Marathon Oil Co. v. Mobil Corp., s. 81-3704

• Decision Date: 23 December 1981
• Docket Number: 81-3713,Nos. 81-3704,s. 81-3704
• Citation: 669 F.2d 378
• Parties: 1981-2 Trade Cases 64,420 MARATHON OIL COMPANY, Plaintiff-Appellee v. MOBIL CORPORATION; Mobil Oil Corporation; Merrill Lynch, Pierce, Fenner & Smith Incorporated, Defendants-Appellants
• Court: U.S. Court of Appeals — Sixth Circuit

Page 378

669 F.2d 378

1981-2 Trade Cases 64,420

MARATHON OIL COMPANY, Plaintiff-Appellee v. MOBIL CORPORATION; Mobil Oil Corporation; Merrill Lynch Pierce, Fenner & Smith Incorporated, Defendants-Appellants

Nos. 81-3704, 81-3713.

United States Court of Appeals Sixth Circuit.

Argued Dec. 17, 1981.

Decided Dec. 23, 1981.

Charles F. Clarke, James P. Murphy, Eben G. Crawford, John E. Lynch, Jr., Squire, Sanders & Dempsey, Cleveland, Ohio, Sanford M. Litvack, Donovan, Leisure, Newton & Irvine, New York City, Richard Cusick, John D. Leech, Calfee, Halter & Griswold, Cleveland, Ohio, John L. Warden, Gandolfo V. DiBlasi, Sullivan & Cromwell, New York City, Howrey & Simon, Washington, D.C., for defendants-appellants.

Patrick F. McCartan, Richard Pogue, Jones, Day, Reavis & Pogue, John L. Strauch, Donald I. Baker, Cleveland, Ohio, Michael W. Mitchell, Rodney O. Thorson, John M. Nannes, Stuart L. Shapiro, Skadden, Arps, Slate, Meagher & Flom, New York City, Murray S. Monroe, Taft, Stettinius & Hollister, Cincinnati, Ohio, for plaintiff-appellee.

Before EDWARDS, Chief Judge, and ENGEL and MERRITT, Circuit Judges.

MERRITT, Circuit Judge.

Section 7 of the Clayton Act, 15 U.S.C. § 18, provides that "no person ... shall acquire ... stock ... where in any line of commerce ... in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." In this suit for injunctive relief under section 7, we review on an expedited basis a preliminary injunction issued November 30, 1981, by District Judge Manos blocking the proposed acquisition of Marathon Oil Company by Mobil Corporation announced October 30, 1981. We have considered the extensive briefs of the parties and the Joint Appendix consisting of detailed statistical and financial information describing the oil industry and concentration ratios in the exploration, production, transportation, refining, terminal and retail phases of the industry, as well as affidavits and testimony of the economic experts of the parties, Mr. Scherer (Marathon) and Mr. Stigler (Mobil), and numerous officers and agents of the two companies. On December 17, 1981, the Court heard arguments of counsel. Based upon consideration of the case, we conclude that District Judge Manos did not err in issuing the preliminary injunction under section 7 prohibiting the takeover.

In Brown Shoe Co. v. United States, 370 U.S. 294, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962), the Supreme Court set out a number of factors to be considered in interpreting the standard of liability established in section 7 of the Clayton Act in a horizontal merger case, including the following: "the relative size and number of the parties to the arrangement"; the "relevant market"; "the market shares which companies may control by merging"; "the history of tendency toward concentration in the industry"; "mitigating factors" demonstrating a "need for combination." Other cases like United States v. E.I. DuPont de Nemours & Co., 351 U.S. 377, 394, 76 S.Ct. 994, 1007, 100 L.Ed. 1264 (1956), have added consideration of " 'cross-elasticity' of demand in the trade" as a consideration and "barriers to new entry," Federal Trade Comm'n v. Proctor & Gamble Co., 386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 303 (1967).

Our conclusion that the District Court was correct in finding likelihood of success on the merits is based on a consideration of the following factors: (1) the size of the industry in comparison to the size of the economy of the nation; (2) concentration ratios in various lines and phases of the industry, particularly motor gasoline, and in various geographical markets of the industry; (3) the elasticity of the demand for petroleum and gasoline and the effect of this elasticity on the market power of the major oil companies, given their market shares; (4) barriers to the entry of new participants in the industry; (5) the conduct of members of the industry respecting joint ventures and exchange agreements at the exploration, production, transportation, refining and marketing stages of the industry; and (6) the possibility of increased economic efficiency and other benefits that could arise from the consummation of the merger.

