of options for a potential entrant is clearly to impede entry.50 Nor in such a situation are the anticompetitive effects of forward integration limited to the supply market. The leverage created in the hands of integrated suppliers can all too readily be put to use to discipline, if not eliminate, enterprises competing only on the customer level. This phenomenon was explained in Marquette, supra:

By narrowing the margin between the price at which they sell cement on the open market and the price at which they sell ready-mixed concrete, the integrated firms can limit the profits and growth of the ready-mixed firm, many of which are small, local companies operating only in the NYMA, or perhaps even drive them out of business. It is, of course, unlikely that the integrated companies would utilize their leverage to drive independent ready-mixed firms out of the market. This kind of overt exercise of market power is unnecessary; nor is it essential that ready-mixed firms be kept in a state of complete dependency. All that is required is that unintegrated firms and prospective entrants be made aware of the ability of the integrated oligopoly group - whether acting collectively or simply in "follow-the-leader" fashion - to utilize its leverage. The net effect would be to keep any of the independents from competing too aggressively, to maintain prices above competitive levels, to keep out new entrants - in short, to permit the readymixed market to function as a highly concentrated oligopoly. (citations omitted) 51

In 1966, ten portland cement suppliers were serving the KCMA.

Id. This percentage amounted to 4.5 percent of all purchases by ready-mixed companies.

"See Marquette Cement Mfg. Co., 75 F.T.C. 32, 103 (1969).

48 Id. at 103-104.

"Brodley, Oligopoly under the Sherman and Clayton Acts - From Economic Theory to Legal Policy, 19 Stan. L. Rev. 285, 319 (1967).

See Marquette Cement Mfg. Co., 75 F.T.C. 32, 96-97 (1969).

S1 Id. at 102.