The rise and fall of monopolies in America - Research Paper Example

?600073 One of the most commonly discussed topics in politics today is the economy. For several years now, it has been in a slump and no matter what the president, the congress, or the economists do, it stubbornly remains slow and precariously balanced on a precipice. If it falls, the United States and the world may experience the worst financial disaster ever. Many theories about how the economy got so bad, who caused it, and what should be done about it have been bandied about, but no one seems to agree on any one solution. Most experts can only suggest and then cross their fingers and hope they will not be blamed if their recommendations make the situation worse. One fact everyone seems to be able to agree upon though is that the slowdown has to do with the market forces. Capitalism, the alleged basis of the economic system of the United States and a large part of the world, invokes the theories of competition and supply and demand among others. However, when a small number of very large corporations control not only supply and demand, but competition too, then capitalism is no longer the type of economic system in practice by those corporations or anyone else for that matter. Instead the economy in that situation is operating under a monopoly, in which one company controls the entire market segment, or under the similar structure of oligopoly, where two or three companies control the portion of the market in which they do business. Think Home Depot and Lowes, Office Depot and Staples, PetCo and Pet Smart, and Perot Systems and NeuStar (aka Lockheed Martin Information Management Systems). Those last two may not be familiar, but they are the perfect example of why oligopolies are just as unfair as monopolies. Perot Systems (yes, Ross Perot) and NeuStar were awarded control over the Number Portability Administration Center (NPAC) in 1996, making the two of them essentially a telephone number oligopoly says Tim McElligott in the June 18, 2007 edition of Telephony. When this two party control of the telephone number industry took place, everyone seemed to be pleased, mainly because it was not a monopoly. No one company had majority control. Most thought the Telecom Act of 1996 would regulate the two companies and make the market fair for both them and consumers. However, that belief did not last long. Perot Systems disappeared from the picture leaving NeuStar the one administrator of NPAC. The inspiration for McElligott’s article was that in 2007 Telcordia Technologies petitioned the Federal Communications Commission (FCC) to enter the market with NeuStar and end the monopoly currently enjoyed by that company.1 One would think this was a no-brainer: one company controls all of a market segment; the FCC can remedy that; it should be a done deal in no time. Think again. According to Telcordia Technologies’ website, the battle between the FCC and NeuStar—as well as others now—to end the monopoly of phone number distribution reached an important point in May of 2011. The FCC issued an order that implemented “a multi-vendor competitive procurement process for NPAC.”2 Of course, now a round of appeals will ensue. They may already be in the courts now. It will most likely take another year or two before it is decided. We may all be walking around with microchips in our heads before the FCC decides whether NPAC should be regulated by monopoly, oligopoly, or capitalism. Capitalism requires competition to regulate. Consumers want to be able to feel as if they control the way they spend their money. One way they can do that is to “vote with their wallets/pocketbooks.” If bargain pricing is their aim, then they want to be able to purchase products at low costs. Some consumers are willing to pay more for better service or higher quality products. Consumers may also want variety so that everybody’s tastes are addressed, even the most eclectic. In a capitalistic economic system, consumers have the power to make or break a corporation. In a monopoly or oligopoly, corporations have the power to limit supply to just what they want to supply in as many or few varieties as they choose at whatever price they choose. Part of capitalism is that invention will also drive the market. Someone will invent a new mousetrap and be able to charge whatever they want, until someone else builds a better one. Then they will have to compete and continue to update their own product. Examples of this type of capitalism in action include personal computers and cell phones. When these items first hit the markets, they were expensive. Then, as others developed the same products with various features, prices came down. Now, there are so many brands of these products at a wide variety of prices, that anybody can find the computer or cell phone that best suits their needs at the price that fits their wallet. All the while, NeuStar has pretty much controlled phone number distribution, so that while computer modems have, for the most part, abandoned any need for a phone number to operate, smart phones have increased the demand for phone numbers. These industries have raced on past any NPAC concerns. Sometimes though, only one or two companies can afford to make a product and if they act in such a way as to prevent others from developing the product and fix the price