The industrial revolution was a fascinating time in the United States of America. New innovative technologies were created, the standards of living rapidly rose, and the country went through a total make over. The government — on the other hand — was also going through an interesting time also. The progressive era entered the landscape, and the political sphere drastically shifted. We are taught that one of the primary reasons that the progressive era was brought about because of large monopolistic businesses taking over industries at a rampant pace. Monopolies were spreading like a cancerous tumor, and the only cure was to use the means of government to stop this such a catastrophe. These people forget that the kryptonite to defeat a monopoly is competition, and the greatest way to bring competition into an industry is — you guessed it — the free market. If there’s a company that is the pinnacle of the frightening robber baron that orchestrates the market in its favor like a puppeteer orchestrates it’s puppets during a puppet show, it has to be Standard Oil.

Now when we are talking about monopolies, it is vital to define what a monopoly is so we don’t get confused. The term monopoly is misused ubiquitously which makes it tough to comprehend what a real monopoly consists of which is the reason why we should define this term correctly. Monopoly: An entity that has exclusive ownership of an entire supply of goods or of a service in a certain area or market. I can’t tell you many times I’ve seen people conflate a big businesses with monopoly; just because a business is large or takes up a gargantuan share of a market doesn’t mean it’s a monopoly. You can be a large business and not be a monopoly. A “free market monopoly” is the epitome of a three headed unicorn, and if such a monopoly exists, it’s because of the government granting them the exclusivity of a market place. Despite Standard Oil’s massive market share, they were not a monopoly and there’s substantial evidence to back this claim.

Like I stated in my definition of monopoly, the entity must have exclusivity — meaning that there’s no competition that the entity would have to face. It’s true that Standard Oil had a gargantuan market share of the refining industry when the company was in its prime; it had 90 percent of the market share at one point in time. Now even at a whopping 90 percent, Standard Oil is still not considered a monopoly, and the oil refining market had no monopolistic symptoms which occur when a monopoly controls the market place. Not surprisingly, these claims are still made by people today. The claims that I’ll debunk are:

  • Claim 1: Restraint of Trade and controlling the market
  • Claim 2: Preferable rebates and discriminatory rates from railroad companies which gave Standard Oil favoritism in the market
  • Claim 3: Unfair Business Practices — such as predatory pricing and use of cartels

 
Claim 1: Restraint of Trade and controlling the market

Before I get to my empirical work, let’s ask this extremely important question: What happens under a monopolistic market? In theory, there are generally two kinds of monopolies: political/coercive monopolies or efficient monopolies. A political monopoly gains its status from the coercion of the government, while an efficient monopoly needs to gain it through vigorous competition in the market place. An efficient monopoly is what you would consider a “free market monopoly”. While that is the usual term to describe such an entity, I think it is erroneous to call it a monopoly since an efficient monopoly — no matter how ruthlessly competitive it is — always has the threat of potential competition lingering around the corner. Just liked I stated earlier: this is the epitome of a three headed unicorn; it’s an extreme rarity and practically mythical. In order to gain the title of efficient monopoly, you have to please practically everyone, and you have to provide a product or service so superior that consumers would only want what you provide. This is extremely difficult to achieve, and if such an entity were to come about, we shouldn’t be disgusted by such an entity. Being distraught by an entity that is so efficient and satisfactory because of its competitiveness and innovative capabilities is like being mad at the baseball team who wins the World Series because of it being an efficient and competitive.

A new company trying to compete with a political monopoly would be dismantled immediately if it stepped foot into the strictly controlled market place. Since a political monopoly can sit back at the beach and never have to worry about competitors, it becomes reckless and inefficient. It has no incentive to keep prices low for consumers since consumers are forced to buy their product or service no matter what anyone says. This leads to wasteful business practices, lower economic output, and higher consumer prices which leads to a lower standard of living. If there’s any kind of resentfulness that transpires from the emotions of the people, it should be resentful of the political monopoly. So that brings us to this question: Did Standard Oil acted like a political monopoly during its heyday? The answer is no. In order to know this, we should take a dive into the history of Standard Oil.

