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Managerial Page iii

Economics and
Organizational
Architecture
Seventh Edition

JAMES A. BRICKLEY
CLIFFORD W. SMITH
JEROLD L. ZIMMERMAN

William E. Simon Graduate School of

Business Administration

University of Rochester
 Page iv

MANAGERIAL ECONOMICS AND ORGANIZATIONAL ARCHITECTURE

Published by McGraw Hill LLC, 1325 Avenue of the Americas, New

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Dedicated to our children— Page v

London, Nic, Alexander, Taylor, Morgan, Daneille, and

Amy.
PREFACE Page vi

The past few decades have witnessed spectacular business failures

and scandals. In 2019, German prosecutors criminally charged top
executives at Volkswagen for allegedly misleading shareholders in
the months before the so-called Diesel-Gate Scandal became public.
Wells Fargo has continued to struggle to regain the confidence of
consumers, regulators, and the general public following its 2016
retail banking scandal. In 2007 and 2008, prominent financial
institutions around the world shocked financial markets by reporting
staggering losses from subprime mortgages. Société Générale, the
large French bank, reported over $7 billion in losses due to
potentially fraudulent securities trading by one of its traders.
JPMorgan Chase bailed out Bear Stearns, a top-tier investment bank,
following its massive subprime losses. Washington Mutual and
Lehman Brothers were added to the list of “top business failures of
all time.” In 2001 and 2002, Enron, WorldCom, and Arthur Andersen,
as well as other prominent companies, imploded in dramatic fashion.
Around the same time internationally, scandals emerged at
companies such as Parmalat, Royal Dutch Shell, Samsung, and Royal
Ahold. Due to these cases and many others, executives now face a
more skeptical investment community, additional government
regulations, and stiffer penalties for misleading public disclosures.
A common perception is that bad people caused many of these
problems. Others argue that the sheer complexity of today’s world
has made it virtually impossible to be a “good” manager. These
views have raised the cry for increased government regulation,
which is argued to be a necessary step in averting future business
problems.
We disagree with these views. We believe that many business
problems result from poorly structured organizational architectures.
The blueprints for many of these prominent business scandals were
designed into the firms’ “organizational DNA.” This book, in addition
to covering traditional managerial economic topics, examines how
leaders can structure organizations that channel employees’
incentives into actions that create, rather than destroy, firm value.
This topic is critical to anyone who works in or seeks to manage
organizations—whether for-profit or not-for-profit.

New Demands: Relevant Yet

Rigorous Education
Fifty years ago, teaching managerial economics to business students
was truly a “dismal science.” Many students dismissed standard
economic tools of marginal analysis, production theory, and market
structure as too esoteric to have any real relevance to the business
problems they anticipated encountering. Few students expected they
would be responsible for their prospective employers’ pricing
decisions. Most sought positions in large firms, eventually hoping to
manage finance, operations, marketing, or information systems
staffs. Traditional managerial economics courses offered few insights
that obviously were relevant for such careers. But a new generation
of economists began applying traditional economic tools to problems
involving corporate governance, mergers and acquisitions, incentive
conflicts, and executive compensation. Their analysis focused on the
internal structure of the firm—not on the firm’s external markets. In
this book, we draw heavily from this research and apply it to how
organizations can create value through improved organizational
design. We also present traditional economic topics—such as
demand, supply, markets, and strategy—in a manner that
emphasizes their managerial relevance within today’s business
environment.
Page vii
Today’s students must understand more than just how markets
work and the principles of supply and demand. They also must
understand how self-interested parties within organizations interact,
and how corporate governance mechanisms can control these
interactions. Consequently, today’s managerial economics course
must cover a broader menu of topics that are now more relevant
than ever to aspiring managers. Yet, to best serve our students,
offering relevant material must not come at the expense of rigor.
Students must learn how to think logically about both markets and
organizations. The basic tools of economics offer students the skill
set necessary for rigorous analysis of business problems they likely
will encounter throughout their careers.
Besides the heightened interest in corporate governance, global
competition and rapid technological change are prompting firms to
undertake major organizational restructurings as well as to produce
fundamental industry realignments. Firms now attack problems with
focused, cross-functional teams. Many firms have shifted from
functional organizational structures (manufacturing, marketing, and
distribution) to flatter, more process-oriented organizations
organized around product or region. Moreover, the pace of change
shows no sign of slowing. Today’s students recognize these issues;
they want to develop skills that will make them effective executives
and prepare them to manage organizational change.
Business school programs are evolving in response to these
changes. Narrow technical expertise within a single functional area—
whether operations, accounting, finance, information systems, or
marketing—is no longer sufficient. Effective managers within this
environment require cross-functional skills. To meet these
challenges, business schools are becoming more integrated.
Problems faced by managers are not just finance problems,
operations problems, or marketing problems. Rather, most business
problems involve facets that cut across traditional functional areas.
Big data, artificial intelligence and data analytics are transforming
the way managers make decisions. For these reasons, the curriculum
must encourage students to apply concepts they have mastered
across a variety of courses.
This book provides a multidisciplinary, cross-functional approach to
managerial and organizational economics. We believe that this is its
critical strength. Our interests span economics, finance, accounting,
information systems, and financial institutions; this allows us to draw
examples from a number of functional areas to demonstrate the
power of this underlying economic framework to analyze a variety of
problems managers face regularly.
We have been extremely gratified by the reception afforded the
first six editions of Managerial Economics and Organizational
Architecture. Adopters report that the earlier editions helped them
transform their courses into one of the most popular courses within
their curriculum. This book has been adopted in microeconomics,
human resources, and strategy courses in addition to courses that
focus specifically on organizational economics. The prior editions
presented powerful economic tools and frameworks that enable
managers not only to make better strategic and operating decisions,
but also to design organizations that motivate self-interested
individuals to make choices that increase firm value. Our seventh
edition continues to focus on the fundamental importance of both
markets and organizational design.
Throughout the book we provide contemporary examples and
applications to help students appreciate the managerial relevancy of
the material. Among these are case studies of corporate scandals
(e.g., Volkswagen and Wells Fargo) that we use to illustrate how
poorly designed organizational architectures can be catastrophic.
Most other managerial economics textbooks provide little coverage
of such managerially critical topics as developing effective
organizational architectures, including performance-evaluation
systems and compensation plans; assigning decision-making
authority among employees; and managing transfer-pricing disputes
among divisions. Given the increased importance of corporate
governance, this omission has been both significant and problematic.
One of our primary objectives in writing this book is to provide
current and aspiring leaders with a rigorous, systematic,
comprehensive framework for addressing such organizational
problems. To that end, we have endeavored to write the underlying
theoretical concepts in simple, intuitive terms and illustrate them
with numerous examples—most drawn from actual company
practice.
Page viii

The Conceptual Framework

Although the popular press and existing literature on organizations
are replete with jargon—Six Sigma, reengineering, outsourcing,
teaming, venturing and empowerment—they fail to provide
managers with a systematic, comprehensive framework for
examining organizational problems. This book uses economic
analysis to develop such a framework and then employs that
framework to organize and integrate the important organizational
problems, thereby making the topics more accessible.
Throughout the text, readers will gain an understanding of the
basic tools of economics and how to apply them to solve important
business problems. While the book covers the standard managerial
economics problems of pricing and production, it pays special
attention to organizational issues. In particular, the book will help
readers understand:

How the business environment (technology, regulation, and

competition in input and output markets) drives the firm’s
choice of strategy.
How strategy and the business environment affect the firm’s
choice of organizational design—what we call organizational
architecture.
How the firm’s organizational architecture is like its DNA; it plays
a key role in determining a firm’s ultimate success or failure
because it affects how people in the organization will behave in
terms of creating or destroying firm value.
How corporate policies such as strategy, financing, accounting,
marketing, information systems, operations, compensation, and
 human resources are interrelated and thus why it is critically
important that they be coordinated.
How the three key features of organizational architecture—the
assignment of decision-making authority, the reward system,
and the performance-evaluation system—can be structured to
help managers to achieve their desired results.

These three components of organizational architecture are like

three legs of the accompanying stool. Firms must coordinate each
leg with the other two so that the stool remains functional.
Moreover, each firm’s architecture must match its strategy; a
balanced stool in the wrong setting is dysfunctional: Although
milking stools are quite productive in a barn, tavern owners
purchase taller stools.
Page ix

Reasons for Adopting Our Approach

This book focuses on topics that we believe are most relevant to
managers. For instance, it provides an in-depth treatment of
traditional microeconomic topics (demand, supply, pricing, and game
theory) in addition to corporate governance topics (assigning
decision-making authority, centralization versus decentralization,
measuring and rewarding performance, outsourcing, and transfer
pricing). We believe these topics are more valuable to prospective
managers than topics typically covered in economics texts such as
public-policy aspects of minimum-wage legislation, antitrust policy,
and income redistribution. A number of other important features
differentiate this book from others currently available, such as:

Our book provides a comprehensive, cross-functional framework

for analyzing organizational problems. We do this by first
describing and integrating important research findings published
across several functional areas, then demonstrating how to
apply the framework to specific organizational problems.
This text integrates the topics of strategy and organizational
architecture. Students learn how elements of the business
environment (technology, competition, and regulation) drive the
firm’s choice of strategy as well as the interaction of strategy
choice and organizational architecture.
Reviewers, instructors, and students found the prior editions
accessible and engaging. The text uses intuitive descriptions
and simple examples; more technical material is provided in
appendices for those who wish to pursue it.
Numerous examples drawn from the business press and our
experiences illustrate the theoretical concepts. These
illustrations, many highlighted in boxes, reinforce the underlying
principles and help the reader visualize the application of more
abstract ideas. Each chapter begins with a specific case history
that is used throughout the chapter to unify the material and aid
the reader in recalling and applying the main constructs.
Nontraditional economics topics dealing with strategy, corporate
culture, outsourcing, leadership, organizational form, corporate
ethics, and the implementation of management innovations are
examined. Business school curricula often are criticized for being
slow in covering topics of current interest to business, such as
corporate governance. The last six chapters examine recent
management trends and demonstrate how the book’s
framework can be used to analyze and understand topical
issues.
 Problems, both within and at the end of chapter, are drawn from
real organizational experience—from the business press as well
as our contact with executive MBA students and consulting
engagements. We have structured exercises that provide
readers with a broad array of opportunities to apply the
framework to problems like ones they will encounter as
managers.

