American oligopolies are the new monopolies

Tim Wu sez, "I wrote something quick in the New Yorker about America's big blind spot when it comes to big business -- if its not a monopoly, its no problem, so highly concentrated industries can get away with whatever they want."

This blind spot is of particular significance during an age when oligopolies, not monopolies, rule. Consider Barry Lynn’s 2011 book, “Cornered,” which carefully detailed the rising concentration and consolidation of nearly every American industry since the nineteen-eighties. He found that dominance by two or three firms “is not the exception in the United States, but increasingly the rule.” Consumers, easily misled by product labelling, often don’t even notice that products like sunglasses, pet food, or numerous others come from just a few giants. For example, while drugstores seem to offer unlimited choices in toothpaste, just two firms, Procter & Gamble and Colgate-Palmolive, control more than eighty per cent of the market (including seemingly independent brands like Tom’s of Maine).

The press confuses oligopoly and monopoly with some regularity. The Atlantic ran a recent infographic titled “The Return of the Monopoly,” describing rising concentration in airlines, grocery sales, music, and other industries. With the exception of Intel in computer chips, none of the industries described, however, was actually a monopoly—all were oligopolies. So while The Atlantic is right about what’s happening, it sounds the wrong alarm. We know how to fight monopolies, but few seem riled at “The Return of the Oligopoly.”

Things were not always thus. Back in the mid-century, the Justice Department went after oligopolistic cartels in the tobacco industry and Hollywood with the same vigor it chased Standard Oil, the quintessential monopoly trust. In the late nineteen-seventies, another high point of enforcement, oligopolies were investigated by the Federal Trade Commission, and during that era Richard Posner, then a professor at Stanford Law School, went as far as to argue that when firms maintain the same prices, even without a smoke-filled-room agreement, they ought to be considered members of a price-fixing conspiracy. (By this logic, the Delta and US Airways shuttles between New York and Washington, D.C., would probably be price-fixers, since their prices do vary by how far in advance you buy, but are always identical.)

The Oligopoly Problem


  1. A good term for this system is Corporate Kleptocracy.   Since through lobbying, unfettered campaign finance, and revolving-door employment of regulators. they own the government- it’s game, set and match.

    1. I think you hit the nail on the head.  It isn’t oligopoly that is necessarily bad, it’s when there is a revolving door of government influence that the real problems start to pop up.  Oligopolies in some industries are just unavoidable.
      After working in the semiconductor memory industry for a decade, I would say that things are better off now that there are three major producers, vs. the roughly 10 that there were in the late 90s.  Back then pricing was very chaotic, as shortages and oversupply played havoc with capacity planning.  When prices were high, companies would expand production.  The problem was, it would take 2 years for new capacity to hit the market, with the result that it would immediately glut and crash prices, leading to huge losses.  The cycle happened again and again, until smaller players one by one exited the market.  Now, finally, with only 3 big players, the market is finally stabilizing. 

      1.  And Mussolini made the trains come on time.  Everything has a positive aspect. 
        Some things are necessarily bad, just not in all aspects. 

  2. I like this notion that large competitors who settle on similar prices would be considered colluders. But what else would happen? Would they be obligated to instead drive prices down as far as they can, which might put the other out of business? Or float their price up higher than their competitor and enjoy a higher margin on a smaller share of the market? Just how would this work?

    1. What else? They would be shut down:
      On May 15, 1911, the US Supreme Court upheld the lower court judgment and declared the Standard Oil group to be an “unreasonable” monopoly under the Sherman Antitrust Act, Section II. It ordered Standard to break up into 34 independent companies with different boards of directors, the biggest two of the companies were Standard Oil of New Jersey (which became Exxon) and Standard Oil of New York (which became Mobil).[36]

      1.  And now they are….  ExxonMobil…  those who do not learn from history are bound to repeat it.

      2. And where would the balls to “shut down” suddenly come from? The banks nearly destroyed the economy and were “too big to fail”.  No shut down or restructuring followed. You are saying the solution is something we never do anymore.

