Thursday, July 24, 2003

Mind space and winner-take-all oligopolies Some winner-take-all markets arise because of cognitive limitations on the part of buyers. In many markets, we are either unable to, or we simply choose not to, keep track of a host of similar competing products. Psychologist G.A. Miller has surveyed evidence suggesting that people have difficulty processing lists that contain more than seven items. To simplify our lives, we remember the relevant details of at most a few products in each category. (Robert H. Frank, Philip J. Cook, The Winner-Take-All Society, Penguin Books, 1996, p.38) The authors term this later a limit of "mental shelf space," or what we see as mind space. In the society they describe, those few celebrities that manage to stick in our minds, reap awards far out of proportion to their relative quality. The same can be said about products. Companies know that if most consumers just don't have mind space for a detailed comparison of every item on their shopping cart. Who really knows whether Colgate, Pepsodent, or Crest is the better toothpaste or whether Gillette, Wilkinson/Schick or Bic razors are better? But clearly, those are the brands they are likely to have any opinions about; in most areas, the competition will be ignored. These brands will get the lion's share of the market, and their only real competitors are each other. As Frank and Cook write, being a winner is a self-reinforcing. Nabisco, Keebler/Sunshine (yes, they're united as a part of Kellogg), and Pepperidge Farm cookies get most of the shelf space because they are perceived as market leaders. Getting most of the shelf space increases, in turn, the perception of them as market leaders. They get shelf space because they have mind space; they get mind space because they have shelf space. For that reason, it is worthwhile for companies to do almost anything, to pay almost any price, in order to tighten an oligopoly. Whether that means buying out or eliminating a competitor, the payback for the move is almost always positive. That's why deal prices are for more money than can be apparently justified by the past revenue stream and why most companies are so eager to acquire rivals. 4:47:50 PM

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