Vietnam National University – HCMC International University SCHOOL OF BUSINESS Introduction to Microeconomic STANDARD OIL – MONOPOLY
Lecturer: Cao Minh Mẫn
Group members: Trần Hồ Gia Hy – BABAIU22360
Nguyễn Bùi Phước Tân – BABAIU22
Trần Gia Bảo – BABAIU22355
Nguyễn Trần Gia Huy – BABAIU22
Phạm Bá Khiêm – BABAIU22 Ho Chi Minh city, Vietnam
1 THPT CHUYÊN LÝ TỰ Ọ TR NG Table of contents
CHAPTER 1 ............................................................................................................................................... 1
1. Rockefeller’s Youth................................................................................................................................. 1
2. Pre-Standard Oil career ........................................................................................................................... 1
2.1. As a bookkeeper ................................................................................................................................... 1
2.2. Business partnership and Civil War service ......................................................................................... 2
2.3. Beginning in the oil business ............................................................................................................... 3
CHAPTER 2 ............................................................................................................................................... 4
1.Standard Oil founding and early growth .................................................................................................. 4
2.Standard Oil Trust Certificate 1896 ......................................................................................................... 5
3.Standard Oil Refinery No. 1 in Cleveland, Ohio, 1897 ........................................................................... 5
4.How Standard Oil became a monopoly ................................................................................................... 6
5.The antitrust movement ........................................................................................................................... 9
CHAPTER 3 ............................................................................................................................................. 10
1.Standard Oil v. United States ................................................................................................................. 10
2.Comment on social media ..................................................................................................................... 12 CHAPTER 1
1. Rockefeller’s Youth
John D. Rockefeller was born on July 8, 1839, in Richford, New York. His father, William
Avery Rockefeller, was a doctor who claimed he could cure cancer and charged people
money for treatments. His mother, Eliza Davison Rockefeller, was very religious and very
strict. She taught John how to work and to save money, and also how to give to charities.
By age 12, he had saved more than $50 working for neighbors and raising turkeys for his
mother. At his mother's urging, he borrowed $50 from a local farmer at 7 percent annual
interest. Rockefeller was impressed when the farmer returned him with interest the following
year, and spoke of it in 1904: Money...”
Rockefeller attended an elite school in New York in the early 1850s. He was very good at
mental arithmetic and was able to solve difficult problems quickly. This skill would be very
useful to him in his business career. In other subjects, Rockefeller was average, but the
quality of the education was very high.
John Rockefeller attended high school in Cleveland from 1853 to 1855. He was very good
at math and was on the debating team. His school encouraged public speaking, and although
Rockefeller was only average, it was a skill that would prove to be useful to him in the future.
2. Pre-Standard Oil career 2.1. As a bookkeeper
In September 1855, when Rockefeller was sixteen, he got his first job as an assistant
bookeeper working for a small produce commission firm in Cleveland called Hewitt &
Tuttle. He worked long hours and delighted, as he later recalled, in "all the methods and
systems of the office." He was particularly adept at calculating transportation costs, which
served him well later in his career. Much of Rockefeller's duties involved negotiating with
barge canal owners, ship captains, and freight agents. In these negotiations, he learned that
posted transportation rates that were believed to be fixed could be altered depending on
conditions and timing of freight and through the use of rebates to preferred shippers.
Rockefeller was also given the duty of collecting debts when Hewitt instructed him to do so.
Instead of using his father's method of presentation to collect debts, Rockefeller relied on a
persistent pestering approach. Rockefeller received $16 a month for his three-month 1
apprenticeship. During his first year, he received $31 a month, which was increased to $50
a month. His final year provided him with $58 a month.
As a youth, Rockefeller reportedly said that his two great ambitions were to make $100,000
(equivalent to $2.91 million in 2021 dollars) and to live 100 years.
2.2. Business partnership and Civil War service
In 1859, Rockefeller went into the produce commission business with a partner, Maurice B.
Clark, and they raised $4,000 ($120,637 in 2021 dollars) in the capital. Clark initiated the
idea of the partnership and offered $2,000 towards the goal. Rockefeller had only $800 saved
up at the time and so borrowed $1,000 from his father, "Big Bill" Rockefeller, at 10 percent
interest. Rockefeller went steadily ahead in business from there, making money each year
of his career. In their first and second years of business, Clark & Rockefeller netted $4,400
(on nearly half a million dollars in business) and $17,000 worth of profit, respectively, and
their profits soared with the outbreak of the American Civil War when the Union Army
called for massive amounts of food and supplies. When the Civil War was nearing a close
and with the prospect of those war-time profits ending, Clark & Rockefeller looked toward
the refining of crude oil. While his brother Frank fought in the Civil War, Rockefeller tended
to his business and hired substitute soldiers. He gave money to the Union cause, as did many
rich Northerners who avoided combat. "I wanted to go in the army and do my part,"
Rockefeller said. "But it was simply out of the question. There was no one to take my place.
