University of Southern California

The “Hub-and-Spoke” Conspiracy that Created the Standard Oil Monopoly

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Article by Benjamin Klein
From Volume 85, Number 3 (March, 2012)

The government’s challenge to Standard Oil’s monopoly of refining and the resulting court-ordered break up of Standard Oil one hundred years ago, was motivated to a large extent by the now discredited idea of protecting competitors rather than preserving competition. Consistent with a principal concern of the framers of the Sherman Act that large corporations often received discriminatory discounts which placed small companies at an unfair disadvantage, the government focused its case on Standard Oil’s use of its dominant position to obtain preferential railroad rebates that forced rival refiners to either agree to be acquired by Standard Oil or to go out of business.

While it is now nearly universally accepted that Standard Oil’s preferential railroad rates were a crucial factor in Standard Oil’s growth and dominance of refining in the 1870s, Michael Reksulak and William Shughart have recently advocated a procompetitive view of Standard Oil’s rate discounts. Relying on Ron Chernow’s conclusion that the railroads achieved significant cost savings by transporting Standard Oil’s large shipments, Reksulak and Shughart argue that Standard Oil’s rate rebates were merely the way the railroads shared with Standard Oil the transportation efficiencies associated with handling Standard Oil shipments as part of the normal competitive process.

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