V.

 PHILIP MORRIS, INC., ET. AL.,
DEFENDANTS.
 

TOPIC:          TRIAL TRANSCRIPT
          TRANSCRIPT OF PROCEEDINGS
DOCKET-NUMBER:  C1-94-8565
VENUE:          Minnesota District Court, Second Judicial District, Ramsey County.
YEAR:           March 18, 1998
          A.M. Session

JUDGE:          Hon. Judge Kenneth J. Fitzpatrick, Chief Judge

THE CLERK: All rise. Ramsey County District Court is again in session, the Honorable Kenneth J. Fitzpatrick now presiding.
 (Jury enters the courtroom.)
    THE CLERK: Please be seated.
    THE COURT: Good morning.
 (Collective "Good morning.")
    THE COURT: Counsel.
    MR. BLEAKLEY: Thank you, Your Honor.
    ROBERT J. DOLAN called as a witness, being previously sworn, was examined and testified as follows:
BY MR. BLEAKLEY:
    Q. Good morning, Professor Dolan.
    A. Good morning.
    MR. BLEAKLEY: Good morning, ladies and gentlemen.
 (Collective "Good morning.")
    Q. Yesterday when we broke, for what I hope was an enjoyable balance of St. Patrick's Day for everyone, we were talking about some of the published literature dealing with the issue of the effect of cigarette advertising on -- on consumption. Do you recall that?
    A. Yes, I do.
    Q. And I was asking you about the 1987 economic report of the president. Is that correct?
    A. Yes, I recall that. Uh-huh.
    MR. BLEAKLEY: Your Honor, I now have a complete copy of the 1987 Economic Report of the President, which I have -- copy of which I have placed up there by Professor Dolan, I've given to counsel for the plaintiffs, and I believe Your Honor has a copy too.
    THE COURT: Are you moving its introduction?
    MR. BLEAKLEY: Yes, Your Honor, we move the admission of Exhibit CW000158.
    MR. CIRESI: As a government document?
    MR. BLEAKLEY: Yes, Your Honor.
    MR. CIRESI: No objection, Your Honor.
    THE COURT: Court will receive CW000158.
BY MR. BLEAKLEY:
    Q. Would you turn, Professor Dolan, to page 188 in that exhibit. Excuse me, 186.
    A. 186? Yeah.
    Q. Actually let me first ask you: This document is entitled "Economic Report of the President" as "Transmitted to the Congress" in January of 1987; is that correct?
    A. That's what I see on the front page, yes, uh-huh.
    Q. And chapter six of this exhibit is entitled "Risk and Responsibility," do you see that?
    A. Well, let's see --
    I do now on page 111. Okay.
    Q. And chapter six -- I'm sorry.
    A. Table of contents? On the table of contents page?
    Q. Yes.
    A. Yes, chapter six, "Risk and Responsibility," yes, uh-huh.
    Q. And would you turn to page 179 first.
    A. 179?
    Q. Yes.
    A. Okay. Okay.
    *2 Q. Page 179 is the beginning of chapter six --
    A. Yes.
    Q. -- which reads, "Risk and Responsibility." Do you see that?
    A. I do.
    Q. "Risk is a fact of life. Every person balances risks of accident and injury against the attainment of other goals." Do you see that?
    A. I do see that.
    Q. Okay. Now if you would turn to page 186, the Economic Report of the President states, "The effects of tobacco advertising are complex. There is little evidence that advertising results in additional smoking. As with many other products, advertising mainly shifts consumers among brands." That's what the Economic Report of the President says?
    A. I believe you read that correctly, correct, yes.
    Q. And when it says "advertising mainly shifts consumers among brands," that's the brand switching that we've been talking about; isn't it?
    A. Right. Uh-huh.
    Q. Now the Surgeon General of the United States in his 1989 report also concluded that there is no scientifically rigorous study available to the public that provides a definitive answer to the basic question of whether advertising and promotion increased the level of tobacco consumption; isn't that right?
    A. I believe that is correct. If you stipulate that that's true, I would not argue with you on that. Again, it's taking advertising away from the rest of the total marketing and communications campaign, and --
    Q. You --
    A. -- when the Economic Report of the President marshalled the evidence of tobacco bans in Italy, Finland, Iceland and Singapore as the primary evidence for their statement, I'd much rather look at what's going on in the United States and the total marketing and communications program in making a judgment about that.
    Q. Well let's talk about the advertising bans for a moment. You're also aware of the fact, are you not, that there have been a number of studies of the effect of advertising bans on cigarette consumption in those countries that have enacted advertising bans; aren't you?
    MR. CIRESI: Objection, irrelevant.
    THE COURT: Well you may answer if you know.
    A. Yes, I'm aware that there have been a number of studies.
    Q. And you know that these studies conclude that there is no significant change in cigarette consumption after advertising bans have been enacted; don't you?
    MR. CIRESI: Same objection, Your Honor, it's irrelevant.
    THE COURT: Sustained.
    Q. Now let's talk for a moment about some of the ads that you discussed yesterday.
    A. Are we done with the economic report?
    Q. Yes.
    A. Can I get rid of this?
    Thank you.
    Q. You would agree with me, would you not, that there have been no what you described as explicit health claims in cigarette ads since about 1954?
    A. I -- I honestly don't know the specific point in time beyond which I would say there would be no -- there have been no explicit health claims.
    Q. Well let's say the mid-1950s then. You would agree with me that there haven't been any since then?
    *3 A. I -- I'd really have to stick with my previous answer. I -- I
 

don't have any at the ready to offer you as being post-mid- '50s that did have explicit health claims, but that's as much as I can say about that.
    Q. Haven't been any for a long time in any event.
    A. Well I suppose that gets us into a discussion of what is a long time and so forth, so --
    But there haven't been any recently as far as I -- as far as -- not to my knowledge anyway.
    Q. Now Mr. Ciresi asked you yesterday if the cigarette companies in any of their ads have warned people about the risk of lung cancer. Do you remember that question?
    A. I do.
    Q. You know that in fact there has been a health warning on every pack of cigarettes sold in the United States since 1966, though; don't you?
    A. I do.
    Q. Now what you described as the implicit health claims have all related to filters and low tar and nicotine, haven't they?
    A. I -- I would not say that that's necessarily the case. I mean I think the ones that we looked at explicitly yesterday were around the issue of filtration, the Lark ad and the True ad and Merit and so forth, they were around the issue of filtration and low -- and lower tar and lower nicotine.
    Q. Well then let me ask the question directly: Are you aware of any advertisements in which the cigarette companies have made implicit health claims that did not involve filters or low tar and nicotine?
    A. I would say that some people would interpret an ad as being a health reassurance ad and not explicitly note the tar and nicotine aspect of it.
    Q. Which ones?
    A. I guess I don't have a specific example to give you as I sit here, but as I looked through the general theme of -- of the advertising, I mean I -- it's not clear to me that every one of them that is offering health reassurance -- it could be just depicting of a healthy person. If we looked at the -- as you remember the Merit ad that we looked at yesterday with the -- with the woman saying, "Yes, I can" on it, and then it goes on to discuss low -- low tar and nicotine, I believe that's a health reassurance-type advertising. I mean if you look at the general theme which is set out in the advertising and marketing strategy statement, the theme of health reassurance is there. And -- and as we saw with -- with B.A.T. Company saying, look, this has got to pervade everything that we do in our communications.
    So there could be some ads, some communications with the marketplace which don't explicitly have low tar/low nicotine in big letters which in fact do fall under this heading or promote the general theme of health reassurance.
    Q. Have you done any research to determine whether smokers looking at those ads see them as health reassurances?
    A. I have not. I have not looked explicitly at the question of: When you see this ad, do you interpret it as health reassurance? What I do know is that when they asked people in the mid-'70s what is the primary improvement you would like to see in your cigarettes, they said low tar/low nicotine. That's the primary improvement that they wanted to see.
    *4 Q. And in fact, filters and low tar and nicotine cigarettes are the primary improvement that took place in cigarettes during the '60s and '70s and '80s; isn't it?
    A. I wouldn't regard them as an improvement at all. Mr. Schindler said that he has no data at RJR and there's no data at all in the industry that shows that low tar/low nicotine cigarettes are in any way safer.
    Q. All right. We'll say design then. The principal changes in the design of cigarettes in the '60s, '70s, '80s, and '90s has been in the area of filters and low tar and nicotine; correct?
    MR. CIRESI: Objection, Your Honor, it's outside the scope. He's not here on the design of cigarettes.
    THE COURT: Sustained.
    MR. BLEAKLEY: I'm not asking him any questions about the actual design, what I am attempting to do, Your Honor, is establish that filters and low tar and nicotine, which is the subject of all of this advertising and is the subject matter of Professor Dolan's testimony.
    THE COURT: I don't think he's ever been qualified as an expert on the design. I don't think that's his area of expertise.
    MR. BLEAKLEY: Well I'll try a different question.
    THE COURT: Okay.
BY MR. BLEAKLEY:
    Q. You would agree with me, would you not, Professor Dolan, that as more and more filters and low tar and nicotine cigarettes came on the market, the cigarette market in the United States became intensely competitive; didn't it?
    A. I would say that coincidence -- coincident with the establishment of this new segment of the market, this health reassurance and the proliferation of brands, as we talked about a number of times about the product line extensions; for example, Merit now being available in -- well Merit coming onto the market first as a low tar brand and then being available in three different types, that there were many new brands introduced to the marketplace during that time period.
    Q. And virtually all of them, if not all of them, were filtered or low tar and nicotine cigarettes; weren't they?
    A. Well I would -- I would be certainly --
    I would be comfortable saying that it is my belief that most of the new product introductions in the mid -- you know, after 1970 had been in the low tar and low -- low nicotine area.
    Q. And the --
    A. The health reassurance segment.
    Q. And the claims that the cigarette companies could make about these cigarettes were regulated by the Federal Trade Commission; weren't they?
