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Sunday, November 17, 2013

Anti-Anti-Trust: The Standard Oil Case

I've concluded over years of occasional study that Antitrust law does more harm than good, particularly when viewed from perspective of the consumer.  There are a wide variety of subtle reasons why I believe this and my plan is to occasionally write about various aspects of those reasons.

I approach many narratives with skepticism, and the Antitrust narrative is one of those.  When looking at Antitrust cases, I've noticed that the glorious narrative of noble "Trust Busters" courageously fighting uber-powerful, evil corporations for the benefit of the consumer doesn't hold up very well and is quite dependent on spin.  In other words, the facts don't speak for themselves.  The following is one example (from ANTITRUST: THE CASE FOR REPEAL by Dominick T.. Armentano):
The conventional account of the Standard Oil case goes something like this.  The Standard Oil Company employed ruthless business practices to monopolize the petroleum industry in the nineteenth century.  After achieving its monopoly, Standard reduced market output and raised the market price of kerosene, the industry's major product. The federal government indicted Standard under the Sherman Act at the very pinnacle of its monopolistic power, proved in court that it had acted unreasonably toward consumers and competitors, and obtained a divestiture of the company that helped to restore competition in the petroleum industry. 
This account has almost nothing in common with the actual facts.  It is not possible to review the entire history of the case here, but a summary of the government findings against and actual conduct of Standard Oil will serve to make the point. 
The Standard Oil Company was a major force in the development of the petroleum industry in the nineteenth century.  It grew from being a small Ohio corporation in 1870, with perhaps a 4-percent market share, to become a giant, multidivisional conglomerate company by 1890, when it enjoyed as much as 85 percent of the domestic petroleum refining market.  This growth was the result of shrewd bargaining for crude oil, intelligent investments in research and development, rebates from railroads, strict financial accounting, vertical and horizontal integration to realize specific efficiencies, investments in tank cars and pipelines to more effectively control the transportation of crude oil and refined product, and a host of other managerial innovations.  Internally-generated efficiency allowed the company to purchase other businesses and manage additional assets with the same commitment to efficiency and even to expand its corporate operations abroad. 
Standard Oil's efficiency made the company extremely successful: it kept its costs low and was able to sell more and more of its refined product, usually at a lower and lower price, in the open marketplace.  Prices for kerosene fell from 30 cents a gallon in 1869 to 9 cents in 1880, 7.4 cents in 1890, and 5.9 cents in 1897.  Most important, this feat was accomplished in a market open to competitors, the number and organizational size of which increased greatly after 1890.  Indeed, the competitors grew so quickly in the years preceding the federal antitrust case that Standard's market share in petroleum refining declined from roughly 85 percent in 1890 to 64 percent in 1911.  In 1911, at least 147 refining companies were competing with Standard, including such large firms as Gulf, Texaco, Union, Pure, Associated Oil and Gas, and Shell.
So, before and during the period when Antitrust action was brought against Standard Oil, prices were plummeting and Standard Oil's market share dropped significantly.  Harm to the consumer was nowhere to be seen and, in fact, consumers benefited hugely from the price drop.

There are quite a number of other Antitrust cases like this that follow this "Anti" narrative.  The common wisdom is often just a particularly spin and narrative which don't reflect the facts particularly well.

32 comments:

Howard said...

There you go again expressing your personal preference for non-fiction.

Clovis e Adri said...

Bret,

Well, first thanks for the post, I was waiting for this one.

I have a few points to make, but I will start with only one: you do make a case for the non necessity of that anti-trust process, but you did not try to demonstrate that it was harmful for the consumers.

IOW, when that huge company was dispersed in dozens of other ones, it is - at least in principle - possible that the competition generated was good for consumers. Do you have a case to make that it was not?

erp said...

When a company gets too big, it gets very expensive to operate. I remember a physicist cousin who's my age, so this was at least 50 years ago, saying that places like Boeing (where he worked a the time) can't sharpen a pencil for less than 50 thou.

Clovis is wrong. Bill Gates overtook IBM, the biggest baddest gorilla of them all at the time, from his parent's garage.

