American Monopolies

Economic Definition• Sole supplier of a product w/no substitutes–Only Nike shoes, McDonalds food, Saddlebred

clothes, Dell computers, Arrowhead bottled water, etc.

• Company has more market power than anyone else–Can raise prices w/o losing $$$ to rivals–Arrowhead is the only supplier of bottled water

they can charge higher prices

Barriers to Entry (BTE)• BTE – restrictions of entry by new firms into an

market/industry

(1) Legal restrictions–Making entry illegal via patents• 1 supplier of hot dogs in a stadium• 1 company picking up garbage• U.S. Postal Service

Barriers to Entry (BTE)(2) Economies of scale – business expands, i.e. makes

more $$$, as costs go down–1 firm supplies market @ a lower avg. cost than

2+ firms (natural monopoly)• Electrical companies (HSV Utilities)• Cable companies (Comcast)

–Rural areas• 1 grocery store• 1 theater• 1 restaurant

Barriers to Entry (BTE)(3) Control of essential resources–Alcoa was only supplier of bauxite• Important raw material for aluminum

–China is world’s only producer of pandas–De Beers family has dominated the diamond

trade since 1930s

Collusion• Agreement b/w 2+ people/companies to limit

market competition by deceiving others–An attempt to gain unfair advantage–Divide the market– Set artificial prices– Limit production

Microsoft (MS)

Basics• 1975 – Founded by Bill

Gates & Paul Allen

• 1980 – Co. introduces its first OS, Xenix

• 1990 – FTC begins decade-long fight w/MS over collusion

Microsoft Business Practices• 1988-1994 – MS received royalties from computer

companies selling computers w/microprocessors–Due to a per processing license, it received $$$

regardless if computer had MS software or not

• 1995 – Windows 95 released– Included Internet Explorer (IE) web browsing &

MS Office

United States v. Microsoft (2000)• U.S. Dept. of Justice & 20 states filed civil actions

against MS for violating the Sherman Act• MS alleged crimes:–Abused monopoly power on Intel-based

computer systems in its sales–Bundled IE w/its Windows operating system

United States v. Microsoft (2000)• Original ruling–MS violated Sections 1 & 2 of Sherman Act–MS is to be divided into 2 companies• 1 to produce operating systems• 1 to produce software components

–MS appealed the ruling• Settlement (2001)–MS shares software w/3rd-party companies–MS still allowed to bundle IE w/Windows

U.S. Standard Oil

Basics• 1870 – Est. as a

corporation in Cleveland, OH

• Led by John D. Rockefeller

• Eliminated most competition in Cleveland w/i first 2 months of existence

Standard Oil Business Practices• 1882 – Combined diff. companies spread across diff.

states under 9 individual trustees; formed a trust

• 1890 – Sherman Act passed by Congress– Forbade any contract, scheme, deal, or

conspiracy that restricted trade–OH AG files lawsuit against Standard Oil

• 1897 – Rockefeller retires, remains major stockholder in Standard Oil

Standard Oil Business Practices• 1911 – US DOJ sued Standard Oil, ordered group to

break up into 34 companies– Jersey Standard Exxon– Standard Oil Company of New York Mobil– Standard Oil of Ohio Amoco– Standard Oil of California Chevron

• Exxon & Mobil later merged to form ExxonMobil

Standard Oil Business PracticesOther Trusts…

• Dumped gasoline into rivers

• Piled mountains of heavy waste

Standard Oil Trust…

• Fueled its machines

• Used waste to produce items like Vaseline

Standard Oil of New Jersey v. United States (1911)

• Standard Oil undercut a lot of other businesses; later bought them out, particularly gas/service stations– Significantly underpriced same items as

competitors–Made threats to suppliers & distributors of

competitors

• US-SC needed to determine if a company buying out others to rid of competition is legal

Standard Oil of New Jersey v. United States (1911)

• Original ruling– Standard Oil’s business practices led to a

monopoly, thus restricting trade/competition for other businesses–Congress had power through its Commerce

Clause to regulate monopolies, and enforce the Sherman Act