{"id":348,"date":"2021-07-31T18:06:32","date_gmt":"2021-07-31T22:06:32","guid":{"rendered":"https:\/\/researchbdev.wpengine.com\/zorina-khan\/?p=348"},"modified":"2022-06-01T13:53:45","modified_gmt":"2022-06-01T17:53:45","slug":"whos-afraid-of-standard-oil","status":"publish","type":"post","link":"https:\/\/research.bowdoin.edu\/zorina-khan\/life-on-the-margin\/whos-afraid-of-standard-oil\/","title":{"rendered":"Who\u2019s Afraid of Standard Oil?"},"content":{"rendered":"

The breakup of\u00a0 Standard Oil Company in 1911 continues to be wielded as a bludgeon to threaten successful firms, and as a banner to encourage populists in their forays against free markets.\u00a0 Consider the recent Executive Order on Competition: “<\/a>When past presidents faced similar threats from growing corporate power, they took bold action. In the early 1900s, Teddy Roosevelt\u2019s Administration broke up the trusts controlling the economy\u2014Standard Oil<\/strong>, J.P. Morgan\u2019s railroads, and others\u2014giving the little guy a fighting chance.”<\/em><\/p>\n

In 2000, when District Judge Jackson ordered the break-up of Microsoft, he compared the company to Standard\u00a0 Oil: “Mr. Rockefeller had fee simple control over his oil. I don’t really see a distinction.”\u00a0 Today, of course, who cares about Microsoft’s monopoly power?<\/p>\n

ECONOMIC ANALYSIS OF STANDARD OIL<\/strong><\/p>\n

What does economic analysis have to say about the role of Standard Oil (SO)? My superpower is speed-reading, and an examination of thousands of antitrust cases<\/a> empirically confirms the suspicion that antitrust is typically motivated by politics and populism more than economics.\u00a0 Most of these lawsuits can be lodged under the title of\u00a0 United States v. Laissez Faire Inc<\/a> (yes, this is a real antitrust case, not a satirical reference).<\/p>\n

MARKET SHARE<\/p>\n

All antitrust indictments start with an assessment of market share.\u00a0 At the same time, the relevant market comprises one of the most imprecise and malleable concepts imaginable (to the satisfaction of consultants on both sides). Standard’s share of refining had been falling for over a decade. There were over 100 domestic oil\u2011refining firms in the national market, with many new entrants in the Southwest, along with other large competitors like Texaco, Gulf Oil, and Sun.<\/p>\n

However, the relevant market was global, rather than domestic, and the majority of SO transactions were overseas.\u00a0 The company\u2019s international competitors included firms from Canada, Peru, Britain, Poland,\u00a0 India and Russian.\u00a0 SO’s market share in 1909 was just 14 % of the global market.<\/p>\n

OUTPUT AND PRICES<\/p>\n

At the time Standard Oil was founded in 1870, the price of kerosene was 30 cents a gallon. Two decades later, the price had fallen to around 6 cents a gallon. Kerosene output had correspondingly\u00a0 expanded enormously (contrary to the “standard” monopoly model).\u00a0 SO was able to take advantage of economies of scale, quantity discounts, and operating efficiencies to reduce costs and prices. The beneficiaries were the \u201clittle guy\u201d that the Executive Order is allegedly protecting.<\/p>\n

PREDATORY PRICING?<\/p>\n

\"California<\/p>\n

\u201cPredatory\u201d pricing is one of those empty weasel words which evoke emotional responses rather than representing valid economic reasoning.\u00a0 Lower prices benefit consumers, period.\u00a0 Charges of predatory pricing are usually brought by losers in the marketplace; but, as the court stated in Arco v. USA Petroleum<\/a>, \u201ccutting prices to increase business is often the essence of competition.\u201d<\/p>\n

The FTC seems bent on resuscitating this concept against Amazon, in a move that might be termed zombie economics<\/em>.\u00a0 The nonsensical nature of predatory pricing is revealed in such examples as an antitrust ruling that forced Walmart to increase consumer prices<\/a> in Germany.<\/p>\n

