The purpose of this study is to write a report on a Standard Oil Company that has its operations in the United States of America operating in the oil industry. This report will also comprise of a one-page proposal whose intention is to avoid potential potholes in future. The other aim of this report is to investigate the nature of the Standard Oil Company and the prominent products associated with it. The operations of the Standard Oil Company are set in oligopoly market meaning that for better understanding of how this company operates and its potential to conquer other firms in the market there is a need to define oligopoly. Oligopoly is a business term mainly applicable in the market field to describe the nature of the market. Other terms such as monopoly and perfect competition usually gives people a hard time to differentiate oligopoly from these two terms (U.S. Census Bureau, 2007).
Oligopoly resembles perfect competition market though it is said to be more than that. It is a situation in which there are fewer independent firms in the market that are not exerting severe pressure upon each other, but they have the ability to influence both supply and price. This is to mean that in oligopoly there are fewer firms controlling the supply and the price in the market. Compelling examples are firms operating in t eh oil industry such as Standard Oil Company, Exxon-Mobil, Chevron and shell Corporation among many others in the U.S that are dominating the market with other fewer oil-manufacturing companies. Such companies because they are few in the petroleum refineries industry they have the potential to control both the supply of the oil and their prices without exerting severe competition to each other. They offer similar products, the difference in these products differ in the manner they advertise them and promotional expenditures.
Proposal for the Standard Oil Company
Based on the economics of regulation and antitrust for the Oil Company, 340 U.S. 231 will be the antitrust case chosen and it highlights or explores the case between the Standard Oil Company and the Federal trade commission. This antitrust case falls in the hands of the Standard Oil Company that belongs to oil manufacturing industry in the U.S. The case will focus on the price strategy for the Standard Oil Company. It will explore reasons why the Standard Oil Company sell its products at a relatively lower price compared with other firms in the oil manufacturing industry that are also trading the same products to that of the Standard Oil Company (Office of Compliance, 1995).
The antitrust case will also show how the price discrimination offered by the firms is against the antitrust laws. It will also examine how the non-competitive environment in oil manufacturing industry came to be. Additionally, the case will explore the petroleum refineries, which is the NACIS for the oil manufacturing industry in the U.S. the study will examine the products which the Standard Oil Company and its competitors offers in the oil manufacturing industry. A compelling example of such products will be the processed petroleum that is got from refining crude oil. The steps involved in the refining process that to be mentioned in this study would include cracking, straight distillation of crude oil and the fractionation among others. This study will also highlight the number of firms that will be selected for oil manufacturing industry. According to the latest Census data done in 2007, the number of the selected firms will be 98 (U.S. Census Bureau, 2007).
The study will use the concentration ratio for 4 largest and 8 largest companies selected to determine whether the oil manufacturing industry. For instance, the selected 4 largest companies have approximately a market share of 50% while the other selected 8 largest companies have a market share of about 100%. However, the NACIS code for the Standard Oil Company will be 324110 as indicated in the Census data done in 2007.
Line of the products the Manufacturing Oil Industry Offers
Manufacturing oil industry produces a variety of products that are oil based to its esteemed customers worldwide. A compelling example is the automotive lubricants and industrial lubricants. These two categories simply classify different products according to their function or usage. The Standard Oil Company which is among other largest companies in the US specializes in the manufacturing of processed petroleum which is a product got from crude refineries. A part from petroleum products, other products that the Standard Oil Company offers in the market are brake fluid and grease that are used in both automotive and industrial lubricant (U.S. Census Bureau, 2007).
According to the census data done in 2007, it is true that the Standard Oil Company operates in oligopoly market because there are other firms that offer the same products. Both the Standard Oil Company and its competitors are in a position to influence supply and the prices of their products simply because they are fewer and none of them exerts severe competition against the other. The Standard Oil Company is among the largest 98 companies selling petroleum products in the US.
Selling of processed petroleum by these 98 selected oil companies in the oil manufacturing industry offers a mere competition that would enable the market to qualify for oligopoly market structure in the US. The implication being that the 98 oil companies selected during the 2007 census operate in an oligopoly market structure with the ability to control both the supply and prices of processed petroleum.
