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Section 2: The Era of Leniency (1911-1940)
Standard Oil of N.J. et al. v. U.S. [221 U.S. 1 (1911)]
 | The issue of market definition was straightforward in this case: domestic crude oil refining, of which Standard Oil had a 90 percent share. Standard Oil did not dispute the fact that it had effectively monopolized the market for refined crude oil products. |
| Key issue facing the courts in the early days: Would § 2 be subject to a per se rule? Answer: NO. The court determined that each case should be subject to a "rule of reason." |
| For Justice White, the crucial issue was: "Did Standard Oil behave reasonably (ital. added) in the consolidation and maintenance of its monopoly power" This statement implies that evident purpose, or intent to monopolize, can be established from unreasonable or abusive business practices. |
| The trial transcript included 57 pages of (ostensibly) unscrupulous business behavior by Standard Oil including: (1) alleged predatory pricing in local markets where S.O. faced strong rivals; (2) aggressive use of monopsony power to extract secret rebates from railroad companies; (3) foreclosure of pipeline transportation to rivals by vertical integration (acquistion of National Transit); and (4) industrial espionage. |
| Standard Oil was convicted based on the so-called "abuse theory" of § 2 . Hence the Standard Oil holding company was ordered to divest of its holdings--33 companies were left afterwards. Shepard spoke about the effectiveness (or lack thereof) of the remedy: "The holding company was merely removed, leaving the previous series of regional monopolies, still largely under shared ownership. The shareholders realized a 47 percent capital gain in the year after dissolution. It took 10-20 years for competition to spread in the industry" [W. Shepard. Public Policies Toward Business, 7th ed. , p. 188]. |
U.S. v. United States Steel, et al. [251 U.S. 417 (1920)]
| U.S Steel was formed in 1901 by means of a horizontal consolidation of 180 independent steel companies. Immediately after its formation, U.S. Steel accounted for 80-95 percent of domestic iron and steel production. Its share subsequently fell to 40 percent, however. |
| The key issue were the "Gary dinners." These dinners were inaugurated in 1907 by U.S. Steel President E.H. Gary to grapple with an industry-wide crises of excess capacity and price instability. They subsequently evolved into trade association meetings during which the persuasive Judge Gary impressed upon rivals the advantages deriving from their participation in a system of mutual forbearance with respect to prices. |
| Invoking the abuse theory of section 2 elucidated by the Court in the Standard Oil case, Judge McKenna rendered the following opinion. |
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