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

Elizabeth Granitz and Benjamin Klein
The Journal of Law & Economics
Vol. 39, No. 1 (Apr., 1996), pp. 1-47
Stable URL: http://www.jstor.org/stable/725768
Page Count: 47
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Monopolization by "Raising Rivals' Costs": The Standard Oil Case
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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.

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