Monopoly

Lecture Introduction

Pre-Industrial Philosophy of MonopolyIn the late 1700s and early 1800s, monopolies were often granted for things that were really, really difficult to do.Things for which there were no suppliers yet.(You were the first one)2. Things that required a hefty up-front capital investment (economies of scale)Tough StuffExample: Building a bridge across the Charles River

Question:Why would we want to build a bridge across the river? Only if called upon:

Press 1 (Only if told, press 2)(Only if told, press 3)000

You can travel by horse across the river (or walk)More commerceBetter infrastructure for moving things around (another financial benefit) Benefits:

Not just anyone can do this (bridges dont just spring up in the late 1700s or early 1800s)Problem:

Photo taken by Songquan DengEngineering problemsEconomies of Scale

Government will grant you an exclusive license for the bridge for 30 years.No competition (no other bridges) for 30 yearsYou can collect 30 years worth of fares and be the only option to cross the river by bridgeHeres the DealGovernment will grant you an exclusive license for the bridge for 30 years.No competition (no other bridges) for 30 yearsYou can collect 30 years worth of fares and be the only option to cross the river by bridge

Heres the DealQuestion:Is this a good deal for everyone?Good Deal For Everyone?

YesNo11 Only if called upon:


Government granted monopolies to get difficult things done when there was no other supplier of the good or service-- Was a way to get economic innovation(Not the similar logic for why Hamilton had to get the government to start a bank)SummaryRobber-Barron Philosophy of MonopolyIn the late 1800s, the situation changes. Monopolies are being formed by private corporations, not governmentThey do this by merging or buying up their competition.Late 1800sCompany 1

hypothetical:High speed internet (above 13 mbps)Company 2Company 3customersCompany 1

hypothetical:High speed internet (above 13 mbps)Company 2Company 3customersCompetition produces a price range of $34.99 to $49.99

Company 1

hypothetical:High speed internet (above 13 mbps)Company 2Company 3customersCompetition produces a price range of $34.99 to $49.99

hypothetical:High speed internet (above 13 mbps)customersIt can now charge, say, $49.99 for the serviceCompany profits more than it would have if it had to competeYou pay more for the price

Comcast

hypothetical:High speed internet (above 13 mbps)customersIt can now charge, say, $45.00 for the serviceCompany profits more than it would have if it had to competeYou pay more for the priceNote: its not that they gouge you. They dont win unless they make a sale. So they dont price the product out of the range of dire affordability.Rather, they simply price it so that they can get more than what they would get if competition existed. They give you a monopoly (inefficient) price.In essence, you are subsidizing them. They are not getting the price that merely allows the business to be profitable, they are getting the price that also allows for a windfall.

ComcastCompany 1Another example:Car InsuranceCompany 2Company 3Geico bill for six months was $412, after being there for several years. [Kept going up explain variables]Research shows that lazy (loyal?) consumers pay more because they dont comparison shop.Progressive offered me a rate of $274 if I changed companiesEach bill, I expect, it will rise. $300. $320. If there was no competition, the same insurance would cost above $400. With competition, it is more efficiently priced at $300My StoryCompany 1

Company 2Company 3customersQuestion:Is there another way for the companies to get the monopoly price without merging or being taken over? Only if called upon:


Company 1

Company 2Company 3customersQuestion:Is there another way for the companies to get $45 without merging or being taken over?Answer: Collusion

An agreement not to compete. Company 1 sells to Ohio only. #2 sells to Indiana only. #3 to Michigan.This is what JP Morgan used to do with companies in the late 1800s (explain). Hed buy large interests in all 3 and get them to collude. He was their banker, so he could control them.Film clip: JP Morgan

(From History Channel).

Three insights:

Morgan bought enough stock in entire industries to control the participants;

he would profit from buying stock in companies that were losing out in competition (undervalued), and would resuscitate them through ordering and colluding the playing field (stock value goes back up);

Finance is the industry that will control all other industries JP Morgan and other giants were imposing order on the economy not unlike the way that mafia families divide up territory and operate in ways that do not competeImposing economic orderCapitalism as a pre-configured arrangement for price and profit, that protects itself from insurgent competitionFilm clip: Morganization


Film clip: John D. Rockefeller


What you call Monopoly I call Enterprise

(relate this to Social Darwinism)Mergers and Power in 18963/1/2015Copyright, Sean Wilson. 200729William McKinley

-- Elected President in 1896. -- Handmaiden of the robber baronsFilm clip: buying the 1896 election


Mention three things:

William Jennings Bryan is the opponent in 1896;Money and Factory Foreman are the toolsThe Robber Barons act in concert as a singular entity 3/1/2015Copyright, Sean Wilson. 200731New Economic Goliaths-- Mergers, Trusts, Monopolies, OligopoliesMassive Mergers --

Under the McKinley administration, there were massive mergers going on, so that companies were growing into large trusts and monopolies. By 1900, two thirds of the largest 75 industrial companies in the United States had not existed just a few years earlier. 3/1/2015Copyright, Sean Wilson. 200732

3/1/2015Copyright, Sean Wilson. 200733

Interest on mortgaged farm3/1/2015Copyright, Sean Wilson. 200734

Captain of a trust wielding legislation as a sword3/1/2015Copyright, Sean Wilson. 200735

Comparison to feudal times

Robber BaronsOn the backs of the muggles3/1/2015Copyright, Sean Wilson. 200737Inequality-- There is great inequality between rich and poorFilm clip: inequality in 1896


Mention four things:

This clip is talking about the 1896 election (weve already moved past that in the lecture)Rockefeller is worth 1% of the entire US economyFactory workers dont have a livable wage1 in 11 Steel workers die on the job

Documents

Monopoly