Howard, it boggles my mind that the same people who think free enterprise can't be trusted to become too big, salivate at the thought of the government running everything. Big business must be responsive to customers unless of course, they are bailed out and given to the unions like GM & Chrysler to name a few while government can continue to swallow everything in its maw as it'd doing now.

o/t but amusing. While on line in Home Depot, I couldn't help overhearing a conversation between a man who works with his hands and an aging female flower child -- both late 50's/60's. The subject: Obamacare.

He was trying to explain to her that nothing is free. Working people pay for everything. She looked at him with amused compassion and explained, that of course, it isn't free, the government pays for it.

Any hope you think?

Clovis e Adri said...

Erp,

The funny part is that I made no affirmations, only questions - and I am still wrong.

---
Howard, it boggles my mind that the same people who think free enterprise can't be trusted to become too big, salivate at the thought of the government running everything.
---
It boggles mine too, I do not remember to be defending here ever expanding government. But, well, I am wrong anyway, what does it matter what I say?

erp said...

Clovis:

We have a saying, "If the shoe doesn't fit, don't try to squeeze you foot into it."

Clovis e Adri said...

Erp,

I have a saying: if you do not intend to fit a wrong shoe in other people's foot, do not call them by name and say "here is your shoe!".

erp said...

Clovis, I categorically stated that you are wrong IMO. No shoes were required.

Bret said...

Clovis wrote: "...but you did not try to demonstrate that it was harmful for the consumers."

Yes. This first post did not focus on that (as I wrote, "my plan is to occasionally write about various aspects of those reasons").

I was originally going to write a single post on the subject, but it's way too complex for me to pull that off.

Clovis wrote: "...possible that the competition generated was good for consumers..."

No, I can't prove that there's no possibility in every case that the Antitrust action didn't help when compared to every possible alternate, but unknowable, universe where there was no Antitrust action.

I will be attempting to make the case over a series of many posts that there is no clear evidence that it has been beneficial overall. Then, given it that government intervention has substantial costs itself, I will argue that it follows that the Antitrust bureaucracy should be dismantled.

Peter said...

Bret, surely this is a strange argument from someone whose very last post was about the inherent corruption in bigness and concluded with a resounding Limiting the number of large and powerful companies would be a good thing since, to paraphrase Lord Acton, power corrupts and big power corrupts bigly. If you don't like anti-trust laws, how would you accomplish this? I trust with something a little more muscular than consumer boycotts.

Assuming your arguments about price and efficiency are correct, isn't this more about power, political corruption and market manipulation? I could go on, but I'll just wait for Harry to come along to tell us how his racist great uncle ran Standard Oil and, with the full backing of the Vatican, had a grand old time cheating honest farmers out of their land and poisoning their well water until freedom-loving Democrats used the benevolent power of government to stop him.

Bret said...

Peter wrote: "...surely this is a strange argument..."

Yes. I am the king of strange arguments. :-)

Peter wrote: "If you don't like anti-trust laws, how would you accomplish this?"

As I wrote in Big Power Corrupts Bigly: "Second, institute a revenue tax (NOT income tax), on all revenues over some amount, say $10 billion, with no loopholes, and increasing rates as revenues increase beyond $10 billion. If economies of scale still favor the company even with the revenue tax, fine. If not, the shareholders will force a breakup of the company because the new pieces will then be more profitable in aggregate because each piece will be smaller and able to avoid the tax on revenue. This would help reduce the number of Bigs and their inherently corrupt relationship with Big Government."

Wallah! Mission Accomplished(TM). Well, except for all the things I haven't (yet) foreseen. :-)

The point is to use relatively simple rules to accomplish objectives (rule of law) versus complex bureaucracies such as the Antitrust establishment (rule of man).

Harry Eagar said...

There is a difference between having and using antitrust laws. what is the market dominance of firms engaged in making, eg, advanced jet fighters?

I was amused -- having read Nevins's life of Rockefeller, where all those achievements of management are extolled -- to see them repeated, but without adding the clever market maneuver of having the railroads charge Standard's competitors more and pay he difference back to Standard.

The free market is a wonderful thing, and some people proclaim that most business managers are honest.

Clovis e Adri said...

Harry,

---
There is a difference between having and using antitrust laws.
---

You point out what I intended to.

Big companies, retaining such economic power as they do, represent in effect a new kind of "government". The importance of having anti-trust law is more the possibilities it opens than their realization. It is more about checking powers than anything else.

