Article written by Barry K Rothman.
Standard Oil is the classic example of what people point to when they talk about anti-trust litigation. The company is well known as the world’s largest producer of oil and kerosene, but the story of how it gained prominence provides a philosophical lens into anti-trust law. Was the government right to break up this monopoly?
Most economists would agree that the anti-trust litigation set in motion by Standard Oil is a positive guiding principle. The company, the story goes, used secret back room deals to gain an advantage over smaller competitors.
Standard had a problem. Rockefeller had grown the company substantially, finding customers all over the United States, but getting oil to them was an expensive prospect. As a youth, John had become adept at estimating transportation costs and what he would find later as an adult was that it would be cheaper to offer a rebate to transportation providers. So Standard Oil gave a rebate of what is equivalent to fifteen cents on the dollar for transportation costs, effectively sharing the burden.
Because Rockefeller had scaled his business well during the early years, reinvesting his cash reserves to improve infrastructure and increase production, he was in the position to take a small loss for long term gain.
Standard Oil also dramatically undercut competitors, sometimes taking losses or only a very slim profit, to ensure that smaller companies would not be able to thrive.
In point of fact, Standard Oil was reacting to legislation at the time. The company did establish a monopoly, which is well documented fact, but the government made it difficult for companies like Standard to incorporate in various states. Owning smaller businesses was one of the only ways the company could effectively grow.