    A. I understand that to be the case, yes.
    Q. And the Federal Trade Commission wouldn't allow the cigarette companies to make any claims that they didn't think were supported by scientific evidence.
    MR. CIRESI: Objection, Your Honor, that calls for a legal conclusion. Also the form of the question, counsel is testifying.
    THE COURT: Sustained.
    Q. Incidentally, the health reassurance ads, as you described them, that you showed to the ladies and gentlemen of the jury yesterday, were for Barclay, True and Kool; were they not?
    *5 A. No, that's incorrect.
    Q. They weren't for Barclay?
    A. No.
    Q. And they weren't for True?
    A. They were for True.
    Q. And they weren't for Kool.
    A. No, they were not.
    Q. Has True been a big success in the market?
    A. Well in 1970 I believe it hailed itself as the largest selling brand in the market -- in the -- in the low tar/low nicotine segment of the market. I believe it is still sold today.
    Q. Has it been a big success?
    A. Well that would get us into a long discussion of how you want to define  "success."
    Q. Which you're not prepared to do; is that right?
    A. Well you can ask -- I could --
    I guess you could ask me if I regard it as successful, but - -
    Q. Well what are the biggest selling brands in the marketplace? What have been the biggest selling brands in the marketplace over recent years?
    A. Over the recent years?
    Q. Yeah.
    A. Well I would say the -- you know, certainly the -- obviously the --
    The largest selling ones would be Marlboro, and sticking within the -- sticking within the Philip Morris family for the moment, I mean it would be Marlboro and its different versions, Benson & Hedges, Virginia Slims, Merit I guess would be the Philip Morris ones. RJR, we'd have Winston, Camels, Salems. Brown & Williamson, we'd have -- I believe that's Kool. Right? Lorillard we'd have Newport. So those -- those would be some of the major ones.
    Q. Would you agree with me that the filtered and low tar and nicotine cigarettes were introduced in response to consumer demand?
    A. No, I don't -- I don't know that that's the case.
    Q. You don't think that's what consumers wanted?
    A. I think consumers would like a low tar -- would -- would like a cigarette which reduced their health risk, but they don't want a cigarette which is bogusly proclaimed to do so but in fact does not.
    Q. So my question is: Do you think that low tar and nicotine and filter cigarettes were introduced in response to consumer demand?
    A. I don't believe consumers had demand for a low tar/low nicotine cigarette which in fact provided them no benefit. Consumers have a desire, a demand for a product which is safer, does in fact give them benefits. The situation here is that consumers wanted health reassurance and this health reassurance segment was established because consumers wanted the health reassurance, and in fact they were provided products which were no safer than the products which were already on the market. So --
    Q. Your testimony is that they were no safer.
    A. I -- I know what Mr. Schindler said about this, that he has no data at -- at RJR and that he knows of no other industry data that would show that low tar/low nicotine cigarettes are safer than the other cigarettes.
    Q. Is it your testimony that low tar and nicotine cigarettes are not safer?
    MR. CIRESI: Objection, asked and answered.
    THE COURT: I think he answered it.
    Q. Do you have an expert opinion as to whether low tar and nicotine cigarettes are safer?
    *6 MR. CIRESI: Objection, Your Honor. He wasn't offered as a medical doctor. He reviewed the defendants' documents.
    MR. BLEAKLEY: But he offered the opinion, Your Honor, just a moment ago on his own.
    MR. CIRESI: Your Honor, I object to the form of the question. Counsel's argument is improper.
    THE COURT: Sustained.
BY MR. BLEAKLEY:
    Q. All right. Would you agree with me, Professor Dolan, that filtered and low tar and nicotine cigarettes were introduced -- were actually being called for by doctors and public health authorities?
    MR. CIRESI: Objection to the form of the question. Counsel is testifying.
    THE COURT: Okay. You can answer that.
    A. My understanding is that there was a --
    You know, certainly doctors and health authorities wanted to see a safer product in the marketplace, and there may well have been some doctors who perceived that having a lower tar/low nicotine cigarette in fact was a way to achieve that, not understanding the issues of compensation, which -- the changes in smoking behavior which the people inside the industry did -- did understand.
    Q. Are you testifying about compensation?
    A. I'm sorry?
    Q. Are you testifying here about compensation?
    A. Am I test -- I'm --
    I don't understand your question.
    Q. Do you have any expert knowledge on the issue of compensation?
    MR. CIRESI: Your Honor, he wasn't offered as an expert on compensation. Counsel asked a question. He told him his opinion based on the documents he's reviewed.
    MR. BLEAKLEY: Your Honor, if the witness volunteers information like that, I should be allowed to cross-examine.
    THE COURT: On what?
    MR. BLEAKLEY: On the issue of compensation. He has made a statement about compensation, and I want to find out if he knows what he's talking about.
    THE COURT: All right. I believe you asked him the question, he answered your question.
    He can answer whether he is an expert on compensation.
    A. Oh, I do not consider myself an expert on the issue of compensation.
    Q. Okay. Now, isn't it a fact that doctors and public health authorities made specific calls for the production and sale in the United States of filtered and low tar and nicotine cigarettes?
    MR. CIRESI: Objection, it calls for facts that this witness is not aware of. Counsel is testifying. He's not relating it to anybody. It's outside the scope of direct.
    THE COURT: You can answer that if you know.
    A. I really wouldn't know.
    Q. Would you turn to Exhibit 10 --
    Let me ask you first: --
    A. Okay.
    Q. -- don't the documents that you reviewed in this case in fact reveal that doctors and public health authorities were calling for filtered and low tar and nicotine cigarettes?
    A. I do -- I do understand that -- let's see, it would be what, late '60s or so, I think, the Surgeon General was saying that, you know, there seems to -- you know, the evidence suggests that low tar and low nicotine would be a -- I think had some health benefit associated with it. Subsequently, in later Surgeon General's reports, when we get to the Surgeon General report of 1981, that -- that report concludes there is no such thing as a safe cigarette, there is no safe level of compensation -- there is no safe level of consumption, and in fact says the move to low tar/low nicotine, there are some caveats that you have to adopt with respect to it. Number one is the issue of the changing of the smoking behavior. Number two is the issue of whether in fact, when that smoking behavior is changed, whether the smoke goes deeper into the lungs and now causes a different kind of cancer, and also the issue of additives. I mean it says, you know, there is no -- there's no substitute, really, for quitting.
    *7 So I think the Surgeon General adopted a much more cautious tone over time about what the benefits of low tar and low nicotine might be.
    Q. So the answer to my question is that, yes, public health authorities did call for the production and sale of filtered and low tar and nicotine cigarettes; right?
    MR. CIRESI: Objection to the form of the question, a characterization of the testimony.
    THE COURT: I think it's been answered.
    Q. Would you turn to Exhibit 10602.
    A. Out of mine or yours?
    Q. That's a plaintiffs' exhibit. I'm sorry.
    A. Okay.
    Q. Yes, one of the exhibits that you referred to yesterday, a BATCo Ltd. document.
    Do you have that document in front of you?
    A. I do.
    Q. Would you turn to the page that's Bates numbered 583.
    A. Uh-huh.
    Q. Yesterday you referred the jury's attention to paragraph 14 and 15 --
    A. Uh-huh.
    Q. -- about explicit health claims and implied health claims; right?
    A. I -- I did refer to those points, uh-huh.
    Q. Paragraph 16, which you did not bring to the attention of the jury yesterday, says, "Reduction in biological activity per cigarette (rather than specific activity) will continue to be accepted by doctors as desirable." Right?
    A. I believe you read that correctly, yes.
    Q. So according to one of the documents upon which you relied, the reduction in biological activity per cigarette will continue to be accepted by doctors as desirable; right?
    A. You read it correctly again.
    Q. Are you aware of the fact that Dr. Ernst Wynder recommended to Congress that --
    MR. CIRESI: Your Honor -- excuse me, counsel, I hate to interrupt you, but it's an entirely improper form of question. Counsel is testifying.
    MR. BLEAKLEY: Your Honor, I object to --
    THE COURT: Do you have --
    MR. BLEAKLEY: -- the repeated interruptions of my questions, especially when counsel then tells me the form of my question is objectionable when I haven't even been permitted to finish it.
    THE COURT: Do you have a document that you're going to be introducing?
    MR. BLEAKLEY: Yes, I do.
    THE COURT: Okay.
BY MR. BLEAKLEY:
    Q. Actually, let me go to -- let me go to the Surgeon General's report that you just discussed, the 1981 Surgeon General's report. Do you remember the 1981 Surgeon General's report in your testimony just a moment ago?
    A. I --
    Q. Remember what the subject matter of the 1981 Surgeon General's report was?
    A. Let's see, I believe it was health -- healthier cigarettes or something along -- I -- I honestly don't remember exactly what the title was.
    Q. Would you take a look at tab 45 in -- in the second of the three binders that we gave you.
    A. Sorry. Here I am. Okay.
    Q. Now did I understand you to be saying that the 1981 Surgeon General's report no longer recommended low tar and nicotine cigarettes?
    A. It -- as I said, it affirmed, I -- I believe, the -- the earlier Surgeon General's reports, saying that basically the idea of low -- moving to low tar and no -- low nicotine cigarettes seems to be equated with a potential improvement in health, particularly with respect to lung cancer. However, it then does go on to add the caveat that we talked about a moment ago and it said while it reaffirms the earlier report, it adopts a more cautious tone and says, you know, there's -- there's nothing like quitting.
    *8 There's the issue of compensation, there may be new diseases as people adjust their behavior in smoking and take the smoke deeper into their lungs, and we're not so sure about the new additives that have gone in. So it reaffirms what the earlier reports had said, but then adds these important caveats.
    Q. Would you turn to page 200, please. Do you see the paragraph that begins with "The U.S. Public Health Service...?"
    A. Yes, I see that.
    Q. And what that says down toward the bottom of the sentence that begins  "In 1966...," "In 1966, the PHS" --
    That's Public Health Service, right?
