What Is So Bad About Monopolies?

Can a monopoly be sexy?

A monopoly (from Greek monos / μονος (alone or single) + polein / πωλειν (to sell)) exists when a specific person or enterprise is the only supplier of a particular commodity.

Thankfully, the question in the subject line is not so alien today as it was in the mid 1990s when my Strategic Management instructor used that as a lecture topic.  I was in the same boat then as many reading this today, with my reaction somewhere along the lines of How can you even ask that?  Of course they are bad!  They destroy the competition in the marketplace!

He, being a great lecturer, listened to a few of our comments and then launched into a quick destruction of them all: monopolies are short lived and competition destroys them.  Barriers to entry eventually disappear with new innovations and alternate products.  Of course, the lecture was much longer than that.

Now, there has been this lie spread through non-business academia and the mainstream media that once a monopoly is established, nobody can compete with it any more.  The consumer is a captive slave of the monopolist and that is that until the government does something.  As usual, the poets and news readers get this as wrong as one can possibly get anything wrong.  The persistent monopoly exists because of the intervention of government, not a lack of government action.

Need a few examples?

One often cited is Standard Oil of New Jersey.  The way it is told by Professors of History is that Standard had taken over the oil business (omitting that it was primarily kerosine, a replacement for whale oil in lamps, and a replacement for coal fired engines) and was gouging consumers.  They beat their competitors to a pulp and ran the show from derrick to home.

In reality, Standard had about 20% of the refining capacity by the time their case came before the United States Supreme Court and gained that through buying out their competition.  Some monopoly, huh?  By the time the case got to court, crude oil and refining competitors were emerging in the Western States and Getty (the primary shareholder) was boycotting those States because they were not giving him favorable deals to expand Standard to that part of the country.

Another falsehood in this Liberal Arts Department fable is that Standard owned oil fields.  In fact, they did not own a single oil well and were delighted when suppliers undercut each other on the price of crude.  When the government "broke them up" they were "divided" into different firms, all with the same owners with the same proportion of ownership as Standard of New Jersey.  All the government did was add inefficiency to the mix.

In reality, Standard had a short lived spike in market dominance that was going away through competition and a lack of government support from Western States.

The AT&T story is a study in the other half of the monopoly lie.  The story goes that "Ma Bell" (American Bell Telephone Company) created and protected their monopoly on voice telephone service through various sorts of dastardly acts and they thwarted government action to break them up until the feds were finally able to break the monopoly in the early 1980s.

First, the only reason that "Ma Bell" had any monopoly at all was because the federal government granted them one, as a national utility, under the Franklin Delano Roosevelt administration in 1934.  In spite of being granted a monopoly, the US Justice Department decided to muck around and make some headlines for themselves in the 1950s and got the monopoly throttled back to 85% of the US market, along with restrictions on their foreign business.

By the 1980s, the American Bell System had had enough and asked the government nicely to become a "regular" company and compete without the umbrella of government monopoly power.  The agreed settlement resulted in a breakup of the firm into regional operating companies and an explosion in innovation and profit due to normal competition.  Those profits came in spite of overwhelming persistant government regulation that continues to this day.

Note also, in both of the above examples, National Socialist regimes were behind all of the government meddling with businesses that would have succeeded just fine with normal competition.

AOL CD Throne

AOL disk dress

CD bikini

Now for a few "monopoly" examples that should make anybody laugh: AOL, Netflix, Walmart (also accused of being a 'monopsony', NBC, Microsoft, and IBM.

Steve Jobs Has Died

I was never a big fan of Jobs, mostly because I was never a big fan of his expensive products.  Perhaps if I were more of a graphic artist I would appreciate them, and the price tag more.  Don't get me wrong, I loved using them when someone else was buying them, like my employer or school.  When it came down to outfitting my home and office, I always bought Toshiba.  It is all about the price/utility tradeoff.  I do use an iPhone and complaints about it could fill another post.

Part of my attitude was influenced by Steve Wozniak, who never spoke ill of Jobs, I just did not like how he described the way Jobs behaved.  I am a big fan of Woz and have met him in person, for a couple of hours.  It was more of a valued opinion sort of thing.  Woz can say anything and I tend to believe it.

Perhaps it was my lack of knowledge about how he ran Apple.  I never studied it, never went out of my way anyway.  I appreciate him more now that I know he really ran Apple computer.  From what I thought I knew in the past, I had the impression that Jobs kept wrecking the company and everybody else around him shored it up.  Not true, not even close.  However, when the press begins heaping praise on Jobs for inventions and engineering, because that was Woz, not Jobs.

I see that there are already comparison wars erupting, comparing Jobs to Edison.  Jobs was no Edison, he was no Wozniak either.  He was a fantastic marketer and knew good ways to package products.

Rush Limbaugh was always touting Apple products, reportedly without any compensation, just because he liked their stuff.  Perhaps if I were not as frugal as I am on certain things, I would be in the same Apple camp as Rush.  His show tomorrow should be interesting.

What does this have to do with How Many Borders Would You Like With That Socialism?  Nothing really.  Not much, really.  I recall in the 1980s(?) Jobs did a big computer "giveaway" to any schools that wanted to buy Apple products at cost.  As I recall, it was an effort to keep the company open during an economic slump.  This deserves more research and could be relevant to my current project.  It was like a reverse of rent-seeking, with Apple marketing and selling to government without seeking a government enforced monopoly.

On the surface, it is similar to the story of tobacco companies giving cigarettes to the US government for Soldiers in WWI.  I am still researching that one, but the story goes on that the returning Soldiers, of all walks of life, retained the habit and introduced cigarette smoking to sectors of society that had shunned the habit in the past.

The Apple giveaway, from memory, placed Apple computers as the introductory platform for school children of all ages for decades.  In college, it was my preferred platform and where I learned to use MS Word and Excel when MS Windows was not yet ready for prime time.  As this group grew older, a significant portion of them continued to purchase and use Apple products.  IIRC, the recent boom in Apple sales did not start until they began producing non-computer products, like the iPod and iPhone.

One of the critical mistakes they made in the early days of Apple was their insistence on making the Apple Graphic User Interface operating system incompatible with other platforms.  Unix, then Microsoft owned the government and business markets.  Apple acted like their hardware platform was superior and it would become obvious to everybody "any day now."  That event never happened and Microsoft expanded their rule over the non-academic computing market.

Eventually Apple did make their computing platforms compatible with Microsoft, but it was too little, too late.  Even today, non-Apple users cite Apple incompatibility with their favorite programs, which has been false for over a decade.

I need to do more research into the Apple federal lobbying efforts over the years.  Apparently, they never lobbied to get their platforms into the federal government.  If they did, it was a colossal waste of money, however I have never heard a hint of that.  Microsoft had problems because they began, and won, the business and government desktop war on the coattails of IBM.  They retain that position today, after being bullied by the federal court system into playing the crony capitalism game and positioning lobbyists to shower money on government officials in DC.

In retrospect, Steve Jobs is more of a great marketer to the masses, rather than a technological innovator, who knew what people wanted before they did, a little more like George Gilder.