“We can have democracy, or we can have a horde of multi-millionaires. We can’t have both.” – Congressman Edward Keating, 1933

This research note draws heavily from Sally Hubbard’s (2020) book Monopolies Suck: 7 Ways Big Corporations Rule Your Life and How to Take Back Control.

The Basics

What is a monopoly?

The term monopoly means a single seller has all the power: that there is just one seller selling a unique product on the market (duopoly = two, oligopoly=3+).

The term monopsony means that a single buyer has all the power: that there is just one buyer buying a unique product on the market.

Antitrust refers to the rules that regulate monopolies. It is called that because a lot of old timey monopolies were organized as trusts. In Canada we call antitrust competition law.

How antitrust is regulated

In the U.S.

In the U.S., antitrust is federally enforced by the FTC and the Department of Justice. These agencies receive notifications from companies that they plan to merge or get a complaint/tip/news report about anti-competitive behavior. Then they investigate. Unlike antitrust enforcers in countries like Canada and the EU, American antitrust investigators have to sue corporations in court. Most of the time, enforcers settle rather than taking the risk of losing.

State Attorneys General can also file their own antitrust suits, as can regular people and businesses. However, there are steep barriers to filing antitrust class action lawsuits, so in practice most cases are brought by governments or other companies.

In Canada

In Canada, the Competition Bureau administers and enforces the Competition Act. The Bureau investigates alleged breaches of the Competition Act and decides whether to bring them to the Competition Tribunal.

This episode will focuses on the U.S. because many of the largest monopolies are American, and most of the attention is on American antitrust. But Canada has monopolies and oligopolies too—in industries like airlines, banking, telecoms, insurance, media, and property development.

Illegal monopolization

Monopoly on its own is not illegal. It is illegal to monopolize. Illegal monopolization has two requirements:

1. Monopoly power

2. That a company has acquired or maintained monopoly power using “exclusionary conduct”

Monopoly power

Monopoly power is the ability to control prices or exclude competition. I.e.: “if a company has the power to kick a competitor out of the game or to set prices, it has monopoly power.”[1]

The best way to establish monopoly power is direct evidence that a company controlled prices or excluded rivals. One good example of this is U.S. v. Microsoft, which is about how Microsoft squashed Netscape by pre-installing Internet Explorer on all PCs and integrating it into Windows so that using a non-Microsoft browser would be difficult and glitchy.[2] The government also found correspondence showing that Microsoft executives did not think they could compete directly with Netscape.[3] Unfortunately the antitrust ruling in US v. Microsoft came too late for Netscape—but Google probably wouldn’t exist if the government hadn’t brought the case.

To give another example, Amazon has forbidden sellers and brands from offering lower prices anywhere else online than they offer on Amazon.[4] This was found to be direct evidence of monopoly power by regulators in Germany and the U.K.[5]

If enforcers cannot find direct evidence of monopoly power, they can use indirect evidence. In this case, they would use market share and demonstrate that barriers make it hard for competitors to enter the market. In the U.S., a market share of 70% or more automatically qualifies as monopoly power, and less than that can be enough.[6]

Defining the market

If market share can be evidence of monopoly power, what exactly is the market we are talking about? A market “includes only companies that customers are likely to switch to when prices go up or quality goes down a small amount.”[7] E.g., In 1998, Microsoft’s Windows operating system had a 95% share of the market for “intel-compatible PC operating systems”.

Companies try to argue to define the market as widely as possible to make their market share smaller. For example, Amazon has argued that their market includes “all retail”—every online and physical store—since they only have 4% market share by this definition.[8] But remember that markets only include substitutes that customers can readily switch to. If Amazon raised prices on beauty supplies, a local hardware store would not be a substitute.[9]

Similarly, the ability to delete Facebook does not mean they aren’t a monopoly. “A company does not have to offer a mandatory product to have monopoly power. Anyone could decide to stop drinking milk, for example, but that doesn’t mean there’s no such thing as a milk monopoly.”[10]

Exclusionary conduct

The second requirement of illegal monopolization is exclusionary conduct. Exclusionary conduct means that “a company is trying to kick out rivals in order to get or keep monopoly power”. When identifying exclusionary conduct, courts will often ask: “If a challenger puts forth a product or service that is equal to or better than a powerful company’s offerings, do they have a shot at success?”[11] If the answer is no, you have illegal monopolization.

