The Market That Antitrust Built: Public Policy, Private Coercion, and Railroad Acquisitions, 1825 to 1922

TLDR

Neoinstitutionalists argue that policy shifts undermine the status quo, prompting groups to compete for the best alternative. The study investigates how power influences the choice between two railroad business models that emerged after antitrust laws banned cartels in 1897. The authors analyze how predatory railroads employed tactics to destroy rivals, whereas financiers promoted amicable mergers and threatened to withhold capital to counter predation. Analysis of 167 rail acquisitions shows that financiers succeeded, leading railroads to abandon cartels in favor of their model, and demonstrates that public policy and power shape market features, illustrating how an antitrust‑built market became a neoliberal prototype.

Abstract

How do new business models emerge? Neoinstitutionalists argue that the process often begins when a policy shift undermines the status quo; groups then vie to define the best alternative. The authors explore the role of power in selecting between two alternative business models available to railroads from 1897, when antitrust laws banned the cartel-the prevailing model for managing competition. Predatory railroads prescribed several methods for destroying rivals. Financiers prescribed amicable mergers instead, and fought predation by threatening to withhold capital from predators. An analysis of the 167 rail acquisitions in Massachusetts between 1825 and 1922 confirms that the financiers succeeded. After antitrust laws were enforced, railroads left cartels to follow the business model of financiers rather than that of predators. This can be seen in the conditional variables that predict buying and selling. Thus public policy and power can shape key market features. It is ironic that this market, built by antitrust, became the prototype for the neoliberal ideal of the unregulated economy