at an exorbitantly high rate, they monopolize the market. Another aspect of a monopoly includes restricting who can enter the market as a new company trying to market the same products. In the 1990s Microsoft Corporation was accused of doing this very thing.3 Microsoft was accused of making it difficult for other software and computer manufacturers from entering the market in several ways, but mainly through their domination of operating systems. Most computers had their software which was incompatible with any other and this forced consumers to buy Microsoft products. The courts found in favor of the Department of Justice and against Microsoft. After several years of monitoring, Patrick Thibodeau reporting in Computerworld, says, “The DOJ said in a statement that ‘the final judgment prevented Microsoft from continuing the type of exclusionary behavior that led to the original lawsuit.’ It added that ‘competitive conditions’ bred by the agreement had fostered the development of new technologies, including cloud computing and mobile devices.”4 Microsoft also had to pony up $8.5 billion for Skype. The regulation, however, did not stifle invention as many who oppose antitrust regulation feared. Over a hundred years ago a law known as the Sherman Antitrust Act (1890) was passed to prevent monopolies from occurring. Several states had already passed laws that prohibited trusts— the transfer of stock from several companies to one making it the sole competitor. In return, the owners of those smaller companies shared in the profits of the larger. This move effectively eliminated all competition and gave control of the market to the one giant corporation. Samuel Dodd of Standard Oil Company had first conceived of this business maneuver in 1882 when nine other oil companies surrendered their businesses to Standard Oil in exchange for a portion of stock in the company. In the eight short years that followed, many could see the effect of such power on the economy if other monopolies were formed. States rushed to pass legislation to prevent them from forming, but the individual state laws only prevented the formation of monopolies through a trustee process in each state. The Sherman Antitrust Act made monopolies illegal throughout the United States based on the constitutional power granted to congress to control interstate commerce. Unfortunately the Sherman Act was not worded well because the owners of companies figured out ways to legally outmaneuver it. Terms used to write the law such as “trust,” “conspiracy,” and “monopoly” were not well defined. Several companies launched challenges to the Sherman Act using the ambiguous wording. These would-be monopolies found their way around the law. Only five years after the Sherman Act was passed, the Supreme Court effectively took it apart in The United States v. E.C. Knight Company (1895)5.The American Sugar Refining Company gained control of E.C. Knight Company, another sugar refining company, as well as some other sugar refiners, and 98% of the market. The decision of the Court in this case was that the Sherman Act could not control manufacturing, only individuals states could, so effectively, the state of the laws prohibiting monopolies was back to where it had been before the Sherman Act. Another case, Addyston Pipe & Steel Co. sued because the Sherman Act effectively prohibited their practice of collusion with other piping companies to overbid jobs so that the one company designated to win the bid could underbid the rest and get the contract.6 The Supreme Court ruled that it would be impossible for the United States to restrain such trade agreements if they were reasonable, and, therefore, reasonable limitations on trade, as long as everyone was in agreement, could not be regulated by the Sherman Act. However, just like in today’s politics, the next political cycle brought a president who favored the Sherman Act, Theodore Roosevelt. It was only by fate though that the political will went that way. Roosevelt, who was viewed as a monopoly buster, became president when McKinley, who thought laissez-faire the better policy, was assassinated. During Roosevelt’s administration the Sherman Act was successfully used to prevent monopolies from forming. For instance, in 1904 the Supreme Court upheld the United States government’s right to dissolve the Northern Securities Company in State of Minnesota vs. Northern Securities (1904)7. In this case, the president of the Great Northern Railway, James Jerome Hill, got financial backing for J. P. Morgan, who owned his own railway. With the capital they had, Hill and Morgan tried to buy two other railways and monopolize the railway industry. The public was quite alarmed by this turn of events, but President McKinley did not want to do anything about it. However, right in the middle of the public alarm over this issue, McKinley was assassinated and Roosevelt became president. During Roosevelt’s term in office other cases that concerned the Sherman Act were won in its favor. One such case, Smith Co. v. United States (1905) 8 resulted because Smith Co. meat packers thought that the Sherman Act did not apply to them even though they operated in several states in the Midwest and shipped their products via the railroads. This particular case was a great victory for the American consumer because Smith Co. (as well as