Supply-side oligopolies
Economists that I've talked to agree with me: academic economics has done a poor job in describing and analyzing oligopolies. On the whole, economists have very little to say on this subject, and not much of that is very enlightening.
The problem, as I see it, is an overemphasis on price competition. Most of the economics papers I have read take oligopoly simply as a way of manipulating prices. The idea is that monopoly gives you the ability to set any price you want; an open market allows for natural price levels to develop. And oligopolies are somewhere in-between.
Yes, it is true that oligopolies can and have been used to manipulate prices. Cartels have always existed, and they are still around. And when direct price collusion does not happen, there is the phenomenon of signaling, where a few players can tacitly agree on acceptable price levels, setting generous enough prices so that everyone can make a profit. It's a truce condition, where competitors forbear using the toxic weapon of a price war, for fear of poisoning themselves. Instead, they try to encroach on others' market share in less self-defeating ways.
Given the prevalence of oligopolies now, we see little sign that prices are being held artificially high. Inflation in the consumer price index is quite low, and has been so for a decade. In a number of areas (computers and other consumer electronics) prices have steadily gone down while features have improved. Food price increases have been relatively moderate, clothing shows amazing price stability, and the cost of automobiles has shown relatively modest increase. True, some things have increased seriously in price (housing comes to mind - not an oligopoly market), but, in general, we live in an age of continuing price stability.
So why aren't all these oligopolies conspiring in some way or other to drive up prices? Clearly, price manipulation, while it does exist, is not the kind of problem we might assume from the tendency for markets to get less and less free.
This realization has modified the trust-busting crusade of government antitrust organizations in US and in the EU. A critical factor in their deliberations is anxiety about inflationary pressures from higher prices. But the regulators have seen concentration in every industry with little overall pressure on prices. The growing belief is that oligopolies can be price-neutral. For that reason, many mergers and acquisition that have been turned down in the past are now being allowed, with only minor conditions.
So now we have some claiming that oligopolies are in fact beneficial, making more and better products possible at comparable prices thanks to the reeducation of competition.
All this is based on what might be termed demand-side or price-side considerations. Especially when it comes to consumer prices, it seems that oligopolies have not generated the upward pressure that trustbusters might have expected. For that reason, consumers generally don't care about growing consolidation, as long as they get goods for acceptable prices.
But, as our discussions of oligopsony and oligonomy have shown, there is another area in which oligopolies work. We can call these supply-side or cost-based effects. The real reason that oligopolies can hold the line on consumer prices is that they can drive down the costs of doing business. They do this in several ways:
- They increase efficiencies. The claims of synergy and economies of scale in larger organizations are always exaggerated, but they do exist. In the best sense, large companies have used computers to implement just-in-time strategies that do a better job of ensuring that just enough and not too much of any product or supply is kept available. While increased bureaucracy in larger companies can get in the way, combining administration, buying, and distribution can reduce costs in a major way. Likwise, vertical integration can take another layer of profit-taking out of the equation.
- They put price pressure on their suppliers. Wal-Mart, for example, keeps its prices low by offering less to the companies that supply them with the products they sell. In the end, the supplier facing an oligopsony has little choice but to go along. (Suppliers that produce a unique product, say Coca Cola or Marlboros, have a little more leeway.) But, as we've shown with Wal-Mart ad the music industry, there are only a few products that are absolute must-haves. And the suppliers also put price pressure on their suppliers, and all the way down the line.
- They put indirect pressures on the suppliers. "Slotting fees" are a good example, a growing practice that forces suppliers to share the cost of getting products on the shelves and marketing them. Such ancillary fees are a growing part of all retailing and many other industries. Suppliers are also being asked, as in the book industry, to take all responsibility for unsold inventory, reducing the oligopsony's exposure.
- Oligopolies can put pressure on wages and benefits of their employees. That includes taming or busting unions. The lower number of companies in the same field means that even skilled employees have fewer options. And competitors can point to the low wages and benefits of a competitor as arguments for tightening their own employees' belts in order to survive. That's what's going on now in California, where supermarket unions are being squeezed by the chains so they can compete better with Wal-Mart, which is driving the chains out of business.
- They can export jobs to lower-cost labor markets. That's not just manufacturing jobs, though plenty of those, but also more and more white collar jobs, as medical transcriptions moves to Pakistan, computer programming to India, and customer call centers to the Philippines. Even the threat of these moves can keep wages and benefits down in the US.
- In manufacturing at least, they can play off one country against another, in an attempt to find the lowest price producer. So now the relatively "higher" wages of Mexico or Malaysia is making those countries lose jobs to China and Vietnam.
- They can use buying power (though limited brokers) to force down the price of raw materials across the world. Whether it's cocoa from the Ivory Coast, coffee from Brazil, or copper from Bolivia, the concentration of buyers.
But even more benefit on the cost side comes from sitting at the table with the big boys. Part of this stems from the fact that the major oligopolies are too big to ignore, that government policies that effect them effect the economy as a whole. This might be indicated by the old phrase "What's good for General Motors, is good for the USA." And contrarily, what's bad for McDonald's or General Electric is bad for the US economy.
The other factor, especially in the US, is campaign contributions and lobbying, a practice that oligopolies have perfected in which usually allows them to block most legislation and regulation that they see as threats, short of compelling public outcry.
Some examples of where this clot can be exercised in the US:
- Influencing the antitrust behaviors of regulatory agencies.
- Pushing global trade initiatives when it suits their interest; protectionist polices (like recent US steel tariffs) when the opposite case holds.
Influencing tax policies that favor their interests.
- Extending copyright and patent laws, both legislatively and in the courts. This includes vigorous pursuit of minor infringers, dubious cases, and even satirists. It also involves trying through treaty to extend enhanced US copyright rules to other countries.
- Decreasing employment regulation, both in terms of safety and minimum wage.
- Slowing down or reversing environmental legislation that touches on them.
Influencing broad policy decisions, such as nutrition guidelines, definition of terms like "organic" or "natyral", energy policy, or medical reform, often by sitting on the recommending committees.
- Pressuring state and local governments that try to enforce stricter rules than the federal government with loss of jobs. There's also an opportunity to get state tax breaks and relocation fees.
- In some cases, trying to get lenient enforcement of existing rules and working out slap-on-the-wrist punishments for transgressions.
Both direct cost saving and influence-based cost-avoidance are arts that only big concentrated companies can perform well. They reduce the costs while allow companies to maintain or even reduce prices, while increasing margin. All of these moves can exist without oligopolies. But oligopolies get a compound benefit from them, managing to make money and raise barriers to new competition.
What antitrust organizations and economists do not measure is these supply-side real effects of oligopolies, compared to which the pricing factor may be insignificant. We're not just consumers; we're also citizens, workers and workers.