Organization of the Book

Part 1: Basic Concepts lays the groundwork for the book.
Chapter 2 summarizes the economic view of behavior, stressing
its management implications. Chapter 3 presents an overview of
markets, provides a rationale for the existence of organizations,
and stresses the critical role of the distribution of knowledge
within the organization.
Part 2: Managerial Economics applies the basic tools Page x
of economic theory to the firm. Chapters 4 through 7
cover the traditional managerial-economics topics of demand,
production and cost, market structure, and pricing. These four
chapters provide the reader with a fundamental set of
microeconomic tools and use these tools to analyze basic
operational policies such as input, output, and product pricing
decisions. Chapters 8 and 9 focus on corporate strategy—the
former on creating and capturing values and the latter on
employing game theory methods to examine the interaction
between the firm and its competitors, suppliers, as well as other
parties. These chapters also provide important background
material for the subsequent chapters on organizations: A robust
understanding of the market environment is important for
making sound organizational decisions. Chapter 10 examines
conflicts of interest that exist within firms and how contracts can
be structured to reduce or control these conflicts.
 Part 3: Designing Organizational Architecture develops
the core framework of the book. Chapter 11 provides a basic
overview of the organizational-design problem. Chapters 12 and
13 focus on two aspects of the assignment of decision rights
within the firm—the level of decentralization chosen for various
decisions followed by the bundling of various tasks into jobs and
then jobs into subunits. Chapters 14 and 15 examine
compensation policy. First, we focus on the level of
compensation necessary to attract and retain an appropriate
group of employees. We then discuss the composition of the
compensation package, examining how the mix of salary, fringe
benefits, and incentive compensation affects the value of the
firm. In Chapters 16 and 17, we analyze individual and divisional
performance evaluation. Part 3 concludes with a capstone case
on Arthur Andersen.
Part 4: Applications of Organizational Architecture uses
the framework that we have developed to provide insights into
contemporary management issues. Chapters 18 through 23
discuss the legal form of organization, outsourcing, leadership,
regulation, ethics, and management innovations.

Fitting the Text into the Business

Curriculum
Our book is an effective tool for a variety of classes at the MBA,
executive MBA, and undergraduate levels. Although this text grew
out of an MBA elective course in the economics of organizations at
the University of Rochester, the book’s modular design allows its use
in a variety of courses. We have been encouraged by the creativity
instructors have shown in the diversity of courses adopting this text.
Besides the introductory microeconomics course, this book also is
used in elective courses on corporate governance, strategy, the
economics of organizations, and human resources management. The
basic material on managerial economics is presented in the first 10
chapters. The tools necessary for understanding and applying the
organizational framework we develop within this text have been
selected for their managerial relevance. In our experience, these
economics tools are invaluable for those students with extensive
work experience, and for those who didn’t major in economics as an
undergraduate. Those with an economics background may choose to
forgo components of this material. We have structured our
discussions of demand, production/cost, market structure, pricing,
and strategy to be optional. Thus, readers who do not require a
review of these tools can skip Chapters 4 through 9 without loss of
continuity.
Page xi
We strongly recommend that all readers cover Chapters 1 through
3 and 10; these chapters introduce the underlying tools and
framework for the text. Chapters 4 through 9, as we noted above,
cover the basic managerial-economics topics of demand, costs,
production, market structure, pricing, and strategy. Chapters 11
through 17 develop the organizational architecture framework; we
recommend that these be covered in sequence. Finally, Chapters 18
through 23 cover special managerial topics: outsourcing, leadership,
regulation, ethics, and the process of management innovation and
managing organizational change. They are capstone chapters—
chapters that apply and illustrate the framework. Instructors can
assign them based on their specific interests and available time.

Seventh Edition
This book is noted for using economics to analyze real-world
management problems. The seventh edition maintains and extends
this focus.
 Basic economic principles and concepts do not change greatly
over time. Key frameworks, such as supply and demand analysis,
have existed for over 100 years and have stood the test of time.
What does change with reasonable rapidity is the business
environment, the quantity of data useful for decision making, and
the corresponding demands placed on managers. Examples and
illustrations of economic concepts that were highly relevant just a
few years ago quickly become outdated and hard for students to
relate to.
This edition continues to focus on core economic concepts that are
critical for managers. It significantly updates the motivating case
studies that permeate each chapter, as well as the problem sets,
boxed materials and exhibits. Updated references and recent
relevant research are cited. Data has been updated, where
appropriate. These changes will help students to better understand
how economics can be used both to compete in today’s marketplace
and to design more effective organizations.

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Easily pinpoint the most relevant content through robust
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Manipulate the order of questions or scramble Page xii
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Instructor’s Manual: The instructor’s Manual provides chapter
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Page xiv

Page xv
ACKNOWLEDGMENTS Page xvi

No textbook springs from virgin soil. This book has its intellectual
roots firmly planted in the work of dozens who have toiled to
develop, test, and apply organization theory. As we detailed in the
preface to the first edition, the genesis of this book was a course
William Meckling and Michael Jensen taught on the economics of
organizations at the University of Rochester in the 1970s. Bill’s and
Mike’s research and teaching stimulated our interest in the
economics of organizations, prompted much of our research focused
on organizational issues, and had a profound effect on this text. No
amount of citation or acknowledgments can adequately reflect the
encouragement and stimulation that they provided, both personally
and through their writings.
Bill and Mike emphasized three critical features of organizational
design: (1) the assignment of decision rights within the organization,
(2) the reward system, and (3) the performance-evaluation system.
These three elements, which we call organizational architecture,
serve as an important organizing device for this book. As readers will
discover, this structure offers a rich body of knowledge useful for
managerial decision making.
Important contributions to the literature on the economics of
organizations have been made by a host of scholars. Through the
work of these individuals, we have learned a tremendous amount. A
number of our colleagues at Rochester also contributed to the
development of the book. Ray Ball, Rajiv Dewan, Shane Heitzman,
Scott Keating, Stacey Kole, Andy Leone, Glenn MacDonald, Larry
Matteson, David Mayers, Kevin Murphy, Michael Raith, Mike Ryall,
Greg Schaffer, Ronald Schmidt, Larry Van Horn, Karen Van Nuys,
Ross Watts, Gerald Wedig, Michael Weisbach, and Ron Yeaple
offered thoughtful comments and suggestions that helped to clarify
our thinking on key issues. Don Chew, editor of the Journal of
Applied Corporate Finance, provided invaluable assistance in
publishing a series of articles based on the book; his assistance in
writing these articles improved the exposition of this book
enormously. Our collaboration with Janice Willett on Designing
Organizations to Create Value: From Strategy to Structure (McGraw-
Hill, 2003) enriched our understanding and exposition of many
important topics.
This project also has benefited from an extensive development
effort. In addition to generations of Simon School students, dozens
of colleagues both in the United States and overseas formally
reviewed the manuscript and gave us detailed feedback, for which
we are very grateful. We offer our sincere thanks to following
reviewers, for their thorough and thoughtful suggestions:

Avner Ben-Ner, University of Minnesota

Arnab Biswas, University of West Florida
Ben Campbell, The Ohio State University
Xiujian Chen, Binghampton University
Kwang Soo Cheong, John Hopkins University
Abbas Grammy, California State University—Bakersfield
Charles Gray, University of Saint Thomas
Folke Kafka, University of Pittsburgh
Brian Kench, University of Tampa
Tom Lee, California State University—Northridge
Matthew Metzgar, University of North Carolina
Ronald Necoechea, Roberts Wesleyan College
Harlan Platt, Northeastern University Page xvii
Farhad Rassekh, University of Hartford
Amit Sen, Xavier University
Richard Smith, University of California—Riverside
Neil Younkin, Saint Xavier University

We owe special thanks to Henry Butler, Luke Froeb, Mel Gray, and
Chris James; each provided insightful comments on the material. In
addition, we are grateful for feedback from more than 500
individuals who completed various surveys. Their thoughts served to
guide our refinement of this work. We appreciate the efforts of
Kathleen DeFazio, who provided secretarial support. Finally, we wish
to thank our colleagues at McGraw-Hill—especially Mike Junior—for
their encouragement to pursue this project. Through their vision and
publishing expertise, they provided us with insights and feedback to
help expand our audience while adhering to our mission.
This book represents the current state of the art. Nonetheless,
development is ongoing as the research evolves and as we continue
to learn. Managerial Economics and Organizational Architecture
covers an exciting, dynamic area. We hope that a small portion of
that excitement is communicated through this text. Reviewers,
instructors, and students frequently mention the relevance of
material to the business community, the accessibility of the text, and
the logical flow within the text’s framework. However, in the final
analysis, it is instructors and their students who will determine the
true value of our efforts.
We appreciate the extensive feedback we have received from
many readers; their generous comments have improved this edition
substantially. Although we had a definite objective in mind as we
wrote this book, it is important to be open to suggestions and willing
to learn from others who are traveling a similar yet distinct path.
Although we are unlikely to please everyone, we will continue to
evaluate suggestions critically and to be responsive where consistent
with our mission. If readers would like to share their thoughts on
this work or their classroom experiences, please feel free to contact
any of us at the University of Rochester. Many thanks in advance for
the assistance.
[email protected]
[email protected]
[email protected]
Contents in Brief Page xviii

Part 1: Basic Concepts

Chapter 1 Introduction 1
Chapter 2 Economists’ View of Behavior 12
Chapter 3 Exchange and Markets 64

Part 2: Managerial Economics

Chapter 4 Demand 117

Chapter 5 Production and Cost 154
Chapter 6 Market Structure 190
Chapter 7 Pricing with Market Power 221
Chapter 8 Economics of Strategy: Creating and Capturing Value
254
Chapter 9 Economics of Strategy: Game Theory 293
Chapter 10 Incentive Conflicts and Contracts 326

Part 3: Designing Organizational Architecture

Chapter 11 Organizational Architecture 351

Chapter 12 Decision Rights: The Level of Empowerment 373
Chapter 13 Decision Rights: Bundling Tasks into Jobs and Subunits
407
Chapter 14 Attracting and Retaining Qualified Employees 434
Chapter 15 Incentive Compensation 464
Chapter 16 Individual Performance Evaluation 498
Chapter 17 Divisional Performance Evaluation 534

