The Power of the New Oligopolies

Whenever I've written about emerging market power in the global marketplace and made the point that free and open markets aren't necessarily the competitive markets needed for the invisible hand to direct resources efficiently, it hasn't generated much response. I was beginning to think that perhaps the real and potential competition provided by globalization had largely eliminated fears of dominant firms in the marketplace and that my worries about emerging market power were misplaced. But perhaps I should worry. More to the point, perhaps policymakers should take note of how market power is evolving in the global marketplace:

Wake up to old-fashioned power of new oligopolies, by Barry Lynn, Financial Times: What will it take to wake us up to the ever-tightening grip of oligopolies over ever more of our global marketplaces? Even though their power increasingly warps our production systems, and our free market systems, alarms are rare and fleeting. The collapse of an overly consolidated US flu vaccine system two years ago did not set off any bells. Nor did the revelation ... of deep fragilities in our hyper-rationalised medical and food supply systems. The mega-merger of Procter & Gamble and Gillette last year did not do it. Nor did the general consolidation of food processors; in the US, 10 groups account for half of all retail sales, with single companies often capturing more than 75 per cent of particular product markets. Neither the fact that Wal-Mart controls 30 per cent of sales for many goods in the US economy, nor that four companies account for 94 per cent of UK supermarket sales, seem to concern policymakers. What about Samsung’s effort to capture world markets for liquid crystal display screens and D-Ram computer chips? Or Tokyo’s rewriting of antitrust laws to allow companies to consolidate 100 per cent monopolies over key technologies? Or the capture of 60 per cent of the global sneaker market by Nike and Adidas? In every case, there has been almost no reaction. ...

There is no shortage of competition in many markets. Just ask Volkswagen or Delta Airlines. But the further down we look below the level of branded companies, the more consolidation we tend to find. This is true in commodities, services, industrial components and shipping. ...

As bad as these old-fashioned problems may be, many of our 21st-century global oligopolies appear to pose entirely new dangers. ... Alfred D. Chandler, an industrial scholar, has written that one of the main factors behind the rise of the huge, vertically integrated corporation early in the 20th century was enforcement of US antitrust law, which limited the horizontal growth of these companies. Unable to exert power over the market, many scrambled instead to internalise key functions, for competitive advantage.

This means we cannot ignore the effect ... of the radical relaxation of antitrust enforcement by the Reagan administration in 1981. One result of giving big companies a licence to grow horizontally was that many producers, once they captured control over their markets, opted to sell off or shut down expensive and risky ... operations and buy these “services” from outside suppliers with few or no other pathways to the marketplace. Over time, many of these top-tier companies relied ever more on their power to dictate prices to their suppliers ... In a production system marked by extreme outsourcing, oligopoly ... lead companies capture more power to set supplier against supplier, community against community and worker against worker. ...

So far, especially in America, the tendency has been to blame extreme competition on “globalisation”... The real explanation, however, is not ... mainly globalisation... as much as radical changes in the structure of industry. In other words, it is not the Chinese who destroy US and European jobs, ...[it is the] the world’s largest traders and retailers ...[who] pit producer against producer...

Outright monopoly is absolutely defensible – when granted temporarily to reward companies for bringing truly new ideas to market. But most of today’s powerful companies are not the result of new ideas, only the strategic reordering of markets. ... It will not be long until we realise that to save our free market system will require, among other actions, far more aggressive enforcement of antitrust. Simply stopping any further roll out of power will not be enough. True believers in the free market will admit there is no other choice than to roll the power back.