    A. I would --
    Yeah, right.
    Q. -- "the Public Health Service submitted to Congress (42) the Technical Report on 'Tar' and Nicotine. On the basis of the clear demonstrated -- clear demonstration of cigarette dose- dependent risks of several diseases, the PHS concluded:
    "The preponderance of scientific evidence strongly suggests that the lower the 'tar' and nicotine content of cigarette smoke, the less harmful would be the effect.
    "We recommend...the progressive reduction of the 'tar' and nicotine content of cigarette smoke."
    Right?
    A. Well there's a few dot dot dots in after the "recommend," saying that something has been taken out between -- in that last sentence, but other than that, right.
    Q. Now would you turn to page 18 of the 1981 Surgeon General's report. Now in this, the Surgeon General is not referring back to 1966, but making a statement as of 1981; isn't he?
    A. I'd have to go back and sort of check that, unless you just want me to accept that.
    Q. Why don't you accept it for the moment.
    A. Okay. Fine.
    Q. What the Surgeon General says is, "Today's filter-tipped, lower tar and nicotine cigarettes produce lower rates of lung cancer than do their higher tar and nicotine predecessors." See that?
    A. I do see that.
    Q. And then down in paragraph four he says, "The occurrence of laryngeal cancer has been reported to be reduced among smokers who use filtered cigarettes, compared with those who use non- filtered cigarettes."
    A. Uh-huh. Okay.
    Q. Now have you reviewed the testimony given by Professor -- Dr. Samet here in this trial?
    A. Have I reviewed it? No, I have not.
    Q. Are you aware of the fact that Dr. Samet said that there has been a reduction in lung cancer after the introduction of low tar and nicotine cigarettes?
    MR. CIRESI: I'm going to object -- object to the characterization of Dr. Samet's testimony.
    THE COURT: Sustained.
    MR. BLEAKLEY: Well Your Honor, I think it's an accurate characterization of what Dr. Samet said.
    THE COURT: Counsel, counsel, the objection was sustained. Do you have another question?
    MR. BLEAKLEY: May I refer the witness to Dr. Samet's testimony?
    THE COURT: If he hasn't reviewed it, no.
BY MR. BLEAKLEY:
    Q. You haven't reviewed it?
    A. Oh, no, I have not.
    Q. And no one has told you what Dr. Samet testified about this, on this subject?
    *9 A. No, I don't believe so.
    Q. And you didn't ask what the evidence was about the low tar and nicotine and what effect it has on --
    MR. CIRESI: Objection, Your Honor, it's irrelevant.
    THE COURT: You can answer.
    A. I didn't ask about the evidence?
    Q. Yeah.
    A. I did -- I did, as we --
    As I got into the analysis of the low -- low tar/low nicotine cigarettes, I did pursue the issue of what were the true health impacts of -- of that, yes.
    Q. You looked into it, but you didn't read what Dr. Samet said here in this trial.
    A. Well you could put together the two answers that I've just given and say that, right. I did not review what Dr. Samet said, but I examined the issue.
    Q. Now let's talk for just a moment about brand loyalty and brand switching, which was the fourth of your list of four objectives of what you describe as the defendants' total marketing and communications program. Right?
    A. Right.
    Q. Isn't it a fact that the principal objective of the defendants' advertising and marketing programs over the past years has been brand loyalty and brand switching?
    A. No, I -- as I said yesterday, you know, I -- I take those four objectives that we talked about and kind of look at them as a whole, and I don't really try to separate out -- I think it's improper to try to separate out which one of those four was more important or less important or what the priority order was. It's all part of the total marketing system.
    Q. Isn't it a fact that since industry demand is essentially fixed, the only way to increase sales is through share acquisition; i.e., at the cost of a competitor?
    A. No.
    Q. Didn't you say that?
    A. I quoted someone else saying that as they referred to the cigarette industry in the years 1890 to 1946.
    Q. Would you refer to tab 46, please.
    MR. CIRESI: May we have an exhibit number, please?
    MR. BLEAKLEY: Sorry. Exhibit No. SM000077.
    Q. This is an article entitled "MODELS OF COMPETITION: A REVIEW OF THEORY AND EMPIRICAL EVIDENCE" written by Robert J. Dolan, Harvard University.
    MR. CIRESI: Excuse me, counsel, may I have that again?
    MR. BLEAKLEY: Sorry. SM000077.
    Do you have it, Mr. Ciresi? Did you find it?
    MR. CIRESI: I have an empty folder, but you go ahead and proceed.
    MR. BLEAKLEY: That happened to me yesterday. Very frustrating. I know the feeling.
    MR. CIRESI: I'm not frustrated, counsel. You just proceed.
BY MR. BLEAKLEY:
    Q. Professor Dolan, do you have it?
    A. Oh, yes. I have it.
    Q. And that Robert Dolan is you; is it not?
    A. It sure is. That's me.
    Q. You wrote this article.
    And would you turn to page 232, please. Are you on page 232?
    A. Yeah, I'm there.
    THE COURT: Counsel, may I ask what tab this is, tab number?
    MR. BLEAKLEY: Sorry, I thought I said it. Tab 46.
    THE COURT: All right. I thought you said tab 45.
    MR. BLEAKLEY: I probably did. I apologize.
    THE COURT: Go ahead, I've got it.
    *10 MR. BLEAKLEY: Tab 46.
BY MR. BLEAKLEY:
    Q. Page 232.
    A. Uh-huh.
    Q. Entitled "Cigarette Motorcycle."
    A. Uh-huh.
    Q. You said, "Generic demands for cigarettes is price inelastic while selective demand is price elastic (Tennant 1961)," and then you went on to say, "Since industry demand is essentially fixed, the only way to increase sales is through share acquisition; i.e., at the cost of a competitor." Right?
    A. Well you read correctly what is --
    We don't want to put this one up on the --
    Q. I haven't offered it in evidence.
    A. Oh, I see. Okay. Sorry. Forgot the rules.
    That's -- that's what's written here. I mean basically, again, as I said a moment ago, this was a study which was done of the tobacco industry covering the years from 1890 to 1946, and Professor Tennant in this article and what I'm quoting here, generic demands for cigarette is price inelastic, right, that's what he's referring to there. That's what I'm referring to there, not anything about advertising. So it's saying the size of the market does not change with the price level. And, you know, but selective demand -- and he's looking at cigarettes which were -- some of which were -- he's looking at people switching from brands which were 10 cents to brands which were seven cents and saying that brand shares are -- are elastic. But I think -- I think most of us -- well I -- I would certainly kind of look at the market of recent times and say, "Gee, is the size of the market impacted by excise taxes? Is the size of the market impacted by the way that prices of cigarettes have gone up in the 1980s?" Certainly my judgment is that there has been an effect of price on the overall size of the market.
    Q. But what you said in this article was, "Since industry demand is essentially fixed...," is that not what you said?
    A. I'm -- I'm sort of carrying on with his analysis of the industry from 19 -- 1890 to 1946.
    Q. Isn't it a fact that industry demand is essentially fixed and indeed declining?
    A. I --
    MR. CIRESI: Excuse me, professor. Your Honor, what time period? This one is outside the scope of this case. Is he now --
    THE COURT: Yeah. Can you give us a time period, please?
    Q. Hasn't industry demand been fixed or declining for the last 30 years?
    A. Well those are two different things. Fixed --
    It has been declining. My -- the way I have it in my head, it goes -- starts to go down, what, in 1982 or so, something around there.
    Q. That's about right. Sorry.
    A. Is that right? All right.
    But the issue of whether it's fixed or not is an entirely different issue from whether the number of cigarettes sold has been going down or not. "Fixed" means does the size of the market -- is it responsive to the marketing and communications efforts of the manufacturers? So fixed and whether you're going down or not are totally different concepts.
    Q. Would you turn to tab three.
    MR. CIRESI: May we have an exhibit number, counsel?
    *11 MR. BLEAKLEY: Exhibit MD000113, the 1979 report of the Surgeon General of the United States.
    Q. Do you have that?
    A. Oh, yeah, I have it.
    Q. Would you turn to page 18-23, and refer you specifically to the paragraph that starts with the word "Whiteside...."
    A. Okay.
    Q. Do you see in the middle of that page, "As the cigarette industry has asserted, the major action of cigarette advertising now seems to be to shift brand preferences, to alter market shares for a particular brand?"
    A. Do I see that --
    Q. Yes.
    A. -- statement?
    Q. Yes.
    A. I do see that statement.
    Q. And now would you turn back to the 1987 Economic Report of the President, and to the statement that we referred to before.
    A. So are we done with Mr. Whiteside's speculative analysis?
    MR. BLEAKLEY: Move to strike the commentary, Your Honor.
    Q. Yes, we're finished with that.
    THE COURT: Okay. That will be stricken.
    A. Okay.
    Q. Page 186 of the Economic Report of the President --
    A. Right.
    Q. -- said, "As with many products, advertising mainly shifts consumers among brands." That's the Economic Report of the President. Do you see that?
    A. Yes, I do.
    Q. So I repeat the question I asked before: Hasn't the primary objective of the cigarette companies' advertising been brand switching and brand loyalty?
    A. I -- I would not agree with that conclusion.
    Q. Okay.
    A. I -- I --
    My conclusion, based on my review of the internal company documents which the people who are writing these things did not have access to, is that the role of -- of advertising was a part of the total marketing and communications package, and that total marketing and communications package had four purposes and impacts in the marketplace.
    Q. Based on your review of approximately 4,000 out of 250,000 marketing documents that were produced, a substantial percentage of which were ads; right?
    MR. CIRESI: Your Honor, I'm going to object to the form of the question. Counsel is testifying.
    THE COURT: Restate the question, counsel.
    MR. BLEAKLEY: I'll withdraw it, Your Honor.
