SUCCESSFUL MONOPOLIZATION THROUGH PREDATION: THE NATIONAL CASH REGISTER COMPANY

Date01 July 2004
DOIhttps://doi.org/10.1016/S0193-5895(04)21003-X
Pages85-125
Publication Date01 July 2004
AuthorKenneth Brevoort,Howard P Marvel
SUCCESSFUL MONOPOLIZATION
THROUGH PREDATION: THE
NATIONAL CASH REGISTER COMPANY
Kenneth Brevoort and Howard P. Marvel
ABSTRACT
This paper presents evidence to suggest that despite obstacles that made
predatory pricing essentially impossible, the National Cash Register Co.
(N.C.R.) managed successfully to deploy an arsenal of non-price predatory
strategies that permitted it to consolidate and maintain a nearly complete
monopoly of the cash-register trade. N.C.R. took actions to raise the costs
and reduce the revenues of its rivals, actions that made sense only to the
extent that N.C.R. could recoup their costs through the maintenance of
monopoly rents. Our analysis suggests that antitrust prosecution was a
significant threat to N.C.R., and ultimately forced the company to agree to
abandon its most objectionable practices.
We propose hereafter to set aside, say,$5 on each register made, for knockout expense fund to
be devoted to maintain a monopoly. The N.C.R.1
My first day as a salesman I had to read a booklet telling all Patterson Salesmen what they must
not do, because if they did any of this the boss would go to jail. One of the things I couldn’t
do as a salesman was blackjack the salesmen of competitors. Another was bribe freight agents
to hold up shipments, or drop sand in competitors’ machines to put them out of order, open
Antitrust Law and Economics
Research in Law and Economics, Volume21, 85–125
Copyright © 2004 by Elsevier Ltd.
All rights of reproduction in any form reserved
ISSN: 0193-5895/doi:10.1016/S0193-5895(04)21003-X
85
86 KENNETH BREVOORT AND HOWARD P. MARVEL
offices next door to competitors and cut the prices to knock them out of business – these were
all things that his knockout squad had been doing which I was prohibited from doing.
Senator William Benton2
1. INTRODUCTION
This paper provides a description and analysis of that most elusiveof business enti-
ties, a monopoly able to consolidate and defend its dominant position by means of
an effective predatory strategy. The National Cash Register Company3grew from
a tiny start-up to one of the most prominent, successful, and influential business
firms in the United States. Along the way, N.C.R. built an industry from scratch,
selling a product that most customers did not believe that they needed. N.C.R.’s
irascible and eccentric founder, John Henry Patterson, developed a technology of
selling that was widely imitated throughout the American economy.4But N.C.R.
believed that neither its novelsales strategy nor its extensive patent portfolio would
suffice to defend its position against a gaggle of upstart rivals. Accordingly, it
employed a set of practices that it openly acknowledged as designed to “knock out”
its competitors.5
N.C.R. was hampered in its attacks on rivals by the difficulty it faced in
employing predatory pricing, given that it manufactured a durable good and
therefore faced the difficulty of convincing customers that the machines they
purchased would not almost immediately depreciate due to price cutting. It turned
instead primarily to non-price predatory tactics. Several of its practices were quite
costly and provided no direct benefit to N.C.R. Their sole attraction was that they
served either to raise the costs or reduce the revenues of nascent rivals, thereby
“cutting off the air supply” of those rivals.6N.C.R. shaped its predatory strategy
to cultivate its reputation for toughness in order to deter further prospective
competitors. Its actions cannot be interpreted as merely aggressive competition,
but instead meet the most stringent definition of predation, and were, indeed,
celebrated by N.C.R. itself as predatory both in intent and effect. Ultimately
N.C.R. left its path littered with failed competitors. It was the first firm to be
indicted under the Sherman Act for an offense other than price fixing. Concern
about its activities constituted an important motivation for passage of the Federal
Trade Commission Act designed to inhibit unfair competition.7
Despite its remarkable success in vanquishing its competitors,8and the
attention it garnered from antitrust authorities,9N.C.R. has not been the subject
of a detailed economic analysis. The problems the company faced in marketing
its products were quite different from many of the other trusts of its time. Indeed,
the N.C.R. experience has a contemporary flavor. In contrast to the homogeneous
commodities sold by other trusts, the cash register required extensive sales efforts
N.C.R.: Successful Monopolization through Predation 87
merely to convince prospective purchasers that they had a need for the product.
Owing to the up-front promotion required, margins over production cost were
necessarily substantial. In addition, the cash register was a very durable product
that was typically purchased on an installment plan. Accordingly, N.C.R. faced a
Coase Conjecture problem (Gul, Sonnenschein & Wilson, 1986) that made preda-
tory pricing an unattractive strategy. The prospect of lower prices for registers
could have induced prospective purchasers to postpone purchases indefinitely, an
outcome that could be prevented if N.C.R. maintained a reputation for not cutting
their own register prices (Ausubel & Deneckere, 1989). In place of price predation,
N.C.R. attempted to, and almost universally succeeded in, driving its rivals from
the marketplace by an array of techniques designed to harm the rivals directly by
curtailing their streams of revenue.
In Section 2, we describe the essential features of the cash register and provide a
brief outline of the N.C.R. sales techniques and organization. Section 3 introduces
the N.C.R. Competition Department, a group of special salesmen who were com-
pensated in far different fashion than the N.C.R. sales force, and whose mission
was to destroy any competition that emerged. We detail the practices N.C.R.
engaged in, with particular emphasis on practices that can only be described as
predatory. In Section 4, we catalogue N.C.R.’s acquisitions of rivals, a short listing
in comparison to the number of rivals that N.C.R. faced, suggesting that N.C.R.
adhered to its stated policy: “We do not buy out, we knock out.10 We explain
the unusually large amounts paid in two N.C.R. acquisitions that stand out in the
amount paid. In one instance, the owner of the acquired firm had inside information
on N.C.R.’saccounts, obviating N.C.R.’s threats. The other instance was N.C.R.’s
most expensive acquisition, the Lamson Cash Register Company. Lamson was the
driving force behind a United States Department of Justice Sherman Act indict-
ment of the company. The contrast between these acquisitions and the remainder
of N.C.R.’s purchases suggests strongly that N.C.R. effectively drove its rivals to
submission under terms favorable to N.C.R., and did so strategically, cultivating a
reputation for toughness. Section 5 brings the pre-WorldWar I era to a close with a
discussion of a major effort to punish N.C.R. under both federal and state antitrust
law. Section 6 describes N.C.R.’s postwar behavior, behavior constrained by the
Consent Decree it agreed to in 1916. Finally, Section 7 offersconcluding remarks.
2. THE CASH REGISTER AND N.C.R.:
A BRIEF HISTORY
The cash register is a machine designed to ameliorate the principal-agent problem
that arises in retail transactions. Prior to the development of the register, retail
clerks had occasion to access the cash till unannounced and with no tally of their

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