Economics Regarding Oligopoly Markets - Essay Example

Introduction In the quest of survival, growth and leadership business has always tended to outgrow rivals and become large and monopolistic. The barrier to this tendency has been shortage of financial capital and strong opposition by nations to curb this inclination to protect the consumer at large. Monopolies are largely discouraged in the liberal and free trade era but some countries follow it or allow it in the interest of the country. In these cases too when the purpose is served, usually to nurture a nascent industry where private investors are hesitant to venture initially, competition is allowed to root out the inefficiencies that such systems suffer from. Perfect competition has always been considered to be best for the consumer and is favoured by nations. It is the ideal situation where all similar or identical products are available simultaneously to all buyers. This would make it impossible for both buyers and seller to influence prices. Demand and Supply will determine price at any point in time. In the real world however there is little evidence of such conditions. In the continuum between monopoly and perfect competition Oligopoly has raised its dreadful form to the detriment of the consumer. This is the situation where a few sellers, usually three or four, control the supply side and influence the customer to accept their product or service along with the price they dictate. What is not so obvious is that they also force their supply chain to accept this dictatorial attitude to get the best prices and terms. The beauty of this entire operation is that both consumers as well as the supply chain consider the oligopoly as their benefactor and willingly subscribe to their ideology. Even the state is fooled by them into the false thinking that they contribute positively to the economy by providing huge job opportunity and creating excellent platforms for increasing efficiency and quality. But the fact is that an oligopoly is exploitative although it appears to be benign; and when it hurts it is often too late to help the stakeholders. Defining Oligopoly An Oligopoly is a cluster of companies that deal with similar products or services and offer them within a very narrow band of prices to the consumers. It makes a great show of perfect competition as prices and products are similar and the intensity of rivalry is perceived through their aggressive and persuasive promotional tactics. On the surface, externally, there is great fanfare of competition and competitive advantage but in reality there is great conformity amongst them. An oligopoly exists somewhere between the extremes of perfect competition and monopoly. An Oligopoly usually appears to compete with each in the marketplace, but there are occasions when it acts in cooperation for their benefit. An oligopoly company is a price maker yet their control over the price is determined by the level of coordination among them. There are a also a few mutually interdependent firms that produce either matching products or diverse products. It is observed that only a handful of companies control an industry segment both nationwide and worldwide. The Airline and Automobile Industries for example work more on a national scale when they are suppliers and worldwide when they are buyers and manufacturers. For example in the US when one Airline raises or reduces price, it is immediately followed by others in the same direction although competition demands otherwise. This is because they all realize that it is mutually advantageous to keep to similar prices. Actually what they are doing is that they are competing for market share by means of projecting themselves on basis of quality of service and product and not on price. They are creating brand images without fighting on prices. They are actually aiming to get better prices from consumers and not really aiming to offer lower prices. Interestingly low-cost airlines and entry level cars are marketed as a separate segment that will not affect the prices of the high end services. A look at the airline industry will reveal that low cost airlines have only a 10% share of the market and the entry level of cars are expected to gain a market share of only 20% by 2015 (Christoph Hammerschmidt 2008). This goes to show that the real money and profits lie in the premium sectors and oligopolies are capitalizing on this factor. Oligopoly and the Consumer All companies work for competitive advantage to gain market share and attract customers by working on the age old formula of the 4 Ps (Kotler and Armstrong); Product, Price, Promotion, Place. The other traditional marketing concepts relying on the 7Ps of Boom and Bitner (1981), 4Cs of Kotler (1999) and 30Rs of Gummesson (1996) are indeed a lure to lead the consumer to think that he is king. In fact Gummesson (1994) has the audacity to say that these models were manipulative and exploitative in nature. Both Coke and Pepsi are rivals on a global scale and their cola wars are well known. They however do not compete on price. Nowhere in their advertising do they mention prices except when promoting a new segment or a new product. They compete for market share on basis of popularity of their brand and use celebrities as brand ambassadors to send out messages to create empathy with the consumers. The result is that consumers have not got any benefit on account of lower prices for their products. Oligopoly and the Suppliers The truth is that in the mission of survival companies have looked to capturing market share and for this