Economics

Oligopoly is a term used to refer to a market system in which a particular market sector or industry is dominated by a small number of players, called oligopolies. Since the number of players in an oligopoly is small, strategic marketing policy adopted by one of them is likely to catch the attention of the others. A decision of one of the players or marketers influences the decision of other firms competing in the same market and vice versa. Because of this interdependence in strategic planning, collusion in oligopolies is a very probable occurrence.

Oligopolies differ from monopolies in that for the latter, there is a single entrepreneur or seller of a good or service. While addressing monopolies, two cases exist. In a pure monopoly, a single company has complete control over the design, realization and sale of a particular product (a good or service) for which there are no substitute in the market (Perloff, 12). In this respect, governmental policy regarding the permitting, prohibiting or regulating pure monopolies has direct implications in the industries but on the economy.

A pure monopoly can rarely exist, thus the term is used relatively rather than absolutely. That is why a firm may be classified as a monopoly despite having competition from relatively smaller dealers of the same product or dealers offering products that are somehow similar and to some extent can be substituted to its own. A firm offering a wide range of product can also be regarded to as a monopoly even if it enjoys a monopoly on only one of its products.

Monopolistic entities have the advantage of being able to maximize their profits by charging higher prices as there are no substitutes for their products in the market. They have the flexibility and ability to define market trends owing to there not being external competition (Swenson, 16). They have a higher degree of liberty in setting prices unlike competitive markets which have little if any control over the market prices of their products.

In a competitive industry, a firm can only charge a single price for a product, which in most cases will be similar to the price its competitors are charging for the same product, but monopolists charge prices higher than they would have had there been competition in the market. They can also maximize profits by charging different profit-maximizing prices for different consumer categories. Depending on consumer characteristics, monopolists can charge customers according to income levels, profession or education levels (    Lipsey, Chrystal, 22). Monopolistic markets are characterized by equitability between firm and industry, control over price and output, discrimination in prices of products and high barriers to new entries.

The other market structure is perfect competition, characterized by the existence of many firms offering the same product or solution to a pool of many clients. In such a market, stakeholders or players are at liberty to exit on will or for their benefits. Products offered are homogenous, that is similar in nature and there is a wide variety to choose from. The market in itself dictates the price of product, and the price charged for a particular product is very close to the cost of manufacture (or production) and there is no leverage. However, in the long run these firms end up making normal profits as an attempt to increase price will only shift customers to any of the readily available and affordable alternative products; making the firm lose market share and profitability.

Oligopolies have existed for as long as trade has. As outlined earlier, oligopoly defines a situation where only a few industry players are offering a certain product or service. The operation of an oligopoly contradicts the nature of a free market. Unlike monopolies, oligopolies cannot dictate the price and availability of goods and services but they can often collude and become friendly competitors for the sake of their maintaining profitable prices and stable markets (Greenhunt, 27).

The new trend in oligopoly is the composition of large multinational companies that have identified a particular product category to specialize and dominate. Over time, only two to four of these corporations succeed in maintaining a profitable market share as the least strategic are run out of business. New entries in the particular market are very difficult as the new entries can be chocked up by the oligopolies whose interest is to maintain the status quo.

The opposite of an oligopoly is an oligopsony. This is a market segment in which the buyers are few. An example is the culinary herbs horticulture industry where McCormick and Durkee are among a handful of companies that buy the majority of the total world production of these herbs. To the farmers, this is a disadvantage as the named buyers are at liberty to fix prices not depending on demand and supply but to increase their margins of profitability. To the firms that resell the finished goods, they constitute an oligopoly as they have the advantage of being the only ones stocking such merchandise (Lipsey, Chrystal, 32). They thus act as the sole interface and sectarian custodian between the producers and the eventual retailer and consumer segment.

To further explain this market structure, let me address the conventional retail shopping sector. To consumers (that is, shoppers), Safeway, Wal-mart and Kroger are an oligopoly grocery wise. To the food manufacturing industry and food brokers, they form an oligopsony. The manufactures and brokers constitute an oligopoly from the supermarkets’ perspective while to the small scale grocery producers, they are oligopsonies.

