Money Matters

Economics, Banking, Finance, and Supply Chains

Oligopolies are killing capitalism and how to stop it

Oligopolies: A picture of trust buster par excellence, Thurman Arnold

First, what are oligopolies?

Most people are more familiar with the words monopoly and duopoly.

A monopoly is when there is only one seller in a market, and a duopoly is when there are two.

Modern capitalist economies have very few true monopolies and duopolies, but we have LOTS of oligopolies, which is when a small number of large firms divide up the market between them.

Examples of oligopolies in modern capitalism

Let’s talk about the United States because when it comes to modern capitalism, they are the 800-pound gorilla.

The examples below are from the book The Myth of Modern Capitalism.

>>> Tepper, J., & Hearn, D. (2018). The Myth of Capitalism: Monopolies and the Death of Competition (1st ed.). Wiley. p125-136

In the book, the author identifies 14 sectors of our economy that are dominated by oligopolies, which result in less consumer choice and higher prices.

  1. Credit reporting bureaus: 3 firms, 100% of the market
  2. Tax preparation: 3 firms, 90% of the market
  3. Airlines: Create regional dominance by dividing up terminal slots at hub airports
  4. Cell phones: 4 firms, not quite 100%
  5. Banks: 5 firms, 44% of the market
  6. Health insurance: In 37 states, 3 firms control at least 80% of the market
  7. Medical care: Hospital mergers are creating regional near monolopies
  8. Group purchasing organizations: 4 firms, $300 billion of annual purchases, by 5,000 health systems
  9. Pharmacy benefit managers: 3 firms, 75% of the market
  10. Drug wholesalers: 3 firms, 90% of the market
  11. Meat and poultry: 3 firms, 80% of the market
  12. Agriculture: 3 firms, 75% of the market
  13. Media: 6 firms, 90% of the market
  14. Title insura: 4 firms, 87% of the market

Aren’t their antitrust laws?

In a word, yes.

Sherman Antitrust Act

The Sherman Antitrust Act was signed into law in 1890 and bans firms from colluding or merging to form monopolies.

Clayton Antitrust Act

The Clayton Antitrust Act was signed into law in 1914.

It defines unethical business practices like price-fixing and monopolies and upholds various labour rights.

Robinson-Patman act

The Robinson-Patman Act was signed into law in 1936 to outlaw price discrimination.

They’re not new, so we’ve been here before?

We certainly have. In fact, those three antitrust laws became laws specifically to address prior abuses of our capitalist market system.

Why are things so out of control now?

Lax enforcement.

Since the early 1980s, the antitrust enforcement agencies in the United States, principally FTC (Federal Trade Commission) and the DOJ (US Department of Justice) Antitrust Division have been lax about enforcing antitrust laws.

Firms stating an intention to merge go through a merger review process, which is run by either the FTC or the DOJ (it seems they work that out between themselves on a case-by-case basis).

For the past 40 years, mergers were approved that in prior decades would likely have been denied due to the degree of corporate consolidation they created.

Over time, corporate consolidation has increased one merger at a time, and one new megalith technology company at a time (Microsoft, Apple, Google, Amazon, Facebook, etc) until we came to be in the “economy of oligopolies” where we are today.

How did we break up such corporate conglomerates in the past?

Or, where can we find another Thurman Arnold?

Who was Thurman Arnold?

Thurman Arnold was a lawyer who is best known for trust-busting work as the Assistant Attorney General in charge of the Antitrust Division in the Department of Justice.

He served in this capacity from 1938 to 1943, during the administration of Franklin D. Roosevelt.

And did he ever have a creative way of enforcing antitrust compliance!

What did he do?

First, let’s take a moment to recognize that has trust-busting work occurred from 1938 to 1943, which was just a few years prior to the start of the greatest economic expansion in the history of human civilization, that being the economic expansion of the United States from 1945 to 1985.

Now correlation does not mean causation, but he successfully broke up businesses that accumulated so much power they limited consumer choice and prices.

And shortly after he did so, the US economy entered a period of unprecedented expansion.

No one will ever know exactly why Franklin Roosevelt hired Thurman Arnold as head of the Antitrust Division of the Justice Department in 1938. It may simply have been that head of the Antitrust Division was the first important administration job available when Arnold’s supporters and friends sought a full-time Washington position for him. While the nomination proved to be an awkward and controversial choice, it was also an inspired choice. For the next five years, Thurman Arnold revitalized antitrust law and enforcement and changed the entire focus of the New Deal from corporatist planning to competition as the fundamental economic policy of the Roosevelt administration. Those who favor a consumer-friendly competitive economy owe him a debt that transcends the specific cases he brought and the doctrines he espoused.

Waller, Spencer Weber, The Antitrust Legacy of Thurman Arnold, 78 St. John’s L. Rev. 569 (2004).

What did he do that worked?

Before I get to that, let me first ramble a bit (but just a bit) about why current antitrust efforts are not producing results.

First, why are antitrust actions today ineffective?

  1. The legal challenges take years.
  2. The appeals take longer.
  3. The penalities are small relative to the firms abilities to pay.

So, ultimately, the process lacks accountability for the firms and people whom judgments are rendered.

In 2019 Facebook paid a record-breaking $5 billion fine, which is 16 days’ worth of revenue.

None of Facebook’s senior executives felt any concern that they would be adversely affected by the practices for which they were fined.

And they weren’t.

So why would they stop?

What they’re doing is working, and the $5 billion fine is part of the cost of doing business.

No big deal.

So what did Thurman Arnold do differently?

He filed criminal charges against individuals along with civil lawsuits against the firms.

Why did this work?

Because apparently, if an executive of a corporation knows the corporation is involved in illegal activity and approves of such illegal activity, they are committing a crime.

To illustrate this point, while killing someone is murder, paying someone else to kill someone, while not murder per se, is a crime.

And when Thurman Arnold looked into the antitrust cases before him, there WAS evidence to support filing criminal charges.

So he filed them.

I could not find any individuals who were convicted of the criminal charges and went to prison, but that apparently was not the point.

The threat of a criminal conviction and the possibility of a prison sentence caused the corporate executives to take the antitrust civil suit seriously.

And they were willing to let the antitrust rulings make fundamental and structural changes to their businesses in exchange for the criminal charges being dropped.

So Thurman Arnold was able to get done in months, what today takes years, and results in, metaphorically speaking. slaps on the wrist.

We could solve our oligopolies problem in a similar fashion, if whoever runs that Antitrust Division at the DOJ would take a similar tact today.

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