Capstone Case Study on Organizational Architecture: Arthur

Andersen LLP 568
Part 4: Applications of Organizational Architecture

Chapter 18 Corporate Governance 575

Chapter 19 Vertical Integration and Outsourcing 623
Chapter 20* Leadership: Motivating Change within Organizations
663
Chapter 21 Understanding the Business Environment: The
Economics of Regulation 664
Chapter 22 Ethics and Organizational Architecture 691
Chapter 23* Organizational Architecture and the Process of
Management Innovation 721

Index 722
Glossary* G-1
*These Web chapters and the Glossary can be found online via the
Instructor Library material available through McGraw-Hill Connect®.
Contents Page xix

Part 1: Basic Concepts

Chapter 1: Introduction 1
Managerial Economics and Organizational Architecture 2
Organizational Architecture 3
Economic Analysis 4
Economic Darwinism 6
Survival of the Fittest 6
Economic Darwinism and Benchmarking 6
Purpose of the Book 8
Our Approach to Organizations 8

Chapter 2: Economists’ View of Behavior 12

Economic Behavior: An Overview 13
Economic Choice 13
Marginal Analysis 14
Opportunity Costs 16
Creativity of Individuals 16
Graphical Tools 18
Individual Objectives 18
Indifference Curves 19
Opportunities and Constraints 20
Individual Choice 23
Changes in Choice 24
Motivating Honesty at Wells Fargo 26
Managerial Implications 29
Alternative Models of Behavior 30
Only-Money-Matters Model 31
Happy-Is-Productive Model 31
 Good-Citizen Model 32
Product-of-the-Environment Model 33
Which Model Should Managers Use? 33
Behavioral Economics 35
Decision Making under Uncertainty 36
Expected Value 36
Variability 36
Risk Aversion 37
Certainty Equivalent and Risk Premium 38
Risk Aversion and Compensation 38
Summary 39
Appendix A: Consumer Choice 46
Appendix B: Inter-Temporal Decisions and the Fisher Separation
Theorem 59
Page xx
Chapter 3: Exchange and Markets 64
Goals of Economic Systems 65
Property Rights and Exchange in a Market Economy 66
Dimensions of Property Rights 67
Gains from Trade 67
Basics of Supply and Demand 72
The Price Mechanism 73
Shifts in Curves versus Movements along Curves 76
Using Supply and Demand Analysis for Qualitative Forecasts
76
Linear Supply and Demand 77
Supply and Demand—Extended Analysis 79
Price versus Quantity Adjustments 79
Short-Run versus Long-Run Effects 81
Industry Cost Increases and Price Adjustments 83
Prices as Social Coordinators 87
Efficient Exchange and Production 87
Measuring the Gains from Trade 87
Government Intervention 88
Externalities and the Coase Theorem 93
Markets versus Central Planning 95
General versus Specific Knowledge 95
Knowledge Creation 96
Specific Knowledge and the Economic System 98
Incentives in Markets 99
Contracting Costs and Existence of Firms 100
Contracting Costs in Markets 100
Contracting Costs within Firms 102
Managerial Decisions 103
Summary 104
Appendix: Shareholder Value and Market Efficiency 112

Part 2: Managerial Economics

Chapter 4: Demand 117
Demand Functions 118
Demand Curves 119
Law of Demand 121
Elasticity of Demand 121
Linear Demand Curves 126
Other Factors That Influence Demand 128
Prices of Related Products 128
Income 130
Other Variables 132
Industry versus Firm Demand 133
Network Effects 134
Product Attributes 136
Product Life Cycles 137
Demand Estimation 138
Interviews 139
Price Experimentation 139
Statistical Analysis 140 Page xxi
Implications 143
Summary 144
Appendix: Demand 151

Chapter 5: Production and Cost 154

Production Functions 155
Returns to Scale 156
Returns to a Factor 157
Choice of Inputs 160
Production Isoquants 160
Isocost Lines 162
Cost Minimization 163
Changes in Input Prices 164
Costs 166
Cost Curves 166
Short Run versus Long Run 169
Minimum Efficient Scale 173
Economies and Diseconomies of Scale 174
Learning Curves 175
Economies of Scope 176
Profit Maximization 177
Factor Demand Curves 178
Cost Estimation 181
Summary 183
Appendix: The Factor-Balance Equation 189

Chapter 6: Market Structure 190

Markets 192
Competitive Markets 192
Firm Supply 192
Competitive Equilibrium 195
Barriers to Entry 198
Incumbent Reactions 199
Incumbent Advantages 200
Exit Costs 201
Monopoly 201
Monopolistic Competition 203
Oligopoly 205
Nash Equilibrium 206
Output Competition 207
Price Competition 209
Empirical Evidence 210
Cooperation and the Prisoners’ Dilemma 211
Summary 215

Chapter 7: Pricing with Market Power 221

Pricing Objective 222
Benchmark Case: Single Price per Unit 223
Profit Maximization 223
Estimating the Profit-Maximizing Price 226
Potential for Higher Profits 228
Homogeneous Consumer Demands 229 Page xxii
Block Pricing 229
Two-Part Tariffs 231
Price Discrimination—Heterogeneous Consumer Demands 232
Exploiting Information about Individual Demands 233
Using Information about the Distribution of Demands 236
Bundling 240
Other Concerns 242
Multiperiod Considerations 242
Strategic Interaction 243
Legal Issues 244
Implementing a Pricing Strategy 245
Summary 247

Chapter 8: Economics of Strategy: Creating and Capturing

Value 254
Strategy 255
Value Creation 256
Production and Producer Transaction Costs 258
Consumer Transaction Costs 258
 Other Ways to Increase Demand 259
New Products and Services 262
Cooperating to Increase Value 262
Converting Organizational Knowledge into Value 263
Opportunities to Create Value 264
Capturing Value 266
Market Power 267
Superior Factors of Production 270
A Partial Explanation for Walmart’s Success 275
All Good Things Must End 277
Economics of Diversification 279
Benefits of Diversification 279
Costs of Diversification 280
Management Implications 281
Strategy Formulation 283
Understanding Resources and Capabilities 283
Understanding the Environment 284
Combining Environmental and Internal Analyses 284
Strategy and Organizational Architecture 285
Can All Firms Capture Value? 286
Summary 287

Chapter 9: Economics of Strategy: Game Theory 293

Game Theory 294
Simultaneous-Move, Nonrepeated Interaction 295
Analyzing the Payoffs 296
Dominant Strategies 296
Nash Equilibrium Revisited 298
Competition versus Coordination 300
Mixed Strategies 303
Managerial Implications 305
Sequential Interactions 307
First-Mover Advantage 309 Page xxiii
Strategic Moves 309
Managerial Implications 310
Repeated Strategic Interaction 311
Strategic Interaction and Organizational Architecture 313
Summary 315
Appendix: Repeated Interaction and the Teammates’ Dilemma 320

Chapter 10: Incentive Conflicts and Contracts 326

Firms 328
Incentive Conflicts within Firms 329
Owner-Manager Conflicts 329
Other Conflicts 331
Controlling Incentive Problems through Contracts 332
Costless Contracting 333
Costly Contracting and Asymmetric Information 335
Postcontractual Information Problems 336
Precontractual Information Problems 340
Implicit Contracts and Reputational Concerns 343
Incentives to Economize on Contracting Costs 345
Summary 347

Part 3: Designing Organizational

Architecture
Chapter 11: Organizational Architecture 351
The Fundamental Problem 353
Architecture of Markets 353
Architecture within Firms 354
Architectural Determinants 356
Changing Architecture 360
Interdependencies and Complementarities within the
Organization 361
Corporate Culture 363
When Management Chooses an Inappropriate Architecture 367
Managerial Implications 368
 Evaluating Management Advice 369
Benchmarking 369
Summary 370

Chapter 12: Decision Rights: The Level of Empowerment

373
Assigning Tasks and Decision Rights 374
Centralization versus Decentralization 377
Benefits of Decentralization 377
Costs of Decentralization 379
Illustrating the Trade-offs 382
Management Implications 386
Lateral Decision-Right Assignment 389
Assigning Decision Rights to Teams 390
Benefits of Team Decision Making 390
Costs of Team Decision Making 392
Management Implications 392
Decision Management and Control 394 Page xxiv
Decision-Right Assignment and Knowledge Creation 396
Influence Costs 397
Summary 400
Appendix: Collective Decision Making 404

