Case Study On Industrial Organization

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Landmark Antitrust Case Study Assignment
Dr. Mozayeni
Assigned #:__________________________
Monopoly 221 U.S. 1, Standard Oil of New Jersey v. U.S. (1911)
1. Write a 100- word abstract of the case, including the date of the case.
The Standard Oil of New Jersey v. U.S. was a case that took place in 1911 and gave the Supreme Court gave its verdict on May 15, 1911. In this case, the Supreme Court of the United States found Standard Oil of New Jersey as being guilty of engaging in monopolistic and anticompetitive actions. These actions of the Standard Oil were as an attempt to monopolize the petroleum industry of the United States. The Supreme Court’s verdict was to break the company into several smaller firms, which were separated geographically. This was done to make the petroleum industry competitive as the smaller firms would then compete with each other.
2. Describe the provision of the US Antirust Law invoked to judge presence of anticompetitive behavior or potential of for moving the industry in that direction.
The provision of the US Antirust Law invoked to judge due to the presence of anticompetitive behavior was The Anti-Trust Act of July 2. The law forbids any sort of contract and combination will result in excessive control of trade in interstate commerce . The act is also known as the Sherman Antitrust Act. In this case of The Standard Oil of New Jersey v. U.S., there was unnecessary and excessive control of trade in petroleum and petroleum products in interstate commerce. Because of its massive size, Standard Oil was able to under price its products and threat its suppliers and distributors to not do business with Standard Oil’s competitors. Therefore, Standard Oil violated the Sherman Anti-Trust Act.
3. Describe the basis for the ruling and action that pertain to all OR some of the following factors:
The extent and trend in competition and expected in the future: Industry Structure and trend and projection for the future [based on the past, mostly]; CR4, CR8 and HHI, specially in cases of mergers
Market Structure: Market Definition, Market Imperfections and Degree of Competition:
Defining the Market: the line of product[s] in question (cross elasticity of demand), Product Types, Geographical Market Areas [local, regional or national] , similar prices and price movements, supply conditions, and other considerations that might have been considered in the case.
The geographical domain of the product/firm and its relation to “monopolization” or “dominance”
Trends in firm’s profits [indication of the markup [RE the Lerner Index].
Has there been evidence of growth in “market power”?
Describe the degree of “barrier to entry” in the industry for this case and if it was considered in the legal action in the case.
The degree of competition in the petroleum industry was low. The reason for this is that the petroleum industry is very capital intensive and requires massive investment. The kind of products Standard Oil was engaged in producing were petroleum based. Petroleum, at that time (and today, still), has no good substitute. Its major product was kerosene, which was mostly exported . So the cross elasticity of demand for the products produced by Standard Oil was fairly low.
Being in the United States, Standard Oil was determined in controlling almost every oil refinery of the United States . The Cleveland area of the United States was at that time the centre of oil refining and Standard Oil acquired almost every refinery in the vicinity . This geographical domain of the firm helped to increase the company’s monopolization. Initially, when the firm started out in 1870, it was producing about 10% of the US refined oil, which quickly increased to 20% due to the acquisitions made in Cleveland . Essentially, Standard Oil eliminated its competition.
Moreover, the market power of Standard Oil can be signified by the fact that by 1904, the company controlled 91% of the production and 85% of the final sales . By 1906, Standard Oil controlled 75% of the oil produced in the United States . This shows that Standard Oil controlled almost all of the production of oil within the United States of America.
The degree of barriers to entry in the industry was very strong. Firstly, the industry was capital intensive; hence it requires huge investment on the part of anyone who wishes to enter into the industry. This in itself acts as huge barrier to entry. Moreover, the company was even accused of threatening distributors and suppliers of not to do business with its competitors. Because of its size, Standard Oil was also able to cut prices. This which would push competition out due bankruptcy as the new firms were unable to engage in price wars with Standard Oil .
4. Describe the “conduct” in question that has been considered “anticompetitive:” Determine if the defendant had used an anticompetitive Price Strategy and explain how. Likewise, describe any Non-price Strategies the defendant had used and describes how.
