Monopolies came to the United States with the colonial administration. The large-scale public works needed to make the New World hospitable to Old World immigrants required large companies to carry them out. These companies were granted exclusive contracts for these works by the colonial administrators. Even after the American Revolution, many of these colonial holdovers still functioned due to the contracts and land they held.
A monopoly is characterized by a lack of competition, which can mean higher prices and inferior products. However, the great economic power that monopolies hold has also had positive consequences for the U.S. Read on to take a look at some of the most notorious monopolies, their effects on the economy and the government’s response to their rise to power.
Responding to a large public outcry to check the price fixing abuses of these monopolies, the Sherman Antitrust Act was passed in 1890. This act banned trusts and monopolistic combinations that lessened or otherwise hampered interstate and international trade. The act acted like a hammer for the government, giving it the power to shatter big companies into smaller pieces to suit its own needs.
Despite this act’s passage in 1890, the next 50 years saw the formation of many domestic monopolies. During this same period, the antitrust legislation was used to attack several monopolies with varying levels of success. The general trend with the use of the act seemed to have been to make a distinction between good monopolies and bad monopolies as seen by the government.
Case Study 1: International Harvester and American Tobacco
For example, International Harvester produced cheap agricultural equipment for a largely agrarian nation and was thus considered untouchable lest the voters rebel. American Tobacco, on the other hand, was suspected of charging more than a fair price for cigarettes—then touted as the cure for everything from asthma to menstrual cramps —and consequently called down the legislator’s wrath in 1907 and was broken up in 1911.
The Benefits of a Monopoly
Case Study 2: Standard Oil
The oil industry was prone to a natural monopoly because of the rarity of the deposits. Rockefeller and his partners took advantage of both the rarity of oil and the revenue produced from it to set up a monopoly without the help of the banks. The business practices and questionable tactics that Rockefeller used to create Standard Oil would make the Enron crowd blush, but the finished product was not near as damaging to the economy or the environment as the industry was before Rockefeller monopolized it. (For more on this sector, read Oil And Gas Industry Primer and Unearth Profits In Oil Exploration And Production.)
Back when there were a lot of oil companies competing to make the most of their find, companies would often pump waste products into rivers or straight out on the ground rather than going to the cost of researching proper disposal. They also cut costs by using shoddy pipelines that were prone to leakage. By the time Standard Oil had cornered 90% of oil production and distribution in the United States, it had learned how to make money off of even its industrial waste – Vaseline being, but one of the new products launched.
The benefits of having a monopoly like Standard Oil in the country was only realized after it had built a nationwide infrastructure that no longer depended on trains and their notoriously fluctuating costs, a leap that would help reduce costs and the overall price of petroleum products after the company was dismantled. The size of Standard Oil allowed it to undertake projects that disparate companies could never agree on and, in that sense, it was as beneficial as state-regulated utilities for developing the U.S. into an industrial nation.
Despite the eventual break of up of Standard Oil, the 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. The profits of Standard Oil and the generous dividends also encouraged investors, and thereby the market, to invest in monopolistic firms, providing them with the funds to grow larger.
The Limitations of a Monopoly
Case Study 3: U.S. Steel
Andrew Carnegie, a Scot of the penny-pinching Braveheart variety, went a long way in creating a monopoly in the steel industry when J.P. Morgan bought his steel company and melded it into U.S. Steel. A monstrous corporation approaching the size of Standard Oil, U.S. Steel actually did very little with the resources in its grasp, which can point to the limitations of having only one owner with a single vision. The corporation survived its court battle with the Sherman Act and went on to lobby the government for protective tariffs to help it compete internationally, but it grew very little.
U.S. Steel controlled about 70% of steel production, but competing firms were hungrier, more innovative and more efficient with their 30% of the market. U.S. Steel stagnated in innovation as smaller companies ate more and more of its market share. (To read more about Rockefeller and J.P. Morgan, check out The 5 Most Feared Figures In Finance.)
Clayton Improves Sherman’s Aim
Following the break up of sugar, tobacco, oil and meat-packing monopolies, big business didn’t know where to turn because there were no clear guidelines about what constituted monopolistic business practices. The founders and management of so-called “bad monopolies” were also enraged by the hands-off approach taken with International Harvester. They justly argued that the Sherman Act didn’t make allowance for a specific business or product and that its execution should be universal rather than operate like lightning bolts thrown down upon select businesses by the wrathful gods in government.
In response, the Clayton Act was introduced in 1914. It set some specific examples of practices that would attract Sherman’s hammer. Among these were interlocking directorships, tie-in sales, and certain mergers and acquisitions if they substantially lessened the competition in a market. This was followed by a succession of other acts demanding that businesses consult the government before any large mergers or acquisitions took place.
Although these innovations did give business a slightly clearer picture of what not to do, it did little to curb the randomness of antitrust action. Major League Baseball even found itself under investigation in the 1920s but escaped by claiming to be a sport rather than a business and thus not classified as interstate commerce.
End of a Monopoly Era?
The last great American monopolies were created a century apart, and one lasted over a century, whereas the other was very short-lived or still continuing depending where you sit.
Case Study 4: AT&T and Microsoft
AT&T Inc. (T), was a government-supported — monopoly a public utility — that would have to be considered a coercive monopoly. Like Standard Oil, the AT&T monopoly made the industry more efficient and wasn’t guilty of fixing prices, but rather the potential to fix prices. The break up of AT&T by Reagan in the 1980s gave birth to the “baby bells.” Since that time, many of the baby bells have begun to merge and increase in size to provide better service to a wider area. Very likely, the break up of AT&T caused a sharp reduction in service quality for many customers and, in some cases, higher prices, but the settling period has elapsed, and the baby bells are growing to find a natural balance in the market without calling down Sherman’s hammer again.
Microsoft, Corp. (MSFT), on the other hand, was never actually broken up even though it lost its case. The case against it was centered on whether Microsoft was abusing what was essentially a non-coercive monopoly. Microsoft has been challenged by many companies, including Google, over its operating systems’ continuing hostility to competitors’ software.
Just as U.S. Steel couldn’t dominate the market indefinitely because of innovative domestic and international competition, the same is true for Microsoft. A non-coercive monopoly only exists as long as brand loyalty and consumer apathy keep people from searching for a better alternative. Even now, the Microsoft monopoly is looking chipped at the edges as rival operating systems are gaining ground and rival software, particularly open source software, is threatening the bundle business model upon which Microsoft was built. Because of this, the antitrust case seems premature and/or redundant.
The Bottom Line
Globalization and the maturity of the world economy have prompted calls for the retirement of antitrust laws. In the early 1900s, people suggesting that the government didn’t need to have a hammer to smash big business with would’ve been eyed suspiciously like a member of a lunatic fringe or one of Wall Street‘s big money cartel members. Over the years, these calls have been coming from people like economist Milton Friedman, former Federal Reserve Chairman, Alan Greenspan and everyday consumers. If the history of government and business is any indication, the government is more likely to increase the range and power of antitrust laws rather than relinquish such a useful weapon.