Dominick Armentano emails me about Standard Oil

Tyler,

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.

Dom.

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.

Comments

They suppressed scientific evidence to put lead in gasoline though, so there is that.

https://www.wired.com/2013/01/looney-gas-and-lead-poisoning-a-short-sad-history/

Wired is definitely *the GOTO source* for irrefutable facts! Nothing like a person trained in ascertaining the correct position of a comma - and likely without a single math course - to assess legal proceedings and scientific evidence.

+1

Standard Oil had 90% of the market share then, so while you could point to a few micro-competitors, there definitely was evidence that competition was rather lacking. Also in a democracy you can't ignore mood affiliation (similar to the anti-immigration, anti-China rhetoric coming from Trump) nor can you ignore imbalances of power, as Justice Harlans wrote:

"All who recall the condition of the country in 1890 will remember that there was everywhere, among the people generally, a deep feeling of unrest. The nation had been rid of human slavery, fortunately, as all now feel,—but the conviction was universal that the country was in real danger from another kind of slavery sought to be fastened on the American people; namely, the slavery that would result from aggregations of capital in the hands of a few individuals and corporations controlling, for their own profit and advantage exclusively, the entire business of the country, including the production and sale of the necessaries of life."

Clearly, Justice Harlan just needed to read a love letter to big business to understand that it is wrong to oppose B-B owning the production and sale of the necessaries of life.

Justice Harlan put his finger precisely on the point of the antitrust laws, as understood by the people who enacted them. They weren't there to establish rational consumer-friendly economic analysis--that came much later, in an attempt to salvage them from incoherence--they were there for purely social reasons, over which a veneer of economic rationalization was tackily pasted.

When I studied antitrust law, 49 years ago, with a youngish professor named Stephen Breyer, there was plenty of catechizing with respect to the econo-legal theories behind the rules, but virtually no analysis of whether those rules made actual, you know, economic sense. This was in the days when Justice Potter "I Know It When I See It" Stewart could say with exasperation that "the only consistency in [Clayton Act] Section 7 jurisprudence is that the government always wins." Exactly.

This of course has changed considerably over the past few decades, largely because of the emergence of genuine economic analysis as part of antitrust thinking.

So your conclusion is that "competition was rather lacking", therefore prices went down and Standard Oil lost market share in the decade leading up to the Antitrust actions?

Hmm... something seems wrong with that argument you've got there...

during the manifest destiny epoch in American history, one cannot use words like monopoly and competition with the same weight. It isn't until after World War I, where all is calm on the western front, that is, an era of cultural hegemony became persistent, that is British, that caused Germany to revive into an Empire, that caused the Soviet Union to establish a war against "free markets" at all costs.

I did a term paper on the Standard Oil breakup while an economics student at the University of Chicago, though that was about 48 years ago.

Standard's refining share was closer to 80% and declining, but they were far weaker in production and not the innovator in marketing (that was the Blaustein's American Oil Company, eventually acquired by Indiana Standard). Rockefeller's oil was in Pennsylvania, not Texas. His markets were kerosene and lighting fuel, not automotive fuel, which only took off after the breakup. The very rich Pittsburgh Mellons' Gulf and the Texas Company (later Texaco) were leaders in Texas. The Rockefeller companies only got big in Texas when Jersey Standard later acquired Humble. And people tend to forget Royal Dutch Shell....see the book "Breaking Rockefeller."

Even Teddy Roosevelt repotedly later said he would not have broken up Standard, opposing the Supreme Court decision.

Like the AT&T breakup decades later, the shareholders did prosper from the breakup, as a solid company with deep management became several strong companies. GE and United Technologies are now doing the same, voluntarily.

And the give away in this? - 'as we now understand the meaning of that phrase.'

Standard Oil, much like Microsoft, was attempting to remain in a thoroughly dominant position of a growing industry (including taking actions designed to ensure that dominance - for example, Microsoft requiring to pay for a Windows license even on PCs where Windows was not installed), and making maximum profits from a position which was basically unassailable.

