# What Exactly Were the Big 3 Monopolies and Why Were They So Powerful?

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- Published: 2023-10-23
- Author: Nelson Ayers
- Categories: [Business & Worth](https://33rdsquare.com/category/games/worth/)

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The "Big 3" refers to the three massively dominant companies in different industries that emerged at the turn of the 20th century – Standard Oil, U.S. Steel, and American Tobacco. Through ruthless and often illegal business tactics, these companies were able to gain almost complete control over their respective markets, earning them the notorious designation of "monopolies."

A pure monopoly is defined as a firm that single-handedly dominates an industry, with no viable competition and the power to manipulate prices. The Big 3 checked all these boxes, cementing their status as the most infamous monopolies in U.S. economic history. At their peak, they each controlled over 70% – and sometimes as much as 90% – of total market share in their industries. They employed both natural advantages and deliberate anti-competitive practices to both attain and maintain their monopolies across decades.

Let‘s take a closer look at each of the Big 3 monopolistic empires and how they came to dominate their spheres of business.

## Rockefeller‘s Behemoth: Standard Oil

The Standard Oil company, founded by business tycoon John D. Rockefeller, gained an iron-fisted grip on the nascent oil and petroleum industry in the late 19th century. Through horizontal and vertical integration, Rockefeller brought over 90% of American oil refining under his control by 1879. He integrated oil drilling, transportation via pipelines and railroads, refining, wholesaling, retailing, and exporting – founding the model of vertical monopoly.

By 1884, Standard Oil controlled:

- 90% of U.S. refining capacity
- 84% of kerosene sales
- 87% oil pipeline mileage
- 85% of heating/lighting oil markets

This level of dominance allowed Standard Oil to utterly demolish any scrappy competitors who dared enter the market. Rockefeller would flood the target region with cheap oil, slashing his prices below cost to undercut rivals. Once they went out of business, he would then raise prices even higher than before. From 1865 to 1870, the price of kerosene dropped from $0.60 to $0.08 thanks to Standard Oil‘s efficiency and economies of scale. But during its monopoly, prices crept back up while cost stayed low – meaning astronomical profit margins.

In 1882, Standard Oil became the first company valued at over $1 billion. It would go on to earn over $90 million in dividends in 1899 alone, cementing Rockefeller‘s status as the richest man in the world. He retired with a net worth of nearly $400 billion in today‘s dollars.

While Standard Oil could point to efficiencies and lowering prices early on, its ultimate monopoly power led to price gouging and stifling of innovation. After the Sherman Antitrust Act broke up the company in 1911, competition was restored and prices began falling again.

## Carnegie‘s Steel Stranglehold

Andrew Carnegie, having already built an empire in the railroad industry, turned his sights on the steel business by the 1870s. He constructed the Carnegie Steel Company, which he grew through vertical integration by controlling coke fuel supply, iron ore, transportation, and manufacturing. By 1900, Carnegie Steel produced more steel than all of Great Britain.

Carnegie adopted technical innovations like the Bessemer process to lower steel production costs. But then he would price steel just marginally lower than competitors to undercut them and capture all the market share. By keeping prices just low enough to curb competition, his company reaped enormous profits. In 1901, banker J.P. Morgan orchestrated the merger of Carnegie Steel and other major producers to form the behemoth U.S. Steel Corporation – the world‘s first billion-dollar company.

Some indicators of U.S. Steel‘s monopolistic power:

- Produced 2/3 of America‘s steel by 1901
- Owns massive iron ore deposits and transport infrastructure
- Vertical integration from raw materials to final production
- Acquired competitors like Tennessee Coal and Iron

U.S. Steel controlled every step of the process from mining to manufacturing. They bought out competition and kept prices artificially high. During a huge manufacturing boom from 1899-1902, U.S. Steel saw skyrocketing demand which led to $48 million in profits in 1902 alone. Carnegie retired by selling his company for $480 million, which equates to over $400 billion today. While U.S. Steel survived relatively intact, the 1911 antitrust ruling forced them to dissolve their massive vertical integration.

## Duke‘s Tobacco Takeover

In 1881, Buck Duke consolidated control of the American tobacco industry by merging five major cigarette producers to form American Tobacco Company. He then used this new monopoly power to acquire most competitors and create sector monopolies. By 1890, American Tobacco controlled:

- Over 90% of the licorice market
- Over 80% of the cigarette market
- Over 75% of other manufactured tobacco (snuff, plug, etc)

Duke also slashed tobacco prices to stifle smaller competitors, while reaping huge windfall profits of over 70% margins. He then pioneered mass marketing and advertising to push cigarettes in the 1890s. Per capita cigarette consumption exploded from under 1 per year in 1865 to 54 per year by 1890. Duke‘s shrewd tactics made American Tobacco worth over $60 million by 1896 and made him one of the three richest Americans at the time.

While Duke touted his lower consumer prices, the reality was that American Tobacco‘s monopoly allowed them to squeeze both suppliers and consumers. Eventually public pressure led to the Supreme Court dissolving American Tobacco into 4 separate companies in 1911 under the Sherman Antitrust Act. But the tobacco industry would remain dominated by a small handful of powerful firms.

## Why Healthy Competition Matters

The Big 3 monopolies demonstrate how excessive market power harms an economy. When competition is stifled, the monopolists can essentially name their price and output levels. This leads to slower innovation as the companies lack incentives to improve. Smaller competitors are denied entry to the marketplace. Consumers pay higher prices than necessary.

Monopolies ultimately hurt the competitiveness, dynamism, and fairness of capitalist markets. Most economists argue that some regulation is necessary to prevent monopolistic abuses, while encouraging free enterprise. Antitrust legislation helps strike the balance.

For example, imagine if Google controlled 95% of search and could determine what information you find online. Or if Amazon could arbitrarily set the prices of all consumer goods with no other retail options. While healthy competition between two or three major players in a sector may drive innovation and efficiency, absolute monopolistic power often corrupts.

The history of the Big 3 illuminates the potential dangers of unfettered monopoly capitalism. Maintaining competitive, freely accessible markets establishes more economic opportunity and better consumer choice. If you as a customer have options between multiple sellers, they have to vie for your business by improving products and prices – rather than just sit back and dictate terms knowing you have no other choice!

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