BY MR. BLEAKLEY:
    Q. Now, we've talked about your opinion regarding the objectives of what you describe as defendants' total marketing and communications programs. Yesterday you were asked whether or not your review of the selected documents you saw permitted you to conclude that the defendants' objective of keeping people smoking had been successful. Do you remember that?
    A. I don't recall that question specifically, but may -- maybe -- maybe I had -- was asked that one specifically.
    Q. You showed four documents that you said were representative that showed the success of the defendants' objectives. Do you remember that?
    A. That was --
    Are we referring to Marlboro, the two Newports and -- I forget what the other one was now. Are those the four you're referring to?
    Q. B&W.
    Those are the documents, yes.
    A. But that was under the heading of inducing people to start smoking,. --
    *12 Q. I'm sorry, I misspoke.
    A. -- not quit.
    Q. Success in getting people to start. And you cited those four documents.
    A. I cited those four in particular, but I think it comes out of the more general understanding of the themes that you pick up in the -- in the documents.
    Q. And your -- your testimony is that they're representative; right?
    A. I'm sorry, I couldn't hear you.
    Q. Your testimony is that those four documents were representative.
    A. My testimony is that those four were illustrations -- representative illustrations of the general point.
    Q. Now, have you done any research to permit you to opine on the question of whether the communications of the tobacco industry have had any impact on smokers?
    A. I would say that the analysis which -- which I've done was directed to the issue of understanding what those communications efforts were, how they fit in with the rest of the elements of the total marketing and communication package, what their objectives were, what their impacts were.
    Q. Well let me restate the question then.
    Apart from the approximately 4,000 documents that you reviewed, have you done any research on the effect or impact of defendants' communications programs?
    A. Well I set out for you yesterday what the process was via which I did my research in this -- in this case, and as I did mention, there were a number of journal articles that I looked at. But again, I'll reiterate what I said yesterday. My -- my opinions in my expert report, which are the same opinions that I express when I come to testify here, were based on my review of the internal documents.
    Q. Have you done any research on the attitudes and beliefs of smokers about the health hazards of smoking?
    A. As -- as contained in the -- in the documents that I -- that I reviewed, that was one of the issues I looked at, yes.
    Q. Apart from your review of approximately 4,000 selected documents, have you done any research on the attitudes and beliefs of smokers about the health hazards of smoking?
    A. Well again, I -- I -- I guess I'm just a little confused about --
    My previous answer -- I mean I've described --
    We started out with me describing my research process, and that research process covers the issue of customers' -- of smokers' attitudes and beliefs about the health hazards of smoking, so it comes from the 4,000, actually 5400 documents that I've looked at in this -- in this case.
    Q. Have you reviewed any of the polls that have been taken, either here in Minnesota or elsewhere, about the beliefs and attitudes of smokers regarding health hazards of smoking?
    A. Well certainly contained within the -- the documents which we -- we've referred to previously, there were -- there were various polls in those -- in those documents which I reviewed, and in the set of documents that you sent to me to look at before my testimony here there were more polls, and I reviewed those.
    Q. Did you do any sort of survey of smokers to determine their beliefs or --
    *13 A. Did I?
    Q. -- attitudes?
    Yes, you.
    A. Did I conduct my own survey?
    Q. Yes.
    A. No, I did not conduct my own survey.
    Q. Or have it conducted by anyone else?
    A. No, I did not direct anyone else to conduct a survey for me. There were a large number of large-scale surveys which were -- which had already been done.
    Q. Have you done any research on Medicaid recipients in Minnesota or elsewhere?
    A. Well I've raised --
    I've read the depositions of the Medicaid recipients as the documents -- which are involved in this case. Other than that I have not independently conducted -- conducted research on them.
    Q. And so you don't know what the beliefs and attitudes about the health hazards of smoking there are for Medicaid recipients.
    A. Well I didn't say that at all.
    Q. Well you do know?
    A. Could I have a chance to answer my -- my -- my question, to -- to deliver my question -- my answer? Sorry.
    Q. I apologize.
    A. You know, I said I -- I read 13 Medicaid depositions, and in there there are some beliefs for those 13 people about their perceptions of the health hazards of smoking. That's what -- that's what I did. Now, you know, if you want to characterize -- I guess you can characterize that how you want, but that's what I did. So does that give me -- is that a broad sampling of Medicaid recipients? No. Is it reading the 13 depositions that were available in this case? Yes.
    Q. Did you do any sort of review of the activities of anti- smoking groups in Minnesota?
    A. Again, I'm right where I was a minute ago, such that it was in the documents which were part of the set that I reviewed, I was aware of it, I paid attention to it as I -- as I did my analysis. I did not, again, did not go outside the documents which we've already talked about in doing other research.
    Q. Did you review any of the educational materials used by the Minnesota public school systems to educate the young people of Minnesota about the health hazards of smoking and addictiveness?
    A. I certainly am aware of -- of the -- of the curriculum activities. I don't know that I went down to the level of detail of looking exactly -- at exactly what materials were used, but I -- I am aware of those general -- of the existence of those general efforts.
    Q. Have you made any effort to determine or to estimate the impact of all of the activities of anti-smoking groups, anti- smoking legislation, public education?
    A. Well certainly I did consider the -- as I mentioned when we first started, that when you're looking at your marketing and communications efforts, you have to understand the information environment in which they are taking place. So I generally try -- did try to have an assessment of -- to make an assessment of what was going on, what was being said by others about the industry as well as what was being said by the manufacturers.
    Q. The "information environment" is a term that marketing experts use frequently; isn't it?
    *14 A. Well it's -- it's a term you hear around marketing circles, right.
    Q. And the -- I'm sorry. And the -- the information environment refers to all of the sources of information and knowledge that go into making up people's beliefs and attitudes; isn't that right?
    A. Yeah, that -- I think that's a fair characterization. If you have -- they're targeting a particular customer, you want to understand what's in that person's mind, and, you know, what is shaping their attitudes and behaviors, so you would like to be aware of all the kind of information that they're processing.
    Q. And you know for a fact that the Surgeon General's reports have been widely publicized in the press; right?
    A. Well I -- I do know that they've been published in newspapers and so forth. I'm not sure how many 16-year-olds are reading them as they're published in the newspapers, but I -- I do know that the Surgeon General's reports were generally reported upon in the press, yes.
    Q. You -- you don't know whether 16-year-olds did or did not read the articles that appeared in the newspapers; do you?
    A. I have not conducted a survey, nor do I recall seeing a survey of 16- year-olds' consumption of the front page of the Minnesota newspapers as the Surgeon General's report was written about.
    Q. You do know, however, that 16-year-olds in the state of Minnesota have been taught about the health hazards of smoking and the addictiveness of smoking for decades; don't you?
    A. I do understand that there certainly has been a history of health education, and particularly smoking, the health hazards associated with smoking in the Minnesota schools. I don't know exactly what period in time they were instituted and how they've changed over time. But I certainly do know that there was a long history of them within the state, yes.
    Q. And you do know that anti-smoking groups have been very active in the state of Minnesota for a long time, too; don't you?
    A. I -- I don't really know too much of the details of the extent of their activity, but I -- but I do know that -- I did see in my review of the documents that there were a number of anti- smoking groups which were active, yes.
    Q. And you do know that the polls that you have reviewed show that virtually everyone in Minnesota has believed that cigarette smoking is hazardous for the last 25 years or so; do you not?
    MR. CIRESI: Objection, that's a misstatement of polls, and it's also counsel's testifying.
    THE COURT: Sustained.
    Q. Now let's look at the other side of the coin here. You talked yesterday about The Tobacco Institute. Do you know how many people in Minnesota have ever seen a press release of The Tobacco Institute?
    A. Have ever seen a press release?
    Q. Yes.
    A. Gee, I would -- I don't -- I -- I don't know. I'd be surprised if it were a lot since basically a press release is given to the press to influence what they write about an issue rather than distributed to individuals.
    *15 Q. Do you know how many of the press releases given to the press in Minnesota have been read by the people of Minnesota?
    A. I'll need that read back. I'm sorry. I missed it.
    Q. It was a clumsy question. Why don't I try a different one.
    A. Okay, fine.
    Q. Okay?
    You said that press releases from organizations like The Tobacco Institute are given to the press; right?
    A. That's how I generally think of it.
    Q. And then the press decides whether to print them or not; right?
    A. Well I don't think they so much print them as use the information in them in their article.
    Q. Okay. Do you know how many have been reprinted in exactly that form or any other form in newspapers in the state of Minnesota?
    A. I'm sorry -- I'm sorry, I -- I --
    How many of them have been reprinted --
    Q. Yes.
    A. -- in that form or any other form?
    Q. Yes. What I'm trying to get at is have you made any effort to determine how effective what you call the communications program of the tobacco industry has been in the state of Minnesota?
    A. Oh, particularly in the state of Minnesota. Well my -- my analysis was really at the -- as I looked at the marketing campaigns, the marketing -- total marketing/communications campaigns of the cigarette industry, I really looked at the national -- you know, kind of looked at it from a national point of -- point of view. And by and large the programs are -- you know, the sort of direction, the strategies are national programs. I did not kind of look down at the level of saying exactly -- I -- I did not come down to the state level other -- other than to understand what was going on in the state along the dimensions that you talked about.
    Q. Well let's talk about the national level then.
    A. Okay.
    Q. Have you made any kind of systematic effort to compare the communications from the tobacco industry on smoking-and-health issues against all of the information available to people from anti-smoking groups, legislation, Surgeon General's reports, polls, to compare the two to make any analysis of the two?
    MR. CIRESI: I'm going to object to the form of the question. It's compound.
    THE COURT: Yes, I think you're going to have to rephrase that.
    MR. BLEAKLEY: All right. I'll try to rephrase it, Your Honor.
