Monday, December 01, 2003

Insights into oligopolies Two smart quotes about oligopolies, from an article in the Wall Street Journal  ("Oligopolies Are on the Rise", February 25, 2002. The rise of early-21st-century oligopolies echoes the late 19th century. "They are both periods where there was a retreat from government oversight of the economy, a tremendous amount of entrepreneurial activity, lots of new technology -- and it wasn't clear who would be the winners and losers," says Naomi Lamoreaux, an economic historian at the University of California at Los Angeles. "Firms try to put some bounds on the chaos, to control some markets." While I believe that the new oligopolies are much more self-conscious about these issues, the parallels are strong. While money and politics have always been closely linked in the US, the Teapot Dome and the Enron scandals have lots of parallels. The antitrust zeal of the federal government, kindled in reaction to the late 19th century trusts, has dwindled to a frail echo of itself. Today's Standard Oil and J.P. Morgan have become Microsoft and Citigroup. And, as we have pointed out, fear of disruption as much as greed is the driving force for consolidation. "The odds that somebody will come up with a successful innovation go up with the number of people who are trying new things," says Paul Romer, a Stanford business-school professor. One of the problems with the way oligopolies tend to both scare away competitors and also tend to converge, to think alike, is that they slow down the rate of real innovation. Even when technical innovation happens, oligopolies' need to control can either slow them down or make them irrelevant. Take for example, the way in which Microsoft and its cohorts have stifled innovation in the computer industry when they could. Or take the way in which the phone oligopoly held up the adoption of DSL high-speed Internet access until they were forced to by competition from cable. 5:05:34 PM

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