Other examples of similar scenarios are as follows: Since Borders and Barnes & Noble claim a majority share in all books sold in the United States, they have substantial power over all the book publishers in the country. Thus they are in a better bargaining position to enforce their conditions while sealing deals with book publishers. The Viacom and ClearChannel media groups own most of the radio stations in the country. Thus as an advertiser or a music recording professional, you will be obliged to deal with them in almost entirely their terms (Tucker, 23). Others are the Big Five music recording companies in the music industry and other oligopolies existing in the film, television and beer industries.

It is important while talking about oligopolies to address the competition matrix and the effect the structure has on the market. Clearly, Safeways, Krogers and the other big retailers either swallowed up or ran out of business the other smaller retail shop chains. The only competition they face if from bigger convenience stores and discount or duty-free retail outlets and convenience stores or general merchandise chains.

The competition in the market place has shifted from the confines of including the traditional peers and the attention has been drawn to an increasing emergence of a complex network of diversified potential rivals. The challenges of an economic downturn coupled by rising unemployment levels and decreasing consumer capacity has prompted oligopolies to diversify their operations to new frontiers or go international to remain profitable. Grocery supply chains have added pharmaceutical and the drugs to their line of business and vice versa (Greenhunt, 26). The ultimate result is that most pre-existing oligopolies have been destabilized and desperation has kicked in; as collusion a lot has been deemed insufficient a tool for remaining profitable and afloat in the face of new competition emanating from outside the oligopoly or industry.

The saturation and consequent stagnation of the video market is another clear demonstration of the competition matrix. The video market has been undergoing almost no growth, and as the industry attains its limits, even the major players are struggling and the small players like local video stores become insolvent. One reason for this is the emergence of so any competitors in this narrow domain. Convenience stores, supermarkets and other grocery outlets sell and rent videos. To make matters worse, there are so many local libraries offering videos on borrow and return basis, on absolutely no charge; and there are so many online video stores where these videos can be bought. Add in the competition from television, video gaming and music and the picture is now very clear.

Competition matrices are emerging everywhere in a rate faster than ever before as most firm strive to stand above their base competence. They are especially more pronounced especially in the retailing industry. This is due to the ease of competing because with an already existing retail outlet or grocery store, the cost of incorporating a drug store or a café is lower than while starting from scratch. As a matter of fact, many convenience stores are adopting this approach to make their shops desirable destinations offering a variety of options in goods and services (Tucker, 41). The contrast is that very few powerful companies would be willing to venture in some fields outside their specializations, like auto manufacturers would not find it profitable to start manufacturing soft drinks. However, they still have to guard themselves against emerging alternatives that could overshadow their product categories.

It would seem likely that the competition matrix would liberate the markets and inhibit oligopolies. On the contrary, it validates them more. In the face of stiff competition, companies struggle to maintain leadership in their areas of specialty by stepping up countermeasures to fend off encroachment in their market categories. This intrinsic consolidation of capital and financial muscle flexing only serves to hurt the smaller players in the specific categories, eliminating competition and binding the markets.

The most common method oligopolies employ to maintain their affluence in the markets is to flood the market with products or services very similar to emerging competitive alternatives. These products are tailored in almost the same way to create an illusion of the introduction of variety. This obliterates the minor operatives offering the real variety and pushes them out of the market. The beer industry is on e particular industry where this technique is applied (Perloff, 45). A brewery will, on encountering competition after introduction of a variety of alcoholic beverages, repackage its products and give them names suggesting they are a different product but in essence, they are exactly the same. This phenomenon is called pseudo variety.

To illustrate pseudo variety, one only needs to study the case of Anheuser-Busch. This famous brand owns the trademarks of the Budweiser franchise. While it would not be likely that a retail outlet would flood its shelves with the regular Budweiser beer, the company introduces pseudo variety, having the Light, Dry, Ice and Ice Light generics on the Bud franchise. An experienced drinker would find little if any difference in the taste of all these beer brands.  They are essentially American lager and American light lager, with the latter being a variant of the former on account of a lesser alcohol content. The real variety in beer can be found in The Great American Beer Festival where over sixty categories are exhibited, including fruit beers, bitter, porter, pilsner and wheat beers. But with close imitations flooding the shelves in all major retail outlets, these beers do not have any chance of penetrating the markets (Swenson, 52). The apparent illusion is the presence of diversity in products, but in essence the reality is only diversity in packaging. This is very restricting for the consumer and the markets. Through pseudo variety, oligopolies occupy all the space available in the shelves and in the mind of consumers.

