Pipelines and antitrust

Book · Sun Jan 01 04:00:00 EST 1978

OSTI ID:6130863

Canes, M E; Norman, D A

Noting that the great majority of US pipelines are owned by vertically integrated oil companies, the Justice 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. In this paper, we argue that the reasoning used by the Justice Department to derive its undersizing conclusion is inconsistent with elementary economic theory. Indeed, we show that the assumptions employed by Justice lead plausibly to conclusions almost exactly contrary to those which the Department alleges. Our approach is to describe the Justice Department's reasoning concerning pipeline undersizing, to examine several of its key assumptions, and then to demonstrate that under the Department's assumptions, integrated oil firms will not have an incentive to undersize. Although the arguments herein are framed in terms of oil pipelines, the refutation of the Justice Department's reasoning applies also to the vertical integration of declining cost stages and adjacent stages in other industries. Following the theoretical discussion, we analyze whether, as the Justice Department asserts, prorationing of pipeline space is evidence of undersizing. Finally, we discuss and criticize Justice Department policy prescriptions which appear to be related to the undersizing reasoning. In particular, we criticize the notion that either prospective or retrospective divestiture of oil pipelines would be of benefit to US oil consumers. The criticisms are based on normative precepts that antitrust policy should be based on economic analysis and that consumer welfare is the ultimate aim of antitrust.

• OSTI ID: 6130863
• Country of Publication: United States
• Language: English

Related Subjects

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ENERGY SOURCES
FOSSIL FUELS
FUELS
INDUSTRY
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