Key Words and Phrases

public utility	комунальні служби
regulatory agencies	регулятивні органи
perfect competition	абсолютна, повна (немонополістична) конкуренція
perfect monopoly	абсолютна монополія
to coin the term	створювати термін
homogeneous product	однорідна продукція
market power	ринкова спроможність
polar extremes of monopoly	діаметрально протилежні крайнощі монополії
held theory	теорія володіння (утримання позиції)
threat of entry	загроза вступу
shared monopoly	групова монополія
single-firm monopoly	монополія однієї фірми

Exercises on the text:

Ex. 1. Read and translate the text.

Ex. 2. Answer the following questions:

1. Who is a holder of a monopoly?

2. What is a market power?

3. What does a market power depend on?

4. What theories have economists developed?

5. What is the difference between a shared monopoly and a single-firm monopoly?

Ex. 3. Give Ukrainian equivalents for the following words and word combinations:

a holder of monopoly; a single seller; exclusive control of supply and marketing of some product or service; monopolies granted by the government; perfect competition; price takers; price makers; the greatest market power; are believed to be important; are known as an oligopoly.

Ex. 4. Complete the following words and word combinations. Explain their meaning to your groupmates.

To coin…; many sellers…; infl… the selling…; theoretically have…; … is the term economists…; the behaviour …; … broad … of markets; sellers of sim… products; shared… .

Ex. 5. Speak on the content of the texts freefly, no more than in 15 phrases.

UNIT 20

Industrial Concentration

Much of the present competitive structure of U.S. industry evolved from events beginning in the last decades of the 19^th century. Until then, nearly all businesses were small proprietorships or partnerships - therefore the control of industry was dispersed among many hands. With the relaxation of state incorporation laws, the industrial corporation burst on the scene.

The Growth of Large Firms

An enormous MERGER and consolidation movement began around 1900. In the two decades from 1890 to 1910, swift and irreversible changes occurred in many leading industries. In 1901 the United States Steel Corporation became the largest corporation in the world through the consolidation of most existing steel companies in the United States; it controlled about 75% of the country's steel output in 785 plants with a total of about $1.4 billion in assets. What happened in steel was repeated elsewhere. The most familiar consolidations involved tobacco (American Tobacco), petroleum (Standard Oil), explosives and chemicals (Du Pont), and tin cans (American Can). Although some of the great trusts of that day were later partially broken up, the pattern had been set.

Although considered big business in their day, most of the early trusts were pygmies compared with today's large industrial complexes. Some comparisons will illustrate the difference. In 1991 the two largest U.S. industrial corporations, general Motors and Exxon, had combined sales of about $227 billion. This figure was greater (after adjustment for inflation) than America's gross national product at the time of the Civil War, more than the combined sales of the over 200,000 manufacturing establishments in 1900, and larger than the gross national output of all but 13 (Brazil, Canada, China, France, India, Italy, Japan, Poland, Spain, United States, the former USSR, United Kingdom, Germany) of the almost 200 nations of the world. With each passing year, more of the financial, distribution, and industrial sectors of the economy are run by large corporations.

In 1909 only one and in 1929 only two manufacturing corporations had assets exceeding $1 billion. By 1991, 377 billion-dollar corporations held 71% of total manufacturing assets. (Price inflation accounts for only a small part of the increasing number of billion-dollar corporations. For example, expressed in 1990 dollars, only about 15 industrial corporations in 1990 had assets over $1 billion).

Despite the increase in monopolistic concentration, small business has not disappeared from the industrial scene. On the contrary, the absolute number of small businesses has grown through the years; today there are approximately 250,000 manufacturing companies in existence. Thus the galaxy of a few large corporations is expanding its share in a universe that is itself expanding. Some economists describe the present economy as a dual economy – one part consists of a large number of small- and modest-size businesses, and another part is becoming increasingly centralized among a few hundred huge corporations.

Levels of Concentration

In many industries sales have become concentrated among a relatively few corporations. The overall of concentration for all industries changed little over this 40-year period. These averages, however, conceal more than they tell. Some industries are well above the average and others are below it.

A variety of complex, interacting forces determine the level of concentration in industry. On the one hand, the growth of the economy creates opportunities for more firms to enter an industry and to grow to efficient size. On the other hand, the number of firms can be limited by the requirements of large-scale production, the necessity to be large enough to support research laboratories and to finance new products and new methods of production, and the advantages enjoyed by large firms in distribution and advertising. Market concentration is also influenced by various business practices and the general institutional environment in which businesses operate. These include such factors as federal antitrust laws and the way these laws are enforced.

Economists have not determined the precise impact of these various influences. Research studies show, however, that the level of concentration existing in many industries exceeds that necessary to achieve efficient production. Although the requirements of large-scale production make it impractical to have numerous small companies, they do not necessarily dictate that industries be dominated by only a few firms. Because the U.S. market is large, to have a fairly large number of firms of efficient size in the great majority of industries would be possible. It is not inevitable that markets should become highly concentrated. Therefore researchers seek other causes to explain industrial concentration. Two factors are especially significant.

