The Rise of Monopolies and Oligopolies
This chapter makes the argument that in the current economy, capitalism is not really promoting the ubiquity of competitive markets; rather, it is quickly moving toward consolidation and oligopolies. The growing influence of oligopolies is a primary driver of inequality and redistribution of income. Consolidation and oligopolies have become the norm and are a dangerous threat to the economy.
Capitalism is a free-market system that is supposed to promote competition. In classic capitalist theory, competition leads to innovation and more affordable prices for consumers. Without competition, a monopoly, oligopoly, or cartel may develop. A monopoly occurs when one firm supplies the total output in the market; the firm can then limit output and raise prices because it has no fear of competition. If several companies get together to control output and prices, it is known as an oligopoly or a cartel.
The political defense of capitalism is that economic power is diffuse and cannot be aggregated in such a manner as to have undue influence over the democratic state. Both of these core claims for capitalism are demolished if monopoly, rather than competition, is the rule. I will make the argument that, in the current economy, capitalism, as led by U.S. Multinational Corporations (MNCs), is not promoting the ubiquity of competitive markets. Rather, it has been moving toward consolidation and oligopolies for many years.
In the last 20 years, oligopolies have been created by mergers and acquisitions (M&A) of MNCs. According to the Coalition for a Prosperous America, “The heated pace of mergers and acquisitions, driven by low global interest rates that makes it cheap for large companies to borrow billions of dollars to acquire other companies.” According to a report by financial data firm Refinitiv from October 2021, “Globally, 2021 is the strongest opening nine months of M&A since records began. In the U.S. alone, M&A has surged 139 percent to $2 trillion.”
The formation of monopolies and oligopolies also occurred in the Gilded Age, when the robber barons controlled entire industries, including oil, railroads, steel, and the telegraph. The consolidation did not stop until President Theodore Roosevelt broke up the monopolies using antitrust legislation.
A second Gilded Age is happening all over again. We have entirely too many examples.
Modern-Day Oligopolies
1. Airlines: In the 1970s, more than 30 major airlines operated in the United States. Some of them had been around a long time, such as Pan American, Trans World Airlines, Eastern, National, United, and Braniff, to name just a few. Through mergers, acquisitions, and bankruptcies, that number was reduced to six major airline companies. In the last decade, as United merged with Continental, and American swallowed U.S. Air, there are now only four major carriers in the United States—United, Delta, American, and Southwest which control 55 percent of revenue—plus 17 minor players. Now all four of the major carriers are profitable, pay dividends, buy back their stock, and control the industry pricing.
2. Banks: As everybody now knows, the big banks also have been merging and consolidating. With the repeal of the Glass–Steagall Act in 1999, the big banks refocused their business on proprietary trading—essentially gambling with depositor’s money. Today, the big banks contribute more money to proprietary trading then they do to loans to consumers and businesses. The irony is that the big banks are still too big to fail, and they can rely on what has been, to date, the fact that in gambling they know that nobody will go to jail, and the government (and us taxpayers) will bail them out.
After the big banks collected toxic mortgages and then securitized them to be sold all over the world, the amazing thing was that the government allowed them to use the money to subsidize mergers, such as Wells Fargo’s takeover of Wachovia, JPMorgan Chase’s acquisition of Washington Mutual, and add to that Bear Sterns and Bank of America’s absorption of Countrywide Financial and Merrill Lynch, which accelerated consolidation and created the bank oligopoly we have today. The top five banks in the United States are JPMorgan Chase, Bank of America, Citibank, U.S. Bank, and Wells Fargo, and they control 40 percent of the deposits of the entire banking system.1
3. Hospitals: In the last 30 years, hospitals in most cities have been merging and consolidating in local markets. Though not national examples, they have formed local monopolies in cities, often leaving only a few hospitals to choose from. These mini-monopolies are also able to boost the prices for most of their services. Hospital pricing is the leading cause of health care cost increases. We’ve seen price increases of 50 to 100 percent on services from blood tests to chemotherapy. As long as they are allowed to form oligopolies, there is no incentive to focus on the reduction of health care costs.
4. Meat packers: In 1982, the five largest meatpackers controlled 16 percent of the meat industry. Today, four firms control 85 percent of the beef market. This is an oligopoly that includes National Beef, Cargill, Tyson, and JBS (which purchased Swift). The big four import much of their meat from Brazil, Mexico, and Australia, which puts enormous pressure on domestic farmers and ranchers who have to pay the price demanded by the oligopoly. Foreign beef is not yet labeled by country of origin, so consumers are not aware that the meat is imported.
5. Microsoft: This company has dominated the computer operating system market since the inception of the IBM personal computer in 1981. In 2008, it had 95 percent of the U.S. market. In September 2021, it had 71 percent of the world market. Legal efforts to break its monopoly both in the United States and in Europe have failed.
