The Effects of Big Business

There are many factors that affect the the United States economy but one overlooked aspect is big businesses. There are many industries that have only a few companies controlling a large percent of the market, which gives consumers less choices. Many of these industries could be classified as monopolistic or as an oligopoly because of the limited competition. This can affect the economy in a negative way because smaller businesses are not able to compete against big businesses. There are antitrust laws the government should be enforcing, which protects competition in these industries.

What Monopolies and Oligopolies Are?

Monopolies and oligopolies are a form of big business. A monopoly according to Merriam-Webster Dictionary (2017) is, “exclusive control of a commodity or services in a particular market, or a control that makes possible the manipulation of prices”. To be a monopoly, a company must control almost an entire industry or have so much power that they can control prices for a product . An oligopoly is an industry where "there are few sellers, as a result of which they can greatly influence price and other market factors" (Dictionary.com). Industries can become monopolies or oligopolies through mergers and acquisitions. Woods says mergers are multiple companies combining into one company and acquisitions are where “one company purchases another company” (n.d.). An industry loses competition when two big companies combine through either mergers or acquisitions, which can cause products to be more expensive and less quality.

Current Antitrust Laws

There are antitrust laws that are designed to prevent an industry from becoming a monopoly and to protect competition. The three key antitrust laws that are still in effect today are the Sherman Act, the Federal Trade Commission Act, and the Clayton Act (ftc.gov). According to the Federal Trade Commission (FTC), these laws are to prevent, “unlawful mergers and business practices… leaving courts to decide which ones are illegal based on the facts of each case”. These laws can only be enforced if a case is brought to the courts, which means the government must investigate businesses engaging in these activities and bring the case to the courts. The purpose of these laws is to protect consumers by making sure businesses have a strong incentive “to operate efficiently, keep prices down, and keep quality up” (ftc.gov). There is less incentive for competition if there is only one company or a few companies controlling a majority of an industry.

The first law is the Sherman Act, which makes it illegal for businesses to restrain trade by creating a contract, combining, or conspiring (ftc.gov). It also makes it illegal for businesses to work together to monopolize an industry (ftc.gov). This does not mean all companies working together are violating the law but just in cases where two or more companies are clearly colluding, if they create a monopoly, or if they greatly threaten competition. According to the FTC, “the Sherman Act is also a criminal law" so "individuals and businesses that violate it may be prosecuted by the Department of Justice”. The Federal Trade Commission Act created the FTC and makes it illegal for businesses to conduct "unfair methods of competition" or "unfair or deceptive acts or practices." This guarantees the consumer is protected by preventing companies from using methods that would harm competition. Violations of the Sherman Act and other harmful activities towards competition that do not fit the Sherman Act perfectly are also violations of the FTC Act (ftc.gov).

The final major antitrust law is the Clayton Act, which does not allow mergers that weaken competition significantly and interlocking directorates (ftc.gov). Interlocking directorates are multiple competing businesses with one person making all business decisions (ftc.gov). It has two amendments with the first being Robinson-Patman Act of 1936, which “bans certain discriminatory prices, services, and allowances in dealings between merchants” (ftc.gov). The second is the Hart-Scott-Rodino Antitrust Improvements Act in 1976, which requires the government to be informed about large mergers or acquisitions beforehand (ftc.gov). This seems to be an important law because there are multiple requirements for businesses to follow and it has two amendments. All these laws are put into place so that competition in the economy is preserved so that consumer goods have higher quality and reasonable prices.

Negative Aspects to Monopolies and Oligopolies

There are many negative aspects of monopolies and oligopolies that can influence the economy. Thoma says that one negative would be consumers being charged unreasonably high prices when one or more companies have large amounts of power (2017). Consumers would buy less of the products, which would create less demand and less production (2014). This could have a negative effect on the economy because people would stop spending their money, which would destroy that industry and hurt the economy if it is a big enough industry. Companies can become powerful by “driving competitors out of business” by setting “prices below costs and absorb losses until competitors can no longer survive” and then raising “prices high enough to more than cover the losses it took” (Thoma, 2014). This can be prevented with the antitrust laws that are currently in place that make this practice illegal and would require those laws to be properly regulated.

According to Thoma, wealthy companies can also have “considerable political influence and the ability to "capture the political and regulatory process… to tilt the legal and regulatory processes against any potential threat to its market power” (2014). This gives large companies a major advantage because they can outspend smaller ones when it comes to lobbyists and campaign contributions to politicians or political parties. This would result in legislation that gives those larger companies a decided advantage. Normally it is easy to regulate activities like this by making it illegal for companies to make campaign contributions. This has become difficult in the last few years due to lax campaign finance laws such as Citizens United. Significant market power occurs when there are just a few companies in an industry, but that power becomes weak when there is sufficient competition (Thoma, 2014). Therefore, it is important to enforce antitrust laws so that large companies do not have a significant economic advantage over smaller businesses and cannot price gouge consumers.

