Americans recently awoke to a startling revelation: “Our country is getting ripped off.” Indeed, the purportedly deleterious effects of international trade on the United States domestic economy have claimed top billing in President Donald Trump’s nascent “America First” agenda. As the White House publicly excoriates international free trade for the first time in recent memory, global trade deals and domestic tariffs are cast in stark relief. China and Mexico, along these lines, are cast as chief culprits in a system of international exchange allegedly designed to subjugate American workers to nefarious foreign interests. Overall, recent politics underscore the practical importance of, and interdependence between, competition and cooperation in international economic regulation.
In the arena of hard-nosed international competition, it’s all fun and games––until somebody starts a trade war. But beyond the scope of trade deals and tariffs, sovereign states’ domestic antitrust laws are also critical regulatory levers. Americans at the Antitrust Division of the Department of Justice and the Federal Trade Commission have the power to influence incentives in markets across the globe. For example, although domestic by nature, U.S. antitrust laws do not exclusively apply to conduct in domestic markets—the Sherman Act may extend far beyond American shores to activities conceived and executed abroad.
Recent antitrust decisions and policy initiatives by both the Department of Justice (“DOJ”) and Department of Transportation (“DOT”) have shaped the current U.S. airline landscape. The consolidation trend is not unique to the U.S. domestic air transportation market. The emergence of three global airline alliances—together accounting for around 80% of air traffic across the transatlantic, transpacific, and Europe–Asia markets—has transformed the international air transportation market as well. This Note evaluates the results of the DOJ’s antitrust approach to U.S. airline mergers and reconciles these results with the DOT’s “public interest” emphasis in determining airline applications for antitrust immunity (“ATI”). Given the current domestic market, it is likely that the remaining legacy carriers will leverage their respective global alliances and seek ATI with foreign airlines for continued network growth.
Part I of this Note tracks the tumultuous history of the U.S. airline industry from deregulation to its current health. Part II presents the legal framework, including U.S. antitrust laws, that govern domestic airline mergers and international ATI. Part III proposes practical solutions for the DOT to improve the ATI regulatory process and incubate open market competition, thereby better serving passengers and airlines by edging closer to deregulation.
Antitrust law has been declared a failure, moribund, or possibly just a ghost from the trustbusting era. A quarter of a century ago, Thomas Hazlett declared: “Any responsible historian of American antitrust policy must conclude that, if one takes at face value the assertions that antitrust laws exist to advance competition and protect the consumer, that policy is a failure. The notorious Berkey Photo case may be the flagship of that failed policy.” Hazlett went as far as suggesting it would be “most effective . . . to consider federal enforcement of the antitrust laws to be a per se restraint of trade.” Robert Crandall and Clifford Winston examined the question: “Should the United States pursue a vigorous antitrust policy?” They found “little empirical evidence that past interventions have provided much direct benefit to consumers or significantly deterred anticompetitive behavior.” Other scholars examined whether antitrust was still alive. Yet, recently some stressed that antitrust is not dead, but while “at one time [it] was skewed toward over-enforcement, . . . today if there is any bias it is in the opposite direction.” Statistical figures indicate that, since the 1970s, the volume of civil antitrust litigation is low compared to prior decades. For these reasons and others, Jonathan Baker tried to provide “evidence of the necessity and success of antitrust enforcement.” The Supreme Court, however, voiced skepticism about antitrust litigation. In the fall of 2007, Antitrust therefore posed the question for a special issue: The End of Antitrust As We Know It?
What are the lessons of business history for antitrust policy? In particular, what are the lessons of business history for policies toward firms or practices that Standard Oil has come to symbolize: firms with monopoly power, firms that engage in predatory practices or vertical restraints, or more broadly, firms that just seem too big? There is an interesting and provocative literature that examines the practices and impact that such firms or practices have on consumers and competition. Several of the papers in this volume address the question of whether Standard Oil itself harmed consumers or competition. This discussion is active, after a century, in part because it gets to the underlying question of whether firms ever engage in predatory practices or whether such practices can in fact harm consumers.
The government’s challenge to Standard Oil’s monopoly of refining and the resulting court-ordered break up of Standard Oil one hundred years ago, was motivated to a large extent by the now discredited idea of protecting competitors rather than preserving competition. Consistent with a principal concern of the framers of the Sherman Act that large corporations often received discriminatory discounts which placed small companies at an unfair disadvantage, the government focused its case on Standard Oil’s use of its dominant position to obtain preferential railroad rebates that forced rival refiners to either agree to be acquired by Standard Oil or to go out of business.
