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Note, Structural Shared Monopoly Under FTC 5: The Implications of the Exxon Complaint, 26 Case Western Reserve Law Review 615 (1976).
M. A. Adelman et al., Oil, Divestiture and National Security (National Strategy Information Center 1977).
Thomas D. Duchesneau, Competition in the U.S. Energy Industry (Ballinger Publishing Co. 1975).
Walter S. Measday, "The Petroleum Industry" in Walter Adams (ed.), The Structure of American Industry (5th ed. 1977).
Eugene V. Rostow, A National Policy for the Oil Industry (Yale Univ. Press 1948)
Pipelines and Antitrust
Michael E. Canes
The contents of this paper are for the purposes of study and discus-
PIPELINES AND ANTITRUST
In theory and often in practice, United States antitrust
policies are based upon economic models of competition and monopoly.
For example, such models have been utilized by the federal antitrust agencies to determine whether firms in a given market are behaving in socially desirable fashion and to formulate policy prescriptions
if they are not.
For many years, the oil pipeline market has been subject to antitrust scrutiny.1) Because oil pipelines are subject to large economies of scale, the market is said to be characterized by
"natural monopoly," that is, a situation where over the entire range of oil transportation demand a single pipeline facility is the most economical market alternative. Since these conditions are inherent in the technology of pipelines 2) and since there are substantial transportation costs savings associated with larger diameter pipelines, public policy has allowed firms to take advantage of
For a history of such scrutiny, see Arthur M. Johnson, Petroleum Pipelines and Public Policy, 1906-1959, Harvard University Press, 1967.
Essentially, the cross-sectional area of a pipeline, which is related to its output, increases faster than its diameter, which is related to its cost.
See, for example, Leslie Cookenboo, Jr., Crude Oil Pipelines
Diameter (inches) Pipe Cost Index Capacity Index
48 Testimony of Charles E. Spahr, Chairman, Std. Oil of Ohio, before the House Judiciary Subcommittee on Monopolies and
the scale economies but has imposed both rate and common carrier
regulation to avoid monopoly pricing and to provide equal access to
all prospective shippers.
Thus, although firms have achieved large
scale economies with pipelines, these regulatory constraints are meant to have forced pipeline firms to act about as they would have were the pipeline market characterized by a competitive structure.1/
Recently, however, the U.S. Department of Justice has advanced
a different analysis concerning the oil pipeline market.
that the great majority of u.s. pipelines are owned by vertically integrated oil companies, the Department has reasoned that even if
pipeline rate regulation is perfect, integrated companies can earn monopoly profits in other, adjacent stages of the oil industry by sizing pipelines so as to achieve the monopoly throughput rate. These profits are said to arise because pipeline "undersizing" 27
forces some oil to travel by a more expensive transportation mode,
and because the marginal cost of this other transportation mode
must be reflected in the price of oil at an adjacent industry stage. The reasoning is summarized in recent testimony released by
the U.S. Justice Department.
"As we see it, the ability to avoid regulation is rooted
4-579 O - 79 - 39
by the more expensive transport modes. Where this
In the recent past, the Department of Justice has applied this reasoning not only to oil pipelines, but also to natural gas pipelines, deepwater ports, and to railroad transportation of coal.2/
Further, it has used the reasoning to advance strong policy pre
scriptions concerning all of these markets.3/ In addition, the
Department's reasoning and some of its policy prescriptions recently
have been adopted by the staffs of both the Federal Trade Commission
General, Antitrust Division, before the Senate Judiciary
See "Report of the Attorney General Pursuant to Section 19