Standard Oil used different kinds of price strategy and non-price strategy in order to monopolize the petroleum industry. According to the US Department of Justice, Standard Oil would cut its prices in order to suppress competition . Most companies were unable to compete with the low prices of Standard Oil products, resulting in the competitors losing revenue and going towards bankruptcy. In places where the company faced no competition, Standard Oil would charge excessive prices and earn supernormal profits. Other non-price strategy that Standard Oil was engaged in included espionage of its competitors. Standard Oil was also engaged in contracts with railroad companies. These contacts granted Standard Oil special preferences, while restricting supply to other competitors. The contracts, therefore, violated the Sherman Act as they restrained trade. Moreover, the company controlled pipelines, which helped it in restraint and monopolization .
5. Describe the effect of the defendant’s “conduct” on other firms (or the main rival) in the industry.
The effect was obvious: most companies went bankrupt. Due to the reasons mentioned in the previous question, companies started to become bankrupt as they were unable to compete with Standard Oil’s price. The revenue earned didn’t break-even with the costs, and the new companies started to bear losses. Moreover, suppliers were afraid of losing Standard Oil as a customer, so they refused to supply other smaller firms. The market basically revolved around Standard Oil, as it became impossible for new firms and companies to survive in the petroleum industry.
6. Describe the initial legal action taken against or in-favor of the defendant.
The initial legal action started in 1910, and finally concluded in 1911 . The Supreme Court passed a new ruling called the rule of reason, which prohibits all unreasonable trade restraints. The result was that Standard Oil was split into 34 smaller companies . This was done in order to instill competition into the petroleum industry.
7. Describe any subsequent legal action in the case (such as the Supreme Court), if any.
There were no subsequent legal actions, as the first case concluded in dividing Standard Oil into 34 smaller companies.
8. Carefully describe how the model of Structure-Conduct-Performance has been applied in the case under consideration.
The model of structure-conduct-performance approach informs about the performance of an industry. It says that the industry’s performance depends upon the conduct of the firms in it. The conduct of the firms depends upon the structure of the industry. The structure of the industry in turn relies on the competitiveness of the firms present in the industry. Competitiveness is ensured by the demand of the products in question and other things like the type of technology being operated within the industry . The components of a structure-conduct-performance approach are: basic conditions, structure, conduct, performance and government policy .
This model of structure-conduct-performance can be applied to the case at hand too. When we analyze the basic conditions, we need to realize that a lot of things are covered under its headings. The most important one is the consumer demand. Consumer demand in the petroleum industry has always been high. This is mostly because most of our energy demands are fulfilled by the use of petroleum and its products. Moreover, the period in question is from 1870-1910. This is the period when industrialization was at its peak, and every industry was run on either petroleum or coal. So, the consumer demand was obviously very high. This naturally means that the elasticity of demand of the petroleum industry was very inelastic. Also, substitutes weren’t available at that time and petroleum was only source of fuel, with no alternative fuel available. This again kept elasticity of demand in the petroleum industry very inelastic.
The second thing that needs to be discussed is the structure of the industry. A lot of things encompass the structure of an industry, with the number of buyers and sellers being the primary focus. The number of buyers was obviously very large because of the large energy demands of everyone. The number of sellers on the other hand, was limited. This was due to the nature of the industry itself, i.e. the petroleum industry is highly capital intensive. Moreover, Standard Oil was a monopoly, which made it an almost only seller operating within the petroleum industry, keeping the competitiveness of the industry at a low level. Barriers of entry were high too, as Standard Oil ensured that competition within the industry was eliminated through the various anti-competition tactics that it adopted. Also, a lot of horizontal and vertical integrations took place within the industry, as Standard Oil merged itself with its competitors and acquired numerous oil refineries.
The third aspect is that of conduct. Now a lot of merger and contracts were present within the industry. Standard Oil merged with a lot of its competitors, while it also held contracts with railroads. The pricing behavior within the industry was also discriminatory, as Standard Oil would charge low prices where there was possibility of competition and charge high where there was no competition.
According to the performance aspect, the industry was efficient. This can be proven by the fact that Standard Oil became a monopoly because it was efficiently allocating its resources in the right manner in order to ensure quality. The company, in turn earned great profits.
