Working Paper: NBER ID: w5662
Authors: joseph c mullin; wallace p mullin
Abstract: This paper examines United States Steel's acquisition by long-term lease of the iron ore properties of the Great Northern Railway. This 1906 transaction, which significantly increased U.S. Steel's already substantial ore holdings, has been characterized by contemporary observers and modern economists as an example of vertical foreclosure. We present quantitative and qualitative evidence to support an alternative view that the lease generated a net efficiency gain, resulting in lower steel prices, as it promoted relationship-specific investment in the exploitation of the ore properties. Quantitatively, we examine the stock market reactions of U.S. Steel, the Great Northern Railway, steel industry rivals, and the railroads, a major steel customer, to the announcement of the lease signing. Strikingly, the railroads had a significant positive excess return. Qualitatively, we examine the terms of the lease and the performance of the parties to document the role of the lease in encouraging relationship-specific investment.
Keywords: vertical integration; efficiency; antitrust; contractual governance
JEL Codes: L41; L42; L43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lease arrangement (R33) | lower steel prices (L79) |
| lease arrangement (R33) | net efficiency gain (D61) |
| lease arrangement (R33) | relationshipspecific investments in ore exploitation (L72) |
| lease arrangement (R33) | promote efficiency through contractual governance mechanisms (L14) |
| lease arrangement (R33) | lower market prices for steel (L11) |