Chapter 13: Decision Rights: Bundling Tasks into Jobs and

Subunits 407
Bundling Tasks into Jobs 408
Specialized versus Broad Task Assignment 408
Productive Bundling of Tasks 412
Bundling of Jobs into Subunits 414
Grouping Jobs by Function 414
Grouping Jobs by Product or Geography 416
Trade-offs between Functional and Product or Geographic
Subunits 416
Environment, Strategy, and Architecture 419
Matrix Organizations 420
Exploring the Variety of Random
Documents with Different Content
quietly to his quarters. Perry carefully inspected each gun, and spoke
to the gun’s crew. Seeing some of the Constitution’s old crew, he
said, “Well, boys, are you ready?” The veterans simply touched their
hats, and replied, “All ready, your honor!” This was at that time the
customary mode of address to a commanding officer. Many of the
men (as was the fashion then, in their “hammer and tongs” kind of
fighting) stripped to the belt, retaining only their trowsers, and tying
handkerchiefs round their heads. Perry smiled, and said, “I need not
say anything to you. You know how to beat these fellows.” And then
he spoke a few words to his “Newport boys,” who had come with
him from his own home—the sons of neighbors. The words were
quiet, few, and earnest.
Now ensued a weary waiting, and silence, for a long hour and a
half, as the squadron slowly approached the British line, under a
light air; the silence being only broken by an order, now and then, in
a subdued voice, or the ripple of the waters, as the ship divided
them. This inactivity before the crash of battle is always trying, and
especially so on board ship; and messages are then given to friends,
and last instructions of many kinds. Perry wrapped his public papers
in lead, to be thrown overboard in case of capture. He destroyed his
private papers.
The long suspense was at last broken by the blast of a bugle, on
board the Detroit, and three cheers from the British line; and at a
quarter-before twelve the British flag-ship fired the first gun. It was
aimed at the Lawrence, and fell short. The Lawrence was in
advance, for some of the American vessels were dull sailers, and by
this time much out of line. The second shot from the Detroit’s long
gun was fired five minutes later, and took effect upon the Lawrence,
as she slowly bore down, in the lead. The English fire now began to
be felt, and at this time the distribution of our guns in small vessels
gave advantage to the heavy, concentrated broadsides of the enemy.
Owing to the English superiority in long guns (the entire
armament of the Detroit, with two exceptions, being of this
description), their fire soon became very destructive to the
Lawrence, and there were no other American vessels near enough to
draw a part of it.
 To hasten the moment when his carronades would take effect, and
enable him to return successfully the enemy’s fire. Perry made all
sail again, and passed the word, by trumpet, from vessel to vessel,
along his line, to close up and take station. They did not all do so at
once, however, and there was much trouble and recrimination
afterwards, in regard to the conduct of the Commander of one of
them. Meanwhile the Lawrence was suffering terribly, as she
approached the enemy slowly. At noon Perry luffed up, and fired his
starboard guns; but finding they would not reach, bore away again,
and continued to draw nearer, very slowly, until a quarter-past
twelve, when he opened again with his whole starboard broadside,
continuing to approach until within about three hundred and fifty
yards, when he hauled up on a course parallel to that of the enemy,
and opened a most rapid and destructive fire upon the Detroit. So
steady had been the approach of the Lawrence, in bearing down,
and so unwavering the purpose of her Commander, that Barclay had
apprehended an intention to board. Perry’s object was only to get
within effective reach of his carronades. It required great coolness
and determination to effect this, under the fire of the English long
guns, as Perry was obliged to see his men killed, and his vessel cut
up, without being able to answer until within distance for close
action. Half an hour’s exposure of the Lawrence to the fire of twenty
long guns had caused great carnage and destruction on board of
her. Nevertheless, she now commenced to fire with spirit and effect;
and, notwithstanding great odds, from want of support—having
thirty-four guns almost entirely directed against her—she continued
to reply, with steady and unwavering effort. In this unequal contest
she was soon nobly sustained by the Scorpion and Ariel, which were
on her weather bow. These vessels, being small, and but slightly
noticed by the enemy, or injured by his shot, were enabled to direct
their fire with sure aim, and almost without interruption.
The Commander of the Caledonia, with the same sense of duty
and gallant spirit which animated Perry, followed the Lawrence into
close action as soon as possible, and closed with her designated
antagonist, the Hunter; but for some reason, which afterwards
caused serious imputations against her Commander, the Niagara,
which, when the action commenced had been within hail of the
Lawrence, did not follow her down towards the enemy’s line, so as
to engage her proper antagonist, the Queen Charlotte. This was a
great interference with the order of battle laid down by Perry, as the
Captain of the Niagara failed to engage, at short distance, the
adversary his orders required him to meet. The Queen Charlotte was
thus enabled to contribute to a concentrated fire upon the
Lawrence; and the latter was forced to struggle against unexpected
odds.
Her first division of starboard guns was directed against the
Detroit, and the second against the Queen Charlotte—with an
occasional shot from her after gun at the Hunter, which lay on her
quarter, and with which the Caledonia continued to sustain a hot but
unequal engagement.
The Scorpion and Ariel, from their station on the weather bow of
the Lawrence, were making every effort that their small force
permitted.
The Niagara was by this time in a position which prevented her
from firing, except with her long gun, and at the sternmost English
vessel. The rest of the American vessels, all small, were then too far
off for their fire to have much effect.
With a force of thirty-four guns against her ten in battery, the
Lawrence kept up the battle—with the aid of the Scorpion, Ariel, and
Caledonia—for two hours. She fired with great spirit, and showed
the good training of the men at the guns, until, one by one, these
guns were disabled, and their crews killed or wounded. Her surgeon,
in speaking of the action, says they fired all this time as deliberately
as if at their ordinary exercise. By this time the Lawrence’s rigging
was almost completely shot away, sails torn to pieces, spars
wounded and falling, and the braces and bowlines cut, so as to
render it impossible to trim the yards and keep the vessel under
control. If the destruction was great aloft, on deck it was terrible.
Some of the best trained veteran English seamen had been firing at
the Lawrence for two hours, at close quarters, until only one gun
remained on board of her that could be fired. Her bulwarks were
beaten in until round and grape-shot passed through unopposed.
The slaughter was almost unexampled in naval battles. Of one
hundred well men who had gone into action, twenty-two were killed,
and sixty-two wounded.
The killed were hastily removed out of the way of the guns, and
the wounded crowded together upon the berth-deck. It was
impossible for Dr. Parsons, the only medical officer fit for duty, to
attend to such a press of wounded. Bleeding arteries were hastily
secured; shattered limbs supported by splints, and those which were
nearly severed by cannon balls hastily removed.
Owing to the shallowness of the vessels necessary for lake
navigation, the wounded were all above the water line, and liable to
be struck again by balls passing through the vessel’s sides.
Midshipman Laub, while leaving the Surgeon, after having a
tourniquet put upon his arm, was struck by a cannon ball, which
passed through his chest.
A Narragansett Indian, named Charles Poughigh, was killed in like
manner, after his leg had been taken off.
Perry had a favorite dog on board, a spaniel, which had been put
into a state-room, below, to be out of the way. The confinement, the
noise, and the groans of the wounded, terrified the animal, and at
each broadside he howled fearfully. During the action a shot made a
large hole in the bulkhead of the room, and the dog thrust his head
out, yelping for release, in such a ludicrous manner that the
wounded lying about burst out laughing, in the midst of their
suffering.
Perry kept up the fire from his single remaining carronade,
although he had to send down to the Surgeon for the men employed
in moving the wounded, to enable him to man this single gun.
At last the Captain himself, Purser Hambleton, and the Chaplain,
Mr. Breese, helped to serve that gun, until it too was disabled.
“Perry never seemed to lose heart, and kept up the courage and
enthusiasm of those about him by his undaunted bearing. Calm and
cool, his orders were issued with precision, and obeyed with steady
alacrity, in the midst of the surrounding carnage. Sometimes a single
ball, or a round of grape or canister, would kill or disable a whole
gun’s crew; but the survivors would exchange a glance with Perry,
and then coolly step into their shipmate’s stations. As long as he was
spared they seemed to think that triumph was secure; and they died
cheerfully in that belief.”
In the heat of the fight Yarnall, the First Lieutenant, came to Perry,
and told him that all the officers of the first division were either
killed or wounded. Yarnall was himself wounded in the forehead and
in the neck, and covered with blood, while his nose was dreadfully
swollen by a blow from a splinter. Perry good-humoredly expressed
some astonishment at his appearance, and sent him the desired aid.
Soon Yarnall returned, with the same story, and Perry then told him,
“You must make out by yourself; I have no more to furnish you.”
Perry, even at this critical time, could not help smiling at Yarnall’s
appearance, for, in addition to his disfigured nose, he was covered
with down of “cat-tails,” from the hammock mattresses which had
been struck, and which had adhered to the blood upon his face. Dr.
Parsons describes him as looking like a huge owl.
When he went below, after the action, even the wounded men
laughed at his hideous appearance, and one of them exclaimed,
“The Devil has come for his own.”
Another incident is characteristic of the calm cheerfulness of Perry
and his officers. Dulany Forrest, the Second Lieutenant (who died a
Commodore), was standing immediately beside Perry, fighting his
division, when a grape-shot struck him in the breast, and he fell.
Perry raised him, and seeing no wound, for it was a spent shot, told
him to rally, for he could not be hurt.
The Lieutenant, who was only stunned, soon recovered
consciousness, and pulling out the shot, which had lodged in his
waistcoat, said, “No, Sir! I’m not hurt, but this is my shot.”
More than one man was shot down while actually speaking to
Perry. One of these was the Captain of a gun, whose tackle had
been shot away. Perry advanced to see what was the matter. The
sailor, an “old Constitution,” said, “I can fire, Sir,” and was in the act
of doing so, when a twenty-four pound shot passed through his
body, and he fell at Perry’s feet.
Another incident illustrates the carnage on board the Lawrence.
An excellent young officer, Lieutenant John Brooks, commanded the
marines. He was remarkable for his good looks and amiable
disposition. While speaking to Perry, he was struck on the thigh by a
cannon ball, and carried some distance. He shrieked with pain, and
implored Perry to shoot him—so great were his sufferings. Perry