The company was incorporated in 1870 — though John Rockefeller and Samuel Andrews built their first refinery as early as 1865. The company had its origins in Cleveland, Ohio — which was not too far away from the epic center of the Oil industry’s origins. When the oil industry first emerged into the market place, the industry was extremely unstable with fluctuating prices and wasteful business practices. Once Standard Oil came on the scene, the whole entire industry shifted from extremely unstable to properly balanced. Standard Oil became the first company to revolutionized kerosene which became an extremely popular product. From 1865-1870, the price of kerosene went from 58 cents a gallon to 26 cents a gallon. Standard Oil had around 4 percent of the market share in 1870, and a decade later gained almost 90 percent of the market share. From 1870-1897, the price of kerosene went from 26 cents to 6 cents. Not only was the kerosene cheaper by 1897, its quality dwarfed the kerosene from 1870. As we can see, when Standard Oil had its gargantuan share of the market, it didn’t use tactics that were synonymous with a political monopoly. But what about trade? Didn’t Standard Oil restrict trade during its tenure as the titan of the oil industry? No not even close, in fact, production and economic output increased tremendously under this tenure. From MasterResource:

As for the industry’s total output, it increased steadily throughout the late 1800s; for example, between 1890 and 1897 kerosene production increased 74 percent, lubricating oil production increased 82 percent, and wax production increased 84 percent.69 The fact that Standard Oil faced such stiff competition and was driven to expand output and lower prices even further demonstrates the myth of Rockefeller’s “control” of the market. Markets are not possessions that one can acquire or control. They are dynamic, evolving systems of voluntary association, in which competing producers have no ability to force customers to buy their product, nor any ability to prevent others from offering their customers superior substitutes.

This doesn’t even take into account of the global market which became extremely competitive once the Baku region in Europe — which was under conquest by Russia at that time — became the black gold capital in that part of the world. The Baku region not only had more oil than more American oil wells, it also had a better quality (It was more viscous then American Oil which made it more superior for lubricant products). It’s safe to say that Standard Oil didn’t restrict any trade within the oil industry. From FEE:

Rockefeller’s exploit had come none too soon: the Russians struck oil at Baku, four square miles of the deepest and richest oil land in the world. They hired European experts to help Russia conquer the oil markets of the world. In 1882, the year before Baku oil was first exported, America refined 85 per cent of the world’s oil; six years later this dropped to 53 per cent. Since most of Standard’s oil was exported, and since Standard accounted for 90 per cent of America’s exported oil, the Baku threat had to be met.

 
Claim 2: Preferable rebates and discriminatory rates from railroad companies which gave Standard Oil favoritism in the market

This claim is made constantly by the anti-robber baron crowd; it’s a smearing tactic that’s meant to tarnished Standard Oil. The only problem with this claim is that it doesn’t take into account about how the Railroad industry was like during this expansion of industrialism. First off, rebates and discriminatory rates were common practice in the railroad industry, and it wasn’t some unique phenomenon that only happened for Standard Oil. Plenty of other businesses received rebates and special prices from the railroad industry. Since the Railroad Industry was filled with cutthroat competition, rebates and special draw backs were offered in order to gain more business and profits. The condemners also forget about how efficient and innovative Standard Oil really was for a refining company which gave them a huge advantage. At a time when railroad companies weren’t flowing with constant freight trains, Standard Oil was guaranteeing these railroad companies larger volumes of freight with remarkable stability.

Even one of the staunchest enemies to Standard Oil knew this was common practice among the Railroad industry; this was no big secret to the public. From Ida Tarbell’s The History of Standard Oil pg 101:

As rebates and special rates were essential to this control, he favoured them. Of course Mr. Rockefeller must have known that the railroad was a common carrier, and that the common law forbade discrimination. But he knew that the railroads had not obeyed the laws governing them, that they had regularly granted special rates and rebates to those who had large amounts of freight. That is, you were able to bargain with the railroads as you did with a man carrying on a strictly private business depending in no way on a public franchise. Moreover, Mr. Rockefeller probably believed that, in spite of the agreements, if he did not get rebates somebody else would; that they were for the wariest, the shrewdest, the most persistent. If somebody was to get rebates, why not he? This point of view was no uncommon one.

We shouldn’t disregard Standard Oil just because it was taking advantage of the situation that it was in. If Standard Oil didn’t coexist within the refinery business, another productive company would have taken the same kinds of rebates and deals that Standard Oil received. Standard Oil offered the best deals to the railroads and everyone mutually benefited from such transactions. The company was able to give these railroads massive amounts of freight volume, and the company was also able to cut costs to subservient levels which produce lucrative profits for both Standard Oil and the railroad companies. One example of this was when Standard Oil bought its own forest and produced its own barrels. Standard Oil also invested in its own “tank cars” — train carts that carry huge tanks. As Alex Epstein explains:

Consider the cost of transporting oil in barrels. Barrels were a major expense for everyone in the industry, and barrel makers were notoriously unreliable when it came to delivering barrels on time. Rockefeller at once slashed his costs and solved this reliability problem by having his firm manufacture its own barrels. He purchased forest land, had laborers cut wood, and — in a crucial innovation — had the wood dried in a kiln before using it to transport kerosene. (Others used green wood barrels, which were far heavier and thus more expensive to transport.) With these and other innovations, Rockefeller’s barrel costs dropped from $2.50 a barrel to less than $1 a barrel — and he always had barrels when he needed them.

