Ronald Reagan liked to joke that the closest thing you’ll ever find to eternal life on earth is a federal program. He underestimated the possibilities of a Justice Department antitrust suit.
I was stunned earlier this week to read in the Wall Street Journal that the famous antitrust lawsuit against Standard Oil that broke up John D. Rockefeller’s massive creation and decided at the Supreme Court in 1911 was still an open caseat the Justice Department a century later, and is only now being closed up at long last:
The Justice Department wants to bring to an end its breakup of Standard Oil Co., which started in 1911, along with its efforts to ensure competition in the markets for horseshoes and player-piano rolls.
After a review of old legal agreements, the DOJ on Tuesday asked the U.S. District Court in St. Louis to terminate the decree that was the ultimate outcome of its case championed by President Theodore Roosevelt against the Standard Oil Co. of New Jersey. . .
“To say it’s been overtaken by events,” said Daniel Yergin, who wrote a Pulitzer Prize-winning oil-industry history, “is a vast understatement.”
Yergin’s vast understatement is a vast understatement. Chiefly because the standard accounts of the Standard Oil breakup case are largely wrong on one of the most important points: Standard’s supposed use of predatory pricing.
That was the shocking conclusion of economist John S. McGee in a classic (to some) but largely overlooked (by the “mainstream”) 1958 article in the Journal of Law and Economics called “Predatory Price Cutting: The Standard Oil (N.J.) Case.” Here’s the relevant part of McGee’s setup:
According to most accounts, the Standard Oil Co. of New Jersey established an oil refining monopoly in the United States, in large part through the systematic use of predatory price discrimination. Standard struck down its competitors, in one market at a time, until it enjoyed a monopoly position everywhere. Similarly it preserved its monopoly by cutting prices selectively wherever competitors dared enter. Price discrimination, the story goes, was both the technique by which it obtained its dominance and the device with which it maintained it.
The main trouble with this “history” is that it is logically deficient, and I can find little or no evidence to support it.
Boom!
McGee went on to offer two substantial lines of argument in support of this highly heterodox proposition. First, he reviewed the new insights of price theory that was developing fast at the University of Chicago in those years. But the second part of his evidence was the more interesting: he read through the entire trial court record of the case, and, where possible, contemporaneous historical records of every refinery acquisition Standard made from roughly 1870 on. His conclusion: “The record does not indicate that predatory price cutting forced any refiner to sell out. . . I cannot find a single instance in which Standard used predatory price cutting to force a rival refiner to sell out, to reduce asset values for purchase, or to drive a competitor out of business. I do not believe that Standard even tried to do it; if it tried, it did not work.”
I remember bringing this article to the attention of one of my liberal history professors back in my graduate student days (yes, surprise—surprise—I could be a bit of a nuisance to my professors in the classroom) and he was aghast that anyone could think something so outrageous as this. “Oh my!,” he said.
There’s a lot more to be said about antitrust and such, but the fact that the Justice Department still had the case open and going 100 years later testifies not just to the sloth of government bureaucracy, but perhaps also to the essentially political rather than economic character of antitrust enforcement. One famous scholar once compared antitrust action to a frontier sheriff keeping the peace by just being a bad-ass: “He did not sift the evidence, distinguish between suspects, and solve crimes, but merely walked the main street and every so often pistol-whipped a few people.”
Who said this? A guy you may have heard of named Antonin Scalia.
JOHN adds: In law school in the early 1970s, I took classes in both Antitrust and Economic Regulation. In one of those classes–probably Antitrust, most likely in the context of the Standard Oil case–my professor (Stephen Breyer, now a Justice of the Supreme Court) said that it is not clear, in all of American history, that there has ever been a case of predatory pricing, as defined by the courts. So that learning has been out there for a while, as Steve notes.
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