Monopoly

Cornered: The New Monopoly Capitalism and the Economics of DestructionOil Companies had a monopoly in the United States; one man, one company had control of the American oil industry. The government broke up the monopoly in oil. Eastman Kodak invented American home photography. How did competitors force their way into the picture? Monopoly: Who’s in control? We like to think our economy runs on competition. For instance, we can choose the brand of gasoline we buy. If one station’s prices are too high, we can choose another one. What happens to prices if one company or one person controls all the gas stations? In 1890 that is when the country faces this situation. The company was standard oil; the man was John D. Rockefeller this was the infant oil industry. Drilling equipment was manually operated and cheap, and anybody could join the oil rush, so they did. With thousands of prospectors, drillers, and refiners competing, the oil supply was plentiful. The prices were low, so were profits.
Rockefeller had been doing well as a Cleveland produce wholesaler, but thought he could do better in oil. Ruth Sheldon Knowles the author came from an oil family, and her book The Greatest Gamblers told the industry’s history. “Rockefellers stayed out of drilling because he did not want to lose any money” says Knowles. Rockefeller bought oil that others man drilled, refined it, and sold it. By the year 1869, he had the country’s largest refinery.

A year later, standard oil of Ohio was born. When competition squeezed profits, Rockefeller squeezed the competition. Willing competitors were bought, and unwilling competitors found themselves cut off from railroads, pipelines, and credit. According to Knowles “by having the monopoly that he had originally in refining and pipelining, he was able to control the price of oil for the producers, the independents hated Rockefeller. Everybody blamed the standard oil company for anything that happened.”
Under Rockefeller’s guidance, the industry became less crowded. As competition disappeared, Rockefeller set prices where standard could make the highest profits. Standard oil and other monopolies, like the U.S. steel, general electric, and AT&T, became price makers, but their methods have some problems.
The Sherman Act and the New Anti-Trust Legislation: Reprinted for Private Circulation From the Journal of Political Economy, V.23, Nos. 3, 4, 5, March, April, May 1915 (1915?)Georgetown University law professor Thomas L. Krattenmaker states that “the standard oil trust was formed in 1882 led to widespread public concern, and that public reaction to the trusts leads to the passage. The Sherman Act in 1890, which made it illegal for any one firm to obtain a monopoly, to get complete control over the production of all the goods in one market. Secondly, the Sherman Act made it illegal for firms to agree on how they would compete by setting prices, dividing markets, or determining which customers they would deal with. The Sherman Act was one of the several choices that could have been made in 1890. Congress could have chosen to nationalized the trust or set up a large government department to oversee the trust, or even to run the trust in cooperation with private enterprise. Those devices were widely adopted by those countries around the world. Instead, they affirmed the American belief in leaving power, in private hands, but dispersing that power.” Changing economic and historical trends is not something you do quickly. Congress may set the courts when it passed the Sherman Anti-Trust Act, but it was 20 years and four presidents later before the Supreme Court broke up standard oil. The court did not outlaw all monopolies, just those that were unreasonably anti competitive – what it so called rule of reason.
By the turn of the century, mighty standard was under attack on another flank – the enemy, a ragged band of Texas and Oklahoma wildcatters and roughnecks, their ammunition, vast new Southwestern oil discoveries. In the year of 1901, the first battleground, spindle top. The Dallas oil man Robert L. Goddard says that “my father, Charles Goddard, moved down here from Ohio in 1901, when spindle top opened up. At first he was a driller, and he was the one that ran the rig and knew how to drill for oil. Very few people in those days drilled, oil men had to move where the oil was. Usually there was no city there, tent cities sprung up, little communities with dirt streets. The biggest difference the spindle top make was the amount of production that they found they could obtain out of one well. If you can make 100 or 1,000 barrels a day, now you are in an economic, viable business, so you really have a product to sell. Once you had real production that was the end of monopoly.” By 1911, Rockefeller’s monopoly was shattered, competition from Western oil and from refiners like Gulf and Texaco. The Sherman Act ended the big trusts. The market and the people had delivered the same message. Free enterprise depended on competition for resources like oil and for consumers’ dollars. Monopoly power over production and prices could not be tolerated.
The central economic critique of monopolies is that they keep output too low and their prices and profits are too high. When Rockefeller entered the oil industry in the 1860s, it was competitive – thousands of competing firms, each too small to affect the price of oil. They were price-taker, and their price was set by supply and demand.
If the demand curve for oil looked like this, and the supply curve looked like this, and their intersection is the price of oil. Each firm would make only ordinary profits, just to cover costs because of competition. The monopolists, like Rockefeller in the 19th century, take control of the whole market faced with the power of a firm like standard oil; competitors find entry into the industry virtually impossible. This mean, this single monopolist faces the same economy wide demand curve as all those competitive firms had, except that he does not have to take the market price.
He is a price-setter, not a price taker. It is in his interest to set this price well above the competitive supply and demand level.
The phone company made the connections that pulled us together, but Ma Bell was a monopoly. Can a good monopoly exist? And there is how do you control it? For more than 60 years, the government gave the telephone company one set of answers. Alexander Graham Bell’s original patents expired around 1900. Almost every city had two or three telephone systems, so callers needed two or three phones. Competition meant lower prices and lower profits. In 1914, AT&T president Theodore Vail sent AT&T vice president Nathan C. Kingsbury to Washington. He made a deal that would create what Vail called a natural monopoly. According to Pic Wagner of AT&T about the Kingsbury commitment he states that “the key part was the commitment to refrain from buying up any more independent telephone companies that it would provide long-distance connections to the existing, independent, non-bell companies. AT&T got the government off its back, and with the Kingsbury commitment, we were able to go ahead and set up the long-distance network, and we were assured that the government was not going to come in and take away from us that long-distance network. Henry Geller, former General Counsel of the Federal Communications Commission, was one of the government’s key telephone policy makers. According to Geller, “government bought it because he promised them universal service at reasonable rates. As a monopoly, he could give this integrated end-to-end service. The U.S. had and still has the best telephone service in the world.