A History of U.S. Monopolies

A monopoly is a company that dominates its sector or industry, meaning that it controls the majority of the market share of its goods or services, has little to no competition, and its consumers have no real substitutes for the goods or services provided by the business.

Monopolies came to colonial America well before the United States was born. In many ways, the large-scale public works that were required to build the New World were heavily reliant on large companies to carry them out.

These companies were granted exclusive contracts by the colonial governors. Even after the American Revolution, many colonial holdovers continued to function because of the contracts and land that they held.

How Did Sherman's Hammer Impact U.S. Monopolies?

The Sherman Antitrust Act was passed in 1890 in response to a public outcry over price-fixing abuses by monopolies.

This act banned trusts and monopolistic combinations that placed “unreasonable” restrictions on interstate and international trade. The act was a hammer that gave the federal government the power to shatter big companies into smaller pieces.

Despite this act’s passage, the next 50 years saw the formation of many domestic monopolies. At the same time, it was used to attack several monopolies, with varying levels of success. In many ways, the act sought to distinguish between "good" and "bad" monopolies.

One example of a "good" monopoly at the time was International Harvester, which produced cheap agricultural equipment for a largely agrarian nation and was thus considered untouchable. American Tobacco, on the other hand, was suspected of charging more than a fair price for cigarettes, which were at the time touted as a cure for everything from asthma to menstrual cramps. American Tobacco consequently became a victim of the government's wrath and was broken up in 1911.

How Did Standard Oil Become a Natural Monopoly?

The oil industry was prone to what is called a natural monopoly because of the rarity of the products that it produced. John D. Rockefeller, the founder and chair of Standard Oil, and his partners took advantage of both the rarity of oil and the revenue produced from it to set up a monopoly.

The business practices and questionable tactics that Rockefeller used to create Standard Oil would make the Enron crowd blush. But the finished product was not nearly as damaging to the economy or the environment as the industry was before Rockefeller monopolized it.

In the early days of the oil industry, many competing oil companies were eager to find a source and drilled indiscriminately, pumping waste products into rivers or straight out on the ground rather than troubling with proper disposal. They cut costs by using shoddy pipelines that were prone to leakage.

By the time Standard Oil had cornered 90% of oil production and distribution in the U.S., it had learned how to make money off even its industrial waste, with Vaseline being one of the new products that was developed.

Yet the benefits of having a monopoly like Standard Oil was only evident after it had built a nationwide infrastructure for oil distribution. Its sheer size and scale of resources allowed the company to avoid dependence on trains and their notoriously fluctuating costs.

Despite the eventual breakup of Standard Oil in 1911, the government realized that a monopoly could build up a reliable infrastructure and deliver low-cost service to a broader base of consumers than competing firms. That lesson influenced its decision to allow the AT&T monopoly to continue until 1982.

As the history of Standard Oil shows, when a monopoly can deliver a quality product consistently at a reasonable price—particularly when startup costs for competitors are astronomical—the government may allow it to exist as long as it can regulate it to protect consumers.

What Are the Limitations of a Monopoly?

Andrew Carnegie had gone a long way towards creating a monopoly in the steel industry when J.P. Morgan bought his steel company and merged it into U.S. Steel to create a monstrous corporation approaching the size of Standard Oil.

U.S. Steel controlled about 60% of steel production at the time, but competing firms were hungrier, more innovative, and more efficient. Eventually, U.S. Steel stagnated as smaller companies ate more and more of its market share.

Part of the reason for its decline was that U.S. Steel was made up of many subgroups that did not seize on new technological innovations, such as continuous casting, which was far more cost-effective. In addition, it fought for protective tariffs against foreign steel, which allowed it to raise prices higher, which negatively impacted the customer. In this way, the U.S. Steel monopoly illustrates the limitations of monopolies due to a lack of competition in a given industry.

How Did U.S. Antitrust Regulations Evolve?

Following the breakup of sugar, tobacco, oil, and meatpacking monopolies, big business didn’t know where to turn. There were no clear guidelines about what constituted monopolistic business practices.

The founders and management of so-called “bad" monopolies were enraged by the hands-off approach taken with International Harvester. They argued that the Sherman Act didn’t make any allowances for a specific business or product and that its execution should be universal rather than operate like a lightning bolt that struck select businesses.

