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550 CHAPTER 13 MARKET STRUCTURE AND COMPETITION

APPLICA TION 13.3
U.S. Steel: The Price of Dominance 22
TABLE 13.6 U.S. Steel’s Market Share,
1901–1935
With sales of over $6 billion, the U.S. Steel group of
the USX Corporation is one of America’s largest steel Market Market
companies. But while large in absolute terms, U.S. Year Share Year Share
Steel currently accounts for less than 15 percent of 1901 66% 1920 46%
U.S. domestic steel sales. At one time, though, U.S. 1905 60% 1925 42%
Steel was much more dominant. In fact, when it was 1910 54% 1930 41%
formed (by merger) in 1901, U.S. Steel produced 66 1915 51% 1935 33%
percent of the steel ingot sold in the United States. In
those days, U.S. Steel was a classic dominant firm.
However, as Table 13.6 shows, U.S. Steel’s market 23
those of its rivals, actual or potential.” In addition,
share soon began to decline, and by the mid-1930s, it
as Scherer notes, entry into the steel industry in the
had fallen to 33 percent of the market. According to
early twentieth century took time. It required build-
economic historians Thomas K. McCraw and Forest
ing an integrated steel mill, and in those days it was
Reinhardt:
not easy to secure either financial capital or reliable
sources of iron ore.
For three decades [1900–1930], U.S. Steel followed As a result, it probably made sense for U.S. Steel
patterns of pricing and investment that guaran-
teed an erosion of its market share. Instead of to eschew an aggressive limit pricing strategy and
raising barriers to entry into the steel industry, instead set prices at or close to the levels implied by
it lowered them. It neither tried vigorously to the dominant firm model. And as we saw from Figure
retain its existing markets nor to take advantage 13.8, with an expanding fringe, this implied an ero-
of new growth opportunities in structural and sion of the dominant firm’s share over time. Hideki
rolled markets (p. 616). Yamawaki provides some statistical evidence that U.S.
Steel actually behaved this way. 24 Using data on steel
Why didn’t U.S. Steel follow an aggressive strat- prices and production (by U.S. Steel and rival firms)
egy of limit pricing to slow the expansion by rival from that era, Yamawaki shows that U.S. Steel’s pric-
firms? Our discussion of dominant firm pricing sheds ing decisions were influenced by the market share of
light on this question. Scholars who have studied the fringe producers. He also shows that the price set by
history of U.S. Steel believe that before World War II U.S. Steel significantly influenced the fringe’s rate of
(1941–1945), U.S. Steel probably did not have an ap- production and the rate at which the fringe expanded
preciable cost advantage over its competitors. F. M. over time. Based on this evidence, we can conclude
Scherer writes, “Although some of the Corporation’s that the logic of the dominant firm model nicely fits
plants may have had lower costs, on average USS competitive dynamics in the U.S. steel industry from
could pour and shape steel at costs no lower than 1900 to 1940.

22 This example was inspired by a fuller and more detailed discussion of U.S. Steel’s history and dominant
firm pricing behavior by F. M. Scherer in Chapter 5 of his book Industry Structure, Strategy, and Public
Policy (New York: HarperCollins, 1996). The quotation below and the data in Table 13.6 come from
T. K. McCraw and F. Reinhardt, “Losing to Win: U.S. Steel’s Pricing, Investment Decisions, and Market
Share, 1901–1938,” Journal of Economic History 49 (September 1989): 593–619.
23 F. M. Scherer, Industry Structure, Strategy, and Public Policy (New York: HarperCollins, 1996), p. 155.
24 H. Yamawaki, “Dominant Firm Pricing and Fringe Expansion: The Case of the U.S. Iron and Steel
Industry, 1907–1930,” Review of Economics and Statistics 67 (August 1985): 429–437.