We were in a new business, and if I had not stayed it must have stopped—and with so many dependent on it."
Rockefeller was an abolitionist who voted for President Abraham Lincoln and supported the
then-new Republican Party. As he said, "God gave me money", and he did not apologize for
it. He felt at ease and righteous following Methodist preacher John Wesley's dictum, "gain
all you can, save all you can, and give all you can." At that time, the Federal government
was subsidizing oil prices, driving the price up from $.35 a barrel in 1862 to as high as
$13.75. This created an oil-drilling glut, with thousands of speculators attempting to make
their fortunes. Most failed, but those who struck oil did not even need to be efficient. They
would blow holes in the ground and gather up the oil as they could, often leading to creeks
and rivers flowing with wasted oil in the place of water.
A market existed for refined oil in the form of kerosene. Coal had previously been used to
extract kerosene, but its tedious extraction process and high price prevented broad use. Even 2
with the high costs of freight transportation and a government levy during the Civil War (the
government levied a tax of twenty cents a gallon on refined oil), profits on the refined
product were large. The price of refined oil in 1863 was around $13 a barrel, with a profit
margin of around $5 to $8 a barrel. The capital expenditures for a refinery at that time were
small – around $1,000 to $1,500 and requiring only a few men to operate. In this
environment of a wasteful boom, the partners switched from foodstuffs to oil, building an
oil refinery in 1863 in "The Flats", then Cleveland's burgeoning industrial area. The refinery
was directly owned by Andrews, Clark & Company, which was composed of Clark &
Rockefeller, chemist Samuel Andrews, and M. B. Clark's two brothers. The commercial oil
business was then in its infancy. Whale oil had become too expensive for the masses, and a
cheaper, general-purpose lighting fuel was needed.
While other refineries would keep the 60% of oil product that became kerosene but dump
the other 40% in rivers and massive sludge piles, Rockefeller used the gasoline to fuel the
refinery, and sold the rest as lubricating oil, petroleum jelly and paraffin wax, and other by-
products. Tar was used for paving, naphtha shipped to gas plants. Likewise, Rockefeller's
refineries hired their own plumbers, cutting the cost of pipe-laying in half. Barrels that cost
$2.50 each ended up only $0.96 when Rockefeller bought the wood and had them built for
himself. In February 1865, in what was later described by oil industry historian Daniel
Yergin as a "critical" action, Rockefeller bought out the Clark brothers for $72,500
(equivalent to $1 million in 2021 dollars) at auction and established the firm of Rockefeller
& Andrews. Rockefeller said, "It was the day that determined my career." He was well-
positioned to take advantage of postwar prosperity and the great expansion westward
fostered by the growth of railroads and an oil-fueled economy. He borrowed heavily,
reinvested profits, adapted rapidly to changing markets, and fielded observers to track the quickly expanding industry.
2.3. Beginning in the oil business
In 1866, William Rockefeller Jr., John's brother, built another refinery in Cleveland and
brought John into the partnership. In 1867, Henry Morrison Flagler became a partner, and
the firm of Rockefeller, Andrews & Flagler was established. By 1868, with Rockefeller
continuing practices of borrowing and reinvesting profits, controlling costs, and using
refineries' waste, the company owned two Cleveland refineries and a marketing subsidiary
in New York; it was the largest oil refinery in the world. Rockefeller, Andrews & Flagler
was the predecessor of the Standard Oil Company. 3 CHAPTER 2
1. Standard Oil founding and early growth
Rockefeller c. 1872, shortly after founding Standard Oil.
By the end of the American Civil War, Cleveland was one of the five main refining centers
in the U.S. (besides Pittsburgh, Pennsylvania, New York, and the region in northwestern
Pennsylvania where most of the oil originated). By 1869 there was triple the kerosene
refining capacity than needed to supply the market, and the capacity remained in excess for many years.
On January 10, 1870, Rockefeller abolished the partnership of Rockefeller, Andrews &
Flagler, forming Standard Oil of Ohio. Continuing to apply his work ethic and efficiency,
Rockefeller quickly expanded the company to be the most profitable refiner in Ohio.
Likewise, it became one of the largest shippers of oil and kerosene in the country. The
railroads competed fiercely for traffic and, in an attempt to create a cartel to control freight
rates, formed the South Improvement Company offering special deals to bulk customers like
Standard Oil, outside the main oil centers. The cartel offered preferential treatment as a high-
volume shipper, which included not just steep discounts/rebates of up to 50% for their
product but rebates for the shipment of competing products.