6. Beer: This industry is an almost perfect example of consolidation. Those of us who were of drinking age in the 1970s can remember going to the supermarket and seeing an entire aisle of domestic beer brands to choose from. At that time, there were 43 firms making beer, and the largest had 25 percent of the market. Today, two firms—Anheuser Busch and Miller/Coors—own 90 percent of the noncraft beer market.
7. Oil and gas: There are currently 50 oil and gas producers in the United States producing 2,736 million barrels of oil per year. Exxon merged with Mobil Oil (ExxonMobil) and Conoco merged with Phillips (ConocoPhillips), along with Chevron and Occidental Petroleum. These three giants have 70 percent of all oil produced in the United States.
8. Technology companies: Google now owns 92 percent of the Internet search business and Facebook controls 70 percent of social networks. Facebook purchased its two largest competitors Instagram and What’s App without any regulatory challenges. According to Market Watch, in the last decade, Google, Amazon, Facebook, and Microsoft have acquired 500 competitors.
9. Smartphones: The United States is the second-largest smartphone market after China, with over 260 million users. As of 2020, Apple and Samsung dominate the smartphone market in the United States, with 46 and 25 percent of the market.
10. Pharmaceutical companies: The special advantage of pharmaceutical companies is that they are issued patents for new drugs which allows them monopoly pricing for 12 to 13 years. The largest firms then merge or acquire other firms that have patents, which gives them monopoly power in more drug markets. The bottom line is that drug prices in the United States are twice as high as all European drug prices. For instance, the 25 largest pharmaceutical corporations have an average profit margin of 50 percent versus the 25 largest software have an average profit margins of 13.4 percent.
In 1983, Congress passed the Orphan Drug Act (ODA) which governs the approval of drugs for rare diseases. It was supposed to incentivize pharmaceutical innovation via multiple tax breaks and seven years of market exclusivity. There are 7,000 rare disorders affecting 25 to 30 million Americans, and the patients who have these rare diseases live in fear that the pharmaceutical company will raise prices beyond their ability to pay.
A new breed of pharma company has emerged that doesn’t invest in research. They buy the companies that have invented the drug and have a patent. The business model is to buy the company and patent, and then to raise prices on the patented drug for a quick profit. A good example is Questor who purchased the rights to Aethr Gel, a drug used to treat a rare form of infantile epilepsy.2 Questor raised the price of the drug from $40 to $23,000. These exploitive companies will exacerbate the problem of rising health care costs and jeopardize the lives of many patients who cannot afford it.
11. Railroads: Since deregulation in 1980, 33 firms have been consolidated into just seven. These Wall Street-owned railroads then cut their workforce by 33 percent over the last six years.
These are not the only examples of oligopolies. Consolidation has occurred in almost every industry and hundreds of market niches.
How Did This Happen?
In the 1960s, Robert Bork was a conservative judge who truly believed socialism might take over the country through the antitrust laws. In 1978, his book, The Antitrust Paradox, featured the famous sentence, “The Congress enacted the Sherman Act as a consumer welfare prescription.” One year later, the Supreme Court adopted that sentence—which shifted the whole argument away from efforts by corporations to create monopolies and oligopolies to protecting “consumer welfare.”
About the same time, economists at the Chicago School of Economics began to publish studies claiming that the enforcement of our anti-monopoly laws was harming that defenseless figure—the American Consumer—by promoting wasteful competitions. The Chicago economists saw monopolies as a move toward efficiencies and that “monopoly was thus naturally fleeting and rapidly turned into competition, so it could be ignored.”
This assumption led to the abandonment of antitrust by the government, which began during President Reagan’s term. After he took office in 1981, his new head of the antitrust enforcement, William F. Baxter, swiftly abandoned efforts to promote competition and promised instead a policy based on efficiency considerations. The new focus was on consumer harm with a presumption that the market was naturally competitive, placing the burden of proof on those who thought otherwise. Baxter said the goal was to promote the welfare of the consumer—theoretically by increasing his or her access to cheap goods.
So began the subtle changes using the consumer welfare argument as a cover to justify more consolidation of firms to form monopolies and oligopolies. There was no populist uprising, few protests—virtually nobody challenged the new policy. The free-market capitalists had hit another home run. It gave corporations a free pass to merge and legally form oligopolies and cartels—and the ability to control output and raise prices at the expense of the consumer.
Today, the control of large markets and industries is not an exception, it is the rule. There was no challenge to the abandonment of antitrust from the Reagan and Bush administrations through the Clinton and Obama administrations. Instead of protecting the consumer, oligopolies have exploited the consumer.
Why Increasing Industry Consolidation Matters
Oligopolies and monopolies are the antithesis of how capitalism is supposed to work. Capitalism is based on the ubiquity of competitive markets, but industry after industry is now dominated by oligopolies with few competitors, which leads to an increase in price relative to costs.
Under oligopoly and monopoly conditions, investment slows down. Corporations are better able to raise prices and profits without investing in new technologies and products—declining investment can lead to declining innovation and stagnation.