History of the Standard Oil Company
The Standard Oil Company is a company in the United States of America specializing in the manufacturing of the processed petroleum and other oil products. It is under the oil manufacturing industry that comprise of other many oil companies. The Standard Oil Company was founded in 1870, and that it was the only operating company before other companies ventured or entered the market in late 1911. Studies show that the Standard Oil Company is both a drilling and production company. It is an international oil company because apart from supplying oil in the USA, it also feed other countries with processed petroleum and oil. It manufactures its processed petroleum from crude refineries through cracking, straight distillation and fractionation processes (Office of Compliance, 1995).
The Standard Oil Company is experienced in the manufacture of other products that include oil and gas industry. This company has acquired tremendous growth from the world go. It began as a small firm or industry but after a period of five years in operation, it expanded becoming a large company due to the aspect of monopoly. The Standard Oil Company was able to make huge profits in the first five years. The profit levels declined after new companies entered the market in early 1900s. The company used a prices strategy to capitalize the market. With regard to this, it lowered its prices below that of its competitors an attempt that led its prosecution by the Federal Trade commission in the US.
The advancement in technology has offered the Standard Oil Company a chance to dominate the market. For instance, the introduction of automotive machines that uses processed petroleum in their operations has given the Standard Oil Company the opportunity to make bountiful profits through high production of oil and gas (United State Departments of Justice, 2011).
This company worked in line with the latest technology to ensure that quality products are maintained thus being able to outweigh its competitors. Studies show that the emergent of satellites imaging has enable the Standard Oil Company to achieve high levels of prosperity in the exploration of gas and oil. The company has developed a strategy to protect the environment aiming at improving its image to the public. Based on this strategy, the Standard Oil Company has managed to remain in the category of the largest oil companies in the United States of America. Studies further show that the Standard Oil Company in the US has developed a corporate strategy that would enable it to merge and acquire all energy related properties in future (Pratt, 1980).
Current Status of the Standard Oil Company
As it is indicated in the ABI information, the Standard Oil Company is among the largest oil companies in the United States of America with about 50% market share in the manufacturing oil industry. The rapid growth of the Standard Oil Company has enabled it to become an international company. The Standard Oil Company is supplying other foreign nations with oil at relatively low prices. This is among other factors that have enabled the company to dominate the manufacturing oil industry In the United States of America. It the leading Oil Company because it is able to produce 300million barrel of oil daily as compared to its competitors (Office of Compliance, 1995).
The Standard Oil Company has embraced technology in that it is using satellites to explore gas and oil. The success of this company in the last 10 years has come along with the introduction of satellite technology in the market leading to extreme levels of prosperity in oil and gas explorations. According to the information got from the ABI info, the Standard Oil Company has recently established branches worldwide thus becoming more than an international oil company. It offers quality products at low prices to that of its competitors, and that it was able to attract more customers. Other firms in the industry offer similar products to that of the Standard Oil Company, and this actually indicates how the Standard Oil Company is operating in the oligopoly market structure (U.S. Census Bureau, 2007).
Comparison between the Market Shares of the top 4 and top 8 firms
According to the Census data in 1997 it was observed that the concentration ratio of the selected 4 largest and 8 largest companies differ with those of Census data in 2007. It is true that the census data in 1997 revealed that the concentration ratio for the selected industry for the biggest oil companies in the United States of America was 42.9%. On the contrary, the concentration ratio for the other selected industry of 8 biggest oil companies in the United States was 65.7%. These concentration ratios were used to determine the market share of oil companies in the oil manufacturing industry. When these concentration ratios were examined, it was easier to decide or conclude that the market share of the 4 largest oil companies was approximately 47% while the market share of the 8 largest oil companies was estimated to be 92% (Office of Compliance, 1995).
The conclusion made was that the oil manufacturing industry had an oligopolistic market structure and that the Standard Oil Company and its competitors were able to control both the supply and the prices of the processed petroleum and other products. According to the Census data done in the year 2002 it was found that the concentration ratio of both the selected industry for 4 biggest oil companies was 43.6% while that of the selected industry for 8 largest oil companies in the United States Of America was 74.3%.