You may argue it is a poor way of checking powers, and that devising rules for the companies not to get so big, as Bret did, could be more efficient. I am fine with alternatives, if the standard one is really that bad. But I still would like to see an argument showing that consumers are losing with present anti-trust rules. There are certainly cases where they've lost due to monopoly abuses.

Annoying Old Guy said...

"There are certainly cases where they've lost due to monopoly abuses."

Such as? One of Bret's points is that in the standard examples there was no harm to consumers. The ALCOA case, which I brought up in another string, is similar.

Also, I hardly think it sufficient justification for such government power to be able to claim only that it doesn't active hurt citizens. If a power is not clearly and actively of benefit, then the government shouldn't have it.

Harry Eagar said...

I thought you guys were all about competition.

Oil is kind of interesting in that new finds revolutionize business strategies overnight; sort of like silicon technology.

Antitrust has not been used extensively against Big Oil since 1911, but, curiously, no company has managed to establish a retail operation in all states yet.

This has led me to many idle ruminations about how business actually works. How is it that Big Oil, with its vast financial resources and high profit margins, has been unable to establish a national market, although 2 ketchup makers have done it?

Annoying Old Guy said...

I thought you guys were all about competition.

Yes.

As for your question, take a look at local minima and their impact on situations such as that.

Harry Eagar said...

I don't see the relevance. Texaco briefly had stations opened in the lower 48 but couldn't keep them going. Nobody else even came close.

Since gasoline is fungible -- in a region, virtually all the gas sold under all brands comes from the same refinery -- as far as I can tell there isn't any local effect that would impact a national chain.

Yet another example of how economic functions do not follow simple rules.

Annoying Old Guy said...

I don't see the relevance

You asked why a complex system could get stuck in one state when it had previously been in another. That can easily happen if there are multiple local minima and sufficient perturbation of the system moves it from one to another, even if the new state is not as optimal as the previous. Your question presumes that the system can move smoothly in any direction and therefore return to the original state from any magnitude of perturbation, which can easily be untrue.

The "local" here is not geographical locality, but locality in the state space of the system.

Yet another example of how economic functions do not follow simple rules

Not necessarily. The work for which Wolfram became famous was showing that systems with even very simple rules can have this kind of complexity and hysteresis.

Harry Eagar said...

By coincidence, the invaluable series 'Sundays with the Christianists' examines the same era and is worth reading, for all that it is snarky and contemptuous of people who order their lives by trying to propitiate spooks:

http://wonkette.com/535046/sundays-with-the-christianists-american-history-textbooks-free-enterprise#more-535046

Nut sentences:

"The problem is never capitalism. It’s only dishonest men, and them, we can deal with."

As for complexity, where do we get the idea that not having a national monopoly of gasoline distribution is suboptimal? Also, I am not getting why a system where humans can intervene consciously is going to be locked into definite outcomes. I get it with, say, forests, but forests don't think.

Annoying Old Guy said...

where do we get the idea that not having a national monopoly of gasoline distribution is suboptimal?

I don't know. Where do we?

I get it with, say, forests, but forests don't think

Sentience is irrelevant in this case, as long as you are describing a system with a sufficient number of different states.

You should also define "locked in" more precisely. You, of all people, can not think of any human societies that got locked in to specific structures?

Howard said...

When one looks at the lack of serious finding in the granddaddy of anti-trust cases such as Standard Oil and just how weak most other cases are, it seems that the glorious narrative of noble "Trust Busters" is indeed suspect. If you combine the rent seeking behaviour of business people looking for protection from the rigours of competition with a public choice view of the political class, it looks a lot like the relationship between Rick and Louis.

Bret said...

Harry wrote: "How is it that Big Oil, with its vast financial resources and high profit margins, has been unable to establish a national market, although 2 ketchup makers have done it?"

Perhaps that's because there are no unique ketchup refining laws by state like there are for gasoline? For example:

Because of California's unique fuel blend requirements, motorists can rely only on California's refineries to correct their supply problem. They can't solve the shortage by borrowing from their next door neighbors in Arizona or Nevada the way other states might."

Bret said...

Clovis wrote: "There are certainly cases where they've lost due to monopoly abuses."

Well, I'll partly re-ask aog's question, but I don't want to reignite the Brazilian AIDS drugs dilemma discussion so I'll rephrase it slightly.

Which non-legal (i.e. not related to a government patent or other government grant of a monopoly) "monopolies" can be shown conclusively to have harmed consumers?