      3. That is totally non-responsive to the question though. Once a price equilibrium has been reached, what would the rationale for very different prices for similar services by similar companies be? Maybe the reason Posner isn’t pushing this line of thought anymore is that it’d be impossible to make sense of. If GM and Ford both have an out-the-door cost of $15,000 for a truck and have similar logistics and dealer networks, having the trucks sell for similar prices would be expected, not evidence of a conspiracy.

        1. Yes, that is the gist of my question. But its rarely so simple when you get into a product as complex as a truck for instance. If you look at the author’s paper he outlines the mechanisms where which tactics are taken that exclude competitors from entering. Its not just about gouging us, but keeping others out, and preventing innovation. In fact keeping the price the same but not too high stops new comers from underpricing the established players.

          1. The whole logic of ‘free market’ and competition is that the producers are incentivized to cut their costs and increase their competitiveness through improved technology.  Their competitors will be doing it, so they have to as well.

            If they reach an agreement on price then that incentive is gone.  Any cost cuts don’t carry through to the consumer, and instead are just more profits.  Hence oligopoly, and attendant technological stagnation.

          2. I agree that the barrier to entry has been made  higher, and new innovations are harder to make.  However, I also would argue the capitalist side: that a society doesn’t WANT every Tom, Dick and Harry making new car models and selling them for cheap.  I’d argue that the society actually wants higher quality, more interesting cars that meet ever changing needs.  So if suddenly the sun became much brighter, we’d want cars that kept us cooler shaded our eyes better than current models.  Is it true that only 3 car manufacturers should do it?  No, not necessary, but it’s sufficient.  Should a new player come in with a special cooler/shadier car for the same price or better?  Sure.  Or, an innovator can invent a better cooling system and shading system, and sell THAT to the car makers, or if they won’t bite, sell it as an aftermarket product, and tailor it for a certain model.  That way the manufcaturers would have to stand up and take notice and either come up with their own innovation or buy/license the innovation from the newcomer.  However it plays out, the innovator still has a place, and the big guys still have to answer to consumer demand.  Sure, they shape that demand right back, but if suddenly the roads repair budget dried up and the roads turned muddy, there would be less and less demand for Priuses, and more demand for 4WD cars set high off the pavement and able to handle potholes better.  Capitalism has its bad points, too.  I am well aware.  I’m no fanboy of everything Capitalistic.  But I do see the merits of competition, and how competition can and will still occur even when there is collusion, or effective collusion, among the big players.

          3. Or they make their designs non-standard enough so that aftermarket products can’t reasonably enter the market.

            Look at car radios; once, there was a more or less standard port you could slot a third party upgrade into. Now, barring major modification of the dash, you buy whatever the manufacturer decides it wants to sell you.

          4. I’d argue that the society actually wants higher quality, more interesting cars that meet ever changing needs.

            If it weren’t for state-imposed safety, environmental, etc. regulations, we’d still be driving 1950s DeSotos and Studebakers with minor aesthetic changes.

          5. @Antinous_Moderator:disqus That just isn’t accurate. Saab, Volvo and Mercedes all introduced safety features (airbags and anti-lock brakes, I believe) that were not required anywhere in the world when introduced. Mercedes left some of the technology unpatented as both a marketing ploy and as a Good Deed. What developments would have been introduced when is a different question, but we would not be in 1950s cars.

          6. It sounds like you are arguing how it *should* work and Wu would probably agree. The opposite: when the economy crashes, we unknowingly eat horses. And ice cream packaged to look like Ben & Jerry’s that is so full of crap it doesn’t even melt!! 

        2. Price equilibrium is something that’s never actually supposed to be reached. If it is, it indicates a market problem, and we need government to come in and swirl things up to re-ignite the market action that we’re supposed to be aiming for in the first place.

          One method would be to nationalize whichever firm is seen to be acting least in the public benefit.