others) used price fixing to gouge as much profit from consumers as they possibly could. The formed a “beef trust” by agreeing with other meat packing companies to manipulate the price of livestock. They would do deceptive things like send several buyers to auctions to drive up the price of livestock, so it would appear high. Then they would ship their processed and packaged meat to towns where the price for the product had risen because of the artificial raise in livestock prices. That was bad enough, but they did not stop there. The “beef trust” would allow the prices to fall sharply, and then go purchase livestock at a ridiculously low price and make a profit off of the meat they sold from that livestock. Not long after the Roosevelt Administration’s antitrust victories, the Federal Trade Commission was established in 1914. The Federal Trade Commission Act (1914) was passed on September 24 and included several antitrust and consumer protection laws.9 The FTC Act provides not only general consumer protection, but also several specific laws such as the fact that omission or deceptive representation is prohibited if it misleads the consumer. Other laws passed after the FTC Act gave consumers even more protection including the Wheeler-Lea Act of 1938 that specifically prevents false advertising, and several relating to truth in lending and fair credit laws. Some of those fair credit laws were just recently amended so that large banks and credit card companies could not gouge the consumer by using deceptive billing practices. Other notable functions of the FTC include regulating tobacco and its use, wool and fur products and the correct identification of textile fibers. All these are so that large corporations cannot deceive the consumer. Businesses have had to think of new ways to manipulate consumers to boost their bottom line, and it has been a challenge, but they have done it in a myriad of ways. In the 1980s, during the Reagan Administration, many of the antitrust laws were amended or repealed. Typically, the right wing of politics believes that laissez faire is the best way to operate in a capitalist system. Reagan was no exception. In fact, he is due north on the Republican compass when it comes to conservative lawmakers providing large corporations with the freedom to do as they will. The market will take care of any problems. Anybody suited to compete will do so and the cream will rise to the top. The winner, in the long run, will be the consumer who benefits from price and service wars. Yet, this has not proven to be the case, which was why antitrust laws were enacted in the first place. Currently in the United States and around the world, several companies have become monopolies or oligopolies on all levels from municipal to global. A good example of lower level monopolies is the garbage service in many cities. The city contracts with one hauler and the residents of the city must hire that company to haul their garbage even if they do not wish to do business with the company. The alternative is to have no garbage service at all. The service can provide a minimum amount of service and get by at least until the contract is up. Then there are all sorts of legalities in renewing the contract. Some cities have laws about hiring union companies, or companies with a quota of minority workers, and so on. Either way, instead of the consumer getting to choose another garbage hauler from many businesses, they are stuck with the company the city hires, like them or not and there are no viable options for the consumer. Peter Anderson, Brenda Platt, and Neil Seldman argue that one way to combat such practices is to build locally owned material recycling facilities and allow non-profits to operate them to keep prices competitive. Anderson, Platt and Seldman provide examples of how this worked in San Jose, CA and in the Twin Cities area of Minnesota.10 Yet, this article was written nearly a decade ago, and there are not many of these locally owned facilities in operation. Apparently, the large garbage monopolies stifled that competition too. Governments on all levels are responsible for the existence of monopolies, but they also put into place regulations so that the monopoly cannot gouge the consumer. However, often large corporations can afford to hire lawyers who can figure out how to get around regulations and antitrust laws. John Bellamy Foster, Robert W. McChesney, and R. Jamil Jonna explain how they see the tendency of large companies to circumvent laws preventing monopolies to form the megacorporations who control most of the commerce, and more frighteningly, most of the politics of the world. “More and more industries in the manufacturing sector of the economy are tight oligopolistic or quasi-monopolistic markets characterized by a substantial degree of monopoly. And, if anything, the trend is accelerating. Concentration is also proceeding apace in most other sectors of the economy, aside from manufacturing, such as retail trade, transportation, information, and finance.”11 Locally, garbage haulers, electric companies, cable television and internet services all can be considered monopolies or oligopolies. On a more global basis one only has to think Wal-Mart. Monopolies, in the general sense, operate by eliminating the competition, or at least controlling it. Most people do not understand