trc@houti.UUCP (07/14/83)
Response to Tim Sevener on the Standard Oil case: I and several others had presented the claim that monopolies are either correct (the cheapest, most effective ), or else are backed by government coercion. We did not claim that no monopoly could arise without government intervention. We did claim that government intervention could encourage such monopoly growth. Tim Sevener asks "How about Standard Oil?", and claims that it was "just one of many industrial monopolies which had nothing to do with gov't regulation or intervention. Standard Oil . . . just outright took over the market!" (Tim also makes an argument about government intervention in the railroad industry not being any worse than in any other transportation industry. I will answer that one only by saying - it may not have been worse, but that does not imply that any such intervention was good.) I will make three points: Government actions did have a lot to do with the rise of Standard Oil, Standard Oil did not act nearly as badly as legend would have it, and the split up of Standard Oil is an example of the evils of Antitrust. Let me add one caveat - I am not an expert on the history of monopolies and antitrust, but have merely investigated this particular case. Most of the pro-regulatory, pro-antitrust sources I checked in researching this question merely listed the alleged crimes of Standard Oil, providing no context or support for the claims - they were taken as self-evident from the fact that Standard Oil was a near monopoly. My source for much of what follows is: "The Myths of Antitrust", by D.T. Armentano, PhD, Arlington House, New Rochelle, NY. The historical background of the case is this: The Civil War had just ended, and the government had supported that war, in part, by inflation. In order to allow this inflation, specie payments had been stopped. This inflation had led to a large amount of speculation. In particular, there were around 250 oil refiners in the US - producing kerosene by distillation. Inflation allowed some businesses to get by through the reduction of the value of debts, that would have otherwise collapsed through market forces. Then the government decided to return to specie payments - by 1870. In order to do this, they de-valued the currency by withdrawing greenbacks from circulation. Note that it was the inflation, not the return to the specie payments, which was the major wrong-doing of the government, but that both are examples of govt intervention. In 1870, JD Rockefeller had 4% of the refining market. This grew to 25% by 1874, and to 80-85% by 1880. Eventually, Standard Oil may have had 90% of the refined oil market. How did this happen, if not by means of wrong doing on the part of JDR? The major claims made against Standard that led to its eventual breakup were that: Standard had driven competitors out of business; Standard had too big a market share; Standard had used price cutting against its competitors; Standard had vertically integrated facilities - tank cars, storage tanks, loading facilities, etc; and most importantly, Standard had obtained secret rebates from Railroads for shipping oil, that were not available to competitors. The latter was the charge that supposedly provoked the outcry that led to the split-up of Standard. Railroads have high fixed costs - debt payments, maintenance for the lines, etc; and small variable costs - those that vary with the amount of traffic. As a result, railroads are naturally hungry for traffic, and in particular, steady traffic. This is exactly what Standard could provide them with. JDR knew this, and took advantage of it to obtain reductions in rates. This practice was common, and usually done in secret to prevent price wars. It was *NOT* a wrongful practice - businesses have a right to set prices on the open market by bargaining. The railroads would not have agreed to the rebates unless they were benefiting from the business. Smaller refiners did not provide as good a business, and so could not negotiate equal rebates - and that was the source of their jealousy. "Never-mind that all refiners had had an equal chance to do what JDR did, but didnt take the risks that he did", was their attitude. As to the other charges - Standard Oil competed strongly, and, due to the nature of the economy at that time, some refiners were almost certain to go out of business anyway. It is the nature of the market that those least able to compete fold. The same goes for price cutting. The ownership of vertically integrated facilities is not wrong, except under the morality of antitrust. These facilities allowed Standard to cut costs, which is the proper concern of any business. There was another factor that allowed Standard to compete very effectively - and that was the introduction in 1875 of the process of "destructive distillation" - the cracking of oil. This process was more efficient than the old distillation methods, but required a larger refinery. Most smaller refiners could not afford this process, and so could not continue to be efficient. For this reason, and because of the devaluation of currency, many refineries were quite eager to be bought out. Standard Oil had to pay the best price in order to be the one doing the buying out. JD Rockefeller was involved in some efforts at collusion against competitors - but collusion is a term that is used for secret cooperation, by those that disapprove of that cooperation. If there is no reason to disapprove of the cooperation, there is equally no reason to call it collusion. Only the antitrust provides such a reason for such disapproval, and antitrust is a wrongful intervention of the government into the realm of business. Consider what would have happened if Standard had not been split up. At worst, it might have become a full monopoly, and set prices however it pleased, which would encourage new competition. So long as there are any other competitors, any attempt at a price war would hurt Standard more than the competitors, because it would have a bigger market share to lose on. If it became uneconomical for a competitor, they could either sell out to others with more cash reserves, who could afford to out-wait Standard; or they could simply close down operations and wait for the price to go down. (And sell commodity contracts on the oil they held, so that when prices fall, they could buy back the contracts at lower prices!) And, suppose that oil prices had been kept somewhat higher - do those of you who support antitrust actions really think that would be bad? Note that higher prices would mean less consumption - IE conservation of an important natural resource! Industries would have a natural reason to be more efficient. Big gas-guzzling cars might never have become the fashion. Enforced (limited) "competition" is probably responsible for the energy crisis, and for the often decried "wastefulness" of Americans. I offer this, not as justification for the actions of businesses, but as a simple example of the sort of efficiencies that Antitrust makes impossible. Tom Craver houti!trc
nrh@inmet.UUCP (07/17/83)
#R:houti:-34800:inmet:7800008:000:2431 inmet!nrh Jul 17 03:27:00 1983 Anyone wanting a Libertarian slant on the "dangers" of monopoly if regulation is left to the market can read about it in David Friedman's "The Machinery of Freedom" [Arlington House, 1973 &78] On the subject of Standard Oil, Friedman claims that JDR was not very successful at maintaining the monopoly. Two examples: 1. When JDR tried to threaten a price war if Cornplanter Refineries did not raise their prices, Cornplanter laughed at them: "Well, I says `Mr. Moffett, I am very glad you put it that way because if it is up to you the only way you can get it [the business] is to cut the market [reduce prices], and if you cut the market I will cut you for 200 miles around and I will make you sell the stuff,' and I says, `I don't want a bigger picnic than that; sell it if you want to,' and I bid him good day and left" <Quote from John S. McGee "Predatory Price Cutting: The Standard Oil [NJ] case"> 2. "Another strategy, which Rockefeller probably did employ, is to buy out competitors. This is usually cheaper than spending a fortune trying to drive them out -- at least, it is cheaper in the short run. The trouble is that people soon realize they can build a new refinery, threaten to drive down prices, and sell out to Rockefeller at a whopping profit. David P. Reighard apparently made a sizable fortune by selling three consecutive refineries to Rockefeller. There was a limit to how many refineries Rockefeller could use." [ Reprinted without permission ] Friedman's basic point is that most monopoly is gleefully undercut by chislers, and that governments are often the only means by which monopolies become possible. Even natural monopolies cannot (dare not) keep their prices too high because "... [A natural monopoly] retains the market only so long as its price stays low enough that other firms cannot make a profit. This is what is called potential competition. A famous example is Alcoa Aluminimum. One of the charges brought against Alcoa during the antitrust hearings that resulted in its breakup was that it had kept competitors out of the aluminum business by keeping its prices low and by taking advantage of every possible technological advance to lower them still further." [ Reprinted without permission ] "The Machinery of Freedom" is, I'm told, available from Laissez-Faire books in New York City. No, I don't work for them.