          1. “Price equilibrium is something that’s never actually supposed to be reached. If it is, it indicates a market problem”


          2. Because advancement is halted. You need some of the players to go bust and be replaced, at least from time to time.

            If that isn’t happening, then there’s something stopping new entrants from displacing the existing players.

        3.  There was a similar situation in Hawaii in the 80s and 90s.  Several times small airlines tried to start up, usually by offering interisland flights at a discounted rate.  Immediately, the 2 major players, Hawaiian and Aloha, would undercut the new guy until they folded or were bought out.  Now the only independents are the ones serving the routes the one remaining airline, Hawaiian, finds unprofitable.

    2. Adam Smith described a condition of “perfect competition” — impossible in the real world but intended as a useful abstraction.  Under such conditions all businesses providing a particular product drop the price as low as possible — to the point where revenues cover costs essentially.  This is how capitalism “saves the consumer money” and “causes innovation” (because a business that innovates and produces a product more cheaply wins, essentially). 

      An “oligopoly” is another way of saying “imperfect competition”.  Under such conditions you do not get the same competitive pricing as under perfect competition.  Brand loyalty and therefore advertising become huge factors in people’s decisions and create elasticity in prices (i.e. people are willing to pay a little bit more for their favorite brand than for a generic version or a competitor’s).  As a result, an industry consisting of a few large firms is able to make a reliable profit whereas a highly competitive industry essentially won’t.

      This is one of many examples of why I think of economics as a “science of exceptions”.  The basic theory doesn’t describe anything in the real world and the study of economics basically consists of figuring out why the theory doesn’t look anything like reality.

      I see below you also make a great point about established businesses creating barriers to entry within their industries, either by regulatory capture or some other mechanism.

    3. I think Posner was arguing that the appearance of price-signaling should be suspect on its face, and grounds for investigation at the very least. With the current arsenal of econometric weapons, you’d think we could figure out when commodity prices are being artificially constrained, but since 1980 nobody has wanted to know. 

    4. A good point.  Market forces would naturally cause similar prices for similar products, after all, why would consumers pay more if they can get it for less somewhere else?
      This is why price collusion laws are only enforced when there is evidence that two companies communicated with the purpose of setting agreed prices. Just having similar prices isn’t enough prosecute unless it can be proven that there was intentional collusion.

  3. This post points out some useful things. The toothpaste example is a good one because we really do have the illusion of competition because of the product labeling. By the same token though, confusing oligopolies with cartels is at least as important an error as confusing monopolies and oligopolies. Posner was trying to remove the distinction, but it is an important one because it directly impacts whether there is actually any market competition (although minimized) or not.

  4. Here in Europe the test for monopolistic / oligopolistic behaviour is whether it harms the consumer.  That can happen in various ways, but a key one is if market dominance is deliberately used to prevent or hinder competition.

    A strong, fit, healthy company that simply outperforms, like Apple, in a market, is not penalised unless they harm consumers.  Which maybe they’re doing, but someone needs to take the case forward – it doesn’t happen by itself.

      1. This would seem to be a Wrong Question. There is also no second source for Charmin Double Rolls of toilet paper. But there *are* other laptops, other operating systems, other toilet papers. Note that I’m not attempting to say that Apple  isn’t part of an oligopoly. I’m just saying that having a branded product is not evidence of such.

  5. So let’s take a look at his actual arguments:

    “Our current approach, focussed near-exclusively on monopoly, fails to address the serious problems posed by highly concentrated industries.”

    What serious problems would those be?

    “Although T-Mobile’s decision is welcome news for consumers, it doesn’t change the fact that the old extortions remained in place for about fifteen years, and that they remain in place for the vast majority of Americans still trapped in contracts with Verizon, AT&T, and Sprint.”