that many current monopolies can also be called monopsonies that is companies who also control their suppliers. Theoretically, that goes against any sort of rational notion of how commerce functions, but Walmart, and others, use the fact that they control the majority of the market to manipulate their suppliers. If the suppliers do not like the manipulation, they are free to stop doing business with Walmart, but then they will be losing the demand for their product that Walmart generates. Barry C. Lynn writing for Harper’s web magazine says, “Not all oligopolists rely on the exercise of monopsony, but a large and growing contingent of today's largest firms are built to do just that. The ultimate danger of monopsony is that it deprives the firms that actually manufacture products from obtaining an adequate return on their investment.”12 Lynn cites the example of the Coca-Cola Company and Walmart. When Walmart decided it did not like the artificial sweetener Coca-Cola was using, Coca-Cola passively designed a second product to meet the demands Walmart made. Perhaps Coca-Cola was so willing to concede because they knew what was going on at Kraft Foods, where they have had to shut thirty-nine plants and lay off thousands of workers because it cannot afford to operate on the prices Walmart commands for their products. There it is, the story of the current economic crisis: layoffs and plant closures. Thousands of smaller businesses had to close because they could not afford to operate in competition either on the supply side or the demand side with the few monopolies and oligopolies that can afford to stay in business because they have commanded the market. Without any antitrust controls, what is are workers and consumers to do? They cannot find cheaper prices than at Walmart, so they have to put up with what Walmart chooses to sell them from the suppliers Walmart chooses to purchase its goods to sell. Not only that, many consumers have lost their jobs because big corporations have put small businesses out of business. Now, in a sickening Catch-22, people who were put out of work indirectly by Walmart cannot afford to shop anywhere else so they must spend the little money they have to feed the great profit machine of the megacorporation that caused them to lose their source of income in the first place. In February of 2009, at the a low point in the current economic crisis, Stephanie Rosenbloom reported for The New York Times that Walmart was making profits and even growing sales. “For the three months that ended Jan. 31, Wal-Mart’s profit was $3.8 billion, or 96 cents a share, compared with $4.1 billion, or $1.02 share, a year ago. That included a charge from settling dozens of class-action lawsuits in which the company was accused of systematically cheating workers out of wages.”13 Had they not had to pay workers what they rightfully earned, Walmart would have made even more profits. Yet, Walmart is not the only company who underpays its workers and controls the market share of the business so that no one else can compete. There are several others in the world and they have only become bigger and more powerful because there are no longer regulatory laws with any teeth left to stop the companies from operating in this manner. These megacorporations who control all the business, all the market, and all the power are the infamous 1%. They have cornered all the wealth and now can manipulate the 99% to buy only what they offer to sell, produce only what they want to buy wholesale to resell retail, and purchase legislators’ votes so that no one can stop them. This was the fear that the public had when it first demanded that its lawmakers do something to stop such a travesty from happening. Unfortunately, lawmakers did little or nothing as those consumer protections were repealed away, and now they refuse to budge on anything that might get back some of the power conceded to these megacompanies. In the meantime, many must submit to the manipulation of monopolies or they will not survive. Bibliography Anderson, Peter, Brenda Platt, and Neil Seldman. "Facts to Act On:“ Fighting Waste Industry Consolidation with Local Ownership of Recycling Facilities.”." Institute for Local Self Reliance.org. 8 2002, November. http://www.ilsr.org/recycling/ftao/ftao_42_consolidation.pdf. (accessed November 25, 2011). Foster, John Bellamy, Robert W. McChesney, and R. Jamil Jonna. "Monopoly and Competition in Twenty-First Century Capitalism." Monthly Review, April 2011: 1-40. Lynn, Barry C. "Breaking the Chain: The Antitrust Case against Walmart." Harper's Magazine. July 2006. http://harpers.org/archive/2006/07/0081115 (accessed November 25, 2011). McElligott, Tim. "It Takes Two--At Least." Telephony, June 18, 2007: Academic Search Premier. Accessed November 25, 2011. Rosenbloom, Stephanie. "Walmart Outpaces a Weak Economy." The New York Times, February 18, 2009: http://www.nytimes.com/2009/02/18/business/18shop.html. Accessed November 25, 2011. Telecordia Technologies. "Number Portability Administration Center (NPAC) Information Portal." Telecordia. May 16, 2011. http://www.telcordia.com/services/number_portability/npac.html (accessed November 25, 2011). Thibodeau, Patrick. "Case Closed: Microsoft Marks the End of an Era." ComputerWorld, May 23, 2011: Academic Search Premier. Accessed November 25, 2011. Read More