Illegal mergers

In addition to illegal monopolization, the Clayton Act establishes that mergers are also illegal where the effect of the merger would be to substantially lessen competition or create a monopoly.[12] Many recent mergers and acquisitions by Big Tech companies are potentially illegal under the Clayton Act in the U.S., but there has been a lack of political will to enforce this rule.[13] Two examples are Facebook’s acquisition of Instagram and Whatsapp. Together, Facebook and Google have bought over 150 companies since 2013.

The Monopoly Crisis

Nearly every marketplace in the U.S. is more concentrated than a generation ago.

Academics have documented increased industry concentration—and decreased competition—since the 1990s.[14]

Between 1997 and 2014, corporate concentration increased in 80% of industries by an average of 90%.[15] And in some industries, concentration has increased more than 200% over that period.[16]

We are in a monopoly crisis, and it affects almost every aspect of our lives.

To give just a few examples:

80% of U.S. washer, dryer, and dishwasher sales are controlled by Whirlpool
Nike controls almost two-fifths of the global sports shoe industry
The U.S. defence contracting industry has also become more concentrated—from 107 firms in 1993 to just 5 today
Three companies control 80% of the baby formula market[17]
Two companies control more than 90% of dialysis centres[18]
Three publishers control 80% of the textbook market[19]

A generation ago, most food was produced by small, independent farms. Today, Dean Foods and the Dairy Farmers of America control 80-90% of the U.S. milk supply chain in some states. The story is similar in eggs, grain, meat, produce, and food processing.

In the face of widespread industry concentration, corporate profit margins have gone from around 20% in the 1980s to 40% in 2017.[20]

Harms of Monopolies

Why are monopolies bad? The concentration of economic power harms society in a bunch of ways. Above all, it allows companies to adopt business practices that are exploitative rather than generative. In other words, a monopoly only has to work for the monopolist—not anybody else.

Proponents of capitalism want markets to be fair and open so that anyone can compete and—in theory anyway—the best will win the day. From this perspective, if competition works it should produce innovation and that should create productivity increases, which should mean workers have to work less hard and consumers get better products for less money.

But capitalism does not actually look like this in practice. Companies want to make money and gain as much market share as possible—in fact, they are institutionally set up to maximize shareholder value.

And that leads them to try various tactics to consolidate power as much as possible. Monopolies are what happens when companies succeed in taking all of the power.

Antitrust law—which regulates competition—is meant to keep markets in check by ensuring that power is dispersed across the economy. Monopolies and monopsonies cause a slew of harms because they concentrate power in a few hands, which allows those powerful few to dictate terms for the rest of us.

Monopolies harm consumers, employees, economies, democracy, and society more broadly.

For Consumers

The “ability to switch to a substitute is important because having a choice empowers you and helps constrain companies from treating you badly.”[21] We live with high prices and absurd fees in many aspects of our daily lives. These are monopoly rents that companies can only charge because they do not face open competition.

Big Tech companies also extract rents from you in the form of your personal data. 76% of websites have hidden Google trackers.[22] In 2018 and 2019 Facebook made more than a billion dollars per week from collecting data and using it to target ads.[23] Monopoly power allows Big Tech to profit by surveilling us because there are no real alternatives.

Industry concentration has also meant that companies can provide lower quality goods and services without fear of losing your business.

And monopolies can dictate wildly unfair contract terms. One example is exclusivity requirements in pharmaceutical contracts.

We are often provided the illusion of choice by different brands operated through the same company. For example, eleven car rental brands are owned by just three companies.

For Employees

Monopsony, duopsony, and oligopsony give employees fewer choices—which in turn means lower pay, worse working conditions, and greater vulnerability to abuse.

The consolidation of the economy is one big reason that employee wages have stagnated for decades despite rising productivity and increases in corporate profitability. Even though productivity and corporate profit margins have skyrocketed, employee pay has hardly increased since the 1980s. From 1973 to 2014, productivity has risen 72%, while employee pay has risen only 9%. And CEO pay has risen 940% since 1978. Monopoly is one cause of this trend. An economic study found that when a labor market goes from the 25th percentile in concentration to the 75th percentile, it creates a 17% decline in wages.[24]

Corporate consolidation makes it more difficult for workers to organize, because it makes anti-union tactics like firing organizers more effective. Monopolies can also demand unfair contract terms for employees, like noncompete clauses.