ordered him to be taken below, and as this was being done, his
servant, a mulatto boy, rolled upon the deck, crying out that his
master was killed, but at an order returned to his duty as powder
boy, the tears running down his face all the time, at the thought of
his master’s suffering.
Perry’s brother, a mere youth, had several shots through his
clothes and hat, and was knocked down by a hammock torn from
the nettings by a ball, but escaped unscratched.
At 2.30 p. m. the last gun of the Lawrence had been disabled, and
only eighteen persons of those on board remained unwounded,
beside Perry himself and his young brother.
It now became necessary for him to go on board some other
vessel. The Niagara, as we have said, had kept well to windward,
and had remained out of reach of her proper opponent, the Queen
Charlotte, while the Caledonia had borne down to the relief of the
Lawrence, and had suffered much. The Lawrence’s men had bitterly
commented upon the manner in which the Niagara had kept aloof,
when they were suffering so severely. As the last gun of the
Lawrence became disabled, and the vessel, now an unmanageable
wreck, was dropping astern, the Niagara was seen to be upon her
port beam, while the Caledonia was passing the Lawrence’s
starboard beam, between that disabled ship and the enemy.
Perry at once ordered his boat, saying that he would bring the
Niagara up; and adding that she did not seem much injured, and
that the American flag should not be hauled down that day, over his
head. He left the command of the Lawrence to Mr. Yarnall, and
stepped down into the boat, calling to Yarnall, as he shoved off, “If a
victory is to be gained, I’ll gain it.”
When he left the Lawrence the Niagara was passing her weather,
or port beam, “at a distance of nearly half a mile.” The breeze had
freshened, her main-top-sail filled, and she was passing the British
squadron rapidly. Standing erect in his boat, Perry pulled for the
Niagara, anxious to get a fresh battery in action; being conscious
that he had already much damaged the enemy.
The latter, seeing his movements, soon penetrated his design;
and, apprehending the consequences of Perry’s getting on board a
fresh vessel—after the proof he had given them of his tenacity and
fighting powers—immediately opened on the boat a fire of great
guns and musketry, trying to destroy the boat and crew. Several
oars were splintered, the boat traversed by musket balls, and the
crew wet through with the spray thrown up by round shot and
grape, that tore up the water on every side.
Perry, unmindful of danger, continued to stand erect, although his
boat’s crew besought him to sit down. At last he did so, and the
crew pulled with a will; but the breeze was now quite fresh, and it
took him fifteen minutes to reach the Niagara.
His passage was, of course, watched with breathless interest by
both sides, as so much depended upon it. As they saw him cross the
gangway of the Niagara, the little group of unwounded men left on
board the Lawrence gave three hearty cheers. These survivors now
took heart, and felt that they had not sustained the long and bloody
contest in vain.
As the Lawrence’s colors were still flying, she remained a mark for
the enemy’s shot, although unable to reply. To save further loss of
life, Lieutenant Yarnall, after consultation with others, determined to
surrender, and the colors were hauled down, amid cheers from the
British vessels, which manned their bulwarks, while the men waved
a triumphant defiance. But their triumph was short-lived. The first
act of the play was over, with partial success remaining to the
British; the second was now to begin, and to terminate less
favorably for them.
On the berth-deck of the Lawrence the scene was at this time
deplorable. Great despondency prevailed among the wounded, who
shouted to those on deck to sink the ship rather than she should
become a prize. Brooks was dying. Purser Hambleton lay with a
shattered shoulder, received in working the last gun with his
Commander. The single medical officer was hard at work, among the
cries and groans of the wounded.
 But there was the reaction of hope and joy when the word was
passed that Perry had safely reached the Niagara; and he soon gave
the enemy something else to do besides taking possession of the
Lawrence.
Elliott, the Captain of the Niagara, met Perry with an inquiry as to
how the day was going. Perry said, “badly.” He had lost all his men,
and his ship was a wreck. He then asked Elliott what the gun-boats
were doing so far astern. Elliott offered to bring them up, and at
once left in a boat to do so, with Perry’s consent. Perry afterwards
stated that he found the Niagara uninjured in crew and hull; and
that from the moment he boarded her he felt confident of victory.
His first order, on boarding the Niagara, was to back the main-top-
sail, as she was running out of action. His next was to brail up the
main-try-sail, put the helm up, and bear down before the wind, with
squared yards, straight for the enemy; or, in other words, at a right
angle with the course he found her upon. At the same time he set
top-gallant-sails, and made signal for close action. The answering
signals were promptly displayed along the line, and greeted with
hearty cheers; as the bold manœuvre of the Niagara renewed the
hopes of the squadron.
At this time the Trippe, which had been the sternmost of the line,
had closed up to the assistance of the Caledonia; and the other
vessels, under the freshening breeze, now approached rapidly, to
take a more active part in the battle—the second stage of which had
now begun.
It was then about forty-five minutes past two.
Seven or eight minutes, with the freshened breeze, brought the
Niagara down upon the enemy. They raked her once or twice, but
she reserved her fire; and the Detroit, of the British squadron, made
an effort to wear ship, to present her starboard broadside to the
Niagara, seven of the English vessel’s port guns having been
disabled already by the Lawrence’s fire.
In this manœuvre the Detroit fouled the Queen Charlotte; and the
Niagara, having shortened sail, passed slowly under the bows of the
Detroit, at pistol-shot distance, and poured into both English vessels,
as they lay entangled, a deadly and destructive fire of grape and
canister.
The Niagara’s port guns at the same time were directed, with
equally fatal effect, into the sterns of the Lady Prevost and the Little
Belt; and her marines cleared the decks of their adversaries by their
musketry. Passing under the lee of the two English ships, which by
this time had got clear of each other, Perry brought by the wind, on
the starboard tack, with his head to the northward and eastward,
and backed the Niagara’s main-top-sail, to deaden her headway. In
this position he continued to pour his starboard broadside into the
Queen Charlotte and the Hunter, which was astern of the Queen
Charlotte. Some of his shot passed through the Charlotte’s ports into
the Detroit.
At this time the small American vessels succeeded in coming up to
windward into close action, and poured in a destructive fire of grape
and canister. Unfortunately their shot, when they missed the English
ships, took effect upon the Niagara.
All resistance on the part of the British now ceased, and an officer
appeared on the taffrail of the Queen Charlotte, to signify that she
had struck, and her example was at once followed by the Detroit.
Both vessels surrendered in about seven minutes after the Niagara
opened her fire, and in about fifteen minutes after Perry had
assumed the command of her.
The Hunter struck at the same time; as did the Lady Prevost,
which lay to leeward, under the guns of the Niagara.
The battle had begun, on the part of the enemy, at about a
quarter before noon; and at three p. m. the Queen Charlotte and
Detroit had surrendered, and all resistance had ceased.
As the smoke blew away, the two squadrons were found to be
completely mingled. The shattered Lawrence, which had borne the
brunt of the hard fighting, lay to windward, a helpless wreck; but
with her flag once more hoisted over her. The Niagara, with the
signal for close action still flying, lay close under the lee of the
Queen Charlotte, Detroit, and Hunter.
The Caledonia, Scorpion, and Trippe, which had gallantly followed
the Niagara through the enemy’s line, had taken a position to
leeward, favorable for preventing the enemy’s escape.
The smoke cloud still passing away to leeward, the English vessels
Chippewa and Little Belt were discovered bearing up towards
Malden, under a press of sail. The Scorpion and Trippe were at once
sent in pursuit, and, after a few shots, compelled them to surrender.
And now began the taking possession of the enemy’s ships, a
proud, and yet a melancholy duty, for some of them were in a
pitiable condition; though not worse than that of the Lawrence when
Perry left her.
The Detroit was a perfect wreck. Her gaff and mizzen-top-mast
hung over her quarter; all the other masts and yards were badly
wounded; all her braces were shot away; not a single stay was
standing, forward; and her heavy oak bulwarks were much
shattered. Many 32-pound shot were sticking in her port side, which
had been fired from Perry’s carronades before the Lawrence got to
close quarters. On the deck of the Detroit the carnage had been
terrible. Many of her guns were dismounted, and the deck was
strewn with killed and wounded, and slippery with blood, in spite of
the “sanding down” preliminary to naval battles of the period. The
deck was found nearly deserted, and in charge of the Second
Lieutenant, the First Lieutenant having been killed about the middle
of the action, and Commodore Barclay having been most
dangerously wounded, somewhat earlier, by a grape-shot in the
thigh. After being carried below, and placed in the hands of the
Surgeon, and his wound temporarily dressed, he insisted upon being
again carried on deck. When the Niagara bore down and delivered
her raking fire, Barclay received a second grape-shot in the right
shoulder, which, entering just below the joint, broke the shoulder
blade to pieces, and made a large and dreadful wound. It will be
remembered that he had already lost an arm, in action with the
French. It is said that when, about the close of the action, a
messenger was sent down to tell this unfortunate and heroic officer
that the day was lost, he had himself carried once more on deck, to
convince himself that further resistance would be unavailing.
The other British vessels were also much cut up, especially the
Queen Charlotte, which ship had lost, early in the action, her
Commander, Captain Finnis, R. N., a brave and accomplished
seaman. Her First Lieutenant was soon after mortally wounded; and
the loss of life among her crew was very severe. Her hull and spars
were also very much damaged.
The other British vessels suffered in like proportion. The Lady
Prevost had both her Commander and her First Lieutenant wounded;
and, beside other injury, had become unmanageable, from the loss
of her rudder. The Commanders of the Hunter and the Chippewa
were both wounded; and this left only the Commander of the Little
Belt fit for duty at the close of the action.
In his official report, Commodore Barclay states that every
Commander and every officer second in command was disabled. He
reports his total of killed and wounded as, for the first, forty-one,
including three officers, and ninety-four wounded, nine of whom
were officers. These returns were probably not very complete, from
the inability of the reporting officer to obtain information; and the
British loss was supposed to be much greater; especially as the
bodies of the British killed (with the exception of those of the
officers) were thrown overboard as they fell.
The shattered condition of the English squadron, which three
hours before had presented a proud and warlike array, and had
