Standard Of Monopolized The Oil Industry - Essay Example

Standard Of Monopolized The Oil Industry In 1890, Rockefeller together with other partners formed the Standard Oil Company. During this period, the petroleum refining sector was highly decentralized and with a high number of competitors. This was the period when most of the young business men tried their hands at the oil industry. The supply was unsteady and prices swayed enthusiastically. Standard Oil introduced order to the hectic market and stabilized prices using numerous techniques. The company employed ruthless methods to gain and terminate the competitors in the market and amalgamate the industry (Montague 23). These techniques included weakening the competitor prices till they either went out of the business or sold themselves to Standard Oil, Purchasing the machineries required to make oil barrels to prevent the competitors from acquiring them, using huge volume of oil shipments to pull off a cooperation with the railroads that granted the company secret rebates and reduced shipping costs, secretly buying the competitors and creating new related companies (Montague 54). Buying Competitors Though most of Standard Oil’s takeovers aimed at gaining competitive advantage, they also benefitted the acquired company too. Rockefeller and his partners gained confidence from the competitors through wide-ranging volunteer association. Standard Oil also offered the former executives, of the acquired companies, high positions in the new company and were assured parity in management and were assimilated into the management because they were experienced and were well acquainted to the oil industry and local markets (Montague 76-81). The Standard Oil trust comprised of different companies in the industry which attained competitive advantage and maintained an even competition among the members. Rockefeller perceived the buyouts of the other refineries in Cleveland as foreseeable. He is quoted noting “the battle of the new idea of cooperation against competition” (Montague 52). In his mind, huge industrial amalgamations, referred as monopolies would substitute competition and individualism in the oil industry. Rockefeller used hardball tactics to buy out the competitors. In 1874, the company started purchasing new oil pipeline networks. This assisted the company to amputate the flow of oil to the other companies that Rockefeller wanted to acquire. When a competing company made efforts to build a rival pipeline across Pennsylvania, Standard Oil purchased the land along the way to barricade the way. At the end, Standard Oil obtained control of all the pipelines within the nation. Notably, Standard Oil had attained full control of 90percent of United States refining companies (Montague 176) Discounted Shipping Rates In order to attain a competitive advantage over its competitors, Standard Oil surreptitiously organized for reduced shipping rates from railroads. This aimed at reducing the average costs incurred by the company. Rockefeller had a fascination for efficiency that was unparalleled. The rail roads ferried crude oil to Standard Oil’s refineries and Kerosene to the huge markets. This forced the small companies to pay higher prices than Standard Oil (Michael &Shughart 271). In 1971, Rockefeller assisted in the formation of an undisclosed merger between the refiners and railroads. They organized for the control of freight rates and oil prices by collaborating with one other. Rockefeller used this deal to threaten and intimidate the other refineries in the industry and sell their companies to Standard Oil at bargain prices (Michael &Shughart 274). Notably, the low railroad freight rates assisted the company increase its profits and gained a huge market share. Needless to say, the rebates resulted to predicted bankruptcy of numerous companies that could not afford the costs of transportation. Along with the secret rebate rates that were granted to Standard Oil, there was another way that railway companies used to guarantee business from significant clients such as Standard Oil. This was the drawbacks. Drawbacks were a system that offered preferential treatment to shippers where they not only received a rebate but also received a rebate on the tariffs paid by all other shippers, who were competitors (Michael &Shughart 276). An example is where members of the Standard Oil alignment were offered a rebate of $1.06 per barrel transported from Cleveland to New York. The non-members were charged $2.56 per barrel. Rockefeller seized this opportunity to assist his company to reduce transportation costs. In essence, this preferential system assisted the organization attain “unfair” competitive advantage and to outrun its competitors in the race to dominate the market. Predatory Pricing and Price cutting Predatory pricing refers to a competitive advantage that an organization can employ to do away with rivalry in the market. The theory behind predatory pricing involves lowering prices to a situation where they fall below the average cost of the competitors. Arguably, this forces the competitors to lower their prices to be competitive, causing a loss for every unit sold, till insolvency is unavoidable (Montague 93). After removing competition in the market, the predator company increases its prices to a lucrative point in order to offset its losses and attain monopoly profits. Standard oil supposedly removed its competitors through predatory pricing. Standard Oil had the intent to monopolize the oil industry. On the other hand, price cutting is a mechanism that does not aim to attain monopoly but to attain a competitive advantage. Because of the low costs of production as a result of buying in huge volumes, Standard Oil was in a position to charge lower prices than the competitors would charge (Lowe1). Standard Oil Company was in a position to charge low prices that would still be above its average costs. In fact, as a huge market power, the company feared increasing its prices for fear of the competitors bouncing up and winning dissatisfied customers. Vertical and Horizontal Integrations Standard Oil focused on both the horizontal and vertical integration. Horizontal integration is where the company merged with similar companies in order to attain control of the other competitors in the oil industry. In vertical integration, the company acquired other companies involved in other stages of production of oil such as pipelines, terminal facilities and railroad tank cars (Berkin 389). By 1873, Standard oil had gained almost 80% of the refining capacity in Cleveland, which was almost one third of the total United States refining capacity. The standard Oil Company also took advantage of the stock Market crash in September 1873, which triggered a depression that lasted for six years, and acquired refineries in Pennsylvania, Philadelphia, New York and Pittsburgh. By the end of the recession in 1879, Standard Oil had attained almost 90 percent of the oil refined in United States, and gained control of most of the oil marketing facilities within the country (Berkin 340-43). Works Cited Berkin, Carol. Making America, Brief.6th ed. Cengage Learning, 2009. Print. Lowe, Eric. "Standard Oil: A Centennial Evaluation (Part II: ‘Unfair’ Practices and Rebates Reconsidered)." Web log post. Master Resource. N.p., 17 May 2011. Web. 12May 2013. Michael, Reksulak, and William F. Shughart. "Of Rebates and Drawbacks: The Standard Oil (N.J.) Company and the Railroads." Springer 38 (2011): 267-83. Print. Montague, Gilbert H. The Rise and Progress of the Standard Oil Company. The Minerva Group, Inc., 2001. Print. Read More