Clovis e Adri said...

Bret,

It is very hard to answer your question, for I can not imagine any big business today which is not related to government through regulations, taxes, etc.

Still, I already gave one example here in GreatGuys where I believe a monopoly has directly harmed my consumer life: Big Beer.

The price, quality and accessibility of good beers is hindered, in the region I live in, due to InBev. AOG does not look to consider my feelings as consumer important here and was not in agreement with me, so you may well not agree too.

Bret said...

Clovis wrote: "...for I can not imagine any big business today which is not related to government through regulations, taxes, etc."

By "legal monopoly," I'm only referring to government granted monopolies. For example, via patents & copy right.

Clovis wrote: "Big Beer. The price, quality and accessibility of good beers is hindered, in the region I live in, due to InBev.

I'll have to take your word for it, but consider this:

"In 1978, there were 89 breweries in the United States; at the beginning of this year, there were 2,336, with an average of one new brewery per day. Most of them are tiny, but a handful, like Sam Adams and Sierra Nevada, have become large national brands. At the same time, sales of Budweiser in the United States have dropped for 25 consecutive years."

Doesn't really sound like a typical monopoly to me, or at least not one that's going to last for very long. Nonetheless, the justice department is looking to block AB InBev from acquiring the rest of Grupo Modelo under Antitrust regulation. As you can probably imagine, I'm rolling my eyes and shaking my head with sadness.

Even the NY Times article agrees that AB InBev is not likely to be the real elephant in the room:

"Over the coming decades, though, the opinion of American government officials might not matter quite so much. China’s National People’s Congress approved its first antimonopoly law in 2008, which, many economists fear, could be used to block foreign competitors and to promote local giants. India’s version, which went into effect in 2009, is even less clear. It’s quite possible that the true monopolistic battles of the 21st century will not be among massive corporations but among the self-interested governments. We can only hope that they don’t engage in a trigger strategy of their own."

Unfortunately, I think the US Justice department qualifies as one of those "self-interested governments."

Considering Big Beer to be a monopoly that will somehow end up delivering something better and cheaper with the Justice Department's involvement is, in my opinion, a conjecture at best.

Clovis e Adri said...

Bret,


The trend of small breweries is happening here too, but in very heterogeneous ways.

The South (where I come from) of Brazil, and the Southwest, have been seeing dozens of new breweries open in the last few years. Those states are more industrialized, and the South counts with a more European background. So many of the best beers come from Santa Catarina, a beautiful state to the South with strong German migration history.

But InBev still uses its muscles to slow the expansion of the market for the small ones. It does make agreements with the big national supermarket brands to restrict access to others.

And, when some of the smaller ones gets bigger, they go and buy it. There was a very good beer produced in Campos do Jordao (a nice place within the state of Sao Paulo), made with high standard recipes, that was growing in national scale. InBev bought it and changed the recipes in order to use cheaper and lower quality ingredients. It still sells it in national scale (to make the propaganda they also have a good beer), but it is more expensive, and what is worse, it is not the same good beer as before.

As I live far away from the best producing places, InBev's hability to restrict distribution of others affects me directly. The products still arrive here, in some smaller and more specialized stores, but the price is much higher. The lack of competition also makes the very few local breweries starting up around to price their beers higher too.


So as I told you, price, quality and accessibility are hindered due to InBev.

I do not think the situation is settled, for as I said in another thread, consumers are evolving and it has been changing the markets. So I am not defending governmental action on this one. But I do feel restricted by that monopoly, and I think it is only natural that the People devise laws to be able to tackle with them when they feel so pissed off :-)

erp said...

Clovis, it's amusing that you support government interference when it's to your personal advantage, but decry it when when it "p*ss*s" you off, i.e., when it interferes with your book or beer purchasing.

Perhaps someday, soon it is to be hoped, you'll notice that government inference never makes things better.

*a very vulgar phrase in the U.S.

Clovis e Adri said...

Erp,

It is amusing you keep ignoring netiquete: the smiley face should indicate how serious my opinion was to be taken.

As for my use of bad language, I am sorry, I see people saying that one in movies so often, I had no measure of how vulgar it may be.

Harry Eagar said...

'Perhaps that's because there are no unique ketchup refining laws by state like there are for gasoline?'

