The Evolution of Monopolies in the United States
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The Evolution of Monopolies in the United States

6 Min.

In many industries, monopolies can control most or even all of the market share. The largest American monopolies were formed a century apart, with one continuing to dominate for over a century. The Sherman Antitrust Act prohibits trusts and monopolistic combinations that impose "unreasonable" limitations on interstate and international markets. Nowadays, the concern regarding monopolies revolves around internet companies such as Amazon, Meta, and Alphabet.

Basics

Before the birth of the United States, colonial America witnessed the emergence of monopolies, essential for executing the monumental public works that transformed the New World into a welcoming haven for European immigrants. Colonial governors awarded these monopolistic companies exclusive contracts, and even post-American Revolution, many endured, sustained by their land and contractual holdings. While monopolies often result in limited competition, resulting in inflated prices and subpar products, it's worth noting that their economic prowess has also yielded beneficial outcomes for the United States.

The Sherman Antitrust Act: A Regulatory Tool Against Monopolies

In 1890, the Sherman Antitrust Act was enacted in response to public outcry against price-fixing abuses perpetrated by monopolistic entities. This legislation prohibited trusts and monopolistic combinations that imposed "unreasonable" constraints on interstate and international trade, effectively empowering the federal government to dismantle large corporations.

Despite the passage of this act, the following five decades witnessed the proliferation of domestic monopolies. Simultaneously, the act was invoked to challenge various monopolies, yielding mixed results. There emerged a discernible tendency to distinguish between favorable and detrimental monopolies.

For instance, International Harvester, which supplied affordable agricultural equipment to a predominantly rural nation, was considered off-limits to avoid potential farmer dissent. Conversely, American Tobacco faced allegations of overcharging for cigarettes, promoted as remedies for ailments ranging from asthma to menstrual cramps, leading to the government's intervention and its breakup in 1911.

The Era of the Natural Monopoly: Standard Oil's Dominance

The oil industry presented the characteristics of a natural monopoly due to the scarcity of its products. John D. Rockefeller, the founder and leader of Standard Oil, along with his associates, capitalized on both the rarity of oil and the revenue it generated to establish a monopoly.

Rockefeller's business tactics, marked by questionable practices, were akin to those of the Enron scandal. However, the result was less detrimental to both the economy and the environment than the state of the industry before Rockefeller's monopoly.

In the early days of the oil sector, numerous competing oil companies, in their enthusiasm to secure sources, engaged in indiscriminate drilling disposing of waste products into rivers or on the ground rather than proper disposal. They cut corners by employing substandard pipelines susceptible to leakage.

Once Standard Oil secured a 90% share of oil production and distribution in the U.S., it learned to profit even from its industrial waste, leading to the development of products like Vaseline. The advantages of having a monopoly such as Standard Oil became apparent when it established a nationwide oil distribution infrastructure, reducing reliance on trains with their volatile costs. Standard Oil's scale enabled it to undertake projects beyond the reach of smaller competitors, contributing to the nation's industrial development akin to state-regulated utilities.

Although Standard Oil was eventually broken up in 1911, the government recognized that a monopoly could construct a reliable infrastructure and provide cost-effective services to a broader consumer base compared to competing firms. This lesson influenced the decision to permit the AT&T monopoly to persist until 1982. Clearly, when a monopoly consistently delivers a quality product at a reasonable price, especially when competitors face excessive startup costs, the government may allow its existence while regulating it to safeguard consumers.

The Constraints of a Monopoly

Andrew Carnegie had made significant strides in establishing a steel industry monopoly when J.P. Morgan acquired his steel company and merged it with U.S. Steel, creating a colossal corporation approaching the magnitude of Standard Oil.

Despite its vast resources, U.S. Steel made limited use of its assets, exemplifying the constraints inherent in a company under a singular vision. Surviving its legal battle with the Sherman Act, the corporation subsequently lobbied for protective tariffs from the government to enhance its international competitiveness.

While U.S. Steel commanded approximately 60% of the steel production sector, it was surpassed by more ambitious, innovative, and efficient competitors. Over time, smaller companies gradually eroded its market share, causing U.S. Steel to stagnate.

Clayton Act Refines Antitrust Regulation

After the dissolution of monopolies in industries such as sugar, tobacco, oil, and meatpacking, uncertainty prevailed in the corporate landscape. The absence of clear guidelines on monopolistic business practices left businesses perplexed.

Those associated with the so-called "bad monopolies" expressed frustration over the leniency shown to International Harvester, contending that the Sherman Act lacked specificity, calling for universal application rather than selective enforcement. In response, the Clayton Act emerged in 1914, specifying practices subject to Sherman Act enforcement, including interlocking directorships, tie-in sales, and mergers that substantially reduced market competition. Subsequent legislation required government review before major mergers or acquisitions could proceed.

Monopolies tend to arise with the introduction of new products or services, like oil, telephone service, computer software, and now, social media. These innovations clarified prohibited practices but did not eliminate the unpredictability of antitrust actions. Even Major League Baseball faced investigation in the 1920s but avoided classification as interstate commerce by claiming to be a sport rather than a business.

American Monopolies: Past and Present

AT&T

AT&T Inc., initially a government-backed monopoly, operated as a vital public utility, enhancing industry efficiency like Standard Oil. Its transgressions are related to the potential to fix prices rather than actual price-fixing.

The 1980s breakup of AT&T gave rise to the regional Baby Bells, which later merged and expanded their service areas. While this initially led to service quality declines and higher prices, the market eventually found equilibrium without further antitrust intervention.

Microsoft

Microsoft Corp. faced an antitrust case but remained intact. The case revolved around whether Microsoft abused its market position as a non-coercive monopoly. Market competition and technological shifts eroded its dominance in certain segments, rendering the antitrust decision largely irrelevant.

Meta (Formerly Facebook)

Meta Platforms, formerly Facebook, has drawn scrutiny as a modern-day monopoly. The FTC sued Meta in 2020, alleging anticompetitive behavior via acquisitions of Instagram and WhatsApp and imposing restrictive conditions on software developers. With control over four out of five leading social media platforms, Meta faces potential divestiture efforts by the FTC. A business monopoly entails market dominance, lack of significant competition, and limited consumer alternatives for its goods or services.

Conclusion

Due to the maturity of the world economy and globalization, some are calling for the retirement of antitrust laws. In the early 1900s, anyone questioning the necessity of a government tool to regulate big business would have faced skepticism.

Over time, advocates for such a shift have included economist Milton Friedman, former Federal Reserve Chairman Alan Greenspan, and ordinary consumers. However, historical patterns suggest that rather than surrendering this regulatory instrument, the government is inclined to expand and strengthen antitrust laws, recognizing their utility.

Monopoly
Sherman Antitrust Act
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