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Controlling monopolies in China: lessons from US history

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Controlling monopolies in China: lessons from US history

In recent months, the Chinese government has taken a series of policy measures to enhance competition by barring monopolistic behaviour by domestic firms. Government regulation to control anti-competitive practices is nothing new. Here a historical perspective of the US policy measures before 1913 is examined.

Stefan Gerlach
Stefan Gerlach

The Chinese government has recently taken steps to combat monopolistic behaviour by domestic firms and boost competition, particularly in the tech sector. The lack of competition leads to more inequality, reduced productivity and less economic growth at a time when China is moving away from investment-led growth.
While the owners of the Chinese firms exposed to tighter regulation might not recognise it, there is little doubt that the government’s view that monopolistic behaviour is harmful, is sound economics. In fact, regulations to boost competition are commonplace in western economies, no more so than in the US, where they were introduced towards the end of the 19th century.

Monopolies in US history

After the end of US civil war in 1865, the US entered “the Gilded Age” which ended in the 1890s. It was an era of rapid economic growth, driven by the railroad. The US economy rapidly became concentrated through mergers and acquisitions of small companies into bigger ones. Many big companies colluded to raise prices by restrictions on supply and regularly forced smaller competitors into bankruptcy through predatory pricing. The result was that many markets became practically monopolies. 

The tide turns

The growing concentration of industry did not go unnoticed among the public and politicians. Monopolistic practices may be good for the profitability of the firms that adopt them, they are bad for their customers, who may be other firms. Overall, monopolies are bad for the broader economy. In response, Congress adopted several laws to ban monopolistic behaviour. 
The Interstate Commerce Act of 1887 was designed to regulate monopolistic practices in the railroad industry which was of critical importance. The Sherman Antitrust Act of 1890 followed. The act bans anticompetitive agreements and practices that seek to monopolise markets. Importantly, having a large market share is not illegal. Monopolies raise prices and attract other firms to enter the industry. To prevent them from doing so, monopolies rely on anticompetitive behaviour, which is prohibited.
The government sued Standard Oil under the Sherman Act in 1906, and the company was broken up by the courts in 1911. Similarly, a court held that American Tobacco Company violated the Sherman Antitrust Act and ordered it to be dissolved in 1911.
The Clayton Antitrust Act of 1914 followed. The Act sought to ban specific anticompetitive practices such as price discrimination, excusive dealing agreements and mergers of firms with the intention to stifle competition. 

The behaviour of stock prices

The reason for taking strong political action against monopolistic practices was that by reducing competition and raising prices for consumers and other firms, they constituted a burden on the economy. US stock prices were broadly flat between 1871 and the early 1890s before anti-competition practices were prohibited. From the 1890s to 1913 as Congress took measures to ban them, stock prices doubled . Reviewing the experiences of the US before World War One, it is easy to understand why the Chinese government would like to limit restrictive practises in business.

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