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Source link: http://archive.mises.org/16934/100-years-of-myths-about-standard-oil/

100 Years of Myths about Standard Oil

May 13, 2011 by

May 15 is the 100th anniversary of the most famous antitrust ruling in US history — the 1911 Standard Oil case, and the 100 years of myths it engendered. FULL ARTICLE by Gary Galles

{ 22 comments }

mushindo May 13, 2011 at 8:22 am

In SOuth Africa, our antitrust regime is driven by the Competition commission, which has become something like th eSpanish Inquisition, right down to the leniency granted to first confessors. And of course th emainstream media makes much of the ‘evil’ of price-fixing, with satisfied cries of jubilation when large fines are levied on companies interrogated by th eTribunal.

The most exquisite irony though is the rhetoric of the Trade Unions, who made loud noises of denunciation about how the ‘evil’ Pioneer Foods and other millers/bakers ‘ fixed the price of bread’ to ‘abuse’ the ‘poor’ consumers, and crowed in jubilation over the half-billion rand fine levied on Pioneer.
what they do not recognise their rank hypocrisy: the same institution of Law which makes price-fixing illegal in the markets for stuff, actually compels the fixing of minmum prices in th emarket for effort. But in principle there is no difference between the two, which makes the Law inconsistent and subverts the ‘all should be equal before the Law’ principle.

J. Murray May 13, 2011 at 9:31 am

What a wonderful way to treat a company that discovered that gasoline was better sold as a propellant than dumped in rivers as was the norm prior to Standard Oil. Environmentalists should love them as a company, they found a way to keep the environment clean and make a profit off it at the same time.

David May 14, 2011 at 12:44 am

No, they just helped along global warming instead ;)

Rich May 13, 2011 at 10:14 am

This article never says what the case was actually about. Why did the court break it up?

Kunsthausmann May 13, 2011 at 11:21 am

You’re right. That’s a serious shortcoming for an essay purporting to bust a myth about Standard Oil, and the facts were more complicated than the author suggested in his brief piece.

The DoJ’s own understanding is glossed in a presentation, Standard Oil:
Ascent and Assessment
.

For example, the DoJ asserts that

-The Trust Agreements of 1879 and 1882 were in unreasonable restraint of trade, tended to monopoly, and were void at common law

-The corporate combination achieved through the establishment of Standard Oil of New Jersey as a holding company was void under

-Sherman Act § 1
-Sherman Act § 2

There were other allegations, too. For example, “Railroad Rate Discrimination” was charged as a means to monopolize commerce. “Local Price Discrimination/Predatory Pricing” was just one of the allegations used to support the charge that Standard Oil engaged in unfair competition. “Operation of secret bogus independent companies” was another.
See slides 20 through 24.

What I don’t recall, however, is if Standard Oil employed common rent-seeking tactics such as petitioning government to establish privileges for it. Of course, had the owners and management of Standard Oil done so, alleging these facts would have tended, at best, not to support the government’s case. In fact, they could have underminded the government’s own agruments and worked to discredit rabblerousers who criticized SO.

Anders Mikkelsen May 13, 2011 at 12:49 pm

It would have been good to have more detail about the case. Even the link is a little unclear as to whether the problem is more that “Standard Oil is centrally planning and controlling an industry, and big institutions are bad.”

The irony is that the breakup probably didn’t do much. Rockefeller and his men still controlled all of the oil refineries. From what I remember they just kept running them like they had. The big change was the rise of new competitors, primarily in Texas I believe.

A big deal was that Standard Oil used their buying power to get lower rates from the railroads, which upset other producers and obviously the railroads would have liked higher rates. Since railroads and I think corporations were viewed more as privately funded quasi-governmental public services than as profit seeking private enterprise, people tended to view railroads as engaging in unfair activity when they gave big discounts to some (though it seems like no one really paid full price.) People might have viewed it a bit like ordinary people having to pay high gasoline taxes or airport taxes, but big companies get an exemption from the taxes. It seems like a good idea for an article or paper to see if people’s view of corporations was much different, e.g. they’re a public service or like a governmental agency that needs to be limited, which might go a way to explaining how people felt about them.

J. Murray May 13, 2011 at 11:21 am

Mostly because the competiton was upset that Standard Oil was able to sell product for less and still make a profit. Predatory pricing usually implies taking a loss to put other companies out of business.

Eiben May 13, 2011 at 2:43 pm

Generally breaking up a monopolist can’t do any harm because in a free competitive market there is no monopolist. The article does not explain what the harm was and indeed there is none.

nate-m May 14, 2011 at 1:15 am

That doesn’t make any sense.

