United States Steel's Acquisition of the Great Northern Ore Properties: Vertical Foreclosure or Efficient Contractual Governance? / Joseph C. Mullin, Wallace P. Mullin.

Format:

Book

Author/Creator:

Mullin, Joseph C.

Contributor:

National Bureau of Economic Research.

Mullin, Wallace P.

Series:

Working Paper Series (National Bureau of Economic Research) no. w5662.

NBER working paper series no. w5662

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

United States Steel's Acquisition of the Great Northern Ore Properties

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1996.

Summary:

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.

Notes:

Print version record

July 1996.