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American Monopolies

American Monopolies. Economic Definition. Sole supplier of a product w/no substitutes Only Nike shoes, McDonalds food, Saddlebred clothes, Dell computers, Arrowhead bottled water, etc. Company has more market power than anyone else Can raise prices w/o losing $$$ to rivals

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American Monopolies

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  1. American Monopolies

  2. Economic Definition • Sole supplier of a product w/no substitutes • Only Nike shoes, McDonalds food, Saddlebred clothes, Dell computers, Arrowhead bottled water, etc. • Company has more market power than anyone else • Can raise prices w/o losing $$$ to rivals • Arrowhead is the only supplier of bottled water  they can charge higher prices

  3. Barriers to Entry (BTE) • BTE – restrictions of entry by new firms into an market/industry (1) Legal restrictions • Making entry illegal via patents • 1 supplier of hot dogs in a stadium • 1 company picking up garbage • U.S. Postal Service

  4. Barriers to Entry (BTE) (2) Economies of scale – business expands, i.e. makes more $$$, as costs go down • 1 firm supplies market @ a lower avg. cost than 2+ firms (natural monopoly) • Electrical companies (HSV Utilities) • Cable companies (Comcast) • Rural areas • 1 grocery store • 1 theater • 1 restaurant

  5. Barriers to Entry (BTE) (3) Control of essential resources • Alcoa was only supplier of bauxite • Important raw material for aluminum • China is world’s only producer of pandas • De Beers family has dominated the diamond trade since 1930s

  6. Collusion • Agreement b/w 2+ people/companies to limit market competition by deceiving others • An attempt to gain unfair advantage • Divide the market • Set artificial prices • Limit production

  7. Microsoft (MS)

  8. Basics • 1975 – Founded by Bill Gates & Paul Allen • 1980 – Co. introduces its first OS, Xenix • 1990 – FTC begins decade-long fight w/MS over collusion

  9. Microsoft Business Practices • 1988-1994 – MS received royalties from computer companies selling computers w/microprocessors • Due to a per processing license, it received $$$ regardless if computer had MS software or not • 1995 – Windows 95 released • Included Internet Explorer (IE) web browsing & MS Office

  10. United States v. Microsoft (2000) • U.S. Dept. of Justice & 20 states filed civil actions against MS for violating the Sherman Act • MS alleged crimes: • Abused monopoly power on Intel-based computer systems in its sales • Bundled IE w/its Windows operating system

  11. United States v. Microsoft (2000) • Original ruling • MS violated Sections 1 & 2 of Sherman Act • MS is to be divided into 2 companies • 1 to produce operating systems • 1 to produce software components • MS appealed the ruling • Settlement (2001) • MS shares software w/3rd-party companies • MS still allowed to bundle IE w/Windows

  12. U.S. Standard Oil

  13. Basics • 1870 – Est. as a corporation in Cleveland, OH • Led by John D. Rockefeller • Eliminated most competition in Cleveland w/i first 2 months of existence

  14. Standard Oil Business Practices • 1882 – Combined diff. companies spread across diff. states under 9 individual trustees; formed a trust • 1890 – Sherman Act passed by Congress • Forbade any contract, scheme, deal, or conspiracy that restricted trade • OH AG files lawsuit against Standard Oil • 1897 – Rockefeller retires, remains major stockholder in Standard Oil

  15. Standard Oil Business Practices • 1911 – US DOJ sued Standard Oil, ordered group to break up into 34 companies • Jersey Standard  Exxon • Standard Oil Company of New York  Mobil • Standard Oil of Ohio  Amoco • Standard Oil of California  Chevron • Exxon & Mobil later merged to form ExxonMobil

  16. Standard Oil Business Practices Other Trusts… Standard Oil Trust… Fueled its machines Used waste to produce items like Vaseline • Dumped gasoline into rivers • Piled mountains of heavy waste

  17. Standard Oil of New Jersey v. United States (1911) • Standard Oil undercut a lot of other businesses; later bought them out, particularly gas/service stations • Significantly underpriced same items as competitors • Made threats to suppliers & distributors of competitors • US-SC needed to determine if a company buying out others to rid of competition is legal

  18. Standard Oil of New Jersey v. United States (1911) • Original ruling • Standard Oil’s business practices led to a monopoly, thus restricting trade/competition for other businesses • Congress had power through its Commerce Clause to regulate monopolies, and enforce the Sherman Act

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