Trusts and Monopolies Concepts

Questions and Answers

What is the economy of scale?

Business principle that buying materials in large quantities reduces basic costs.

Who could take advantage of economy of scale?

Only big companies, since only they had enough capital to buy such large quantities of materials.

What did economy of scale allow big companies to do?

Produce goods as cheaply as possible, then lower their prices to gain market share.

What happened when there were too many competing companies in a market?

Prices became so low that no one made a profit. Signup and view all the answers

What was a pool?

Agreement between companies to divide up their market and all sell their products at an agreed upon price. Signup and view all the answers

Were pools successful?

False Signup and view all the answers

What was a trust?

Several companies turn their stock over to a dominant company in exchange for trust certificates. Signup and view all the answers

Why were trusts created?

To reduce the number of competitors in a market and eliminate the problem of reduced profits due to competition. Signup and view all the answers

What did the period of the 1880s and 1890s produce?

Concentration of businesses in the hands of a few. Signup and view all the answers

Give an example of an industrial monopoly created in that era.

Standard Oil Company. Signup and view all the answers

What did Standard Oil Company control?

Most oil production, pipelines, and much of the oil and natural gas producing property. Signup and view all the answers

What did these monopolies lead to?

Abuses of power by some big businesses, causing the government to take action to control abuses. Signup and view all the answers

What was the Interstate Commerce Act of 1887?

Created Interstate Commerce Commission - federal government attempted to regulate big business. Signup and view all the answers

Was Interstate Commerce Commission successful?

False Signup and view all the answers

What was the Sherman Antitrust Act of 1890?

Law intended to encourage free competition by prohibiting unreasonable restraints or limitations on trade. Signup and view all the answers

Was the Sherman Antitrust Act needed?

True Signup and view all the answers

What was the Sherman Antitrust Act intended to do?

To encourage free competition by prohibiting any unreasonable restraints on trade. Signup and view all the answers

Did the Sherman Antitrust Act accomplish what was intended?

False Signup and view all the answers

If you were in charge of a small competitive company, what methods would you use to attract more business?

Lower prices to increase market share, offer better prices or discounts to customers who buy larger quantities. Signup and view all the answers

Study Notes

Economy of Scale

Refers to the business principle where purchasing materials in bulk reduces overall costs.
Benefits primarily accessible to larger companies with sufficient capital to buy materials at scale.
Enables big companies to minimize production costs, subsequently lowering prices to capture greater market share.

Market Competition

Excessive competition in a market can drive prices down to unprofitable levels for businesses.
Agreements called "pools" between companies aimed to share markets and set prices collectively, but these were often unsuccessful due to frequent breaks in agreements and lack of universal participation among companies.

Trusts and Monopolies

A trust involves multiple companies relinquishing control of their stock to a dominant company for trust certificates, allowing them to share profits without influencing company decisions.
Trusts were formed to consolidate market competition, reducing the number of players from many to one to ensure profitability.
The late 1800s saw a concentration of industries under a few dominant businesses, exemplified by monopolies such as Standard Oil Company.

Standard Oil Company

Controlled a significant portion of oil production, pipeline operations, and oil/natural gas properties.
The emergence of monopolies resulted in notable abuses of power, prompting government intervention.

Government Regulation

The Interstate Commerce Act of 1887 established the Interstate Commerce Commission to regulate large businesses, but it failed to achieve its goals effectively.
The Sherman Antitrust Act of 1890 aimed to foster free competition by prohibiting unreasonable trade restraints and limiting monopolistic practices.
The Sherman Antitrust Act was deemed necessary to mitigate the control exerted by large monopolies and protect trade interests.
Despite intentions, the act did not fully succeed; courts sometimes found that dominating monopolies did not necessarily restrain trade, as illustrated by the Sugar monopoly's 98% control of U.S. sugar refining.

Strategies for Small Businesses

To enhance business competitiveness, small companies could lower prices to expand market share.
Offering discounts for bulk purchases can attract more customers and incentivize larger volume sales.

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Description

This flashcard quiz covers key concepts related to trusts, monopolies, and industrialists, with a focus on the principle of economy of scale. It explores how big companies leverage economies to reduce costs and gain competitive advantages in the market. Test your understanding of these crucial economic terms and their implications.