Oligopoly and high concentration in the markets and availability of friendly financing offers companies an opportunity to engage in new ventures. This translates into the growth of conglomerates and their consolidation of majority share in the market. Increased diversity by these firms can be harmful to the economy. The venture into so many specialties, ranging maybe in entertainment, automobiles, luxury accessories, insurance, banking, publishing and so on results in operating in different market categories with diverse profit models and consumption patterns. This will often lead to inefficiency in management and integration efforts, leading to high rates of disintegration and crashes (Lipsey, Chrystal, 63). Take for instance the disasters associated with Vivendi venturing into the entertainment industry or Time-Warner entering a partnership with America Online to venture into the technology industry.

General Electric claims a majority market share of over 50 percent in the aircraft engine manufacturing industry. This sector is an example of the well defined oligopolies. It has only three stakeholders. But General Electric, despite enjoying such a lucrative share of the market, is to endure persistent threat of this dominance from its competitors, Pratt & Whitney and Rolls Royce of the United Kingdom. The result of this cut throat competition is that the three firms bid for contracts at such low levels that the probability of drawing any profits in such deals tends to zero, with the bid only able to cover the cost of production (Tucker, 30). The only hope of reaping any capital returns lays in the maintenance of the aircraft engines sold.

Oligopolies create a loophole through which the salaries and compensations of chief executives can be inflated. The levels of compensation being offered in the market can not be compared to the normal relationship existing between supply and demand. Despite a massive increase in the number of Business Administration Masters graduates from the universities, the cost of hiring a chief executive officer have continued to rise dramatically. It should be noted that increasing the compensation levels of the existing top executives does not augur well in terms of creating a new pool of potential chief executives for the market. In this respect, the chief executives in oligopolies are very much in the driving sea in determination of their serving conditions (Lipsy, Crystal, 44). The Business roundtable, an association of executives who set standards of engagement is blamed for misguiding advice concerning guidelines for compensation. The result in massive excesses in compensation amounts was a major contributing factor to the collapse of big corporations on and during the economic recession.

Oligopolies encourage the exploitation of customers while safeguarding the interests of the firms concerned. They do this through the establishment of intricate cartels which are sly enough to escape the eye of the public to avoid regulation and possible prosecution. There is a valid relationship between trade unions or industry welfare collusions to cartels. Trade associations that seem neutral and honest act as cover-up for price fixing activities. Consumers in America lose billions of dollars annually though overcharge in goods and services though illegal price fixing scandals orchestrated in an oligopoly (Greenhunt, 34). The structural characteristics of oligopolies match the ideal operating environment of cartels - a high concentration, fewness of the entrepreneurial players in the area of specialty, a high consumer density and homogeneity in product or service on sale. Bearing in mind that oligopolies are increasing in number and power, one can only expect the return of cartels to haunt consumers and industry regulators.

There are various reasons as to why corporations merge their operations. They include synergy and eventual benefit to stock holders and the consumer, greed and the fear of interruption and to increased immunity from competition. But for powerful firms like the merger between JP Morgan Chase and Bank One, the reason for merger it is clearly conceivable immunity from Government regulation. These are super oligopolies, institutions that, by virtue of the gigantism in their portfolios are too important to the economy to crash (Perloff, 79). In such a scenario, imminent failure by such super oligopolies will immediately necessitate Government action to rescue them from trouble even if the cause of failure is bad management or illegal undertakings on the part of their executives.

Super oligopolies have to their advantage that their structure is too complex that regulators, competitors and the financial markets can not clearly conceive the nature and/or legality of their actions from outside, and consequently cannot challenge or enforce regulations on them. Such oligopolies amass enormous influence on political circles and are in a position to intimidate critics and newsgroups or analysts who develop an interest to publish possible vices being done by them (Tucker, 102).

As oligopolies continue to thrive, their maximum potential impact is just starting to be felt. It is estimated that the top three banking institutions in the country will have almost an equal if not more influence on currency supply as the Government. Acting as the custodians of colossal amounts in investor and consumer credit, government policy may have to be dictated by the decisions of these three banks.