begun the battle with cheers, as if certain of victory—hurling death
and defiance at those who had dared to brave the flag of England—
was a most impressive contrast. When the Americans stood as
victors on those blood-stained decks, human feelings at once took
the place of the angry passions raised by the war, and by the
immediate conflict. The prisoners were promptly and humanely
cared for.
Our own vessels had suffered severely, as well as those of the
enemy. The Lawrence’s loss has been already given, and it showed
an aggregate much higher than any previously known in modern
naval combat, unless in cases where the conquered vessel has sunk,
with her whole crew. The Niagara lost two killed and twenty-three
wounded; all but two of the latter having been wounded after Perry
took command. This is stated by the Surgeon who received them.
The Caledonia had three wounded; and the Somers two wounded.
On board the Ariel one was killed, and three wounded; while two
were killed on board the Scorpion, and two wounded on board the
Trippe. Aggregate, twenty-seven killed, and ninety-six wounded;
being more than one in every four.
Two of the schooners, the Tigress and Porcupine, had no
casualties whatever; and this, taken with the small loss of the Trippe
and Somers, shows that, notwithstanding their efforts to close, they
were unable to take any important part in the action until just before
the enemy struck. The Trippe, although originally the last in the line,
from her superior sailing, and the great exertions of her Commander,
Lieutenant Holdup Stevens, was the first of the four sternmost small
vessels to get into close action.
From the fact that the enemy awaited the attack in close line of
battle, his vessels were all equally available from the first, and only a
part of our squadron fought the concentrated British fire.
The victory was a splendid one, and was pre-eminently due to the
exertions of one person—a young man of twenty-seven, who had
never before borne a part in a naval engagement.
He dashed into action in the Lawrence, with youthful ardor,
trusting that his rear would get up in time. The want of support of
the Niagara caused the fearful loss sustained by the Lawrence, more
than the tardiness of the smaller vessels. We have seen that there
was no thought of submission, even at the darkest moment, and
Perry’s act in passing, at great risk, to the Niagara, cannot be
sufficiently extolled. It was a combination of genius and hardihood,
which snatched victory from the grasp of an enemy whose exultant
cheers had already claimed it.
Labor does not end with victory. After the enemy’s colors had
been hauled down, and the prizes officered and manned, the
prisoners were confined, wounded masts secured, and shot-holes
stopped, when all the vessels were hauled by the wind, on the
starboard tack.
Perry then retired to his cabin, to communicate to General
Harrison the intelligence of the event which was to admit of the
immediate advance of his army, and the rescue of our territory from
the savage warfare which the surrender of Hull’s army and
subsequent disasters had entailed upon it.
As far as the immediate seat of war was concerned, the British
naval power was utterly destroyed, and a great and threatening
danger removed.
Perry’s letter was short, but covered the whole ground. It was as
follows:—
“Dear General,
We have met the enemy, and they are ours. Two ships;
two brigs; one schooner; and one sloop.
Yours with very great respect and esteem,
O. H. Perry.”
He also wrote to the Secretary of the Navy, by the same express:
—
“U. S. Brig Niagara,
off The Westernmost Sister,
Head of Lake Erie,
Sept. 10, 1813—4 p. m.
Sir:—
It has pleased the Almighty to give to the arms of the United
States a signal victory over their enemy on this lake.
The British squadron, consisting of two ships, two brigs, one
schooner and one sloop, have this moment surrendered to the force
under my command, after a sharp conflict.
I have the honor to be, &c., &c.,
O. H. Perry.”
This letter, written without deliberation, in the moment of victory,
is modest in describing his battle as a “sharp conflict;” and his
allusion to the Almighty power was sincere, for Perry was a religious
man.
After sending off his despatches, he made signal to anchor, to
enable him to provide for the comfort of the wounded, the better
security of his prisoners, and the reorganization of his squadron.
 Seventy prisoners were placed on board the Somers, under Mr.
Brownell. Forty were confined below; and the rest seated upon deck,
the crew remaining under arms all night, in spite of the fatigues of
the day. After distributing the remaining prisoners, Perry returned to
the Lawrence, to do what he could for his brave shipmates. It was
also proper that he should receive on board his own ship the
surrender of the English officers, and that the men who had done
most to gain the victory should see the last act of it.
Dr. Parsons writes, “He had returned, and was safe; but to a deck
slippery with blood and brains, and strewn with the bodies of officers
and men, some of whom had sat at table with us at our last meal;
and the ship resounded with the groans of the wounded. Those who
could walk received Perry as he came over the side; but the meeting
was a silent and mournful one.
“At the request of his officers he had, during the action, worn a
uniform round-jacket, and he now resumed his uniform, and
standing aft, received the officers of the different captured vessels,
as they came to surrender. At the head of them was an officer of the
41st British Regiment, who acted as Marine Officer on board the
Detroit, and who appeared in full dress, charged by the wounded
Commodore Barclay with the delivery of his sword.
“When they approached, picking their way among the wreck and
dead bodies on deck, they held their swords with the hilts towards
Perry, and tendered them for his acceptance.
“With a dignified and solemn air, and in a low voice, he requested
them to retain their side arms, and inquired with deep interest for
Commodore Barclay and the other wounded officers, offering them
any comforts his squadron afforded.”
As it was impossible to reserve all the killed of the Lawrence for
burial on shore, the seamen were buried alongside, at nightfall; the
few survivors attending the ceremony, and the burial service being
read by the Chaplain.
It was a melancholy night on board the Lawrence, sleep being
prevented by the groans of the wounded. Perry said he believed his
wife’s prayers had saved him, for he escaped untouched, as did his
young brother, only twelve years of age, although the latter had
several bullets through his clothing.
On the day after the battle Perry removed to the Ariel, and sent
the Lawrence to Erie, as a hospital ship; but not before he had once
more returned to her, to inquire after the wounded, and to
encourage them under the operations which Dr. Parsons had to
perform. Beside the wounded, there were many ill with fever and
diarrhœa.
In the course of the day Perry visited Barclay, on board the
Detroit; and a warm and enduring friendship sprang up, at once,
between them. Perry placed every comfort he could command at
Barclay’s disposal; and became responsible for a considerable sum of
money required by the British officers. He also, at Barclay’s request,
advanced money to the army officers serving in the British squadron.
At the very time he was doing this, cruelties were being exercised
towards our countrymen who were prisoners to the English, so great
as to lead to formal remonstrances and threats of retaliation. Just
now it is the fashion to admire the English, and these things are
forgotten, or ignored.
To relieve Barclay’s mind while suffering from his severe wounds,
and with the hope that restoration to his friends and country would
restore him, Perry pledged himself that he should be paroled; and he
made such urgent representations to the Commissioner of Prisoners,
and to the Secretary of the Navy (making the favor personal to
himself, and the only one he had to ask), that he eventually
succeeded.
While Perry was on board the Detroit, on his visit to Barclay, two
strange beings were brought before him, who had been found in
that vessel’s hold, where they had been, without food, since the
action. They proved to be Indian chiefs, ludicrously clad in sailors’
clothes. With others, they had been taken on board to act as sharp-
shooters, in the tops.
Although probably brave enough in their own manner of fighting,
these savages became entirely unnerved by the crash and
destruction around them, and they fled to the hold, nearly
frightened to death.
 The English, in both their wars with us, had a great penchant for
the use of the Indians they could hire; and their barbarous allies
frequently led them into consequences they had not foreseen.
When these two Indians were brought before Perry, they expected
to be at once shot and scalped; and they were astonished at his kind
treatment. Soon after he sent them on shore, with a note to General
Harrison, asking protection for them from our own friendly Indians.
At nine a. m., on the morning of September 11th, the two
squadrons weighed anchor, and soon arrived at Put-in Bay. The
burial of the officers who had fallen in battle took place on the
twelfth.
The day was a serene and beautiful one, and the lake’s surface
was as smooth as glass. The boats, with colors half-masted,
conveyed the bodies to the shore; keeping time, with their measured
stroke, to the funeral march.
As usual on such ceremonies, when the procession reached the
shore, they formed in reversed order. The youngest of the killed was
borne first; then the lowest in rank of the killed of the British
squadron, and so on, alternately, an American and an English corpse
—the body of Captain Finnis coming last.
The officers fell in, two American and two English, according to
reversed rank; Perry himself closing the procession. The drums and
fifes of both squadrons played the dead march, and minute guns
were fired alternately from the captured vessels, as well as from the
American squadron. The bodies were buried near the shore of the
lake, and after the burial service they were, with due ceremony,
lowered to their rest, and volleys of musketry closed the obsequies.
It was a remarkable scene. Conquerors and conquered were of
the same stock; with the same traits, and the same language; the
burial service of the Church of England sounding in their ears with
equal familiarity.
Some of the results of Perry’s success have been already given;
but we may say that his defeat would have given the enemy
command of all the lakes; enabling him to concentrate his forces, in
succession, upon different important points, and would thus have
laid our whole northern frontier open to his incursions.
 His victory led to the immediate evacuation of Detroit, and the
release of the whole Territory of Michigan from the horrors of fire,
murder, and scalping, which the Indian allies of the British had
carried there.
Perry’s victory also wiped away the stigma incurred in the
inglorious surrender of General Hull; strengthening the hands of the
Government, and giving encouragement to those who were fighting,
both on land and by sea. General Harrison’s army now invaded
Canada in turn; the squadron assisting to convey his forces.
This is not the place to recount Perry’s subsequent exploits as aid
to General Harrison, or his participation in the battle of Tippecanoe,
when he served with Cass, Shelby, Richard Johnson, and Gaines,
who was then a Colonel; nor of the consequences of Perry’s
endeavor to shield Elliott’s conduct, in the battle with the English
squadron.
For this, and for Perry’s subsequent service, and premature death,
after distinguished services in Venezuela, we must refer the reader
to the pages of our general history.
ESSEX, PHŒBE AND CHERUB—VALPARAISO. MARCH
28th, A. D. 1814.