It’s like saying: I can shoot this guy in the head because if he never existed then nobody would notice him missing. Therefore I can make him dead and nobody should care.

What your missing is that they are breaking up a company that lowered costs for consumers with made up excuses about monopolies and competitive prices. Basically the losers of the industry got a hold of buddies in the government to destroy a competitor that was better then they were.

You don’t think that this is a problem?

Eric May 13, 2011 at 2:49 pm

A great book on this subject is:

The Myth of the Robber Barons: A New Look at the Rise of Big Business in America

JoshINHB May 13, 2011 at 11:36 pm

Does Mr Galles reject the concept of private monopolies completely?

If not, can he provide an example of an early 20th century monopoly, what forces created it, what harm it caused and what remedial action should have been taken?

nate-m May 14, 2011 at 1:22 am

Does Mr Galles reject the concept of private monopolies completely?

Speaking for Galles (sorry if I am wrong)…

Generally speaking a monopoly in a free market can only exist for as long as it’s beneficial to the market. If they use their clout to raise prices then competitors will see the high profitability and move in and under cut them. To maintain their monopoly they must keep their prices low.

Typically real-life monopolies are a result of government working to create a monopoly. I doubt your going to find any monopoly in the past 200 years (or more) that was not caused by government granting them special privileges. Your definitely not going to find one that was actually harmful who was NOT made monopoly through government forces.

Market created monopolies are rare and short lived. It’s safe to say that the only people with the power to grant monopolies is the government.

JoshINHB May 14, 2011 at 8:38 am

I doubt your going to find any monopoly in the past 200 years (or more) that was not caused by government granting them special privileges.

My, admittedly limited, understanding of the trusts that formed in the late 19th century(US steel, American Sugar etc.) is that they used preferential tax treatment and financing in building monopolies.

Were those entities monopolies in the common sense of the word and did they cause harm to consumers?

Anders Mikkelsen May 19, 2011 at 12:53 pm

No they were attempts at monopolies. It is actually quite well documented that trusts were attempts at cartelization but they weren’t very effective. (Also in the US cartel agreements weren’t enforceable, making trust a useful idea.) They never really achieved enough dominance to set prices high. What would happen is that new entrants were always coming in with newer equipment and lower production costs. Also in the case of Standard Oil I believe quite a few people made money building refineries with the intention of Standard Oil ‘forcing’ them to sell out. In fact there developed the idea of ‘virtual competition’ among finance and economics types – big firms had to always worry about new competitors coming in so they were forced to keep prices down or suffer the competition.

I can suggest Kolko’s Triumph of Conservatism and Chandlers Scale and Scope.

Because cartelization and trusts failed, the end result was the institution of progressive and new deal regulatory regimes explicitly designed to hobble new entrants and keep up prices. That worked pretty well – though it hobbled the industries when faced eventually faced with foreign (or domestic) competition.

Antineofascist May 14, 2011 at 12:14 am

No disrespect intended towards Mr. Galles but I’m a bit disappointed in this article. Instead of a lot of details about the specific SO case and facts to relate the reality of the situation, it instead kinda glosses over the SO case and then glosses over the surface of anti-trust in general.

I would have preferred a good article with lots of facts and details (eg DiLorenzo’s piece on ‘The Myth of Natural Monopoly’) that I can point someone to when they use SO as an example of why we need govt intervention regarding monopolies. I don’t feel this article quite does that.

Can anyone point me towards a better one?

ZDRuX May 14, 2011 at 5:59 am

I’m new here and have enjoyed the article.

I have some questions. With regards to oil companies and “price fixing” at the pump. How would this work itself out in a free market? If all the providers decide to charge a single price that is higher than what it would normally cost to provide fuel, how can this ever be solved?

And it’s not like Joe Blow can just start up an oil corporation and open up a bunch of gas stations across the country.

I can see this working itself out if we’re talking about restaurants, or grocery stores.. but, entire oil manufacturing and refining companies? Seems unlikely.

Can someone explain? Thanks.

nate-m May 14, 2011 at 6:52 am

That is a ‘trust’ or a cabal. Obviously this requires businesses to conspire with one another to set prices.

In the real world such agreements only last for a while. What ends up happening is either:
*) One of the members break rank in secret in order to gain market share. Once other members learn of this the cabal dissolves due to infighting. You can imagine the temptation would be phenomenal*
*) Entrepreneurs notice the high profits of the markets and gain enough investment from other companies to then compete with the cabal.

