Monopolization by 'Raising Rivals' Costs': The Standard Oil Case
Long Island University - Southhampton College
University of California, Los Angeles (UCLA) - Department of Economics; Compass Lexecon
April 1, 1996
Journal of Law and Economics, Vol. 39, No. 1, 1996
Standard monopolized the petroleum industry during the 1870s by cartelizing the stage of production where entry was difficult – petroleum transportation. Standard enforced the transportation cartel by shifting its refinery shipments among railroads to stabilize individual railroad market shares at collusively agreed on levels. This method of cartel policing was effective because Standard possessed a dominant share of refining, a dominance made possible with the assistance of the railroads. The railroads facilitated Standard's refinery acquisitions and prevented new refiner entry by charging disadvantageously high rates to non-Standard refiners. While Standard used its dominant position in refining to sell refined product at a monopoly price and to purchase crude oil at a monopsony price, Standard did not possess independent market power in refining. Whenever the transportation cartel broke down, Standard's pricing power vanished.
Number of Pages in PDF File: 48
JEL Classification: L41, K21Accepted Paper Series
Date posted: July 10, 2011 ; Last revised: September 25, 2014
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