August 8, 2009
PredatorBy Randy Fardal
In a series of articles published from 1902-1904, Ida Tarbell attacked Standard Oil, the leading US supplier of kerosene lamp fuel. The centerpiece of Ms. Tarbell's criticism was that the company had engaged in predatory pricing by continually lowering its prices. Her readers must have asked themselves, "How is that a bad thing? Am I supposed to be outraged that the amount I pay for lamp oil has fallen?"
Although company cofounder John Rockefeller had retired from actively managing Standard Oil in 1896, Ms. Tarbell vilified him in her articles, even criticizing his elderly appearance. Populist US president Theodore Roosevelt joined Ms. Tarbell's witch-hunt. Eventually, she stoked enough public hate and envy toward Rockefeller that the courts broke the company into 34 parts.
Economists point out that Ms. Tarbell's predatory pricing theory is unsustainable in a free market. For instance, auto company execs know that a predatory competitor can't offer money losing rebates forever, so they either match the predator's rebates to preserve their market shares or temporarily cut back production and wait out the storm.
To benefit from the ploy, a predator eventually would have to raise prices enough to recover all losses during the price-cutting period. But competitors then would reenter the market and regain their lost share -- or gain an even greater share if the former predator raises prices too much. By then, a predator also might be weaker financially than competitors that conserved cash while waiting for the storm to pass.
Standard Oil did not raise its prices. At the time Ms. Tarbell's exposé appeared, Standard Oil's customers were paying less than a third as much for kerosene compared to what they had paid two decades earlier.
How could Standard Oil seemingly violate the laws of economics and sell its products below cost for decades? And even more puzzling, if Standard Oil had been selling its products at a loss, how did Mr. Rockefeller become so wealthy? The answer, of course, is that Ms. Tarbell's charges were false. In reality, the company was a free market Olympic athlete, using innovation and good business practices to boost efficiency and reduce production costs.
Consumers only benefited from Standard Oil's actions, so who actually was harmed? --Just its less talented competitors.
Society probably would have been better off back then if someone had written an exposé on Ida Tarbell. Her father, Frank Tarbell, had gone bankrupt because his business was not as efficient as Standard Oil's. Her father wasn't a victim; he just got beaten by a better competitor. Ms. Tarbell must have hoped to use government to get revenge, even if it harmed the consumers she claimed to be protecting.
Ms. Tarbell also neglected to disclose a serious conflict of interest: her brother William was treasurer of Pure Oil Company, a Standard Oil competitor. Had Ms. Tarbell written her scathing articles today and attacked wind turbine giant, General Electric, the Left might have called her "a dishonest lobbyist with secret familial ties to greedy oil industry executives".
Although economists now scoff at claims of predatory pricing in a free market, it does exist in government-controlled markets. Education is a good example. Government uses predatory pricing to secure a near-monopoly of K-12 schools. Public education costs have tripled over the past 30 years, yet the students still pay nothing for it.
Annual federal, state, and local spending now total over $10K per pupil, and far more in areas such as Washington, D.C., where it was $28,900 last year. Private schools' costs are a small fraction of that and their products are better, but they are forced to compete in a market where the dominant rival offers its product at no charge.
The federal government's Fannie Mae and Freddie Mac employed predatory pricing to gain market share in the residential home mortgage business. They used taxpayer funds to cover their losses on risky loans while grabbing share from their free-market competitors. Their predatory pricing would have been suicidal if they were competing as private enterprises.
Federal and state governments use taxpayer-funded subsidies, grants, accelerated depreciation, and ratepayer subsidies to enable economically unviable wind energy businesses to compete with highly efficient electricity producers. The proposed cap-and-trade legislation would pile even more taxes and higher rates on the efficient competitors. Mr. Obama indicated that he wants to use those predatory pricing actions, along with costly regulations and taxes targeted at the coal industry to put it out of business. What would Ida Tarbell say about that?
The government now owns a portion of the automobile industry. Private shareholders demand a profit on their investments, but Mr. Obama didn't invest his own private money. Instead, he invested the public's money -- or more precisely, he invested wealth borrowed from future generations of taxpayers. As de facto CEO, he has more incentive to maximize votes than profits, so why wouldn't he use predatory pricing and subsidies to sell the best vote-getting cars below cost? Future taxpayers will cover his losses, and they can't vote him out of office.
And how better to get campaign funds than subsidizing the production of a politically correct sports car for rich Leftist donors? Mr. Obama has given Tesla Motors $465M -- almost a million dollars for every car they've delivered. Decades from now, taxpayers will have to work two jobs to finance the luxury sports car that some wealthy Hollywood actor got in 2009.
Only Government Can Win at Monopoly
At its peak, Standard Oil's domestic revenue accounted for less than one percent of America's GDP. There were well over a hundred direct competitors in the market, and many competing electric and gas lighting companies. If Standard Oil had been playing the board game Monopoly, it would have owned a house on Baltic Avenue.
Now, a century later, Mr. Obama is eying the multi-trillion dollar healthcare industry. He wants to expand beyond Medicare, Medicaid, and SCHIP to control the entire market. If he were playing Monopoly, it would be the equivalent of having hotels on five of the 28 properties -- from Pacific Avenue to Boardwalk. And he won't buy those hotels with his own money; he asked Congress to take them for him.
Government healthcare insurance will cost society about twice as much as private insurance but will sell for less than market rates, driving private insurers out of business. Once again, Mr. Obama can get away with predatory pricing because future taxpayers -- the ones that don't yet vote -- will be forced to cover his losses. It is fiscal child abuse.
Let's survey the game board:
Public school children are taught that Mr. Rockefeller was an evil businessman and that he used predatory pricing to drive his competitors out of business. But he actually was the consumer's best friend and the courts did not charge Standard Oil with predatory pricing. Only governments can be successful predators.
Free enterprise is win-win, but like most board games, Leftism is win-lose. Mr. Obama apparently thinks the American economy is just a 15 trillion-dollar Monopoly game and he intends to do whatever it takes to win it.
Most of Ms. Tarbell's allegations about Mr. Rockefeller were false, but if she were alive today and made similar charges against Mr. Obama, they would be accurate. The vilified Mr. Rockefeller controlled less than one percent of America's economy, but the deified Mr. Obama wants to seize control of more than one-sixth of the economy -- healthcare -- in a single additional conquest. Perhaps the Justice Department should charge Mr. Obama with anti-trust crimes.