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

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