The Sherman Anti-Trust Act was passed in the US in 1890. The purpose of this was to reign in the power of companies that became too powerful. With that power they could stop competitors in unfair ways. The government meant to be a check against the excesses of the marketplace.
The ironic thing is that monopoly power ultimately is used to manipulate anti-monopoly legislation and even judicial power. In other words, the power that comes with profits influences those that would seek to check it.
(And it is useful to understand that the size and reach of monopolies back then is dwarfed by multinational companies today, wherever monopoly power is discussed.)
In 1890, James Buchanan Duke forced the other four major tobacco producers to join a group called the American Tobacco Company. Duke led this $25 million capitalized consortium. This was known as the “Tobacco Trust” and claimed 90% of cigarette sales in the US.
Further, in 1901, Duke joined with Imperial Tobacco in the UK creating British American Tobacco to cement worldwide tobacco control.
It was these companies joining that led to the Department of Justice indicting American Tobacco in violation of the Sherman Antitrust Act in 1907.
But understand that around this time the Tobacco Trust now had $350 million in assets. What do you do with that kind of money? You wield it to prevent others from taking the power you have obtained as you gobble up even more.
After four years in the courts, in May of 1911, the Supreme Court found American Tobacco was in violation of the Antitrust Act. They ordered the trust dissolved. This led to negotiations on exactly how this would be done over the following months.
Journalist Louis Brandeis closely followed the case. He wrote that American Tobacco was to be divided into “three parts to be owned by the same persons in the same proportions and to be controlled by the same individuals who the Supreme Court held to have combined in violation of the [anti-trust] law…It is inconceivable that even a decision rendered by able and upright judges can make the American people believe that such a ‘disintegration’ will restore ‘honest’ competition.” He wrote that this was, “An illegal trust legalized.”
Prices of cigarettes did not change. The only thing that really changed was that advertising by the cigarette companies exploded upwards. That is covered in the next section.
But let’s fast forward in time. In 1941, Big Tobacco was found in violation of the Sherman Antitrust Act again for price fixing.
This is an important element to recognize. While competition is very apparent with advertising, there is cooperation going on in other aspects. Price fixing, where the companies agree not to compete on price, as it would cause a race to the bottom, is one common area. But there are others cooperative areas crucial to the Big Tobacco story.
In December of 1953, as science showing harms of smoking was solidifying, tobacco company executives met at the Plaza Hotel in New York City to discuss actions to counteract this scientific evidence. As a group, they hired public relations firm Hill & Knowlton, the most influential PR firm in the USA.
Hill & Knowlton led to the publishing in January 1954 of “A Frank Statement to Cigarette Smokers” in 448 newspapers across 258 cities. This PR piece assured people that Big Tobacco was taking the research seriously and would thoroughly investigate it. For this, they announced the creation of the Tobacco Industry Research Committee (TIRC).
As Brandt wrote, “Even as the companies continued to vie for market share among their respective brands, it was imperative that their in-house public relations offices present a united front in the critical domain of health and science.”
And this is the official start of Big Tobacco seeking control over scientific opinion. They operated as a monopoly in this area. As a monopoly is often thought of as a single company, and here we had a group of them, the term cartel might be a better fit. This plan continued with a wide variety of other joint organizations, such as the Tobacco Institute, a lobbying organization established in 1958.
Another example from 1981 is when Philip Morris, R.J. Reynolds and Brown & Williamson joined together to form the Cigarette Export Association, a non-profit trade association “to improve the competitive position” in foreign markets.
Yes, there was competition in advertising and getting people to pick brands. But cooperation in all other endeavors that would expand the overall marketplace. This was not merely providing the desired supply but manufacturing demand.
There certainly were many challenges along the way. In 1964, the FTC was going against Big Tobacco regarding their advertising. At this time, Big Tobacco executives agreed to let attorney Thomas Austern of Covington & Burling represent them all in the case.
Here we see another place that cooperation reigned, within the legal realm. This was equal to science in the amount of teamwork seen from this cartel.
With that threat against them, in April of 1964, Big Tobacco announced self-regulation of their advertising with The Cigarette Advertising Code. The monopoly watched itself! As you might guess, this had little impact on changing commercials and other advertisements.
