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 that 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.
- Monopolies control the majority of market share in their industry or sector with little to no competition, which, depending on the situation, can be good or bad.
- The last great American monopolies were created a century apart, and one lasted over a century.
- The Sherman Antitrust Act banned trusts and monopolistic combinations that placed “unreasonable” restrictions on interstate and international trade.
- Globalization and the maturity of the world economy have prompted calls for the retirement of antitrust laws.
- The focus of modern-day monopolies centers around Internet companies, such as Amazon, Facebook, and Alphabet.
A History Of U.S. Monopolies
In response 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 placed “unreasonable” restrictions on 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 their own needs.
Despite this act’s passage in 1890, the next 50 years saw the formation of many domestic monopolies. However, 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.
One example is International Harvester, which 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 became a victim of legislators’ wrath in 1907 and was broken up in 1911.
The Benefits of a Monopoly
The oil industry was prone to what is called a natural monopoly because of the rarity of the products that it produced. John D. Rockefeller, the founder and chair of Standard Oil, 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 nearly as damaging to the economy or the environment as the industry was before Rockefeller monopolized it.
Back when there were a lot of oil companies competing to make the most of their funds, companies would often pump waste products into rivers or straight out on the ground rather than going through 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, with Vaseline being but one of the new products it launched.
The benefits of having a monopoly like Standard Oil in the country were only realized after it had built a nationwide infrastructure that no longer depended on trains and their notoriously fluctuating costs.
The size of Standard Oil allowed it to undertake projects that disparate companies could never agree on. In that sense, it was as beneficial as state-regulated utilities for developing the U.S. into an industrial nation.
Despite the eventual breakup of Standard Oil in 1911, 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.
It is clear that when a monopoly can provide an organized service by delivering a quality product consistently at a reasonable price—particularly when startup costs can be astronomical for new companies—then it is worth allowing the monopoly to exist, as long as the government is able to regulate the monopoly in some manner to protect consumers.
The Limitations of a Monopoly
Andrew Carnegie 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 60% of steel production at the time, but competing firms were hungrier, more innovative, and more efficient with their 40% of the market. Eventually, U.S. Steel stagnated in innovation as smaller companies ate more and more of its market share.
Clayton Improves Sherman’s Aim
Following the breakup of sugar, tobacco, oil, and meatpacking 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 any allowance for a specific business or product and that its execution should be universal rather than operate like a lightning bolt, striking select businesses at the government’s behest.
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.
Monopolies tend to arise at a point in history when new products or services become dominant within society, such as oil, telephone service, computer software, and now, social media.
Although these innovations did give businesses a slightly clearer picture of what not to do, they did little to curb the randomness of antitrust action. Major League Baseball even found itself under investigation in the 1920s, but it 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. Others were very short-lived or still continue operating today.
AT&T Inc. (T), a government-supported monopoly, was 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 of the potential to fix prices.
The breakup of AT&T by then-President Ronald 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 breakup 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 its position as essentially a noncoercive monopoly. Microsoft has been challenged by many companies over time, including by 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 noncoercive 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.
In the world today, technology companies are the new powerful companies, none so much as Facebook (FB), which many consider being a modern-day monopoly. In December 2020, the Federal Trade Commission (FTC) sued Facebook, claiming that it is maintaining its social networking monopoly via anticompetitive conduct.
The FTC claims that Facebook has done this through its acquisitions of Instagram and WhatsApp, two of the largest social media networks, as well as through imposing anticompetitive conditions on software developers.
The five most used social media platforms worldwide as of January 2021 are Facebook, YouTube, WhatsApp, Facebook Messenger, and Instagram. Facebook owns four out of five, or 80%. That is a significant amount of control regarding how data is shared, how advertising is conducted, and the fact that consumers have very little in terms of other options to use. Facebook really doesn’t have that much competition.
The FTC has called for a breakup of Facebook through the divestiture of WhatsApp and Instagram, but whether or not the government is able to break up Facebook remains to be seen.
What Is a Monopoly in Business?
A monopoly in business is a company that dominates its sector or industry, meaning that it controls the majority of the market share of its goods or services, has little to no competitors, and its consumers have no real substitutes for the good or service provided by the business.
What Is a Monopoly in American History?
Monopolies in American history were large companies that controlled the industry or sector they were in with the ability to control the price of the goods and services they provided.
Many monopolies were considered good monopolies, as they brought efficiency to some markets without taking advantage of consumers, while others were considered bad monopolies in that they provided no real benefit to the market and practiced unethical business.
What Are Examples of Monopolies?
Examples of monopolies include Standard Oil, Microsoft, AT&T, and Facebook.
Why Are Monopolies Bad?
Monopolies are bad because they control the market in which they do business, meaning that they don’t have any competitors. When a company has no competitors, consumers have no choice but to buy from the monopoly.
This means that a monopoly can charge high prices above fair market rates and produce inferior-quality goods, thus increasing their profits, knowing that consumers will still have to buy their products. Monopolies also mean a lack of innovation because there is no incentive to find new ways to make better products.
Is Amazon a Monopoly?
Amazon (AMZN) is considered to be a monopoly because it has significant control over its third-party sellers and suppliers—if they want their products to be sold, then they have few options but to sell them on Amazon’s platform, where a significant amount of retail business is now done in the world.
Amazon’s share of U.S. online retail sales is estimated at 40%, but that figure is believed to be underestimated and more accurately considered to be 50%. Amazon believes these third-party sellers to be competitors and, therefore, has practiced anticompetitive behavior with them to maintain its dominance—and is able to do so because it has such a high market share.
The Bottom Line
Globalization and the maturity of the world economy have prompted calls for the retirement of antitrust laws. In the early 1900s, anyone suggesting that the government didn’t need to have a hammer to smash big business would have been eyed suspiciously, like a member of either a lunatic fringe or one of Wall Street’s big money cartels.
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, then the government is more likely to increase the range and power of antitrust laws rather than relinquish such a useful weapon.