Tag: Antitrust Law

Antitrust and Business History – Article by Margaret C. Levenstein

From Volume 85, Number 3 (March 2012)
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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.
 

 

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The “Hub-and-Spoke” Conspiracy that Created the Standard Oil Monopoly – Article by Benjamin Klein

From Volume 85, Number 3 (March 2012)
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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.

 

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Rethinking the Economic Basis of the Standard Oil Refining Monopoly: Dominance Against Competing Cartels – Article by George L. Priest

From Volume 85, Number 3 (March 2012)
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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.
 

 

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Were Standard Oil’s Rebates and Drawbacks Cost Justified? – Article by Daniel A. Crane

From Volume 85, Number 3 (March 2012)
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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.
 

 

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Revisiting the Revisionist History of Standard Oil – Article by Christopher R. Leslie

From Volume 85, Number 3 (March 2012)
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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. 

 

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The Antitrust Curse of Bigness – Article by Barak Orbach & Grace Campbell Rebling

From Volume 85, Number 3 (March 2012)
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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.
 

 

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Standard Oil and U.S. Steel: Predation and Collusion in the Law of Monopolization and Mergers – Article by William H. Page

From Volume 85, Number 3 (March 2012)
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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.
 

 

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The Strategic Use of Public and Private Litigation in Antitrust as Business Strategy – Article by D. Daniel Sokol

From Volume 85, Number 3 (March 2012)
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One understudied area of the formative period of antitrust and of Standard Oil’s conduct during this period is in the use and nature of antitrust private claims against Standard Oil. In contemporary antitrust, the ratio of private to government brought cases is ten to one. In contrast, one hundred years ago government cases constituted nearly all antitrust cases, and many of such cases were state cases. On the hundredth anniversary of the Standard Oil decision, the present Article uses a discussion of the antitrust private actions against Standard Oil prior to the company’s court-ordered break up in 1911 as a starting point for a broader discussion about the interaction between public and private rights of action in antitrust in the modern era. Traditionally, government will bring antitrust cases to offset competitive distortions in the market either because private plaintiffs do not bring the right kinds of antitrust cases or because private actors lack the resources of government to bring good cases. This Article suggests circumstances in which government not only does not correct but also actually creates the market distortion by bringing a nonmeritorious case that aids the firm’s competitors rather than a case that helps consumers. In identifying this behavior, this Article combines two strands of literature–the strategic use of antitrust by private actors on the one hand and a public choice based economic theory of regulation on the other.

 

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