Share of the Standard Oil Company, issued May 1, 1878
Part of this scheme was the announcement of sharply increased freight charges. This touched
off a firestorm of protest from independent oil well owners, including boycotts and
vandalism, which led to the discovery of Standard Oil's part in the deal. A major New York
refiner, Charles Pratt and Company, headed by Charles Pratt and Henry H. Rogers, led the
opposition to this plan, and railroads soon backed off. Pennsylvania revoked the cartel's
charter, and non-preferential rates were restored for the time being. While competitors may
have been unhappy, Rockefeller's efforts did bring American consumers cheaper kerosene
and other oil by-products. Before 1870, oil light was only for the wealthy, provided by
expensive whale oil. During the next decade, kerosene became commonly available to the working and middle classes.
Undeterred, though vilified for the first time by the press, Rockefeller continued with his
self-reinforcing cycle of buying the least efficient competing refiners, improving the
efficiency of his operations, pressing for discounts on oil shipments, undercutting his 4
competition, making secret deals, raising investment pools, and buying rivals out. In less
than four months in 1872, in what was later known as "The Cleveland Conquest" or "The
Cleveland Massacre," Standard Oil absorbed 22 of its 26 Cleveland competitors. Eventually,
even his former antagonists, Pratt and Rogers, saw the futility of continuing to compete
against Standard Oil; in 1874, they made a secret agreement with Rockefeller to be acquired.
3. Standard Oil Trust Certificate 1896
Pratt and Rogers became Rockefeller's partners. Rogers, in particular, became one of
Rockefeller's key men in the formation of the Standard Oil Trust. Pratt's son, Charles Millard
Pratt, became secretary of Standard Oil. For many of his competitors, Rockefeller had
merely to show them his books so they could see what they were up against and then make
them a decent offer. If they refused his offer, he told them he would run them into bankruptcy
and then cheaply buy up their assets at auction. However, he did not intend to eliminate
competition entirely. In fact, his partner Pratt said of that accusation "Competitors we must
have ... If we absorb them, it surely will bring up another."
Instead of wanting to eliminate them, Rockefeller saw himself as the industry's savior, "an
angel of mercy" absorbing the weak and making the industry as a whole stronger, more
efficient, and more competitive. Standard was growing horizontally and vertically. It added
its own pipelines, tank cars, and home delivery network. It kept oil prices low to stave off
competitors, made its products affordable to the average household, and, to increase market
penetration, sometimes sold below cost. It developed over 300 oil-based products from tar
to paint to petroleum jelly to chewing gum. By the end of the 1870s, Standard was refining
over 90% of the oil in the U.S. Rockefeller had already become a millionaire ($1 million is
equivalent to $28 million in 2021 dollars).
He instinctively realized that orderliness would only proceed from centralized control of
large aggregations of plant and capital, with the one aim of an orderly flow of products from
the producer to the consumer. That orderly, economic, efficient flow is what we now, many
years later, call 'vertical integration' I do not know whether Mr. Rockefeller ever used the
word 'integration'. I only know he conceived the idea.
4. Standard Oil Refinery No. 1 in Cleveland, Ohio, 1897
In 1877, Standard clashed with Thomas A. Scott, the president of the Pennsylvania Railroad,
Standard's chief hauler. Rockefeller envisioned pipelines as an alternative transport system
for oil and began a campaign to build and acquire them. The railroad, seeing Standard's 5
incursion into the transportation and pipeline fields, struck back and formed a subsidiary to
buy and build oil refineries and pipelines.
Standard countered, held back its shipments, and, with the help of other railroads, started a
price war that dramatically reduced freight payments and caused labor unrest. Rockefeller
prevailed and the railroad sold its oil interests to Standard. In the aftermath of that battle, the
Commonwealth of Pennsylvania indicted Rockefeller in 1879 on charges of monopolizing
the oil trade, starting an avalanche of similar court proceedings in other states and making a
national issue of Standard Oil's business practices. Rockefeller was under great strain during
the 1870s and 1880s when he was carrying out his plan of consolidation and integration and
being attacked by the press. He complained that he could not stay asleep most nights. Rockefeller later commented:
“All the fortune that I have made has not served to compensate me for the anxiety of that period.”
One of the key strategies Rockefeller used was to buy up smaller oil companies and
refineries, which allowed Standard Oil to control a significant portion of the market. The
company also invested heavily in new technology and infrastructure, such as pipelines and
tank cars, which helped it to further reduce costs and increase profits.
Rockefeller's business practices were controversial, and he was often criticized for his
ruthless tactics. In 1911, the U.S. Supreme Court ruled that Standard Oil was a monopoly
and ordered it to be broken up into several smaller companies.
