Let me share with you my thinking piece that took me some six hours(Saturday morning from 10:20 to 12:00, 14:15 to 18:00 and Sunday from 11:00 to 12:30 and 15:30 to now!)
Thinking Piece
After a long but not tough reading of an essay concerning law and economics, I have come across many ideas that never appeared before since the study of industrial orgnization. Not only because an economist stood out and defended for Rockefeller, but also for his analysis indicated, at least to me, many points worth pondering.
I was, at first sight, quite surprised to find that the author seemed to be an attorney that was employed by Rockefeller in a drastic debate before the jury. However, after learning that he, Mr. John S. McGee was from
As this is a thinking piece which allows a free tour of mind instead of a rigorous essay with a strictly logical deduction and conclusion, I will in the following share my opinions oriented by some Chinese traditional ideas.
孙子兵法曰：上兵伐谋，中兵伐交，下兵伐城
SunTsu said : wise commander emphasises the ruse, mediocre commander resorts to diplomacy and the last choice is using the physical fighting.
First, concerning the strategy itself, predatory price cutting is not preferrable according to SunTzu, the most influential Chinese martial genius 2500 years ago. One of his famous remarks about war is that never should a marshal start a battle that kills 1000 enemies but loses 800 his own soldiers, unless it is extreme necessary. Predatory price cutting is exactly this kind of strategy if we examine the definition and conditions that it is applied in the first hypotheses part of article. In the case of Standard Oil, choice by the executives was wise, both in the competition against refiners and in dealing with the jobbers and retailers, Standard Oil tried hard not to use this weapon. In fact, except few cases found in the textbook(many of wich are not truly verified), in the daily life, predatory is like some kind of nuclear threat. Poessessing it is a matter whereas appliying it is another.
As a suggestion, I proposed that either we change a little bit the definition of predatory price cutting so that it can be applied to a wider scope or we add some tendancy analysis of this behavior which certainly. Since rpedatory price cutting, born as an anti-trust phenominon, has too much constraints. Nobody wise enough will take it at ease. But that is not to say that predatory has nothing to do with the case.
Concretely, the doubt that I hold towards the paper is that the author devotes a lot in arguing that never had Standard Oil used or tried to use predatory price cutting. Nevertheless, he failed to demonstrate whether this threat that hung over the rivals of Standard Oil had ever caused any effect to the actions taken by both sides, even though neither had it clarified. For example, the Standard Oil did purchase many of his rivals without resorting to predatory price cutting. But the result of potential price cutting that lead probably a predation compared to a irresistable price to sell has a priori preset the end.
To study this kind of case is, to me, quite different in the sense of law and that of economics. Anything that lack direct proof or testimony is not persuasive in before the judge. While if we change the point of view to the economics, we can employ any reasoning indicated by SunTzu to guess the ruse of the player so as to made our study of anti-trust powerful.
孙子曰：知己知彼，百战不殆。
SunTzu said : when you know clearly of your enemy and yourself, you can never lose a war.
The Standard Oil, despite its success in competition against the refiners, didn’t rush to monopolization in the market area of its product. Thanks to a calm analysis, the company left the market fully competed. This can be verified by the author of the article: “In retailing, numbers were often very large, and entry was cheap and quick. Standard Oil never had, or apparently sought, a monopoly of retailing. It would have been pointless to try, and probably impossible to achieve…… The skills and resources devoted to refined oil peddling were neither expensive, scarce, nor specific. A wagon, horse, driver, and some cans or a tank made a peddler.”
Thus, when Standard Oil was facing a market that could fulfill its dream of vertical integration and a possible profit, it was not fascinated by the realm of its own neither let it be. After a careful research about the characteristics and specifics, it sent out the guys to guarantee the market ”efficient and competitive”.
Return to the case of predatory price cutting. Many small refiners had succeeded in surviving just because they got the confidence by knowing well their predator could not possibly last for ever the predatory pricing since its market share caused it a much greater loss, and they then could fight back by shutting down temporarily without selling out their facilities. It is also due to its awareness of the reactions of its rivals that Standard Oil was more than caution in utilizing predatory pricing.
To enlarge this application, we presume that one firm is determined to pick up predatory pricing policy. It is highly recommended that besides knowing its own capacity in coping with the rivals in a long term war, the firm should have a fairly good estimation of its rivals’ ability of gathering money from any possible way to sustain alive, of what reactions its rivals will have when they fail to continue, of how high the barriers of re-enter as well as of possibility of monopolizing, etc. Nowadays, it is the competition of ability to borrow from financial intermediary that decides the result of predatory pricing.
三十六计： 围魏救赵
Thirty-Six Stratagems：relieving the state of Zhao by besieging the state of Wei。
This story happened during the same era, if not later, as Sun Tzu. Standard Oil had perfectly utilized this stratagem in its game. As we can easily find in the record collected by Mr. McGee that instead of predatory price cutting, Standard Oil forced its rivals by cutting the source of oil to the refiners, this kind of indirect antagonism is best explained by the sub title whose common examples, in the history, are destroying the supply for soldiers and hay for horses to win the war.
In Chinese traditional stratagem, an indirect way which can lead to the same result is much more appreciated than the ferocious attack. It is also observed in the enterprise’s strategy as professor Chevalier has pointed out that in the control of a firm, the more camouflaged you are, the more profit you will get.
In the context of Standard Oil, the indirect way it adopted was seizing the railway transport which, even though avoided its commitment of predatory pricing, reached the same target of wiping its rivals out without the price war or sometimes expensive purchase.
A conclusion that has not concluded:
In the competition between energy enterprises, a suitable and flexible strategy is absolutely necessary on noticing that it is not a game of several years or even decades, but a incessant one. Standard Oil case is worth reading again and again not because whether it had exercised a predatory price cutting, but its speculation facing this choice (thanks to Mr. McGee’s data and analysis) and its action to accomplish the goal if the predation proposal is rejected even though some of them are illegal according to the corresponding law.
The point is that with the evolution of the constraints against the monopoly, the enterprises that are pursuing a greater scale and scope should really be careful in the strategy making. Hopefully, they can throw a glimpse onto the famous Chinese traditional treasures and transfer them in the practical business operation.
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