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 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 – 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/3 rd -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 Practices Other 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