And this is silly too - 'this is pre-gasoline after all'. It was also pretty much pre-electric lighting. Want to guess how many people would pay for lighting? Let us just say that Rockefeller knew - 'In 1865, Rockefeller borrowed money to buy out some of his partners and take control of the refinery, which had become the largest in Cleveland. Over the next few years, he acquired new partners and expanded his business interests in the growing oil industry. At the time, kerosene, derived from petroleum and used in lamps, was becoming an economic staple.' https://www.history.com/topics/early-20th-century-us/john-d-rockefeller

'that there were few if any legal barriers to entry'

Which also describes the PC industry of between roughly 1980 and 2000. So what? Microsoft did not care about legal barriers - its licensing arrangements, particularly forcing a PC manufacturer to pay for a Windows license on a PC where Windows was not installed when using another OS - were much more effective than any legal barrier.

Ad microsoft - the whole antitrust case always seemed to me silly. As does the EU thing with browser/search selection regarding Microsoft and Google. As did the IBM one. Microsoft did have competition back than, they never were that strong in the server OS business. You had competition in editors back than - pretty much on the same level as you do today (so what did the opening of the formats do? not very much).
I don't remember what was it about PC manufacturers paying for windows - was it Intel or was it the pc notebook/PC business? I have some lingering suspicion it might have been Intel, but as far as PC manufacturers go - you did have quite a competition in that area, so no big deal. And even Intel had competition back than as well.

'I don't remember what was it about PC manufacturers paying for windows'

If you do not remember that aspect of Microsoft's business model, then it would be difficult to make a good judgment. So, a bit of history on the Microsoft tax.

'The Microsoft tax is an unofficial, but commonly used term that refers to the licensing fee that Microsoft charges major suppliers of personal computers for each unit sold and that purchasers thus usually pay for such computers, regardless of whether or not they want or intend to use a Microsoft operating system.

This tax exists because of pressure that Microsoft exerts on computer manufacturers and sellers in the form of charging higher licensing fees for computer sellers that do not comply. Microsoft has been able to exert such pressure because of its monopoly power, and the ability to dictate that nearly all new personal computers come with Microsoft Windows preinstalled has been a major factor in its ability to perpetuate this monopoly.

An important part of Microsoft's strategy to enforce the Microsoft tax has been its unrelenting propaganda campaign against the supposed evils of selling computers without operating systems or with alternative operating systems installed, claiming that they result in so-called software piracy. The company has even coined a dramatic term for such computers, naked PCs, in order to try to shame vendors into not selling them and to try to influence governments to pass legislation to outlaw them.

Another factor that facilitates extracting this tax is the fact that most purchasers of personal computers are not aware of it, and most of those who are aware of it believe that they have no choice but to pay it. The former situation exists because the share for Microsoft in the total price for each computer is not itemized separately, in contrast to the separate itemization of the sales tax in many countries or localities.' http://www.linfo.org/microsoft_tax.html

Admittedly, in the long term, the market does win out - and Linux (in the form of Android) has destroyed Microsoft's chances to profit from the extensive growth of mobile devices. That Apple used another form of Unix for its own OS is just another sign that in the long run, quality tends to win out, when not restrained by a company that dominates a market using all means in its power to retain that dominance.

To this day, it is still exceedingly difficult to buy a laptop without Windows installed, even if you are going to install Linux on it.

Yep, but it is not due to legal barriers to entry in the OS market.

Particularly since Linux is free, one has to wonder just why basically everyone is only offered systems with Windows on them.

In the EU, such bundling is much harder to get away with, which is why buying a PC or laptop from a seller like Arlt means one can avoid the Windows tax. And the difference is dramatic, actually - for example, this HP 255 G6 - 2VP34ESABD 15,6" system costs 209 euros without Windows. Or you can pay 367.98 euros with Windows 10 installed (with all drivers apparently). https://www.arlt.com/Notebook/Notebooks-arlt/ Of course, the buyer is free to decide in this case, and if you want Windows 10, then it is an extra. Whether it is worth something like 80% of the price of a naked system is left up to the buyer.

Buy a Macbook or Chromebook?

Without an Apple OS pre-installed? Good luck.

