Case Studies
Standard Oil
 The Sherman Act passed in 1890 was in response to the monopoly that John D. Rockefeller and his company Standard Oil had on the oil industry. Rockefeller did not take over the task of drilling for oil. Instead, he concentrated buyingt the oil that other men drilled--refining it and selling it. By 1869, he had the largest refinery in the country and a year later Standard Oil of Ohio was born. When competition squeezed profit margins, Rockefeller squeezed the competition. Willing competitors were bought. Unwilling competitors found themselves cut-off from railroads, pipelines, and credit. The Sherman Act made it illegal for any one firm to obtain a monopoly — that is to get complete control over the production of all the goods in one markets. Secondly, the Sherman Act made it illegal for firms to get together and agree on the way in which they would compete, for example, by setting prices or dividing markets or determining which customers they would deal with
Despite the Sherman act it took awhile for the courts to finally break up Standard Oil. By 1911, competitors like Western Oil, like Gulf and Texaco had entered the refining business and had broken the Standard monopoly.That and the Sherman Anti-trust Act had ended the era of the big trusts.
| Comment & Analysis by Richard Gill The complaints against Standard Oil are based on the central economic critique of monopolies: they keep output too low, and their prices and profits are too high. Economists call these monopolies price-setters. On the other hand, firms whose prices are set in the market by supply and demand are called price-takers. |
Ma Bell Breaks Up
 After Alexander Graham Bell’s original patents expired around the turn of the century, competition for telephone service was tough. Bell slashed rates to undercut competitors. Others were cut off from equipment or from the long distance network which Bell controlled and which only Bell could afford. Independents asked the government to take Bell to court under anti-trust laws. Then in 1914, AT&T sent Nathan Kinsbury to Washington to set up a deal that would create a Natural monopoly. The key part of it was the commitment to refrain from buying up any more independent telephone companies, that it would provide long-distance connections to the independent, which means the non-Bell companies which then existed. The government bought this plan because what was promised was universal service. Bell would charge reasonable rates, and as a monopoly Bell could expand and give this integrated end-to-end service. It was good service. But because land lines had to be laid for the telephone wire, it was extremely expensive to provide and it would be inefficient for two or more companies to provide such lines However, with the advance of microwave technology, competition for long distance service became possible. The days of the protected Ma Bell monopoly were over.
| Comment & Analysis by Richard Gill This story illustrates the notion that a regulated monopoly makes sense when one factors in economies of scale. In most industries, after a certain level of production is reached, a business firm’s cost per unit of output tend to rise. But they may not do so. Because telephone customers need to be connected to each other, it may be very expensive to have several small-scale telephone networks servicing a region instead of just one larger one. |
Microsoft v. US
 Microsoft is the World’s largest software company. Every year for the last decade, Microsoft’s share of the market for personal computer operation systems has stood above 90 percent. Some of Microsoft’s business practices raises serious questions, and in 1998 the US government decided to file an antitrust lawsuit against the company.
Microsoft realized early on that the internet had become a major inducement for consumers to buy personal computers. Access to the internet was controlled by a browser, first successfully developed by the Netscape Corporation in 1994. This posed a threat to Microsoft and that a browser had the potential to replace its operating system. Microsoft decided to develop its own browser, Internet Explorer, and incorporate it into the Windows operating system. The government argued that Microsoft was pursuing a strategy intended to drive Netscape out of business by co-opting the browser business and pulling it into the operating system so that an independent browser could not possible remain on sale.The government also claimed that Microsoft used its power to require its suppliers to give special deals to them that they did not give to special deals to them they did not give to competitors. It required some of its suppliers not to do business with Microsoft’s competitors in order to restrict competition. Microsoft argued that it was just providing a better, more innovative product that would benefit consumers. In October 2001 Microsoft and the government reached an agreement It was to make sure that Microsoft's anti-competetive practices would cease but it could continue to innovate and design its own products.
| Comment & Analysis by Nariman Behravesh The biggest check on Microsoft’s monopolistic behavior could be the rapid pace of technological change in the computer software and online industries. One of the government’s antitrust case was to prevent Microsoft from suppression either the development of new technologies or denying access to these new technologies as competitors. |
|
