“Monopoly is the condition of every successful business” - Peter Thiel
John D. Rockefeller. Richest American to have ever lived. The source of his wealth was Standard Oil, which, at its peak, controlled 90% of oil refining capabilities in the US. In 1911, the Supreme Court of the United States ruled it an illegal monopoly and ordered it to be broken up into 34 (!) different companies, successors of which still operate today. But why would the government break up a company, seemingly punishing success and superior business acumen? To understand its decision, one must understand monopolies and the potential harm they can do.
A monopoly, under pure economic theory, is a firm that is the sole supplier of a good in a market. It does not have any competitors and is thus able to set the price for the good, instead of obeying the market. This is virtually unheard of in the actual world, and thus monopolies are vaguely defined as firms with a very high market share, leading it to have monopoly powers.
On of those powers is predatory pricing, in which a company temporarily decreases the prices it charges consumers unsustainably low. Doing so leads to losses for itself, but steals market share from competitors, as consumers prefer the cheaper product. The competitor, if he were to follow suit, would equally likely be selling at a loss. The monopoly, able to fund this method longer, can thus almost ensure the bankruptcy of the competition, either by erasing his market share or draining his funds in a price war.
To be able to pull this off, it needs the resources to not bankrupt itself in the process. If the competitor is meaningfully smaller, the monopoly could just have enough money in the bank to sustain a period of losses. But often the monopoly would fund this price war in one market with monopoly profits from another market, where its monopoly status allowed it to price products much higher. In this way, a monopoly status in one market can lead to a monopoly status in another, creating a vicious cycle.
This method was one of the allegations against Standard Oil, argued to drive regional competitors out of business and then increase the price much higher than before. This is perhaps the most typical conduct of monopolies that comes to mind for most people, the archetypical abuse of monopoly power. But the original idea of antitrust laws was much broader.
Passed in 1890, the Sherman Antitrust Act sought to protect competitive markets and the positive attributes they inherit. The goals of the act were not merely economic, but democratic as well: to preserve small business and workers rights, ensure access to marketplaces, prevent political corruption, and ensure freedom from fear of monopolists. Stated this way, one can decipher the potential harms a monopoly can spell for its market.
By being the only supplier of a certain good in a certain market, it will also be the only employer for a certain type of worker. This reduced competition for workers allows it a superior bargaining power, meaning it can pay its workers less and treat them worse, since they have less options to leave the company.
Using its size and associated power, it can influence companies higher and lower in the supply chain, restricting access to markets for competitors. To illustrate, take Standard Oil again. It used its power over railroad companies shipping the oil to drastically decrease the rates it had to pay, while increasing those rates for its competitors. The railroad companies were unable to deny this demand since Standard Oil was their main customer. This led to even more monopoly power for Standard Oil, since the cost for moving its good was artificially lower than for competition and it ensured superior access to markets for itself, while worsening access for competition.
The danger of political corruption for monopolies stems from its superior profits. Those it can use to make donations, to lobby, to buy the political capital needed to further its goals, its dominance, and its market power. Lots of smaller firms will compete in the political domain similar to the marketplace, while a monopoly can exploit its outsized power.
The freedom of fear from monopolists is an especially interesting goal. Given the above possibilities, someone in direct competition with a monopoly will quickly realize the impossible fight he is in. If such a situation were to materialize, this business would not have a lot of options: less bargaining power, less political power, less pricing power. The most reasonable way to win a fight with the monopoly would be to sell the business to it, feeding the ever-hungry monster. The goal to be free of fear, necessitates all other to be accomplished, it is only apparent in a truly competitive market.
While this was the original thinking on market structures during the early 20th century, the idea of a monopoly and the governments task to reign it in changed drastically in the later half. Led by Robert Borke, Yale professor, judge and author of “The Antitrust Paradox”, he argued that the extreme concentration of private power itself should not be the focus of Antitrust Regulation. Instead, it should be focused on promoting welfare, as measured by prices. Put simply, he argued monopolies in themselves are not bad, they can even be a force of good, if they reduce the prices for consumers. Period.
This ideology quickly replaced the previous one of fighting monopolies for its own sake and led to a dramatic rise in mergers and acquisitions concentrating power among big corporations. Arguably, it led to the corporate America of today, in which huge swaths of industries are controlled by few companies. But focusing only on the price for a product, establishing this as the only potential harm of a monopoly ignores many attributes equally important.
Take innovation. A true monopoly is the only supplier of a good, it can afford not to constantly innovate, since no competition is innovating either. The good the company provides will by default be state of the art, so there is less need to constantly add value to the existing product.
Even worse, it can actively stifle innovation. A small upstart company might have a superior product, but that company will live in fear of the monopoly. As previously discussed, if not bankrupted by the monopoly, the startup would be inclined to sell. The monopoly then has the power to evolve its current product, or simply shut down the new one, skipping past the need to modernize all production.
Or consider quality. While a company with strong competition will be sure to compete on quality, for brand building and customer loyalty, a monopoly can ignore quality to a certain level. This product offers less value to the consumer, which, while technically is not an increase in price, has the same effect as one. There is little difference between a monopoly doubling the price of shoes or dropping the quality where a consumer needs to buy twice as many.
The ability to pay workers less due to its market power also hurts consumers. That is because those same workers are also consumers outside of their work function. A monopoly can pay these workers less, enriching its owners. The workers have less purchasing power, the owners much more. Effectively a shift of consumer welfare, from the many to the few, from the workers to the owners. While technically the consumer welfare would be the same, the increased inequality in the economy makes this situation much worse than one with more competition and higher wages.
There are many ways a monopoly can hurt consumers beyond simply raising the price. Fortunately, the current administration under President Biden and Lina Khan seem to fighting the increasing concentration in many industries, reversing decades of narrow thinking. But what products could have been invented, what industries transformed and how many lives changed had the US government not decided that monopolies are only bad if they raise prices?