There is evidence that companies are colluding to keep pay low. For example, beginning in 2005, major tech companies began agreeing not to recruit one another’s employees. The Department of Justice concluded that this was illegal collusion, but the penalty they imposed was merely to prohibit companies from breaking the law in the future.[25]

For the Economy

Monopolies stifle innovation by shutting out competitors. Even though predatory pricing is illegal, it is not being enforced. So, monopolies use this tactic all the time to drive competitors out of business.

Monopolies use their platform privilege to gain an unfair advantage over competitors. For example, the European Commission fined Google $5 billion in 2017 for abusing its dominance by requiring phone makers using Android (80% market share in Europe) to pre-install Google’s apps (e.g.: Search, Chrome, Gmail, YouTube, and Maps).[26] Phone makers “didn’t have the power to disobey Google’s anticompetitive requirements because they lacked a viable alternative for an operating system”.[27]

Monopsonies charge rents for companies that rely on their products or platforms. One example is the “Apple tax”: Apple’s 30% commission on app sales, which brought in $15 billion in revenue in 2019. Google requires entrepreneurs and businesses to pay to appear at the top of searches for their business.[28] E.g.: A tech company called Basecamp pays $72,000 annually to be a top result when people Google “Basecamp”.[29]

And the same problems that monopsonies cause for employees also relate to suppliers. Monopsony companies can demand lower prices and unfair business terms because suppliers have no other choices. When monopsonies squeeze suppliers, this, of course, means lower wages and worse working conditions for their employees. Take the chicken industry for example. Like most parts of the food industry, chicken is an oligopoly. Tyson Foods accounts for two-thirds of processed poultry sales in the U.S.. Their near monopoly allows them to lock poultry farmers into exploitative contracts that “require them to take on debt to build expensive chicken houses, and dictate nearly every aspect of their business operations. According to a 2014 study, poultry farmers who run small operations earn an average hourly wage of $11.50.”[30] No wonder three out of four poultry farmers in the US live below the poverty line.

For Democracy

Concentrated economic power can be converted into political power through lobbyists and political contributions. For example, in 2017, Walmart had 62 lobbyists working to influence the U.S. government.

Media monopolies in particular have gutted the free press and local journalism, which leaves us less able to hold politicians to account. Concentration of control over the internet has made news publications dependent on a few tech companies to reach users—the result being that newspapers are dying while Facebook and Google account for 85-90% of the $150 billion North American and European digital advertising market.[31] The frailty of independent media causes a host of problems, but one key issue is that it makes politicians more susceptible to corruption because there is very little accountability. For more information on the state of local journalism, check out my interview with Canadian local journalism expert, April Lindgren.

Monopolies also weaken democracy by increasing inequality.

For Society

Industry concentration is one reason that big companies pay so little tax. Monopolies donate to politicians and have enormous power over regional economic activity—which gives them the power to demand tax breaks and to avoid tax without a response from regulators. Walmart has reportedly sheltered $76 billion in tax havens (just under 10% of the CDC’s public health preparedness and response budget).[32] Amazon’s federal income tax rate in 2018 was -1.2% and its income taxes were -$129 million.[33]

Monopolies also extract rents from our public services. A key example of this Walmart’s double-dipping on food stamps. Walmart pays its employees so little that they make up the largest group of food stamp recipients in most states. And Walmart earns $13 billion in annual revenue from the food stamp program.[34] An estimated 18% of all food stamps are redeemed at Walmart.[35]

The political power of monopolies has also enabled them to block laws that a majority of people support, and to pass laws that a majority of people oppose. For example, mega-food companies have opposed animal welfare laws—which are extremely popular—and gotten “Ag Gag” laws passed. Ag gag laws make it illegal for concerned citizens to document animal cruelty on transport trucks or for investigative journalists to get jobs in factory farms. Monopolies have also used their political power to prevent the passage of minimum wage increases, plastic bans, the green new deal, and public broadband networks.

A Brief History of Antitrust

How did we get here?

