10 - Entrepreneurship, Business Organization, and Economic Concentration

Summary

By the outbreak of World War I, the United States economy had acquired (to use Robert T. Averitt’s phrase) a “dual” structure, consisting of a “center” of large, managerially directed firms surrounded by a “periphery” of much smaller concerns, often run by their owners. In the center parts of the economy, large firms operated in tight oligopolistic markets, where price competition had been all but eliminated. Firms in these sectors were primarily interested in preserving their market shares and insuring their long-term growth. To this end, they integrated backward into raw-material acquisition and forward into distribution and worked to promote consumers’ loyalty to their brands. In the peripheral sectors of the economy, by contrast, enterprises were small and markets competitive. Few firms had the resources to pursue vertical integration or advertise their brands nationally. Time horizons were typically short, and survival depended more than anything else on keeping production costs low.

This division of the economy into center and peripheral sectors was a relatively recent development. Outside the railroad industry, large firms did not appear until the last quarter of the nineteenth century. By then, however, technological change had raised the scale of enterprise in a number of important industries, and as firms increased in size their behavior changed. Once firms grew large enough relative to the market to affect the prices at which they (and others) could sell their output, the rivalry among them became more intense. Each firm stood to benefit by undercutting its competitors’ prices and increasing its share of the market at its rivals’ expense.