Particularly as Apple went out of its way to prevent users from not using Apple applications with a free OS. Darwin is just another example that no one knows how to build walled gardens better than Apple - 'Darwin does not include many of the defining elements of macOS, such as the Carbon and Cocoa APIs or the Quartz Compositor and Aqua user interface, and thus cannot run Mac applications.' https://en.wikipedia.org/wiki/Darwin_%28operating_system%29

And when it comes to getting apps from anyone but Apple (with Apple taking a cut), well, the Supreme Court seems to feel that there just might be grounds to keep looking at Apple's practices in restricting users from using software where Apple is not a mandatory middleman - though one assumes that Prof. Cowen will be defending Apple if it appears necessary to keep a shark like entity from being treated meanly.

'Apple suffered a significant defeat at the Supreme Court on Monday, when the justices ruled that consumers could forge ahead with a lawsuit against the tech giant over the way it manages its App Store.

The 5-4 decision allows device owners to proceed with a case that alleges Apple has acted as a monopoly by requiring iPhone and iPad users to download apps only from its portal while taking a cut of some sales made through the store.

The ruling could have serious repercussions for one of Apple’s most lucrative lines of business, while opening the door for similar legal action targeting other tech giants in Silicon Valley. But the court’s opinion — led by conservative Justice Brett M. Kavanaugh, who joined its liberal justices in the majority — did not rule on the merits of the lawsuit itself.

“Apple’s line-drawing does not make a lot of sense, other than as a way to gerrymander Apple out of this and similar lawsuits,” Kavanaugh wrote.' https://www.washingtonpost.com/technology/2019/05/13/supreme-court-rules-against-apple-allowing-lawsuit-targeting-app-store-proceed

Why do you think Microsoft kept Apple around?

And why do you think Apple ended in a tacit agreement that they would innovate, but never contest for the larger market?

MS was bad, and yes they stiffled innovation. We are just lucky that the internet and open standards blew things open again. Apple certainly wasn't trying.

If Microsoft had "won" that battle and kept the "tax," would Steve Jobs never have developed the iPod, iPhone, iPad, and iTunes, resulting in a far bigger and more profitable company than Microsoft?

If the Justice department had never intervened with Microsoft, then yes Apple would have gone under as they were a dollar stock stuck with terrible management. DoJ made MS invest in Apple and put MS Office on the Mac. Just enough daylight for the return of Jobs.

You do realize that a number of people believed that that Microsoft supported Apple to simply avoid being called a monopoly, right?

Or at least that was considered fairly clear more than 2 decades ago - '1997: Microsoft rescues one-time and future nemesis Apple with a $150 million investment that breathes new life into a struggling Silicon Alley icon.

In a remarkable feat of negotiating legerdemain, Apple co-founder Steve Jobs got needed cash — in return for non-voting shares — and an assurance that Microsoft would support Office for the Mac for five years. Apple agreed to drop a long-running lawsuit in which they alleged Microsoft copied the look and feel of the Mac OS for Windows and to make Internet Explorer the default browser on its computers — but not the only choice.

Microsoft got to look like a noble competitor, for a change, for what amounted to a rounding error on their annual revenues. Timing mattered: The company was in the midst of an image-tarnishing antitrust fight over its heavy-handed promotion of IE during the height of the browser wars with Netscape.' https://www.wired.com/2009/08/dayintech-0806/

That some irony exists in how a major company supported a smaller company that eclipsed the previous giant is likely not lost on anyone at IBM.

" Steve Jobs never have developed the iPod, iPhone, iPad, and iTunes..."

And if he hadn't no one would care. Blackberry was doing very well and drawing plenty of competition. Apple's rise was the fall of Blackberry and other producers and who knows, Amazon was already moving that direction anyway with Kindle.

I bought an iPad for my mother and I really don't get the excitement. I hate it. It's far less flexible that a windows. I can't imagine that the loss of Apple would have been a loss for society. Myriad other products, and possibly much better products, would have filled the void.