his naval action, fought in the vicinity of Valparaiso,

during our last war with Great Britain, is so
remarkable for the circumstances attending it, and
for the pertinacity of the American defence against
superior force, that, although not a decisive battle,
we have thought it right to insert it here.
Few Englishmen would now attempt to uphold
the breach of neutrality committed by the two
English ships upon the Essex, with her anchor
down upon Chilian soil, and with the Spanish flag
flying upon forts and batteries within sight. But, as
it was not the first, so it is not the last time that
England has infringed such laws, where she has been able to do so
with impunity.
The United States frigate Essex, 32, sailed from the Capes of the
Delaware October, 6th, 1812, upon a cruise, the object and
destination of which were kept profoundly secret. Her destination
was the Pacific—still called the “South Seas”—the navigation of
which was still comparatively unknown; new islands being constantly
discovered, the inhabitants of which had never seen any other men
than their fellow islanders.
The object of the cruise was to destroy the “South-sea-men,” or
whalers, of Great Britain; as well as the traders of the same nation,
and thus inflict a heavy blow upon a sensitive part of an Englishman
—his pocket.
The story of the cruise, by Captain Porter, the Commander of the
Essex; with his passage to the Cape Verde Islands, the Coast of
Brazil, around Cape Horn into the Pacific, and his operations there;
together with the incidents of his stay at the Gallapagos and
Washington groups, and his numerous captures, read like a romance
of the sea. Yet it is all true; and the account is written in a
circumstantial manner, with day and date, by a genuine and
successful sailor.
This cruise is memorable for another reason—that Farragut,
afterwards the greatest naval commander of his day, made his first
cruise then, and witnessed his first naval action, while still a child,
deporting himself with the coolness and gallantry which ever
afterwards distinguished him.
David Porter, the Commander of the Essex, was born in Boston, in
1780, and was at this time thirty-three years of age—that glorious
period of life which combines the fire and ability of youth with the
experience and self-control derived from contact with the world. He
entered the navy in 1798, and was a midshipman in the
Constellation, in her action with the French frigate Insurgente, in
February, 1799. He afterwards served on the West India station, as a
Lieutenant, and had many conflicts, in the schooner Experiment,
with the pirates and privateers which, at that time, and long after,
infested those waters. In 1801 he was in the schooner Enterprize,
and, off Malta, he captured, after an engagement of three hours, a
Tripolitan cruiser of fourteen guns.
Soon after, in a boat expedition, at Tripoli, he was wounded for
the second time; and in October, 1803, he was captured in the
frigate Philadelphia, and remained a prisoner until the war closed.
He was made a captain in 1812, and appointed to the Essex.
After the war with England, Porter became a member of the Board
of Navy Commissioners, but resigned that post to take command of
an expedition against the West Indian pirates. He was court-
martialed for exceeding his powers during this cruise, and sentenced
to be suspended for six months.
Upon this he resigned his commission and entered the Mexican
service as Naval Commander-in-chief. After serving there for some
years he returned to the United States in 1829, and was made
United States Consul General for the Barbary States. He was
afterwards transferred to Constantinople as Chargé d’Affaires, and
soon became Minister Resident.
 He died in Constantinople, in March, 1843, and his remains were
brought home in a man-of-war, and interred in the Naval Asylum
grounds.
And now, to return to the Essex and her cruise. All Americans
should read Porter’s account, which vies in interest with those of
Anson or La Peyrouse, the difference being that their sole object was
discovery, while Porter had principally in view the crippling of his
enemy’s resources. His attack upon British interests in that part of
the globe was entirely unexpected, and the unbounded rage of the
English was excited when they learned, from prisoners sent in
cartels, that such wholesale destruction was going on, and their
trade being completely annihilated; and they hastened to take
means to stop Porter’s career.
The latter, in the meantime, was living off the enemy, showing the
greatest activity and resource, maintaining discipline under
exceptional circumstances, and keeping his crew in good humor,
with much tact and knowledge of sailor character.
In those days no docks or dockyards were to be found anywhere
south of the line. Ports were few and not much frequented, for fear
of blockade. Necessary food, sea-stores, rigging and material for
repairs were, indeed, as far as Porter was concerned, only to be
obtained by capture, and it required a man not only of pluck and
nautical ability, but of resources in many other directions, to make
such a cruise as he did. At the last, through no fault of his, he was
overwhelmed in a harbor which should have afforded him security,
and the career of the Essex brought to an end by a shameful
violation of neutrality.
In the course of his cruise, Porter had seized and disarmed a
Peruvian corvette, which had been preying upon American whalers,
and then sent her away with a caution. He had also seized and
disposed of, in different ways, English “South-sea-men,” aggregating
3369 tons, with 302 men and 107 guns; had provisioned his own
crew and partly paid his men, from the prizes. One of the latter, the
Atlantic, he had fitted out for cruising, under his first lieutenant, Mr.
Downes, re-naming her Essex Junior. This ship mounted 20 guns and
was efficient as a cruiser against merchantmen and whalers, but was
not expected to stand an engagement.
Porter had sent Downes, with some prizes, to Valparaiso, and
upon his return the latter reported that Commodore James Hillyar,
an English officer of experience, ability and courage, had been sent
out in the frigate Phœbe, of 36 guns, to look for the American
frigate, her work having caused great consternation when the news
of it reached England. The English sloops Raccoon and Cherub were
also despatched to the Pacific, under Hillyar’s orders.
The Essex being in much need of repairs after her long and
stirring cruise, Porter determined to put her in as good condition as
his resources permitted, and then seek to bring the enemy to action,
if he could meet him on anything like equal terms.
He, therefore, went to Nukahivah, or Madison’s Island, in the
Washington group, which had been discovered by Captain Ingraham,
of Boston. Here he caulked his ship and overhauled the rigging,
made new water casks, and took from his prizes provisions and
stores for four months.
On the 12th of December, 1813, he sailed for the coast of Chili,
and arrived on January 12th, 1814. He could hear nothing of the
British squadron reported to be looking for him. Some persons even
supposed that they had been lost in trying to double Cape Horn. At
this period Porter had completely broken up British navigation in the
Pacific, as those vessels which had not been captured by him were
laid up, and dared not venture out of port.
He had, in the meantime, afforded ample protection and
assistance to our own ships. The English whale fishery was entirely
destroyed, and now a squadron was coming out to look for him,
involving very great expense. As has been said, he had lived upon
the enemy, and had been obliged to draw no bills, but, on the
contrary, had been able to advance pay to both officers and crew.
Considering how much they had been at sea, his crew was very
healthy, and he had had but one case of scurvy, then the curse of
cruising ships. Two officers only had been lost: the Surgeon, from
disease, and a Lieutenant, killed in a duel; while eight seamen and
marines had been lost from sickness and ordinary casualties.
 Porter believed that Hillyar would try to keep his arrival in the
Pacific secret, and seek him at Valparaiso, and he, therefore, cruised
in that neighborhood, where he hoped also to capture some
merchant vessels expected from England.
On the 3d of February the Essex anchored in Valparaiso bay, and
exchanged the usual salutes and civilities with the Spanish
authorities.
These appeared civil, and even cordial, and the governor duly
returned Captain Porter’s visit.
The Essex Junior was directed to cruise off the port, for the
twofold purpose of intercepting the enemy’s merchant vessels, and
of informing Porter immediately of the appearance of any of their
men-of-war. Then work began, to put the Essex in order, after which
liberty was given to the crew. The people of Valparaiso showed great
civility, and this was returned by an entertainment on board the
Essex, in which the Essex Junior participated, but kept a sharp
lookout at the same time. They danced until midnight, and the Essex
Junior then went outside.
Next morning they had not had time to take down the awnings,
flags and decorations spread for the party, when the Essex Junior
signalized two English ships in sight. At this time half the Essex’ crew
were on shore, on liberty. A gun was fired as a signal for their
return, and the ship restored to her usual condition as soon as
possible. Porter went out in the Essex Junior to reconnoitre, and
found that both the English vessels appeared to be frigates;
returning at once, he anchored the tender near the Essex, and
prepared for mutual defence. When he returned to his own ship, at
about 7.30 a.m., he had the gratification of not only finding the ship
prepared for action, but every man on board. He felt great doubts
about the English respecting the neutrality of the port, but resolved
to act upon the defensive entirely.
At 8 a. m. the two English ships, a frigate and sloop of war, came
into the harbor. The frigate, which proved to be the Phœbe, ranged
alongside the Essex, within a few yards, and between her and the
Essex Junior. The Phœbe was seen to be all ready for action.
 Captain Hillyar hailed, and politely inquired after Captain Porter’s
health, and the usual compliments were exchanged between them.
Captains Hillyar and Porter had been acquainted in the
Mediterranean. Among the American officers at that time on the
station, no British officer was so much liked as Hillyar, and his family
was visited, at Gibraltar, by Porter and many others. On one occasion
Hillyar’s family had gone, as passengers, with Commodore Rodgers,
from Malta to Gibraltar. The relations between the two Captains,
thus brought face to face, with tompions out and matches lighted,
were rather peculiar.
Finding the Phœbe approaching nearer the Essex than either
prudence or the neutrality of the port would permit, Porter called to
Hillyar that the Essex was all ready for action, and that he should act
on the defensive.
Hillyar replied, in an off-hand way, “Oh, I have no intention of
getting on board of you.”
Porter replied that if he did fall on board of him there would be
much blood shed. Hillyar merely called out again that he had no
intention of falling on board the Essex. Porter, finding that he was
luffing up so much as to cause his ship to be taken aback, and her
jib-boom coming over the Essex’ forecastle, called, “All hands to
board the enemy;” directing them, if the ships touched, to spring on
board the Phœbe. The latter vessel was now in a precarious
condition, for not a gun of hers could be brought to bear upon either
of the American vessels, while her bow was exposed to the raking
fire of one, and her stern to that of the other. The Phœbe’s consort,
the Cherub, of 28 guns, was too far off to leeward to afford any
assistance. The Phœbe had been informed, by a boat which had
pulled out from an English merchant ship, that the Essex was in
great confusion, from the entertainment of the night before, and
that half her crew were on shore, on liberty.
Great was the surprise of the Englishmen, then, when they saw a
full crew ready to board them, and kedge-anchors triced up to the
yard-arms, ready to drop and grapple them.
Captain Hillyar at once sang out that he had no intention of
boarding; that it was an accident that his ship was taken aback, and
that he was sorry to be put in an equivocal situation, and had no
hostile intention.
The Phœbe was, at this moment, entirely at the mercy of the
Essex; and Porter could have destroyed her. The temptation was
great to do so. Porter would have been justified, upon the plea of
self-defence; but Captain Hillyar’s assurances disarmed him, and
Porter at once hailed the Essex Junior, and ordered Captain Downes
not to begin firing without orders. Captain Hillyar was then allowed
to extricate his ship from her disagreeable position; the Phœbe
separating from the Essex, and drifting by the American vessels,
constantly exposed to their raking fire, to finally anchor on the east
side of the harbor, just within shot of the Essex’ 18-pounders, but
beyond the reach of her carronades. The Cherub anchored quite
close upon the port bow of the Essex; whereupon Porter ordered the
Essex Junior to so place herself that the Cherub would be between
two fires; an arrangement which seems to have excited the
ineffectual anger of Captain Tucker, the Commander of the smaller
English vessel.
Porter tells us that, on going on shore, great astonishment was
expressed by the officials and people of Valparaiso, that he had not
taken advantage of the opportunity, and destroyed his enemy. Porter
replied that he respected the neutrality of the port, and should
