Monopoly and Competition Notes

Monopoly and Competition

Introduction

• Producers aim to avoid intense competition by:
  • Differentiating products.
  • Solidifying consumer loyalty.
  • Offering special inducements (e.g., easy credit).
  • Seeking monopolies in specific times and places.
• Ironically, these efforts often increase competition.
• Advertising by one seller prompts others to do the same.
• Extending credit by one merchant leads to similar actions by others.
• Competition and attempts to monopolize trade are two sides of the same coin in a relatively free market.

Government Regulation of Monopoly and Competition

• Regulation: Government controls set by legislation or agencies to restrain business activities.
• Deregulation: Removing government controls previously restraining businesses.
• Since the 1880s, the U.S. Federal Government and state governments have adopted regulations controlling business and trade.
  • These regulations often addressed monopoly and competition, including antitrust acts, fair trade acts, and regulations of interstate commerce.
• From the late 1970s through the 1980s, there was a move toward deregulation, followed by a revival of regulatory control.
• Reformers held ambiguous attitudes toward competition:
  • In the 1890s and early 20th century, they generally favored competition.
  • In the 1930s, they opposed "cutthroat" competition.
  • There was confusion about the definition of competition and how to promote it.
• Government, being monopolistic by nature, uses force within its jurisdiction.
  • Extending its power tends to make it more monopolistic.
• Competition is elemental to the market.
  • Buyers compete with one another, and sellers compete with one another, even when they try to avoid it.
• Government intervention may inhibit rather than promote competition.

The Sherman Antitrust Act

• The Sherman Antitrust Act of 1890 was the first major anti-monopoly act passed by the U.S. Government.
• The act's language was vague and ambiguous.
• Henry Steele Commager noted the act's lack of definition for terms like "trust," "monopoly," and "restraint."
• It was unclear whether the act applied to combinations of labor as well as capital.
• The failure to define "restraint" is critical.
  • Ordinarily, the word connotes the use of force or coercion to prevent some actions, and in this case would appear to refer to the use of coercion or force to prevent interstate trade or trade with foreign nations.
• "Combination" is a vague word that could refer to a corporation, a union, or any association.
• The act states:
  • "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a misdemeanor…."
• Any attempt to compete in commerce could be construed as an "attempt to monopolize."
• Lowering prices, offering credit, delivering goods, or providing carts could be seen as attempting to monopolize trade.
• Violators could be fined up to 5,000 or imprisoned for up to one year, or both.
• The law misunderstood both monopoly and competition.
• The courts never held that it prohibited competition.
• The Sherman Antitrust Act was not vigorously applied until a decade and a half later, and then only very selectively and arbitrarily.
• The act may have inhibited the formation of holding companies and various combinations, but it did not prevent them completely.

Rate Fixing the Railroads

• Regulation of rail rates began with the Interstate Commerce Commission in 1887.
• The Interstate Commerce Act initially lacked significant rate fixing authority.
• Setting prices is a major way sellers compete.
• The Elkins Act of 1903 prohibited rebates by railroads.
  • Rebating is the practice of returning a portion of what has been paid for a good or service to the buyer.
• Rebates were often competitive reductions given to large shippers.
• The Interstate Commerce Act required the publication of rates.
• The Elkins Act effectively removed one way railroads could compete.
• In 1906, the Hepburn Act empowered the Interstate Commerce Commission to set "just and reasonable" maximum rail rates.
• Maximum rates tended to become minimum rates.
• The Mann-Elkins Act of 1910 made it more difficult for railroads to alter their rates.
• Railroads were increasingly focused on surviving rather than competing.
• Railroads needed a general increase in rates due to rising prices and labor costs.
• The ICC was slow to allow rate adjustments.
• John F. Stover described the situation in The Life and Decline of the American Railroad.
  • Railroads filed new freight rate schedules with increases of from 8 to 20 percent in 1910.
  • New federal regulation had transferred the burden of proof to the railroads in such rate cases, and the ICC suspended the increase while conducting an investigation…
  • After long hearings the ICC unanimously refused the rate increase request early in 1911.
  • During 1911 and 1912…general prices continued to inch upward, and railroad labor made new demands for higher pay.
  • A second request made in 1913 to the ICC for increased freight schedules eventually resulted in a modest 5 percent hike in rates.
  • The ICC again was slow in its deliberations, and when the moderate increase was authorized it was clearly inadequate.
• Rate regulation was used to impoverish the railroads and reduce competition.