The Robber Barons

The Robber Barons are a group of wealthy monopolists that rose to power during the Gilded Era in America. They are called robber barons because they built their business models on exploitation. Think Rockefeller, Carnegie, J.P. Morgan, and others. From 1895 to 1904, over 2,000 manufacturing firms merged into just 157 corporations. This resulted, in high levels of industry concentration. For example, by 1904 Standard Oil controlled 91% of oil production and 85% of sales.

Ida M. Tarbell published an exposé of Standard Oil’s business practices in 1902, prompting a citizen outcry that ultimately led to modern antitrust law. The Teddy Roosevelt administration filed an anti-trust case against Standard Oil in 1906, and in 1911 the Supreme Court ordered the breakup of Standard Oil.

By the end of the 1910s, most of the trusts had been broken up or otherwise regulated under anti-trust law.

Early Antitrust Law

“If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessities of life.” — Sen. John Sherman

The first antitrust law was passed in Canada in 1889. It was based on the U.S. Sherman Antitrust Act, which passed in 1890. This law kicked off an era of trust busting beginning in the early 1900s. In 1914 Congress created the Federal Trade Commission and passed the Clayton Act and Federal Trade Commission Act.

How and whether anti-trust law is enforced depends a lot on the political will of people in power. Anti-trust enforcement weakened during WWI. It became more aggressive again under FDR during the depression, then waned again during WWII.

The Peak Antitrust Era

The post-WWII period was the most aggressive era of anti-trust enforcement. One reason is the large monopolies that prevailed in Hitler’s Germany. U.S. Secretary of War Kenneth Royall placed the blame for fascism partly on monopolies: “Monopolies soon got control of Germany, brought Hitler to power, and forced virtually the whole world into war.” Competition was seen as a safeguard against both fascism and communism.

In 1950, Congress passed the Celler-Kefauver Act, which strengthened the mandate against mergers. Along with this legislation, the liberal composition of the Supreme Court at the time made possible an era of peak anti-trust.

During this era, the FTC and Supreme Court were extremely skeptical of mergers that regulated in a larger market share for one company.

AT&T is a key anti-trust case. In 1974 the Department of Justice filed an anti-trust case against AT&T, which had been the sole phone service provider in the U.S. for decades. AT&T was broken up in 1982. (This was a big deal, but as of 2018 AT&T now owns most of the companies that were broken away from it.) The breakup of AT&T marked the end of the peak anti-trust era and the beginning of the current era, in which anti-trust cases are judged by the consumer welfare standard.

The Consumer Welfare Standard

Beginning in the 1950s, the “Chicago Boys” – free market economists at the University of Chicago funded by right-wing think tanks – argued that not all anti-competitive behaviour is inefficient. The most influential Chicago Boy in antitrust was a legal scholar named Robert Bork. The Chicago Boys proposed that anti-trust action should only be brought against companies if enforcers could show that it caused consumer harm—for example, if a merger resulted in higher prices.

This is known as the consumer welfare standard. Consumer welfare is the additional value we derive from a product or service that is above and beyond what we pay. This standard is largely all about prices, but could be about increasing other kinds of value. In 1979 the Supreme Court adopted the consumer welfare standard in Reiter v. Sonotone. The election of Ronald Reagan cemented this shift.

From the 1980s onward, the consumer welfare standard has become the basis of anti-trust law. So, rather than enforcing antitrust on the basis of how big companies are or how much market share they have, U.S. enforcers now need to show that monopoly has resulted in a harm to consumer welfare—even though promoting corporate efficiency does not appear anywhere in the Sherman Act. In practice, the consumer welfare standard has meant a lot more freedom for companies to merge and to engage in monopolizing practices.

…And the Results

Between 1996 and 2016, the number of companies listed on the U.S. stock market fell by half. The FTC has challenged fewer and fewer proposed mergers that would leave only 5 or 6 major firms in an industry. In the U.S. today there are only: 4 major airlines, 4 major tele-communications carriers, 3 major drugstores, and 2 major beer producers.

At the end of WWII, antitrust law supported a vision of a diverse, competitive society where no company held power over the entire economy. Today we have returned to an era of extreme industry concentration, where just a few companies have substantial power.

Solutions

So, what can we do about monopolies?

Sally Hubbard is clear in her book: we can only address the monopoly problem through public policy. Consumer behaviour alone will never be enough because monopoly by its nature restricts our consumer choices.

