 Chapter 12
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Chapter 13
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472. Letter to researcher from Ted Gamble Clause, Deputy Attorney
General, dated July 26, 1995, at 3-4; see also AG (1990) at
20-21; AG (1994) at 11, 20-21.
473. Letter from John Tantlinger, Ed.D., Energy Planner for the Department of Business, Economic Development, and Tourism,
to Wendell K. Kimura, Director, Legislative Reference
Bureau, dated July 26, 1995, at 3.
474. Letter to researcher from Richard C. Botti, Executive
Director of the Hawaii Automotive & Retail Gasoline Dealers
Association, dated August 1, 1995, at 3.
475. Letter to researcher from Alec McBarnet, Jr., Vice President
of the Hawaii Petroleum Marketers Association, dated August
14, 1995, at 1-2 (emphasis in original).
476. Letter to researcher from Jennifer A. Aquino, Administrative
Manager, Aloha Petroleum, Ltd., dated September 21, 1995, at
7-8. Retail divorcement, which prohibits manufacturers and
jobbers from operating retail service stations in Hawaii
under certain circumstances, is codified at section 486H-10,
Hawaii Revised Statutes; see Appendix H.
477. Shell further cited the following testimony opposing
divorcement legislation from the U.S. Department of Justice,
in an analysis that Shell considered to be equally
applicable to the divestiture concept, in explanation of why
such legislation would be harmful to consumers:
[T]he retail gasoline industry is competitive in most
markets. Major oil companies have partially
integrated into retailing to provide an apparently
more efficient and lower cost means of distributing
motor fuel. Prohibiting major oil companies from
using what they believe is an efficient method of
distributing motor fuel will not result in lower
retail prices; rather, it is far more likely to force
consumers to pay for a less efficient distribution
method in the form of higher gasoline prices or lesser
availability of supply, or both.
Statement of Charles F. Rule, Deputy Assistant Attorney
General, Antitrust Division, U.S. Department of Justice,
before the Committee on the Judiciary, U.S. Senate,
concerning S. 1140, at p. 11 (Oct. 9, 1985); Shell letter,
Letter to researcher from R. A. Broderick, Western Region
Business Manager, Shell Oil Products Company, dated July 31, 1995, at 3.
478. Shell letter, July 31, 1995, supra note 6, at 3.
479. Letter from Susan A. Kusunoki, BHP Hawaii Inc., to Wendell
K. Kimura, Director, Legislative Reference Bureau, dated
August 10, 1995, at 4-5.
480. Letter from J. W. McElroy, Regional Manager, Chevron U.S.A.
Products Co., to Wendell K. Kimura, Director, Legislative
Reference Bureau, dated August 7, 1995, at 8.
481. In this report, the terms "divestiture" and "vertical
divorcement" are used interchangeably to refer to the
divestment of a vertically integrated oil company of its
major operations, in this case, its retail outlets; the
terms "divorcement" and "retail divorcement", on the other
hand, are used to refer to the prohibition of integrated oil
companies from operating their own retail outlets. See
chapter 15 for a discussion of retail divorcement.
482. Jeffrey L. Spears, "Note: Arguments For and Against
Legislative Attacks on Downstream Vertical Integration in
the Oil Industry," 80 Ky. L.J. 1075, 1076 (Summer, 1992);
see generally Bruce Bringhurst, Antitrust and the Oil
Monopoly: The Standard Oil Cases, 1890 - 1911 (Westport,
CT: Greenwood Press, 1979).
483. Franklin Tugwell, The Energy Crisis and the American
Political Economy: Politics and Markets in the Management
of Natural Resources (Stanford, CA: Stanford University
Press, 1988) at 47.
484. Fred C. Allvine and James M. Patterson, Competition, Ltd.:
The Marketing of Gasoline (Bloomington: Indiana University
Press, 1972) at 216-217; but see Alan Stone, Regulation and
its Alternatives (Washington, DC: Congressional Quarterly
Press, 1982) at 76, noting that a body of evidence, although
subject to dispute, suggested that Standard Oil did not as a
matter of common practice engage in predatory conduct.
485. Tugwell (1988) at 48.
486. 221 U.S. 1 (1911).
487. Arthur M. Johnson, "Lessons of the Standard Oil Divestiture"
in Vertical Integration in the Oil Industry, ed. Edward J.
Mitchell (Washington, DC: American Enterprise Institute for
Public Policy Research, 1976) at 191.
488. Tugwell (1988) at 48-49.
489. See, e.g., Allvine and Patterson (1972) at 216.
490. Johnson (1976) at 213-214:
The post-dissolution record of companies severed from
the Standard Oil combination in 1911 suggests that
vertical integration was not a device fostered by the
trust to monopolize the industry but a logical
structure for stabilizing operations in a basically
unstable industry. Taking advantage of the atomistic
competition of domestic independent producers, the
Standard Oil combination achieved stability primarily
through its dominance in refining, marketing, and
transportation. When the antitrust decree of 1911
sought to end that dominance by divorcement, the
economic advantages of vertical integration were
directly challenged. But the historical record shows
that they were not to be denied. Reintegration of the
parent company, Jersey Standard, and integration of
its principal severed companies was achieved within
two decades while the industry itself became more
competitive.... The antitrust decree hastened the end
of the grip that Standard Oil had held on the
industry, though the combination was already losing
ground in 1911. But it was through vertical
integration of the severed companies and reintegration
of the parent that competition was fostered, not only
with non-Standard companies but also between the
former affiliates of the combination.
491. Spears (1992) at 1077.
492. Id. at 1077 n. 14.
493. John E. Gray, Energy Policy: Industry Perspectives
(Cambridge, MA: Ballinger Publishing Co., 1975) at 15.