Flood of Regulatory Legislation

• New antitrust fervor led to the passage of two new acts in 1914:
  • The Federal Trade Commission Act in September.
    • Created a Federal Trade Commission to oversee corporations and business conduct.
    • Declared "unfair methods of competition in commerce are hereby declared unlawful."
    • The act did not define what methods of competition were unfair.
    • The Commission was authorized to issue cease and desist orders.
    • The commission's activities did not notably retard the growth of large businesses.
    • The main tendency of the act was to reduce competition, since competitive acts could be declared unfair.
  • The Clayton Antitrust Act in October.
    • Best known for exempting labor organizations from antitrust laws.
    • Declared that labor is not a commodity.
    • The thrust of this provision was to reduce competition among workers for jobs, whether it succeeded or not.
    • Made it "unlawful for any person engaged in commerce" to cut prices if the effect of such discounts or rebates "may be to substantially lessen competition or tend to create a monopoly in any line of commerce…."
    • The act appears to be in the direction of restraining competition.
    • Congress may have had in mind the kind of situation in which a company drives out competitors by cutting prices. Even so, the reduction of prices is a time honored way of competing; it is a way of selling slow moving goods; it is a way of increasing one's customers.
    • Congress was caught once again in the illogic of trying to prevent what does not so clearly exist, i.e., private monopolies, and doing so by hampering competition.
• The (Esch-Cummins) Transportation Act was probably the most thorough regulatory act ever passed.
  • Authorized the ICC to set both minimum and maximum rates, thus virtually removing that means of competition from them.
  • Rates were supposed to be fixed so as to assure a "fair" return upon investment if the railroad were efficiently run.
  • Initally, Congress declared that a fair return in most instances would be 5.5% annually of the aggregate value of railway properties.
• Any railroad that earned more than 6% on the aggregate value of its properties in a given year was to have one-half of the excess placed in a reserve fund for its own future use and the other one-half to be turned over to the Commission to place in a general contingency fund to aid ailing railroads.
  • The more successful railroads were to subsidize the less successful ones.
• the rules under which the railroads operated were so restrictive that roads could hardly compete in this way.
  • In order to build or expand a railroad, the managers had to have a certificate of convenience and necessity from the ICC.
  • Nor would it be possible for railroads to do any long term borrowing for expansion or improvements without approval of the Commission.
  • No more could railroads compete with one another for traffic interchanged with other rail lines.
  • The ICC was now authorized to decide what routes interchanged traffic should go on.
  • Even if a railroad owned well located terminal facilities, or built them, it was not at all certain it would be able to use them to gain an advantage over competitors.
  • The law provided that if the Commission should find that it would be in the public interest it shall have the power to require the joint or common use of terminals, including mainline trace or tracks for a reasonable distance outside of these terminals…."
• The act abandoned any concern with monopolies and focused virtually the whole attention on restricting competition.
• In the early 1930s, under the New Deal, the government abandoned even the facade of concern with monopoly to focus virtually its whole attention on reducing competition.
  • The crowning piece of legislation was the National Industrial Recovery Act passed in 1933.
    • This act authorized industries to develop their own codes.
    • These codes were supposed to have the force of law within each covered industry.
    • The declared purpose of the act was to provide:\
      • for the general welfare by promoting the organization of industry for the purpose of cooperative action among trade groups, to induce and maintain united action of labor and management under adequate governmental sanctions and supervision, to eliminate unfair