The component is the government policy. The government had a statutory law in place, known as the Sherman Act. This Act was an Ant-Trust Act, in order to ensure that no industry is monopolized and the power of monopoly is broken down. This presence of government policy resulted in the breakdown of Standard Oil as it violated the Sherman Act. The Supreme Court decision came about as a result of the consumer oppression that was taking place due to the presence of a monopoly in the petroleum industry. Price discrimination and other actions were deemed as unreasonable.
Monopoly 392 U.S. 481, Hanover Shoe, Inc. v. United Shoe Machinery Corp. (1968)
1. Write a 100- word abstract of the case, including the date of the case.
In this case, United Shoe Machinery Corp, which was a manufacturer and distributer of show machinery, was sued Hanover Shoe, Inc. for monopolizing the shoe machinery industry. This was in violation of the Sherman Act. The United was accused of the practice of leasing and at times refusing to sell its shoe machinery. Hanover was entitled to damages from 1939 to 1955. The case was filed in 1955 but a verdict was given in 1968. The United was believed to be a monopoly for decades until the firm was ordered to be broken down. The firm attempted to diversify it but failed and was caught up in huge debts. Finally, the United was bought by Emhart Corporation in 1976.
2. Describe the provision of the US Antirust Law invoked to judge presence of anticompetitive behavior or potential of for moving the industry in that direction.
Hanover was the customer of the United, and United was sued on the basis of violating the Sherman Act by engaging in anti-competitive actions. The United was engaged in the practice of leasing and refusing to sell its sophisticated and important shoe machinery. This was considered as an instrument of monopolization .
3. Describe the basis for the ruling and action that pertain to all OR some of the following factors:
The extent and trend in competition and expected in the future: Industry Structure and trend and projection for the future [based on the past, mostly]; CR4, CR8 and HHI, specially in cases of mergers
Market Structure: Market Definition, Market Imperfections and Degree of Competition:
Defining the Market: the line of product[s] in question (cross elasticity of demand), Product Types, Geographical Market Areas [local, regional or national] , similar prices and price movements, supply conditions, and other considerations that might have been considered in the case.
The geographical domain of the product/firm and its relation to “monopolization” or “dominance”
Trends in firm’s profits [indication of the markup [RE the Lerner Index].
Has there been evidence of growth in “market power”?
Describe the degree of “barrier to entry” in the industry for this case and if it was considered in the legal action in the case.
The degree of competition in the shoe manufacturing industry was high, with lots of different firm competing with each other. However, these footwear manufacturing companies were dependent on the machinery provided by the United. This gave a lot of power to the United, and as a result, it gave United the room to exploit its customers. So, the United was engaged in leasing out its sophisticated machinery, instead of selling them. This ensured United’s monopolistic power over its customers, and earned the company a lot of profits.
The firm’s profits were seen as never declining and always increasing, even during period of Great Depression and other periods of Economic cycle . The main reason was the leasing out strategy that the United adopted, which ensured a constant influx of money into the company.
The evidence of market power was apparent throughout. As the company was following the US policy of leasing machinery, a lot of discontent and opposition sprung up from footwear manufacturers, especially Northampton manufacturers. These manufacturers believed that the United was becoming a monopoly, as leasing gave them undue leverage over their customers, which included shoe manufacturers .
The barriers of entry in the footwear manufacturing industry were low, as leasing machinery had the ability of minimizing costs of new, potential customers . However, it also acted as a barrier to entry as refusal to sell the machinery to its customers meant that leasing machinery was a cost that the footwear manufacturers always had to bear. It couldn’t be there fixed cost because the United refused to sell the machinery to any footwear manufacturer.
4. Describe the “conduct” in question that has been considered “anticompetitive:” Determine if the defendant had used an anticompetitive Price Strategy and explain how. Likewise, describe any Non-price Strategies the defendant had used and describe how.
The conduct that has been considered as anticompetitive was the lease only policy adopted by the United . The Supreme Court had a problem with the fact that the United was only leasing its machinery, without giving its customers the option to buy that machinery. This policy of leasing was essentially used as an instrument to increase the monopoly of the United. The fact that United refused to sell its machinery resulted in harming the potential and actual competition within the industry .
