Monopolization by 'Raising Rivals' Costs': The Standard Oil Case

48 Pages Posted: 10 Jul 2011 Last revised: 25 Sep 2014

Elizabeth Granitz

Long Island University - Southhampton College

Benjamin Klein

University of California, Los Angeles (UCLA) - Department of Economics; Compass Lexecon

Date Written: April 1, 1996

Abstract

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.

JEL Classification: L41, K21

Suggested Citation

Granitz, Elizabeth and Klein, Benjamin, Monopolization by 'Raising Rivals' Costs': The Standard Oil Case (April 1, 1996). Journal of Law and Economics, Vol. 39, No. 1, 1996. Available at SSRN: https://ssrn.com/abstract=1872213

Elizabeth Granitz

Long Island University - Southhampton College

Southhampton, NY 11968
United States

Benjamin Klein (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

1999 Avenue of the Stars
Suite 1150
Los Angeles, CA 90067-4628
United States
310-728-2025 (Phone)
310-728-2070 (Fax)

HOME PAGE: http://www.econ.ucla.edu/people/Faculty/Klein.html

Compass Lexecon ( email )

1999 Avenue of the Stars
Suite 1150
Los Angeles, CA 90067-4628
United States
310-728-2025 (Phone)
310-728-2070 (Fax)

HOME PAGE: http://www.compasslexecon.com/professionals/bio?id=152

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