Dominick Armentano emails me about Standard Oil


Just watched your recent interesting  exchange with Professor Wu on whether the Standard Oil divestiture made public policy sense.

Wu asserted that the decision was good public policy. You said you were not so sure since  the evidence (on competition and consumer welfare) prior to divestiture may have been ambiguous. Wu had a near heart attack at that suggestion which showed me, of course, that he has never read the case, has never read the trial record (it’s 11,000 pages long and the State of Connecticut library in Hartford actually had a copy when I was researching this case back in 1970) and has never read any economist (such as myself) that has done  some of that work so that professors such as Wu can be marginally smarter in policy debates.

This is one of the most misunderstood cases in antitrust history. (Even Bork, who gets much of the revisionist case history correct, totally flinches on this case; he does nearly nothing with it.)

The first misunderstanding in almost all of the law texts is that this is the first “rule of reason”  antitrust case. That implies that the SC must have sifted through all of the conflicting facts and arguments presented at court and determined that Standard had acted “unreasonably.”  Totally False.  A modified rule of reason approach was articulated in the case by Justice White in 1911 but, of course, was never applied to the specifics in Standard.

As any antitrust lawyer can tell you this is a job for a lower court anyway, not for the SC; but this case was never remanded. The SC simply decided that the many mergers by Standard prior to 1890 constituted an attempt to monopolize in violation of the Sherman Act and, notice, divestiture follows logically from that reasoning. But whether Standard ever “restrained trade” (as we now understand the meaning of that phrase, i.e. able to reduce industry output  and raise industry price) was NEVER determined. Thus whether Standard missallocated resources, charged monopoly prices, repressed innovation, etc…was never decided by the SC or any other court.

Which leaves totally open the question of what was actually going on in the oil industry between say 1880 and 1907 (aside from the many mergers). I determined that this industry (crude oil, transportation, refining, marketing was all very small ( this is pre-gasoline after all); that there were few if any legal barriers to entry and that business organizations entered and left with some frequency, typical of a young and innovative industry; that Standard, despite mergers, always had many rivals in refining (Texaco, Pure Oil,  Associated Oil and Gas, Sun Oil, Gulf and many many others) and, of course, there were hundreds of firms in crude oil production and marketing which were never “monopolized”; that  costs and prices decreased throughout the period of alleged monopolization (even Ida Tarbell admits this. Indeed I got much of my cost and price information from her “History of the Standard Oil Company”; that Standard’s market share decreased in the 10 year period prior to the antitrust suit (1907); and that, as John McGee argued long ago, that Standard probably did not engage in predatory pricing.  There is much much more to this story and I tell a good share of that in “Antitrust & Monopoly.”

Perhaps Wu can make the case that the divestiture in 1911 produced a better result (in terms of all of the things that economists measure) than what would have happened if nothing dramatic had been done. That’s counter-factual so good luck with that!! All I know is that his knowledge of the actual history of the oil industry is quite stunning and I fear for the life of his more curious students.


As I said in the Wu debate itself, I do not know enough about this case and I am agnostic on the question.  Still, there is a perspective you don’t usually hear, and so I am passing it along.


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