5. Describe the effect of the defendant’s “conduct” on other firms (or the main rival) in the industry.
The effect of United’s conduct on Hanover and other firms due to illegal overcharge by the United was that Hanover passed on the high costs to the customers, resulting in the consumers suffering from high prices and Hanover losing sales .
6. Describe the initial legal action taken against or in-favor of the defendant.
The initial legal action taken resulted in United paying Hanover treble damages. These were the damages that Hanover incurred as a result of the overcharge of the machinery that Hanover leased from United . The reason for this was that Hanover paid more than it should have, and as a result, Hanover suffered a loss in profits. Because United was taking more from Hanover and others than the law permitted it to, it was entitled to pay Hanover for the damages it caused.
7. Describe any subsequent legal action in the case (such as the Supreme Court), if any.
Later on in 1968, the Supreme Court ordered that the United to be broken down. The company was also required to dissociate itself from its leasing strategy for the next ten years. However, the company was caught up in so much debt that its stock prices fell drastically and it became an ideal company for a takeover .
8. Carefully describe how the model of Structure-Conduct-Performance has been applied in the case under consideration.
The model of structure-conduct-performance approach informs about the performance of an industry. It says that the industry’s performance depends upon the conduct of the firms in it. The conduct of the firms depends upon the structure of the industry. The structure of the industry in turn relies on the competitiveness of the firms present in the industry. Competitiveness is ensured by the demand of the products in question and other things like the type of technology being operated within the industry . The components of a structure-conduct-performance approach are: basic conditions, structure, conduct, performance and government policy .
Consumer demand for footwear manufacturing machinery has always been high. As clothing is a necessity, and shoes are a part of clothing, the elasticity of demand for the footwear manufacturing machinery is relatively inelastic. The substitute for machinery is labor. However, considering the world of mass production that we live in today, using labor as a substitute for machinery to make shoes is a weak substitute. So the cross elasticity of demand for the footwear manufacturing shoes is low. Method of purchase, as seen earlier, was through leasing, rather than selling. Moreover, the product durability was high, considering that the products that were provided were machinery. Machinery has high durability.
Legal tactics used in the industry is that because firms are allowed to lease, most companies are engaged in leasing out their machinery to footwear manufacturers. Moreover, as numbers of sellers are limited, prices are usually overcharged, like we’ve discussed earlier too. Technological progress is high because any company that owns better machinery will be able to yield greater profits as they would possess more sophisticated machinery capable of producing better products. In this case, United possessed the sophisticated machinery, giving it an edge over other companies present within the industry.
Barriers of entry as discussed earlier are high because of the industry is capital intensive. Government regulations are in regards to the statutory law in place. This statutory law is the Sherman Act, which checks anti-competition behavior. The Sherman Act ensures that no action is carried out that would result in the monopolization of the industry. In this case, the lease only of machinery was against the spirit of competition and harmed the competitive environment. Companies, like Hanover, could’ve afford the machinery that was being leased out by United, hence damaging the level of competition that could’ve been achieved had Unite given the choice of buying their machinery. Therefore, the Sherman Act acted to ensure that power of a monopolistic firm, in this case United, was broken.
Works Cited
Chernow, Ron. Whatever Happened to Standard Oil? 2004. .
Cornell. Standard Oil Co. of New Jersey v. United States () 100 U.S. 1 173 Fed. Rep. 177, modified and affirmed. .
Cummings. Background & History. .
FindLaw. U.S. Supreme Court - HANOVER SHOE v. UNITED SHOE MACH., 392 U.S. 481 (1968). 2012. .
Justia.com. Hanover Shoe, Inc. v. United Shoe Machinery Corp. - 392 U.S. 481 (1968). .
—. Standard Oil Co. of New Jersey v. United States - 221 U.S. 1 (1911). .
mitpress. What is Industrial Organization? .
Regherh, Wgre. British United Shoe Machinery - rollformers - roll form machinery Manufacturer. 15 January 2011. .
rhapsodyinbooks. May 15, 1911 – The U.S. Supreme Court Decided Standard Oil Co. of New Jersey v. United States. 15 May 2009. .

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