Despite this setback, Rockefeller remained one of the wealthiest men in the world, and he
continued to be involved in philanthropy throughout his life. He donated large sums of
money to various causes, including education, medical research, and the arts. Today, he is
remembered as one of the most successful and influential businessmen in history.
5. How Standard Oil became a monopoly.
Shortly before the Civil War, Rockefeller and a partner established a shipping company in
Cleveland, Ohio. The company made much money during the war. In 1863, he and his
partner invested in another business that refined crude oil from Pennsylvania into kerosene for illuminating lamps. 6
By 1870, Rockefeller and new partners were operating two oil refineries in Cleveland, then
the major oil refining center of the country. The partners incorporated (under a charter issued
by the state of Ohio) and called their business the Standard Oil Company.
To give Standard Oil an edge over its competitors, Rockefeller secretly arranged for
discounted shipping rates from railroads. The railroads carried crude oil to Standard's
refineries in Cleveland and kerosene to the big city markets. Many argued that as "common
carriers" railroads should not discriminate in their shipping charges. But small businesses
and farmers were often forced to pay higher rates than big shippers like Standard Oil.
The oil industry in the late 1800s often experienced sudden booms and busts, which led to
wildly fluctuating prices and price wars among the refiners. More than anything else,
Rockefeller wanted to control the unpredictable oil market to make his profits more dependable.
In 1871, Rockefeller helped form a secret alliance of railroads and refiners. They planned to
control freight rates and oil prices by cooperating with one another. The deal collapsed when
the railroads backed out. But before this happened, Rockefeller used the threat of this deal
to intimidate more than 20 Cleveland refiners to sell out to Standard Oil at bargain prices.
When the so-called "Cleveland Massacre" ended in March 1872, Standard controlled 25
percent of the U.S. oil industry.
Rockefeller saw Standard Oil's takeover of the Cleveland refiners as inevitable. He said it
illustrated "the battle of the new idea of cooperation against competition." In his mind, large
industrial combinations, more commonly known as monopolies, would replace
individualism and competition in business.
Rockefeller planned to buy out as many other oil refineries as he could. To do this, he often
used hardball tactics. In 1874, Standard started acquiring new oil pipeline networks. This 7
enabled the company to cut off the flow of crude oil to refineries Rockefeller wanted to buy.
When a rival company attempted to build a competing pipeline across Pennsylvania,
Standard Oil bought up land along the way to block it. Rockefeller also resorted to outright
bribery of Pennsylvania legislators. In the end, Rockefeller made a deal with the other
company, which gave Standard Oil ownership of nearly all the oil pipelines in the nation.
By 1880, Standard Oil owned or controlled 90 percent of the U.S. oil refining business,
making it the first great industrial monopoly in the world. But in achieving this position,
Standard violated its Ohio charter, which prohibited the company from doing business
outside the state. Rockefeller and his associates decided to move Standard Oil from
Cleveland to New York City and to form a new type of business organization called a "trust."
Under the new arrangement (done in secret), nine men, including Rockefeller, held "in trust"
stock in Standard Oil of Ohio and 40 other companies that it wholly or partly owned. The
trustees directed the management of the entire enterprise and distributed dividends (profits) to all stockholders.
When the Standard Oil Trust was formed in 1882, it produced most of the world's lamp
kerosene, owned 4,000 miles of pipelines, and employed 100,000 workers. Rockefeller often
paid above-average wages to his employees, but he strongly opposed any attempt by them
to join labor unions. Rockefeller himself owned one-third of Standard Oil's stock, worth about $20 million.
During the 1880s, Standard Oil divided the United States into 11 districts for selling
kerosene and other oil products. To stimulate demand, the company sold or even gave away
cheap lamps and stoves. It also created phony companies that appeared to compete with
Standard Oil, their real owner. When independent companies tried to compete,
Standard Oil quickly cut prices--sometimes below cost--to drive them out of business. Then
Standard raised prices to recoup its losses. 8
Much of the trust's effort went into killing off competition. But Standard Oil while
Rockefeller was in command also usually provided good quality products at fairly
reasonable prices. Rockefeller often declared that the whole purpose of Standard Oil was to
supply "the poor man's light."
6. The antitrust movement
By 1900, the Standard Oil Trust had expanded from its original base in the East to new oil
regions further west. At the same time, a wave of anti-monopoly sentiment swept the United
States. Farmer organizations, labor unions, muckraking journalists, and many politicians
attacked such combinations as the sugar and tobacco trusts. But they especially targeted the "mother trust," Standard Oil.