When these concentration ratios were scrutinized and put under tight examination, it was noted that the 4 largest oil companies had a market share of about 49% while the other 8 largest oil companies had a market share of approximately 98%. The conclusion got from this analysis was that the oil manufacturing industry had an oligopolistic market structure meaning that competitors such as the Standard Oil Company, Exxon-Mobil, Chevron and shell Corporation were operating in an oligopoly market structure with a potential to influence both the prices and the supply of oil, gas and the processed petroleum (Pratt, 1980).
Describe the trend in market share in this industry and the trend you observe in the HH Index for this industry
As mentioned earlier in this study, the market share for the oil manufacturing industry is determined by the use of data collected during the 1997, 2002, and 2007 Census. The determination of such market share depends largely on the concentration ratios of selected industry for the 4 biggest oil companies and that of 8 largest oil companies in the United States of America. The implication is that statisticians used concentration ratio to analyze the position of the oil industry competitors such as the Standard Oil Company, Exxon-Mobil, Chevron and shell Corporation in the market (U.S. Census Bureau, 2007).
In 1997 based on the issue of the concentration ratio it was concluded that the 4 largest oil companies had a market share of about 47% while that of the 8 largest oil companies had a market share of about 92%. In the 2002 Census data, after the statisticians analyzed their data it was revealed that the 4 largest oil companies had a market share amounting to 49% while that of the 8 largest oil companies had a market share of 98%. On the contrary, the Census data of 2007 did yield different results. After the analysis was done, it was found that the 4 largest oil companies had a market share of approximately 50% while that of the other 8 largest oil companies was estimated to be 100%.
The trend is that the market share of these oil companies increased a year after another. This is demonstrated by how the market share increased from 1997 to 2002 and 2002 to 2007. The market shares for the year 1997 are quite small compared to that of the year 2002. On the contrary, the market shares for the year 2002 were much lower to that of the year 2007. This means that those market shares are increasing after a certain period as indicated by the three Census data in the HH Index for the oil manufacturing company (U.S. Census Bureau, 2007).
History of growth in this industry
In order to determine how the industry is expanding it is important to know how the growth of such industry understudy is taking shape. A growth has two side, we have the negative side and the positive side. The key concern of the industry growth as stated in this study is the positive direction the oil manufacturing industry particularly the Standard Oil Company in the United States of America. It would be true to argue that the Standard Oil Company has acquired tremendous growth in the last ten years. This was evident by the manner into which the industry expanded. The Standard Oil Company was able to establish new branches and plants in other foreign countries such as Japan, Egypt, China and Africa countries (Pratt, 1980).
Through the attempt, the many companies operating in the oil industry such as the Standard Oil Company, Exxon-Mobil, Chevron and shell Corporation have become an international company in the last ten years. The Standard Oil Company has achieved the highest market share compared to other oil companies in the United States of America. In addition to this, the Standard Oil Company has begun manufacturing other products such as gas and oil.
Several automotive and industrial machines are now using oil as the only source of lubricants. This is to mean that apart from the processed petroleum, the Standard Oil Company has managed to introduce other products to suit the demand of its esteem customers worldwide. The other thing that has led to prosperity and rapid growth in the Standard Oil Company in the United States of America is the introduction of the latest technology in the production process. This in further has ensured quality product that enabling the Standard Oil Company to use its reputation to attract more customers hence achieving high profit levels.
The oligopoly structure in the oil manufacturing industry based on things such as the relative position of the competing firms in this industry by considering of their relative HHI Index and the Market shares
Just like any other industry, oil-manufacturing industry can also operate in oligopoly market structure though it is a quite difficult for many to notice. The complexity of the oligopoly market structure lies between the monopoly and perfect competition. It is true to argue that the oil manufacturing industry in the United States of America operates in an oligopoly market structure because there are fewer oil companies dominating or operating in the market. There are fewer oil companies selling similar energy related products such as the processed petroleum, gas and oil. Compelling examples of such oil firms include the Standard Oil Company, Exxon Mobil and Shell Corporation (Grant & Thille, 2001).
