Monopolies Then And Now

The equation of monopoly with certain named business houses was a peculiarly illogical and Indian adaptation; in other countries monopoly power was construed only in terms the market share of a firm. The pioneer in anti-monopoly legislation was the US. It was in America that the original anti-monopoly act, the Sherman Act, was passed in 1890.

As the railway network thickened in the US in the late 19th century, competition between distant producers intensified. Particularly in the states on the Atlantic seaboard, price-cutting became a common, and often ruinous weapon in competition. Soon there arose price-rigging arrangements or cartels in response. Only industry could form cartels; farmers, who were disgorging a flood of wheat from the midwestern states, found that the prices they got went on falling whereas the prices of the industrial goods they bought went up. This perception led to a political backlash, and finally to the Sherman Act which banned cartels.

 

Paradoxically, its effect was to encourage mergers. Thus it was after the Sherman Act that Rockefeller bought off oil producers and set up the monopoly Standard Oil Co. Kerosene was the popular heating and cooking fuel at that time, and the consumers did not like to see the end of cut-throat competition amongst oil companies. The US government broke up the Standard Oil monopoly in 1911, and in 1914 passed the Clayton Act that legislated against mergers as well.

In those years before the first World War there was much paranoia about monopolies. American politicians feared that the great moneybags would become too powerful and would subvert democracy. Thus the anti-monopoly fervour was more political than economic.

Then came the interwar years. The 1920s saw breathless growth, ending up in the great crash of 1929. In the depression that followed, cartels were seen as devices to prevent businesses from going bankrupt. No one was worried about the disadvantages of monopolies; governments even promoted competition-limiting devices. The Nazi government was foremost in forcing industry to collaborate for the greater glory of Germany; but other European governments were not entirely inactive. Our own Coffee Board was born as an official price-rigging arrangement in 1934.

Then in the prosperity of the 1950s, another wave of mergers and acquisitions started in the US. Money was cheap, profits were high, and businesses were expanding. In those conditions, companies saw diversification into unrelated areas as a means of risk reduction; that is when the great American conglomerates were born.

The 1950s and 1960s were also the years when anti-monopoly policy was at its most active in the US. US trustbusters and judges then lived in the mental world in which our leftists live today: they regarded all mergers as undesirable. Thus they in 1955 they stopped two shoe companies, Brown and Kinney, from merging although together they would have owned 2 per cent of the shoe shops in the US. In 1963, two Philadelphia banks felt the competition from big New York banks and wanted to merge; they were not allowed because it would reduce competition in Philadelphia.

This mindset began to change in the 1970s, under the general influence of Milton Friedman and the Chicago school which held that the government could not usefully intervene in the economy. But there were more concrete reasons. It was realized that numbers mattered only beyond a point: that a reduction in the number of competitors from 20 to 10 did not have the same significance as from 2 to 1. Baumol introduced the contest of contestable competition: even if there was a monopoly, if the business was easy to enter, ease of entry would force it to keep its prices low. The effects of mergers on costs mattered; it was more than likely that substantial cost reductions would filter down to buyers. And competition from imports was recognized: as economies became more open and trade barriers fell, concern with competition between domestic firms declined.

The trend towards more and bigger mergers was also reversed in the 1980s. After 1981, interest rates fell, and money became more plentiful. Many conglomerates combined disparate businesses and supervised them sloppily. They were sitting on valuable assets and businesses, but the businesses cross-subsidized one another untidily, and the value of the conglomerates was lower than the sum of the value of its parts. In these unwieldy octopuses, corporate raiders saw an opportunity. They bought up the conglomerates, sold off parts, and made a tidy profit. Or they made leveraged buy-outs. They took hold of companies, loaded them with debt, and with the money raised, they bought off recalcitrant shareholders, leaving a lean company in the hands of a strong management. The 1980s were a decade of demergers.

The 1990s have seen another change of track. There have been mergers and acquisitions galore in the 1990s. In the last year alone the total value of mergers worldwide is estimated to have been a trillion dollars - $650 billion in the US alone. But these mergers have been different from those of the 1950s and 1960s. They are generally amongst companies in the same business; and they are usually designed to cut costs rather than increase monopoly power.

The difference from the earlier mergers is twofold. First, the US equity market has been booming. Equity is cheap, and companies are buying others with their own equity. Second, markets are much more competitive today. Inflation has been brought down to a negligible figure in the US; it is impossible to push up prices. So companies combine to reduce costs.

The US Supreme Court has not tried a major anti-monopoly case for over 20 years. The Federal Trade Commission and the Department of Justice, the chief arms of the US government that enforce anti-monopoly policy, have not been sitting idle, but their techniques have changed. Under the Hart-Scott-Rodino Act of 1976, merging companies above a certain size are supposed to inform the Federal Trade Commission. It tries and predicts the effect of the merger on prices, costs, output etc and sets conditions. These conditions are then monitored over the next few years. There is much less litigation, but more regulation.

India is at the tail-end of the great international merger wave; foreign acquisitions of Indian companies are a small part of their worldwide acquisitions. Indian industrialists find them very uncomfortable, however. But that is because the foreign companies have ready access to the low-cost capital markets of industrial countries, whereas Indian companies have none. The latters discomfort is due to inconvertibility on capital account, and not due to their inherent handicaps.