The most important single force promoting concentration in many industries is advertising, which plays an important role in the marketing process. The advent of television as a preferred medium of advertising for many products has been a major factor in promoting concentration. For various reasons, television advertising has favored large companies in many consumer product industries; the result is a persistent trend toward increased centralization of business among a few corporations. The concentration in consumer-goods industries increased by more than 10.2 percent in the years 1947-87.

Consumer-goods industries produce goods for final consumption, such as processes foods, detergents, beer, automobiles, and clothing. Although average concentration in all of these industries taken together rose significantly, the greatest increases were in the highly differentiated consumer-goods industries. These are industries such as prepared cereals, beer, and household detergents that are most dependent on advertising.

Another factor promoting concentration is mergers among business firms. Extensive merger activity occurred in the 1960s – when about one tenth of the manufacturing companies with assets over $10 million were acquired by other firms – and again beginning about 1980. During the course of the 1980s, merger activity accelerated; as it reached new heights, commentators dubbed the phenomenon "merger mania". A partial list of billion-dollar companies that were acquired in the 1980s includes: Crown Zellerbach, Firestone Tire, General Foods, Gulf Corporation, Kraft, McGraw Edison, and Staufer Chemical Company. The merger movement created enormous CONGLOMERATE enterprises that have subsidiaries in many industries. Economists do not agree about the effect of industrial conglomeration on the competitive process. Especially when small companies are involved, mergers may increase efficiency and heighten competition. Mergers among large firms, however, clearly work to centralize control over the economy in ever fewer hands. Huge enterprises, possess a great deal of potential power over smaller firms and lead to further industrial concentration.

A unique feature of the takeover movement of the 1980s was the use of so-called leveraged buyouts (LBOs). LBOs involve acquiring a company's voting stock with high interest-rate bonds, called "junk bonds", that are backed by the assets of the acquired company. In effect, outsiders (or in some cases company managers) gain control of a company using the acquired company's own assets. This development greatly increased the indebtedness of numerous American corporations.

Among those hardest hit by this practice was the grocery supermarket industry, where LBOs and acquisitions involved companies with combined annual sales of about $100 billion. Practically every large public grocery supermarket chain that was not closely controlled by a family or other dominant shareholders was involved in this movement during 1979-89, including such giants as A&P, Safeway, and Kroger.

The LBO movement reached its peak in the mid-1980s and largely sunsided during 1990-91. By then many corporation were heavily burdened with junk bonds and were forced into bankruptcy or were compelled to retrench their operations. The Securities and Exchange Commission initiated investigations of some LBO and junk bond promoters, which led to jail sentences and huge fines for some parties. The end result of the financial excesses of the 1980s are not entirely clear. But an increasing number of businessmen and economists have come to believe that on balance the lBO movement decreased the domestic and international competitiveness of many American corporations and contributed to the depth and length of the recession that began in 1990.

The Effects of Concentration

According to economic theory, when sellers are few they have more control over their output and price decisions than when they are many. Numerous studies have been made of the relationship between market power and prices. Economists use complicated statistical procedures to isolate the role of market power from other factors influencing prices and profits. They seek to estimate the net effect of market power when other influence are also taken into account.

The best evidence suggests that the costs of market power are substantial. One authority on the subject, F.M Scherer, estimated the wastes and inefficiencies resulting from monopoly power at 6.2% of gross national product, or about $250 billion in 1985 (by some accounts, a conservative estimate). Other effects exist as well.

Market power also redistributes income from consumers to the owners of the firms with power. The amount of this redistribution has been estimated at 3% of the gross national product, or about $115 billion, in 1985.

These are only the most obvious costs of excessive market power. Some observers claim that market power prevents the economy from achieving full employment with stable prices. In economic theory, perfect competition leads to full employment of people and resources without inflation. Limitations on competition lead to less employment and higher prices.

Critics of industrial concentration charge that it also leads to the corruption and misuse of political institutions. They point to the enormous political pressures brought to bear on legislators in Washington and the state capitals by LOBBYISTS and SPECIAL-INTEREST GROUPS, many of them financed by industrialists. Indeed, many monopolies could not exist if they did not have the backing and protection of the government.

Import competition plays an important role in limiting the power of domestic firms in concentrated industries. Since World War II the proportion of imports to American-made products has risen substantially, so that concentration figures based on domestic-company sales overstate significantly the actual level of concentration in some industries. Because the producer-goods industries were most affected by imports, effective market concentration in those industries has actually declined rather than remained unchanged. Consumer-product industries were impacted less by import competition, especially highly advertised products like ready-to-eat cereals, detergent, and many other products sold in supermarkets.