United States Steel's Acquisition of the Great Northern Ore Properties: Vertical Foreclosure or Efficient Contractual Governance?

75 Pages Posted: 9 Oct 1996 Last revised: 23 Dec 2022

See all articles by Joseph C. Mullin

Joseph C. Mullin

Sidley & Austin

Wallace P. Mullin

George Washington University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 1996

Abstract

This paper examines United States Steel's acquisition by long-term lease of the iron ore properties of the Great Northern Railway. This 1906 transaction, which significantly increased U.S. Steel's already substantial ore holdings, has been characterized by contemporary observers and modern economists as an example of vertical foreclosure. We present quantitative and qualitative evidence to support an alternative view that the lease generated a net efficiency gain, resulting in lower steel prices, as it promoted relationship-specific investment in the exploitation of the ore properties. Quantitatively, we examine the stock market reactions of U.S. Steel, the Great Northern Railway, steel industry rivals, and the railroads, a major steel customer, to the announcement of the lease signing. Strikingly, the railroads had a significant positive excess return. Qualitatively, we examine the terms of the lease and the performance of the parties to document the role of the lease in encouraging relationship-specific investment.

Suggested Citation

Mullin, Joseph C. and Mullin, Wallace P., United States Steel's Acquisition of the Great Northern Ore Properties: Vertical Foreclosure or Efficient Contractual Governance? (July 1996). NBER Working Paper No. w5662, Available at SSRN: https://ssrn.com/abstract=4304

Joseph C. Mullin

Sidley & Austin

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Wallace P. Mullin (Contact Author)

George Washington University - Department of Economics ( email )

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