1. Size

The size of the oil industry and the firms involved in it in relation to the overall economy is a factor to be considered. But it is only one factor to be considered in relationship to others. An industry and the firms within it may be very large and still be very competitive. Size becomes important for antitrust purposes when firms within an industry appear to possess market power or the power to raise prices above or restrict output below levels that would occur in a competitive marketplace. To the extent that an industry is not fully competitive, its large dollar size simply increases the dollar loss of the consumers who must pay higher prices.

Of the largest 20 industrial companies in the country, 13 are oil companies. Exxon is the largest industrial company in the nation and in the world with sales of $103 billion and net income of $5.65 billion. Mobil is the second largest industrial company. Mobil has sales of $63.7 billion and net income of $3.27 billion. The comparable figures for Marathon are $8 billion and $379 million. The total sales of the 13 largest oil companies are $421 billion. The oil industry dwarfs other major industries of the country in size and profits.

2. Concentration

In terms of dollar volume, motor gasoline is the largest end product produced by the oil companies. The parties agree, and the District Court found, that the market in motor gasoline is the most significant "line of commerce" affected under section 7. A merger between Mobil and Marathon would produce market shares or concentration ratios for motor gasoline in various geographical markets of the country as follows: 50% in Muskegon, Michigan; 44% in Green Bay, Wisconsin; about 27% in Toledo and Columbus, Ohio; 20.44% in the State of Michigan; 17.80% in the State of Illinois; 17.44% in the State of Wisconsin; 17.13% in the State of Indiana; 16.7% in the State of Ohio; and 10% in the nation as a whole.

It seems clear that there are many geographical markets and submarkets for motor gasoline in the country. The District Court did not err in analyzing concentration ratios in defining relevant markets by state rather than limiting its consideration to the nation as a whole. On remand, the District Court will have an opportunity to further define and describe the relevant geographical markets and submarkets.

Mobil's main contention, and the argument of its economic expert, is that "motor gasoline prices in the nation tend to approach uniformity with due regard for transportation costs." They conclude from this that the country as a whole is the only relevant market. The District Court noted that this argument overlooks the evidence adduced by Marathon's economic expert of local price variations that transportation costs do not explain and the finding of the District Court that "the persistence of price differentials in various areas of the nation demonstrates that motor gasoline does not move from area to area in response to price changes easily or as steadily as Mobil asserts." Mobil's theory does not explain why the parties in the actual operation of their business collect and analyze information and plan pricing and marketing strategies on the basis of states and metropolitan areas, as well as nationally and internationally.

Finally, the evidence shows that Marathon does not do business in approximately 28 states, and it is difficult to include within the relevant geographical market those states in which Marathon does not compete with Mobil. See United States v. Marine Bankcorporation, Inc., 418 U.S. 602, 621-22, 94 S.Ct. 2856, 2869-70, 41 L.Ed.2d 978 (1974).

3. Elasticity of Demand

Professor George Stigler of the University of Chicago Department of Economics, Mobil's main outside expert witness, testified:

Two things enter the interpretation of a concentration ratio. One, what level do we worry about? And I must say that we have no precise point which is a critical point at which you must worry.

And secondly, what is the elasticity of demand facing the industry we are talking about? (App. 2220.)

This is the same basic point that Professor Areeda makes: "Market power ... is a matter of degree measured by the responsiveness (or 'elasticity') of buyer demand to price changes." Antitrust Analysis, § 229 (2d ed. 1974). Although Professor Stigler did not testify about the responsiveness of demand to price change in the oil business, other portions of the record indicate that the demand for crude oil and gasoline is relatively inelastic. Since the Arab oil embargo in 1973 the price of crude oil has risen from $3.00 a barrel to $35.00 a barrel, a ten-fold increase in price; and demand has declined only moderately. Likewise, gasoline prices over the same period have risen more than three fold, but demand has remained relatively constant. Where demand is unresponsive to price in a large industry on which the nation is dependent for its economic health, the courts must be especially vigilant in the enforcement of the antitrust laws for in such an industry competition is more difficult to maintain.

4. Barriers to Entry

The petroleum industry is characterized by high barriers to entry because of capital requirements. For example, Marathon's last refinery in Louisiana cost $700 million to build, and the cost figure would now be around $1 billion. It is unlikely that a new vertically integrated oil company would enter the market to take Marathon's place as a competitor and supplier for independent dealers. The cost of exploration, drilling and production and the cost of facilities for refining and distribution are great. Mobil's own documents show that new entry is "prohibitively expensive." (App. 2064.)

5. Joint Operations in the Oil Industry

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