By this time, nearly 30 states and the federal government had passed antitrust laws that
attacked monopoly abuses. These laws usually rested on a set of legal and economic assumptions:
1. The common law, inherited from England, condemned the restraint of trade.
2. Monopolies tended to restrain trade by keeping prices high, suppressing product
improvements, and making excessive profits.
3. Competition among many independent firms was necessary to assure fair prices,
highquality products, and reasonable profits.
Starting with Ohio in 1887, 10 states and the Oklahoma Territory filed 33 separate lawsuits
against companies affiliated with the Standard Oil Trust. In most cases, Standard lost in
court. But Standard's directors reorganized the trust shifted operations from state to state,
and otherwise evaded court rulings to maintain their monopoly.
Since state lawsuits against Standard Oil were going nowhere, muckraking journalists
pressed for federal action against the trust.
Starting in November 1902, Ida Tarbell wrote a series of 19 carefully researched articles in
McClure's Magazine. She detailed how John D. Rockefeller ruthlessly forced his
competitors to "sell or perish." She correctly identified railroad discounts, specifically 9
outlawed by the Interstate Commerce Act of 1887, as key to creating Rockefeller's Standard Oil monopoly.
Called "Miss Tarbarrel" and "this poison woman" by Rockefeller, Tarbell helped push the
federal government to investigate the Standard Oil Trust. While publicly attacking Standard
Oil and other trusts, President Theodore Roosevelt did not favor breaking them up. He
preferred only to stop their anti-competitive abuses.
On November 18, 1906, the U.S. attorney general under Roosevelt sued Standard Oil of
New Jersey and its affiliated companies making up the trust. The suit was filed under the
Sherman Antitrust Act of 1890. Under this federal law, "Every contract, or combination, in
restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal." CHAPTER 3
1. Standard Oil v. United States
The Standard Oil trial took place in 1908 before a Missouri federal court. More than 400
witnesses testified. The government produced evidence that the Standard Oil Trust had
secured illegal railroad discounts, blocked competitors from using oil pipelines, spied on
other companies, and bribed elected officials. Moreover, the government showed that from
1895-1906 Standard's kerosene prices increased 46 percent, giving enormous profits to the monopoly.
Although Rockefeller was technically president of Standard Oil, he had retired from active
management in 1895. But he remained the single largest stockholder. Rockefeller testified
that Standard Oil achieved its position because its combination of cooperating companies
was more efficient and produced a better product than its rivals. When cross-examined on
how Standard Oil grew so dominant, the 71-year-old Rockefeller frequently stated that he could not remember.
Attorneys for Standard Oil contended that the large combination of companies making up
the trust had developed naturally and actually saved the industry from destructive price wars.
They also argued that since Standard Oil was a manufacturing business, it was exempt from
the Sherman Act, which only addressed interstate commerce.
Both the trial judge and a unanimous federal appeals court agreed that Standard Oil was a
monopoly violating the Sherman Antitrust Act. They also supported the government's 10
recommendation that the trust should be dissolved into independent competing companies.
Standard Oil then appealed to the U.S. Supreme Court.
On May 15, 1911, the Supreme Court unanimously upheld the federal appeals court and
ruled that the Standard Oil Trust was a monopoly that illegally restrained trade. All but one
justice, however, went on to hold that only monopolies that restrained trade in
"unreasonable" ways were illegal. Although it found that Standard Oil did, in fact, act
unreasonably, the Supreme Court's use of the "rule of reason" made it more difficult for
government to prosecute other monopolies.
The Supreme Court justices concluded that to restore competition in the oil industry, the
Standard Oil Trust would have to be broken into independent companies. But the
government permitted Standard Oil stockholders to each receive fractional shares in all 34
companies that were formed. This meant that each of these companies had exactly the same
stockholder owners. These companies were then supposed to compete with one another. In
reality, the companies had little real incentive to do this and acted together in setting prices for a decade or more.
Following new petroleum discoveries in the United States and abroad, independent oil
companies finally brought real competition to the industry. But the former Standard Oil
companies, with modern names like Exxon, Mobil, Amoco, Chevron, ARCO, Conoco, and
Sohio, continued to exercise significant influence on oil pricing.
When the Supreme Court broke up the Standard Oil Trust in 1911, electric lights were
rapidly replacing kerosene lamps. But the gasoline-driven automobile was just beginning to
appear. Gasoline, up to that time a useless byproduct of oil refining, made the companies
formed from the trust wealthier than they had ever been. Rockefeller, owning a 25 percent
share in each of the new companies, was worth $900 million in 1913 ($13 billion in today's
dollars). This made him the richest man in the world.
In retirement, Rockefeller made a science of philanthropy. He and his son gave away most
of the Rockefeller millions, mainly to medical research, public health, and educational
institutions. Even so, he bitterly objected to the federal income tax when it began in 1913.
