Summary:
Whether Standard Oil was a monopoly or not, the more important question to economists is, were the practices of the Standard Oil Company efficient and did it hurt the social wealth of the country? The government's enforcement of the Sherman Antitrust Act on Standard Oil hurt the country's social wealth and efficiency.
Arguments have raged over Standard Oil and its business practices since its prime in the 1870's and 1880's. Was it a monopoly? Did it severely impede fair competition? If it was a monopoly, did it hurt the consumer? These are the questions that have been argued in debates about Standard Oil and its practices. Whether Standard Oil was a monopoly or not, the more important question to economists is, were the practices of the Standard Oil Company efficient and did it hurt the social wealth of the country? The government's enforcement of the Sherman Antitrust Act on Standard Oil hurt the country's social wealth and efficiency.
John D. Rockefeller was the founder and owner of Standard Oil. Considered by many to be the first great businessman in the United States, he was extremely industrious and methodical. He could not stand to waste anything. He had begun working in business at the age of sixteen and had always displayed hard working and diligent qualities that impressed his superiors. He went into business for himself at the age of twenty by starting a commission merchant company trading grain, hay and meats. In the early 1860's, the oil boom struck in the eastern United State and Rockefeller wanted to get in on the ground floor. "Rockefeller began investigating the feasibility of entering the oil refinery business in 1862 and the firm of Andrews, Clark & Company was formed in 1863"(Entrepreneurs and American Economic Growth). Rockefeller bought out his partners and began to work with his brother William Rockefeller and Henry Flagler, a fellow business man, and Standard Oil was born.
At this point in the oil market, the barriers to entry were extremely low. One could buy a small refinery for $10,000 and a large one for $50,000. With all of these other entrepreneurs entering the market Rockefeller and Flagler set up a plan in order be highly competitive within this environment. First, they built extremely high quality, larger refineries. They also set forth in creating their own cooperage or barrel making plant. The plant ended up cutting the cost per barrel from $3.00 to $1.25 and saving Standard Oil around $4,000,000 per year (John D. Rockefeller and the Standard Oil Company). Twenty wagons were purchased by 1868 to more cheaply move the oil. A warehouse was built on the Hudson and East River in New York City and Standard Oil had their own boats to transport the oil. They were also the first to transport the oil via tank cars and invested in a fleet of them. All of these moves were vertical integration steps that reduced the production costs of Standard Oil.
Since Standard Oil was so large, it became economical to build a plant to create products from the waste of the refining of Kerosene. They produced lubricating oil that replaced lard for machinery. They used the gasoline as fuel instead of dumping it into the Cuyahoga River like some competitors had been doing. Consequently, the Cuyahoga had frequently caught fire. Paraffin was another byproduct that they manufactured because it was insoluble in water could be used for making candles and waterproofing goods. The most recognizable product that was created from the waste was Petroleum. Petroleum was a basis for ointments and lubricants. It was later marketed under the brand name of Vaseline. With Standard Oil nothing was left to chance. Every small detail was measured and accounted for. "Economy, precision, and foresight were the cornerstones of their success" (Entrepreneurs and American Economic Growth).
The most crucial key to the success of Standard Oil was Rockefeller's dealings with the railroad barons. Rockefeller brokered many deals with the many railroad companies. The railroad companies were all coveting Standard Oil's business due to the sheer volume of rail shipping that the company engaged in. This provided Rockefeller with great leverage in terms of bargaining with the railroads. Rockefeller used this leverage to accomplish two goals. First, rebates were given to Standard Oil from the railroad company basically just for letting the railroad company receive their business. These rebates became huge over time and were one more of the means that Rockefeller used to cut his production costs. At on point, "on refined oil, non-Standard companies shipping from Cleveland, Pittsburg and Titusville paid $1.44 per barrel while Standard paid $.80." The second way that Rockefeller used his leverage with the railroads to help Standard Oil was with drawbacks. Drawbacks were a "tax" Standard Oil put on the rail road of around 25 to 35 cents per barrel of crude oil that the railroad shipped for another party (Entrepreneurs and American Economic Growth). In essence, Rockefeller was taxing his competitors directly into his own pocket. Rockefeller also would force the railroad companies he worked with to issue reports to Standard Oil on all the transports for competitors including their name, quantity, quality and price paid. Rockefeller would send spies to make sure that the price discrimination was being employed correctly.