BY MR. BLEAKLEY:
    Q. What I'm trying to get at is whether or not you have sat down and taken all of the communications that you learned about in reading your selected 4,000 documents and compared them to all of the other information in the information environment that people were receiving and make an analysis of it? Have you done that?
    A. I wouldn't say I compared them. What I did is integrate them. I try to --
    I don't say it's A versus B. I put A and B together so that I get a total understanding.
    Q. And how did you do that?
    A. How did I do that?
    Q. Yes. How did you do it?
    A. Via my review and research in the, quote, selected 4,000 documents.
    Q. So we're back to the 4,000 selected documents; right?
    *16 A. Yes. To use your terminology, yes.
    Q. At least half of which were ads; --
    MR. CIRESI: Your Honor, --
    Q. -- correct?
    MR. CIRESI: -- objection, now asked and answered.
    THE COURT: You can answer it again if you want.
    A. I believe the -- again, in -- in your counting system of a one-page ad counts as a document and a hundred-page marketing document, marketing plan counts as a document, the majority of them were ads. If you put them on a scale, as I said yesterday, the ads would lose miserably to the other -- the non-ads.
    MR. BLEAKLEY: I have no further questions, Your Honor.
    THE COURT: Should we take a break now, or --
    It's about time. Is that all right?
    MR. CIRESI: Fine, Your Honor.
    THE COURT: Why don't we take a short recess.
    THE CLERK: Court stands in recess.
 (Recess taken.)
    THE CLERK: All rise. Court is again in session.
 (Jury enters the courtroom.)
    THE CLERK: Please be seated.
    THE COURT: Counsel.
    MR. CIRESI: Thank you, Your Honor.
BY MR. CIRESI:
    Q. Good morning, professor.
    A. Good morning, Mr. Ciresi.
    MR. CIRESI: Good morning, ladies and gentlemen.
 (Collective "Good morning.")
    Q. Professor, after your expert report, did you look at additional documents?
    A. I did. I continued my review and analysis.
    Q. Okay. How many total documents did you look at?
    A. Five thousand four hundred, I believe.
    Q. Now are you aware of how many documents Mr. Bible of Philip Morris looked at of his own documents?
    A. No, I don't know.
    MR. BLEAKLEY: Objection, Your Honor, that's not relevant.
    THE COURT: Sustained.
    Q. Can you direct your attention to Exhibit 12493, which was the RJR presentation to the board of directors of September 30, 1974. It's in volume one, sir.
    A. Yes.
    Q. And you recall that Mr. Bleakley asked you a series of questions regarding whether there was anything in there about the target market after the first six charts? Do you remember that?
    A. I do recall that, yes.
    Q. Can you direct your attention to the Bates number page 1316.
    Do you have that, sir?
    A. I do.
    Q. And that's the point where the reference was made to the book store at Harvard Square. Do you see that?
    A. Right, I do. They're referring to Vantage cigarettes.
    Q. Correct. And do they talk about targeted efforts, right below that, against young adults?
    A. Right. Quite -- quite clearly, as you see there, what they say,  "Advertising spending has been increased with more targeted efforts against young adults." You know, clearly, clearly the young adults being the target market.
    Q. And right there in the next chart, chart 14, do they talk about increased media efforts toward young adults?
    A. Yes, they do.
    Q. Now Mr. Bleakley also asked you a number of questions concerning the Surgeon General's report --
    A. Right.
    Q. -- of 1981. Do you recall that, sir?
    A. I do.
    Q. I believe that was in tab 45 of the defendants' documents, if you could pull that up. Do you recall that?
    *17 A. Yes. Oh, yes, I do.
    Q. And was that the right tab? I wasn't sure if I had that right.
    A. Yes, that's the right tab.
    Q. Now he directed your attention, I believe, to pages 200 and page 18. Do you recall that?
    A. I honestly don't recall the specific page numbers, but that could well be.
    Q. All right. If you take a look at page 200 and page 18, could you just confirm that those are the pages he directed your attention to?
    A. Okay. Well 18, yes, I recognize that, and yeah, 200, yeah, right.
    Q. Okay.
    A. You refreshed my memory that those were the two pages, yes.
    Q. Now do you recall that you, in response to a question, told him about the statements of the Surgeon General over succeeding years with respect to low tar and low nicotine cigarettes?
    A. Yes, I recall that I did that.
    Q. Okay. Could you go to the preface of the Surgeon General's report there.
    A. In tab 45?
    Q. Yes.
    A. Well I was looking for it earlier in response to the direct -- to the cross-examination. I couldn't find it.
    Q. It's not there?
    A. It doesn't seem to be here.
    Q. All right. Well we'll put up the whole part here. Could you put up preface? Maybe you could use the -- the monitor right next to you.
    A. I'll use this. Fine.
    Q. Okay?
    Now on the preface, which is part of the complete 1981 Surgeon General's report, is there a history provided by the Surgeon General with regard to low tar and low nicotine?
    A. Yes. Yes.
    Q. All right. I'd like to direct your attention, then, to the third paragraph of the preface where it starts, "In 1966...," do you see that?
    A. I do see that.
    Q. Okay.
    A. That's exactly what I was looking for earlier.
    Q. I want to read some -- some parts of this.
    "In 1966, the Public Health Service held that 'The preponderance of scientific evidence strongly suggests that the lower the tar and nicotine content of cigarette smoke, the less harmful would be the effect."' Do you see that?
    A. I do.
    Q. And you related to that on your direct -- or cross- examination; did you not?
    A. Yes, I did.
    Q. The Surgeon General's report of 1981 then goes on to state, "In 1979, the Public Health Service confirmed this statement, citing new evidence, but was more cautious. 'In presenting information on the public,' I wrote in the Preface to the 1979 Report, 'three caveats are in order: consumers should be advised to consider not only levels of tar and nicotine but also, paren, (when the evidence becomes available) levels of other tobacco smoke constituents, including carbon monoxide. They should be warned that, in shifting to a less hazardous cigarette, they may in fact increase their hazard if they begin smoking more cigarettes or inhaling more deeply. And, most of all, they should be cautioned that even the lowest yield of cigarettes presents health hazards very much higher than would be encountered if they smoked no cigarettes at all, and that the single most effective way to reduce the hazards associated with smoking is to quit."'
    *18 Now, sir, in responding to questions by Mr. Bleakley, did you give that chronology with regard to the succeeding Surgeon General's reports?
    A. The general spirit of that. I think I missed the point about one of the caveats being to look at things other than -- other than tar and nicotine. But this was certainly the sense that I was trying to convey in my answer.
    Q. Okay. Now the '81 report goes on to state in the preface, "In this 1981 Report, the Public Service has reviewed the question again and in far greater depth than before. Overall, our judgment is unchanged from that of 1996 and ' 79; smokers who are unwilling or as yet unable to quit are well advised to switch to cigarettes yielding less tar and nicotine, provided they do not increase their smoking or change their smoking in other ways. But our new review raises new questions and suggests an even more cautious approach to the issue.
    "Here are the basic findings of this Report:"
    Now sir, the basic findings then are set forth below there; is that correct?
    A. That's correct.
    Q. And these were some of the findings that you related in your answer on cross-examination; correct?
    A. Yes, they were.
    Q. Okay. Number one, "There is no safe cigarette and no safe level of consumption."
    Number two, "Smoking cigarettes with lower yields of 'tar' and nicotine reduces the risk of lung cancer and, to some extent, improves the smoker's chance for longer life, provided there is no compensatory increase in the amount smoked. However, the benefits are minimal in comparison with giving up cigarettes entirely. The single most effective way to reduce hazards of smoking continues to be that of quitting entirely."
    Number three, "It is not clear what reductions in risks may occur in the case of diseases other than lung cancer. The evidence in the case of cardiovascular disease is too limited to warrant a conclusion, nor is there enough information on which to base a judgment in the case of chronic obstructive lung disease. In the case of smoking's effects on the fetus and newborn, there is no evidence that changing to a lower 'tar' and nicotine cigarette has any effect at all on reducing risk."
    Number five, "Smokers may increase the number of cigarettes they smoke and inhale more deeply when they switch to lower yield cigarettes. Compensatory behavior may negate any advantage of the lower yield product or even increase the health risk."
    Six, "The 'tar' and nicotine yields obtained by present testing methods do not correspond to the dosages that the individual smokers receive: in some cases they may seriously underestimate these dosages."
    Number seven, "A final question is unresolved, whether the new cigarettes being produced today introduce new risks through their design, filtering mechanisms, tobacco ingredients, or additives. The chief concern is additives. The Public Health Service has been unable to assess the relative risks of tobacco -- of cigarette additives because information was not available from manufacturers as to what these additives are."
    *19 Now sir, that also is part of the 1981 report?
    A. That's a part of the entire report, yes.
    Q. Okay. And can you direct your attention to page seven of the 1981 report, and specifically to the bottom, the second-to-the- last sentence. "As discussed...," do you see that, sir?
    A. I do.
    Q. "As discussed in this report, the recent reductions in 'tar' yield have been accomplished by altering tobacco growth and processing and by changes in cigarette manufacture. These changes may have produced a 'tar' with a different composition from that of old higher 'tar' cigarettes and may have changed the concentrations of some of the constituents contained in the gas phase of the smoke."
    Now is that another part that you had read in this Surgeon General's report?
    A. It is.
    Q. And can you direct your attention to page 99.
    A. I don't have that page either.
    Q. That's not either --
    Okay. We'll put that up on the overhead. This deals with flavor additives, and I -- I would direct your attention to the last paragraph, and is it reported there, "The exact delineation of the chemical structure of the additives, their pyrolytic products, the possible carcinogenic properties, and the quantities found in smoke of lower 'tar' cigarettes is urgently needed in order to assure the customer that the filter, lower 'tar' and nicotine cigarette does not carry additional or new health risks." Do you see that?
    A. I do.
    Q. And earlier in this Surgeon General's report it was reported that the defendants did not provide that information; correct?
