Chapter Overview: 13

Monopolies – Coercive and Non-Coercive

The original, and continuing, political justification of anti-monopoly political laws is that monopolies in commerce are harmful to consumers. However, the federal state claims a monopoly of its own — a monopoly of coercion. Business monopolies that do not use coercion cannot harm anyone, but the state’s coercive operations harm everyone.

Can Johnson & Johnson force an individual to buy its products? Can the government force an individual to pay taxes or fight its wars?

Can Johnson & Johnson force an individual to buy its products? Can the government force an individual to pay taxes or fight its wars?

Even when a business is a monopoly, it cannot hurt consumers, because no business  monopoly can compel anyone to buy its goods or services.

A commercial monopoly is vulnerable to the ability of consumers to reduce their purchases if prices are unacceptably high and to substitute alternative goods and services.

High profits of a monopoly would attract competitors seeking to offer the product or service at a lower, yet still profitable price. Therefore, there can be no sustainable monopoly in a free market where no one can coerce others into buying.

Let’s contrast a business monopoly to the way the state operates. The state

  • demands the right to be the sole source of supply for many of its services;
  • does not offer the services on a voluntary basis, but imposes the services on those unwilling to have such services;
  • dictates what people must pay as taxes for state services;
  • asserts the power to wage war and to raise armies by placing its citizens in military servitude under penalty of imprisonment or death for refusing to participate;
  • demands unquestioned obedience to military orders, no matter how senseless.
The U.S. military has been an all-volunteer force since the end of the Vietnam War but male U.S. citizens and non-citizens are still required to register for the military draft within 30 days of their 18th birthday.

Male U.S. citizens and resident non-citizens are required to register for the military draft within 30 days of their 18th birthday. Failure to register is punishable by up to five years imprisonment or a fine of up to $250,000, or both.

Andrew Galambos observed that it is a supreme irony of political democracy that politicians wielding the coercive powers of the state have convinced most of the American people that state coercion was their only protection against exploitation by non-coercive private enterprise.

A Monopoly in Water

pure drinking waterWater is a resource that is necessary to sustain life. Galambos posited that even a monopoly source of water could not charge any price it pleased. Consumers can reduce their consumption to the minimum needed for drinking and bathing. Bottled water for drinking could be available in local stores at a lower cost than the local monopoly’s charges. People could move out of the area of monopoly or refrain from moving there due to an excessive price for water. The reduction in consumption caused by high prices would cause a reduction in revenues and profits to the monopoly supplier of water. Furthermore, high profits in a monopoly product provide a powerful incentive for the entry of competitors into a market, even one where the cost of building an infrastructure of supply would, ordinarily, be a barrier to the entry of competitors into the market.

If a monopoly of water supply, a necessity of life, could not deprive consumers’ access to water, it follows that no other non-coercive business monopoly could harm consumers.

John D. Rockefeller – Robber Baron or Benefactor of Humanity?

John D. Rockefeller (1839-1937) American businessman and philanthropist.

John D. Rockefeller (1839-1937) American businessman and philanthropist.

Ida Tarbell, in what has been regarded as the definitive Rockefeller biography, stated that Rockefeller was one of the most reviled businessmen in American history, partly because he was so ruthless and partly because he was so successful.

While Rockefeller was indeed a shrewd and aggressive  businessperson, he also made enormous contributions to society.

Light to Mankind 

Rockefeller played the most influential role in the creation of the petroleum industry, an industry that has benefited everyone by bringing to mankind inexpensive kerosene for illumination in the second half of the nineteenth century, and a fuel that provides power to industry, and mobility undreamed of until the dawn of the 20th century. Even the poorest of individuals in poor countries may benefit from motor vehicle transport for travel and transport of goods. From the inception of Standard Oil’s participation in the petroleum industry the retail price of kerosene fell by 90%, from 60 cents a gallon in the mid-1860s to less than six cents a gallon in the 1890s. In 1885 Rockefeller wrote one of his partners, “Let the good work go on. We must ever remember that we are refining oil for the poor man and he must have it cheap and good.” 

