Monday, January 25, 2010

Trusts and Oligopolies and Vertical Integration...Oh My!

OK, I really hate it when I have classes that confuse even me. It would be easier for me to explain the meaning of life than to totally grasp all of the economics terms in Chapter 17. But at least let me try to make it clear as mud for you.

First, none of this stuff was new at the time. They were standing business models, ideas for how to manage things. What changed in the Gilded Age was the fact that the big business owners that we discussed tweaked old ideas in an effort to become dirty, filthy, stinking rich. And of course, it worked for them.

VERTICAL INTEGRATION- this idea means that a business controls all aspects of their business from the bottom to the top. This maximizes profits because it cuts out the middle man. The business is not having to purchase anything from anybody. The name best associated with vertical integration is Andrew Carnegie. Carnegie implemented it in his steel factories. For each factory, he owned the mines that produced the iron ore, the boats or railroad cars used to transport this ore to the factory and all of the places that made the equipment used inside the factory. Carnegie had no need to seek material from outside suppliers.

TRUST- where a business owner owns or acts as a trustee for stock in all of the businesses within his industry. Although the businessman/trustee doesn't completely own ALL of these businesses, it decreases competition. John D. Rockefeller used this to his and Standard Oil's best advantage. Since he owned or held stock in nearly all of the oil refineries, he was the one dictating policy, ultimately driving out his competition. This wasn't illegal but the government said that it was unfair.

OLIGOPOLY- similar to a trust in that it is done simply to decrease competition. J.P. Morgan's US Steel banded together with other large steel companies working together as a block. Morgan owned stock in some of these companies but not all of them. It didn't really matter whether or not he owned stock in them, any of the businesses tied together as an oligopoly made policy and acted together as a unit. The only thing that saved the oligopoly from being a monopoly was the fact there was just enough competition out there to keep Morgan from controlling the entire industry. Your book says that Bethelehem Steel was a strong enough competitor to keep US Steel from complete domination.

WATERED STOCK- the idea is a throwback to livestock sales. Animals are sold by weight so to get more bang for their buck, farmers would force their cows, pigs, whatever to drink and drink and drink water until they were about to bust. This artifically inflated the weight and ultimately inflated the price of the animal. Apply that to stocks. Technically (and legally) you are only supposed to sell stocks for whatever they are valued at. J.P. Morgan "watered" his stock. If he had $1000 worth of stock in a company, he would have $2000 worth of stock certificates drawn up and sell them. He automatically doubled his profits. Highly illegal but extremely lucrative. You know the old saying, it ain't illegal unless you get caught.

I hope this helps. Post any questions in the comments or email me!

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