Monopolies: How Limited Competition Affects Everyday Life
The FTC’s recent court cases and new guidelines signal a seismic shift in the fight against monopolies. With a sharper focus on potential competition and a deeper analysis of mergers, the FTC is taking a bold stand to protect consumers and small businesses. The era of unchecked monopolies may be nearing its end.
Competition is supposed to be the lifeblood that fuels innovation, growth, and prosperity. It is the engine that drives businesses to improve their products, offer better services, and strive for excellence. However, the rise of limited competition beginning in the 1980s choked off innovation, posing significant risks to small businesses and consumers alike. Recent draft guidelines released by the Federal Trade Commission (FTC) last week highlight the government’s seismic shift in efforts to curb this activity.
How Monopolies Affect the Marketplace
Monopolies, by their very nature, wield an enormous amount of power. They control prices, dictate terms, and can effectively eliminate competition. This unchecked power can lead to a number of negative consequences, particularly for small businesses and consumers.
Consider the example of AT&T (then known as the Bell System), which held a monopoly over the American telecommunications industry for much of the 20th century. As the sole provider of telephone services, AT&T controlled pricing, dictated terms, and stifled competition. As the sole provider of telephone services, AT&T also controlled the design and manufacture of telephones. The prevalence of the same model telephone in nearly every 1950s thru 1980s movie and TV show is a direct result of AT&T’s monopoly. It wasn’t until the landmark antitrust lawsuit in 1982 that AT&T was broken up into several smaller companies, known as the “Baby Bells.” This breakup spurred competition, leading to lower prices, improved services, and countless technological innovations.
Here in Rhode Island, Cox Communications held a monopoly on cable TV (and later, broadband Internet) from the 1980s until 2007. During this period, Cox’s high speed Internet cost today’s equivalent of $95/mo for “up to” 3Mbs speeds. When Verizon entered the market, it immediately resulted in fierce promotions between both entities trying to steal (and retain) customers. Today, thanks to this and new competition from wireless providers, not only has the price of home broadband Internet gone down over the past 20+ years, but extremely fast speeds now exceeding 1Gbs (333x faster than what Cox offered in 1997) are available for less than $100/mo.
Devastating Effects of Monopolies
With no competition to keep them in check, monopolies can hike prices, reduce product quality, and limit consumer choice. The lack of competition can stifle innovation, leading to fewer advancements and improvements in products and services.
Take the case of the pharmaceutical industry. The lack of competition in certain drug markets has allowed some companies to dramatically increase prices. For instance, Martin Shkreli’s Turing Pharmaceuticals raised the price of the life-saving drug Daraprim from $13.50 to $750 per pill overnight, a move that put patients at risk, sparking outrage and highlighting the dangers of monopolistic practices. This underscores the potential harm monopolies can inflict on consumers, particularly in industries where they have little choice but to pay the exorbitant prices set by these companies.
Let us also not forget the potential hospital monopoly here in Rhode Island that would have resulted from the merger of Lifespan and Care New England that, thankfully, did not materialize. This would have almost certainly resulted in fewer choices among medical practitioners, less incentive to innovate, higher hospital bills, and a longer wait for services, as detailed by the Open Market Institute.
Monopsonies, the term used when there is only one buyer or employer in an industry, is a form of monopoly that forces small businesses to sell their goods for little profit and jump through hoops to appease their only possible customer. In the workplace, it is a situation where only one employer exists in an area, leaving workers with no choice but to accept sub-par wages and poor conditions. Imagine you work at a company that makes a special type of motor used in fighter jets. You had to acquire a college degree and train for years to learn how to build, service, and maintain these motors. You work for Company X, which competes with Company Y, and a smaller Company Z. You have good pay and great benefits, the result of competition between the firms. Then Company X merges with Company Y. Suddenly, your choice of workplaces is down to two. The now-bigger Company X engages in a price war with Company Z, and soon thereafter puts them out of business. Now there is only one company in the entire state that offers a home for the skills you possess. They’ve decided, because there is no longer anywhere else for you to go and more available craftsman like yourself than ever (after they were laid off from Company Y and Company Z), they are going to offer you the choice of a 40% pay cut or you can be laid off, to be replaced by someone making half as much. This is what monopolies do to workers.
Monopolies don’t just exist in the marketplace. For decades, the Republican and Democratic Parties have held an iron-grip on the US political system. This has resulted in low quality candidates, candidates with very few major differences, and ultimately voter indifference (1/3 of eligible Americans – nearly 70 million people – chose not to vote in the last Presidential election). We will cover the consequences of this political duopoly in-depth in a future piece.
