Alcoa's natural monopoly

The processes for extracting aluminum on a large scale were invented at the end of the nineteenth century. Because they were patented, a small number of companies were able to dominate the industry right from the start. Among these companies, the most successful was Alcoa (shorthand for ‘The Aluminum Company of America').

Since the production of aluminum is capital intensive, it is subject to large economies of scale. This led Alcoa to manufacture intermediate or final aluminum products so as to develop adequate markets for its growing output. The production of aluminum is also intensive in energy (smelting requires a lot of electricity) and in raw materials (bauxite). Alcoa quickly understood the competitive advantage it could gain by controlling the procurement of these two crucial inputs. As for energy, Alcoa became in 1893 the first customer of the new Niagara Falls Power Company, signing up for hydroelectric power in advance of construction. As for the raw material, Alcoa progressively managed to stake out all the best sources of North American bauxite for itself.

As a result of these strategies of downstream and upstream vertical integration (we study these strategies in Chapter 17), Alcoa managed to improve its productivity and increase its scale. These efficiency gains made entry more difficult and protected its leadership after initial patents had expired.

Other factors explain the virtual monopoly position that Alcoa enjoyed until World War II: public policy, tariff protection, the failure of Alcoa's few potential competitors, and the limited checks of antitrust before World War I (see Appendix B for more on the latter factor).