purpose have grown large. These market seekers have gone national as well as global. For this they acquire rivals in the name of efficiency and reach and at the end of the road only three or four survive and claim to be competitive with each other to serve the customer better. They lower the prices but rarely compete with each other on price. The source of lower prices is the clout they carry on their supply chain. A definition by Cooper et al (1997) is that three or more organizationally distinct handlers of products, where products include physical goods, services and information, make a supply chain. Due to this multi-organizational nature the supply chain management has emerged as the core strategy of the firm for competitive advantage with a focus on building and maintaining inter-firm relationships. It has also been noted by Achrol and Kotler (1999) that it is now widely understood that since this has become core strategy, the competitive advantage is now sought not at the level of the individual firms but at the level of the entire chain of suppliers that they work with. A large number of companies realize the route to becoming world class competitors’ lies in their ability to establish high levels of trust and cooperation with their suppliers (Buono 1997). Globalization has lent credence to this need more acutely and creating a cooperative relationship has now become a core strategy in supply chain management (Andraski 1998; Stank et al 2001). Working in far flung markets, with varied requirements for different manufacturing units; with increased focus on cost, quality and flexibility, procurement has become the primary factor as the first step towards competitive advantage. In the US markets Wall-Mart, Home Depot, Target, JC Penny and Kroger form an oligopoly of retail trade. Of these, Wal-Mart easily outsells all of them put together. “There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.” (Sam Walton). This statement from the Founder and Chairman of Wal-Mart is the cornerstone of his ambitious plan to sell at rock bottom price to the consumer. Very early on it was decided by Wal-Mart to buy directly from manufacturers to eliminate the middleman’s cut and initially the company was firmly promoting the “Buy American” programme. Later of course this was dropped in favour of globally procured goods for the benefit of the consumer. The company grew very quickly and the annual growth rate was 35%, far above the retail industry average of around 10%. But this strategy had its price. By squeezing the prices to their limits, the suppliers of Wal-Mart were forced to look overseas where cheap labour was available, in order to continue to serve their buyer. This resulted in flight of manufacturing jobs to under-developed and developing countries. To keep improving on prices and reducing costs jobs kept moving to poorer countries. The company did not even spare its own 1.2 million American employees. They are paid the lowest wages and the company admits that some may find it difficult to survive on these pay-scales. Cutting prices in now a habit with the company and it continuously looks for ways and means to cut costs. The Fashion Industry is particularly dependant on sweat shops of the East to thrive. Wal-Mart attracts shoppers for fashion clothing mostly made in dangerous sweatshops of Bangladesh, Pakistan, China and Vietnam using child labour as well as underpaid workers. Wages paid were so low that in most cases the worker was unable to feed his family properly. Besides hazardous work conditions, work and gender abuse, child labour are accepted as common local practice and the managements ignore it all. Owners/Managers of the factory refuse to engage in good-faith bargaining with workers It comes as a surprise to many that sweatshops exist in the US too. The backstreets of Los Angeles bear witness to this fact. In a report published in the Independent, UK, Andrew Gumbell stated that he visited an outfit called Fashion 2K along with a team of inspectors from Californias Labour Standards Enforcement Bureau, in response to a worker complaint. The conditions found were atrocious. Low wages, long hours, inhuman working conditions existed in the heart of thriving Los Angeles. (Gumbel, Andrew). Wal-Mart induced by oligopolistic behaviour, is strained to offer cheap goods manufactured under conditions of unethical practices. This encourages the manufacturers to provide them with unethically sourced goods. This practice is again adopted by the other companies of the same oligopoly to retain their market share and to compete with the leader of the pack. This goes to show that the power of the oligopoly forces its supply chain to do its bidding. Although the consumer gets cheaper pricing and willingly supports Wal-Mart without realizing that he is contributing to loss of job of a US worker elsewhere (Charles Fishman 2003). Oligopoly and the State The US has its anti-trust act and Europe has anti-monopolistic acts to protect their consumers. These are extreme cases where consumer protection is considered vital and benefits are obvious to all. To circumvent these oligopolies were structured in the last part of the 20th century and the various states and nations accepted them as an evolutionary concept that gave the consumer goods and services at lower prices. In the name of competitive advantage this was hailed as the best business practice and practitioners fell overboard with the concept that they saw as a move towards perfect competition. Porter (1996) has described three generic strategies; cost leadership, differentiation