In response, the Clayton Act was introduced in 1914. It set some specific examples of practices that would attract Sherman’s hammer. Among these were interlocking directorships, tie-in sales, and certain mergers and acquisitions if they substantially lessened competition in a market.

The Clayton Act was followed by a succession of other acts demanding government review before any large mergers or acquisitions were finalized.

These innovations gave businesses a slightly clearer picture of what not to do but did little to curb the randomness of antitrust action. Major League Baseball even found itself under investigation in the 1920s, but escaped by claiming to be a sport rather than a business and thus not classified as interstate commerce.

End of a Monopoly Era?

The last great American monopolies were created a century apart, and one lasted over a century. Others were very short-lived and some continue operating today, as highlighted chronologically below.

AT&T

AT&T Inc. (T), a government-supported monopoly, was also an essential public utility. Like Standard Oil, the AT&T monopoly made the industry more efficient. It wasn’t guilty of fixing prices, but rather of the potential to fix prices.

The breakup of AT&T in the 1980s gave birth to the regional Baby Bells. Over time, many of the Baby Bells began to merge and increase in size to serve a wider area.

The breakup of AT&T may have caused a sharp reduction in service quality and even higher prices for many customers. But that is now long past, and the descendants of the Baby Bells are finding a natural balance in the market without calling down Sherman’s hammer again.

Microsoft

In the 1990s, a case was brought against Microsoft centered on whether it was abusing its position as a so-called noncoercive monopoly. A noncoercive monopoly exists because brand loyalty and consumer apathy keep people from searching for an alternative.

Like U.S. Steel, Microsoft couldn’t dominate the market indefinitely across certain business segments because of innovative domestic and international competition. Ultimately, Microsoft Corp. (MSFT) never actually broke up even though it lost its antitrust case, which took place through the 1990s.

The Microsoft monopoly got a little chipped at the edges as rival operating systems gained ground and rival software, particularly open-source software, threatened the bundle business model that Microsoft was built upon. It also failed over time to dominate the internet browser wars. Because of this, the antitrust decision now seems irrelevant.

Meta (Formerly Facebook)

In today's world, big tech companies are the new monopolistic powers, none so much as Meta Platforms (META), formerly Facebook. As of January 2024, Meta controls three of the five biggest social media platforms in the world—Facebook, Instagram, and WhatsApp.

In December 2020, the Federal Trade Commission (FTC) sued the company, claiming that it was maintaining its social networking monopoly via anticompetitive conduct.

As part of the antitrust lawsuit, the FTC argues that Meta has done this through its acquisitions of Instagram and WhatsApp, as well as by imposing anticompetitive conditions on software developers. Furthermore, the company enjoys a significant amount of control over how personal data is shared and how advertising is allocated, raising concerns for regulators.

The FTC is calling for a breakup of Meta through the divestiture of WhatsApp and Instagram, which Meta has rejected, while stating that the case is too narrow and doesn't consider other key competitors such as Apple, Microsoft, and Google-parent, Alphabet.

Apple

In March 2024, the FTC accused tech giant, Apple, of monopolizing the smartphone market. The lawsuit claims that Apple uses exclusionary practices that make it challenging for competitors to integrate with its smartphones.

Android users, for example, don't have access to the same iMessage features as iPhone users, and their messages are not encrypted. The Justice Department argues that this disincentivizes consumers from buying less expensive alternatives to Apple smartphones.

Today, Apple controls over 65% of the U.S. smartphone market and is the second-largest company globally by market capitalization.

The crux of the matter is that Apple should enable rival software to work more effectively on Apple iPhones, instead of making them operate worse than the iPhone-to-iPhone interface. These restrictions, in turn, represent noncompetitive behavior and lock in consumers to buy Apple products.

In recent years, Apple has faced other antitrust issues for abusing its market power in its App store business practices—namely, how it monopolizes its payment systems, where it takes a 27% cut from software developers across any purchase or subscription.

The Bottom Line

In the early 1900s, anyone suggesting that the government didn’t need to have a hammer to smash big business would have been eyed suspiciously. But globalization and the maturity of the world economy have prompted calls for the retirement of antitrust laws.

Over the years, these calls have come from people like economist Milton Friedman, former Federal Reserve Chairman Alan Greenspan, and everyday consumers.

But if the history of government and business is any indication, the government is more likely to increase the range and power of antitrust laws rather than relinquish such a useful weapon.