While it is now nearly universally accepted that Standard Oil’s preferential railroad rates were a crucial factor in Standard Oil’s growth and dominance of refining in the 1870s, Michael Reksulak and William Shughart have recently advocated a procompetitive view of Standard Oil’s rate discounts. Relying on Ron Chernow’s conclusion that the railroads achieved significant cost savings by transporting Standard Oil’s large shipments, Reksulak and Shughart argue that Standard Oil’s rate rebates were merely the way the railroads shared with Standard Oil the transportation efficiencies associated with handling Standard Oil shipments as part of the normal competitive process.
The success of the Standard Oil monopoly is not well understood. Standard Oil first developed a monopoly over the refining of crude oil, though later extended its control to gathering pipelines, later still to trunk pipelines (from the western Oil Regions to East Coast ports) and, even later, expanded operations to include oil production (drilling) and retail sales at the time the Supreme Court ordered its dissolution over 100 years ago, in 1911.
Though there are several journalistic exposes of Standard Oil–including Henry Demarest Lloyd and Ida Tarbell, as well as business histories–none are fully explanatory. The currently dominant theory of Standard Oil’s success is by Elizabeth Granitz and Benjamin Klein who assert that Standard Oil was chosen by oil shippers, the railroads, to police a railroad cartel. According to Granitz and Klein, the railroads split with Standard Oil the profits from cartelization of the crude and refined oil industry.
Standard Oil’s preferential railroad rebate structure lies at the heart of the seminal Standard Oil case, which culminated in the Supreme Court’s 1911 affirmation that Standard Oil had violated the Sherman Act and should be broken up. Beginning in 1868, Standard Oil received rebates of varying amounts from railroads for crude and refined oil shipped east over their lines. In some later years, it also received drawbacks for oil shipped by independent refiners–Standard Oil’s competitors. The rebates and drawbacks gave Standard Oil a competitive advantage over their rivals and accounted for a large part of the reason that John D. Rockefeller obtained such dominance in oil refining and distribution.
The muckraking journalist Ida Tarbell made Standard Oil’s discriminatory rebates a central feature of her crusade against the Rockefeller interests. The government also made the rebates a central point of its case, and the Supreme Court affirmed their illegality. Thereafter, the Interstate Commerce Commission effectively ended the legality of such rebates as a regulatory matter.
From the beginning, however, pro-Standard Oil voices have argued that, far from exhibiting a rapacious strategy to destroy rivals, the rebates and drawbacks were simply a reflection of Standard Oil’s superior efficiency.
As the contributions to this symposium prove, the Standard Oil case continues to inform many aspects of current antitrust policy. Part of Standard Oil’s significance, however, has been lost over time. The Supreme Court condemned a range of conduct by Standard Oil as anticompetitive, including predatory pricing. Predatory pricing occurs when a firm prices its product below cost in order to drive its competitors from the market. Once enough rivals have exited the market, the predator raises price and earns a stream of monopoly profits.
In the decades following the opinion, the conventional wisdom held that Standard Oil had engaged in predatory pricing. The Standard Oil opinion stood for the proposition that using predatory pricing to acquire or maintain a monopoly violates Section 2 of the Sherman Act. The opinion did not define the contours of predatory pricing, neither explicitly saying that a predatory price is a price below cost nor specifying what measure of cost courts should use. Nevertheless, the opinion laid the groundwork for future federal courts to address these questions and to provide more structure to the predatory pricing cause of action.
In 1882, Standard Oil’s General Solicitor invented the corporate trusts that inspired the birth of the antitrust discipline. The public aversion to trusts in the United States gave the field its enduring and uniquely American name. As the discipline matured, distrust of business size took root in cases and doctrines. Justices Louis Brandeis and William Douglas wrote the narrative into early case law and it remained embedded in the field even as economics became the antitrust methodology. Economics merely transformed the fear from a concern about absolute size to one of relative size (market shares). While size should be an irrelevant consideration in antitrust analysis, it still mistakenly serves as a driving force behind the law. This Article studies how the fear of bigness–of absolute or relative size–has shaped and confused analytical perceptions of antitrust, established and sustained no-fault monopolization theories, and contributed to various doctrinal oddities. The American discipline might owe its birth to the fear of size, but this fear has been a burden and a curse on the development of sound antitrust policies.
The Supreme Court’s 1911 decision in Standard Oil gave us embryonic versions of two foundational standards of liability under the Sherman Act: the rule of reason under Section 1 and the monopoly power / exclusionary conduct test under Section 2. But a case filed later in 1911, United States v. U.S. Steel Corp., shaped the understanding of Standard Oil’s standards of liability for decades. U.S. Steel, eventually decided by the Supreme Court in 1920, upheld the spectacular 1901 merger that created the Corporation, as U.S. Steel was known. The majority found that the efforts of the Corporation and its rivals to control prices in the famous Gary dinners had violated Section 1 when they occurred, but paradoxically insulated U.S. Steel from liability under Section 2. U.S. Steel was formed to monopolize the industry but failed; it demonstrated its impotence by fixing prices with rivals instead of crushing them, as Standard Oil had done.