All these oil firms offer identical products in the market a fact that explains that the oil manufacturing industry is operating in an oligopoly market structure. They take into account what each other Oil Company does. According to the Census data of 2007, the Standard Oil Company has a market share of about 50% while the other oil companies owning a market share of about 100%. This actually led to the conclusion that the oil manufacturing industry is operating in an oligopoly market structure. According to the concentration ratios indicated in the HHI Index, it is clear that the company with the largest concentration ratio has high market share in the market. This is because statisticians and economists uses the concentration ratio got from the HHI Index to determine the amount of the market share owned by various oil companies particularly the Standard Oil Company (Grant & Thille, 2001).
Nature of competition in the oil manufacturing industry in the United States of America
According to Pratt (1980), oil companies in the oil manufacturing industry exert or experience some sort of competition though it is not pronounced, as it is the case with perfect competition. Such oil companies are said to trade identical products to the customers within and outside the US. The nature competition that such companies experience in an oligopoly market structure is not steep as it is in the perfect competition. Each of these companies is producing products of high quality to attract as many customers as possible in the market (Grant & Thille, 2001).
Lowering of petroleum prices in among other strategies used by various oil companies in the oil manufacturing industry to dominate the market. The other form of competition is the advertisement and promotional mix aimed at attracting more customers thus making high profits in the market. According to the antitrust laws, oil companies should set prices for their products. Additionally, since such oil companies are trading similar products antitrust laws states that all these companies should set a price common to all.
Top firm’s price and non-price strategies such as advertising expenditures and R&D for maintaining their market position
A compelling example of a firm using the price strategy in an oligopoly market structure as it is explored in the oil manufacturing industry in US is the Standard Oil Company. This is demonstrated in the manner in which the Standard Oil Company has lowered its prices below those of the other oil companies. This was evident in 2007 when the Standard Oil Company lowers the price of processed petroleum from a dollar ($1) to a value smaller than this. The other oil companies maintained the prices of petroleum at $1 thus encouraging many people to withdraw, and look for cheaper petroleum in the Standard Oil Company. Such firms have used non-price strategies to attract more customers. Compelling examples of such non-price strategies include advertisement and R&D with an aim of maintain their position in the market (Grant & Thille, 2001).
In the petroleum refining industry, competitors such as Standard Oil Company used a low pricing strategy whereby they sold their products i.e. petrol, oil and gas at a lower price compared with Exxon Mobil and Shell who are its competitors. By so doing the Standard Oil Company was able to attract more customers than the Exxon Mobil and Shell.
This refers to the use of other means of marketing apart from the price. It may include things such as promotion mix and other modes advertisements. In the petroleum refining industry various firms such as the Exxon Mobil, Shell and the standard oil company used different means of advertising their products. The graph below shows the expenditures of these firms in the advertisement. The common used means of advertisement used were the media (radio, TV etc), Adverts and Road shows.
Exxon Mobil and Shell spend large amounts of money on media adverts and Road-shows compared with the standard oil company that spent less in these non-pricing strategy as it is the case with the price strategy.
Interdependency of the firms in this Oil Manufacturing Industry
The interdependency of the firms in the oil manufacturing industry in the United States of America was evident when used similar marketing strategies to market their petroleum products in and outside the US. According to the Grant & Thille (2001), Ontario petroleum industry and the standard oil industry have used price strategy to dominate the market. These two oil companies have lowered prices of their processed petroleum below those of other oil companies in the oil manufacturing industry. The two-shared same ideas hence highlighting how interdependency between oil companies was enhanced (Grant & Thille, 2001).
Oligopoly market structure as highlighted in the report states that most of the oil companies in the United States of America are operating within such market structure. Such oil companies starting with the Standard Oil Company are fewer in the market, and that they are able to control over their supplies and prices. The marketing strategies used by such oil companies include the prices strategy and non-price strategy. Only fewer oil companies have managed to use the price strategy this is because it was prohibited by the antitrust laws.
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Pratt, J. A. (1980). The petroleum industry in transition: Antitrust and the decline of monopoly control in oil. The Journal of Economic History, 40(4), 815-837. Web.
U.S. Census Bureau, (2007). North American Industry Classification System. Web.
United State Departments of Justice, (2011). Antitrust Fillings. Web.