    So he’s complaining about a company *lowering* prices and benefiting consumers?? And extortion? Really? The word “extortion” means to extract property or services from someone through coercion – threats of physical violence. Can the author explain to me exactly how AT&T, Verizon, Sprint, and T-Mobile were threatening violence against their customers? Of course he can’t, because it doesn’t happen. People sign up for cell phone contracts completely voluntarily, and if they are unhappy with those bills, they can stop paying when the contract is done, break the contract, or even fight it legally. No one is extorting anyone.

    So we’ve established that there is no coercion going on. So what exactly does the author see as a problem? Similar pricing structures? That seems likely to occur in a mature market, as he himself points out with the example of gas station owners. What evidence does he offer of collusion among these companies? None whatsoever – but that doesn’t stop him.

    His next argument is about “parallel exclusion”, where oligopolies collude to exclude competitors. The two examples he gives are very instructive.

    “Over the eighties and nineties, despite “deregulation”, the established airlines like American and United managed to keep their upstart competitors out of important business routes by collectively controlling the slots at New York, Chicago, and Washington airports.”

    Perhaps Mr. Wu needs to check his sources, because the last time I looked, those airports are controlled by … local government entities. It is these protected, government-granted monopolies that kept competitors from bidding for slots and favored the big players. More importantly, this effort was a failure, as Southwest and other budget competitors have been eating their lunch for years.

    “Visa and MasterCard spent the nineties trying to stop American Express from getting into the credit-card industry, by creating parallel policies (exclusionary rules) and blacklisting any bank that might dare deal with AmEx.”

    Again Mr. Wu seems confused. It wasn’t Visa and Mastercard who started excluding people, it was American Express – and the plan backfired on them. Today all those cards (plus others like Discover) are accepted virtually everywhere today.

    Now let’s look at the actual monopoly that’s the problem in the case he’s discussing:

    “The Federal Communications Commission is supposed to insure that the carriers, who are leaseholders on public spectrum, use that resource to serve the public interest, convenience, and necessity.”

    Whoa, wait a minute. “Leaseholders”? How were those “leaseholders” selected, and why can’t new competitors use the so-called public spectrum? Oh, right, that would be because the FCC has assumed monopoly control of the electromagnetic spectrum, and only lets certain companies use it – despite the fact that we’re technologically long past the point where spectrum needed to be reserved, if there ever was such a time. It’s not hard to see why these companies behave like an oligarchy – it’s because they ARE a government-granted and government-protected oligarchy. If anything, he should be *praising* T-Mobile for breaking ranks and acting to benefit consumers!

    At the end of the article, he does actually manage to put his finger on the real problem:

    “Exploitation of concentrated private power is not a problem that will ever go away. In the United States, it has been a concern since the framing: the original Tea Party was actually a protest against a state-sponsored tea monopoly.”

    Note that last bit: a “state-sponsored tea monopoly”. It would be more accurate to call it a government-granted monopoly. His arguments, far from supporting his assertion that “we” should do something about oligopolies by simply assuming that anyone with parallel pricing structures and similar business models are criminals, actually support the opposite conclusion – competition works when permitted to operate, and the way to deal with the current oligopolies is to stop granting them government protection from competition.

      1.  Yeah it’s funny. I pretty much can choose between all of two companies to get internet from where I live. Funny he sees no problems that arise from that. Maybe he should try dealing with customer service some time..

        1. I’m genuinely curious: where do you live such that you only have two choices of companies to get internet from?

      2. Somehow, I suspected this retort wasn’t going to actually say why regulation is not a problem. 

    1. Again Mr. Wu seems confused. 

      So the citations in the paper he linked are bullshit, then?  It was all a dream he had?

    2. TL;DR: You don’t actually know what the word extortion means:

      [mass noun]
      the practice of obtaining something, especially money, through force or threats:
      he used bribery and extortion to build himself a huge, art-stuffed mansion
      [as modifier]:
      extortion rackets

      The threat need not be of violence, withholding of a necessary good or service would be sufficient.