SUBSTITUTES<\/p>\n

A prerequisite for monopoly is a lack of available substitutes. SO\u2019s major market was kerosene, which was used for stoves and lighting.\u00a0 Stoves could also be fuelled with coal, wood, corn waste, and other products.\u00a0 Alternatives to kerosene lamps included candles, whale oil, and camphine (a volatile fuel consisting of turpentine and alcohol).\u00a0 Later, with the development of electricity, yet another substitute was developed, but kerosene remained viable owing to its relatively cheap and ready access. In fact, the market for electric automobiles failed to develop further at that time because gasoline was far more cost-effective.<\/p>\n

SIDE DEALS AND SUBTERFUGE<\/p>\n

The government case passionately declared that SO was bent on \u201coppressing the public and destroying the just rights of others, … its infinite potency for harm and the dangerous example which its continued existence affords, is an open and enduring menace to all freedom of trade, and is a byword and reproach to modern economic methods.\u201d<\/p>\n

From a less breathlessly-partisan perspective, SO was able to use its countervailing power as leverage against other oligopolies to obtain rebates and other privileged deals, that translated into benefits to consumers.<\/p>\n

THE NEW MUCKRAKERS<\/strong><\/p>\n

The greatest misstep of Standard Oil was in not recognizing the power of bad press.\u00a0 Ida Tarbell, whose personal animus against the firm was founded in her father\u2019s failure in the oil industry, provided the supposedly objective analysis that would justify using the power of the federal government to disrupt and destroy a successful private enterprise.\u00a0 One of today\u2019s Ida Tarbells, equally unqualified in Economics, has been elevated as head of the FTC<\/a>.\u00a0 Just as before, these new muckrakers are mis\/using empirically unwarranted concepts like predatory pricing to justify politically-motivated policies against “Big Tech.”\u00a0 \u00a0As Frederick Scherer pointed out, “it is questionable whether the circle of [antitrust] beneficiaries extends much wider than the attorneys who earn sizeable fees interpreting its complex provisions.”\u00a0 History shows that these measures are unlikely to benefit “the little guy.”<\/p>\n

EPILOGUE<\/strong><\/p>\n

The tentacles of the alleged SO octopus regenerated after the dissolution of the company.\u00a0 These enterprises became larger than ever, proof of the underlying valid economic reasons for their size and dominance.\u00a0 The new entities included:<\/p>\n

\"Octopi<\/p>\n

Standard Oil of New Jersey (EXXON)<\/p>\n

Standard Oil Company of New York (MOBIL)<\/p>\n

Standard Oil of California (SOCAL)<\/p>\n

GULF Oil Company<\/p>\n

Texas Company (TEXACO)<\/p>\n

Esso (SO)<\/p>\n

Exxon and Mobil merged in 1999, appearing as number 3 (number 10 today) on the Fortune 500 list, a ranking that is \u201csynonymous with business success.\u201d<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

The breakup of\u00a0 Standard Oil Company in 1911 continues to be wielded as a bludgeon to threaten successful firms, and as a banner to encourage populists in their forays against free markets.\u00a0 Consider the recent Executive Order on Competition: “When past presidents faced similar threats from growing corporate power, they took bold action. In the […]<\/p>\n","protected":false},"author":140,"featured_media":683,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[18,1],"tags":[19,21,20],"class_list":{"0":"post-348","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-antitrustworthy","8":"category-life-on-the-margin","9":"tag-antitrust","10":"tag-predatory-pricing","11":"tag-standard-oil","12":"entry"},"_links":{"self":[{"href":"https:\/\/research.bowdoin.edu\/zorina-khan\/wp-json\/wp\/v2\/posts\/348","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/research.bowdoin.edu\/zorina-khan\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/research.bowdoin.edu\/zorina-khan\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/research.bowdoin.edu\/zorina-khan\/wp-json\/wp\/v2\/users\/140"}],"replies":[{"embeddable":true,"href":"https:\/\/research.bowdoin.edu\/zorina-khan\/wp-json\/wp\/v2\/comments?post=348"}],"version-history":[{"count":0,"href":"https:\/\/research.bowdoin.edu\/zorina-khan\/wp-json\/wp\/v2\/posts\/348\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/research.bowdoin.edu\/zorina-khan\/wp-json\/wp\/v2\/media\/683"}],"wp:attachment":[{"href":"https:\/\/research.bowdoin.edu\/zorina-khan\/wp-json\/wp\/v2\/media?parent=348"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/research.bowdoin.edu\/zorina-khan\/wp-json\/wp\/v2\/categories?post=348"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/research.bowdoin.edu\/zorina-khan\/wp-json\/wp\/v2\/tags?post=348"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}