The Structure and Consequences of Oligopoly

The Structure Behind the Business Ladder

What is the brand of your current cellphone?  From what telecommunication company are you subscribing?  The most probable answers for a cellphone brand would be Nokia, Apple, and Samsung.  And surely, one is subscribing from Globe, Smart, or Sun Cellular.  Why are the answers so predictable? Why are these companies very well-known?   This is because they are the powerful ones in the market today.  In different industries, there are dominating firms controlling a specific sector.  For example, we have ABS-CBN, GMA, and TV5 for television; Shell, Caltex, and Petron for the petroleum industry; Jollibee, KFC, and McDonald’s for fast food chains, and SM and Ayala Malls for commercial and property development.  The list goes on.  That is what oligopoly is.

        As how Othman Frederick describes it, oligopoly is like a cheese merchant who deals out the cheese from his big warehouse with the price he wants.  Add around three merchants grouped together, and that makes an oligopoly (Frederick 4).  In a formal sense, what makes an industry an oligopoly is when there are around two to twenty firms dominating.  It is judged based on the relationship of a firm’s market power and performance.  As the number of sellers or producers decrease, their dominance increases, and the market moves farther from a perfect competition. The higher the power, the higher is the barrier to entry.  This is a feature of both monopoly and oligopoly types of market structure (McAuliffe 177).  If another term for monopoly is “no competition”, then oligopoly is also known as “imperfect competition” (University of North Carolina).  But even if oligopoly encourages innovation and development in business, it is not beneficial to the common good, since it widens the gap between the rich and the poor.

[pic 1]Figure 1 Market Structure Diagram

Monopoly and oligopoly are similar in a way that the dominating firms are very visible.  The barrier blocking new entrepreneurs to enter the market is very high (this will be discussed later on).  What makes oligopoly different from monopoly is that, instead of one company controlling an industry, there are at least two.  Another difference is that the level of competition is higher in oligopoly.  But this level is closer to zero competition than to a perfect competition.  It is inevitable for it to have the same qualities and consequences as monopoly.  Since the ratio of the sellers or producers to the consumers is very big, the demand of the buyers for the products and services is also extensive.  This contributes to the monopolistic characteristic of the market structure (Hotelling 41).  Let’s take the petroleum industry for example.  Aside from the three dominating firms, we also have Sea oil, Total, and Flying V.  But the demand for oil is very high.  There are many vehicles with only a few companies to supply the demand.  As for the commercial and property development industry, we have SM and Ayala Corporation.  Yes, there are other malls like Eastwood, Greenhills, Shangri-La, etc, but SM & Ayala are still dominating.  We can see SM in almost every city in the country.  

        How is oligopoly different from perfect competition?  Imagine the structure of a “tiangge”.  Most of them sell similar products within a similar price range.  They do have brand names, and there are a lot of sellers.  They are in the same level of playing field.  This is an example of a market closer to perfect competition.

        What are the benefits of oligopoly being near to zero competition?  First, technological advancements would not have been possible without oligopoly.  According to James Kwak as cited in Nick Schulz article, this is because new inventions and innovations by different firms serve as their weapons against their competitors.  Since they want to match and beat their rivals, innovations must be done continuously. Mr. Kwak compares it to a war between two countries.  One side worries about the attack of the other side.  That is why each party tends to compete with the military spending of the other side (Schulz).  At present, an obvious example would be the competition between Apple and Samsung.  

        Apple developed a touch screen smartphone with new applications.  Then Samsung made its own smartphones to challenge Apple’s product.  And that is how both companies started introducing new generation of smartphones.  They update and release new models rapidly to overtake each other.  With each updated smartphone they release, there are always new features installed such as Siri and the air gesture.  Imagine if Apple were the only dominating brand, it would not make as much effort to improve its products, since it has already captured the consumers.  Maybe it would not have thought of inventing Siri or creating better retina display for iPhone 4S and iPhone 5.  If Samsung were the only one dominating, maybe it would not invent the air gesture function for Samsung S4.

        Mr. Louis Galambas, a professor and an economist states that: “Global oligopolies are as inevitable as the sunrise. . . .  Oligopolistic competition proved to be beneficial . . . because it prevented ossification, ensuring that managements would keep their organizations innovative and efficient over the long run.” (Zachary).  That is how the market is.

        Another benefit of oligopoly is market prices tend to be stable.  Companies are hesitant in changing prices.  This is because if they raise the prices of their products or services, less consumers will buy or avail that service.  If they lower the price, they may get a bigger share in the market, but they will have a lower revenue. Instead, to be on the safer side, they tend to follow and settle with the price that the leading company has set.  This stability of prices is beneficial to the consumers, because they can plan their expenditures well (Pettinger).  They will have an idea of around how much each product usually costs.

        To prevent zero competition and companies from merging, anti-trust laws are implemented by the government.  Their main objective is to remove monopolies and oligopolies.  They are created to promote competition and to keep prices low (Federal Trade Commission). Over the past years, different anti-trust bills in the country have been proposed, but are always rejected.  Former Senator Manny Villar mentioned that the Philiippines has no comprehensive anti-trust laws.  (Villar, 2013)

        But these laws are not always successful enough to protect oligopoly from being disruptive. Legal proceedings from these kinds of laws are not necessarily effective.  For example, if they impose fines on companies for restricting trade, companies tend to lower their output (Smith 995).  This is not beneficial for the consumers because it will deplete the supply.  Based on the Law of Supply and Demand, if there is more demand than supply, the price automatically increases.  And even if these anti-trust laws exist, whatever happens, it is in the nature of oligopoly to merge with other companies to become more powerful. Tereso Tullao explains “Firms in this type of market structure [oligopoly] either compete or collude with another.  If they compete, they can engage in a destructive competition which may ruin everyone concerned. . . . Because many firms in an oligopolistic market may face the disadvantages of independent action and destructive competition, they often agree among themselves to control the entire market and industry.  This agreement, often secret, among just a few sellers in a large market to control the industry is known as collusion. . . . (Tullao 147)”  

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