continue to do so. He had reason, not very long after, to regret his
moderation.
When on shore in Valparaiso Porter generally staid at Senor
Blanco’s, and the two British Captains paid him a visit there, on the
day after their arrival. This visit was returned, and a rather friendly
intercourse was soon established, not only between the
Commanders, but the officers of the respective ships, whenever they
met on shore—their conduct being such that no one could have
supposed that they belonged to nations at war with each other.
At the first meeting on shore, Porter told Hillyar that it was
important to know whether he (Hillyar) intended to respect the
neutrality of the port. Hillyar replied, very emphatically, “You have
paid so much respect to the neutrality of the port that I feel myself
bound in honor to respect it.”
 Porter rejoined that his assurance was sufficient, and that he
should henceforth feel at his ease, and not always prepared for
action.
The English frigate had hoisted a flag (motto flags were then the
fashion), bearing the words, “God and country; British sailors’ best
rights; traitors offend both.” Porter asked Hillyar what the flag
meant, and was informed that it was a reply to Porter’s motto, “Free
trade and sailors’ rights,” which was particularly offensive to the
British navy; and that he should always hoist it when Porter hoisted
his. The next time the English motto was hoisted Porter replied with
a flag having, “God, our Country, and Liberty—tyrants offend them,”
and each ship gave three cheers for their flag.
In spite of all this, personal intercourse and apparent good feeling
continued between the two Captains. They discussed the objects of
the British squadron; their long hunt for Porter, and the present
status.
This intercourse between public enemies was, in fact, a very
curious thing.
Hillyar asked Porter what he intended to do with his prizes; when
he was going to sea; and other pertinent and delicate questions of a
like nature.
Porter told him that whenever he sent away the Cherub the Essex
would go to sea, and that his sailing day would be fixed by Captain
Hillyar. Once met, Porter said he would test the force of the two
ships, but as the Essex was smaller than the Phœbe, he would not
be justified to his country in losing his ship, and so would not
challenge him. If, however, the Captain of the Phœbe would send
away the Cherub and then challenge the Essex, he (Porter) would be
willing to fight. No doubt all this was discussed over a cigar and a
glass of wine, but this we can only conjecture.
Hillyar said that success in naval actions depended upon so many
accidents, and that the loss of a spar or mast sometimes determined
the fate of the day, so he should trust to chance to bring the two
ships together; that he was not disposed to yield the advantage of
superior force, and should blockade Porter until other English men-
of-war arrived, and at all events prevent him from doing further
mischief to British commerce.
Porter told Hillyar that his prizes were only an encumbrance to him
under the circumstances, and that some time he should take them
out to sea and destroy them. To this Hillyar rejoined that he dare not
do so with him in sight. Porter merely answered, “We shall see.”
As Hillyar was determined to lose none of the advantage of
superior force, and it was known that other ships were soon coming
to join him, Porter endeavored still to provoke the English
Commodore to challenge him to a single contest.
The Cherub lying near the Essex, the crews sang original songs
directed at each other. It is said that the Yankee songs had the most
point, which is likely, for the average English nautical mind is not
very brilliant. The officers encouraged this amusement, which took
place in the fine, calm first watches, to the frequent annoyance of
the English and the great amusement of neutrals. Captain Hillyar
requested Porter to put a stop to it, but the latter refused to do so
unless the Cherub ceased first.
At length the quasi-friendly relations between the Commanders
became very much “strained,” as the diplomatists say, by the
harboring of an escaped prisoner from the Essex on board the
Cherub. This led to an exchange of strongly-worded letters. Porter
and Hillyar continued to meet on shore quite frequently, and at this
time Porter proposed an exchange of prisoners by sending one of
the prizes to England as a cartel, to bring thence to the United
States an equal number. This proposition came to nothing, but
Porter liberated his English prisoners on condition that they should
not serve until exchanged; and Hillyar undertook to write to England
and have as many Americans liberated.
In the meantime the Essex Junior had gone outside to reconnoitre
a strange sail, and was very nearly cut off by the English vessels
both going out, but the Essex manned her boats, sent them out and
towed her in in safety.
The English ships then continued to cruise outside, and Porter, to
try his rate of sailing with them, chose an opportunity, when they
were well to leeward, to get under way and let them chase him. He
found he could outsail them both, and could escape at almost any
time, but he was led to remain in Valparaiso by the hope of bringing
the Phœbe to single action. This resolution, though chivalric, was not
exactly prudent.
One day Porter towed the ship Hector, a prize, to sea. The two
British ships were then far in the offing, and Porter had the prize set
on fire. He then returned to his anchorage, unmolested, although
the English made every exertion to come up with him. This insult
seemed to have the desired effect, and on the afternoon of the 22d
of February, 1814, the Cherub was seen to be about three miles to
leeward of the harbor, while the Phœbe was standing in alone. At 5
p.m. she hove about, a short distance from the Essex, with head off
shore, shortened sail, fired a gun to windward (a nautical challenge),
and hoisted her motto flag.
Porter instantly accepted the challenge, hoisted his motto, fired a
gun and got under way.
The Phœbe made sail and stood off shore, while Porter followed,
under all sail. He was nearing the English frigate fast, when to his
astonishment, she bore off before the wind, and ran down for her
consort. Porter fired two shots across her fore-foot, but they did not
bring her to, and the Essex hauled her wind and returned to port,
where she anchored before the two British vessels could reach her.
Porter did not spare some caustic remarks upon this affair, and
they reached Hillyar, through British residents on shore.
Defiant letters were interchanged between the ships’ companies.
Porter wrote to Hillyar, and Hillyar to Porter, and, as was natural,
angry feelings increased.
About the middle of March the First Lieutenant of the Phœbe (who
was afterwards killed in the action) came on board the Essex, under
a flag of truce, with a message from Captain Hillyar.
Presuming it was a challenge, Porter required the presence of
some of his officers, and then asked the English officer the purport
of his message.
The Englishman said that Captain Hillyar had heard that Captain
Porter had publicly stated that Hillyar had acted in a cowardly
manner, by running away from the Essex after challenging her, but
that he could not believe the report, and had sent his first
Lieutenant to ascertain the truth.
Porter at once told him that he had said so, and still thought so.
The English Lieutenant then stated that he was instructed to tell
Captain Porter that the hoisting the flag and firing the gun, by the
Phœbe, was not intended as a challenge, but as a signal to her
consort.
Porter replied that Captain Hillyar had informed him that the flag
was intended for the Essex, and there “was not a man, woman nor
child in Valparaiso who did not think it a challenge.” The Lieutenant
repeated that Captain Hillyar desired him to assure Captain Porter
that it was not intended for a challenge.
Porter said he was bound to believe Captain Hillyar, if he said so;
but that he should always consider such a proceeding a challenge:
and that, whenever he chose to send away the Cherub, and repeat
the manœuvre, he should act as he had before done. The Lieutenant
once more assured Porter that it was not a challenge, and that
Captain Hillyar did not approve of challenges, as he was a religious
man.
Such a state of things as we have been describing could not, of
course, last very long.
Exasperation was fast taking the place of self-control, on both
sides; and as more British vessels were expected, it was necessary
for Porter to take some decided step. A crisis was evidently
approaching.
The relative strength of the two nations, in Valparaiso, was then
as follows:—
The Phœbe carried thirty long eighteens; sixteen thirty-two pound
carronades; one howitzer, and six three-pounders in the tops; in all,
fifty-three guns. Her crew consisted of three hundred and twenty
men.
The Cherub carried eighteen thirty-two pound carronades; eight
twenty-fours; two long nines; and had a crew of one hundred and
eighty men.
On the American side, the Essex mounted forty-six guns. Forty of
these were thirty-two pound carronades, and six were long twelves.
Her crew, reduced by those in prizes, was only two hundred and
fifty-five men.
The Essex Junior, built for whaling, was principally a store-ship, or
tender. She mounted twenty guns, taken from captured whalers. Ten
of these were eighteen-pound carronades, and ten were short sixes.
She had a crew of sixty men.
For six weeks the English ships had been mostly under way, and
cruising off the port; and Porter was finally induced to put to sea by
the certain intelligence that the Tagus, 38, and two other English
frigates, were on their way to the Pacific. The Raccoon was also
expected; which sloop had been sent up to the northwest Coast of
America for the purpose of destroying the American Fur Company’s
establishment, on the Columbia river.
Having agreed upon a rendezvous where he could meet the Essex
Junior, Porter determined to allow the two British vessels to chase
him off the coast, and thereby to permit his tender to escape.
On March 28th the wind came out fresh from the southward, and
the Essex parted one of her cables, and dragged the other anchor
directly out to sea; so that it was necessary to get sail on the ship
instantly. The enemy were, at the time, close in with the western
point of the bay; but when Porter had made sail, and opened them,
he saw a chance of passing them to windward; and, taking in top-
gallant-sails, which had been set over single-reefed top-sails, he
braced up for that purpose.
Unfortunately, as the Essex came up with the point, and was
passing it, it happened (as it often does in such localities) that a
heavy squall struck the ship, and carried away her main-top-mast;
and all the men aloft, furling the top-gallant-sail, were lost.
Admiral Farragut said, in after years, that the reason why they lost
the main-top-mast was, that the yard jammed, and would not come
down when the halliards were let go—the top-gallant-sail being
clewed down.
The loss of this spar was most disastrous. Both the English ships
at once gave chase, and the crippled Essex endeavored to regain the
port. Finding he could not reach the usual anchorage, Porter ran into
a small bay, about three-quarters of a mile to leeward of a small
Chilian battery, on the east side of the harbor, and anchored within
pistol-shot of the shore; intent upon repairing damages as soon as
possible. The enemy’s vessels continued to approach, and showed
every intention of attacking him, regardless of the fact that the
Essex was anchored close to neutral shores. They bore down with
caution, however, hoisting a number of motto flags and jacks.
Porter went to quarters and got his ship clear of the wreck and
ready for action as soon as possible, but he had not time to get a
spring upon his cable, for at about 4 p. m. the attack was made, the
Phœbe assuming a position under the Essex’ stern, and the Cherub
one on her starboard bow. Their fire was promptly returned, and the
Cherub soon found her position a hot one, and she bore up to join
the Phœbe under the Essex’ stern, whence they delivered a severe
raking fire. The Essex could not get her broadside to bear, but
fought three long twelve-pounders out of the stern ports, which
were worked with such bravery, skill and rapidity, that in half an hour
both English ships were obliged to draw off to repair damages.
During the firing, the Essex succeeded, by dint of great exertion,
in getting a spring upon the cable no less than three times, but the
fire of the enemy was so heavy that it was each time shot away
before her broadside could be brought to bear.
The Essex was already much damaged and had a good many
killed and wounded, but the ship’s company were in good spirits,
and though they were caught at such a disadvantage, resolved to
resist to the last.
The gaff, with the motto flag and ensign, had been shot away, but
“Free Trade and Sailor’s Rights” continued to fly at the fore. The
ensign was now made fast in the main rigging, and several jacks
displayed at different points. The enemy soon repaired damages and
were ready to renew the attack, and both his ships now placed
themselves on the Essex’ starboard quarter, out of the reach of her
broadside carronades, and where her stern guns would not bear.
They then opened and kept up a galling fire, which the Essex could
not return at all, and there was no chance for the American ship,
unless she could get underway and assail in turn. The Essex’ top-sail
sheets and halliards were all shot away, as well as the jib and stay-
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