Policy solutions

Hubbard proposes four policy solutions: privacy regulation, antitrust enforcement, interoperability, and non-discrimination rules.

There are other policy proposals to address monopolies. One example is nationalization. For example, James Muldoon of Jacobin has called for making Google and Facebook public utilities.

What about Canada?

These policy solutions are all based on the U.S., but a lot of these solutions would work in Canada too. Canada’s Competition Bureau chief Matthew Boswell is calling for our antitrust legislation, the Competition Act, to be modernized so it works better. For example, our maximum fines are currently $10 million for a first offence and $15 million for subsequent violations, which is obviously way too low.

This seems to not be a major point of public discourse in Canada. Calls for reform to the Competition Act seem to be mostly coming from two academics (Vass Bednar and Robin Shaban) and the Competition Bureau itself. The one exception is cellphone prices, which were in the NDP platform last election.

I was unable to find a single petition or advocacy group pushing for anti-monopoly action in Canada.

So, um, I guess… start one? Or email your Member of Parliament and tell them you’re fed up with your internet bill and your bank fees.

So, how can you help?

Talk about monopolies and why they suck.

Getting an issue out there is the first step to galvanizing action on the subject. Stay informed about monopoly issues. Why not subscribe to Vass Bednar’s regs2riches newsletter? Or, follow her on Twitter @VassB

Support an anti-monopoly citizen group where you are.

Sign up for their newsletter. Or, failing that, donate to a national anti-monopoly group in the U.S. Examples include: the Open Markets Institute, American Economic Liberties Project, and the Institute for Local Self-reliance.

There are also groups with a wider mission that includes anti-monopoly work, like the Roosevelt Institute and Demos. You can also support specific coalitions like Freedom from Facebook and Google.

Overcome default bias.

The monopoly problem cannot be solved through consumption, but you can take certain actions to protect yourself from some harms. We are not privacy experts, but here are some tools we found to protect our privacy: Brave, Firefox (use strict privacy settings), DuckDuckGo, Protonmail, and Signal.

Better know a monopolist.

Next time you buy food, pop into a drive-thru or buy a tube of toothpaste, find out who owns your go-to brand. Are they a monopoly?

References

[1] Hubbard, Sally. (2020). Monopolies Suck: 7 Ways Corporations Rule Your Life and How to Take Back Control. New York: Simon & Schuster Paperbacks at p.56.

[2] Hubbard, Monopolies Suck.

[3] Hubbard, Monopolies Suck.

[4] Hubbard, Monopolies Suck.

[5] Hubbard, Monopolies Suck.

[6] Hubbard, Monopolies Suck.

[7] Hubbard, Monopolies Suck at p.57.

[8] Hubbard, Monopolies Suck.

[9] Hubbard, Monopolies Suck.

[10] Hubbard, Monopolies Suck at p.63.

[11] Hubbard, Monopolies Suck at p.58.

[12] Hubbard, Monopolies Suck.

[13] Hubbard, Monopolies Suck.

[14] Davis, Leila and Orhangazi, Özgür. (2020). Competition and Monopoly in the U.S. Economy: What Do the Industrial Concentration Data Show? Competition and Change https://doi-org.proxy.library.carleton.ca/10.1177/1024529420934011

[15] Hubbard, Monopolies Suck.

[16] Davis and Orhangazi 2020.

[17] Hubbard, Monopolies Suck.

[18] Hubbard, Monopolies Suck.

[19] Hubbard, Monopolies Suck.

[20] Hubbard, Monopolies Suck.

[21] Hubbard, Monopolies Suck at p.57.

[22] Hubbard, Monopolies Suck.

[23] Hubbard, Monopolies Suck.

[24] Hubbard, Monopolies Suck.

[25] Hubbard, Monopolies Suck.

[26] Hubbard, Monopolies Suck.

[27] Hubbard, Monopolies Suck at p.87.

[28] Hubbard, Monopolies Suck.

[29] Hubbard, Monopolies Suck.

[30] Hubbard, Monopolies Suck at p.167.

[31] Hubbard, Monopolies Suck.

[32] Hubbard, Monopolies Suck.

[33] Hubbard, Monopolies Suck.

[34] Hubbard, Monopolies Suck.

[35] Hubbard, Monopolies Suck.