Examples of Industries with Weak Competition

There are many examples of industries with weak competition because of increased consolidation or a few companies being too large for other companies to compete. One industry that has had consolidation, which has caused less competition is the media. According to Lutz, 90 percent of the media is owned by six corporations compared to 50 corporations in 1983. These companies are CBS, Comcast, Disney, News-Corp, Time-Warner, and Viacom. This means there are less companies controlling the U.S. media with news and entertainment, which has led to less choices for people. The result could be information being more easily controlled even if it is unintentional, such as covering a big news story in favor of a smaller one to make more money. Another example of an industry with less choices is cable and internet providers. There are 78.8 million cable subscribers among Charter, Comcast, DirectTV, Dish, and Verizon FiOS (Dunn, 2017). There are 75.13 million internet subscribers among AT&T, CenturyLink, Comcast, Charter, and Verizon (Dunn, 2017). The small amount of competition could result in those providers not being very different from each other with similar prices.

The financial industry is another area with few companies controlling a majority of the industry. Experian, Equifax, and TransUnion are the only three companies that are responsible for collecting people’s information and credit reporting (consumer.gov). This could be dangerous because these companies are responsible for millions of people’s information and that information is at risk when there are security issues. An example of this is the recent data breach of Equifax where “143 million American consumers whose sensitive personal information was exposed” (Gressin, 2017). These companies have no incentive to improve their security because they know people only have three choices.

The ten largest banks control $11.8 trillion in assets as of 2017 including Bank of America, Capital One, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, PNC, TD Group, U.S. Bancorp, and Wells Fargo (Dixon, 2017). That is a lot of money for only 10 banks to control but that number does not tell what percentage of the industry that is. According to Schaefer the total assets of U.S. banks was $15.3 trillion in 2014 and the top five banks controlled 44 percent of that (2014). The 10 biggest banks control 77 percent of bank assets if that number holds up in 2017, but that percentage could be lower. Having only a few banks could be dangerous because the economy can take a major hit if one or more banks mishandles and loses money by making too many risky investments. There are many more examples of industries with limited competition.

Solutions

There currently is a problem with big businesses gaining significant advantages over their competition, which is hurting consumers and small businesses. This causes some industries with big companies to become monopolies or oligopolies because of weak competition. The simple solution to this problem is to enforce the antitrust laws that are currently in place to guarantee there is sufficient competition. Another possible solution would be to update current antitrust laws to include regulations to prevent oligopolies because current ones only mention monopolies. Oligopolies can be just as dangerous to the economy and an oligopoly could become a monopoly with acquisitions and mergers. Both solutions would increase competition in several industries that currently have little, which would be beneficial to consumers and small businesses.

References

https://www.consumer.gov/articles/1009-your-credit-history

Dixon, A. (2017, Jun. 26). America’s 10 Biggest Banks. Retrieved from http://www.bankrate.com/banking/americas-top-10-biggest-banks/#slide=1

Dunn, J. (2017, Jan. 26). A Verizon-Charter Combo Would be the Biggest Internet Provider in the US. Retrieved from

https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws

Gressin, S. (2017, Sep. 8). The Equifax Data Breach: What to do? Retrieved from https://www.consumer.ftc.gov/blog/2017/09/equifax-data-breach-what-do

Lutz, A. (2012, Jun. 14). These 6 Corporations Control 90% of the Media in American. Retrieved from http://www.businessinsider.com/these-6-corporations-control-90-of-the-media-in-america-2012-6

monopoly. 2017. Merriam-Webster.com. Retrieved October 31, 2017, from https://www.merriam-webster.com/help/citing-the-dictionary

oligopoly. 2017. Dictionary.com. Retrieved October 31, 2017, from http://www.dictionary.com/browse/oligopoly

Schaefer, S. (2014, Dec. 3). Five Biggest U.S. Banks Control Nearly Half Industry’s $15 trillion in Assets. Retrieved from om jpmorgan-citi-bankamerica/#384dfb9b5395

Thoma, M. (2014, Sep. 8). What’s so Bad About Monopoly Power? Retrieved from https://www.cbsnews.com/news/whats-so-bad-about-monopoly-power/

Woods, C. (n.d.). What Are Mergers and Acquisitions? - Definition & Examples. Retrieved from http://study.com/academy/lesson/what-are-mergers-and-acquisitions-definition-examples-quiz.html