Dom's description of the Standard Oil case is highly misleading. The SC did not create the "rule of reason", it merely adopted it; the rule of reason had been crafted by William Howard Taft in 1899 in a different case while Taft was chief judge of the sixth circuit. Indeed, by adopting the rule of reason, the SC was narrowing not expanding the scope of the anti-trust laws. Before Standard Oil, all restraints on trade were illegal regardless of their effects. By adopting the rule of reason, only unreasonable restraints of trade were illegal (unreasonable in the sense of producing higher prices, reduced output, and reduced quality). Justice Harlan concurred in the result, but wrote a separate opinion objecting to the adoption of the limitation (i.e., only unreasonable restraints of trade are illegal). I have not read the trial court record, but according to Justice Harlan, the record "overwhelmingly" supported the holding that SO and its subsidiaries engaged in a combination in restraint of trade and attempted to monopolize the market.

Never said that the SC created the rule of reason. Where did you get that? Said, in fact, that it was a common "misunderstanding" that Standard was the first rule of reason antitrust case. I argued further that while a modified "rule" was articulated in the case, there was no rigorous application of the rule with respect to the conflicting facts and arguments developed by the defense at trial. So, then, how was the case actually decided? You actually provide the answer: the "combination in restraint of trade" that Harlan refers to is, in fact, the formation of the Standard Oil Trust which was also seen as an attempt to monopolize. Case closed. Contrast all of this judicial "reasoning" with the relatively careful economic analysis that the trial court did in U.S. Steel (1915) and what the SC did with that analysis in 1920. From an economic perspective, the approach in these two cases is like night and day.

It is interesting to see a lament about the Supreme Court's lack of attention to the record in the Standard Oil case in light of the practice of the majority on the current Court in at least it two most recent antitrust decisions. In American Express, the majority virtually ignored district court fact findings contrary to the majority's a priori assertions. And in Apple v Pepper, the majority and dissenting opinions began from diametrically opposed understandings of the key fact, the identity of the seller, even though the case arose on motion to dismiss and thus should have been decided on agreed facts.

Maybe the beer Justice was confused as to who was buying what from whom. Was the beer Justice really overturning Illinois Brick? Or was the beer Justice just expressing his grievance against tech and its social media for spreading malicious lies about him? Is the beer Justice the new social media Justice?

I first heard this argument from Thomas Rustici and have always enjoyed throwing it into discussions about Standard Oil.

Standard Oil didn't just own refineries and pipelines. It owned politicians. Andrew Mellon took Standard to court and won.

There also is the important question of what the breakup of SO achieved. The general consensus is, I think, that one big "monopoly" was replaced by set of regional monopolies. If that is true, what did this case accomplish? Prices and outputs would still have been at the monopoly level. See, e.g., the discussion of Standard Oil in this recent speech by FTC Commissioner Noah Phillips: https://www.ftc.gov/public-statements/2019/04/we-need-talk-toward-serious-conversation-about-breakups

With change in technology, monopoly is becoming impossible. Facebook today, something else tomorrow.

Something you'll notice reading histories of the era -- the competitors Rockefeller drove under were terribly run. The Pennsylvania oil boom had a lot of wildcat drillers, and and a lot of wildcat refiners, too. Many of them couldn't say for sure how much it cost them to refine a barrel of oil.

One of Rockefeller's most effective tactics was to get a lower price on freight by guaranteeing that guaranteeing the railroads that he would fill X trains per day -- even if he had to pay for the occasional empty train. Tarbell waxes wroth about this, but it's a pretty basic manouver. Rockefeller is absorbing the risk of underfilled trains, in return for a reduction in freight rates. That gives him a huge advantage over competitors who aren't organized well enough and aren't operating on a large enough scale to make the same deal.

In any gold rush situation, you're going to get some folks who show up with nothing much more than dreams of striking it rich. They prosper for a little while, then get driven out when the professionals show up and start organizing things at a larger scale. In fact, Tarbell's father was just such a wildcat refiner -- he was a joiner who got into the oil business by making storage tanks, then became a small scale refiner.

Is anybody really surprised that the moonlighting cabinetmakers of the world got undercut by the guys who were running multiple trains a day?

Here's something you probably already know.

The Standord Oil spinoff was named Esso -- because it sounds like 'S' 'O'. Later, Esso was changed to Exxon.

Also, I have to mention Walter Isaacson's book on Rockefeller supports Dominick's point. And what a great read it is.

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