Economist Robert Heilbroner once described John D. Rockefeller as "an agent for better and
worse in the immense industrial transformation of America." Outliving most of his business
associates and critics, John D. Rockefeller died in 1937, a few weeks short of his 98th birthday. 11
7. Comment on social media
Do Monopolies Actually Benefit Consumers? Both Republican and Democratic politicians
have been sounding alarms about market power in the United States, arguing that a few
companies such as Amazon, Facebook, and Google have become too dominant. In July 2021,
the White House issued an executive order and statement doubling down on antitrust law
enforcement, with a promise to reign in “corporate consolidation” and “bad mergers” in the
interest of US consumers. A growing body of research supports this notion, pointing to a
regulatory leniency over the past few decades that is driving concentration across US
markets and segments. Stanford’s C. Lanier Benkard and Ali Yurukoglu and Chicago
Booth’s Anthony Lee Zhang provide more support for this claim—in part. The researchers
find abundant evidence of rising concentration at the broader market level, with more
mergers, fewer players, and a rise in organizations with high market share.
But they find a different picture at the level of individual products, where more concentration has led to more competition.
Monopolies are generally considered to be bad for consumers and the economy. When
markets are dominated by a small number of big players, there’s a danger that these players
can abuse their power to increase prices to customers. This kind of excessive market power
can also lead to less innovation, losses in quality, and higher inflation.
Thus, US legislators have historically sought to limit the market power of large corporations.
Three major antitrust laws have been passed by Congress over the past century, all aimed at
prohibiting price-fixing, preventing monopolies, and driving free competition as the rule of trade.
But the discussion about concentration has traditionally centered on the number of
companies operating and competing in different segments, with less attention paid to the
situation at the individual product level. When there are fewer players producing goods and
services, does it follow that there are fewer goods and services to choose from—and
therefore less choice for consumers in terms of prices?
The researchers analyzed newly available data from MRI-Simmons, a provider of attitudinal
and behavioral US consumer insights, to reexamine and reassess trends in concentration in
US product markets between 1994 and 2019. Indeed, they see divergent patterns emerge
when it comes to companies and products. 12
In the area of household goods, for instance, corporate concentration has increased. Procter
& Gamble and Phoenix Brands, among other larger companies, have systematically acquired
the makers of brands such as Tide, Cheer, Ajax, and Fab in the detergents category.
And yet, at the level of individual product markets in detergents, as well as in personal
hygiene products, shampoos, and toothpastes, concentration has declined and competition
has increased, the researchers find. Over time, P&G’s and Phoenix’s conglomerated
companies have not only continued to manufacture existing products, but they’ve also
ramped up efforts to produce new brands.
Similar patterns can be seen in other markets including food and financial services,
according to the study. Companies such as Nestlé, Kraft Heinz, and Visa dominate at the
corporate level, but concentration has been dropping at the individual product level.
In total, the researchers looked at 337 consumer product markets using the
HerfindahlHirschman Index—a standard measure of the size of companies relative to the
industry they operate in—to assess concentration at the market and product levels over time.
It’s important, they note, that the study is limited to consumer markets and doesn’t look at
markets for labor or intermediate goods (components used to manufacture final products).
Industries with HHIs between 1,500 and 2,500 are considered moderately concentrated, with
anything above 2,500 being highly concentrated.
“When you look at the distribution of HHIs at the local product level in consumer goods,
concentration has fallen over time,” says Zhang. “The median HHI fell from 2,256 in 1994
to 1,945 in 2019, so there has actually been a substantial improvement in competition in
these individual product markets over time.”
The researchers hypothesize that this effect could be driven by economies of scale and
greater efficiencies in processes and operations as large companies consolidate their
presence and integrate expertise and know-how from the smaller firms they acquire.
Superior access to research and development and emerging technologies may also have a
role to play in streamlining production and manufacturing—a benefit that seems to be
making its way across conglomerates and their roster of owned brands and into the pockets of US consumers.
This has implications for US legislators concerned about rising concentration. To date, the
understanding of the full dynamics at play within the US antitrust context has been
incomplete, the researchers argue. “There is some subtlety required to understand the big 13
picture and to see things through the lens of consumers, who are enjoying greater choice and
more competitive product pricing from American manufacturers today than they were 20
years ago in certain markets,” says Zhang.
Why monopolies don’t always harm the economy? What is one thing Verizon, The Walt
Disney Company, and Southwest Airlines have in common? All conduct business in highly
concentrated industries, in which a handful of major players have wielded increasingly
concentrated power and market share over recent decades.
As you might recall from high school economics or a certain board game, monopolistic
markets can damage the broader economy. After all, if one entity in an industry wields
outsized market power, then you’re likely to see prices rise, workers get the shaft, and
consumer surplus begin to fall.