In 1965 the FTC required label on packages saying “Caution: cigarette smoking is dangerous to health and may cause death from cancer and other diseases.” This was from the passage of the Federal Cigarette Labeling and Advertising Act of 1965, heavily lobbied for by Big Tobacco. This act was actually in their favor. More on why and how that worked for them will be explored later. For now, understand that monopoly cooperation was used in lobbying and both the fighting and passing of legislation.
In 1995, Big Tobacco contributed a then record $4.1 million to congressional campaigns. Monopoly cooperation in putting politicians in their pockets.
Despite all this, their crimes did eventually catch up with them, even if they only got a slap on the wrist for it.
In 1999, the DOJ announced civil litigation against Big Tobacco charging them with violating the RICO Act. In 2004, United States v. Philip Morris et al. wrapped up with $280 billion in fines for the criminal enterprise. And in August of 2006, Judge Kessler issued her decision in the RICO case already mentioned.
“[I]t is critically significant that a federal court has now conclusively found that the industry engaged in a racketeering conspiracy to defraud the American public about the mortal dangers of their product, and that it continues to do so,” writes Brandt.
So you might ask, if the companies were found guilty of being a criminal organization, why are they still around? The answer is monopoly power. In other words, the racket was too big to fail.
To sum up, the idea behind the Sherman Anti-Trust Act was that companies can become too powerful, making it unfair for competition. The RICO Act held that powerful leaders of organizations could insulate themselves from committing any crime themselves, while the organizations they head engage in plenty of criminal activity. Big Tobacco was guilty of both.
Cooperation between a few, the elite insiders, on the important stuff is always going to be more helpful than total competition. This allows you to gain more power and better fight off those that would take it from you.
It goes far beyond competing in a marketplace. When you have the funds to influence science, journalism, law, regulation and therefore, the culture at large, you are playing in a field different from what most people even know exists.
It’s not a level playing field, not even close. You’re playing soccer, kicking the ball along, and they’re playing football, picking up the ball and running with it into the goal. Despite this, their moves are invisible to most. Why? Because they can do things in the shadows and have the money and power to largely keep it that way.
I started with this section because it is ultimately monopoly power that allows those other strategies of the playbook to work. Indeed, it may even be required in some cases. If there were real competition among the big companies, the competitors would expose each other’s ill deeds. But it is better, meaning more profitable, to collude.
Key Takeaways on Monopoly Power
- A monopoly is often thought of as a single company holding all the power, but many times it is a group of companies that cooperate, and thus the term cartel may better function.
- Monopoly power is so potent that it can in fact defy and influence government anti-monopoly action. Despite being found guilty of the Sherman Anti-Trust Act twice, Big Tobacco continued to act as a monopoly.
- Competition can occur on one level, such as advertising for brand loyalty, but cooperation on another level, such as price fixing and a united PR, scientific, legal, and lobbying front.
- The companies that made up Big Tobacco were found guilty of the RICO Act, stating there was a fifty-year conspiracy between them. This means they functionally operated as organized crime, like the mafia, for decades.
- Some monopolies ultimately become too big to fail, meaning they’ve accumulated enough power and connections to prevent themselves from going under no matter the criminal activity they’ve engaged in.
- Compare the power of a monopoly or cartel against the power of the average individual. It is not a level playing field which gives such Industry Playbook strategies even more power.
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This monopoly game gets even more convoluted once you understand that government is vital for monopolies to exist. So many people demand that this industry, or that industry get regulated. Yet, all that regulation does, and all that it was ever designed to do, is make the entry costs into that area prohibitive to competitors. In other words, regulation creates monopolies. And monopolies are easier to work with than small businesses (though small businesses are better for the overall prosperity) for your lazy government bandit. They get to scoop all that money from one neat pile, rather than hustle all over the place for the little dregs from each small business. The corruption we have in our business world has all been worsened by government.
I don’t fully agree with that. Yes, regulation can create barriers of entry to newcomers. But regulations can also be enforced just on big companies, and not little ones. That does occur within the supplements space for instance. Under a certain size, you don’t have to follow certain regulations.
It is also clear that some involved in regulation are earnestly trying to help. If the government didn’t exist then monopolies would still exist.
It’s true that some involved in regulation are trying to help; but it’s a rigged system. I used to work in the most regulated industry in the world: Securities. All that regulation was designed to protect the company and the brokerage firms.