The sperm whale was threatened with extinction in the 1800's, but kerosene oil for lamps cut the market for sperm whale oil.

Saving whales from extinction 

Thanks in large part to John D. Rockefeller’s development of the market for kerosene as an illuminant, the sperm whale survived the era of hunting and killing sperm whales to use their oil for illumination.

Avoiding pollution of streams and rivers 

The refining process typically used 60% of the crude oil to make kerosene. While many of Rockefeller’s competitors discarded the other 40% of the oil, causing pollution by dumping into streams and rivers, Rockefeller and his company sold the remaining crude oil to refiners specializing in other non-kerosene products such as paraffin wax and gasoline.

Labor Relations

In the last three decades of the 19th century there were some violent conflicts between labor unions and management, some resulting in deaths on both sides. Rockefeller’s Standard Oil had a minimum of labor unrest. Paying higher than market wages was Rockefeller’s policy: he believed it helped slash costs in the long run.

Philanthropy

From his very first paycheck Rockefeller tithed ten percent of his earnings to his church. As Rockefeller’s wealth grew, so did his giving, primarily to educational and public health causes, but also for basic science and the arts. In total he gave $550 million, the majority of his personal fortune, to a broad range of philanthropic causes.

In 1884, Rockefeller provided major funding for a college in Atlanta for African-American women, which became Spelman College (named for Rockefeller's in-laws who were ardent abolitionists before the Civil War). This photograph shows freshman students in the dorm.

In 1884, Rockefeller provided major funding for a college in Atlanta for African-American women, which became Spelman College (named after the family of Rockefeller’s wife who were ardent abolitionists before the Civil War). This photograph shows freshman students at Spelman conversing in a dormitory room.

Aluminum Company of America (Alcoa)

The Alcoa story began in 1888 with a handful of individuals who raised $20,000 and started producing aluminum in a corrugated-iron shed with a dirt floor in Pittsburgh. At that time, aluminum was selling at $8.00 a pound and output averaged less than ten pounds a day.

The commercial aircraft industry developed in the 1930s at a time when Alcoa was a true monopoly and the sole source of supply of aluminum in America. America was a world leader in developing commercial aircraft. This image is of the Douglas DC-3, a fixed-wing propeller-driven airliner. Its speed and range revolutionized air transport in the 1930s and 1940s. Its lasting impact on the airline industry and World War II makes it one of the most significant transport aircraft ever made.

The Douglas DC-3, a fixed-wing propeller-driven airliner. Thanks to comparatively lightweight aluminum, the speed and range of the DC-3 revolutionized air transport in 1930’s – 1940s. Its lasting impact on the airline industry and World War II makes it one of the most significant transport aircraft ever made.

Alcoa was so efficient that by the late 1930s the company had cut the price of aluminum by 98%, to 20 cents a pound, and had  raised production to over 300,000,000 pounds a year. Alcoa had been a true monopoly, the sole source of supply, in the American aluminum industry for the 50+ years following its inception. Aluminum was, and remains, an ideal metal  for construction of large aircraft due to its combination of strength and light weight. But for Alcoa aluminum there might have been no commercial aircraft industry; that industry came into existence and flourished thanks to aluminum supplied by Alcoa. Due in large part to aluminum from Alcoa,America’s aircraft manufacturers became world leaders in  developing commercial aircraft.

In 1937, the Antitrust Division of the Department of Justice (DOJ) sued Alcoa for being a monopoly in the aluminum business. In the trial Alcoa lost on only one of the one hundred forty separate counts in the DOJ prosecution for monopolization of the market for virgin aluminum ingots.

Despite this, with World War II looming, Alcoa initiated a $200,000,000 expansion program to meet an expected demand for military procurement of aluminum. Alcoa’s aluminum became an indispensable product for the U.S military.