Industry consolidation controls income redistribution. Oligopoly power can reduce employee wages and benefits, on the one hand, and increase prices, on the other hand. It is the perfect formula for shifting income from the worker to the oligopoly companies.
Oligopolies have the power to reduce supplier prices. As consolidation continues to grow, there are more sellers (suppliers) and fewer buyers (oligopolies), so the buyers gain. For example, a pig farmer today can sell to only four major pork producers. The average price a farmer can get for a hog dropped 31 percent from 1989 to 2008.
Another example, if you are a small manufacturer selling to Walmart, they will pressure you to lower your price by comparing your goods to that produced by its Chinese suppliers. They have 6,000 Asian suppliers and only 1,000 American suppliers.
Consolidation has given many of the large firms the ability to avoid taxation. According to Joseph Stiglitz, “Just 5 American firms, Apple, Microsoft, Google, Cisco, and Oracle, collectively have more than half trillion dollars stashed abroad as they achieve tax rates in some cases well under 1 percent of profits.”
The political consequences: The agglomeration of market power also leads to political power where the oligopolies and monopolies create and control the rules of the economic game which leads to political inequality.
I think it is in capitalism’s DNA to create oligopolies and monopolies, and they can only be restricted by government regulation. The only answer is antitrust. However, ever since the breakup of AT&T, there have been very few antitrust cases. Regardless of whether Democrats or Republicans are in the White House, the Justice Department has remained inactive in terms of antitrust activity.
Joseph Stiglitz summarizes the problem as,
We have become a rent-seeking society, dominated by market power of large corporations, unchecked by countervailing powers. And the power of workers has been weakened, if not eviscerated. What is required is a panoply of reforms—rewriting the rules of the American economy to make it more competitive and dynamic, fairer and more equal. Much is at stake—not just the efficiency of our market economy, but the very nature of our democratic society.
Consolidation has not been good for working people, taxpayers, the middle class, and suppliers. People have deluded themselves by thinking that oligopolies are simply the natural outcome of Free Market Capitalism (FMC), globalization, or other mysterious economic forces. It is time to accept the fact that this consolidation contributes to redistribution of income, lower wages, inequality, lower standards of living, and a slowdown in productivity. “In short, the poor performance of the American economy in so many dimensions.”3
The answer is to revive antitrust as it was used in the New Deal and President Joe Biden started down the antitrust road when he signed an executive order in July 2021 targeting what he labeled as anticompetitive practices in tech, health care, and other parts of the economy, declaring it would fortify an American ideal “that true capitalism depends on fair and open competition.”
The sweeping order includes 72 actions and recommendations that would lower prices for families, increase wages for workers, and promote innovation and faster economic growth. Biden said “Let me be clear: Capitalism without competition isn’t capitalism.”
To begin addressing the trend, the order encourages the Justice Department as well as the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency to update guidelines to provide greater scrutiny of mergers. It also encourages the Consumer Financial Protection Bureau to issue rules allowing customers to download their banking data and take it with them when they switch.
The order includes several provisions that could also affect the agricultural industry. It calls on the U.S. Department of Agriculture to consider issuing new rules defining when meat packers can use “Product of USA” labels. It also encourages the FTC to limit the farm equipment manufacturer’s ability to restrict the use of independent repair shops or do-it-yourself repairs—such as when tractor companies block farmers from repairing their own tractors.4
In January 2022, the Biden administration pledged $1 billion in rescue funds to small and independent meatpackers to counteract the oligopolies control of the meat packing industry. This provides some relief to the smaller companies in the industry but begs a bigger question. Is the answer to oligopoly and monopoly control of markets and pricing going to be a government bailout in each industry affected, or would a better solution be to implement antitrust laws to break up the oligopolies as happened early in the 20th century and in the Depression? The oligopoly problem is driven and controlled by MNCs, and the only hope for change is by Congress.
Senator Amy Klobuchar, a Minnesota Democrat who chairs the Senate Judiciary Subcommittee on Competition Policy, said that Biden’s executive order needs to be buttressed by congressional action. “Competition policy needs new energy and approaches so that we can address America’s monopoly problem,” Klobuchar said, “That means legislation to update our antitrust laws, but it also means reimagining what the federal government can do to promote competition under our current laws.”5
1 Trefis Team, Contributor, Forbes Magazine. December 14, 2017. “The Five Largest U.S. Banks Hold More Than 40% of All Deposits,” Forbes Magazine.
2 A. Pollack. December 29, 2012. Questor Finds Profits, at $28,000 a Vial, NewYork Times.
3 J. Stiglitz. October 26, 2017. America Has a Monopoly Problem and It Is Huge (The Roosevelt Institute).
4 A. Madhani and M. Gordon. July 9, 2021. “Biden Signs Order Targeting Big Businesses,” U.S. News.
5 K. Rapoza. July 29, 2021. “Congress Takes on Beef Monopoly in Dual Hearings,” Coalition for a Prosperous America.