The Impact on Small Businesses
Small businesses, often hailed as the backbone of our economy, are especially vulnerable to the detrimental effects of monopolies. According to a report by the Institute for Local Self-Reliance (ILSR), monopolies can undermine the economic vitality of small businesses in several ways.
Monopolies can engage in predatory pricing. They can afford to lower prices to a point where small businesses cannot compete, driving them out of the market. Once the competition is eliminated, monopolies can then raise prices at will. For instance, Amazon has often used this tactic, selling products at a loss to drive out competitors, and then raising prices once it has secured a dominant market position. This practice, while beneficial for the monopoly, can be devastating for small businesses that simply cannot compete with such pricing strategies.
Monopolies can limit access to essential goods and services. For instance, a monopoly in the supply chain can restrict a small business’s access to necessary materials, making it difficult for them to operate. One case in point is the control large agricultural businesses have over the supply of seeds and fertilizers, which can make it challenging for small farmers to compete. These farmers, who often operate on thin margins, can find themselves at the mercy of these large corporations, unable to secure the resources they need at a fair price.
Monopolies can stifle innovation. Small businesses often drive innovation and competition, but when faced with a monopoly, they often lack the resources or market access to bring their innovative ideas to fruition. The dominance of tech giant Google, for example, has stifled competition in the online ad industry. Companies like Google, with their vast resources and market reach, can easily copy or acquire innovative startups, effectively quashing potential competition.
While monopolies pose a significant threat to competition, it’s important to note that duopolies (two dominant firms) and other situations where competition is limited can also lead to many of the same problems. In these situations, two or a few companies dominate the market, which can lead to reduced competition, higher prices, and less innovation. Take, for example, the home improvement retail industry, where Home Depot and Lowe’s largely dominate the market and have put most small home improvement stores out of business. While they do compete with each other, the lack of other significant competitors can lead to less pressure to innovate or reduce prices. The two giants can also exert significant power over suppliers, potentially squeezing out smaller competitors.
The lack of robust competition can lead to many of the same problems associated with monopolies. It underscores the importance of promoting competition in all its forms, whether it’s preventing the formation of monopolies or encouraging more competition in markets dominated by a few large players.
The FTC’s New Guidelines
Recognizing the detrimental effects of monopolies, the FTC has recently released new guidelines for mergers, and opened them for public comment. These guidelines aim to prevent the formation of monopolies and promote healthy competition in the market.
The new guidelines take a more aggressive stance against mergers that could potentially lead to monopolization. They propose a more comprehensive analysis of proposed mergers, considering not just the immediate impact on competition, but also the potential long-term effects. This represents a significant shift in policy, reflecting a growing recognition of the dangers posed by monopolies.
The guidelines also emphasize the importance of protecting potential competition. This means scrutinizing mergers that could eliminate firms that, while not currently significant competitors, could become one in the future. This is a significant shift from previous guidelines, which focused primarily on current competition. By considering potential competition, the FTC is taking a more proactive approach to preventing monopolization.
The guidelines propose a more rigorous examination of the merging parties’ internal documents. This would provide insights into the merging parties’ motivations and the likely competitive effects of the merger. This is a crucial step in preventing anti-competitive mergers, as it allows regulators to better understand the intentions and potential impacts of the merging entities.
Monopolies and limited competition pose a significant threat to our way of life, regardless of political affiliation and income level. However, the new guidelines released by the FTC represent a promising step towards curbing this menace. By promoting healthy competition, we can enjoy a vibrant and dynamic economy that benefits everybody.
As we move forward, it is crucial that Rhode Islanders remain vigilant against the rise of monopolies. We must foster an environment that encourages competition, innovation, and growth. Only then can we ensure the continued prosperity of our economy and the well-being of all its participants.
The fight against monopolization is not just about protecting small businesses or consumers. It’s about preserving the very essence of our economic system. It’s about ensuring that the lifeblood of our economy – competition – continues to flow freely. It’s about standing up for the principles of fairness, opportunity, and innovation that underpin our market system.
In the end, the battle against monopolies is a battle for the soul of our nation. It’s a battle we cannot afford to lose. As we continue to grapple with the challenges posed by monopolies, it is our responsibility to ensure that our state and our country remain a place where competition thrives, innovation flourishes, and opportunities are plenty.
If you’d like to read more about the devastating effects of monopolies, check out Matt Stoller’s BIG newsletter which covers monopoly power and the ways it touches all aspects of our lives.