If we want to make a strong claim of harmful monopoly[0], we should not expect to see a massive surge in production combined with an impressive decrease in price.
[0]Here I use the term "harmful monopoly" to refer to a firm that has both market power (can influence prices by controlling supply) and uses it to increase its own profits.
What we see instead is a time period where we do indeed have a dominant firm, but one behaving as if it were in a competitive market.
The important characteristics of a competitive market here are low barriers to entry/exit, and a commodity product. There were incredibly low barriers to entry/exit, and oil has, for nearly its entire existence as a product in the modern age, been a commodity.
According to the very Wikipedia article you link, Standard Oil was found guilty of anticompetitive actions.
Note that monopolistic behavior does not necessarily imply rising prices. See: Wal-Mart. Also see this quote from that Wikipedia article again:
"The evidence is, in fact, absolutely conclusive that the Standard Oil Co. charges altogether excessive prices where it meets no competition, and particularly where there is little likelihood of competitors entering the field, and that, on the other hand, where competition is active, it frequently cuts prices to a point which leaves even the Standard little or no profit, and which more often leaves no profit to the competitor, whose costs are ordinarily somewhat higher."
I believe we are going to be at an impasse here, but the quote you extracted illustrates the point I made, that Standard Oil acted as a competitive firm. We expect to see profit driven to zero in a competitive market, and that is what we saw in Standard Oil's pricing.
In cases where there was little competition, that clearly indicates an area where the costs of the trade were such that the market price would be higher.
The former is strictly competitive and the latter is strictly not anti-competitive.
I think we're going on the wrong track. What I meant was that Rockefeller and Ellison both show that wealth doesn't always come from producing value, but can also be made by abusing market dominance.
Arguing the nuances of Standard Oil's behavior is a moot point when the Supreme Court settled that issue in 1911.
I was responding specifically to the latter portion of the quote excerpted by the grandparent post, which indicated minimal and zero profits for Standard Oil in areas with competition, in alignment with economic theory which indicates economic profit tends toward zero with increased competition.
I responded to multiple points in the post. You questioned a specific excerpt. I responded regarding that specific excerpt. You are now accusing me of laser focus.
This thread has all the markings of one that becomes net negative for all involved and those reading. I'll leave it with this:
I am focusing on the outcome to the consumer of the behavior in question, not on the outcome to competitors of the behavior.
To get a little more insight into the impact to consumers, and the reason why this behavior is illegal, read the two sections of that Wikipedia quote the other way around.
Where there was no competition, Standard Oil provided oil. Where there was competition, Standard Oil provided oil at zero or near-zero profit.
The former is a situation of supply where there was otherwise none, and some is better than none. The latter is a situation of competitive pricing, and competitive pricing is better than non-competitive pricing.
How is this worse off for consumers than the situation without Standard Oil?
No, if profit is close to zero then there would be no point in being in a market. Markets drive profits to the 'standard' risk adjusted ROI for the economy they operate in. In other words if you could run a gas station, a book store, a flower shop, or whatever, then you do whichever one gives the most profits.
You can confirm this concept in any economics text. (economics jargon) Profit is driven to zero in a (economics jargon) competitive (economics jargon) market.
Economic profit is not the same thing as profit. In a pure economic debate you can drop it, but when talking about specific firms in a general context such as HN you really should clarify.
For everyone else: https://en.wikipedia.org/wiki/Profit_(economics) "Economic profit is similar to accounting profit but smaller because it subtracts off the total opportunity costs (not just the explicit costs, but also the implicit costs) of a venture to an investor.[1] Normal profit refers to zero economic profit.[2] A concept related to economic profit, and sometimes considered synonymous, is that of economic rent."
You can think of Economic profit as the 'standard' ROI you get in a given economy. Hypothetically Economic profit is also being driven to zero in a static economy, but that's a separate and long term thing.
PS: I am just being this clear because general HN readers are likely to miss the distinction.
Without any comment on the business practices of Standard Oil, I do think it's interesting that the price of crude actually increased substantially after the antitrust ruling.
World War I, increased demand, and a period in the 1920s during which there was genuine concern that all the oil that could be found had been.
That fear disappeared with the East Texas oilfield discovery in 1930. Which so increased the supply of oil relative to demand that prices fell to 13 cents per barrel.
This created a number of problems, including the prospect of damaging oilfields to the point that future extraction would be compromised. It ended up with the governors of both Texas and Oklahoma calling out the state militia, and, in Texas's case, the Texas Rangers, and seizing control of wellheads by force of arms in an effort to constrain extraction and drive oil prices up -- to $1/bbl.
This resulted in the Texas Railroad Commission effectively controlling US oil output (with oversight from the US Department of Interior) from 1931 to 1972, at which point, peak US oil meant that there was no longer any surplus extraction capacity to limit. Shortly afterward the Arabs tried another of their periodic embargos against the US and Europe, and, to everyone's shock, it actually worked.
If you look at the price of oil, from 1931 to 1972 it was remarkably stable. Even WWII and the post-war consumption boom barely moved the needle. Post 1974, everything goes all to hell. We're still there now.
Daniel Yergin's masterpiece work, The Prize, covers this history in great depth.
I should have been more specific - I was more remarking on the period between 1911 and 1914, which saw crude prices rise; that seemed rather interesting, since I'd expect an antitrust ruling to have the opposite effect if Standard had been keeping prices high through elimination of potential competition. The effect of WWI is quite obvious, naturally.
The rest of the history, though, is quite interesting. I've added that book to my reading list. Thank you!
My great-great-grandmother was very interested in news of Rockefeller's philanthropy. My great-great-grandfather had died middle-aged, so she had to raise their children on a tight budget. She noticed that the price of kerosene would always rise shortly after Rockefeller made a major donation.
Particularly chapters 3 "The Oil War of 1872", 4 "An Unholy Alliance", and 5 "Laying the Foundations of a Trust".
The oil industry has almost always been controlled by a small cartel, though that cartel has varied though the years: Standard Oil, the As-Is agreement, the Texas Railroad Commission, the Seven Sisters, the National Producers, and OPEC.
It's not been a competitive market.
Though I'd argue that oil has been tremendously underpriced since 1869.
Founded 1870, antitrust 1911:
https://en.wikipedia.org/wiki/Standard_Oil
Crude prices in that time frame (and beyond):
https://commons.wikimedia.org/wiki/File:Oil_Prices_Since_186...
Production in that time frame (having trouble finding a nice long time-series chart):
https://en.wikipedia.org/wiki/History_of_the_petroleum_indus...
If we want to make a strong claim of harmful monopoly[0], we should not expect to see a massive surge in production combined with an impressive decrease in price.
[0]Here I use the term "harmful monopoly" to refer to a firm that has both market power (can influence prices by controlling supply) and uses it to increase its own profits. What we see instead is a time period where we do indeed have a dominant firm, but one behaving as if it were in a competitive market.
The important characteristics of a competitive market here are low barriers to entry/exit, and a commodity product. There were incredibly low barriers to entry/exit, and oil has, for nearly its entire existence as a product in the modern age, been a commodity.