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Published on January 12th, 2013


Monopolies & Cartels: Truths and Misconceptions

John D. Rockefeller was born to a poor Cleveland area family in 1839. From these exceedingly humble beginnings emerged a man bent on revolutionized America through sheer will and a belief that no one could do it better. He believed in order, control, efficiency, and innovation; however with the emergence of this colossus, there were many who were forced into submission along the way. By creating Standard Oil and pursuing the dominant position of delivering stable, affordable kerosene, and later petroleum, to the U.S., Rockefeller created the most efficient and profitable singular controlling body the world has seen, that is until 1960 with the emergence of the multi-national, government cartel, the Organization of the Petroleum Exporting Countries (OPEC).

Before veering towards OPEC, I would like to spend a few moments discussing the worthwhile merits of the early tycoons who had their empires fall by the wayside during President Theodore Roosevelt’s “Trustbuster” crusade.

Monopolies in their truest sense occur infrequently. Typically, in a mature marketplace, it is highly unlikely for a pure monopoly, one in which “one firm is the sole producer/seller of a product or service for which there are no substitutes” (Brue, pg. 181) to be present. However based on observation throughout history, monopolies emerge during the fledgling period of a new industry. Rockefeller’s Standard Oil (Standard) was the grandest example of this, as it consolidated power during a period when petroleum refineries were still in their inefficient infancies and the industry as a whole was looking for an iconoclastic figure to lead it forward with some semblance of direction. This was the case not only with Standard and refining, but with AT&T and telephones, Microsoft and operating systems, and many others.

Rockefeller and Standard still serve as the foremost example of monopolistic consolidation. At the time, “the Standard was the result of lawful competitive methods, guided by economic genius of the highest order, sustained by courage, by keen insight into commercial situations, resulting in the acquisition of great wealth, but at the same time serving…to widely extend the distribution of the products of petroleum at a cost largely below that which would have otherwise prevailed” (Morris, pg. 220). At its peak, Standard Oil controlled approximately 90% of oil refining and pipelines in the United States.

As with U.S. Steel, and later AT&T and Microsoft, there are benefits that monopolies bring to industry, especially at the onset, which are highly valuable to the competitive landscape that follows their eventual dissolution. “The benefits of having a monopoly like Standard Oil in the country was only realized after it had built a nationwide infrastructure that no longer depended on trains and their notoriously fluctuating costs, a leap that would help reduce costs and the overall price of petroleum products after the company was dismantled. The size of Standard Oil allowed it to undertake projects that disparate companies could never agree on and, in that sense; it was as beneficial as state-regulated utilities for developing the U.S. into an industrial nation (Beattie, 2010).”

Along with all the benefits, there were obvious drawbacks to monopolies. Outside of the abhorrent working conditions in the early 1900s, the reason Roosevelt, and later William Howard Taft, went after these tycoons was the fact that they wielded power far beyond the bounds of their industries and there was the perception that the lack of competitive landscape was not in the public’s best interest. With a monopoly effectively controlling the industry, it is against the free market ideals upon which the US economy is based. Thus, it was through accusations of “predatory pricing, or below-cost pricing strategies to drive specific independents out of business” (Morris, pg. 220) that gave the government grounds to file suit and drove Standard, U.S. Steel, and others towards their dissolution. Most of the general public still believes that it is due to a firm’s greed and desire for higher prices that monopolies are outlawed; however the contrary is reality. Monopolies, due to a “fixed down sloping demand curve…can increase sales only by charging a lower price” (Brue, pg. 184).

With this historical backdrop fresh in our minds, it is worthwhile to transition to oligopolies, most notably, OPEC. Where Standard Oil helped to develop the use of petroleum domestically and benefited as a firm when they lowered prices, OPEC looks to regulate oil through a network of formal and informal agreements and benefit when price regularly exceeds marginal cost (Brue, pg. 225).

There was a dramatic shift around mid-20th Century from domestic oil to foreign. It was in this space that OPEC was founded and has since consolidated power amongst its twelve member nations. Whereas Standard acted as a monopoly for many years, controlling the market, OPEC has replaced them; however with a small group of producers acting in joint interest to largely control an industry. OPEC is also a cartel as it is organized to “divide up the market in order to maintain an agreed-upon price” (Brue, pg. 219) and regularly sets the price higher due to potential geo-political factors.

Understandably, there is a lot of contention around OPEC and the influence they exert on global commerce, politics, and stability; however they do fill a vital role in the global economy that cannot be done without: they keep in check volatile participants through mutual interest. Would the geo-political landscape be better off without OPEC and other cartels? Possibly, however they manage the output and profit on a non-renewable resource with careful oversight towards long-term ends. In addition, they do a majority of this within the most volatile region in the world.

In closing, there are obvious drawbacks to having monopolies and oligopolies present: unfair competition (or lack thereof), non-competitive pricing, and the potential for inferior quality due to little or no alternatives. However in a limited industry or a newly emerging industry/specialty, there are benefits that we cannot overlook. Thus, when we look at the impact of monopolies and oligopolies, we must realize that they emerge as a necessary part of domestic and global commerce. Without them, our industries would have lacked much of the infrastructure and efficiencies that brought us to where we are today.


ABOUT THE AUTHOR: Erol Senel has been plying his trade in the world of finance and personal investing. Through this real world experience, he has found his true professional passion in economics and financial history.

Twitter: @senelslant


Beattie, A. (2010, Nov 21). A History of U.S. Monopolies. Investopedia. Retrieved from

Brue, S. L., McConnell, C. R., & Flynn, S. M. (2010). Essentials of Economics. (2nd ed.). New York: McGraw-Hill Irwin.

Morris, C. R. (2005). The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, & J.P. Morgan Invented the American Supereconomy. New York, NY: Holt.

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