Oligopolies, innovation, and tradeoffs
In their book, The Rise of the Corporate Commonwealth (BasicBooks, 1988), authors Louis Galambos and Joseph Pratt discuss the tradeoffs that big business make.
One can appraise any business in terms of its ability to perform three major functions: innovating, achieving efficiency in day-to-day operations, and maintaining control of its external environment. Successfully carried out, these three functions produce profits and the growth of the firm.
In a way, the efficiency is the most fundamental function. Efficiency is the first concern of good management, and companies which are either very innovative or very controlling can manage to squeak out an existence. But without at least some efficiencies, almost all regular businesses-unless so lucrative (selling illegal drugs, owning oil wells) to be impervious to gross waste and mismanagement-will soon end up in the ditch.
Control of the environment is exactly the kind of influence that only growing bigger can give. Whether it involves co-opting regulators, crowding out competitors, influencing customers or negotiating with buyers, all of them air aimed at reducing risk from the often chaotic market forces. That kind of influence is an engine behind most corporate growth. At some point, big companies no longer have efficiencies of scale, though that is the ritual motivation for all acquisitions and mergers. But big companies do gain influence from getting bigger, without exception.
As the authors go on to write:
To some extent, of course, the three functions involve tradeoffs in any business. A high degree of operating efficiency is unlikely in a firm constantly engaging in innovative behavior. Nor is a high degree of control-by a monopoly, for instance-generally associated with a high level of entrepreneurship.
We would, of course, substitute oligopoly for monopoly here, and we'd point to the vulnerability of non-innovative companies to disruption. The authors trace the development from the innovative, entrepreneurial companies of the 19th century to the efficient, controlling megacorporations of the 20th. But the secret of the 21st century oligopoly is its ability to buy, to consume innovation by taking over the smaller companies. That's always been a possibility; but now it has become a doctrine.