      1.  Libertarians seem to really like to use the word “violence” in these contexts a lot…

    3.  You will need to cite some of your assertions here.

      With the wireless market we see prices have not gone down but have gone up. Data was $30 for unlimited now that same $30 buys you 2GB. Incoming text messages were free now they cost 20 cents. There was a phone plan that cost $35 for 200 anytime minutes, unlimited nights and weekends and free incoming text while outgoing was 20 cents each. Now the minimum for a plan is $40 a month. It cost me $10 dollars more a month just to have a cell phone through the same company.

      Also please look at the link about subsidized phones. The idea the plans cost so much is that we need to pay them back for the cheap initial cost but after the contract price does not go down for your monthly plan.

  6. A major symptom of an oligopoly is when you see fierce advertising competition for customers, but on anything but price. Classic examples include airlines, cell service and broadband. An interesting clear case was the height of the SUV craze.  Markup on SUV’s was many times higher for SUV’s than for cars, often over $10k on a $30k or $40K SUV. So where was the maker willing to take a lower margin for a bigger market share? None wanted to spoil the party. So whether it was a Ford or a Toyota, the high markup was guaranteed.  

    Economists will say this is a sensible approach for the industry to avoid a “race to the bottom” in prices, but it illustrates that a “free market” is rarely the case, and to base our regulation of it as such is nonsense.

    1. Consumers have fallen into the trap of sucking down the marketing Kool Aid.  I make my stand for economic reality by insisting on discounts for just about everything I buy – and it works.  Why anyone pays sticker price I’ll never know.

    2. The SUV example is inapt. I can think of at least 9 distinct companies offering SUVs off the top of my head and they offer (and offered) a range of vehicles across price points. In fact, they did compete on price, as well as features. Just because manufacturers were able to charge a premium across models does not mean that the market wasn’t working.

        1. Oh, those stupid consumers and their willingness to pay premiums to any of a dozen companies spread across three continents!

          1. Well, I for one, did not pay an SUV premium. I bought a different vehicle. I could have paid an SUV premium, but I didn’t.

            I don’t think this is that complicated. The SUV example just isn’t apt. There are others that are.

          2. But you couldn’t buy an SUV without paying the premium, therefor the SUV market is distorted.

        1. Unlike SUVs that actually is a good example. Toothpaste was another good one. SUVs just aren’t. Ford, Chrysler, the GM family, BMW, Mercedes, Kia, Honda, Toyota, Volkswagen, Porsche, etc. are genuinely different companies genuinely competing in a lucrative market segment.

  7. This also affects why people start smaller businesses. Especially in Silicon Valley, very few actually intend to remain independent now and are instead aiming to be bought out by a bigger corporation. That certainly doesn’t add new competition to the market, and makes a pretty mess of the new companies being started.

  8. I have noticed this going on for sometime, and sometimes check the box at the grocery store to see who really makes things. I started this after reading a 2007 article in the NYT about pink slime and how the process had been created by one big food company, I believe it was ConAgra. So I wanted to not buy ConAgra brand foods, since I wanted to avoid ecoli and/or ammonia nor support the company that was probably putting at least a small amount of both in our food. I looked up what food they made and was astounded at how many brands they own. It would be very hard to not buy any ConAgra brand foods. I then looked up other big companies and found out exactly what this article states: a few big names owns most of the little ones. Even things like Stoneyfield Farms that really push the small farm, family company angle are now owned by a large multinational corporation. Not that there is anything inherently wrong with being a big successful company, but here is my concern: when something like the horse meat scandal in Europe happens, it affects many, many different brands and products. The lack of diversity in who produces a product means that when something goes wrong, it is much more wide spread and harder to isolate than if it was one brand or even just one supplier of horse meat. It’s like this web that is hard for consumers, and in the case of recalls, governments, to untangle. I believe in stricter regulation, but that’s not my point here. More transparency for the consumer is really the best thing we can do in the short-term, while working on longer term goals, which I am not up for discussing before my morning coffee.

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