    A. That's correct.
    Q. And finally, sir, can you direct your attention to page 181 of the Surgeon General's report of 1981.
    A. I have that one.
    Q. And at the top of that page it talks about compensatory smoking. Do you see that?
    A. Yes, I do.
    Q. Is it reported there in the 1981 report that, "Compensatory smoking is central to the question of the public health benefits of lower 'tar' and nicotine cigarettes. The frequency and extent of compensatory smoking should be measured in detail in order to determine whether smokers who switch to lower 'tar' and nicotine cigarettes actually inhale fewer harmful compounds." Is that reported?
    A. Yes, it is reported.
    Q. And is that consistent with what you found in your investigation, sir?
    A. Yes, it was.
    MR. CIRESI: I have no further questions. Thank you, professor.
    MR. BLEAKLEY: I have two questions.
    THE COURT: Is this something -- an area that's new?
    MR. BLEAKLEY: Yes. Very short.
    THE COURT: All right.
BY MR. BLEAKLEY:
    Q. Professor Dolan, this 1981 Surgeon General's report was a public document; was it not?
    A. I think so, yes.
    Q. And widely published in the public press throughout the United States; wasn't it?
    A. Widely published in --
    Q. Yes, widely reported in the public press throughout the United States?
    A. I believe it was.
    MR. BLEAKLEY: That's all I have, Your Honor.
    *20 MR. CIRESI: No further questions, Your Honor.
    THE COURT: You may step down.
    THE WITNESS: Thank you, Your Honor.
 (Witness excused.)
    MR. GILL: Good morning, Your Honor.
    THE COURT: Good morning.
    MR. GILL: The state of Minnesota and Blue Cross Blue Shield call Professor Adam Jaffe.
 (Witness sworn.)
    THE CLERK: Please state your name and spell your last name.
    THE WITNESS: My name is Adam B. as in Benjamin, Jaffe, J-a- f-f-e.
    THE CLERK: Thank you. You may be seated.
    MR. GILL: Good morning, ladies and gentlemen.
 (Collective "Good morning.")
    ADAM B. JAFFE called as a witness, being first duly sworn, was examined and testified s follow:
BY MR. GILL:
    Q. Good morning, Professor Jaffe.
    A. Good morning, Mr. Gill.
    Q. Would you introduce yourself to the members of the jury, please.
    A. I'm Adam Jaffe.
    Q. And where you live, Professor Jaffe?
    A. I live just outside of Boston, Massachusetts.
    Q. And is your mike turned on, Professor Jaffe?
    A. No, it is not.
    How is that?
    Q. That's much better.
    I think you told us that you live just outside of Boston?
    A. That's correct.
    Q. Are you married?
    A. I am.
    Q. And do you and your wife have any children?
    A. Yes, I have a boy and a girl.
    Q. And what do you do, Professor Jaffe, for a living?
    A. I'm professor of economics at Brandeis University, which is just outside Boston, and I'm also a partner in an economic consulting firm in the Boston area.
    Q. A little over a year ago, Professor Jaffe, did you agree to review information concerning the competitive behavior of defendants?
    A. Yes, I did.
    Q. And do you have in mind the issues that you'll be addressing during your testimony?
    A. Yes, I do.
    Q. What are those issues?
    A. Whether the defendants engaged in an antitrust conspiracy to suppress fundamental competition in the U.S. cigarette market with respect to the smoking-and-health issue, and if so, whether that conspiracy unreasonably restrained trade in that market.
    Q. All right. Professor Jaffe, I think you've given us a mouthful. Let me see if we can break that down a little bit in terms of some of the particular terms that you used.
    You first mentioned antitrust conspiracy. What is an antitrust conspiracy?
    A. From an economist's point of view, an antitrust conspiracy is an agreement among the firms in an industry to suppress or restrict competition among themselves.
    Q. And you mentioned "fundamental competition." What type of competition is fundamental competition?
    A. Well when I talked about fundamental competition with respect to smoking and health, what I meant was significant or important competition that would have an effect on the market.
    Q. And then you mentioned an "unreasonable restraint of trade." What do you mean by that term?
    A. Well an unreasonable restraint of trade is one that has more than a minimal impact on the market and which does not have any pro-competitive or legitimate justifications.
    *21 Q. Now have you reached opinions in connection with the issues of antitrust conspiracy and economic impact?
    A. Yes, I have.
    Q. All right. Before I ask you to explain your opinions, I'd like to have you cover the qualifications that you bring to the effort to analyze the defendants' anti-competitive behavior. Are you agreeable to doing that?
    A. Okay.
    Q. Let's start with your educational background. Would you summarize that, please.
    A. Yes. I did my undergraduate work in chemistry at the Massachusetts Institute of Technology, and I got that degree in 1976, and then I stayed at MIT and got a master's degree in technology and policy from MIT, and then did doctoral work in economics at Harvard University, and I got the Ph.D. degree in economics in 1985.
    Q. And in connection with earning your doctorate degree, I take it you were required to do a thesis or a dissertation?
    A. That's correct.
    Q. What did your dissertation deal with?
    A. My dissertation looked at the process of research and development among firms in the private sector in the U.S. economy.
    Q. All right. Now in addition to doing your thesis work as you've just described, how else did your educational background come into play in addressing and analyzing issues of antitrust conspiracy and economic impact?
    A. Well my undergraduate science training in the technology and policy degrees that I did prepared me generally to look at the research process in the private sector and its consequences, but then more specifically in my Ph.D. work I focused on the areas of antitrust economics as well as the economics of research and development and innovation and its consequences in the economy.
    Q. All right. You introduced a new term to us in that answer, "antitrust economics." What do you mean by that term?
    A. Well antitrust economics is a -- sort of a broader subfield within economics in which economists study competitive behavior, anti-competitive behavior, or behavior that restricts competition in many different forms, as well as the factors in a particular industry that would be conducive to competition, and on the other hand, the factors that are conducive to restrictions of competition.
    Q. So if I understand you correctly, antitrust economics can refer to pro- competitive behavior or anti-competitive behavior.
    A. That's correct.
    Q. Let's move now to your professional background and experience. Would you briefly summarize that, please.
    A. Yes. After getting my doctoral degree at Harvard in 1985, I joined the faculty at Harvard in the economics department and I taught at Harvard until 1993, when I moved to my current position at Brandeis University, where I teach in the economics department at Brandeis.
    During the time I was at Harvard for the academic year 1990- '91, I was granted a -- an academic leave of absence from Harvard because I was asked to go to Washington to serve as a senior staff economist at the President's Council of Economic Advisors in Washington, D.C., which is the organization that produces that report that we just saw some excerpts discussed previously.
    *22 In addition to my academic appointments, initially when I was at Harvard I began doing some consulting work on the side relating to economics, particularly in the areas of competition and antitrust economics, and in the late 1980s I started a consulting firm with another economist from Harvard, which is called the Economics Resource Group or ERG, and I continued through ERG to do consulting for various organizations in the areas of -- of economics. And finally as part of my academic responsibilities, in addition to my work at Brandeis, I'm the coordinator of a project at an organization called the National Bureau of Economic Research, which is a non-profit economics research organization also in Boston, and I coordinate the project on industrial technology and productivity at the National Bureau of Economic Research, and I've done that since 1993.
    Q. All right, then, professor, let me ask you: How specifically has that professional background that you just recited qualified you to address the issues of antitrust conspiracy and economic impact?
    A. Well all of my professional work has really focused on the areas of antitrust economics, competitive behavior, anti- competitive behavior, as well as the area of research and development and innovation and interaction between the two, and I've really focused on these two areas in my research in my -- that is, in my academic research, in my teaching, as well as in sort of the real-world work that I've done through the consulting and the government work.
    Q. Let me ask you if you can explain for us what the relationship is between antitrust economics on the one hand and your focus there, and new- product innovation which you've mentioned several times.
    A. Yes. Well there really --
    The relationship goes in both directions. The extent of competition and the nature of competition in an industry is an important factor which affects the way research is done and in particular how much innovation, how much development of new products there will be in an industry. And then conversely, the process of innovation is itself an important component of competition within industries. And so there's a -- there's a -- a relationship that goes from innovation to competition as well as a relationship from competition to innovation.
    Q. All right. And you mentioned that you have focused on antitrust economics and new-product innovation in several different forums; is that correct?
    A. Yes.
    Q. All right. Let's go through those one at a time and get a better idea of exactly where the focus has been in those particular forums.
    First of all I heard you mention research. How has your work on -- in the research area particularly focused on these areas of antitrust economics and new-product innovation?
    A. Well as an academic researcher really for the last 15 years or so, I have spent most of my time studying the processes of innovation in the -- in firms and how it relates to competition, reading the -- the material that's been written by other economists on the subject, and then really going out and doing my own original research where I gathered data in various forms on various different topics, and I -- and I do research on the subject of research and development and innovation and its relationship to competition, and I've published many academic papers on this topic in economics journals, and also this project that I've coordinated at the National Bureau of Economic Research, my role there really has been to be in touch with economists all over the country who are working on issues relating to technology and productivity, organizing conferences and that sort of thing related to that issue.
    *23 Q. So your own individual research or original research has led to publications.
    A. Yes.
    Q. And have these publications occurred in peer-reviewed journals?
    A. Most of them, yes.
    Q. Approximately how many publications have you had in peer- reviewed journals that related to the subjects of antitrust economics and/or new-product innovation?
    A. Several dozen.
    Q. In addition to publishing in peer-reviewed journals, have you had any particular relationship with peer-reviewed journals in other ways?
    A. Yes. I'm a member of the board of editors of the American Economic Review, which is, most economists would agree, the leading American -- most widely read American economics -- academic economics journal, and as a member of the board of editors I play a prominent role in reviewing papers submitted by other people within my areas of expertise, which are antitrust economics and -- and research and development, and reviewing those papers, providing advice to the -- the ultimate editor of the journal regarding whether those papers should be published.