The last key to success for Standard oil was price wars and competitor buyouts. Standard Oil could lower their prices enough as to drive out competition because of the fact that they could keep their production costs so much lower. The prices were dropped as low as necessary to drive the competition to bankruptcy and then buy them out. Standard Oil would then be allowed to dictate the prices to the drillers and retailers of the oil (John D. Rockefeller and the Standard Oil Company).
Competitor buyouts were an extremely useful tool in expanding Standard Oil while eliminating competition at the same time. Rockefeller's strategy when it came to these buyouts was to go for the strongest refineries first. This was because if he had bought the weaker one first he felt as if he would have to pay higher prices for the strong ones and face more resistance. He would always meet with the competing refiner in person. Rockefeller would have the refinery appraised. He would offer the value of the property plus "good will" as in extra compensation in the equivalent Standard Oil stock or cash if that was what they preferred. The more talented owners were offered a chance to join the management of Standard Oil. Evidence suggests that Rockefeller was always fair if not generous in terms of paying his rivals. Many of these rivals that were intelligent enough to take the Standard Oil Stock became extremely rich (Entrepreneurs and American Economic Growth).
Due to these actions, Standard Oil did break the law despite the fact that most of it was good business. The Sherman Antitrust Act is the law in question that the government eventually used against Standard Oil in court. According to Encyclopedia Britannica the Sherman Antitrust act states, "One of the act's main provisions outlaws all combinations that restrain trade between states or with foreign nations. This prohibition applies not only to formal cartels but also to any agreement to fix prices, limit industrial output, share markets, or exclude competition. A second key provision makes illegal all attempts to monopolize any part of trade or commerce in the United States" (Sherman Antitrust Act). Standard Oil violated the first provision of the act by directly attempt to restrain trade by using the drawbacks within their agreements with the railroad companies. By forcing the railroad companies to charge their competitors extra and give the money to Standard Oil is a textbook example of a restraint to trade. In terms of the second provision of the act, Standard Oil violated that provision with their price wars and competitor buyouts. Through these means they were attempting to monopolize the oil trade and commerce in the United States. At one point Rockefeller controlled 90-95% of all of the oil refined in the United States (Standard Oil- Part1).
Just because Standard Oil was violating the law that does not mean that enforcement of the law by the government is hurting efficiency and the social wealth of the country. Standard Oil allowed for prices of consumer products such a kerosene lamp oil and Vaseline made from their oil extremely cheap compared to his competitors. These products were made so cheap because of the many different ways that Rockefeller lowered production costs through cheaper transportation and creation of their inputs such as barrels. Also Rockefeller took advantage of his economies of scale in order to deliver the products cheaper to the consumer. The consumer also benefited from the price wars that Rockefeller engaged in. They received extremely low prices during the war and afterwards despite a small raise in the price, Rockefeller would not raise the price too high as to not attract new competition. This reduction in prices contributed the greater social wealth of the country.
Rockefeller's purchase of the refineries also produced positive results. When a fellow refiner was bought out by Rockefeller they either had Standard Oil stock which would soon make them rich or they had a large sum of cash from the buyout. These former refiners who were entrepreneurs had this buyout money and could move on to other ventures. This would free up their human capital to help move out the production possibilities of the nation. This obviously would increase social wealth and lifestyle of the country.
Rockefeller was a business genius as seen by his use of vertical integration and economies of scale to create extremely low production costs. It is true that his dealings with the railroads, price wars and competitor buyouts did violate the Sherman Antitrust Act. Despite the fact that Rockefeller was breaking the law he was improving the social wealth and efficiency of the country. Therefore the government's enforcement of the Sherman Antitrust act in respect to Standard Oil hurt the nation's collective social wealth and efficiency.
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