392 U.S. 481, Hanover Shoe, Inc. V. United Shoe Machinery Corp. (1968) Case Study Examples

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Hanover Shoe, Inc. v. United Shoe Machinery Corp.
- Abstract
In this 1968 case, Hanover Shoe was a customer of United Shoe Machinery, leasing their shoe-making machinery. Previously, United Shoe lost a suit brought by the United States based on the anti-trust effects of their leasing scheme. Hanover used this finding as a basis for suing United Shoe themselves, requesting treble damages. The Court found that the prior case did stand for the proposition that the leasing scheme was illegal monopolization and found for Hanover. United Shoe argued a “passing on” defense and that Hanover’s additional taxes should be excluded from the damages calculations, but both arguments were dismissed.
2. Hanover asserts that United Shoe monopolized the shoe industry under § 2 of the Sherman Act. Section 2 of the Sherman Act addresses “the acquisition and maintenance of monopoly power by anticompetitive conduct.” (Adkinson 1).
3. The industry structure was a central consideration in this case as the perceived market power of United Shoe had been both gained and maintained by their use of a solely leasing structure to market their shoe manufacturing machinery, a characteristic of the shoe manufacturing machinery industry at that time. This was having a significant effect on competition, as discussed below.
The market structure that was present in the underlying case was essentially a monopoly or perhaps, an oligopoly, with United Shoe being the holder of the major market power. It had effectively prevented other competitor entry by its leasing its shoe manufacturing machines. This provided many documented benefits to the company including stability of revenues, ability to conduct research easily, a repair service that kept their machines as the top quality available, and a wide distribution of machinery in a relatively narrow market (392 U.S. 481, 505).
The line of product in question was machinery for manufacturing shoes and the elasticity of the demand was discussed in relation to the “pass-on” defense that was raised by United Shoe. In utilizing a “pass-on” defense, the defendant argues that there was no loss to the buyer of their product due to their anti-competitive activities because the buyer was able to “pass-on” the increased costs to their customers (Schaefer, 1975). The Court in this case observes that this could be valid for a market where the demand for the buyer’s product is very inelastic. However, in the next paragraph it dismisses recognizing this defense, primarily due to the inability to reliably measure or determine the factors needed to support it using “sound laws of economics” (392, U.S. 481, 492-93).
Geographical domain was discussed in relation to the effect of having repair services provided by the same company that provided the machines themselves. The inability of competitor machine makers to provide local service for their machines like United Shoe provided was cited as a difficult barrier to entry, especially for foreign-based firms (392 U.S. 481, 509).
However, the leasing scheme decreased the barrier to entry for the shoe manufacturers by allowing those with less capital to enter a manufacturing industry, but the Court noted even then it had not “necessarily promoted . . . the goals of a competitive economy and open society” (392 U.S. 481, 506).
4. The conduct at issue in this case was a leasing scheme for machinery used to manufacture shoes. Some of the characteristics within this scheme that deterred competition included the ten-year term, difficulties in trying competitor’s machines due to lease rather than purchase of United Shoe’s machine, no second-hand market competition for machines, United Shoe’s control of the repair market, and having lease provisions that link credit given to the manufacturer by United Shoe if they kept a full line of United machines (392 U.S. 481, 508-10).
5. United Shoe’s conduct affected other firms in the industry by reducing the chance that shoe manufacturers would experiment with their competing machine because the manufacturer leased rather than purchased the machine. This chance was also reduced because of specific provisions within the lease including a “full capacity clause,” the need to request time for the experimental period which may turn out to be too short to give a full evaluation, and the requirement for commuted future payments on the lease to United Shoe should a competitor’s machine be preferred and purchased. Because of a lack of a second hand market, competitors are also unable to obtain a machine to reverse engineer those parts that are not patented. Also, because of a lack of independent repair companies, competitors could not market their own complicated machine without supplying service (392 U.S. 481, 508-509).
