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