As the war neared a victorious conclusion for the U.S., the federal antitrust prosecutors continued with their case against Alcoa. In 1945, the federal Appellate Court, in a decision written by the eminent Judge Learned Hand, declared that Alcoa was an illegal monopoly. In his opinion, Judge Hand stated:

[Alcoa] insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections, and the elite of personnel. Only in case we interpret exclusion as limited to maneuvers not honestly industrial, but actuated solely by a desire to prevent competition, can such a course, indefatigably pursued be deemed not exclusionary.

In his book Ten Thousand Commandments: A Story of the Antitrust Laws, journalist Harold Fleming concludes: “In effect the Court said that Alcoa excluded competitors by being so efficient. This was a new view of the meaning of the Sherman Antitrust Act. Up to this opinion if you excluded competitors you did so by . . . maneuvers not honestly industrial. Alcoa beat its competitors by keeping ahead of them. This was a new kind of crime. This was perhaps also the legal basis on which the Department of Justice [asserted] that ‘efficiency is no defense.’”

Alcoa was a monopoly, the only producer of primary aluminum, for over fifty years. However, it was not a coercive monopoly. It did not force anyone to buy its aluminum. It was a monopoly because no other company wanted to try to compete with Alcoa due to its combination of high production, high quality, and low prices. Alcoa was prosecuted by the state because it was considered to be too good a competitor.

President Obama visiting Alcoa’s Davenport, Iowa, Plant. His visit was intended to highlight the role of manufacturing in U.S. job creation and exports. It is ironic that several decades after the government's attack on Alcoa, a U.S. president travels to the plant to highlight the company's contribution to the economy.

In 2011 President Obama visited Alcoa’s Davenport, Iowa, Plant to highlight the role of manufacturing in U.S. job creation and exports. It is ironic that more than seven decades after the government’s attack on Alcoa, a U.S. president highlights the company’s contribution to the economy.

DuPont Cellophane

1936 advertisement for cellophane. The ability to keep food fresh in plastic cellophane revolutionized the food industry.

1936 advertisement. The ability to keep food fresh in moisture-proof cellophane revolutionized the food industry.

In 1924, William Hale Charch (1898-1958) invented moisture-proof cellophane while working at DuPont, a leading American chemical company. After spending millions of dollars on research and development, DuPont put cellophane on the market in 1926 at $2.65 a pound. In the next 20 years the company cut the price 20 times, down to 45 cents a pound.

In 1947, the DOJ brought suit against DuPont, charging that DuPont’s position in the cellophane business constituted a monopoly. After a lengthy and costly trial, judgment was entered for DuPont on all issues. The U.S. Supreme court affirmed in a 4-3 decision.

This case reveals the folly of government intervention in business for several reasons.

If DuPont invented waterproof cellophane, it should come as no surprise that DuPont was the market leader in the production of the product. Yet the company was penalized for its innovation and business success with an antitrust lawsuit.

Second, the supposed justification for government intervention in business competition is to protect the consumer. However, once the DOJ initiated its lawsuit against DuPont, the company prudently chose to cancel expansion plans, thus limiting the supply of cellophane for consumers. As a matter of self defense, DuPont also sought out potential competitors by offering to finance their entry into the cellophane business. Government intervention in DuPont’s production of cellophane did not protect consumers, but rather created a scarcity.

Finally, with the ultimate outcome in favor of DuPont, state action against the company served only to waste time and money on both sides of the lawsuit, limiting the supply of cellophane for customers in the process.

IBM

NACA researchers (later NASA) using an IBM type 704 electronic data processing machine in 1957.

NACA researchers (later NASA) using an IBM type 704 electronic data processing machine in 1957.

International Business Machines (IBM) was the most spectacularly successful American company of the period ranging from 1914 to the early 1970s.

In the 1960s and early 1970s, although IBM was dominant in computers, it had several large companies as competitors.

In 1969 the federal state sued IBM in federal court for allegedly monopolizing or attempting to monopolize the market for business computers.

