Pre-Industrial

Philosophy of
Monopoly

Tough Stuff

In the late 1700s and early 1800s, monopolies were often

granted for things that were really, really difficult to do.
1. 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)

Example: Building a
bridge across the
Charles River

Question:
Why would we want to
build a bridge across
the river?

Only if called
upon:
1.
2.
3.

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

0
0
0

Benefits:

You can travel by horse across the river (or walk)

More commerce
Better infrastructure for moving things around (another
financial benefit)

Problem:

Not just anyone can do this (bridges dont just spring up in

the late 1700s or early 1800s)

Photo taken by Songquan Deng

Engineering problems

Economies of Scale

Heres the Deal

Government will grant you an exclusive license for the

bridge for 30 years.
No competition (no other bridges) for 30 years
You can collect 30 years worth of fares and be the only
option to cross the river by bridge

Heres the Deal

Question:
Government will grant you an exclusive
license for the
bridge for 30 years.
Is this a good

No competition (no other bridges) fordeal

30 for
years
everyone?

You can collect 30 years worth of fares and be the only

option to cross the river by bridge

Good Deal For Everyone?

Yes
B. No
A.

1
1

Only if called
upon:
1.
2.
3.

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

0
0
0

Summary

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)

Robber-Barron
Philosophy of
Monopoly

Late 1800s

In the late 1800s, the situation changes.

1. Monopolies are being formed by private
corporations, not government
2. They do this by merging or buying up their
competition.

hypothetical:

Company
1

High speed internet (above 13 mbps)

Company
2

customers

Company
3

hypothetical:

Company
1

High speed internet (above 13 mbps)

Company
2

Company
3

Competition produces a price range of $34.99 to $49.99

customers

hypothetical:

Company
1

High speed internet (above 13 mbps)

Company
2

Company
3

Competition produces a price range of $34.99 to $49.99

customers

hypothetical:

High speed internet (above 13 mbps)

Comcast
It can now charge, say, $49.99 for the service
Company profits more than it would have if it
had to compete
You pay more for the price

customers

hypothetical:

High speed internet (above 13 mbps)

Comcast
Itits
can
say, $45.00
fordont
the service
Note:
notnow
thatcharge,
they gouge
you. They
win unless they
make a sale. So they dont price the product out of the range of
Company profits more than it would have if it
dire affordability.
had to compete

Rather, they simply price it so that they can get more than what
You
pay
for the price
they
would
getmore
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 alsocustomers
allows for a windfall.

Another
example:

Company
1

Car
Insurance

My
Story

Company
2

Company
3

Geico 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 companies
Each 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 $300

Company
1

Company
2

Company
3

Question:
Is there another way for the companies to get the
monopoly price without merging or being taken over?

customers

Only if called
upon:
1.
2.
3.

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

0
0
0

Company
1

Company
2

Company
3

Answer: Collusion
Question:

there
another way
for the1 sells to Ohio
1. An agreementIsnot
to compete.
Company
to get#3$45
without
only. #2 sells companies
to Indiana only.
to Michigan.
merging or being taken over?
2. This is what JP Morgan used to do with companies in the
late 1800s (explain). Hed buy large interests in all 3 and get
customers
them to collude. He was
their banker, so he could control
them.

Film clip: JP Morgan

(From History Channel).
Three insights:
(1) Morgan bought enough stock in entire industries to
control the participants;
(2) 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);
(3) Finance is the industry that will control all other
industries

Imposing economic order

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 compete
Capitalism as a pre-configured arrangement for price and
profit, that protects itself from insurgent competition

Film clip: Morganization

(From History Channel).

Film clip: John D. Rockefeller

(From History Channel).
What you call Monopoly I call Enterprise
(relate this to Social Darwinism)

Mergers and Power in

1896

William McKinley
-- Elected President in 1896.
-- Handmaiden of the robber barons

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Copyright, Sean Wilson. 2007

29

Film clip: buying the 1896 election

(From History Channel).
Mention three things:
(1) William Jennings Bryan is the opponent in 1896;
(2) Money and Factory Foreman are the tools
(3) The Robber Barons act in concert as a singular entity

New Economic Goliaths

-- Mergers, Trusts, Monopolies, Oligopolies
Massive 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.

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Copyright, Sean Wilson. 2007

31

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Copyright, Sean Wilson. 2007

32

Interest on mortgaged
farm

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Copyright, Sean Wilson. 2007

33

Captain of a trust
wielding legislation as
a sword
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Copyright, Sean Wilson. 2007

34

Comparison to
feudal times

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Copyright, Sean Wilson. 2007

35

Robber Barons

On the backs of
the muggles

Inequality
-- There is great inequality between rich and poor

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Copyright, Sean Wilson. 2007

37

Film clip: inequality in 1896

(From History Channel).
Mention four things:
(1) This clip is talking about the 1896 election (weve
already moved past that in the lecture)
(2) Rockefeller is worth 1% of the entire US economy
(3) Factory workers dont have a livable wage
(4) 1 in 11 Steel workers die on the job