But has this actually happened in recent decades?
A new study published in the American Economic Journal: Microeconomics by Georgetown
professor Sharat Ganapat aimed to find out. The results, which have limitations, suggest that
the increasing concentration of industry in the U.S. over recent decades hasn’t been as
harmful as you might expect, and that monopolies and oligopolies might even have brought
some benefits to the national economy.
For those who can’t quite remember economics class, economists are often wary of
monopolies coming into existence. Unlike smaller firms in a competitive market,
monopolies can dictate prices by controlling the supply of the goods they provide. If the
monopoly is looking to maximize its own profits, as many economists presume, it has an
incentive to produce fewer goods at a higher price than a smaller firm in a competitive
market. The monopolist can also charge a higher price.
Oligopolies are similar to monopolies, but they feature a handful of firms dominating a
market rather than just one. Oligopolies and monopolies can produce similar problems,
though entities in oligopolies tend to hold less market power. To keep markets competitive,
many nations have established antitrust laws that prohibit large companies from, for example,
pricing out smaller companies in certain geographic regions.
Markets don’t always follow theory
To illuminate the effects of market concentration, Ganapati examined census, pricing, and
industry data from 1972 to 2012 in the U.S. The results showed that market concentration 14
was not correlated with price hikes. Instead, market concentration was correlated with
increased output — a significant finding, considering that economists would generally
expect to see reduced output in both oligopolies and monopolies.
What explains the findings? Ganapati suggests that “superstar” firms outperform their rivals
in productivity and innovation, enabling them to dominate their industries. In an interview
with the American Economic Association, he used the success of Walmart to illustrate his superstar hypothesis:
“Walmart is a great example of what’s going on. They spent billions of dollars in the ‘80s
and early ‘90s computerizing their entire infrastructure operations. It gave them an almost
insurmountable lead for 20 years in the big-box store industry, letting them kill off rivals
such as Sears and JCPenney.”
But it’s not all good news. Although the data suggest that many large firms earned their top
rank through innovation and productivity improvements, they also employed fewer workers.
These workers were typically paid better than average, but their earnings didn’t reflect the growth of their companies.
“A 10 percent increase in the market share of the largest 4 firms is correlated with a 1 percent
decrease in the labor’s share of revenue,” Ganapati noted.
Beyond labor concerns, there are industries where contracting market power is
understandably concerning to economists. For example, market concentration in health care
has led to price increases. Another concern: Even in industries where market concentration
didn’t lead to hikes, the savings from productivity haven’t always been passed on to customers. A role for regulation
None of these findings suggest that the old concerns over monopolies and oligarchies are
obsolete and that we should welcome market concentration. Rather, the research suggests
that monopolies and oligopolies don’t always cause the damage they’re capable of causing. Ganapati concludes:
“…taking the superstar firm hypothesis seriously does not imply that antitrust authorities
should be powerless. Dominant firms may entrench themselves and use their newly
dominant market positions to engage in anticompetitive behavior. Natural monopolies can
give way to anticompetitive monopolies that act to raise prices and squelch innovation. 15
Monopolies may be taking a bigger share of productivity innovations for themselves and
only passing a small share of the gains to the consumer. Effective regulators may want to
force monopolies to share a greater share of their surplus with the public.”
As More People Worry About Monopolies, an Economist Explains What Antitrust Can and
Can’t Do According to a growing chorus of critics, America has a “monopoly problem.”
Nobel Prize-winning economist Joseph Stiglitz has said as much, as has Democratic U.S.
Senator Elizabeth Warren. President Trump has called Amazon a “no-tax monopoly”. In
response, pundits, politicians, and think tanks are renewing their interest in antitrust policy.
But is America really dominated by monopolies? And is antitrust the answer? Carl Shapiro
is a professor at the Haas School of Business at the University of California at Berkeley, an
expert in antitrust, and served at the Department of Justice during the Obama and Clinton
administrations. He also served on the Council of Economic Advisors under President Obama.
In a new paper, he reviews the evidence of growing concentration in the U.S. economy,
discusses whether that constitutes a decline in competition, and outlines the role he sees for
antitrust going forward. I spoke to Shapiro by phone and email. What follows is excerpts
from our conversation, edited for length and clarity.
On the timing of his paper, “Antitrust in a Time of Populism”:
Shapiro: Certainly, Trump’s election is part of it. But it’s more than that. During the 2016
election, both parties were saying that the system is rigged and the little guy is not getting a
fair deal. That feeling was partly directed at government, but it was also directed at business.
Quite a few Americans seem to believe that powerful large businesses control the system
and that regular people and small businesses are not getting a fair shake.
