Wealth

Part 19 - Monopolies

https://www.youtube.com/watch?v=nyt7uZ63vMU 

Adam Smith warned about the danger posed by monopolies and other groups intent on raising prices by reducing competition.

A monopoly is defined by a lack of competition which can mean higher prices and inferior products or the provision of large scale projects that benefit all of society. Today many monopolies such as electricity and gas suppliers and telecommunication companies are regulated by governments so that prices charged for service are reasonable. 

Monopolies started in America with the British colonial administration because the new country needed large-scale public works and this required large companies to be granted exclusive contracts. The Sherman Antitrust Act was passed in 1890 to ban monopolistic combinations that placed "unreasonable" restrictions on interstate and international trade and it gave the US government the power to break up big companies.

Despite this, the next 50 years saw the formation of many monopolies as USA legislators tried to distinguished between the good and the bad.

International Harvester, making cheap agricultural equipment for a country of farmers, was considered untouchable while American Tobacco, suspected of charging more than a fair price for cigarettes (then touted as the cure for everything) was broken up in 1911.

John D. Rockefeller, the founder of Standard Oil, took advantage of the rarity of oil to set up a monopoly. The questionable business practices Rockefeller used to create Standard Oil annoyed a lot of people but the company was less damaging to the economy and the environment than the earlier competitive chaos. 

Before Rockefeller took over, many small competing oil companies often pumped waste products like gasoline and heavy oil into rivers or contaminated ground water by dumping waste onto the ground rather than finding markets for anything other than kerosene. They also cut costs by using leakage prone, shoddy pipelines. 

The benefits of the Standard Oil monopoly were not realized until it had developed markets for waste oil products like gasoline and Vaseline and had built a nationwide infrastructure including pipelines so that transporting oil product no longer depended on expensive and unreliable trains.

Despite the break up of Standard Oil in 1911, the US government realized that a monopoly could build up a reliable infrastructure and deliver low-cost service to a broader base of consumers than competing firms, a lesson that influenced its decision to allow the AT&T monopoly to continue until 1982.  

Also, the Standard Oil profits and generous dividends also encouraged investors to invest in monopolistic companies thus providing the funds for them to grow larger.

Andrew Carnegie was well on the way to creating a steel industry monopoly when J.P. Morgan bought his steel company. This created a huge corporation, U.S. Steel, that did very little with its resources. The company survived a court battle with the Sherman Act but it grew very little. Although U.S. Steel controlled about 60% of steel production at the time, competing firms were more innovative and more efficient and eventually, U.S. Steel stagnated as smaller companies took more and more of its market.

Following the break up of sugar, tobacco, oil, and meat-packing monopolies, big companies lobbied for a clearer and more equitable laws. The Clayton Act of 1914 set specific examples of undesirable practices; interlocking directorships, tie-in sales, and certain mergers and acquisitions if they substantially lessened the competition in a market. Businesses were also required to consult the government before agreeing to large mergers or acquisitions.

AT&T was a government-supported monopoly that, like Standard Oil, made the industry more efficient and was not guilty of fixing prices. After it was broken up in the 1980s, the parts (known as "baby Bells") have since begun to merge and increase in size to provide better service over wider areas but the competition has promoted more innovation. 

 Microsoft was never actually broken up although it had a near monopoly on software for personal computers, although more recently it has been challenged by other companies including Google.

Just as U.S. Steel couldn't dominate the market indefinitely because of innovative domestic and international competition, the same is true for Microsoft.

In recent years, many people, including economist Milton Friedman and former Federal Reserve Chairman, Alan Greenspan, have called for the retirement of antitrust laws.