Rockefeller further lowered his costs by eliminating the use of barrels altogether in receiving crude oil (barrels would remain in use for shipping refined oil to customers for some time). He did so by investing in “tank cars” — railroad cars fitted with giant tanks — shortly after they came on the market in 1865. By 1869, he owned seventy-eight of them, yielding huge cost savings over his competitors.

Railroad companies and Standard Oil both benefited from their interactions with each other. Standard Oil was one of the only companies that were offering such deals which gave them a greater advantage over its competitors. If you don’t believe me, how about we let one of the Vice presidents of a railroad company tell us then? From the affidavit of James H.Devereux — Vice president of the Lake Shore Railroad:

That Mr. Flagler, at this time representing Rockefeller, Andrews and Flagler, proposed to make regular monthly shipments by rail throughout the year provided a proper rate could be made for the business then offered, this rate to cover transportation of crude from the region to Cleveland, and when refined from Cleveland to New York. Rockefeller, Andrews and Flagler being the only refiners here who proposed to compete for the export business or offered oil for the entire haul from the regions to Cleveland and thence to New York; that Mr. Flagler’s proposition was to assure to the Lake Shore Railroad sixty carloads of refined oil per day [83] from Cleveland to New York at a rate of $1.75 per barrel from the regions to New York, being thirty-five cents per barrel for crude from the regions to Cleveland and $1.30 per barrel for refined from Cleveland to New York; and Rockefeller, Andrews and Flagler were to assume all risk and losses from fire or other accidents. That affiant took this proposition into consideration and made careful computation of the cost of this transportation to the railroad, which cost is the proper basis in fixing the rate to be charged; that affiant found that the then average time for a round trip from Cleveland to New York for a freight car was thirty days; to carry sixty cars per day would require 1,800 cars at an average cost of $500 each, making an investment of $900,000 necessary to do this business, as the ordinary freight business had to be done; but affiant found that if sixty carloads could be assured with absolute regularity each and every day, the time for a round trip from Cleveland to New York and return could be reduced to ten days, by moving these cars in solid trains instead of mixing oil cars in other trains, as would be necessary when transported in small quantities and by moving the oil trains steadily without regard to other cars; that by thus reducing the time to ten days for a round-trip, only six hundred cars would be necessary to do this business with an investment therefore of only $300,000. That the regularity of the traffic would insure promptness in the unloading and return of the cars; that upon these considerations affiant concluded that Mr. Flagler’s proposition offered to the railroad company a larger measure of profit than would or could ensue from any business to be carried under the old arrangements, and such proved to be pre-eminently the case; that the proposition of Mr. Flagler was therefore accepted, and in affiant’s judgment this was the turning-point which secured to Cleveland a considerable portion of the export traffic. That this arrangement was at all times open to any and all parties who would secure or guarantee a like amount of traffic or an amount sufficient to be treated and handled in the same speedy and economical way, the charges for transportation being always necessarily based upon the actual cost of the service to the railroad, and whenever any shipper or shippers will unite to reduce the cost of transportation to the railroad, to refuse to give them the benefit of such reduction would be to the detriment of the public, the consumers, who in the end pay the transportation charges.

It should also be mentioned that by the time the first ever long distance pipes were used to transport oil, pipelines became the form of transportation that Standard Oil preferred. Majority of the oil that Standard Oil transported was through pipelines, and it shouldn’t be surprising that Standard Oil created its own piping company which turned out to be cost effective and extremely efficient.
 
Claim 3: Unfair Business Practices — such as predatory pricing and use of cartels

Standard Oil was practically a flawless company that rarely made any costly mistakes, but like all things that are made up of humans, mistakes will occur. One of the biggest mistakes that Standard Oil committed was when it joined the South Improvement Company cartel. This turned out to be a horrific error on the part of Standard Oil, but it should be stated that none of Standard Oil’s success came from the actions of cartels. In fact, the South Improvement Company didn’t even commence to compete; it ended when it first started. It didn’t even ship any oil. From Burton Folsom:

The scheme was hatched by Tom Scott of the Pennsylvania Railroad. Scott was nervous about low oil prices and falling railroad rates. He thought that if the large refiners and railroads got together they could artificially fix high prices for themselves. Rockefeller decided to join because he would get not only large rebates, but also drawbacks, which were discounts on that oil which his competitors, not he, shipped. The small producers and refiners bitterly attacked Rockefeller and forced the Pennsylvania Legislature to revoke the charter of the South Improvement Company. No oil was ever shipped under this pool, but Rockefeller got bad publicity from it and later admitted that he had been wrong.

