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

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  • Granitz, Elizabeth
  • Klein, Benjamin

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 dominate position in refining to sell refined products 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. Copyright 1996 by the University of Chicago.

Suggested Citation

  • Granitz, Elizabeth & Klein, Benjamin, 1996. "Monopolization by "Raising Rivals' Costs": The Standard Oil Case," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 1-47, April.
    • Handle: RePEc:ucp:jlawec:v:39:y:1996:i:1:p:1-47
    DOI: 10.1086/467342
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    1. Telser,Lester G., 1987. "A Theory of Efficient Cooperation and Competition," Cambridge Books, Cambridge University Press, number 9780521306195, September.
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    3. Lamoreaux, N., 2019. "The Problem of Bigness: From Standard Oil to Google," Cambridge Working Papers in Economics 1963, Faculty of Economics, University of Cambridge.
    4. Gerking, Shelby & Hamilton, Stephen F., 2010. "SO2 policy and input substitution under spatial monopoly," Resource and Energy Economics, Elsevier, vol. 32(3), pages 327-340, August.
    5. Micola, Augusto Rupérez & Banal-Estañol, Albert & Bunn, Derek W., 2008. "Incentives and coordination in vertically related energy markets," Journal of Economic Behavior & Organization, Elsevier, vol. 67(2), pages 381-393, August.
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    10. Bolanos, Jose A., 2019. "Energy, uncertainty, and entrepreneurship: John D Rockefeller’s sequential approach to transaction costs management in the early oil industry," LSE Research Online Documents on Economics 100852, London School of Economics and Political Science, LSE Library.
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