    Q. In addition to that journal, have you served in the capacity of a reviewer of peer-review submissions for other economic journals?
    A. Yes. In economics they're called referees, and I've served as a referee for probably eight or 10 of the economics -- academic economics journals that publish in the areas in which I have expertise.
    Q. All right. You also mentioned that in your teaching background at Harvard and at Brandeis, you have focused on these areas of antitrust economics and new-product innovation. How has that developed?
    A. Well the courses that I've taught since 1985 have been in the areas of, first of all, what's called microeconomics, which is more -- a broader area within economics. It really refers to generally the study of how firms and consumers interact in particular markets and how that interaction affects the amount of benefits that consumers derive from particular products. And so microeconomics looks at this interaction in particular markets as opposed to macroeconomics, which is the study of what determines the overall rate of inflation, the overall rate of unemployment and things like that in the economy as a whole. So I've taught courses in -- in microeconomics. I've also taught courses at both the undergraduate and the doctoral level in antitrust economics, and I've taught courses in the economics of research and development and innovation, the other major area of my expertise.
    Q. What does a professor such as yourself have to do to get ready to teach those types of courses?
    A. Well you really do a fair amount of work. In general, I would be familiar with the important literature that already exists within a given area, but what I would do would be to sit down with the material that I know exists that people have written within a given area and then try to organize it in a way that I think is systematic and -- and most susceptible to being digested by the students so that I can prepare an outline and a syllabus for the course.
    *24 Q. And finally with respect to your consulting activities, how have they focused on the antitrust economics and the innovations?
    A. Well in consulting, what I've specifically done is I've been asked by -- sometimes by law firms, sometimes by companies or by government organizations, to examine issues with regard to various industries, and much of this work has related to competition, often assessing how competitive a particular industry is, assessing whether certain behavior in a particular industry has been anti-competitive, and assessing whether the structural conditions in a given industry or given market are or are not conducive to competition or conducive to anti-competitive behavior.
    Q. You mentioned your work with respect to the President's Council of Economic Advisors.
    A. Yes.
    Q. First of all let me ask you: Was that a political appointment?
    A. No. The -- the staff of the President's Council of Economic Advisors are traditionally non-political. The majority of them are academic economists like myself who are brought in for a year or two in order to give the members of the council who in turn advise the president essentially objective economic advice on issues of economic policy.
    Q. What kinds of duties did you perform in that role?
    A. Well my --
    The areas that I was responsible for when I was at the council, not surprisingly, included technology and science policy, and also policy relating to competition, both with respect to legislative and regulatory proposals involving the antitrust laws themselves, and also regulatory issues in other industries regarding regulatory efforts to promote competition.
    Q. As someone who has specialized in the field of antitrust economics, what is your understanding of the purpose of the antitrust laws?
    A. Well from an economist's point of view, the purpose of the antitrust laws is to preserve competition in industries and also to preserve for consumers the benefits that competition normally generates.
    Q. Why is competition so desirable to consumers?
    A. Well economists generally believe that competition is desirable because, if we have an industry in which the firms in that industry are engaged in vigorous competition, that competition will drive them to produce products that consumers desire and to produce them in a way that is cost effective, that -- that efficiently uses resources. And therefore an industry that is competitive is an industry that will, in general, deliver the maximum benefits to consumers for the resources that are being consumed by that industry in the production of its products.
    Q. Are there various aspects of competition?
    A. Yes.
    Q. Would you explain.
    A. Well there are -- there are a number of different aspects to competition. I guess probably the most obvious one is the price that firms charge for the good or service that they sell. You'll often see firms competing with other firms by trying, if they can, to sell their product at a lower price in order to garner a larger share of the sales in that industry. So the price of a good is clearly one aspect or dimension along which firms compete. But it's not the only one. Firms will also compete with respect to any attributes or characteristics of a given product that are important to the consumers of that product.
    *25 So if we were talking, for example, about competition among auto companies, consumers compare how durable, how reliable, how fuel-efficient, how powerful, and also how safe the automobile is. These are all characteristics or attributes of an automobile that matters to consumers. And so the firms in that industry, in addition to competing with respect to price, will also compete with respect to these particular attributes or characteristics that consumers value. So these -- these product's characteristics collectively are another aspect of the competition typically among firms.
    Now this process of competition, particularly with respect to these attributes or characteristics, also generates information, so information is another aspect of competition, if you will. The firms in the industry, in an attempt to sell their products, in an attempt to convince consumers that their products are superior with respect to these characteristics that consumers value, will generate information to consumers about those products. They will tell the consumers about the characteristics or the attributes of the products that they sell, and so in this way the process of competition among them with respect to these attributes generates information for consumers which, of course, the consumers need in order to make informed choices, in order to decide, you know, do I want to buy a Ford Taurus or do I want to buy a Buick, they need to have information regarding all of the different characteristics of those products that are important to them. And in a normally functioning industry, the process of competition will generate that information so that consumers can make those choices.
    Now then the last sort of aspect of competition that's important for the analysis in this case is the notion of short-run competition versus long-run competition. So if we think of firms, just to stay with the auto industry for a minute, if the firms are competing on a very short-run basis, one of the things a firm can do, for example, is offer a rebate, you know, 500-dollar rebate on this model for the next couple months if they want to increase their sales over a short period of time. And so there are certain aspects of competition that occur over this relatively short time horizon involving the price and some of the characteristics of the good over the short run.
    But the firms in an industry also compete on sort of a long- term basis. At the same time that they're trying to figure out how to sell more cars tomorrow, they're trying to figure out what can I do today that will allow me two years from now or five years from now or 10 years from now to be selling more cars than I do today, and hopefully more cars than my competition. And this long-run competition involves really a long-term, often expensive effort to fundamentally change the nature of the products that are being offered, to sell a car 10 years from now that is significantly different from the cars that are being sold today, or figure out a way of making them that's significantly less expensive so that I can lower the price, and in that way over the long term gain a really significant competitive advantage over other firms.
    *26 Q. While in comparing, Professor Jaffe, short-term competition with long-term competition, as an economist, which type do you believe is more beneficial to consumers?
    A. Well over any significant time horizon, if we look at a period, say, of -- of decades, I think most economists would agree that the long-term competition ultimately is much more important for consumers. It's the long-term competition which allows really quantum changes in what consumers can get out of the economy.
    And in fact there's an economist named Joseph Schumpeter who's looked at this, and he coined a term which is now widely used among economists for this notion of long-term competition, he called it "creative destruction," and the notion of creative destruction is that when firms in an industry compete over a long period of time, they're driven by their urge to get ahead, to increase their market share, to increase their profits. They're driven to create, to come up with new ways of doing things that no one has ever done before. Because it's only by coming up with a new way of doing things, a new product or a new way of making it or a new way of delivering it, that firms can really get a long-term advantage over their competitors.
    So they're driven by their competitive instincts to this process of creation, or "innovation" is another word that Schumpeter used for the creation part of it. But at the same time, when a firm does that, when a firm succeeds in creating a new product, there is a destructive aspect of that which is that they destroy the market position of the current market leaders because a new and better product is going to undermine the sales of the existing products.
    And so Schumpeter described creative destruction like a race that nobody ever wins. The firms are always trying to get ahead. And how do they try to get ahead? They try to get ahead by innovating, by creating. But you can never be permanently ahead because there's always some other firm behind you or next to you who is trying to do the same thing, trying to engage in this creative, innovative process, and one of these days, typically, if you're the market leader, one of these other firms is going to come up with something even better than what you've got and destroy your market position.
    So we have this constant process of creation and destruction. Firms create new things and, in so doing, destroy the market position of the existing product. But of course consumers get the benefits of the creation and don't really need to worry about the destruction because they don't care that some other firm's profits have now been reduced.
    And in fact the way Schumpeter and other economists have talked about it is the creative destruction is an engine of economic progress, it's the force which over time drives the economy forward. And in industry -- (clearing throat) excuse me -- industry after industry or market after market over a long period of time will transform the market and deliver far greater benefits to consumers than was there before.
    *27 Q. Professor, do economists believe that an industry's research and development capability is important to the process of creative destruction?
    A. Yes. Research and development in firms in a modern economy is to a significant extent the activity that they engage in in order to run this race, in order to try to innovate and get ahead. They -- they -- they hire scientists, they build laboratories, and they invest often very large sums of money in trying to figure out better ways of doing what has been done before in order to get ahead in this creative destruction race.
    Q. Are there factors that economists such as yourself have identified which would tend to promote or foster this process of creative destruction that ultimately benefits consumers?
    A. Yes. As we -- as we just indicated in talking about research and development, this -- this creative destruction process requires money. Firms are making long-term investments in order to try to get ahead, and the more resources that they have available for these long-term investments, the more competition that there will typically be to try to win this race.
    And this is not only an expensive process, but it's a very risky process, because the way that you engage in research is you try new things. Someone has a good idea, you work on it, you invest money in it, you develop it, you build a prototype, and sometimes it doesn't work and you throw it away. Or other times you invest, you develop it, you are working on it, you think you're almost there, and your competitor comes out with something even better before you've even managed to get it to the point where you can deliver it. And so even if in some technical sense it works, you still have to abandon it because basically you've been preempted. So this process of -- of research leading to creative destruction is an expensive and a risky one, and therefore one which requires significant resources in order to undertake.
    Now in addition -- in addition to resources, I've been describing this as a long-term process, so obviously it takes time. We can't expect through the process of creative destruction to see an industry transformed over night. It's typically -- it's a process which takes years or decades as firms make these long-term investments in research in order to try to get ahead.
    So money, time, and then the third thing that's important, really, is the incentive or motivation to engage in the contest. And as I've indicated, that incentive will typically be there; firms always want to get ahead of their competitors. But if you have an industry where the market dynamics are such that the stakes are really high, where there's perceived to be a very significant - - some kind of transforming event in the industry which makes it clear to everyone in the industry that there are huge opportunities to use research to respond to consumer demands, and that kind of high-stakes opportunity will create an unusually large incentive or motivation for this creative destruction process.
