Big Business

Chapter 9 Section 3

Monopolies• 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. (This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few entities dominating an industry)1[] Monopolies are thus characterised by a lack of economic competition to produce the good or service and a lack of viable substitute goods.2 The verb "monopolise" refers to the process by which a company gains much greater market share than what is expected with perfect competition.

• A monopoly is be distinguished from monopsony, for which there is only one buyer of a product or service ; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), for which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations such that one or a few of the entities have market power and therefore interact with their customers (monopoly), suppliers (monophony) and the other companies (oligopoly) in a game theoretic manner - meaning that expectations about their behavior affects other players' choice of strategy and vice versa. This is to be contrasted with the model of perfect competition such that companies are "price takers" and do not have market power.

• When not coerced legally to do otherwise, monopolies typically maximize their profit by producing fewer goods and selling them at greater prices than would be the case for perfect competition. (See also Bertrand, Cournot or Stackelberg equilibria, market power, market share, market concentration, Monopoly profit, industrial economics). Sometimes governments decide legally that a given company is a monopoly that doesn't serve the best interests of the market and/or consumers. Governments may force such companies to divide into smaller independent corporations as was the case of United States v. AT&T, or alter its behavior as was the case of United States v. Microsoft, to protect consumers.

• Monopolies can be established by a government, form naturally, or form by mergers. A monopoly is said to be coercive when the monopoly actively prohibits competitors by using practices (such as underselling) which derive from its market or political influence (see Chainstore paradox). There is often debate of whether market restrictions are in the best long-term interest of present and future consumers.

The Rise of Big Business

• By 1900 big business dominated the economy of the U.S.

Corporation

• What is a corporation?

• What can a corporation do?

• People who own the corporation are called stockholders.

Economies of Scale

• All businesses have two kinds of costs, what are they? Pg 320

• What were some advantages big corporations had over small manufacturing companies?

• How can a corporation achieve economies of scale?

–Investing in more machines and larger manufacturing facilities.

Andrew Carnegie (DO NOT WRITE)

• Born in Scotland

• Began working at age 14 as a messenger in a telegraph office.

• Worked his way up to be president of the Pennsylvania Railroad.

• Invested much of his money in companies that served the railroad industry.

Andrew Carnegie• On a trip to Europe, he met

Sir Henry Bessemer, who invented a new process for making high quality steel efficiently and cheaply. (Bessemer process)

• Carnegie would then concentrate on the steel industry.

• He founded a steel company in Pittsburgh.

Vertical Integration

• A vertically integrated company owns all the businesses it depends on.– Ex: Standard Oil Company– Example in Book: Page 321

Horizontal Integration

• Horizontal integration combines many firms engaged in the same type of business into one large corporation. – Ex: GAP Inc. controls Banana Republic, Old

Navy, and the GAP brand.– Ex: Disney

• Large companies preferred horizontal integration.

• When a single company achieves control of an entire market, it becomes a monopoly.