little over a century ago, the United States found themselves in the grip of a vicious monopoly that not only controlled the petroleum market and held its consumers hostage, but also endangered the very foundation of American democracy. Peter B. Doran, Vice President for Research at the Center for European Policy Analysis and host of the podcast History of Oil, sets out to present to the general public how the “anaconda” of the Standard Oil monopoly was finally defeated in Breaking Rockefeller: The Incredible Story of the Ambitious Rivals Who Toppled an Oil Empire.
The story of John D. Rockefeller and the Standard Oil trust is one of the most controversial in business history.The story of John D. Rockefeller and the Standard Oil trust is one of the most controversial in business history. Not only is it regularly used as the classic case for free markets inevitably leading to abusive and hostage-taking monopolies, but it also serves as one of the prime examples justifying the need for government regulation of competition and the adoption of the Sherman Antitrust Act (never mind the fact that the Sherman Act was adopted in 1890, but applied to Standard Oil only 20 years later).
Rockefeller’s story made the subject of many books and articles, starting with emotional, misleading muckraker publications, all the way through dry business studies and some more approachable biographies. Mr. Doran’s work finds itself on the more welcoming side of these works, and is a fresh addition to the rich literature on the subject. Moreover, his book takes a wider look at the Standard Oil’s business career, putting it in an international context. Regrettably, as far as the Standard Oil company is concerned, this look is sometimes much too wide, relying mainly on Ron Chernow’s previous biography of Rockefeller (Titan: The Life of John D. Rockefeller, Sr.) and neglecting other valuable economic and historical studies on the subject.
Published in 1998, Ron Chernow’s Titan was the first full-length biography of John D. Rockefeller since the one published by Allan Nevins almost half a century before. It also came at an opportune time as public debate again settled on the problem of monopolies and the need for government intervention to protect the “freedom” of our markets. This time, it was Microsoft’s turn to be subjected to State antitrust scrutiny, and Bill Gates was at the time commonly compared to Rockefeller (although, beyond superficial similarities in their positions, anyone familiar with their biographies would have steered clear of such comparisons).
Chernow’s biography of Rockefeller attempted to tell a balanced and fair history of this titan of industry, and, for the most part, it succeeded. While the progressive muckrakers Henry Demarest Lloyd and Ida Tarbell excoriated the “robber baron” for monopolizing the oil industry and abusing its consumers, biographers such as Allan Nevins depicted Rockefeller in an admiring and heroic light, overcompensating in an effort to set the historical record straight. Chernow tried to maintain a composed approach and presented his subject as both wrong-doer and benefactor, giving credit to Tarbell where it was due, but speedily repudiating certain falsehoods.
Although Chernow had access to mostly the same research material as Nevins, his work still presents new or previously unused details of Rockefeller’s life; additionally, fresh material relating to personal and familial matters was made available to the author, and he made good use of it in presenting a mostly impartial picture.
Unfortunately, rather than giving a proper vindication of Rockefeller’s business practices, Chernow balanced the businessman’s ruthlessness with his lifelong philanthropy, highlighting the way in which his strong Baptist beliefs shaped his vision of himself as an entrepreneur favored by God’s blessing as well as a humanitarian patron charged with improving the state of the world. Despite convincingly attributing Standard Oil’s growth to many of its innovative entrepreneurial accomplishments, Chernow fell short of addressing the economic case behind the company’s business practices and is visibly troubled by the railroad rebates or the “predatory pricing” on which Tarbell based her attacks.
The Standard Oil’s “Predatory” Pricing
Following in Nevins’s footsteps, Chernow acknowledged a certain commercial reasoning behind railroad rebates and even the fact that the Standard Oil combination was more like a federation of independently managed (and sometimes uncoordinated) companies rather than a single unit under Rockefeller’s despotic rule. He even mentioned the fact that the Standard Oil’s pricing policies were not uniformly “predatory” (although he didn’t expand on how a dynamic pricing strategy in the face of different sellers is essentially competitive rather than monopolistic), but never saw beyond the antitrust rhetoric which claims that the Standard Oil gained and maintained its monopoly position by undercutting its competitors and subsequently buying them out.
When the Standard Oil reduced its prices, it did so below the costs of competing enterprises rather than below its own production costs.As Nevins himself showed earlier, when the Standard Oil reduced its prices, it did so below the costs of competing enterprises rather than below its own production costs. And, indeed, Standard Oil did not have a uniform pricing policy, which would have been both commercially unsound and ridiculous – how could anyone expect a company to lower prices equally in all markets, when they had different configurations? Instead, it “discriminated” in establishing prices that responded to different markets’ elasticities with a view to maximizing profits. What is noteworthy about the investigation into Standard Oil’s predatory pricing is that it sorely lacks any study of the actual prices, but relies heavily on quotes from various people complaining about the great trust’s prices.
This is a particularly important point that was put forth by John McGee in his valuable study Predatory Price Cutting: The Standard Oil (N. J.) Case. McGee’s conclusion after exhaustive investigation was that “Standard Oil did not use predatory price discrimination to drive out competing refiners, nor did its pricing practice have that effect.” Moreover, he presented a compelling series of arguments (which he later refined in a subsequent paper) on why the tactic of predatory pricing is unfeasible and even foolish in any attempt to monopolize any market.
In short, and for illustration purposes only, the arguments are that: market unpredictability and indeterminate term of such a war makes it much too high a gamble (this would be especially inconsistent with Rockefeller’s general commercial philosophy); since relative to its size a larger firm would lose money much faster selling at a loss than a smaller one, competitors may temporarily close down (or in the case of the oil refining business, as indeed everyone pointed out, simply reinvest in building another concern, which is what some of Rockefeller’s bought-out competitors actually did in order to get another round at selling at a profit); and that contrary to the espoused scenario in Rockefeller’s case, a price war in one market would quickly invite competition in other “monopoly price” markets and soon the war would have to be waged in numerous contested markets. Also worth mentioning is the fact that the predatory pricing setup presupposes the existence of a “war chest” of accumulated funds that the predator rests on. While this is certainly an advantage against smaller sellers,