    *28 Q. Professor, can you cite for us any examples that we might all be familiar with of how this process of creative destruction has benefited consumers?
    A. Sure. You really just have to look around the courtroom. I mean -- or around your house. I mean we see automobiles today that are far more fuel- efficient, far more reliable and durable and also much safer than automobiles just a couple decades ago, and that has been brought about by investments that automobile companies have made in improving the technology in cars. And interestingly, in the car industry, that process seems to have been particularly accelerated in the late 1970s and '80s when the competitiveness of the industry was increased by the entry of Japanese and other foreign competitors into the U.S. market, and that that -- it was partially the force of that competition which seems to have really spurred tremendous improvement in -- in cars.
    Computers, we all know about computers, they didn't even exist a few decades ago. And what's interesting about computers is that the companies which today are the market leaders in the computer business also didn't exist decades ago, and the companies that were the pioneers in the sale of computers are companies you may not even have heard of, companies like Sperry and Univac, who were essentially driven out of the computer market by IBM in the '60s and '70s, and then IBM in turn was not exactly driven out of the computer market, but its dominant position in the computer market was significantly undermined when other firms came along with PCs. So that now we have Compaq and Dell and all these other companies that -- that have joined or -- or surpassed IBM in sales of computers.
    Q. Well what were the product attributes of the computers that Sperry and Univac were distributing decades ago?
    A. Well they were able to process very large amounts of information relative to what could be done at the time, but of course they took up a whole room and they were very, very -- they consumed a lot of energy. And what they considered to be large amounts of information we would laugh at today. I mean today you have a computer sitting on your desk has many, many times more information-processing capability than computers that filled an entire room in the 1960s.
    Q. And what was the nature of the cost to acquire one of those pioneering computers that Sperry and Univac were marketing decades ago?
    A. I don't know exactly, but it was tens of thousands of dollars.
    Q. And compared to today's computers, how has the cost changed?
    A. You can get one today for less than a thousand dollars.
    Q. And taking up about how much space?
    A. Well, some of them are about yea big (gesturing).
    Q. Well, Professor Jaffe, if time and money and motivation foster and promote the process of creative destruction, have economists identified conditions which would tend to inhibit, stymie, or frustrate that process?
    A. Well the conditions that are going to stymie the process of creative destruction are essentially an aversion to the risk that this dynamic race represents for firms and a desire to try to maintain the status quo. So that if we have the firms in an industry looking at this possibility of a vigorous race, particularly in the kind of circumstance I mentioned a minute ago where you have some kind of transforming event that really shows the possibility of a huge change in the industry, on the one hand that's a very attractive prospect, particularly to the firm that thinks they're going to win, but it's also a very frightening prospect because, A, it's very expensive, the firms are going to recognize that once that race is begun it's going to consume enormous resources on the part of all of the firms in the industry, and they're not all going to win, some of them are going to run that race and lose, and in the process, having invested a lot of money which is going to basically have gone down the tubes. So there is going to be a reluctance typically, on the part of at least some of the firms, to make that leap, to take that chance. And if they have the ability, if they have some mechanism to get together and say, "Hey guys, this is really scary, this is really risky, we could undermine everything we've got, let's hold back," then that kind of agreement to hold back could be what stymies the process of creative destruction.
    *29 Q. And you describe that as a maintenance of the status quo?
    A. Yes.
    Q. Is the process that you just described something that would fall into the category of anti-competitive behavior?
    A. Well if the firms individually should all just happen to chicken out, then that would not be anti-competitive behavior. But if they get together and agree to hold back, to restrict this process of long-term dynamic competition, this process of creative destruction, then that is anti-competitive behavior because they are restricting or suppressing the competition that would otherwise occur among them.
    Q. Have you over the years studied various forms of anti- competitive behavior?
    A. Yes, I have.
    Q. Which particular form of anti-competitive behavior have you focused on in connection with this case?
    A. Well economists use the term "collusion" to describe a situation where the firms in an industry agree not to compete, agree to restrict or suppress in some way what would otherwise be their natural inclination to compete with each other, and so what I have looked at in this case is the possibility of collusion.
    Q. And how does collusion differ with the concept of antitrust conspiracy which you previously explained?
    A. From an economist's point of view, those terms are essentially interchangeable.
    Q. How, then, would an economist such as yourself go about performing an investigation as to the possible existence of a collusive agreement in a particular industry?
    A. Well there are basically three steps that you would want to go through. The first step is, from an economist's point of view, to -- to define what we would call the relevant market. So if we're going to analyze an allegation of collusion with respect to a particular set of firms, we need to define or delineate what are the boundaries of the market in which those firms compete so that we can then look at the question of anti-competitive behavior. And when we're looking at defining the boundaries of the relevant market, there are two dimensions that we think about. We need to define the boundaries in terms of what products are included. So if we were thinking about an allegation that the car dealers in St. Paul were somehow suppressing competition, we would have to decide, well, is the market cars or is the market cars and trucks or is it cars and trucks and buses or is it cars and trucks and buses and trains? We have to make a determination as to what set of products is the set of products that are truly competing with each other, and that's called the product dimension of the relevant market.
    Q. Professor, if I can interrupt for a moment, why would that type of a distinction be so important to the type of work that an economist would do in connection with investigating a collusive agreement?
    A. Well as we're going to talk about a little bit more in a minute, the next step is going to be to investigate whether the structure of the market is such that it is plausible that collusion would have occurred, and before we can get to sort of analyzing the structure of the market, we just need to decide what is the market that we're talking about in order to proceed to the next step.
    *30 Q. Why would it make a difference, though, whether the product, relevant product under analysis, would be cars or cars and trucks?
    A. Well it -- it may or it may not. But it could, for example, affect the number of competitors, the number of potential competitors, and it could affect the ability of the alleged -- firms that are colluding to succeed in controlling competition depending on exactly how large is the scope of the market that would have to be controlled. And so the principle that's followed in defining relevant market is what we -- what we typically do is we would want to define the smallest area, whether we're talking about -- for example, with respect to products, the smallest set of products which, if it were controlled, if competition was suppressed, you could succeed and you would not be frustrated by competition from something that's outside the boundaries.
    So, for example, clearly, if we thought about a hypothetical relevant market that consisted of red cars, we would say well that can't be the right relevant market because even if you control everything about red cars, well people don't care that much about the color. If you didn't control the blue cars and the green cars and the orange cars and the brown cars, you couldn't succeed in controlling that market. So red cars is clearly too small.
    At the other extreme, probably airplanes, even though they're also a means for getting people around, are not a substitute for cars. If you control the market for cars, you wouldn't really have to worry about the fact that your efforts to control the market for cars are somehow going to be undermined by people buying airplanes. People don't go out and buy an airplane for the same reasons they buy a car.
    Now in between it may be a closer call. It may be a matter of judgment at what point the products become poor-enough substitutes that they're not competing with the products within the relevant market. But that's the basic concept.
    Q. So then the analysis in this particular analogy would be: Would trucks be a conceivable substitute for cars if someone had controlled the car market.
    A. That's correct.
    Q. Okay. How about with respect to the geographical aspects of the relevant market, what's involved there?
    A. Right. So I -- I don't think I know -- remember if I said this yet, but the second dimension of relevant market, after you've figured out which products would be included, is what is the geographic scope of that market. So if we stay with the St. Paul car dealers for -- for a moment, if there was an allegation that the St. Paul car dealers were colluding and we were trying to assess that allegation, one of the things we need to figure out is: Is the market St. Paul? Or do St. Paul car dealers, if they were hypothetically to collude, face sufficient competition from Minneapolis car dealers that you really couldn't successfully monopolize the market just by controlling car dealers in St. Paul, you'd really have to also control the car dealers in Minneapolis?
    *31 And so there's an issue of what is the geographic extent of the market. And again, the principle that we would follow would be what is the smallest geographic extent which, if you did control it, would be sufficient to carry out an anti-competitive purpose without that anti-competitive purpose being significantly undermined by competition from outside the boundaries that you've drawn.
    Q. All right. That's the relevant market.
    A. Right.
    Q. What other factors would economists analyze in attempting to determine the possible existence of a collusive agreement?
    A. Okay. Well after analyzing -- after establishing and defining a relevant market, the next step is to investigate the question of whether the notion of collusion in this case is plausible, is economically sensible. Does it make economic sense that the firms in this particular industry would have been likely to have even tried to engage in some kind of collusive behavior?
    Q. And what would you focus on in connection with the analysis of plausibility?
    A. Well with respect to plausibility there are now three factors. The first is the market share or the concentration of the firms in the industry, because collusion essentially is an agreement to coordinate our activities and -- and to suppress competition. And if you've got lots and lots of firms, or the firms involved in the collusion have very small shares of the market, then -- (clearing throad) excuse me -- it's just not plausible to think that they would think that they could pull that off.
    You couldn't imagine, for example, all of the wheat farmers of America trying to get together and somehow control the wheat market. There's just too many of them and it would be too hard for them to -- to arrange that.
    And so I mean when looking at the plausibility of a conspiracy, we look at the market shares of the firms and the concentration of those market shares among relatively few firms, and the larger are the market shares and the more concentrated are the sales among a small number of firms, the more plausible it is that they might have engaged in collusion.
    Q. If you could just clarify a bit, professor, the relationship between this term "market share" on the one hand versus your other term, "concentration" on the other hand.
    A. Yes. Market share refers to the sales of the individual firm, what fraction of the market does an individual firm have. And large market shares are conducive to collusion, all else equal, and small market shares make it less plausible.
    Q. Simply because there are too many members of the potential conspiracy to deal with?
    A. That's correct.
    Q. And then concentration --
    A. A re