In the supplement industry you named, just how helpful has the regulations been? Centrum is the most popular vitamin in the world, and it’s basically just a hunk of limestone. This is no different than any other aspect of our society. The corruption is everywhere, and government is always there to help it become even more corrupt.
These politicians of today are no more corrupt than any other generation of politicians. They’ve always been that way. How is a body of corruption going to regulate anything when they’re all for sale to the highest bidders?
If we didn’t have the state, we might still have monopolies. However, if people didn’t live under the illusion that some “higher power” had their back, those monopolies would hardly have the power they do today. Besides, they are largely monopolies BECAUSE the government has written the regulations to protect their status as monopolies.
In our current state, in which we hear that FaceBook, Twitter, and those other monstrosities (even though I’ve heard nothing of this in the last few months), are facing regulation; it would be a godsend for them if regulation did happen. How many social media company startups would be able to afford to jump through all of the hoops imposed on them? No grassroots ones.
If you look back at the meat packing industry, in which Upton Sinclair popularized by his mostly fictitious tale “The Jungle”, he was trying to popularize unions. Instead, it was used to wipe out all of the small meat packing companies that were a burden to the larger ones. This was done via regulation.
Yeah, we’re mostly on the same page. However, I do think there is a way regulation could be done in a non-corrupt way.
There is a way, but it doesn’t involve government. Third party guidelines for each industry. I forgot the name of it, but they already have such a system in place for many companies. It’s open, and geared towards ensuring that compliance benefits the consumer. Unfortunately, being as the nature of government is corruption; I see no way for that skunk to change its’ stripes.
If you recall that name, please let me know as it would be something I’d like to look into.
Found it! It’s ISO standards. Can’t believe I forgot the name as I once helped a girl I was dating to write her company standards. Though this is not the only way. There is also third party verification, as your company does. Also, I believe that transparency is going to become a big deal in the future. However, regardless of how the industry goes forth, it’s of paramount importance that the consumers become more educated and insistent upon quality. Manufacturers can only get away with shoddy practices because the consumers are uneducated and submissive.
Thank you.
You’re not wrong, but government does have its place. The reason we don’t (still) have children working in mines, and do have forty hour workweeks with a minimum wage (and overtime pay); or factories (still) dumping raw effluent in major rivers, an etcetera: government. Rarely is something all good or all bad.
Actually, the reason why we don’t still have children working is because the modern manufacturing process meant that we no longer needed their labor. Government is a chokepoint for corruption.
The people neighboring a plant in Florida demanded that it stopped dumping its waste into the river. They did. This because Florida (where I live) was, and still is, heavily populated by rednecks with shotguns and short tempers. I believe this was a phosphate or aluminum plant. In either case, it was fluoride that was being dumped. Or at least part of it. So, the government then got involved and declared fluoride great and started putting it in our drinking water. Yay for government!
The 40 hour week was really fairly early in our history. You can credit drunken Germans for it. They would bring their beer to work and on Fridays would often get so drunk that their work was useless. Combine this with advanced manufacturing processes and you have a 40 hour week. The overtime is not from the government either. Your whole argument rests on employees being powerless victims of businesses. They’re not. It takes two to tango. The law of supply and demand works for employees as well. If you want to have a business, you need to ensure that people want to work for you.
Also, on the raw effluent, the EPA required all industries to dump their toxic waste into the sewers. This meant that all of those toxic chemicals go through the treatment process. The end result is that many cities are selling that “toxic sludge”, which has every chemical known to man (and this is no exxageration) in it, for people to use in their gardens. And they call it green. I’m sure it won’t kill you if you raise food with it (though in the fine print it will say don’t do that), or that the cotton they plant with it won’t leach any chemicals into your skin, or that any of it won’t wind up airborne to give who knows what kind of disease, or that it would ever possibly wind up in your drinking water. Crap in the water before government. Government made it worse. Don’t usually bomb a comment section like this, but there’s a lot to address here.
mmm. Well, yes. “Don’t believe everything you think” is a generally wise policy. The gaps in your claims are legion, but let’s not argue!
If the gaps are so legion, I’m sure you would have pointed them out. I wasn’t wrong on anything I wrote. If you’re going to claim you’re on the higher ground, then please provide the proof of your superiority.