and focus that are the foundations of competitive advantage or difference. Market and Resource seeking motives have been the two most recognized categories of motives (Dunning 2000). These two are the main reasons for most first time internationalization attempts by firms. It often happens that resources fall short in the home country which limit growth of firms and in turn maces them inefficient, whereas the required resources may be readily available abroad. This would tempt the firm to go international for just the reason of acquiring resources to become competitive in the home market. Many an MNE like Nike and Nokia have exploited cheaper labour and raw material abroad for reducing costs of their products for sale in the home countries. This has led to another type of competitive advantage that firms are now actively pursuing in the shape of Mergers & Acquisitions (M&A). The new Multinational company has realized that putting up new production facilities or organizing fresh marketing efforts have a long gestation period. Hence they find buying out of rivals and competition a quicker and painless way of enhancing both efficiency and markets. Cross border M&A has become a common feature and an attraction of the Locational advantage type. Wal-Mart acquired ASDA in UK to expand its activity and along with Tesco, Sainsbury and Mark & Spencer has helped form the retail oligopoly in that country. Vodafone wanted to become the dominant player in the global mobile and fixed telephony market. It made many an acquisition, both friendly like that of AT&T to create Verizon, or hostile like Mannesmann GmbH of Germany, but the outstanding M&A of 2007 was that of Hutchison (Hong Kong) 50% share of its Indian joint venture for a staggering sum of $ 11.1 billion. The motive here was clearly market seeking as with this acquisition Vodafone has become the world number one Mobile operator. It is part of the worldwide oligopoly with China Mobile and Verizon that control worldwide mobile telephony and ISPs. Conclusions All the above practices are accepted by the buyers, sellers and the governments as part of the competitive advantage process that offers the customer the best and cheapest variety of goods and services. What is overlooked is that in the process the hold and control a few companies exercise in influencing the customer to pay more wherever it suits them. Also overlooked is the fact that overall employment is coming down in the developed country. That employment is going up in the under-developed countries and emerging economies is no compensation for loss of jobs in the developed nations. The oligopolies are squarely responsible for this malady but regrettably there appears to be no effort to curb their control over the destinies of the consumers and the workers alike. It is concluded that existence of oligopolies is not desirable, despite the apparent price advantage they offer, as in the larger interest of public interest they have caused much damage to the structure of smaller companies that are forced by them to shift factories and jobs to cheaper locations. It is certainly not in the public interest to allow the oligopolies to function in the way they do and curbs should be applied to regulate them. Bibliography Achrol, Ravi S. and Phillip Kotler (1999), "Marketing in thé Network Economy," Journal of Marketing, Vol. 63, No. 4, pp. 146-163. Andraski, Joseph C., (1998), "Leadership and The Realization of Supply Chain Collaboration," Journal of Business Logistics, Vol. 19, No. 2, pp. 9-11. Booms, B.H. and Bitner, M.J. (1981), “Marketing strategies and organization structures for service firms”, in Donnelly, J.H. and George, W.R. (Eds), Marketing of Services, American Marketing Association, Chicago, IL, pp. 47-51. Buono, A., (1997), Enhancing Strategic Partnerships: Intervening in Network Organisations. Journal of Organizational Change Management, (10:3)pp 75-86 Cooper, Martha C., Lisa M. Ellram, John T. Gardner, and A.M. Hanks (1997), "Meshing Multiple Alliances," Journal of Business Logistics, Vol. 18, No. 1, pp. 67-89. Dunning, J., (2000), Regions, Globalization and the Knowledge-based Economy. Oxford: Oxford University Press. Gummesson, E., (1994), A perspective on service productivity. In GUMMESSON,E., & TORESSON-HALLGREN, I. (Eds.) Service productivity: current research. Stockholm: Stockholm University/EIASM. Gummesson, E., (1996) Why Relationship Marketing is a Paradigm Shift: Some Conclusions from the 30R Approach Presented at 1st Management & Decision Internet Conference on Relationship Kotler, P., Armstrong, G,. (2001), Principles of Marketing, 9th edition, Prentice Hall & Pearson Education. Porter M.E., (1996), What is Strategy, Harvard Business Review, Stank, Theodore P., Scott B. Keller, and Patricia J. Daughterly (2001), "Supply Chain Collaboration and Logistical Service Performance," Journal of Business Logistics, Vol. 22, No. 1, pp. 29-47 World Wide Web Fishman, Charles, The Wal-Mart You Dont Know, available at: http://www.fastcompany.com/magazine/77/walmart.html?page=0%2C9 Gumbel, Andrew in Fashion Victims Inside the Sweat Shops of Los Angeles, Published on Friday, August 3, 2001 in the Independent / UK © 2001 Independent Digital (UK) Ltd available at: http://www.commondreams.org/headlines01/0803-02.htm Hammerschmidt, Christoph., (2008), Low-cost cars to gain market share, available at: http://www.automotivedesignline.com/209600437?cid=RSSfeed_automotivedesignline_adlRSS Sam Walton Quotation available at: http://baronburg.blogspot.com/2007/05/quotations-from- sam-walton- himself.html Read More