1. Big Business
Chapter 14 Section 3

2. Corporations
Corporation – an organization owned by many people but treated by law as though it were a single person
Stockholders – the people who own the corporation
Stock – shares of the company owned by stockholders
Issuing stock allows a corporation to raise large amounts of money while spreading out the financial risk

3. Economies of Scale
Economies of scale – corporations make goods more cheaply b/c they produce so much so quickly by using large manufacturing facilities
All businesses have 2 kinds of costs
Fixed costs – costs a company has to pay whether or not it is operating
Loans, mortgages, taxes, etc.
Operating costs – costs that occur when running a company
Paying wages, shipping charges, buying supplies, etc
Big companies have big fixed costs and low operating costs

4. Big company advantages
Produce more goods cheaply and efficiently
Continue to operate during poor economic times
High fixed costs, lower operating costs
Negotiate rebates from the railroads
Lowers operating costs even more
Able to cut prices more than small business to sell more of their product
Low operating costs
Discounts on shipping
Small business have a hard time competing
Many were forced out of business

5. The Steel Industry Sir Henry Bessemer
From England
Invented a new process for making high quality steel efficiently and cheaply
Andrew Carnegie opened a steel company and adapted his mills to use the “Bessemer process”
Carnegie then began the vertical integration of the steel industry

6. Vertical Integration
A vertically integrated company owns all the different business on which it depends for its operation
Prevents having to pay other companies for the coal, lime, iron needed for the steel industry
Carnegie’s company just bought the coal mines, limestone quarries and the iron ore fields
This saves a big company lots of money and allows it to grow even bigger!

7. Horizontal Integration
Combining many firms engaged in the same type of business into one large corporation
Big business owners like Carnegie wanted horizontal integration

8. Horizontal Integration
When a company b/g to lose market share it would often sell out to competitors to create a larger organization
By 1880 a series of buyouts had enabled Rockefeller’s Standard Oil to gain control of approx. 90% of the oil refining industry in the US
Horizontal integration or a monopoly???

9. Monopolies
Monopoly – when a single company achieves control of an entire market
Monopoly critics feared monopolies
They argued a monopoly could charge whatever it wanted for its products
Most Americans were anti-monopoly
Monopoly supporters argued that monopolies had to keep prices down b/c high prices would encourage new competitors to the market

10. Trust
Many states made it illegal for one company to own stock in another w/o permission from the state legislature
To preserve competition and to prevent horizontal integration
In 1882 Standard Oil formed the first trust
A new way of merging businesses that did not violate the laws against companies owning other companies
A legal concept that allows one person to manage another person’s property
Trustee - the person that manages the other person’s property

11. How a Trust Works
Stockholders give their stocks to a group of trustees to manage
The stockholders receive shares in the trust and get a portion of the trust’s profits
Since the trustees did not own the stock and were only managing the stock they were not violating any laws
This enables the trustees to control a group of companies as if they were one large merged company

12. A Holding Company Holding company
Does not produce anything itself
It owns the stock of companies that do produce goods
The holding company controls all of the companies it owns
Which merges them into one large enterprise