Monopolies.

 What are monopolies?

What are monopolies?

A monopoly, by definition, is a business that is the majority owner/producer/seller of a certain product (usually essentials) and has the power to leverage high prices as there is no free-market competition. As a traditional monopoly does not have any significant competitors to be forced set reasonable prices.

Example of a monopoly.

Monopolies are very rare at present because of anti-monopolistic government policy. But the most notable one was John D. Rockefeller’s company  - “The Standard Oil company and trust”- an American oil-producing, transporting, refining, and marketing company established in 1870. Standard Oil controlled 90% of the US oil market in 1880, a mere 10 years after it started.

But how do businesses like Standard Oil gain monopolies?

 Standard Oil, like many other monopolies, grew in power and wealth through horizontal integration; by purchasing rival businesses in the refining sector and through vertical integration, by purchasing means to produce, transport and market the oil. Unlike other monopolies, Standard Oil did not use aggressive pricing to undercut other businesses. Monopolies traditionally also use aggressive pricing to undercut smaller providers of the product, where the monopoly would set their prices artificially low to make the substitution effect work in the business’ favour. (Substitution effect- a low price increases demand as people want to buy things for cheaper prices and thus, they will switch from their original provider to a cheaper one). This artificial pricing caused a short-term loss for the monopoly, but since it was so large, the losses don’t affect it significantly. However, smaller competitors would not be able to sustain themselves if people weren’t buying their products at the original price and they didn’t have the capital to match the artificial prices of the monopoly.This would force the smaller competitors  into bankruptcy, while the monopoly, which had sustained the losses, would now receive a larger market share, and thus could increase their prices, and in turn make a larger profit, as there would be less competitors.  However, standard oil was different than other monopolies as it found a more efficient method to refine the oil and thus was able to sell the oil for cheaper. Some would argue that this is a form of aggressive pricing, but it is the way the free market functions: the company which can provide goods for cheaper prices will be the default producer of the good.

Are monopolies bad for everyone?

For the shareholders and workers in the monopoly, no, they would become ultra-rich. The Standard Oil’s monopoly made Rockefeller worth US$450 Billion (adjusted for inflation). Which is more than double Jeff Bezos’s net worth. Typically, under a monopoly, things are become much more expensive, monopolies would attempt to increase prices to increase profits. Under Standard Oil, the price of oil fell. The price of oil before Standard Oil was established in 1869 was $5.64 per barrel and when standard oil became a monopoly the price of oil fell to a mere 94 cents per barrel and kept decreasing until 1892 when the price of oil fell to $0.51 per barrel, less than a tenth of the value of oil in 1869 (according to the U.S. Energy Information Administration). Thus, people were paying less than before for oil under Standard Oil.

The Collapse on an empire.

In 1890, Congress passed the Sherman anti-trust act, which laid the foundations of the USA’s present day set of anti-monopolistic laws. The Sherman anti-trust act illegalised all interference with capitalism’s basic competition. This illegalised collusion between companies, and monopolies. Standard oil was now being targeted and studied by the government as the company would be classified as a monopoly. Finally on May 15, 1911, the US Supreme Court upheld the lower court judgment and declared the Standard Oil group to be an "unreasonable" monopoly under the Sherman Antitrust Act, Section II. It ordered Standard to break up into 34 independent companies with different boards of directors, the biggest two of the companies were Standard Oil of New Jersey (which became Exxon) and Standard Oil of New York (which became Mobil). This would re-install competition in the U.S. oil businesses. Standard's president, John D. Rockefeller, had long since retired from any management role. But, as he owned a quarter of the shares of the resultant companies, and those share values mostly doubled, he emerged from the dissolution as the richest man in the world.