Thursday, June 12, 2014

Leslie on the Standard Oil Case

Christopher R. Leslie, University of California, Irvine School of Law, has posted Revisiting the Revisionist History of Standard Oil, which appeared in the Southern California Law Review 85 (2012): 573-603.  Here is the abstract:    
TR v. Standard Oil (LC)
The Standard Oil case continues to inform many aspects of current antitrust policy. Part of Standard Oil’s significance, however, has been lost over time. The Supreme Court condemned a range of conduct by the Standard Oil Company as anticompetitive, including predatory pricing. Predatory pricing occurs when a firm prices its product below cost in order to drive its competitors from the market. Once enough rivals have exited the market, the predator raises price and earns stream of monopoly profits.

In the decades following the opinion, the conventional wisdom held that Standard Oil had engaged in predatory pricing. The Standard Oil opinion stood for the proposition that using predatory pricing to acquire or maintain a monopoly violates Section 2 of the Sherman Act. The opinion did not define the contours of predatory pricing, neither explicitly saying that a predatory price is a price below cost nor specifying what measure of cost courts should use. Nevertheless, the opinion laid the groundwork for future federal courts to address these questions and to provide more structure to the predatory pricing cause of action.

Based on a revisionist history of Standard Oil written by John McGee in 1958 article, the new conventional wisdom now holds that the Standard Oil Company never engaged in predatory pricing and that the case stands for the proposition that monopolists do not use below-cost pricing as a mechanism to acquire or maintain monopoly power. The article challenges McGee’s thesis. After exploring how McGee’s work has affected antitrust jurisprudence, this article challenges McGee’s interpretation of the trial record in Standard Oil, showing several instances where the data shows the Standard Oil Company charging a price below its costs. McGee often ignored or misinterpreted evidence inconsistent with his thesis that the Standard Oil Company never engaged in predatory pricing. Finally, despite claims that McGee’s work is empirical proof of the irrationality and nonexistence of predatory pricing, this article shows that McGee’s work is theoretical, not empirical, and has had undue influence.

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