More specifically, quite a few journalists, policy analysts, and politicians have been talking
about what they see as the decline of competition in America over the past 30 or 40 years. I
detail this in my paper. That assertion directs attention to the question of whether antitrust policy has somehow failed us.
On increasing industry concentration, and whether that suggests a decline in competition:
We’re not really interested in concentration for his own sake. We use market concentration
as a proxy or a signal about whether a market is competitive. I spend a lot of time in the
paper looking at the data and asking whether U.S. markets have in fact become significantly
more concentrated over the past 20 or 30 years. There are some significant measurement 16
issues. Much of what’s been said about changes in concentration does not have a sound
basis when one looks more closely at the data. I see some increase in concentration, but not
to levels that indicate the presence of many monopolies or even tight-knit oligopolies.
But the bigger question is what do we make of the increases in concentration that we observe.
There are two very different interpretations. One interpretation is that when a market gets
more concentrated, that means it’s less competitive, so we have a problem. That is not a new
view; it was a fairly popular view in the ‘50s and ‘60s. And many people seem to be taking
that view without even realizing that there is a perfectly coherent alternative view. The
alternative view attributes increases in concentration to growing economies of scale, which
means that the larger companies tend to be more efficient than the smaller ones. In that
situation, over time the larger companies will tend to edge out their smaller rivals. That is
what happens naturally when firms compete and there are substantial scale economies.
When you have scale economies and some firms are more efficient than others those firms
are going to get bigger and take over and you could very well see increasing concentration.
Plus, it’s well understood by industrial organization economists that many markets are
naturally rather concentrated. So that’s the alternative explanation: at least some of the
increasing concentration we are seeing reflects the competitive process at work.
On the proper role of antitrust, and the principles it should follow:
There are well established principles of antirust. It’s bipartisan. It’s long-standing. The
antitrust enforcement agencies, private lawyers, antitrust economics, and the courts all
follow these principles. Everybody who works in this area has converged on these principles
over the past 50 years, and we have even exported these principles around the world. What
is striking is that these principles seem to be on the table again. People are questioning these
without really, in my view, offering a very coherent basis for doing so or a workable alternative.
So, what are the principles? First, that the goal of antitrust is to make sure that consumers
benefit from the forces of competition. What that means is several things. First, we have to
make sure that mergers don’t eliminate competition. Second, we cannot let firms form
cartels to collude rather than compete. Third, we cannot let big, powerful firms stiff-arm or
exclude competitors that would threaten them. The common theme is that antitrust prevents
firms from doing things, either alone or in groups, that disrupts the competitive process and
harms consumers. That is the core principle, that’s what we’re trying to do with antitrust. 17
Now let’s set that against two things we’re not trying to do. First, antitrust does not break up
or regulate a firm simply because it has grown to be large or powerful. Other laws do that.
If we conclude that an industry is a natural monopoly, so competition in that industry just
cannot work, we need to resort to price or rate-of-return regulation; we do this for utilities.
But antitrust does not punish firms for being successful even if they become dominant.
Sometimes one firm is very successful and obtains a dominant position in the market. So
long as that firm does not exclude its competitors or engage in “monopolization,” antitrust
is going to accept that outcome as part of the competitive process. This does back to the
Sherman Act from 1890, which outlaws “monopolization” but not “monopoly.” Second,
antitrust does not protect small companies from competition by larger ones. Antitrust is
about unleashing the forces of competition, not throttling them. For over 100 years there
have been political tendencies to protect small companies. If we conclude that is an
important social goal, it should be achieved through other means such as the tax system or
via regulations, not through antitrust.
I am very much struck by how much the discussion today mirrors the discussion of 50 years
ago and also the discussion of 100 years ago. It’s almost as though there are 50-year cycles
by which these populist sentiments arise and look to antitrust to solve certain problems that
are not fundamentally problems having to do with competition.
On the problems antitrust is not suited for:
The most important one is the excessive political power of large companies — to pick their
regulators and to influence Congress in terms of the rules of the road, from environmental
policies to labor policies to tax policies. I happen to think that’s a huge problem, and indeed
is part of a broader problem of generalized corruption by which money has such enormous
influence in politics. I am hardly alone in having this concern, but antitrust cannot solve
that problem. The solution must come from campaign finance reform, greater transparency,
a broader legal definition of corruption, or other policies along those lines.
The second big problem people are asking antitrust to solve is inequality of income and
wealth. Effective antitrust naturally helps somewhat with inequality because it protects
consumers. But antitrust cannot be a central way of addressing inequality. That’s got to be
tax policy and other major policies such as health care and education.
On the case for more utility-like regulation or some other dramatic regulatory scheme to
limit the autonomy of major tech companies: 18