It is hard to have a serious discussion with people for whom time does not flow. Big Oil tried to establish national retail networks for generations before states (or one state) began imposing local requirements. You should look up the term-of-art 'skimming' in the context of Big Oil vs. regional independents

'You, of all people, can not think of any human societies that got locked in to specific structures?'

I cannot. I know of some that are more conservative than others, but even Muslims now emigrate to live in non-Muslim states, something that is explicitly forbidden by the Koran and was unheard of 200 years ago.

'Which non-legal (i.e. not related to a government patent or other government grant of a monopoly) "monopolies" can be shown conclusively to have harmed consumers?'

Welding rods.

Harry Eagar said...

'Perhaps that's because there are no unique ketchup refining laws by state like there are for gasoline?'

It is hard to have a serious discussion with people for whom time does not flow. Big Oil tried to establish national retail networks for generations before states (or one state) began imposing local requirements. You should look up the term-of-art 'skimming' in the context of Big Oil vs. regional independents

'You, of all people, can not think of any human societies that got locked in to specific structures?'

I cannot. I know of some that are more conservative than others, but even Muslims now emigrate to live in non-Muslim states, something that is explicitly forbidden by the Koran and was unheard of 200 years ago.

'Which non-legal (i.e. not related to a government patent or other government grant of a monopoly) "monopolies" can be shown conclusively to have harmed consumers?'

Welding rods.

Clovis e Adri said...

Bret,

Actually, I do want to make the case that anti-trust laws could, potentially, have been helpful in the Big Beer case.

First, a little history. There were two main brands, in market share, in Brazil up to year 2000, Brahma and Antarctica. Together try probably had 70 to 80% of the market. There were famous "beer wars", where they would make agressive marketing and pricing moves to steal market share from each other. There were also other companies with reasonable market shares (10 - 15%) competing too.

Even though all of those companies made awful beer, their price war surely were beneficial to the consumer.

Then, in 2000, Brahma and Antarctica make a bid to merge to one company only, AmBev. The anti-trust laws we have should prohibit that (or make it a lot harder), but as they had all the powerful friends they needed, they surpassed any restriction and had the approval to merge.

Well, not only powerful friends explain their merging. There has been, since the oughts, a tendency within our government to incentive (through easing of restrictions and subsided loans) the formation of huge international companies, on the theory that their expansion and competition into international markets would be beneficial.

After a few years, AmBev then marged with the (Belgian) Interbrew, ending up this huge company they are now.

Ok, that's the history. Now, for my point: after the initial merge, there were no more "beer wars", no more tough competition driving prices down. And with time that other companies (with 10-15% market share) have been steadily losing space for InBev, for they have no way to compete as before.


So I ask myself: *if* the anti-trust laws had been used back in 2000, would our beer market be a better one today?

What I know is that they have not been used, and the end result does not look good in any way I look at it. Even forgetting about beer quality, competition has diminished, after all.

Well, for sake of completness, let me remark that, as InBev is a threat to other multinational Beer companies, some of the international competition came here to try to hit InBev at one of his strongholds. So the level of comeptition has been getting better from 3 or 4 years ago to now. And, as I commented before, the higher level of demand on quality beer by a growing share of consumers also has been provoking changes.

Maybe, in future, we may conclude that it was better not to apply anti-trust laws and wait for the market to evolve. Maybe not. A final point I want to make is that, the same way we do not know how things will go from now on, those people who started suing Standard Oil back in 1911 had no crystal ball either. How sure can we be that, had no anti-trust happened, things would not be worse afterwards?


Annoying Old Guy said...

even Muslims now emigrate to live in non-Muslim states

Doesn't that indicate the originating culture is so locked in that people must move, not the culture? How has that immigration changed any of the locked societies?

Harry Eagar said...

'Doesn't that indicate the originating culture is so locked in that people must move, not the culture? How has that immigration changed any of the locked societies?'

I don't see that. You could just as easily (following Hobsbawm) suppose that thy are migrating for economic opportunities that were unavailable in their home countries because of capitalist colonialism.

In any case, the Muslim countries have changed since 1800 (when even educated Muslims had not heard of the USA) by exposure. As Bernard Lewis points out, parliamentary government has no precedent in Muslim political theory.

We could also note that many Muslims, even sometimes women, can read now, which is novel.

And many other things.