These sort of things just don’t last without government enforcement. The Fed is the big example of this. The national banks got together and formed a trust to manage the market. However state banks were now starting to rise in popularity. So they formed the Federal Banking system to keep the state banks from being competitive against the national banks. In return for getting the Fed the national banks supported the politician spending and political schemes…

Here is a example of how a oil cabal will dissolve over time, from a perspective of a service station owne….

* Imagine your a owner of gas station. You are a customer of Exxon, but it doesn’t really matter since all the oil companies sell you gasoline at the same rate. Now imagine a Shell company rep that you know calls up when you’re at home. He will offer you a 10% discount on gas if you switch to their fuel, but you must not actually lower your prices or you will lose your discount. That way he can get the salesman commission for landing a new customer and you get to keep significant profits.

So that works out. You switch to Shell and get to keep the profits and none is the wiser. Since you no longer really are able to gauge expenses as effectively as you did before you just match what the current market price in your area for fuel.

A few months go buy and you notice that the guy that owned the 7-11 down the block has dropped his prices by 2% and now is getting a large amount of your customers. Well that is the new market value, right? You must of missed something. So you lower your prices to match his. Eventually you notice that everybody else in town has now matched your price.

A few more months go buy and that same guy drops his price another 1%, and starts to get a lot of new customers. So you end up matching them after a while. *Shrug* Your still getting 7% ‘hidden’ profit, right? You’re still getting wealthier then him so who cares?

Now imagine you’re a different guy.

Your a worker for Exxon. Say a middle management accountant type. Your on vacation and your driving through these small towns one after another. Town after town you pay the same price on gasoline.

Until you get to this one county. Instead of paying 3 dollars a gallon of gas you notice that everybody there is asking for 2.91. That’s odd, you think.

Your curious and you wonder how these businesses in this particular town can cut the margins down to make money at 2.91. Everybody pays the same amount for the fuel, but how are these people able to cut the margins down that much and still stay in business?

They must have some notion about how to run a gas station better then everybody else… maybe some trick with employee benefits or something.

You decide to call up the local Exxon sales goon and ask him what is up.

You call him and ask him what is different about these gas stations in this town….

He says he doesn’t know and, unfortunately, he probably can’t find it out for you.

You see he is having a rough time since all of them had switched to using Shell gasoline for some odd reason…

ZDRuX May 14, 2011 at 7:56 am

Thanks for the explanation, I guess when you throw this many people at the equation, and at different levels of the scheme, everybody wants a little piece of the action, which then in itself causes the pie to go stale and break up eventually.

JoshINHB May 14, 2011 at 8:46 am

That explanation only works in the absence of vertical integration and is actually an argument for not allowing the branding of a commodity. As it now stands, the gas stations are either corporately owned by the distributors of have exclusivity contracts with them that prevent competition at that level.

BioTube May 14, 2011 at 7:23 pm

Gas is how a lot of corner stores draw in customers – they don’t make much profit off it as it stands, so taking a loss to draw more customers into the store proper isn’t too far out of the question.

Anders Mikkelsen May 19, 2011 at 1:11 pm

One of the things that will happen if prices are raised unilaterally is the market won’t clear, there will be unused capacity. Oil will just be sitting somewhere waiting to be shipped. (At first under the gas station, then at the shipment point, then at the refinery, etc. until people have to start turning off oil wells.

If the price of oil is not allowed to rise during high demand or low supply seasons then gas stations will find themselves running out of oil and customers will no longer be able to count on being able to drive up and fill up. Similarly if prices don’t fall during low demand or low supply seasons the gas station owner finds himself unable to sell all the gas that gets delivered too him. It then becomes dead inventory that isn’t making anyone any money – so he’s better off lowering prices so he doesn’t create a backlog of unsold gas that someone has to unload.

So it is possible for oil companies to try to raise prices and cut supply unilaterally but all sorts of effects will reverberate through the supply chain.

For a capital intensive business / sector there is a high opportunity cost of idle capacity. Using the idle capacity has a very low marginal cost compared to the marginal sales, so you’re often better off running at full capacity no matter what the market price. (Think how firms airlines sell unused seat at a discount – there’s a low marginal cost compared to the marginal sale. I suspect the oil industry as a whole operates much more along these lines than one might realize.)

Gilbert W. Chapman May 17, 2011 at 6:00 am

D.T. Armentano’s books answer all the questions asked above, and as you’ll note in the ‘side bar’ are still in print.

Granted . . . I’m biased . . . Armentano was the professor I learned under while doing post graduate work in economics while at the University of Hartford in the mid seventies.

It’s a real shame he is retired now. With no reservations, I say, “He was, without a doubt, the most gifted economics teacher (of about a half dozen) I had while in college.”

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