Thankfully this wasn’t such a costly mistake in the long run, and Standard Oil sure learned its lesson. Since we are on the topic of cartels we should have a discussion about them. Cartels could form in a free market but they are very unlikely to remain stable and they usually collapse rather rapidly. The higher the cartel raises its prices above the market rate, the stronger the incentive that all the businesses have to break away from the cartel. Generally, cartels form so they can cut down production and raise prices, but as we have seen time and time again, you will bring competition into your market if you overprice your service or products. It all depends if the cartel fixes the price to the correct market rate.

Just as cartels are an ineffective means of achieving dominance in a market place, predatory pricing is even more ineffective; its foundation is fundamentally brittle and it logically makes so sense. One aspect of the predatory pricing doctrine that is really ludicrous is that lowering prices is somehow detrimental to the consumer. I guess these believers in predatory pricing would prefer prices to be twice as high for consumers instead of twice as low. Under the doctrine of predatory pricing, the predator sits on his “monopoly profits” and drops his prices below the market rate which then causes his competitors to go under water. After the competitors are defeated, the predator jacks up his prices to monopolistic levels, and now the monopolist doesn’t have a thing to worry about. This doctrine sounds just as fictional as a Disney movie, and it doesn’t make any sense at all.

Firstly, how can you obtain monopoly profits without being a monopoly? The predator is already in competition with other companies which would disqualify if from being a monopoly. It contradicts the whole predatory premise: you can’t obtain monopoly profits without being a monopoly. Not only that, no intelligent business men would engage in such tactics since they make no sense. When the anti-robber baron crowd describes a predator, they usually mean the largest company in a market. If that’s the case, doesn’t that mean the larger the market share, the more units that could be sold under the name of such a company? That means the more the predator sells under these predatory prices, the more losses it makes which in return make the company weaker. This also doesn’t take into account the uncertainty of how long this war of prices would last. Does the predator need to engage in these tactics for 6 months? 1 year? 5 years? Even the greatest fortune teller of all time couldn’t predict such a future.

Let’s say this nightmare like scenario comes true, and the predator defeats its competition with predatory pricing methods. There’s one important question that I think the progressive camp forgets to ask: How did the predator become a monopoly in the first place? The answer: by having below market prices! In order for the monopoly to still coexist, it needs to keep its prices at that subservient rate. The whole purpose of predatory pricing is to rely on your futuristic monopoly profits, but if you were to raise your prices to monopoly like levels, competition will sprang up again like flowers in May. Keeping your prices at those subservient rates will be suicidal, and the predator will soon be fossilized like a dinosaur. Don’t forget that a smaller competitor could close temporarily and wait for the predator to raise its prices, and don’t forget about the reputation of the predator being tarnished after the company has acted in such an unpleasant manner. The doctrine of predatory pricing is more unstable than a stack of Jenga blocks; it’s not only risky but idiotic to use such tactics. That still doesn’t answer our question about Standard Oil: Did it use predatory pricing to gain its market share? The answer is no. From Predatory Price Cutting: The Standard Oil Case by John Mcgee:

Judging from the Record, Standard Oil did not use predatory price discrimination to drive out competing refiners, nor did its pricing practice have that effect. Whereas there may be a very few cases in which kerosene peddlers or dealers went out of business because after or during price cutting there is no real proof that Standard’s pricing policies were responsible. I am convinced that Standard did not systematically, if ever, use local price cutting in retailing, or anywhere else, to reduce competition. To do so would have been foolish; and, whatever else has been said about them, the old Standard organization was seldom criticized for making less money when it could have readily make more.

 
Conclusion

It is safe to say that Standard Oil was never a coercive monopoly that was more thirsty than Dracula at a slaughter house. It out competed businesses with its efficient business practices, and it truly brought a consumer a great product which rose the standard of living to new heights. From its inception, prices continued to drop throughout its tenure, and the industry went through an explosive boom. It’s also worth mentioning that by the time Standard Oil was taken to trial for violating the Sherman Antitrust Act, its market share was around 60 percent, and there were around 137 competitors that Standard Oil had to compete with. The characteristics of Standard Oil are nowhere near monopolistic, and it’s a shame that such a myth still rests in the minds of normal Americans. Standard Oil was never a monopoly. Point blank period.