American Tobacco Co. v. United States

Facts

The “Big Three” tobacco companies (American, Liggett & Myers, and Reynolds) dominated the cigarette industry, collectively controlling between 68% and 90% of the domestic cigarette market from 1931 to 1939. Despite a gradual decline in their market share percentage, their combined production volume actually increased. The companies engaged in parallel pricing behavior, with identical list prices and simultaneous price changes. When faced with competition from cheaper “10 cent cigarettes,” they collectively reduced prices to drive out this competition, then raised prices again once the threat diminished.

In tobacco purchasing, the companies refused to buy on markets unless all three were present, effectively controlling which markets would succeed. They established price ceilings for their buyers, formulated grades to avoid competition among themselves, and purchased predetermined percentages of crops. When manufacturers of cheaper cigarettes emerged, the defendants began purchasing the lower-grade tobacco used in these cigarettes, despite no apparent need for it in their own products.

The companies also controlled distribution channels through identical discount structures and coordinated retail pricing strategies. They used various tactics to maintain a price differential of no more than 3 cents between their premium brands and competitors’ cheaper cigarettes, including threats and incentives to retailers. Their enormous advertising budgets, large tobacco inventories, and financial resources created significant barriers to entry for potential competitors.