6. The initial legal action was taken by the United States against United. This case ultimately resulted in a Supreme Court decision that affirmed the United State’s case against United (United Shoe Machinery Corp. v. United States, 347 U.S. 521 (1954)), with the arguable finding that their lease-only policy was illegal monopolization. Hanover, a customer of United Shoe, then relied upon the findings of that case to bring their own action against United in District Court, requesting treble damages. The District Court found for Hanover, awarding the requested treble damages as well as attorney fees (Hanover Shoe, Inc. v. United Shoe Machinery Corp., 245 F. Supp. 258 (M.D. Pa. 1965)). United appealed to the Court of Appeals of the Third Circuit, which affirmed the liability but altered parts of the damage award (United Shoe Machinery Corp. v. Hanover Shoe, Inc., 377 F.2d 776 (3rd Cir. 1967)). Both Hanover and United Shoe appealed that decision to the Supreme Court.
7. This case is a Supreme Court case so no further directly related actions occurred.
8. The Structure-Conduct-Performance Analysis
The analysis of market structure includes examining the number, type and size distribution of sellers and payers, the type of product, barriers to entry into the market, and any information asymmetry that exists between the various members of the market (Weiss, 1106). In the present case, United Shoe is one of a small number of suppliers of shoe manufacturing machinery. United Shoe is the largest company in the market, although the size of the market is relatively small, as heavy machinery goes, because the product is specialized. The product is expensive and requires consistent investment for repairs and maintenance. Because of the cost of production, there intrinsically high barriers for market entry and additional barriers have been added by United Shoe’s conduct, discussed below. There is also significant information asymmetry between the manufacturer of the machinery and their customer, the manufacturer of shoes, as they are essentially doing business in very different industries.
Determining the conduct portion of the analysis requires looking at pricing behavior, product promotion, and research and development (Weiss, 1109). United Shoe’s conduct is directly related to the leasing scheme that is at issue in this case. Rather than sell their machines, United Shoe determined it could maximize revenue by leasing them, very long term with specific credit arrangements, to those who wanted to enter the shoe manufacturing business. The lease had within it many clauses that worked both economically and psychologically upon the leasing company to keep their machinery with United Shoe. Additionally, United Shoe was the only source of repair service for their machines and repair and upkeep was included in the lease cost.
Another conduct discussed in this case was research and development. Because United Shoe had such market penetration, they were the first to learn of new needs of their customers and thus had advantages over competitors with less customer contact. In sum, this collection of conduct gave them many benefits, which have been summarized above, but was found to be illegal monopolization of the market and they had to stop their behavior. They were also found liable to their customers for the damages incurred due to the monopoly that resulted.
The final component of the analysis is performance. Performance can be determined by looking at production and allocation efficiency, equity, and technological progress. The monopolization of the market driven by United Shoe’s conduct has some negative effects on this aspect of the analysis. If competition is needed to maximize the efficiency aspects, its absence likely meant that the market’s production and allocation were not at their peak due to United Shoe’s dominance. However, it should be noted that the lease set up did mean the machinery that was being used was well maintained and function. On the other hand, there was no equity within this market, which likely had effects on what price United Shoe could charge for their leases. Arguably, technical progress was slowed, as if United Shoe didn’t address an issue, there was a chance that it would never be addressed. Therefore, it is clear that in this case, United Shoe’s conduct had significant negative effects on the ultimate performance of the shoe manufacturing machinery market.
Works Cited
Adkinson, Jr., William, Karen Grimm, and Christopher Bryan. “Enforcement of Section 2 of the Sherman Act: Theory and Practice.” FTC Working Paper. (November 3, 2008). Web. 18 June 2013.
Hanover Shoe, Inc. v. United Shoe Machinery Corp., 245 F. Supp. 258 (M.D. Pa. 1965). Web. 18 June 2013.
Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968). Web. 18 June 2013.
Schaefer, Elmer. “Passing-On Theory in Antitrust Treble Damage Actions: An Economic and Legal Analysis.” William and Mary Law Review 16, 883 (1975). Web. 18 June 2013.
United Shoe Machinery Corp. v. United States, 347 U.S. 521 (1954). Web. 18 June 2013.
United Shoe Machinery Corp. v. Hanover Shoe, Inc., 377 F.2d 776 (3rd Cir. 1967). Web. 18 June 2013.
Weiss, Leonard. “The Structure-Conduct-Performance Paradigm and Anti-trust.” University of Pennsylvania Law Review 127, 1104-40 (1979). Web. 18 June 2013.

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