494. Gerald L. Parsky, "The United States Treasury Analysis: The
Effects of Divestiture" in Capitalism and Competition: Oil
Industry Divestiture and the Public Interest, Proceedings of
the Johns Hopkins University Conference on Divestiture,
Washington, D.C., May 27, 1976, ed. George A. Reigeluth and
Douglas Thompson (Baltimore: Center for Metropolitan
Planning and Research, and School of Advanced International
Studies, Johns Hopkins University, 1976) at 50; see also
Walter S. Measday, "The Case for Vertical Divestiture," in
Capitalism and Competition, id. at 12-19.
495. See United States, Department of Energy, Deregulated
Gasoline Marketing: Consequences for Competition,
Competitors, and Consumers (Washington, DC: March 1984)
(hereinafter, "DOE (1984)") at 107.
496. W. T. Slick, "A View from a Large Oil Company," in Witnesses
for Oil: The Case Against Dismemberment (Washington, DC:
American Petroleum Institute, 1976) at 26-27.
497. David J. Teece, "Vertical Integration in the U.S. Oil
Industry," Vertical Integration in the Oil Industry, ed.
Edward J. Mitchell (Washington, DC: American Enterprise
Institute for Public Policy Research, 1976) at 182; see also
Edward J. Mitchell, "Capital Cost Savings of Vertical
Integration", id. at 101. See generally R. J. Boushka, et
al., Witnesses for Oil: The Case Against Dismemberment
(Washington, DC: American Petroleum Institute, 1976); Annon
M. Card, "The Case Against Divestiture" in Capitalism and
Competition, supra note 23, at 19-24.
A recent study also concluded that, in certain
instances, vertical integration in an
oligopolistic industry leads to higher social
welfare compared with alternative vertical
structures, such as spot market transactions,
exclusive contractual relations, and mixed
integration. See Changqi Wu, Strategic Aspects of
Oligopolistic Vertical Integration, studies in
Mathematical and Managerial Economics, vol. 36,
ed. Herbert Glejser and Stephen Martin (Amsterdam:
North-Holland, 1992) at 210.
Another study focusing on industry structures with
only a few upstream producers, each of which uses
downstream intermediaries that carry only its
product line, found that "consumers are best off
when manufacturers sell through company stores
independent of whether the manufacturers are
colluding or behaving noncooperatively." Timothy
W. McGuire and Richard Staelin, "An Industry
Equilibrium Analysis of Downstream Vertical
Integration," Marketing Science, vol. 2, no. 2
(Spring 1983) at 188. The authors noted, however,
that their results suggest that "when
manufacturers in an oligopoly are behaving
noncooperatively, we should not infer from their
use of privately-owned franchised dealers in a
conflict-free channel structure that the consumer
is getting as low a price as possible":
Thus, for example, the apparently fierce competition
among automobile dealers or (at times) gasoline
station dealers does not imply that the automobile
manufacturing or petroleum industries are highly
competitive. Rather, the use of franchised dealers by
profit-maximizing manufacturers implies that both
retail and manufacturers' profits are greater than
they would be if the manufacturers were to switch to a
pure factory outlet distribution structure." McGuire
and Staelin (1983) at 188.
498. Walter Miklius and Sumner J. LaCroix, Divorcement
Legislation and the Impact on Gasoline Retailing in the
United States and Hawaii (Honolulu: University of Hawaii,
January 20, 1993) at 7. See notes 66 to 74 and accompanying
text in chapter 15 for a discussion of predatory pricing.
499. See notes 26 to 38 and accompanying text in chapter 3.
500. DOE (1984) at 78, 83.
501. Id. at 96 (footnote omitted):
Companies that consider using their own employees to
run their outlets are not interested simply in having
company-operated stations to run. They must believe
that company-operated outlets are the most profitable
means to accomplish their overall marketing strategy.
For example, it may be that a company has decided that
as a result of ... changes in the marketplace ..., the
most efficient way to market gasoline is through a
series of high volume, low overhead, pumpers staying
open 24 hours a day and 7 days a week. The most
direct way of accomplishing this would be to run the
outlets with their own employees and set the prices
low enough to obtain the needed volumes. An
alternative would be to use franchisees but to specify
narrowly the hours of operation and minimum volumes
required. It even would be possible to franchise the
outlets in groups of two or more stations with common
management thus enabling [them] to achieve whatever
economies of scale exist in multi-station management.
502. Id. at 46 n. 33. An earlier DOE study also noted that a
marketing style favoring high-volume outlets may be
considered both more efficient and profitable in certain
circumstances than conventional retail outlets. See United
States, Department of Energy, The State of Competition in
Gasoline Marketing, Final Report (Washington, DC: Jan.
1981) at ES-2:
This study develops an alternative explanation
which shows that the profitability of alternative
marketing channels depends upon the investment costs
of providing stations, the operating costs of selling
gasoline through different outlets, and the selling
price at these different outlets. Under certain
conditions, a low-volume, dealer-operated network is
the most profitable to the refiner-supplier. Thus,
the alternative explanation asserts that the marketing
style adopted by the major refiners was the most
profitable for these firms at the time.
This explanation also helps explain today's
movement to higher volume outlets generally and to
company stores for some refiners. Because of changes
in consumer preferences, increases in construction and
operating costs, the legalization of self-serve, etc.,
the higher volume network has become relatively more
profitable than a lower volume, dealer-oriented
system. Viewed in this light, today's movement to
high-volume, company-operated outlets may not be
subsidization, but may represent a profit-maximizing
response by refiners to changing market conditions.
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Chapter 13
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