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

  • Granitz, Elizabeth
  • Klein, Benjamin

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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Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 39 (1996)
Issue (Month): 1 (April)
Pages: 1-47

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Handle: RePEc:ucp:jlawec:v:39:y:1996:i:1:p:1-47
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