The markets no longer work.
If I go to my local outdoor market, I can choose whether or not to buy from the bread stall.
From past experience I know whether its bread is any good, and whether the price is reasonable. If not, I can go to a shop that sells bread, or to the nearby supermarket.
Thus the market for bread operates as economists imagine it does. It has competitors, and consumers know about the quality and price of the loaves.
But in many other markets, it isn’t the case. Many are near monopolies. If you want to write a document or create a spreadsheet, it’s hard not to buy into Microsoft. If you want to design graphics, it’s not easy to avoid Adobe.
And when I say ‘buy’, I really mean ‘rent’. For that’s what the monopolists increasingly want you to do. ‘Gig’ workers have to pay to make bids on a platform like Upwork. The platform owner does nothing in return, once it has built the site. Amazon takes a percentage off sellers who use its ’Market place’ platform. And private landlords make money off their tenants over and above the cost of mortgage (if they have one). The costs of house maintenance, which are included in the rent, help the owner to keep the house in good order long after the tenant has left.
And Microsoft, as I mentioned above, will charge you an annual fee in perpetuity for access to its Microsoft 365 software, this consisting of programs whose development costs are tiny.
If it’s not a monopoly, it’s an oligopoly
Not every market is a monopoly. Often, there are just a handful of businesses, an oligopoly as it’s called. Here are some of the largest oligopoly markets in the UK:
- Supermarkets: The UK supermarket industry is dominated by four major players: Tesco, Asda, Sainsbury’s and Morrisons. These four control over 70% of the market, and have a significant impact on prices and product selection (https://www.studysmarter.co.uk/explanations/microeconomics/microeconomics-examples/uk-supermarket-oligopoly/).
- Energy: The UK energy market is also an oligopoly, with a small number of companies controlling the generation and supply of electricity and gas. Centrica, EDF Energy, E.ON, Scottish Power and SSE are the five largest suppliers in the UK. Between them they control over 90% of the market (https://www.gov.uk/government/publications/energy-bills-support).
- Banking: The four largest banks in the UK – HSBC, Barclays, Lloyds Banking Group, and Royal Bank of Scotland – have 75% of the market (https://www.investopedia.com/terms/o/oligopoly.asp).
- Telecommunications: The UK telecommunications market is an oligopoly, with three companies controlling what phone and broadband you can have. BT, Vodafone, and Three, control over 90% of the market ((https://www.ukessays.com/essays/economics/advantages-and-disadvantages-of-the-oligopoly-market-system-economics-essay.php).
- Airlines: The three largest airlines in the UK are British Airways, EasyJet and Ryanair. They attract 60% of the passengers (http://colbournecollege.weebly.com/uploads/2/3/7/9/23793496/unit_1_the_uk_aviation_industry_score_sheet_lo_1___2.pdf).
What effects do oligopolies have on us, the consumer?
There are six reasons why oligopolies are bad for us:
- Reduced consumer choice: With fewer competitors, we consumers have fewer alternatives to choose from. It can lead to less variety.
- Limited Innovation: Oligopolies have less incentive to innovate, compared to more competitive markets. It’s a cosy world. When a firm has a dominant position, it can prioritise maintaining its profits rather than invest in new products or technologies.
- Barriers to Entry: Oligopolies often erect high barriers to entry, making it difficult for new firms to enter the market and challenge the incumbents. These barriers can include brand loyalty, patents, network effects, and economies of scale. If you wanted to launch a new breakfast cereal, you’d need a huge factory, because the supermarkets like to see the same products in each store.
- Reduced Quality and Service: Oligopolies have less incentive to maintain high quality and service standards, as they may face less competition. This can lead to a decline in the overall quality of goods and services offered to consumers. If you’ve ever hung on the end of a phone line, waiting for a ‘customer service advisor’ to answer, you’ll know the feeling.
- Exploiting their Power: Oligopolies may use their market power to exploit consumers, suppliers or employees. This leads to unfair practices, such as monopsony, where a single buyer has excessive bargaining power over suppliers. We discuss this later when we get to the ‘gig’ platforms.
- Higher prices: Oligopolies often engage in price collusion or tacit coordination, where firms agree to maintain similar prices rather than engage in intense price competition. This can lead to artificially higher prices for consumers, reducing their purchasing power. Let’s look at some examples of that:
Collusion is a problem
Imagine you make widgets, and you’re at a widget trade conference. There are only two other companies that make widgets, so you tend to know your opposite number in each of them. Over lunch one day, the conversation gets round to pricing. You happen to have a trade price list in your pocket, and you wave it under the noses of your two fellow diners. They ask if they can see it. A conversation follows about how much better it would be if prices were relatively the same, because it would avoid unnecessary and harmful price cutting.
And so you make them copies of your price list, on the understanding that they won’t undercut you. All of a sudden, there’s price fixing!
There are three typical types of collusion:
Fixing prices: Businesses agree to charge the same price for their goods and services. This eliminates price competition and allows firms to charge higher prices than they would otherwise be able to. The EU Commission fined MAN, Volvo/Renault, Daimler, Iveco, and DAF a total of €2.93 billion for forming a cartel and colluding on truck prices for 14 years (https://www.cnbc.com/2017/06/27/the-largest-fines-dished-out-by-the-eu-commission-facebook-google.html). In the USA the Department of Justice fined five vitamin manufacturers a total of $1 billion for colluding to fix prices, and fined 15 airlines a total of $214 million for fixing prices on cargo flights ( https://www.ft.com/content/809007e6-274f-11de-9b77-00144feabdc0).
Dividing up markets: Businesses agree to divide up the market among themselves. This stops them from competing in each other’s territories and lets them charge higher prices in their own territories. Two companies that supplied drawer parts to furniture manufacturers such as SilentNight shared out which customers they would supply, agreeing not to go after each other’s clients so they could keep prices artificially high and avoid a price war (https://www.gov.uk/government/case-studies/furniture-parts-cartel-case-study).
Rigging bids: Businesses agree to submit collusive bids on contracts. This prevents fair competition and allows companies to win contracts at higher prices than they would otherwise be able to. The UK’s Competition and Markets Authority fined 10 construction firms £60 million for illegally colluding to rig bids for demolition and asbestos removal contracts. Three senior managers in the firms involved were disqualified from being directors (https://www.gov.uk/government/news/construction-firms-fined-nearly-60-million-for-breaking-competition-law-by-bid-rigging).
The companies are in control
Corporations matter. They’re increasingly monopolies, and they’re taking ever closer control over our lives and habits. The same applies to the rich, whose wealth has reached unprecedented levels in the past few years.
Decisions are being made in boardrooms, and in ministerial meetings with business lobbyists, that have far-reaching impacts on our lives.
And they’re doing it through the work of the Concierge Class, as discussed in my book.