IBM contested the prosecution. The case became a war of attrition, lasting for thirteen years. The case was litigated by legions of lawyers all around the country. IBM and the state incurred tens of millions of dollars of legal fees. The company also had to defend itself from private suits by competitors based on the same facts as the state’s prosecution.

During thirteen years of litigation of the IBM case (1969-1982) IBM’s dominance was undermined by developments in computer technology, namely production of relatively inexpensive microprocessors by Intel Corporation and growing use of personal computers by business.

In 1982, the Justice Department finally conceded that its prosecution of IBM was without merit and ended the litigation by abandoning its case. However, the Department of Justice continued to harass IBM by repeatedly questioning its business decisions and operations during much of the 1980s.

AT&T

AT&TAT&T is an example often cited as to why it makes sense for the government to permit monopolies in various utilities such as water, electric power, natural gas and, in the case of AT&T, telephone communications. Because developing the infrastructure for utilities requires enormous costs, utility companies often argue that government support in the form of a legally sanctioned monopoly is necessary. In 1907, Theodore Vail of AT&T approached the federal state for aid in excluding competitors, asking to be allowed to function as a legally sanctioned monopoly subject to regulation of its charges to consumers. The U.S. government accepted this request. It granted AT&T monopoly status in 1913 and then, in 1974, sued to break up the monopoly. AT&T finally agreed to its dismemberment effective January 1, 1984.

In the full text of this chapter, we posit that even when a company must develop extensive infrastructure, government support is not necessary. The mobile communications industry, as just one example, was developed by a myriad of independent mobile companies (e.g., Sprint, Verizon, and T-Mobile) that have succeeded without the backing of the state.

Microsoft

Bill Gates (1955 - present), founder of Microsoft

Bill Gates (born in 1955) co-founder of Microsoft at age 20.

A 1998 DOJ federal antitrust suit against Microsoft illustrates the risk that great success in business will result in great troubles with the state.  According to the DOJ, the offense of Microsoft was business practices by which the firm marketed its software for personal computers. Microsoft contested the charges, lost in the trial court, obtained an appellate court reversal of the trial court judgment, then settled with the DOJ to buy its peace from further litigation.

3M

In 2012 the Department of Justice objected to a proposal of 3M Corporation (3M) to buy the labels business of Avery Dennison Corporation on grounds it would enable 3M to achieve a dominant position in adhesive products, such as the 3M product known as Post-Its or sticky notes.

post itAfter expiration of the 3M patent on the Post-It innovation, the law allowed anyone to make Post-It type note papers. Large office product chain retailers with thousands of stores around America, such as Staples and Office Depot, also offer their own version of Post-Its. These office supply stores had achieved 15% of the market for Post-It type note papers at the time the federal antitrust lawyers objected to the 3M-Avery transaction. The office supply stores’ house brands of Post-Its sell for a significantly lower price than the 3M brand. The cost of sticky notes is trivial, amounting to around $1 per 100.

Because Post-Its are extremely inexpensive there appears to be no benefit to consumers from the state interfering with the market for this product.

Avery and 3M called off their transaction, presumably because in their determination the cost of defending a federal antitrust prosecution was not worth the potential gain from the proposed transaction.

Conclusion

Andrew Galambos and Jay Snelson asserted that the antitrust laws allowed the state to charge any business with illegal and even criminal activities for almost any activity in the normal course of business. Therefore, these laws are an extremely harmful expansion of the power of the state.

In the preceding chapter we gave close examination to the wars of the United States of America. The picture presented is ugly. In this chapter close examination reveals a similarly ugly picture of the U.S. laws on competition, the antitrust laws.

Antitrust and competition laws do not protect the consumer. They attack producers who benefit consumers. They penalize productivity and efficiency, thereby harming consumers. Rather than promoting competition, they are anti-competitive; they are used by some businesses to seek state protection against competition from other businesses. The analysis in the full text of this chapter shows that the antitrust laws in operation are every bit as harmful to producers and consumers as Galambos and Snelson claimed.

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