What's the standard charge against Standard Oil with regard to railroad rebates?

March 14, 2008 11:12 AM

What's the standard charge against Standard Oil with regard to railroad rebates?

I'm diving into the history of antitrust, and a repeated charge made against Standard Oil is that they were such a dominant shipper, that they were able to treat railroads very harshly.

From what I've seen, they got huge volume discounts, in addition to a discount that was designed to be a percentage of the railroad's other business (so designed, apparently, to make sure that the railroads bled everything they could without going under). This latter behavior is called "drawbacks."

(The railroads later sought rate regulation with open arms as a means to prevent themselves from giving such handsome discounts: an instance where the regulated industry players think they can make more money if they're told they're not allowed to charge under a certain amount.)

Everything I've read about SO and the railroads either defends SO's behavior as legal, rational economic behavior, or attacks it but without much basis. (See what they did? See how big they were? That's bad!)

I am looking to read a more reasoned attack on SO, justifying the antitrust actions, public outcry, and the breakup of that concern. Can you point me to sources that relate the traditional charge in a thorough way, countering the defenses of SO made by Chicago-style economists?

posted by yesno to law & government (3 comments total)

I recently read Conquering Gotham by Jill Jonnes, on the subject of the Pennsylvania RR's tunnels into Manhattan. Although the book's not about drawbacks, they play a part in the story (coal and steel got into the act as well) and the book talks a bit about the anti-trust laws which came into being around then. It's probably a wee bit biased in favor of the PRR, but I found it a very enjoyable read. Anyway, it gives a wider picture of the time and its politics.

AIUI, what it boiled down to was that SO was acting rationally (in the economics sense) and legally (mostly?) to maintain some monopsony power over shipping, but this was perceived as not being beneficial to the country, and so we got antitrust regulations.
posted by hattifattener at 11:55 AM on March 14, 2008

I would qualify hattifattener's comment to note that the underlying theory of antitrust regulation was ancient and well-established before Standard Oil -- that the public was entitled to the benefit of competition.

What was new and radical about the "trust busters" was the use of this well-established theory to break up (non-natural) monopolies rather than to prevent and punish cartels (independent companies colluding to maintain prices and limit services, rather than competing).

It should also be pointed out that the railroads had the opposite problem -- they were profligate competitors who went through many cycles of borrowing, building, and bankruptcy. Because the public benefit of a dense and frequently-served railroad network was so profound, government was strongly inclined to err on the side of protecting them.
posted by MattD at 5:28 PM on March 14, 2008

Thanks for your answers.

I would say that based on my further reading, at least by today's standards, SO did nothing wrong in obtaining rebates, which were little more than volume discounts.

The problem with drawbacks wasn't that SO got, in effect, even deeper discounts-- viewed that way, it was a rational way for SO to ensure the received the largest possible discount without driving the RRs under. Rather, it was that they effectively forbade the RRs from giving the same discounts to other shippers. While there is nothing suspect about using your size to extract concessions, getting into the details about the RR's other deals is a bit shady. It's a form of exclusive dealing.

There is also some talk the SO acted in effect as an agent of an illegal price-fixing scheme among the RRs-- that they spread their business among the different RRs in a way beneficial to the RRs. I haven't actually read too much about this theory, though.
posted by yesno at 2:36 PM on March 15, 2008